ICICI Pru NASDAQ 100 Index Fund Review: Is this better than existing alternatives?

Published: September 27, 2021 at 7:51 am

Subbiah asks, “Dear Pattu Sir, ICICI Pru NASDAQ 100 Index Fund will be available for investing from next week (NFO period is from Sep 27 to Oct 11 2021). Can we buy this instead of MO Nasdaq 100 FOF or Kotak Nasdaq 100 FOF as it is a simple index fund?”

ICICI Pru NASDAQ 100 Index Fund is an open-ended index fund replicating NASDAQ-100 Index. That is, it will directly invest 95% to 100% of its assets in N100 stocks. The Nasdaq 100 consists of the 100 largest non-financial companies listed on the Nasdaq exchange.

With tech giants like Apple, Microsoft, Google and Facebook dominating the index, it has caught the fancy of many mutual fund investors who dig no deeper than trailing returns. Today, looking at its recent performance, many of us have forgotten that the index was “underwater” for the first 15 years of this century (early 2000 to late 2015).  Most investors who want a slice of Nasdaq 100 or the S&P 500 only desire returns. They often do not consider the responsibility of regular portfolio rebalancing.

We have recently pointed out that actively managed international equity fund options are expensive and tend to underperform benchmarks. See:

Passively managed international equity fund options have significant tracking error issues: Tracking errors of MO S&P 500 Index fund, MO Nasdaq 100 ETF and FoF. It remains to be seen if Mirae Asset S&P 500 Top 50 ETF and FOF (link points to fund review) would fare any better.


Which international equity option is better for an Indian retail investor?

S&P 500 vs Nasdaq 100: From a practical viewpoint, most Indian investors are only looking for a small slice of US stock exposure. So it then should not matter whether this slice is the Nasdaq 100 or the S&P 500. What matters more is regular two-way rebalancing (equity to debt and vice versa or international equity to domestic equity and vice versa as per the situation demands). For investors desiring significant international equity exposure, the MO S&P 500 index fund is a reasonable choice. It is less volatile and more diversified than the Nasdaq 100. See: Motilal Oswal S&P 500 Index Fund: What return can I expect from this?

Indian mutual funds investing in international stocks: Those worried about the non-equity taxation angle can consider a concentrated exposure in funds like Parag Parikh Flexicap or Axis Growth Opportunities. See Axis Growth Opportunities Fund vs Parag Parikh Long Term Equity Fund. This would also eliminate the need for a periodic reset of international exposure.

The main drawback here is fund manager performance risk. IMO this is still a reasonable risk considering the high tracking errors + higher taxation + higher maintenance in dedicated passive international equity funds. Trivia: My international equity exposure is about 16% from Parag Parikh Flexicap. See: I rebalanced my retirement portfolio twice this year thanks to the bull market.

Options for investing in the Nasdaq 100

For those desirous of investing in the Nasdaq 100, there are four options at the time of writing.

  1. Motilal Oswal NASDAQ 100 ETF (launched 2011)
  2. Motilal Oswal NASDAQ 100 FOF that invests in Motilal Oswal NASDAQ 100 ETF (launched Nov 2018)
  3. Kotak Nasdaq 100 FOF that invests in IShares NASDAQ 100 UCITS ETF (Launched Feb 2021)
  4. ICICI Pru NASDAQ 100 Index Fund (Launched Sep 2021).

Motilal Oswal NASDAQ 100 ETF had significant NAV-price deviations until the AMC actively reduced it after AUM started to flow into Motilal Oswal NASDAQ 100 FOF.

A good 70% of the AUM in the ETF is held by the FOF. This makes the MO ETF a poor choice of investment. Volatile US markets can result in significant NAV-price variations – the risk carries over to the FOF as well. The FOF typically buys and sells the ETF at market price except for large orders. The MO FOF is a reasonable choice but still suffers from appreciable tracking errors, as pointed above.

Kotak Nasdaq 100 FOF is theoretically expected to fare better than Motilal Oswal NASDAQ 100 FOF because the tracking errors of the underlying ETF are lower. This is a comparison of the NAV of both funds since Feb 2021. We cannot tell them apart as yet and need some more time.

Kotak Nasdaq 100 FOF compared with Nasdaq 100 Total Return in INR (top panel) and Motilal Oswal Nasdaq 100 FOF middle panel). In the bottom panel Motilal Oswal Nasdaq 100 FOF is compared with Nasdaq 100 Total Return in INR
Kotak Nasdaq 100 FOF compared with Nasdaq 100 Total Return in INR (top panel) and Motilal Oswal Nasdaq 100 FOF middle panel). Motilal Oswal Nasdaq 100 FOF is compared with Nasdaq 100 Total Return in INR in the bottom panel.

Note: The Nasdaq 100 notional net return index (ticker: XNDXNNR) is a better choice as a benchmark as this accounts for dividend withholding tax. However, for the short time window considered above, there is barely any difference between the net total return index (ticker: XNDX).

Should you invest in ICICI Pru NASDAQ 100 Index Fund?

We recommend not investing in ICICI Pru NASDAQ 100 Index Fund for now as its ability to effectively track the Nasdaq 100 is unknown. More time is required to compare the tracking errors of the ICICI Nasdaq 100 index fund and Kotak Nasdaq 100 FOF with MO Nasdaq 100 FOF.

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