What to buy: PSU ETFs or equity mutual funds?

This year, equity investors would have encountered two PSU-focussed ETFs hitting the markets. The first was the CPSE ETF which came out with its second fund offering earlier this year. More recently, we had the Bharat 22 ETF making a new fund offer. Both ETFs are part of the government of India’s PSU divestment to the tune of Rs 72,500 crore. By investing in these ETFs, common investors can indirectly beco-me shareholders of some of India’s most iconic companies. Can your returns be better in PSU ETFs? Let’s take a look at what it means to invest in these giants of corporate India vis-a-vis investing in equity mutual funds.

WHERE YOUR MONEY IS GOING:

The CPSE ETF comprises of 10 Maharatnas and Navratnas, with a firm focus on the energy sector. The Bharat 22 ETF is a lot more diversified, with 22 stocks from six sectors. In both funds, the majority of the underlying stocks are among the biggest corporate entities of India. In comparison, an equity mutual fund is not restricted to just large-cap companies or PSUs. There may be a variety of themes to which the fund can invest. For example, the best-performing funds in the last 12 month contain mid-cap and small-cap stocks that delivered impressive returns since the shock of the demonetisation.

RETURNS:

Since its launch in May 2014, the CPSE ETF has returned 12.30 per annum, and 18.84 per cent year-to-date as on December 20. The Bharat 22 ETF, which launched in November 2017, has so far seen negative returns. What you can expect from both these PSU ETFs — or most large-cap funds — are stable, sedate returns over the long term. Think of it like a fixed deposit for the long term. In comparison, an equity mutual fund’s returns may vary depending on its composition. Year-to-date, large-cap funds have delivered a whopping 30 per cent, mid-cap funds 40 per cent, and small-cap funds a whopping 51 per cent. These are fund category averages. The returns are the highest in the mid-and small-cap segments, where the risks are also the highest. In comparison, the PSU ETFs present lower risk due to the stable nature of the underlying assets.

ACTIVE FUND VS PASSIVE FUND:

A big reason why mutual funds compare favourably against ETFs is that they are actively managed. Your fund manager decides what to buy, hold, and sell in the fund portfolio with an objective to maximise your returns. But in an ETF, the fund is passively-managed. An ETF tracks a stock index’s performance. It is composed in the same manner and proportion the index is.

HOW TO INVEST:

The CPSE and Bharat 22 ETFs-or any ETFs for that matter can be bought and sold on the stock exchange. For this, you will need a demat trading account which you can open by visiting your bank branch and submitting the required documents along with a cheque. Mutual funds, on the other hand, can be bought in many ways. You can buy them through online aggregators by registering online and paperlessly submitting your KYC documents and providing an ECS mandate. If you are a seasoned investor, you should buy your mutual fund directly from the fund house and enjoy a lower expense ratio.

EXPENSE RATIO:

Expense ratio is what you pay your fund house for managing your investment for you. ETFs being passively-managed funds have very low expense ratios. For the CPSE ETF, the expense ratio is around 0.07 per cent, and for the Bharat 22 ETF, it is a miniscule 0.0095 per cent as of today. In comparison, the expense ratios of equity mutual funds may typically be anywhere between 0.5 per cent and 3 per cent. This may seem inordinately high in comparison. But with equity funds, you are also presented a much better chance of earning higher returns.

FINAL WORD:

With the CPSE and Bharat 22 ETFs, you get to invest in the giants of the Indian economy. You also get a chance to own a piece of our most iconic companies, which are core to the Indian economy. Think of investing in these companies as putting your money in a low-risk fixed deposit - you may get stable, moderate returns in the long term, therefore you should have a long horizon for these investments. Investing in equity mutual funds, though, is a different ball game.Depending on the amount of risk you can endure, your long-term returns may range from moderate to explosive.