Mutual Funds

PSU equity funds: A mixed show

Yoganand D | Updated on August 09, 2020 Published on August 09, 2020

Though they’ve managed to beat benchmark, long-term returns have been mediocre

Thematic equity funds that bet on PSU stocks have limited the downside well, compared with their benchmark — the BSE PSU Index — over the past one-, three- and five-year periods.

Following a strong run in 2016 and 2017, PSU (public sector undertaking) stocks’ drive came to a halt in late 2017. Since then, the PSU index has been on a long-term downtrend.

The top sectors in the index include oil and gas (30 per cent), finance (28.5 per cent) and power (20.7 per cent).

The underperformance of the stocks in these sectors has kept the PSU index under pressure over the past two-and-a-half years.

Over the past one, three, five and 10 years, the BSE PSU TRI has delivered negative returns of 22.6 per cent, 14.8 per cent, 5.7 per cent and 4 per cent per cent, respectively.

There are three mutual funds and one exchange-traded fund (ETF) under the PSU thematic funds category. Among the MFs, two are veterans with a track record of more than 10 years — Invesco India PSU and SBI PSU.

Launched in December 2019, Aditya Birla Sun Life PSU Equity is the youngest scheme in the category. The sole ETF in the category, CPSE ETF, was launched in March 2014.

Bharat 22 ETF, launched in November 2017, too, invests predominantly in PSUs stocks. However, three private companies make up almost one third of the fund’s portfolio value.

These funds invest predominantly in PSUs or companies in which the government (State or Central) is a majority shareholder with at least 51 per cent shareholding, and also in debt and money market instruments issued by PSUs and others.

Performance

Invesco India PSU Equity, the top-performing scheme in the category, has clocked a positive return of 9.85 per cent over the past one year, and outpaced its peers by a wide margin.

Over the last three and five years, Invesco India PSU Equity has delivered returns of -1.8 per cent and 3.73 per cent, respectively. The fund invests more than half of its assets in growth-oriented mid-cap stocks.

The fund’s strong performance over the last one year can be ascribed to some of the stock holdings, namely Gujarat Gas, Mishra Dhatu Nigam and SBI Life Insurance.

It has gradually increased allocation to the gas and finance sectors, and reduced allocations to transport over the past six months.

SBI PSU invests 64 per cent of its assets in large-cap stocks and about 22 per cent in small-caps. The under-performance of small-caps over the past six months has limited the NAV of the fund.

It has the flexibility to invest up to 20 per cent in equities of companies other than PSUs. It has underperformed over the past one year; this can be attributed to some stocks such as SBI, ONGC, NTPC and The New India Assurance Company.

Aditya Birla Sun Life PSU Equity delivered a negative return of 13.4 per cent in its first six months, beating the benchmark’s decline of 23.9 per cent.

It predominantly invests in large-cap stocks that have long-term value.

CPSE ETF has slumped 26.1 per cent, 14 per cent and 6.5 per cent over the past one-, three- and five-year periods, drastically underperforming the PSU fund category.

Investors looking to invest in the category should take a cautious approach as PSU stocks have broadly delivered mediocre returns over the past few years.

Though the schemes have managed to beat the benchmark, long-term returns are below that of the diversified equity funds category.

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Published on August 09, 2020
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