Unfortunately, the first budget of Modi 2.0 didn't consider any of these. Nirmala Sitharaman's maiden budget has thoroughly disappointed the mutual fund industry as well as investors.

The only relevant announcement for the mutual fund industry and investors was the inclusion of PSU-focused Exchange Traded Funds (ETFs) in investment options specified under 80C that qualify for tax deductions of upto Rs 1.5 lakh in a financial year. At present, two such ETFs exist: Central Public Sector Enterprises (CPSE) ETF, Bharat-22. We can expect a roll out of a few more in future.

More than for investors, the government is likely to benefit by the provision of allowing deduction on investments in PSU-focused ETFs. As you might be aware, the government has set a steep disinvestment target of Rs 1.05 lakh crore for FY 2019-20. Without broad-based retail participation, it might fail to achieve it. Given that market conditions are tough, allowing tax deductions for investments in PSU-ETFs doesn't come as a surprise.

Should you invest in PSU focused ETFs?

So far, the performance of CPSE ETF and that of its benchmark against Nifty TRI (Total Return Index) has been mediocre across timeframes.

Table: Lacklustre performance of CPSE

Returns upto 1 year is Absolute, and above 1 year are Compounded Annualised
Data as on July 08, 2019
(Source: PersonalFN)

Bharat 22 ETF, which is relatively more diversified compared to CPSE ETF, has also generated just 8.61% returns in last one year and 1.35% CAGR returns since its inception in November 2017.

Consider this before you invest in PSU-focused ETFs?

Technically, investors would get one more option to invest in equity mutual funds carrying tax deduction benefits, but one has to have a very high-risk appetite to invest in them. They have a high portfolio concentration and high single sectoral exposure. For example, CPSE ETF holds over 60% of its portfolio in energy sector and top four stocks constitutes over 75% of the portfolio. Similarly, Bharat-22 holds 55% of its portfolio in the top five stocks.

Ideally, you should invest in a well-diversified mutual fund. Although your primary objective is to save taxes, you can ignore the performance of a mutual fund scheme.

The fund manager of an actively managed ELSS would consider a whole host of factors such as macroeconomic indicators, financial strength of a company, and its competitive advantage, etc. while constructing a portfolio. Contrary to this, the portfolio of PSU-focused ETF depends on the government's disinvestment plan. The stocks aren't selected on merit.

The track record of PSU companies so far isn't very encouraging. Despite having a monopolistic situation in many businesses, many PSU units haven't generated attractive returns for their shareholders.

For all the reasons mentioned above, we believe you would be better off avoiding PSU-focused ETFs. Our long-time readers and investors would know, we have always cautioned investors against sector funds and thematic funds. PSU-focused ETFs are nothing but thematic funds following the theme disinvestment. They have an expense ratio of 0.01%. In other words, they come almost free, but considering the mediocre returns they generate; they might prove extremely costly for you.

ELSS is still a better option for tax savers who can take risks for superior returns.

Editors' note:Wish to know the best ELSS for tax saving this year, mutual fund schemes to SIP into, and schemes that have the potential to provide BIG gains?

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