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What is CPSE ETF (Central Public Sector Enterprises) & How to Invest in it?

What is CPSE ETF (Central Public Sector Enterprises) & How to Invest in it?
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If you’re an investor looking for a unique and rewarding way to build a diversified portfolio, CPSE ETF could be the perfect solution. In this blog, we’ll delve into what CPSE ETF is, how it works, its advantages and risks, and why it’s gaining popularity among both seasoned investors and newcomers alike.

Before we dive deeper into the CPSE ETF, let’s understand the CPSE ETF meaning. So, CPSE means companies owned and operated by the Indian government. The Government of India established CPSE ETF as a financial instrument to allow investors to invest in a basket of these public sector companies. This investment avenue offers numerous benefits and aligns with the government’s push towards disinvestment and public sector participation.

What is CPSE ETF?

The Nifty CPSE full form is the Central Public Sector Enterprises Exchange-Traded Fund. It is a unique financial instrument that allows investors to buy shares in a basket of Central Public Sector Enterprises. It is a form of an ETF (ETF stands for exchange-traded fund), which means it is traded on stock exchanges just like individual stocks. The CPSE ETF is a component of the government’s disinvestment strategy, with the objective of generating more than ₹1 lakh crore through the sale of its shares in various Public Sector Units (PSUs or PSU stocks).

The concept behind Central Public Sector Enterprises Exchange-Traded Fund (ETF) is to offer diversification, cost-effectiveness, and transparency to investors. By investing in a single CPSE ETF, investors gain exposure to a wide range of public sector companies across different sectors, spreading the risk associated with investing in a single company. This diversification also helps mitigate the impact of volatility that individual stocks may experience.

One of the key features of Nifty CPSE ETF is that it is a passively managed fund. This means that the design of the fund is such that the fund’s portfolio tries to replicate the composition of a specific benchmark index, such as the Nifty CPSE Index. The fund manager‘s role is to ensure that the ETF’s performance closely tracks the index it is linked to. Making it a relatively low-maintenance investment option.

Top 10 Stocks Holding in CPSE ETF Portfolio

Stocks Invested in Sector Value% of Top Holdings
National Thermal Power Corporation LtdPower Generation48635.721.53%
Power Grid Corporation of India LtdPower Generation49644.9 19.74%
Oil and Natural Gas Corporation LtdOil Exploration & Production4473019.80%
Coal India LtdCoal 43783.517.41%
Bharat Electronics LtdAerospace & Defense32221.212.81%
NHPC LtdPower Generation9314.73.70%
Oil India LtdOil Exploration & Production 6956.3 2.77%
SJVN LtdPower Generation3365.7 1.34%
NBCC (India) LtdCivil construction2602.61.03%
Cochin Shipyard LtdShip Building & Allied Services2507.11.00%
Disclaimer: Please note that the above list is for educational purposes only, and is not recommendatory. Please do your own research or consult your financial advisor before investing.

Note: The data on the top CPSE ETFs in India in the list is from 9th October 2023.  However, for real-time updates on stock prices and market trends, visit the smallcase stocks collection today!

Brief History and Inception of CPSE ETF in India

The idea of Central Public Sector Enterprises Exchange-Traded Fund was first introduced by the Government of India as a part of its disinvestment strategy to unlock value from its holdings in public sector companies. The first CPSE ETF, known as the “CPSE ETF 2014,” was launched in March 2014 by the Department of Disinvestment, now known as the Department of Investment and Public Asset Management (DIPAM).

The CPSE ETF 2014 was well-received by investors, as it offered an opportunity to invest in some of India’s leading public sector companies with a single transaction. Building on its success, subsequent tranches of CPSE ETF were launched, including CPSE ETF 2017 and CPSE ETF 2019, each comprising different sets of CPSEs.

The success of Central Public Sector Enterprises Exchange-Traded Fund encouraged the government to explore more disinvestment opportunities through ETFs. In addition to this, the government also introduced other sector-specific ETFs, such as the Bharat 22 ETF, which includes a mix of CPSEs, public sector banks, and strategic holdings of the government.

Features of CPSE ETF

The CPSE ETFs are flexible investment options with no mandatory holding period. Investors can trade units on stock exchanges, with a minimum purchase of just 1 unit, granting exposure to the CPSE stocks in the NIFTY CPSE index.

Currently, approximately 98.6% of the CPSE ETF is invested in equities, while the remainder is in liquid securities. The majority of these equity holdings are in large-cap firms, constituting over 75%, while mid-cap companies make up around 20% of the CPSE ETF.

The CPSE ETF is notably concentrated, mainly in the power and oil & gas sectors. Companies like NTPC, Power Grid Corp, and ONGC each hold nearly 20% of the CPSE ETF’s portfolio.

As passive funds, CPSE ETFs have the industry’s lowest expense ratio, currently at 0.05%, in contrast to the typical mutual fund’s 2% expense ratio.

Comparison with Other Types of ETFs and Investment Options

To better understand Central Public Sector Enterprises Exchange-Traded Fund and its place in the investment landscape, let’s compare it with other types of ETFs and traditional investment options. While traditional ETFs may track various market indices, CPSE ETF focuses exclusively on the performance of government-owned companies.

Compared to actively managed mutual funds, CPSE ETFs generally have lower expense ratios due to their passive management style. This can be advantageous for investors seeking cost-effective investment options while still aiming to benefit from market growth.

Additionally, when compared to investing in individual stocks of CPSEs, CPSE ETF share offers diversification benefits. As it spreads the investment across multiple companies. This diversification can reduce the impact of poor performance from any individual CPSE on the overall investment.

However, like any investment, Central Public Sector Enterprises Exchange-Traded Funds come with their own set of risks. The performance of the fund is directly influenced by the performance of the underlying CPSEs. And factors affecting the public sector, such as government policies and economic conditions, can impact the ETF’s returns.

How Does CPSE ETF Work? 

At the heart of the CPSE ETFs lies its underlying assets, which are the stocks of various (CPSEs). These CPSEs are government-owned companies that play a crucial role in India’s economy, operating across diverse sectors like energy, banking, infrastructure, and more. Some prominent CPSEs included in the CPSE ETF portfolio may be well-known names like ONGC (Oil and Natural Gas Corporation), NTPC (National Thermal Power Corporation), Coal India, and others.

The performance of CPSE ETF share price is closely tied to the combined performance of these CPSE stocks. As an investor in CPSE ETF, you indirectly hold a portion of shares of all the companies included in the ETF’s portfolio, enjoying the collective benefits and risks of those investments.

Role of the Government of India in Managing CPSE ETF

The Government of India, specifically the Department of Investment and Public Asset Management (DIPAM), plays a critical role in managing Central Public Sector Enterprises Exchange-Traded Funds. DIPAM is responsible for creating and launching the CPSE ETF, as well as deciding on the composition of the portfolio. The government aims to raise funds through disinvestment by selling its shares in CPSEs to the public through the ETF route.

The government’s continued stake in Nifty CPSE ETFs means it remains invested in the performance of the underlying CPSEs. Consequently, the government has a vested interest in promoting the growth and profitability of these public-sector enterprises.

Creation and Redemption Mechanism of Central Public Sector Enterprises Exchange-Traded Fund Units

The creation and redemption mechanism is a unique feature of ETFs, including CPSE ETFs. It allows for the continuous availability of units in the market and helps ensure that the CPSE ETF price closely tracks its net asset value (NAV).

  • Creation: When an ETF is launched, an authorized participant, typically a large financial institution or broker, works with the ETF issuer (in this case, the government) to create new units of the ETF. This is achieved by buying a designated basket of the underlying assets (CPSE stocks) in the same proportion as the ETF’s composition. These new units are then made available for trading on the stock exchange.
  • Redemption: On the other hand, when an investor wishes to exit their position in the ETF, they can do so by redeeming their units. The process is similar to creation but in reverse. The investor sells their ETF units on the stock exchange to the general public, and the ETF issuer then buys back those units from the investor in exchange for the underlying assets (CPSE stocks). 

Advantages of Investing in CPSE ETFs

Diversification Benefits for Investors

One of the most significant advantages of investing in CPSE ETF is the diversification it offers to investors. By holding a basket of stocks from various CPSEs, the ETF (ETF full form is Exchange-Traded Fund) spreads the investment risk across multiple companies and sectors. This diversification helps reduce the impact of poor performance from any single company. Thus, providing a more stable investment option compared to investing in individual stocks.

Additionally, CPSE ETF companies are from different sectors. This includes energy, banking & finance, power, and more, further enhancing diversification and exposure to different segments of the economy. This diversification can be especially beneficial for investors who prefer a balanced approach to risk management.

CPSE ETF has Low Expense Ratios and Cost-Effectiveness

CPSE ETFs are passively managed, which means they aim to replicate the performance of a specific index without frequent buying and selling of assets. As a result, the management fees and expenses of CPSE ETF constituents are generally lower compared to actively managed funds. This cost-effectiveness allows investors to retain a higher proportion of their returns, maximizing the potential gains from their investment.

Moreover, due to their structure and efficiency, CPSE ETFs can offer an attractive investment avenue with relatively low expense ratios. Consequently, making them an appealing choice for cost-conscious investors seeking long-term growth opportunities.

Liquidity and Tradability Advantages

Central Public Sector Enterprises Exchange-Traded Funds are listed and traded on stock exchanges, which grants investors the advantage of liquidity. Unlike traditional mutual funds, where the units are bought and redeemed directly from the fund house. Hence, investors can buy or sell CPSE ETF units on the exchange at prevailing market prices throughout trading hours.

This liquidity feature ensures that investors have the flexibility to enter or exit their positions whenever they desire. That too without being subject to any lock-in periods. The ability to trade in real-time offers investors greater control over their investments. Thus, providing them with the freedom to adjust their portfolio according to changing market conditions or personal financial goals.

Potential for Stable Returns Over the Long Term

CPSE ETFs are composed of shares of established and well-known Central Public Sector Enterprises, which have a substantial presence in the Indian economy. These CPSE ETF companies often have a track record of stable performance and may distribute regular dividends to shareholders.

Over the long term, CPSE ETFs have the potential to generate stable returns, especially when the underlying CPSEs perform well. Moreover, the government’s efforts to boost the growth and efficiency of public sector companies can contribute to the long-term appreciation of CPSE ETFs.

For investors with a long investment horizon, CPSE ETFs can serve as a suitable addition to their portfolio. And can provide a balance of stability and potential for growth.

Performance and Historical Analysis of CPSE ETFs 

Reviewing the Historical Performance of CPSE ETF

To know about the historical performance of CPSE ETF, we can examine the past trends of some main NSE CPSEETF. Let’s look at various tranches of CPSE ETF launched by the government over the years and analyze their performance.

For example, we can consider the performance of the initial CPSE ETF share launched in 2014, as well as subsequent tranches like Central Public Sector Enterprises Exchange-Traded Fund 2017 and CPSE ETF 2019. By evaluating the returns and fluctuations in their NAVs (Net Asset Values) over different time frames, we can assess how these ETFs have performed in various market conditions.

Analyzing Past Trends and Returns

When analyzing the historical performance of CPSE ETFs, it’s essential to consider both short-term and long-term returns. Short-term fluctuations may be influenced by market sentiment and macroeconomic factors. While long-term performance can provide insights into the overall sustainability and potential of these ETFs.

For instance, suppose we examine the past five years’ performance of Central Public Sector Enterprises Exchange-Traded Funds. We might observe that these ETFs have experienced periods of growth, and occasional corrections. And even volatility due to changing market conditions. Analyzing such trends can help investors understand the typical behaviour of CPSE ETFs and make more informed investment decisions.

Factors Affecting the Performance of CPSE ETF

The CPSE ETF share price and performance can be influenced by a variety of factors. Understanding these factors is crucial for investors to assess the potential risks and rewards associated with investing in these ETFs.

  • Market Conditions: The overall health of the share market and the economy can significantly impact the performance of CPSE ETFs. During bullish market phases, these ETFs may exhibit strong growth, while bearish markets can lead to corrections in their NAVs.
  • Sectoral Performance: The performance of specific sectors represented in the CPSE ETF portfolio can also influence overall returns. For instance, if the energy sector experiences a surge in demand and profitability, it could positively impact the ETF’s performance.
  • Government Policies: Government policies and decisions regarding disinvestment, economic reforms, and sector-specific initiatives can have a direct bearing on CPSE ETF share price. Favourable policies may boost the performance of these ETFs, while unfavourable decisions could lead to temporary setbacks.
  • Interest Rates and Inflation: Changes in interest rates and inflation levels can affect the overall market sentiment and investor behaviour. This indirectly impacts the performance of Central Public Sector Enterprises Exchange-Traded Funds.
  • Global Events: Geopolitical developments and international events can create ripples in the global financial markets, affecting investor sentiment. And, consequently, the performance of Central Public Sector Enterprises Exchange-Traded Funds.

What are the Risks Associated with Investing in CPSE ETFs?

Some of the risks associated with CPSE ETFs are as follows:

Market Risks and Volatility

Like any investment in the stock market, Central Public Sector Enterprises Exchange-Traded Funds are exposed to market risks and fluctuations. The overall performance of the stock market can influence the NAV of CPSE ETFs, leading to potential gains or losses for investors. Market volatility, driven by economic conditions, geopolitical events, and investor sentiment, can result in rapid price movements, making it essential for investors to be prepared for short-term fluctuations.

Investors should be aware that the value of Central Public Sector Enterprises Exchange-Traded Fund units can rise or fall based on market conditions, and they should consider their risk tolerance before investing in such funds.

Sector-Specific Risks Associated with CPSE Stocks

Central Public Sector Enterprises Exchange-Traded Funds consist of stocks from various sectors, and the performance of these sectors can vary based on industry-specific factors. For example, the energy sector’s performance might be influenced by fluctuations in crude oil prices, while the banking sector’s performance could be affected by interest rate changes and loan quality.

Investors should be cautious about concentrating their investments heavily in one sector, as it may lead to increased exposure to sector-specific risks. Diversification across different sectors can help mitigate this risk.

Government Policies and Regulatory Risks

Government policies and regulations can significantly impact CPSE ETF stocks. Decisions related to disinvestment, privatization, or changes in sector-specific policies can affect the performance of the underlying NSE CPSEETF and, consequently, the ETF’s returns.

Moreover, changes in tax laws or investment regulations could impact the taxation of capital gains on ETF units, affecting investors’ net returns. Investors should stay informed about government policies and their potential implications on CPSE ETF investments.

Importance of Due Diligence and Risk Management

Given the various risks associated with investing in Central Public Sector Enterprises Exchange-Traded Funds, conducting thorough due diligence is crucial. Investors should carefully analyze the ETF’s historical performance, portfolio composition, expense ratios, and the expertise of the fund manager.

Moreover, understanding their own risk tolerance and investment goals is essential before making any investment decision. CPSE ETFs may be suitable for some investors seeking long-term growth with moderate risk, while others may prefer different investment avenues.

Investors should consider diversifying portfolio across various asset classes and industries to reduce risk and enhance potential returns. Asset allocation based on individual financial goals and risk appetite can play a vital role in managing overall risk exposure.

Additionally, seeking advice from a qualified financial advisor can be instrumental in making well-informed investment choices aligned with individual circumstances and financial objectives.

Now that we have covered what is CPSEETF and CPSEETF company products, let’s understand how to invest in ETF CPSE and maintain a CPSEETF portfolio in the next section.

How to Invest in CPSE ETF?

A step-by-step guide to investing in Central Public Sector Enterprises Exchange-Traded Funds

Step 1: Research and Assess

Begin by researching CPSE ETFs and understanding their historical performance, portfolio composition, expense ratios, and risk factors. Assess whether investing in Central Public Sector Enterprises Exchange-Traded Fund aligns with your financial goals and risk tolerance.

Step 2: Choose the Right CPSE ETF

There are different tranches of Central Public Sector Enterprises Exchange-Traded Funds available in the market. Select the one that best suits your investment objectives. Consider factors such as the underlying CPSEs, sector exposure, and expense ratios.

Step 3: Open a Demat Account

To invest in CPSE ETFs, you need a Demat account. If you don’t have one, you can open an account with a stockbroker or a financial institution. Ensure that the Demat account is linked to your bank account for seamless transactions.

Step 4: Place an Order

Log in to your trading account and place an order to buy Central Public Sector Enterprises Exchange-Traded Fund units. Enter the desired quantity of units you wish to purchase and the price at which you want to buy them. Central Public Sector Enterprises Exchange-Traded Funds are listed and traded on stock exchanges like regular stocks.

Step 5: Monitor Your Investment

Once you have bought Central Public Sector Enterprises Exchange-Traded Fund units, keep a close eye on their performance. Monitor market conditions and any changes in the CPSE ETF portfolio that may affect its performance.

Why Should You Invest in CPSE ETF Stock?

Here are some of the following reasons as to why you should invest in CPSE ETF stocks. 

  • Before deciding to invest in CPSE ETF companies, individuals should carefully assess their financial objectives and risk tolerance. These considerations are vital, particularly in the context of potential fluctuations in CPSE ETF share prices.
  • CPSE ETFs provide an avenue for investors to diversify their portfolio by gaining exposure to a range of public sector companies, referred to as CPSEs. These CPSE ETF companies span various sectors, offering investors a well-rounded opportunity for growth.
  • For those keen on participating in India’s public sector growth story, CPSE ETFs represent an accessible means of doing so. These ETFs are purpose-built to mirror the performance of CPSEs, making them an appealing choice for individuals interested in this sector.
  • Keeping a watchful eye on CPSE ETF share prices is prudent, as these prices can fluctuate based on market dynamics and the performance of the underlying CPSEs. Consistent monitoring of share prices is essential for investors seeking to make informed decisions regarding the purchase or sale of CPSE ETF units.

Available Platforms and Exchanges for Investing

Investing in Central Public Sector Enterprises Exchange-Traded Funds is relatively straightforward, and investors can do so through various platforms and stock exchanges. Most stockbrokers and financial institutions in India offer the option to trade ETFs. This includes CPSE ETFs, on major stock exchanges like NSE (National Stock Exchange) and BSE (Bombay Stock Exchange).

Online trading platforms and mobile apps provided by stockbrokers make it convenient for investors to buy and sell Central Public Sector Enterprises Exchange-Traded Fund units with a few clicks. Investors can also access information about the performance and composition of NSE CPSE ETF through these platforms.

Tax Implications and Considerations

Investors should be aware of the tax implications of investing in CPSE ETFs. These are treated like equity-oriented funds for tax purposes.

  • Short-term Capital Gains (STCG): If you sell CPSE ETF units within one year of purchase, the gains are treated as short-term capital gains and are subject to a flat tax rate of 15%.
  • Long-term Capital Gains (LTCG): If you sell CPSE ETF units after one year of purchase and the gains exceed Rs. 1 lakh, they are considered long-term capital gains and are taxed at 10% without indexation
  • Dividends: Central Public Sector Enterprises Exchange-Traded Funds may also declare dividends, which are tax-free in the hands of investors. But the fund house deducts Dividend Distribution Tax (DDT) before distributing them.
  • Tax-saving Investments: Investors should note that CPSE ETFs do not qualify for tax-saving under Section 80C of the Income Tax Act. They are considered regular equity investments.

It’s advisable to consult with a tax advisor or financial expert to understand the tax implications based on your specific financial situation.

Current Market Outlook and Future Prospects of CPSE ETFs

The current market outlook for CPSE ETF appears promising, given the continued government emphasis on disinvestment and public sector reforms. As the economy expands and the government takes measures to improve the efficiency and profitability of CPSEs, the prospects for CPSE ETFs look favourable.

Moreover, the long-term growth potential of India’s public sector enterprises, coupled with the diversification benefits offered by CPSE ETF, makes them an attractive investment option for investors seeking stable returns and exposure to various sectors.

Factors Influencing CPSE ETF Performance in the Coming Years

Several factors are likely to influence the performance of Central Public Sector Enterprises Exchange-Traded Funds in the coming years:

  • Government Initiatives: The government’s policies related to disinvestment, privatization, and reforms in the public sector will play a crucial role in shaping the performance of CPSE ETF stocks. Investor sentiment will be influenced by the government’s commitment to enhancing the value and efficiency of CPSEs.
  • Economic Growth: The overall economic growth of the country can have a significant impact on the performance of CPSE ETF. Robust economic growth is generally favourable for the profitability of public sector companies.
  • Sectoral Performance: The performance of specific sectors represented in the CPSE ETF share portfolio will be a key driver of returns. Investors should closely monitor the growth prospects and challenges faced by these sectors.
  • Global Factors: Geopolitical developments and global economic trends can also influence investor sentiment. And capital flows into Central Public Sector Enterprises Exchange-Traded Funds.

Investors should remain vigilant and stay informed about these factors to make well-informed decisions regarding their investments in CPSE ETFs. While CPSE ETFs present attractive opportunities, investors should always approach the market with a long-term perspective. And be prepared for short-term fluctuations.

To Wrap It Up…

In conclusion, CPSE ETFs offer investors a unique and promising opportunity to capitalize on India’s growing public sector enterprises. As a passively managed investment instrument, they provide diversification benefits, low expense ratios, and liquidity advantages, making them an attractive addition to any well-structured investment portfolio.

Financial experts endorse CPSE ETF stocks as a valuable investment avenue, acknowledging their potential for long-term growth and government-backed stability. As the government continues its disinvestment and public sector reforms, these may witness further value-unlocking opportunities.

However, investors should stay attuned to changing market dynamics and global events that can influence the performance of CPSE ETFs. By maintaining a long-term investment perspective and consulting with financial advisors, investors can navigate the markets with confidence. And make prudent choices to achieve their financial aspirations.

FAQs

1. What is CPSEETF full form?

The CPSE full form in economics is Central Public Sector Enterprises Exchange Traded Fund.

2. What is a CPSE ETF?

A CPSE ETF (Central Public Sector Enterprises Exchange Traded Fund) is a type of exchange-traded fund that invests in shares of public sector companies owned by the Indian government.

3. What is CPSE ETF growth?

CPSE ETF growth refers to the increase in the value of the CPSE ETF over time. It is a measure of how the ETF has performed in the stock market.

4. Is CPSE ETF taxable?

Yes, CPSE ETF is taxable like any other investment. Capital gains from selling CPSE ETF units are subject to capital gains tax, and dividends earned from the ETF are taxable as per the investor’s tax slab.

5. Who should in invest in CPSE ETF constituents?

Investors seeking diversified exposure to India’s PSU stocks should consider investing in CPSE ETF constituents, especially those interested in long-term growth and potential dividend income.

6. Is CPSE ETF good investment?

The CPSE ETF full form is  can be a good investment option for investors who are looking for a diversified and low-cost exposure to the Indian stock market. However, investors should be aware of the risks involved before investing in any CPSE ETF.

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