ICICI Prudential PSU Equity Fund: Should You Invest in PSU Stocks?

Sep 02, 2022

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Public Sector Undertakings are also referred to as government-backed companies since the central government, state government, or both the central government and one or more state governments collectively possess at least 51% of the company. PSUs are present across sectors, thereby providing wide investment opportunities.

PSU stocks have relatively less Key Managerial Personnel (KMP) risk from a continuity perspective as compared to the promoter-run company. The multiple sectors with PSU dominance are expected to do well. Promoter holding, i.e., Govt. ownership in PSU companies, is substantial compared to non-promoters (FPIs, DIIs & Retail). Valuations in the PSU space have been attractive for a while now, again indicating that companies have a better Margin of Safety. After a decade of underperformance, PSU Index has recently witnessed an upward trend, and the same is expected to continue.

PSUs tend to offer better dividend yields than broader markets. In a volatile environment, companies providing high dividend yields tend to have higher demand resulting in capital appreciation. These factors have gained investors' interest in the PSU segment, and many are seeking to invest in stocks of PSU companies.

ICICI Prudential Mutual Fund has launched ICICI Prudential PSU Equity Fund, it is an open-ended equity scheme following the PSU theme. The scheme aims to invest in stocks of PSU companies and benefit from the growth potential of these companies in the long run.

Commenting on the scheme, Mr Chintan Haria, Head of product development and strategy at the ICICI Prudential Asset Management Company, said, "PSU companies are present across different sectors, presenting wide investment opportunities. "Also, PSUs appear to be attractively placed on a valuation basis and offer a better margin of safety. In a volatile environment, companies providing high dividend yield tend to have higher demand, resulting in capital appreciation."

Table 1: Details for ICICI Prudential PSU Equity Fund

Type An open-ended equity scheme following the PSU theme. Category Thematic - Equity Fund
Investment Objective The objective of the scheme is to generate long-term capital appreciation by investing predominantly in equity and equity-related securities of Public Sector Undertakings (PSUs). However, there can be no assurance or guarantee that the investment objective of the scheme would be achieved.
Min. Investment Rs 5,000/- and in multiples of Re 1 thereafter. Additional purchase Rs 1,000/- and in multiples of Re 1 thereafter. Face Value Rs 10/- per unit
SIP/SWP/STP Available
Plans
  • Regular
  • Direct
Options
  • Growth
  • Income Distribution cum Capital Withdrawal (IDCW)
Entry Load Not Applicable Exit Load
  • 1% of applicable Net Asset Value - If the amount sought to be redeemed or switched out is invested for a period of up to 1 month from the date of allotment.
  • Nil - If the amount sought to be redeemed or switched out is invested for a period of more than 1 month from the date of allotment.
Fund Manager - Mr Mittul Kalawadia
- Mr Anand Sharma
Benchmark Index S&P BSE PSU TRI
Issue Opens: August 23, 2022 Issue Closes: September 06, 2022
(Source: Scheme Information Document)
 

The investment strategy for ICICI Prudential PSU Equity Fund will be as follows:

ICICI Prudential PSU Equity Fund is a thematic equity fund which will invest predominantly in equity and equity-related securities of the PSU companies. PSU refers to any undertaking where 51% or more of the company is held by the Central Government, State Government, or jointly by the Central Government and one or more State Governments.

ICICI Prudential PSU Equity Fund: Should You Invest in PSU Stocks?
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The scheme will be actively managed and invest in equity and equity-related instruments, which form part of the benchmark index. Amongst sectors that form a part of the benchmark, public sector banks, utilities, energy and defence sectors can be considered with major PSU dominance. The scheme can invest in opportunities available across the market capitalisation and may invest up to 20% in other equities and equity-related securities.

The scheme may engage in stock lending activities. The scheme may invest in derivatives such as Futures & Options and other derivative instruments like Stock/Index Futures, Interest Rate Swaps, Forward Rate Agreements or such other derivative instruments as may be introduced and permitted by SEBI from time to time.

Under normal circumstances, the asset allocation will be as under:

Table 2: Asset Allocation for ICICI Prudential PSU Equity Fund

Instruments Indicative Allocation (% of net assets) Risk Profile
Minimum Maximum High/Medium/Low
Equity & Equity related instruments of Public Sector Undertakings 80 100 Very High
Other Equity & Equity-related instruments 0 20 Very High
Debt instruments, Units of Debt, Mutual Fund schemes, and Money market instruments @ and Preference shares 0 20 Low to Medium
Units issued by REITs and INVITs 0 10 Very High
(Source: Scheme Information Document)
 

About the benchmark

The S&P BSE PSU index is designed to measure the performance of public sector undertakings (PSUs) as defined by BSE Ltd. The index comprises of stocks that are identified as PSUs by BSE and are part of the S&P BSE 500. The S&P BSE PSU is calculated using a float-adjusted, market-cap-weighted methodology.

Here's the list of top 10 constituents by their weightage and sector representation under the index as on August 30 2022:

(Source: S&P BSE PSU Index)
 

Note that the index will rebalance Semi-annually in June and December.

Who will manage ICICI Prudential PSU Equity Fund?

Mr Mittul Kalawadia and Mr Anand Sharma will be the designated fund managers for this scheme.

Mr Mittul Kalawadia is a CA and holds M. Com and B. Com degrees, and has an overall experience of 13 years in fund management/Investment analyst roles. He is associated with ICICI Prudential AMC since 2006 for Business Planning & MIS and later as an Equity Research Analyst.

At ICICI Prudential Mutual Fund, Mr Kalawadia currently manages ICICI Prudential Equity & Debt Fund, ICICI Prudential Dividend Yield Equity Fund and ICICI Prudential ESG Fund.

Mr Anand Sharma has completed B.E. (Computer Engineer) and Master of Management Studies (from the University of Mumbai) and has an overall experience of 13 years in the financial services industry. He has been associated with ICICI Prudential AMC since 2014 as Research Analyst and later Fund manager (PMS and AIF). Prior to this, he has worked with Oracle Financial Services Software Ltd. as Associate Consultant.

At ICICI Prudential Mutual Fund, Mr Sharma currently manages ICICI Prudential Housing Opportunities Fund.

 

Fund Outlook - ICICI Prudential PSU Equity Fund

ICICI Prudential PSU Equity Fund aims to predominantly invest in equity and equity-related instruments of PSU companies. The scheme invests in stocks of government-owned companies and in opportunities across the market cap, i.e. large, mid or small cap.

The public sector undertakings are present across various sectors like Telecom & IT, Agriculture, Energy, Defence, Power and more. The scheme provides investors with an opportunity to benefit from the growth potential of PSU companies across sectors. PSUs usually have substantial government ownership; thus, investment in this segment offers a better margin of safety to investors.

Unlike other promoter-run businesses that diversify into multiple businesses, PSU stocks have a lesser risk of diversification into unrelated businesses. The valuation of PSU companies is attractively placed and offers a better dividend yield than broader markets. The scheme being actively managed, the fund manager's ability to construct the portfolio remains to be seen.

Although the scheme invests in PSU stocks and offers long-term returns to investors, it is still prone to high market risks. The scheme invests a majority of its assets in equities, which are highly volatile in nature. Being a thematic fund, the scheme will only invest in companies pertaining to the PSU sector; this creates a concentration risk.

In addition, the persistent repercussions of the Russia-Ukraine conflict, spiralling inflation and the RBI's recent announcement to hike policy rates again by 50 basis points to curb demand and control inflation may cause a significant risk to economic growth. The margin of safety appears to be narrow, and the clear direction for the equity market from the current elevated levels is unknown. These factors, among many others, may affect the scheme's performance and impact the scheme's portfolio negatively if the sector moves out of favour.

Therefore, this scheme is suitable for investors seeking long-term capital appreciation with a desire to be a part of PSUs' growth story. Ensure that you hold a high-risk appetite and a long investment horizon of at least 5-7 years to sustain the market volatility and that your objectives align with the funds.

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Warm Regards,
Mitali Dhoke
Research Analyst



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