India's Exchange Traded Fund - Bharat 22 ETF

Last week, the government announced Bharat 22, an exchange traded fund of 22 large cap shares. While the composition includes mostly profit-making, dividend paying public sector companies it also includes some shares of blue chip companies.

The government observed in the release that over the past 3 years to June 2017, assets under management of exchange traded funds in India surged five times to just under Rs 54,000 crore. The release also emphasized that exchange traded funds or ETFs are a popular class of funds globally. Assets under management are expected to grow to $7 trillion by 2021 from $4 trillion today. There is merit in the argument the government has made in the press release.

ETFs have become a preferred vehicle for parking the long-term money. Sovereign Wealth Funds and Pension Funds worldwide love them. While the average cost of fund management is high in active funds, it is much lower in exchange-traded funds. At the same time, they are relatively less risky with well-defined assets under management. The liquidity of these funds is also high since they are listed on stock exchanges.

So if you make a checklist of investments, ETFs tick most of the boxes.

Why good economics?

The government's move to create Bharat 22 will allow it to raise money for meeting the disinvestment target. The budget estimate puts it at over Rs 72,000 crore. So far, in 2017-18, it has only managed to raise Rs 9,300 crore. The timing is just about right if they launch it now. This is because stock markets are at a record high and new investors attracted to India are looking for assets like blue chip company shares. The government could raise a significant amount of money by transferring some of the direct holding to the ETF. The release issued last week does not comment on the timing and the amount the government proposes to receive through this. However, the interest the government has shown in putting Bharat 22 together could mean that the government looks at it as an avenue for disinvestment. In 2016-17, the government raised Rs 8,500 crore through the Central Public Sector Enterprises ETF or CPSE ETF. The government release makes a mention that provident funds in India also prefer these instruments. We may see the government using this template to raise more money to meet disinvestment objectives and fiscal targets.

Sound Investment

If fund managers of long-term term savings funds prefer ETFs, there is no reason for individuals to stay away. Indian shares are trading at a record high. Large institutional investors are waiting to buy quality stocks. The retail investor participation is growing rapidly too. The composition of Bharat 22 ETF is such that only large cap, dividend paying companies are available. There is a good chance that the government could offer a discount to retail investors like it did during the new fund offer and follow-on offer of CPSE ETF. For those wary about directly buying shares or looking to make their first stock market transaction, Bharat 22 ETF could be the way to go. Some investors also think a lot before investing in equity mutual funds. ETF has some quality stocks and just like mutual funds, they can spread their risk across 22 quality companies. As these companies grow their business and profits, individual investors can look forward to better returns.