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The change
The Budget announced that the government will offer an investment option in CPSE related Exchange Traded Funds (ETFs), on the lines of Equity Linked Savings Scheme (ELSS). ELSS are equity-oriented mutual funds with a lock-in period of three years and are eligible for 80C benefit. ETFs are passively managed mutual fund schemes traded on the BSE and the NSE, like other shares. Through demat accounts, investors can buy and sell ETF units at prevailing market prices.
Henceforth, like ELSS, investments made in the ETFs will be subject to lock-in for three years and eligible for tax deductions of up to ₹1.5 lakh under section 80C of the Income-Tax Act.
Also proposed was an offer of concessional rate of Short-term Capital Gains (STCG) tax to certain equity-oriented fund of funds (FoF) which invest in funds set up for disinvestment of Central Public Sector Enterprises (CPSEs). But currently, there is no FoF available in the market that invests in a CPSE fund or CPSE ETFs.
The background
Investors now get one more option for investment under the Section 80C basket. Other investment products enjoying 80C tax benefit include public provident fund, national savings certificate and NPS.
Though the stocks in the portfolio are attractive on high dividend yield and low valuation, these ETFs are suited for investors with a high risk profile. Both CPSE ETF and Bharat 22 ETF track the equity indices having high sectoral concentration risk.
CPSE ETF follows the NIFTY CPSE TRI Index, which comprises 11 stocks. The stocks — ONGC, Coal India, NTPC and IOCL comprise the three fourth of the portfolio.
Bharat 22 ETF tracks S&P BSE Bharat 22 TRI comprising 22 companies. Though the index is semi-diversified, the sectors banks, construction and power hold 50 per cent of the weightage in the portfolio.
The performance of the CPSE ETF has been disappointing over the long run as it generated compounded annualised return of 9 and 1.2 per cent over the last three and five years, respectively. Nifty 50 TRI delivered 14 and 10 per cent during these periods. However, over the last year, the CPSE ETF clocked 12 per cent return while Bharat 22 ETF generated 18 per cent.
Investors need demat and broker’s trading account to transact in the ETFs through exchanges. Investors applying for these units during new offer and further offer periods will get some discount on the reference market price. No systematic investment plan (SIP) facility is allowed by the AMCs to buy ETFs units in the exchanges.
The verdict
investors should not choose to invest in these ETFs just for tax benefit. The performance track record matters more.
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