Don’t invest in the Bharat 22 ETF
When the Government wants to earn money, it sometimes sells it’s stake in public sector companies, you know, your SBI, ONGC, NHPC etc. This is called a divestment (fancy term for Government selling stocks). This is handled by the Department of Investment and Public Asset Management who put their ongoing divestments on their website.
There’s news all over about the B22 ETF. At lease 19 mutual fund distributors have called, advising me to invest 2 lakhs in it. I don’t want to waste your time with the basics of the B22 or what an ETF is, but in case you live in sub-Sahara, here you go. The ETF opens for subscription tomorrow.
But, but, there are private companies in the B22, Anurag. How is it a divestment?
In 1964 Unit Trust of India launched a scheme called the Unit Share-64. US64 was the first mutual fund in India and invested in equities. Apart from capital gains and fat dividends, US64 also had a guaranteed return. As always, by 1998, the guaranteed return plan bombed and ate into the reserves of the scheme. Post the dotcom crash in 2001, the scheme was left holding a pile of odorous excrement.
The Centre had to bail it out and the company was bifurcated with one part becoming what is now UTI Mutual Fund and another entity named SUUTI (Specified Undertaking of UTI) where the Centre took over 11.66% in Axis Bank, 11.77% in ITC and 8.18% in L&T. It’s this very stake the Center is selling to you now.
It’s been done before.
In 2014 the Center had launched the Central Public Sector Enterprises (CPSE) ETF which consisted of 10 PSUs. The CPSE has returned 53.56% versus a return of 58.14% for NIFTY, essentially underperforming the index. See chart below.
The smart beta is umm, the Government? If the principle of factor investing are to be followed, your portfolio should be divided into various factors that add beta and in the long run alpha to your portfolio. For example, a tenth of your portfolio can be in dividend yielding utility stocks, a fifth in momentum stocks, a fifth in high yield bonds and so on. That’s how a prudent investor invests.
You never buy an ETF with 30% allocation to two stocks.
Livemint.com did some backtesting on B22 and it looks like it would have underperformed NIFTY in the last 5 years. The reason ETFs work as a viable way to invest is because that index constituent selection is done professionally and weak companies are regularly weeded out (like how falling stocks are thrown out of the NIFTY) while introducing better companies as they come to the notice of the market.
This brings a passing element of active management and human research to an ETF and can boost returns. While the B22 ETF will rebalance once a year, the rebalance process is not going to be based on performance, it will have to include mostly PSUs. There are better ways to invest. Rather than buy the B22, it’s more prudent to simply invest in a portfolio of diversified mutual funds. Comment your thoughts below and Minance will help you with your mutual funds.
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