Latest Developments Involving Disinvestment ETFs and need for Demat Account

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Exchange traded funds(ETFs) are similar to mutual funds which are listed and traded on the stock markets just like shares. The Government of India transferred its stake in key state-owned companies in May 2014 through Central Public Sector Enterprises (CPSE) and later through Bharat 22 (B22) ETF in November 2017. It was a great opportunity for investors to own shares in big government-controlled organisations, plus three big private sector organisations.

Demat Investment

The Bharat 22 ETF enables the government to collect its holdings in selected PSUs in an ETF and generate disinvestment funds from investors at one go. It monitors the specifically made S&P BSE (Bombay Stock Exchange) Bharat 22 Index, controlled by Asia Index Private Limited. This index is composed of 22 PSU (Public Sector Undertakings)stocks and with some private sector organisations.

Since these are ETFs and listed on the stock exchanges, you needed a demat account to buy them. If you don’t know what is demat account, then it is nothing but a way to hold your shares and securities in a dematerialised, i.e.,electronic format. To trade in the share market, it is mandatory to have a demat account.

The Importance Of ETFs

Typically, ETFs are passive funds, which is a type of investment vehicle that tracks a market index or a particular market segment. In this, the fund manager doesn’t pick stocks on your behalf. Alternatively, the ETF directly copies an index and attempts to match its performance accurately. In an ETF, an investor can purchase and sell units at the current market price on a real-time basis during the market’s working hours.

ETFs are cost-efficient and considering that they don’t make any stock or security choices, they don’t utilise the services of star fund managers. In India, Sensex 30 and Nifty 50 ETFs impose annual expenses of 0.05 to 1% of their Net Asset Value (NAV).However, actively maintained funds charge 2.5 to 3.25% NAV a year, and open-end index funds charge 0.20 to 2% a year. The Bharat 22 ETF is an attractive deal at an expense ratio of 0.0095%, for three years from the day of listing.

Expenses apart, there are two reasons why ETFs are the rage amongst global investors.

ETFs enable investors to avoid the uncertainty of poor security choice by the fund manager while allowing a diversified investment portfolio.

The securities and stocks in the indexes are thoughtfully selected by index providers and are rebalanced systematically.

How ETFs Play A Significant Role In Disinvestment

The CPSEs can increase the pace of disinvestment only when more individuals invest in the ETFs. The data shows that a significant group of investors in India have funded in ETFs due to certain benefits that they had in this type of investment.

Let’s take a look at some of them of the advantages:

Investment In Low Cost

The primary investors in these ETFs were given a discount of 5% on the market price of the shares.Moreover, there was a reward for a ‘loyalty bonus’ of 1/15 for the investors who retained the shares for at least one year.

Further Fund Offer (FFO)

The government’s earlier offer attracted a lot of attention from investors. The government’s planning to increase the same to the next round of ETFs by naming it as an FFO. Therefore,the investors will get the same benefit as the initial investors.

Better Returns

The current investors have observed an increment in their returns at 12.21% per annum. This comes with an addition to the reward that was earned at an additional 6.66%. It was largely due to the offers presented by the government. So, if such offers continue, it will unquestionably earn the same profits in the near future.

Transparency

With ETFs, there is transparency in the investing process as people get to track the market of these shares throughout the day.

Benefit To The Government

ETFs has become one of the simplest tools for the Public Sector Enterprises (PSE) to disinvest. They are receiving a steady number of investors throughout the day who are trading in ETFs, which makes the process faster and streamlined on a daily basis. The government is not obliged to wait for the end day purchases and valuations unlike other bonds and securities of government.

Exposure

Due to the advantages mentioned above, the ETFs also give an excellent opportunity to the investors to get exposure to the equity market at an affordable cost.

The disinvestment in ETFs appears to be a lucrative deal, wherein an individual or company wanting to try the exchange market can readily invest. By doing so, it will give them an idea to a PSE and also assist them to be a member of the long-term development of the economy!