Bharat 22 ETF Tranche 4: Worth Your Hard-Earned Money?
Oct 04, 2019

Author: Aditi Murkute

(Image source: Photo created by jannoon028 - www.freepik.com)

Recently, it was reported in the news that Bharat 22 ETF's fourth tranche is made available for subscription. It was open for subscription for anchor investors (Institutional investors) on 3rd October 2019 and for non-anchor investors (such as individual retail investors) it was open for subscription on the 4th October 2019.

Let's look at Bharat 22 ETF in detail ...

It is an open-ended Exchange Traded Fund investing in S&P BSE Bharat 22 Index, initially launched in November 2017 as a part of GOI's disinvestment plan.

Department of Investment and Public Asset Management (DIPAM), Ministry of Finance and Government of India appointed ICICI Prudential Asset Management Company Limited to launch and manage the BHARAT 22 ETF in accordance with SEBI Regulations.

In accordance with this, the AMC had formulated this scheme offered to the public for subscription by way of a New Fund Offer (NFO).

Since the launch of Bharat 22 ETF, the government has managed to raise a whopping Rs 35,900 crore-Rs 14,500 crore at the time of its launch, followed by Rs 8,400 crore in June 2018 and Rs 13,000 crore in February 2019 in the form of tranches. Currently, as a follow-up offer, a fourth tranche is available to further garner Rs 8000 crore from the investors.

Table 1: Details of the Bharat 22 ETF

Type An open-ended Exchange Traded Fund investing in S&P BSE Bharat 22 Index Benchmark Index S&P BSE Bharat 22 Index
Investment Objective To invest in constituents of the underlying Index in the same proportion as in the underlying Index and endeavour to provide returns before expenses, which closely correspond to the total returns of the underlying index.

However, the performance of the Scheme may differ from that of underlying index due to tracking error.

There can be no assurance or guarantee that the investment objective of the Scheme would be achieved.

Min. Investment During Further Fund Offer Period Anchor Investors:
Retirement Funds and Qualified Institutional Buyers (QIBs) - Rs 10 crore and in multiples of Rs 1
Plans  Nil
Non-anchor investors:
Retail Individual Investors - Rs 5,000 and in multiples of Rs 1 and up to Rs 2 lakh
Retirement Funds– Rs 2,00,001 and in multiples of Rs 1
QIBs – Rs 2,00,001 and in multiples of Rs 1
Non- Institutional Investors – Rs 2,00,001 & in multiples of Rs 1 thereafter
Options Nil
Face Value Rs 10 per unit Entry Load NA Exit Load Nil
Issue Opens


 
  • Anchor investors: 3-October-2019
  • Non-Anchor investors: 4-October-2019
Issue Closes
 
  • Anchor investors: 3-October-2019
  • Non-Anchor investors: 4-October-2019
(Source: Scheme information document)


How will the scheme allocate its assets?

Under normal circumstances, it is anticipated that the asset allocation of the scheme will be as follows:

Table 2: Asset Allocation

Instruments Indicative Allocation
(% of Total Assets)
Risk Profile
Maximum Minimum High/Medium/Low
Securities of companies constituting the underlying index$ 100 95 Medium to High
Units of Liquid/Money Market Mutual Fund schemes, Money Market Instruments (with maturity not exceeding 91 days), including TREPS, cash & cash equivalents. 5 0 Low to Medium
$ Including derivatives instruments to the extent of 5% of the Net Assets.
* The Scheme can take exposure up to 20% of its net assets in stock lending.
(Source: Scheme information document)


[Read:  Why You Should Not Ignore Personalized Asset Allocation While Investing]

What is the Investment Strategy?

The corpus of the Bharat 22 ETF is invested predominantly in stocks constituting the underlying index (S&P BSE Bharat 22 Index), in the same weights as in the Index in an endeavour to track the benchmark index. A very small portion (0-5% of the Net Assets) of the scheme will be kept liquid to meet the liquidity and expense requirements.

However, the performance of the scheme may not commensurate with the performance of the underlying index on any given day or over any given period. Such variations are commonly referred to as the tracking error. The scheme intends to maintain a low tracking error by closely aligning the portfolio in line with the index.

[Read:  Should You Be Investing In Passive Funds Now?]

The stocks comprising the S&P BSE Bharat 22 Index are periodically reviewed by Index Service Provider. A particular stock may be dropped, or new securities may be included as a constituent of the index, subject to approval from DIPAM. In such an event, the Bharat 22 ETF will endeavour to reallocate its portfolio, but the available investment/ disinvestment opportunities will not permit precise mirroring of the underlying index immediately but not later than 7 days from the date of such event.

Similarly, in the event of a constituent stock being demerged/merged/delisted from the exchange or due to a major corporate action in a constituent stock, the scheme will reallocate the portfolio and seek to minimize the variation from the index.

[Read: What Are the Reasons for the Growing Popularity of Index Funds?]

About the S&P BSE Bharat 22 Index:

There are 22 stocks under the S&P BSE Bharat 22 Index which comprises shares of Central Public Sector Enterprises (CPSE), Public Sector Banks, and some of the strategic holding of Specified Undertaking of Unit Trust of India (SUUTI).

S&P BSE Bharat 22 Index is a well-diversified index across six sectors, including 3 privately owned companies and 19 public sector units.

The stock level capping is at 15% and sector capping is at 20% applied annually at rebalancing.

Chart: S&P BSE Bharat 22 Index constituents by weight

stragicy
Data as on September 04, 2019
(Source: Bharat 22 ETF FAQ PDF)


What are the salient features of the scheme?

  • A 3% Discount shall be offered to all categories of investors investing in FFO 2 of BHARAT 22 ETF. The discount shall be offered on government disinvested shares.

  • The Scheme can declare dividend subject to availability of distributable surplus and approval from the Trustees of the Scheme.

  • The index is designed to track stocks of companies selected by the Government of India for their divestment program.

  • Since it is an ETF that is usually passively managed fund, wherein subscription /redemption of units work on the concept of exchange with underlying securities, it has lowest expense ratio of up to 0.01% p.a. of daily net assets of the scheme.

  • Being an ETF, it can be traded on the Stock exchange.

  • No Loyalty Units will be offered to the investors during the FFO of the scheme.

Who manages Bharat 22 ETF?

Bharat 22 ETF will be managed by Mr Kayzad Eghlim.

Mr Kayzad has earned a B.Com and M.Com as well as a Masters in Business Administration degree to his credit. He has been associated with ICICI AMC since 2008. Prior to that, he has been associated with IDFC Investment Advisors Ltd, Prime Securities, and Canbank Mutual Fund.

Some of the other schemes Mr Enghlim has managed in the past are ICICI Prudential Nifty Index FundICICI Prudential Nifty Next 50 Index FundICICI Prudential Sensex ETFICICI Prudential Equity- Arbitrage Fund - Equity Portion, ICICI Prudential Nifty ETFICICI Prudential Nifty 100 ETF, and ICICI Prudential NV20 ETFICICI Prudential Midcap Select ETF.

How has Bharat 22 ETF performed so far?

Since the Bharat 22 ETF was launched in 2017, the performance track record is barely two years old. This is a short timeframe to analyse the overall performance of the fund if you want to invest your hard-earned money into since it comprises of equity stocks. And equity investment needs to be evaluated for longer time periods of at least three years or more.

However, the scheme and its benchmark have not performed well, generating negative returns as compared to the Nifty50 TRI index as seen from the table below. Despite the volatile environment, the NIFTY 50 TRI index has generated positive returns in the same time period.

Table 3: Performance Table

Scheme Name Absolute Returns (%)
6 Months 9 Months 1 Year
Bharat 22 ETF -7.86 -0.65 -2.23
S&P BSE Bharat 22 Index- scheme benchmark -8.95 -3.22 -5.02
NIFTY 50 - TRI -2.02 7.18 5.55
Data as on October 4, 2019
Source: ACE MF


Besides, most of the stocks constituting the PSU ETF belong to Energy, Financial Services, Industrials and infrastructure sectors, making the scheme more thematic in nature. And currently these sectors have been hit hard by the prevailing sluggish domestic and global growth.

[Read: Why A Slowdown in GDP Matters To You As An Investor?]

The outlook for Bharat 22 ETF:

As mentioned, the scheme seems to be more concentrated with investments as per the underlying index, i.e. S&P Bharat 22 Index with a focus on PSU units and it is thematic/sectoral in nature.

To reiterate, energy, infra and industrial, and its allied sectors do have long-term growth potential, but are of a defensive sector, i.e. it is an indispensable sector which has its own set of regulatory risks involved. Since sectoral funds focus on a fixed set of theme/sectors, the underlying risk potential of such funds is comparatively high.

[Read: Why Thematic Funds Are Not Solid Long-Term Investment Bets]

Changes in government policies can heavily affect the growth of these sectors. During such times, how the PSEs play their business strategies needs to be watched. It would be prudent to evaluate the performance of the scheme over a period of at least three years before investing in it from a portfolio diversification standpoint.

Plus, in terms of risk-return also, since index fund mirrors the benchmark, the fund loses out opportunities of actively managed funds and it may be affected by a general decline in the Indian Markets.

Besides, in terms of alpha generation, Indian markets are poised to provide opportunities that can outperform the benchmark index over the long term. Hence, PersonalFn is of view that you should avoid investing in Bharat 22 ETF's fourth tranche and consider diversified actively manged equity funds with a proven track record.

[Read: Why Index Funds May Not Be An Ideal Bet For Your Core Portfolio]

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nagayatearta@gmail.com
Oct 06, 2019

Account cash Deposit today Result
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