Should You Invest in Bharat 22 ETF?

The Government of India has launched an exchange traded fund (ETF) comprising of 22 blue chip companies or stocks. This is the second ETF launched after the success of CPSE ETF. These 22 stocks are of all public sector companies of the diversified sector such as energy, finance, utilities etc. We will look at the features of Bharat 22 ETF and should you invest in Bharat 22 ETF or not?

What is ETF?

An exchange traded fund (ETF) is a security traded in stock exchanges like a stock. It holds assets such as stocks, commodities or bonds. It tracks an index, a commodity or a sector like an index fund or a sectoral fund. The price of ETF changes throughout the day as they are bought and sold in the stock market.

Features:

The Government of India launched CPSE ETF in 2014 and raised Rs 11500 crore in three phases. As a part of government’s divestment plan and raising of Rs 72,500 crore it has launched this Bharat 22 ETF scheme.

  • Bharat 22 ETF comprises of 22 blue chip stocks.
  • It covers the basic six sectors such as basic materials, energy finance, FMCG, Industrials, and utilities. So it is well diversified in terms of sectors.
  • It consists of public sector Units like ONGC, Power Grid, NTPC, Coal India etc. and banking majors like SBI.
  • It also consists of companies which are partially owned by Government of India such as Axis Bank, L&T, ITC etc. These stocks are part of the government’s holdings in SUUTI (Specified Undertaking of Unit Trust of India).
  • Bharat 22 ETF will be managed by ICICI Prudential AMC whereas Asia Index will be index provider.
  • The allocation to ETF shall be rebalanced annually.
ETF Vs Mutual Fund:

Mutual funds are comprising of stocks and managed by professionals. The funds are collected from different investors and that funds are managed by funds managers of that specific fund. There are various differences between ETF and Mutual Funds. ETFs are traded during the market hours and its price changes due to the fluctuation in demand and supply. Mutual funds are traded on the basis of net asset value which is set at the closing of the market.

There is no minimum investment specified in case of ETFs whereas you have to invest a minimum amount specified in case of mutual funds. As you are able to sell it during the market hours the liquidity is more for ETFs than mutual funds though I believe that would not make much difference to individual investors. 🙂

Holdings of Bharat 22 ETF:

Bharat 22 ETF comprises of 22 Blue chip companies with different weightages. This composition shall be renewed every year. The companies and their portion (in bracket) to the ETF is as per the followings:

  1. Larsen & Toubro Limited (17.1%)
  2. ITC (15.2%)
  3. State Bank of India (8.6%)
  4. Power Grid Corporation of India (7.9%)
  5. Axis Bank (7.7%)
  6. NTPC (6.7%)
  7. ONGC (5.3%)
  8. NALCO (4.4%)
  9. Indian Oil Corporation (4.4%)
  10. BPCL (4.4%)
  11. Gail India (3.7%)
  12. Coal India Limited (3.3%)
  13. Bharat Electronics limited (3.3%)
  14. Engineers India Limited (1.5%)
  15. Bank of Baroda (1.4%)
  16. Rural Electrification Corporation (1.3%)
  17. NHPC (1.2%)
  18. Power Finance Corporation (1 %)
  19. NBCC (0.6%)
  20. NLC India (0.3%)
  21. Indian Bank (0.2%)
  22. SJVN (0.2%)

How to invest in Bharat 22 ETF?

Bharat 22 ETF has not yet launched or opens for subscription by the fund house. Once it is open for subscription more clarity will come. Everybody is expecting a discount of 5% at the price during launch same as CPSE ETF. You can subscribe in the same way you subscribe IPO through ASBA. You should have a valid Demat account to subscribe the ETF. Once it is listed on the market you can buy and sell ETF like stocks.

Tax Treatment:

The Bharat 22 ETF has tax implications same as stock or equity mutual fund. The short term capital gain by selling the ETF is taxable at a rate of 15%. If you sell after one year of purchase it is called as long term capital gain and this is tax-free. If you want to know more about the capital gain tax read another article on capital gain tax on stocks, mutual fund and property.

Should you invest in Bharat 22 ETF?

As the Bharat 22 ETF comprises of 22 Blue chip stocks the performance of the ETF depends on the performance of those stocks. If you observe the weightage factors L&T, SBI and ITC shares the whopping 40% of weightage among the 22 stocks. The remaining 60% weightage is shared by rest 19 stocks. Also, remember its performance depends on first 11 stocks which share almost 85% of the weightage.

If you compare Bharat 22 ETF with CPSE ETF it would not be fair because CPSE ETF was launched in 2014 and the market was down that time and that’s why the return is more in case of CPSE ETF. This will not happen for this ETF most likely as the market is already up and there is less room for increase.

Moreover, as the ETF is PSU centric it is not well diversified in that way. It can be called as a diversified fund with the PSUs. In my opinion, It would more appropriate if you select a diversified equity fund from a mutual fund house.

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