CPSE fund FFO 18-20 Jan 2017

As per the prospectus, (kim-cpse-etf-ffo-form)The 5% subsidy is without any lock-in. Also in today’s paper EPFO has been mandated to subscribe to 50% of the total fund offering i.e. 2,800-3,000 cr INR. Add to it LIC and other agencies managed by government. It is likely that there will be a healthy secondary market allowing the investors to exit by 10th of Feb. So there is a cushion of 4-5% on your investment. I guess it is not a bad deal for short term. The question I want to answer is for the long term does it have merits?

I am wondering why each and every one of the stock trades at a discount in the futures market? If markets are efficient, then the future price should be higher to accommodate cost of funds/interest. Will I be better off investing directly in the futures market rather than going through the fund itself?

For those who don’t understand F&O market, open the details of your favorite mutual fund and look at the weight-age of the that fund to these stocks. Most likely it will be less than the weight given by Nifty. This indicates that these stocks are likely to under-perform the market and fund manager can beat the market by staying away.

stock weight spot future price (Feb/March) expected returns
ONGC 24.39% 195.2 193 -1.13%
Coal India 20.57% 307.8 292 -5.13%
Indian Oil Corporation 17.99% 352.25 344 -2.34%
Gas authority of India limited 11.19% 442 435 -1.58%
Power finance corporation 5.59% 137.05 132.15 -3.58%
Rural electrification corporation 5.22% 143.7 137.45 -4.35%
Container corporation 5.05% 1201.95 1189.55 -1.03%
Bharat Electronics 4.33% 1513.6 1505.1 -0.56%
Oil India 3.39% 341.4 335.8 -1.64%
Engineers India 2.26% 153.9 153.5 -0.26%
Total 99.98% weighted avg -2.49%

Take the recent petrol pump swiping chaos. Modi announced a 0.75% cash back on digital payments at petrol pump without ever explaining who will foot the bill. Later on Finance minister waived the 1% transaction charge on petrol bunks without informing oil marketing company, bank, credit card or petrol bunks who will foot the bill. When will government understand that commodities work on wafer thin margins and government has no business in fixing the prices or promotion schemes on behalf of these Navaratna companies.

No wonder while the government keeps on cribbing the energy subsidy bill bankrupting the government, the retail prices for fuel are higher than those in America, where there is no subsidy. Taxes, inefficiency, distribution losses and poor customer service are the black holes where the tax player money is going.

The fund management fee of 64 basis points for a passive fund is high. If there is no turnover, ETF means that the fund manager is under no obligation to sell the holdings to honor redemption, where is the money going. Well it is a separate discussion on how distributor & fund managers are able to corner such a large fees in India.