Kotak NASDAQ 100 Fund of Fund NFO: Betting on tech themes

Kotak Mutual Fund has launched Kotak NASDAQ 100 Fund of Fund (FoF). The open-ended scheme is open for subscription till January 25. The FoF will invest in units of iShares NASDAQ 100 ETF.

The fund offers a diversification opportunity away from financials-dominated indices such as India’s Nifty 50. According to the fund house, the correlation between Nadaq-100 TRI (including rupee depreciation benefit for Indian investors) and Nifty 50 TRI has been just 0.22 in the last 17 years. Financials has zero weightage in Nasdaq-100.

Technology companies have a weightage of around 48 per cent, consumer discretionary around 19 per cent and communication services around 19 per cent.

With a major focus on tech sector, it also provides an opportunity to invest in the most innovative technology companies in the world.

FoF vs investing directly in ETFs

While investors in India now have the opportunity to invest directly in international ETFs, an FoF structure has lower entry barriers irrespective of the unit price of the underlying ETF.

The initial minimum investment required in Kotak NASDAQ 100 FoF is ₹5,000, and in multiples of ₹1,000 thereafter. For SIPs, the minimum amount is ₹1,000. One does not need a trading account to invest in an FoF.

The annual expense ratio will be up to 1 per cent for the regular plan (0.5-0.6 for the direct plan). On the other hand, if you invest in the international ETF directly, you willbe charged only the ETF expense ratio, which averages around 0.3 per cent, says Viram Shah, Co-founder and CEO, Vested Finance. However, taking such a route will include bank charges for currency conversion.

Number crunching by the fund house shows that if an Indian investor had invested ₹100 in the Nasdaq-100 in January 2010, it would be worth around ₹1,230 today vs the ₹307 one would have got by investing in Nifty 50.

In this period, 60 per cent of the returns came from the index’s performance in USD and the remaining from rupee depreciation.

Peer Motilal Oswal Nasdaq NASDAQ 100 ETF FoF, launched in end-November 2018, has so far returned 38.23 per cent.

The Nasdaq-100 is currently trading at its most expensive valuation post the dot-com boom. It trades at around 32 times its one-year forward earnings as against the historical mean of 19-20 times. Much of the recent outperformance has come from PE expansion and not earnings growth.

Its earnings CAGR over the last 10 years is 10 per cent. While its earnings CAGR for FY20-FY23 is expected to be higher at around 19 per cent — this comes with the benefit of base effect, with the FY20 earnings impacted by Covid-19. Also, optimism about a ‘V’-shaped global economic recovery is reflected in the earnings estimates — this at a time when the US economy faces risk of double dip recession. At least history indicates that the risk exists — eight out of the last 11 recessions in the US have had a double-dip.

Some of the key components of the index are also displaying symptoms of bubble valuation. For example, Tesla, which accounts for 5 per cent of the index, is up 10 times since the beginning of last year and trades at 19 times its CY21 estimated revenue.

Should you invest?

Relatively, the FoF might be a better option than buying the Nifty 50, which trades at 25 times the one-year forward PE, when its last 10 years’ earnings CAGR is around 4 per cent.

However at an absolute level, it is hard to find value in buying at current levels, and investors can consider buying post a correction in markets.