ICICI Prudential Mutual Fund today announced the launch of ICICI Prudential PSU Equity Fund, which is an open-ended equity scheme. The New Fund Offer (NFO) from ICICI Prudential AMC may be attractive to investors who are bullish on PSU stocks but want to minimise risks and investment hassles via the mutual fund route.

In a statement, ICICI Prudential AMC said the objective of this PSU Equity Fund is to provide long-term capital appreciation by investing predominantly in equity and equity-related instruments of PSU companies. The ICICI Prudential PSU Equity Fund may invest in sectors/stocks that form a part of the S&P BSE PSU Index. The scheme may invest in opportunities across market cap i.e. large,  mid or small cap, ICICI Prudential AMC said in a statement.

“PSU companies form an important constituent of Capital Markets and 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 yields tend to have higher demand resulting in capital appreciation,” Chintan Haria, Head – Product Development and Strategy, ICICI  Prudential AMC, said. 

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Key Dates

The NFO will open on 23 August 2022, and close on September 06, 2022. 

Factors that make PSU space attractive 

  • Government Ownership: Promoter holding i.e. Government ownership in PSU companies is substantial compared to non-promoters (FPIs,  DIIs & Retail). As these companies are highly under-owned by non-promoters, the PSU space provides a better Margin of Safety, the AMC said.
  • Attractive Valuations: Starting point i.e. valuations in PSU space have been attractive for a while now again, indicating that companies have a better Margin of Safety. 
  • High Dividend Yields: The AMC said that PSUs tend to offer better dividend yields than broader markets. The average dividend yield of the S&P BSE PSU Index (last 17 years) is 2.6 whereas that of the S&P BSE Sensex is 1.3. In a volatile environment, companies providing high dividend yields tend to have higher demand resulting in capital appreciation. 

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Sectors with PSU dominance that may do well 

  • PSU Banks – 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. 
  • Defence – With the Government focusing on indigenization by allocating ~ Rs. 764 Bn for the Armed forces to bolster defence capabilities and reduce foreign spending on systems/equipment, defence (with major PSU contribution in overall production) is expected to do well. 
  • Power – Power generation is mainly dominated by PSU players. Power demand has been on a rise despite the pandemi. This, coupled with fixed ROE for power generating stations, bodes well for the sector. 

“Historically, in the run-up to elections, PSUs tend to perform well on optimism around reforms. PSUs could do well over the next 2 years given the pre-election period. Apart from these, investing in PSU stocks provides a  range of benefits. The cost of borrowing is low owing to inherent sovereign comfort leading to better credit rating/standing. This is beneficial during a rising interest rate scenario,” the AMC said.

Fund Manager

ICICI Prudential PSU Equity Fund will be managed by Mittul Kalawadia and Anand Sharma. 

(Mutual Fund investments are subject to market risks, read all scheme-related documents carefully and consult your financial advisor before making any investment in a mutual fund scheme)