What is a CPSE ETF? A Complete Guide to Investing in India’s Public Sector Giants
What is a CPSE ETF?
The Central Public Sector Enterprises (CPSE) Exchange Traded Fund (ETF) is an investment vehicle launched to facilitate the Government of India’s initiative to disinvest some of its stake in selected CPSEs through the ETF route. By investing in this ETF, you essentially get exposure to India’s largest public sector companies.
How Does CPSE ETF Work?
The CPSE ETF is a passive investment fund that tracks the Nifty CPSE Index. It works by replicating the portfolio of this index, investing in the same stocks in the same proportion.
- The Index: The index comprises 10 select CPSEs.
- Sector Focus: The portfolio is concentrated in key sectors such as Power, Oil, Gas and Consumable Fuels, Capital Goods, and Construction.
How are companies selected in the CPSE Index
For a company to be included in the Nifty CPSE Index, it must meet rigorous criteria:
- Govt. List: Included in the list of CPSEs published by the Department of Public Enterprise.
- Listing: Listed on the National Stock Exchange of India Ltd. (NSE).
- Ownership: Have more than 51% government holding (stake via Govt. of India or President of India) under the promoter category.
- Market Cap: Have an average free-float market capitalization of more than ₹1,000 Cr. for the six-month period ending December 2019.
- Dividends: Companies must be IRDA dividend norms compliant.
Methodology and Rebalancing
The index follows specific rules to ensure it accurately reflects the performance of these CPSEs while managing risk:
- Base Date: The index has a base date of 01-Jan-2009 and a base value of 1000.
- Rebalancing Frequency: The index is rebalanced quarterly. Changes come into effect from the last trading day of March, June, September, and December.
- Corporate Actions: The index undergoes a review in case of corporate actions like mergers or de-mergers.
Constituent Capping (Risk Management)
To prevent any single stock from dominating the fund, the index uses a capping mechanism:
- The 20% Rule: The weights of constituents in the Nifty CPSE index are capped at 20%.
- Realignment: This capping factor is recalculated and applied on a quarterly basis. Between these periods, a stock's weight may drift above 20% due to price movements, but it will be reset at the next rebalance.
Factors Affecting the Performance of CPSE ETF
- Government Policy: Changes in regulations or subsidies directly impact these state-owned enterprises.
- Commodity Prices: With a heavy weight in Oil, Gas, and Power, global commodity prices influence profitability.
- Interest Rates: These capital-intensive sectors are sensitive to interest rate fluctuations.
Advantages of Investing in CPSE ETFs
- High Dividend Yield: Since the selection criteria require companies to be dividend-compliant, investors may often enjoy regular payouts.
- Stability: Investing in established government-backed companies offers a degree of perceived stability.
- Low Cost: As an ETF, it typically has a lower expense ratio compared to actively managed funds.
Tax Implications
According to the latest budget (effective July 23, 2024):
- Short-Term Capital Gains (STCG): If sold within 12 months, gains are taxed at 20%.
- Long-Term Capital Gains (LTCG): If held for more than 12 months, gains exceeding ₹1.25 Lakhs are taxed at 12.5%.
Conclusion
CPSE ETFs offer a focused route to invest in India's industrial giants. With its transparent selection criteria and built-in risk management through capping, it serves as an efficient tool for investors seeking exposure to the Public Sector growth story.
Frequently Asked Questions (FAQs)
1. Is there a lock-in period for investing in CPSE ETFs?
No, there is no lock-in period for CPSE ETF units bought from the secondary market. You can sell your units on the exchange during trading hours.
2. Is there a cap on how much one stock can weigh in the CPSE ETF?
Yes, the weight of any single constituent is capped at 20% during the quarterly rebalancing to ensure diversification.
3. What is the difference between CPSE ETF and Bharat 22 ETF?
While both invest in Public Sector Enterprises (PSEs), they track different indices. The CPSE ETF is more concentrated, tracking the Nifty CPSE Index (10-12 stocks), primarily in the Energy and Power sectors. The Bharat 22 ETF is more diversified, tracking 22 companies across various sectors, including some private companies where the government holds a stake (via SUUTI).
4. What is an FFO in the context of CPSE ETF?
An FFO stands for a Further Fund Offer. This is a subsequent offering of units in an existing fund after its initial New Fund Offer (NFO) period has closed. FFOs are often used by the government to divest additional stakes in public sector companies. Investors sometimes receive a discount to the prevailing market price when subscribing to units during an FFO
5. Can I pledge CPSE ETF units for margin?
Yes, since CPSE ETF units are held in your Demat account, most stockbrokers may allow you to pledge them to get a margin for trading in the equity or derivative markets, subject to a haircut.
Source:
Nifty Indices - CPSE Factsheet
Methodology Document for Equity Indices
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Published on Dec 15th, 2025