Groww Nifty India Railways PSU Index Fund and ETF NFO review

Groww has launched a unique index fund and ETF (exchange-traded fund) offering exposure to PSUs (government-run companies) connected with the Indian Railways.

Titled Groww Nifty India Railways PSU Index Fund and ETF , they opened for subscription on January 16, 2025, and will remain open to the public until January 30, 2025.

But is this index fund and ETF worth your time and effort?

Groww Nifty India Railways PSU Index Fund and ETF: How will it be measured?

Groww Nifty India Railways PSU Index Fund and ETF will be passive funds, meaning they will simply aim to copy the Nifty India Railways PSU Index.

About the Nifty India Railways PSU Index

Since Groww Nifty India Railways PSU Index Fund and ETF's fortunes depend on Nifty India Railways PSU Index, let's take a closer look at the latter:

• Launched: November 25, 2024
  
• Focus: Tracks PSUs from the Nifty 500 that directly or indirectly cater to the Indian Railways.
  
• Reconstitution: Happens bi-annually in March and September.

Sector allocation
As of December 31, 2024, the Nifty India Railways PSU Index is heavily allocated to the following sectors:

• Construction (25.4 per cent)
  
• Financial Services (19.4 per cent)
  
• Consumer Services (17.3 per cent)
  
• Services (15.8 per cent)
  
• Power (6.9 per cent)

Together, these five sectors have an 85 per cent weighting in the total index.

This raises concentration concerns, as focussed allocations to a few sectors increase the risk of severe drawdowns during market corrections.

Stock constituents
The Nifty India Railways PSU Index also heavily relies on a few stocks within the index.

The top four constituents, Indian Railway Finance Corporation (19.4 per cent), Rail Vikas Nigam (17.4 per cent), Indian Railway Catering and Tourism Corporation (17.3 per cent) and Container Corporation of India (15.8 per cent), command a worrying 70 per cent of the total index weight.

The remaining 30 per cent is distributed across 10 stocks, with National Thermal Power Corporation (NTPC) holding the largest share, at 7 per cent.

Such concentrated exposure to a handful of stocks amplifies volatility and increases the fund's reliance on just a few stocks.

In comparison, an average diversified equity fund like a flexi-cap fund has currently allocated only 28 per cent to its top five stocks, ensuring it is not held captive to the performances of a handful of companies.

Nifty India Railways PSU Index performance: Returns are an outlier

Since its inception on April 1, 2021, the index has grown more than 4x, an impressive 45 per cent CAGR over nearly four years. In comparison, the broad-based Nifty 500 has delivered a more modest 17 per cent over the same period.

The recent stellar performance of railways PSU stocks can largely be credited to the increased budgetary allocation to the Indian Railways.

However, it's essential to recognise that PSU stocks have historically underperformed due to factors like a lack of pricing power and frequent government intervention. This raises questions about the sustainability of the current rally.

If you had invested Rs 10,000 monthly in the Nifty PSE Index, which represents companies where the government holds a majority stake either directly or indirectly, starting January 1, 2001, your annualised return would have been a modest 8.64 per cent by December 31, 2019. This performance is only slightly better than the returns offered by bank fixed deposits (FDs).

In stark contrast, the broad-based Nifty 500 index would have delivered an annualised return of over 15 per cent during the same period, resulting in a corpus difference of nearly Rs 60 lakh!

This stark difference highlights the inherent risks and potential opportunity costs associated with long-term investments in PSU stocks.

Groww Nifty India Railways PSU Index Fund and ETF: Should you invest?

This index fund and ETF offer a low-cost way to gain niche exposure to the railways PSU sector. However, there are notable drawbacks: high concentration in a few stocks and sectors, the uncertain nature of PSUs and limited historical data due to the index's recent launch.

While it may appeal to high-risk investors with firm conviction in the railways theme, most investors would benefit from diversifying across the broader index or flexi-cap funds to manage risk effectively.

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