ICICI Mutual Fund splits face value of units in an ETF: Here’s what investors must know

Splits in stocks are quite common. But what if a mutual fund unit’s face value is reduced to smaller value? Recently, ICICI Prudential Mutual Fund announced a split in the face value of one of its schemes. The units of ICICI Prudential S&P BSE 500 ETF (IPB500) are reduced to Re 1 from Rs 10. What does the split mean and does it affect investors?

What is the issue?

ICICI Prudential Mutual Fund has issued a notice that effective closing business hours of October 29, 2021, the face value of units of IPB500 is reduced to Re 1 from Rs 10. This means that each unit of the scheme will be approximately equal to 1/1000^th of the underlying index value. The net asset value of the unit will reduce proportionately. And the number of units held by investors will increase accordingly.

Why a change in face value?

This change in face value of a unit is akin to a stock split.  The net asset value of the unit has been reduced by 90 percent from Rs 250.3453 to Rs 25.0345. The unit traded at Rs 25.45.  “This split enables an increase in the number of units outstanding and makes it accessible to a larger number of investors,” says Chintan Haria, Head Product and Strategy, ICICI Prudential Mutual Fund.

How does that impact investors?

Haria says, “Stock split does not change the underlying value of an investment. The only change from an investor’s perspective will be in the number of units in his/her demat account.”

Put simply, the price corrects by approximately 90 percent and the number of units grow by 900 percent. So, instead of holding 100 units of Rs 250 each, one ends up holding 1000 units of Rs 25 each. The value of investment stands unchanged at Rs 25,000.

New investors may find the units accessible due to the lower price.   “Fund houses split the face value of units of ETF to optically make them appear more affordable for investors,” says Debasish Mohanty, Former Sales Head of UTI MF and now Advisor to L&T Mutual Fund. As more fin-techs enter the broking and financial intermediation sector and as there is a misplaced investors’ preference towards ETF units with lower face value, product manufacturers use the split route to attract young investors with less amount of investable surplus, he adds.

This is not the first time a mutual fund house has opted for reduction in face value of the units. The units of gold ETFs used to track the price of one gram gold. However, it led to a situation wherein the price of the unit was running into a few thousands of rupees. Some of the fund houses hence opted to reduce the face value of the units.

Many ETFs managed by Nippon Life India AMC also saw changes in face values from Rs 10 to Re 1 in December 2019. For Nippon India ETF Gold BeES, the face value was changed to Re 1 from Rs 100 earlier. From June 18, 2021 the face value of units of Motilal Oswal Nasdaq 100 ETF was brought down to Re 1 from Rs 10 earlier to enable liquidity in units.

Such sub-division of units of mutual funds ensure that the prices appear affordable. Even investors with less capital can buy them. However, the fundamentals of the unit do not change. Though the price falls, the valuation of the underlying portfolio does not change. Units of all ETFs rise 10 percent if the index they track increased in value by 10 percent in a given period of time, irrespective of their face values. Investors have to be NAV-agnostic while investing in mutual funds. Instead, they should give more weight to their asset allocation based on their financial goals and their risk-taking appetite.