Invest In Icici Prudential Nifty Etf: A Beginner's Guide

ICICI Prudential Nifty 50 ETF is a mutual fund that closely tracks the performance of the Nifty 50 Index by investing in almost all the stocks represented in the index. The fund has a large investment in domestic equities, with a focus on Large Cap stocks, and aims to provide similar returns to the Nifty 50 Index. With an expense ratio of 0.03%, it offers a cost-effective way to invest in a diverse range of stocks. Investors can choose between Regular and Direct options, with the latter having a lower expense ratio and potentially higher returns.

Direct vs regular funds

When considering how to invest in ICICI Prudential Nifty ETF, it is important to understand the differences between direct and regular funds.

Every mutual fund comes in two versions: direct and regular. The main difference between direct and regular mutual funds is the expense ratio, which is the fund's total expenses relative to its assets under management (AUM). Direct funds do not have a distribution commission, while regular funds do, making the expense ratio higher for regular funds. This means that the returns of a direct mutual fund are always higher than those of a regular fund. The Net Asset Value (NAV) of a direct fund is also always higher than that of a regular fund.

Direct plans are bought directly from the Asset Management Company (AMC) without any intermediaries, whereas regular plans are purchased through mutual fund distributors who charge a commission. This commission is added to the total expense ratio (TER) of regular plans, making their TERs higher than those of direct plans. The TER includes management fees, registrar's fees, trustee fees, marketing costs, and distribution costs.

When deciding between direct and regular funds, investors should consider their level of investment experience and knowledge. Direct plans are better suited for investors who understand their investment needs and risk appetite, as they can carry out the investing process independently without the assistance of financial advisors. On the other hand, regular plans may be preferable for those who need help with investment decisions and monitoring their investment portfolio.

In the case of ICICI Prudential Nifty ETF, both regular and direct options are available, and investors do not need to pay any additional fees to purchase either option. However, it is important to note that the expense ratios differ between the two options due to the commission paid to the broker/distributor. As a result, the direct option will provide higher returns to investors due to the lower expense ratio.

Expense ratios

The expense ratio is an important factor to consider when investing in ICICI Prudential Nifty 50 ETF or any other mutual fund or exchange-traded fund (ETF). The expense ratio measures the annual fees that a fund charges, expressed as a percentage of your investment in the fund. For example, if you have $5,000 invested in an ETF with an expense ratio of 0.04%, you will pay the fund $2 per year. This fee is deducted from the fund's gross return and paid to the fund manager, reducing the returns to investors.

When it comes to ICICI Prudential Nifty 50 ETF, the fund has both Regular and Direct options. While the investment options are the same, they have different expense ratios. The Regular fund has a higher expense ratio because it includes the commission paid to a broker or distributor. On the other hand, the Direct fund has a lower expense ratio, which leads to higher returns for investors.

In general, expense ratios are an important consideration for investors as they directly impact the returns on their investments. A high expense ratio can significantly affect your returns over time. It is recommended to look for funds with low expense ratios, typically those that fall below the asset-weighted average.

When selecting an ETF, it is essential to compare its expense ratio with other funds, especially those tracking the same market index or providing exposure to similar types of assets. Additionally, investors should be aware of other costs associated with ETFs, such as trading costs like commissions and bid/ask spreads, which can also impact their returns.

The expense ratio of a fund covers various operating expenses, including management, marketing, distribution, accounting, administration, record-keeping, custodial services, and legal services. These fees are usually stated as a percentage but may also be reported in basis points (bps), which are 1/100 of 1% or 0.01%.

It is worth noting that even small expense ratios can add up over time. For example, investing $100,000 in a fund with a 4% annual return and a middle-of-the-road expense ratio of 0.5% could result in $20,000 lower returns over 20 years, excluding other costs and fees. Therefore, investors should carefully consider the impact of expense ratios and other costs on their investment returns.

VIP investment plans

VIP or Value Averaging Investment Plan is an investment strategy where you invest more when markets are down and less when markets are at their peak. VIP is similar to a Systematic Investment Plan (SIP) in that you invest in the fund every month, but the amount you invest varies each month.

For example, let's say you started a VIP on 1st Jan 2017 with an initial investment of ₹10000, and the first instalment was processed at a Net Asset Value (NAV) of ₹100. If you want to change your investment amount by 10% for every 5% change in NAV, then on all subsequent instalment dates, you need to check the NAV and compare it with the first NAV. Based on the difference, you adjust your investment amount. For instance, if the 1st Jan 2018 NAV is 120 (20% higher than the first NAV), then you need to reduce your investment by 40% (new instalment amount will be ₹6000). This way, you average the price and get better returns, while also maintaining asset allocation.

ICICI Prudential Nifty 50 ETF offers VIP investment plans. The fund has a current Asset Under Management (AUM) of ₹7,81,394 Cr and the latest NAV as of 27 Nov 2024 is ₹252.52. The minimum Systematic Investment Plan (SIP) investment is set to ₹100.

Large cap stocks

Large-cap stocks are a key component of the ICICI Prudential Nifty 50 ETF, accounting for 79.95% of the fund's domestic equity investments. This ETF aims to replicate the performance of the Nifty 50 Index, which comprises 50 large-cap stocks across diverse sectors.

Large-cap stocks are those with a market capitalisation of over Rs 20,000 crore. They are considered to be more stable and less volatile than mid-cap or small-cap stocks, making them a popular choice for investors seeking lower-risk investment options. Large-cap companies are often well-established, with a strong track record and a history of stable financial performance.

When investing in large-cap stocks through the ICICI Prudential Nifty 50 ETF, investors benefit from a diversified portfolio of some of India's largest and most prominent companies. The fund's portfolio includes stocks such as Reliance Industries Ltd., Tata Consultancy Services Ltd., and Larsen & Toubro Ltd.

By investing in this ETF, investors gain exposure to a range of sectors, including refineries, software, consulting, and telecom services. The fund's large-cap focus provides a level of stability and predictability to the portfolio, making it suitable for those seeking long-term capital appreciation with a relatively lower risk compared to mid-cap or small-cap stocks.

It is important to note that while large-cap stocks are generally considered lower-risk, all investments carry some level of risk, and investors should carefully consider their financial goals and risk tolerance before investing.

Portfolio analysis

When considering investing in the ICICI Prudential Nifty 50 ETF, it is important to conduct a portfolio analysis to understand the composition and performance of the fund. Here is a detailed analysis of the fund's portfolio:

Portfolio Composition:

The ICICI Prudential Nifty 50 ETF is an index fund that aims to mimic the performance of the Nifty 50 index. The fund primarily invests in domestic equities, with a focus on large-cap stocks. As of October 2024, the fund had approximately 79.95% of its investments in large-cap stocks, 5.13% in mid-cap stocks, and the remaining in other assets. The top holdings include well-known companies such as Reliance Industries Ltd., Tata Consultancy Services Ltd., and Larsen & Toubro Ltd.

Portfolio Turnover:

The portfolio turnover ratio for this fund is 15.00%, which is lower than the category average of 21.47% or 26.45% (as of September 30, 2024). This indicates that the fund manager updated the portfolio less frequently than peers, holding stocks and bonds for a longer duration.

Risk Analysis:

The standard deviation value for the fund is not provided, but the risk meter indicates a relatively low risk of negative returns. The fund falls on the left-most green scale, suggesting minimal risk.

Performance Analysis:

The ICICI Prudential Nifty 50 ETF has delivered above-average performance compared to its peers. The fund has a Sharpe ratio indicating better risk-adjusted returns, and a Treynor's ratio reflecting higher returns for the amount of risk taken. However, the fund's alpha indicates that it has generated poor risk-adjusted returns when compared to its benchmark.

Alternative Funds:

There are several alternative funds in the same category, such as the Aditya Birla Sun Life Nifty Next 50 ETF, UTI Nifty Next 50 Exchange Traded Fund, and Motilal Oswal BSE Enhanced Value ETF. These funds offer similar investment strategies and are worth considering when diversifying your portfolio.

In conclusion, the ICICI Prudential Nifty 50 ETF provides a well-diversified portfolio with a focus on large-cap stocks. The fund has delivered above-average performance and has a relatively low-risk profile. However, it is important to note that past performance does not guarantee future results, and investors should conduct their own due diligence before making any investment decisions.

Frequently asked questions