Don’t Nudge What Ain’t Broken

Bureaucrats are loath to tinker with anything that’s working well. Don’t fix what ain’t broken is the axiom they live by. That is why it’s quizzical that a bureaucrat stepped in to comment on portfolio allocation by mutual funds—a segment that, measured by size and investor participation, is performing more than just fine.

That's why the question raised by the Department of Investment and Public Asset Management, which now wants fund houses to allocate more capital toward public sector undertakings, is befuddling. The sales pitch? A consistent track record of record dividends.

Nudging mutual funds towards PSUs risks turning professional allocators into policy instruments. That’s not how you build trust in capital markets.

To be fair, PSUs do appear to be having a moment. They now account for a quarter of all dividends paid out in 2024-25 —₹1.5 trillion—despite making up just 10% of India’s total market capitalisation. For yield-hungry investors, that’s an eye-catching figure.

PSU dividends aren’t always a reward for performance—they also follow a directive. CPSEs are required to pay out at least 30% of their net profits. That’s a state-mandated floor, not resulting from boardroom capital allocation debates. In tight budget years, PSUs are tapped like ATMs. It’s no coincidence that dividend windfalls often coincide with fiscal stress.

Sustainable investor flow into PSU shares requires evidence of constant improvement, not guidance or moral suasion. Markets reward consistent reinvestment, margin expansion, and capital efficiency—not a one-off rally powered by state advocacy and retail exuberance.

For investors seeking a steady stream of dividend income, there’s a dedicated option: the Nifty Dividend Opportunities 50 Index ETF. This fund is designed to provide exposure to high-yielding companies among listed companies, making it a suitable choice for those who prioritise dividends as part of their investment strategy. Needless to say, PSU companies constitute nearly 50% of the index.

If an investor’s focus is on public sector undertaking, there are sector-specific funds and ETFs that invest exclusively in government-owned companies. The CPSE ETF and Bharat 22 ETF are two prominent options. The CPSE ETF tracks the Nifty CPSE Index, which comprises major central public sector enterprises, giving investors diversified exposure to some of India’s largest and most influential PSUs. The Bharat 22 ETF, on the other hand, includes a broader mix of 22 stocks spanning sectors like energy, finance, industrials, FMCG, and utilities, all with significant government ownership. 

Both ETFs offer the flexibility of real-time trading, lower expense ratios, and the potential for attractive dividend yields, making them appealing to those who want to participate in the PSU growth story.

This brings us back to DIPAM’s suggestion to private-sector companies to raise dividends. However well-meaning, it blurs the line between market autonomy and policy ambition. Calls for companies to increase dividends can be problematic. Such directives interfere with a company’s capital allocation policy, which the board should ideally determine based on business needs, growth opportunities, and long-term shareholder value.

Additionally, SEBI requires the top 1,000 listed companies to disclose their dividend policies publicly. This transparency allows investors to make informed decisions based on a company’s stated approach to dividends.

If PSUs are truly amid a structural turnaround, they will receive investor acceptance the old-fashioned way—through numbers that compound and governance that holds up under scrutiny. When that happens, fund managers won’t need nudging. Alpha will do the talking.