ICICI Prudential Mutual Fund announced the launch of an open-ended thematic fund, ICICI Prudential PSU Equity Fund, focused on public-sector undertakings (PSU firms)
ICICI Prudential Mutual Fund has announced the launch of ICICI Prudential PSU Equity Fund, an open-ended equity scheme that seeks to provide long-term capital appreciation to investors by investing in equity and equity-related instruments of PSU companies.
The new fund offer (NFO) opens on August 23, 2022, and closes on September 6, 2022. The fund said it would seek opportunities across large-cap, mid-cap, and small-cap stocks part of the S&P BSE PSU Index.
Commenting on the scheme, Chintan Haria, head of product development and strategy at the ICICI Prudential Asset Management Company, said, “PSU companies are present across different sectors, presenting wide investment opportunities. “Also, PSUs appear to be attractively placed on a valuation basis and offer a better margin of safety. In a volatile environment, companies providing high dividend yield tend to have higher demand, resulting in capital appreciation,” Haria said in a press note.
The ICICI Prudential PSU Equity Fund is an open-ended thematic fund that will invest mainly in equity and equity-related securities of PSU companies. The fund will invest at least 80% of the resources in PSU stocks, while the remaining in other equity and equity-related securities.
The fund will track the S&P BSE PSU TRI Index for performance.
The scheme promises long-term returns to investors by investing largely in PSU companies.
The fund believes the valuation of PSU companies is “attractively placed” and “offer better dividend yield than broader markets”.
The fund could be suitable for investors looking to invest in PSUs for possible long-term growth.
Antique Broking, an institutional brokerage company, observed that PSU companies might provide a better safety net compared to non-promoters, such as FPIs (foreign portfolio investment), DIIs (domestic institutional investors), and retail (retail investors) due to the government ownership.
Moreover, according to BSE data, the PSU sector seems to be attractively placed currently in terms of P/E (price earnings ratio) and P/B (price to book ratio), suggesting PSUs may have a better safety margin.
Besides, the fund noted that PSUs offer better dividend yields than the broader market. For instance, the average dividend yield of the S&P BSE PSU Index in the last 17 years was 2.6 per cent compared to S&P BSE Sensex’s 1.3 per cent. Hence, the fund expects sectors with PSUs’ dominance to do well in the long run.
Additionally, it believes “the public sector banks are in the middle of a cycle change wherein Return on Equity has just begun to pick up, and credit cost appears to have bottomed out with better asset quality.”
The defence sector, primarily led by the PSUs, is also expected to benefit as the government bolsters the country’s defence capabilities. It has announced to allocate Rs. 764 billion to boost defence and indigenization of the industry.
Furthermore, the power sector is dominated by PSUs. Given the rising demand for electricity, coupled with the fixed ROE (rate of interest) for power stations, it is also expected to get a significant boost.
The fund further noted that PSUs tend to perform well on reform optimism in the run-up to elections. Hence, they could do well in the next two years, given the upcoming national elections due.
PSU stocks also provide several benefits. For example, borrowing cost is low due to “inherent sovereign comfort leading to better credit rating”, especially during a rising interest rate scenario.
In addition, it noted PSU companies pose a lesser risk of diversification into unrelated businesses.