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Get a piece of the PSU pie

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Get a piece of the PSU pie

PSU equity funds can help you make the most of the divestment opportunity without running the risk of betting on individual stocks.
Tanvi Varma
and
Money Today
Print Edition: Mar 01, 2010

Do you want a share of the profitable PSU IPO pie but draw a blank when it comes to equities? If so, opt for PSU equity funds, which invest primarily in equity and equity-linked instruments of public sector undertakings. The first such fund, Religare PSU Equity, was launched in November 2009. "As an asset class, PSUs offer a good proxy to play on India's long-term economic growth story as they form its core," says J. Venkatesan, fund manager, Sundaram BNP Paribas PSU Opportunities fund.

These funds are thematic, not sectoral as they invest across sectors and market capitalisations. The mandate for each fund varies. For instance, the PSU Opportunities fund invests at least 65 per cent of its assets in PSUs and may invest up to 35 per cent in other stocks, while the Religare PSU Equity fund invests at least 65 per cent of its assets in BSE PSU Index companies and the balance in PSUs outside the index.

In the past year, the BSE PSU Index delivered returns of 85 per cent, compared with 72 per cent by the Sensex. Is there room for further growth? According to Venkatesan, a PSUfocused fund is likely to give better returns than a diversified equity scheme in the medium term. This is because there is a valuation gap between PSUs and private sector peers that could narrow down over the years. So, investors with a 3-5-year perspective can consider it. Also, there has been a distinct improvement in the operational metrics of many PSUs and they are pursuing good growth strategies. Besides, this asset class has long-term potential as privatisation or a regulatory move like reform initiatives in oil subsidy, banking, power, etc, could result in huge value.

Accessing this sector through mutual funds enables investors to generate better returns due to fund management expertise. However, these are riskier than diversified funds as they have a concentrated exposure to PSUs. Religare's PSU Equity fund has 10 per cent of its assets in NTPC and 10 per cent in ONGC. So, if you want to invest in a PSU fund, you may need to rebalance your portfolio to limit exposure to such firms.

Historically, PSUs have traded at a discount (25-40 per cent) due to operational inefficiencies and lack of professional management. However, in the past few years, the functioning of several entities has improved. In fact, divestment is expected to make them more efficient, leading to a re-rating of stocks. Currently, however, the valuations of many of these stocks have seen a big rise in anticipation of the divestment plan, which makes these susceptible to correction.

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