CPSE ETF is an open-ended exchange listed index fund which invests in securities constituting Nifty CPSE Index in the same proportion as in the index

Summary

Type	An Open-Ended Index Exchange Traded Scheme	Benchmark Index	Nifty CPSE Index
Min. investment:	For Non-Anchor Investors Retail Individual Investors -Rs 5,000 and multiples of Rs 1 thereafter Non-Institutional Investors / Qualified Institutional Buyers (other than Anchor Investors) -Rs 2,00,001 and multiples of Rs 1 thereafter For Anchor Investors -Rs 10 Crores and multiples of Rs 1 thereafter	Plans: Options:	Regular Direct Growth
Face Value	Rs 10 per unit	Expense Ratio:	Upto 0.49%
Entry Load	NA	Exit Load:	Nil
Issue Opens (Anchor Investors)	January 17, 2017	Issue Closes: (Anchor Investors)	January 17, 2017
Issue Opens (Non-Anchor Investors)	January 18, 2017	Issue Closes: (Non-Anchor Investors)	January 20, 2017

Investment Objective*

The investment objective of the Scheme is “to provide returns that, before expenses, closely correspond to the total returns of the Securities as represented by the Nifty CPSE Index, by investing in the Securities which are constituents of the Nifty CPSE Index in the same proportion as in the 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.

*Source: Scheme Information Document

Is this fund for you?

The NIFTY CPSE Index was constructed on January 01, 2009 to facilitate Government of India's initiative to disinvest some of its stake in Central Public Sector Enterprises (CPSEs) through ETF route. The initial public offering of the CPSE ETF was launched in March 2014 and initially Goldman Sachs AMC was appointed by the Government to manage the CPSE ETF. Schemes of Goldman Sachs were acquired by Reliance Mutual Fund in October 2015. It is currently the only equity mutual fund that tracks the Nifty CPSE index which comprises 10 central public sector enterprises. Below is breakup of constituents of the fund.
 

Top constituents	Weightage in CPSE ETF	Weightage in Index	Top Sectors	Weightage in CPSE ETF	Weightage in Index
Oil & Natural Gas Corporation Ltd.	24.35	24.51	Energy	56.87	57.25
Coal India Ltd.	20.54	20.68	Metals	20.54	20.68
Indian Oil Corporation Ltd.	17.96	18.08	Financial Services	10.79	10.87
GAIL (India) Ltd.	11.17	11.25	Services	5.04	5.08
Power Finance Corporation Ltd.	5.58	5.62	Industrial Manufacturing	4.33	4.36
Rural Electrification Corporation Ltd.	5.21	5.25	Construction	2.26	2.28
Container Corporation of India Ltd.	5.04	5.08
Bharat Electronics Ltd.	4.33	4.36
Oil India Ltd.	3.39	3.41
Engineers India Ltd.	2.26	2.28
Cash & Others	0.17	--

Data as on December 30, 2016
(Source: NSEIndia.com; ACEMF, PersonalFN Research)

Due to concentrated index, the CPSE ETF lacks diversification and is operating more like a Thematic fund, concentrated towards Energy sector. This makes it a risky bet for retail investors who invest in mutual funds for diversification. Currently around 57% of the fund’s portfolio is concentrated in Energy and around 20% in Metals. Hence, the performance of the fund will depend on sentiments prevailing in the Energy and Metal space and driven by few PSU stocks like ONGC, Coal India, Indian Oil and Gail.

The fund was initially created to help the Government in its divestment programme. The fund has generated around 17% CAGR return ever since its inception. At the time of initial launch in 2014 the fund was offered at 5% discount price along with unique ‘loyalty bonus’. In addition to the returns, unitholders in the ETF who remained invested in it for more than a year since the initial allotment were also offered loyalty units in the ratio of 1:15, by the Government.

The fund has as now announced a ‘Further Fund Offer’ (FFO). The investors who now invest in the FFO will get a 5% discount in market price of the underlying stocks. In the follow-on public offer of CPSE ETF, the Government has set a target of Rs 4,000 - 6,000 crore. The fund also qualifies under Rajiv Gandhi Equity Savings Scheme (RGESS). So, if you’re looking for a tax benefit under Section 80CCG of the Income-tax Act, 1961 the said ETF can be considered provided you hold a high risk profile and longer investment horizon.

How will the fund allocate its assets?

Under normal circumstances, the asset allocation pattern followed by the fund will be as under:

Instruments	Indicative allocations (% of total assets)		Risk Profile High/Medium/Low
	Minimum	Maximum
Securities covered by Nifty CPSE Index	95%	100%	High
Money Market Instruments (with maturity not exceeding 91 days), including CBLO, cash & cash equivalents.	0%	5%	Low to Medium

(*Source: Scheme Information Document)

Further, the offer document states that:

• The Scheme will not invest in securitized debt, ADR, GDR, foreign Securities, nor will it engage in short selling and Repo in corporate debt.
• As the Nifty CPSE Index is an Equity index, the constituents of the index do not include debt Securities
• Other than for purposes of portfolio rebalancing, the Scheme will not invest in Derivatives. These investments would be for a short period of time. The notional exposure of the Scheme in Derivative instruments shall be restricted to10% of the net assets of the Scheme.
• Subject to the SEBI Regulations as applicable from time to time, the Scheme may, if the Trustees permit, participate in securities lending. The maximum exposure of the Scheme to a single intermediary in the stock lending programme at any point of time would be limited to 5% of the market value of its equity portfolio or up to such limits as may be specified by SEBI. The Scheme will not lend more than 20% of its corpus.

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What investment strategies will the fund follow?

In the endeavour to achieve the investment objective set out, CPSE ETF will follow the below mentioned investment strategy…

For Equity Investments:

CPSE ETF will follow a passive management approach. Passive approach eliminates the risk which is otherwise associated with active fund management where over/underperformance vis-à-vis the benchmark may be a possibility. The Scheme is mandated to invest at least 95% of its total assets in the stocks in the underlying index in the same proportion as the Nifty CPSE Index.

So, unlike other funds CPSE ETF does not try to “beat” the markets they track and do not seek temporary defensive positions when markets decline or appear over valued. The fund does not make any judgments about the investment merit of a particular stock or a particular industry segment or the underlying nor will it attempt to apply any economic, financial or market analysis. The fund shall invest all of its funds as per its investment objective and asset allocation pattern, except to meet its liquidity requirements.

Further the fund manager would monitor the Tracking Error of the Scheme on an ongoing basis and would seek to minimize Tracking Error to the maximum extent possible. Tracking error is a measure used to calculate the volatility in the difference of performance between the fund and its index. Under normal circumstances, the AMC shall endeavour that the Tracking Error of the Scheme shall not exceed 2% per annum. There can be no assurance or guarantee that the Scheme will achieve any particular level of Tracking Error relative to performance of the underlying index. The investment decisions will be determined as per the benchmark index.

For Debt Investments:
The fund shall also invest upto 5% in Money Market Instruments (with maturity not exceeding 91 days), including CBLO, cash and cash equivalents, as per its investment allocation pattern.
 

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Fund Manager Profile

CPSE ETF is being managed by Payal Wadhwa Kaipunjal

Ms Payal Wadhwa Kaipunjal is Sr. Fund Manager with over 12 years of experience in the capital markets. She has been managing CPSE ETF since its inception in March 2014. She is an MBA and has to her credit PGDIM, FRM (GARP). Prior to joining Reliance AMC, she was associated with Goldman Sachs Asset Management Private Limited (India) and Benchmark Asset Management Company Private Limited.

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Fund Outlook

After evaluating the investment objective and strategy and its past performance it is evident that the fund is suitable for aggressive investors with long term horizon. CPSE ETF is skewed to a sector  - the Public Sector Enterprises (PSEs) – and hence the fortune of the fund will be closely lnked with the performance of its benchmark, the Nifty CPSE Index. At present, the portfolio of the fund is heavily skewed towards energy sector with the top-four having 74.14% weightage in the index.

As the stable Government in the centre has helped kick start the reforms process, especially in Public Sectors sectors like mining, oil & gas and other infrastructure sectors, almost all companies of the CPSE index in that space have been beneficiaries of the Government's initiatives on the reform process, so far. This has helped CPSE Index as well as CPSE ETF deliver superior returns over the last 1 year. However, it is noteworthy that the long-term returns of CPSE Index have been far below the S&P BSE 200 Index. Any concern in PSUs in future may result in underperformance of the fund.

However, India meets 80% of its oil demand through imports. This makes the Indian economy vastly dependent on crude oil prices as they affect the national budgets and policies. Oil import-dependent developing countries, such as India, can't have a system of passing on these price rises to the consumers. It endangers the general price stability. On the side of the scale, petroleum products can't be made heavily subsidized as it puts a severe strain on public finances. The Government faces a bigger dilemma when limited revenue restricts its ability to spend on the developmental agenda. This is precisely what the Indian Government faces today. To grow at brisker pace, it is important for the country to invest hugely in infrastructure development, reduce subsidy bill, and increase state revenues. To shore up Government funds, NDA Government increased the duties on petroleum prices when the crude oil prices were falling relentlessly in FY 2014-15 and FY 2015-16.

Following a deal between Russia and other non-OPEC producers to join the Organisation of Petroleum Exporting Countries (OPEC) in capping output in a bid to curb oversupply that hammered down oil prices, once again paved the upward path for oil prices, which too weighed on the equity markets. During such times how the PSEs play their business strategies, needs to be watched and closely align the fortune of CPSE ETF.

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DISCLOSURE AS PER SECURITIES AND EXCHANGE BOARD OF INDIA (RESEARCH ANALYSTS) REGULATIONS, 2014

About the Company including business activity

Quantum Information Services Private Limited (QIS) was incorporated on December 19, 1989.

QIS was promoted by Mr. Ajit Dayal with an objective of providing value-based information / views on news related to equity markets, the economy in general, sector analysis, budget review and various personal products and investments options available to the Public. It was the first company to start equity research on an institutional level.

‘PersonalFN' is a service brand of QIS and was started in the year 1999. In 1999, the Company registered the Domain name www.personalfn.com for providing information on mutual funds and personal financial planning, financial markets in general, etc and services related to financial planning and research in various financial instruments including mutual funds, insurance and fixed income products to customers. It offers asset allocation and researched investment recommendations through its financial planning services.

Quantum Information Services Private Limited (QIS) is registered as Investment Adviser under SEBI (Investment Adviser) Regulations, 2013 and having Registration No.: INA000000680. In terms of second proviso to Regulation 3 (1) of SEBI (Research Analysts) Regulations, 2014 the Company is not required to obtain Certificate of registration from SEBI.

Disciplinary history

There are no outstanding litigations against the Company, it subsidiaries and its Directors.

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Details of associates

1. Money Simplified Services Limited;
2. PersonalFN Insurance Services India Limited ;
3. Equitymaster Agora Research Private Limited;
4. Common Sense Living Private Limited;
5. Quantum Advisors Private Limited;
6. Quantum Asset Management Company Private Limited;
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9. QIEF Management LLC, Mauritius
10. Natural Streets for Performing Arts Foundation;
11. Primary Real Estate Advisors Private Limited;
12. Rahul Goel;
13. I V Subramaniam.

Disclosure with regard to ownership and material conflicts of interest
 

1. Neither QIS, it's Associates, Research Analyst or his/her relative have any financial interest in the subject Company, except QIS receives fees for providing research to Quantum Equity Fund of Fund (QEFoF) which is Fund of Fund scheme managed by QMF and our associates has financial interest in the subject company.
2. Neither QIS, it's Associates, Research Analyst or his/her relative have actual/beneficial ownership of one per cent or more securities of the subject Company, at the end of the month immediately preceding the date of publication of the research report.
3. Neither QIS, it's Associates, Research Analyst or his/her relative has any other material conflict of interest at the time of publication of the research report except that QIS is, as per SEBI (Mutual Funds) Regulations 1996, an associate / group Company of Quantum Asset Management Company Private Limited and Trustees and Sponsor of Quantum Mutual Fund (QMF) and to that extent there may be conflict of interest while recommending any schemes of QMF. However any such recommendation or reference made is based on the standard evaluation and selection process, which applies uniformly for all Mutual Fund Schemes. The payment of commission (upfront /annualized & trail), if any, for any Schemes by QMF to QIS is also at arm's length and as per prevailing market practices.
    

Disclosure with regard to receipt of Compensation

1. Neither QIS nor it's Associates have any compensation from the subject Company in the past twelve months.
2. Neither QIS nor it's Associates have managed or co-managed public offering of securities for the subject Company in the past twelve months.
3. Neither QIS nor it's Associates have received any compensation for investment banking or merchant banking or brokerage services from the subject Company in the past twelve months.
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5. Neither QIS nor it's Associates have received any compensation or other benefits from the subject Company or third party in connection with the research report
    

General disclosure

1. The Research Analyst has not served as an officer, director or employee of the subject Company.
2. QIS or the Research Analyst has not been engaged in market making activity for the subject Company.
    

Subject Company means Mutual Fund Schemes

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