Betting on corporate governance? Go for Bharat 22

'Bharat 22' is not the desi version of secret service agent James Bond, also known as 007. It is actually an index that measures the performance of 22 select companies, most of them substantially controlled by the government. This index will form the basis of a new investment product called Bharat 22 Exchange Traded Fund (ETF).

The new ETF will give you concentrated exposure to these 22 companies. It's not a good idea for fund investors to buy a theme-specific fund. But you can go for Bharat 22 ETF if you understand the sophisticated risks of betting on the government's corporate governance credentials. Here's why.

Govt prefers ETF route

The Indian government, after successive failures to reach its disinvestment targets, has come to the sombre realisation that creating an ETF and selling off tranches of stock through it is a better way to divest public sector holdings. Previously, the government used to conduct a large number of individual sales of company shares. When times were good, investors lapped up those individual sales but when markets turned turtle, the government had to rely on financial institutions like LIC.

That being the case, sometime in 2014, the government launched the Central Public Sector Enterprises (CPSEs) ETF. ETFs are mutual funds that replicate an equity index. Instead of the fund manager actively scouting and managing stocks in the portfolio, an ETF fund manager simply copies a pre-defined index. Some of you may be confused between ETFs and mutual funds. Here's a Bollywood analogy:

Think of a normal mutual fund like somebody making an original film without any reference point or any guarantee of success. An ETF, on the other hand, is similar to a screen-to-screen Bollywood copy of a hit South Indian film. Movie buffs will recollect how Bollywood made Hindi remakes of Katha Parayumpol (into Billu Barber), Ready (into Ready), Pokkiri (Wanted), and Ghajini (Ghajini). The government has probably realised that tapping the markets through the ETF route is a better way, than using the public issue route.

CPSE ETF and Bharat 22 ETF

The CPSE ETF's underlying index was a new one created in 2014 by NSE. It has stocks of ten public sector giants like Coal India, GAIL, ONGC, Indian Oil, Bharat Electronics, Oil India, PFC, REC, Container Corp and Engineers India. While the oil and energy companies had a huge weight in the Rs 5,781-crore CPSE ETF, it fortunately turned out to be a good deal for investors. This was chiefly because of two main government moves: one, the government gave a five per cent discount at launch, and two, investors who held on to their holdings for at least a year got an additional 1/15 loyalty bonus. In last one year, CPSE ETF has given nearly 17 percent returns. Reliance Nippon Life Asset Management Ltd manages CPSE ETF.

But the Bharat 22 ETF is a slightly different animal. Bharat 22 ETF will be based on the newly launched S&P BSE Bharat CPSE Index. It's portfolio of 22 companies fall mainly in the central public sector enterprise category and also comprises shares of a few companies that were under the Specified Undertaking of the Unit Trust of India (SUUTI). Unlike the CPSE index, the risk of any particular sector being given unduly high weightage is mitigated by the caps on each sector in the case of the Bharat 22 index. The total weightage of CPSEs in the Bharat 22 index is nearly 50 percent while that of the three SUUTI companies is around 40 percent. The weightage for public sector banks is around 10 percent. This index has been licenced to ICICI Prudential AMC for the development of an ETF.

Bharat 22 Ki Jai, or perhaps not

Why do investors buy ETFs? There are two main reasons. One, an ETF has a lower cost structure than a typical fund. This is because the fund manager doesn't go around searching for stocks and doing many investments. The ETF fund manager simply copies the index. Two, an ETF trades throughout the trading day on the stock exchanges, like stocks. A mutual fund trades only at the end of the day at the net asset value (NAV) price. So, ETFs offer greater flexibility.

Do remember that an ETF is as good as its stock portfolio. It's like buying players for an IPL team and sticking to a set playing 11 for the whole season. In a normal mutual fund, you could buy 15-20 players and rotate them depending upon their performance throughout the season.

The Bharat 22 ETF may offer discounts, some tax breaks and loyalty bonuses to lure and compensate investors. However, that doesn't take away the risks in this product.

For average retail investors, betting on a theme is always dangerous. A theme can either work well or flop. So, all the stocks behave in a same fashion. The problem with a government theme is that it is actually not a theme. A theme could be consumption (FMCG, consumer durables), lending (banking, NBFC, housing finance, microfinance) or transportation (cars, bikes, trucks, buses). However, Bharat 22 or the CPSE ETFs are not like this. Bharat 22 ETF is a clear bet on the government's corporate governance program.

Also, given the anecdotal experience of dealing with government departments, would you like to bet your money on government-owned companies? If your answer is yes, go in for the Bharat 22 ETF. The attractiveness of PSUs in recent years is on account of a perception change about the government's working style and policies.

Ideally, such funds are for more evolved investors. This is only because the performance of thematic funds can be very erratic. If you are an investor who can stomach that risk, go for it. And, limit the exposure to less than 10 percent of your total portfolio.