Mutual Fund Unlocked: CPSE ETF or ELSS Mutual Funds?

The fifth tranche of Central Public Sector Enterprises (CPSE) Exchange Traded Fund (ETF) would be open for subscription for retail investor on July 19, 2019 and as we all know in though the recent budget has not brought any substantial changes directly to mutual funds, but have announced tax benefit to CPSE ETF, wherein investor can claim tax deduction up to Rs. 1.5 lakhs under section 80C of the Income Tax Act. This is something similar to ELSS (Equity Linked Saving Schemes) in mutual funds, which is also eligible for section 80C tax deduction benefit. So, now question arises should you invest in CPSE ETF or ELSS?

To understand what would be ideal among CPSE ETF and ELSS we have carried out a study wherein we have taken daily NAVs (Net Asset Values) of CPSE ETF and closing values of S&P BSE 200 index which would represent ELSS. S&P BSE 200 is representing ELSS for the fact that almost 34 per cent of ELSS use this as its benchmark index. The period for which this study is carried out is April 1, 2014 to March 31, 2019. In this study, we have taken 1-year and 3-year rolling returns of CPSE ETF and S&P BSE 200 index.





In 1-year rolling returns, CPSE ETF was able to beat S&P BSE 200 index only from October 2015 to July 2016. But for the rest of the period S&P BSE 200 index beats CPSE ETF. When we take a look at 3-year rolling returns then we can see that through out the period S&P BSE 200 index was easily able to beat the CPSE ETF. If we look in terms of average 1-year rolling returns for CPSE ETF and S&P BSE 200 index then they stand as 3.06 per cent and 9.66 per cent, respectively. The average 3-year rolling return for CPSE ETF and S&P BSE 200 index stands as 5.6 per cent and 10.98 per cent, respectively. If we take the average rolling returns of one of the worst-performing ELSS with the benchmark as S&P BSE 200 index then its 1-year and 3-year average rolling returns stand as 12.96 per cent and 10.26 per cent, respectively. Now if we take a look at the 1-year and 3-year rolling return of best performing ELSS then it stands as 14.06 per cent and 12.24 per cent, respectively.

So, as we can see from the study that S&P BSE 200 index, which is a representative of ELSS is better than CPSE ETF in terms of performance. So, now even if CPSE ETF is coming with a tax benefit, ELSS still stands strong. So, investing in ELSS would be a better choice than investing in CPSE ETF for availing the tax benefit.