Investments in the US-based Nasdaq 100 index have given handsome returns over the past 5-10 years. After Motilal Oswal and Kotak, ICICI Prudential is rolling out a new Nasdaq 100 Index Fund (IPN100). Though the index has done well in the past, should you invest in this scheme at this juncture?
What’s on offer
IPN100 is an open-ended index fund that aims to replicate the returns generated by the Nasdaq 100, before expenses. The fund manager of this scheme will buy the stocks present in the Nasdaq 100 index in the same proportion.
The Nasdaq 100 Index comprises 100 marquee non-financial companies that are listed in the US and earn revenues globally. Nearly 44 percent of the weightage of the index is to technology stocks. Companies from sectors such as communication services, consumer discretionary, consumer services and industrials are also present in the index. Investment in this index can give a diversified exposure with potential for growth.
What works
The fund brings in the much-required global diversification for Indian investors. Investing in the tech-focused index ensures that high-growth technology giants become part of your portfolio. These include Apple, Microsoft, Amazon, Alphabet, Facebook and Tesla among others. “Investors willing to take risks associated with equity investing and looking to benefit from geographical diversification over the long term should consider investments in this scheme,” says Chintan Haria, Head – Product Development & Strategy, ICICI Prudential Mutual Fund.
The index has low correlation with Indian equities and offers a potential hedge for rupee depreciation against US Dollar. As on September 1, 2021 Nasdaq 100 TRI has given 34.6 percent returns compared to 18.8 percent returns given by Nifty TRI in the last one year.
The scheme is passively managed. So, there is no fund manager risk and costs would be lower than active schemes. The fund house has indicated an expense ratio of 50 and 100 basis points for the direct and regular plans, respectively.
What doesn’t
The markets have already run up quite a bit and, at the moment, stocks from the technology sector look especially overheated. The price to earnings ratio of Nasdaq 100 TRI stands at 28.01 compared to 26.45 for the Nifty 50 TRI.
“The rally in stock prices has been supported by lower interest rates and high global central bank liquidity. This has led to improvement in valuations of all major global indices including the Nasdaq 100. Investors need to have a long-term view to benefit from the earnings growth of constituent companies that offer products & services to people worldwide,” says Haria.
That may be the long-term potential, but investing in an overheated market can have its pitfalls.
“For investors keen to benefit from a technology oriented stocks portfolio, investments in the Nasdaq 100 index make sense. However, investors looking for more diversification should invest in the S&P 500 index fund,” says Vinayak Savanur, Founder and CIO at Sukhanidhi Investment Advisors. Investors should also check how efficiently this index fund is managed by ICICI Prudential AMC before investing in it, he adds.
What should you do?
This is a maiden passive offering in the international fund category by ICICI Prudential. We already have ICICI Prudential Global Advantage Fund of Fund, ICICI Prudential US Bluechip Equity Fund and ICICI Prudential Global Stable Equities Fund. ICICI Prudential US Bluechip Fund buys stocks listed in the US. The rest have been investing overseas through the fund of fund route and have done reasonably well so far.
Being an index fund, the scheme will ensure liquidity at the end of day net asset value for investors. This works better than the exchange traded fund route, where liquidity can be an issue.
For now, it’s better to wait till we get to see the scheme’s tracking error. The new fund offer closes on October 11, 2021.
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