Why is one Nasdaq FOF earning 60 per cent more than the other?

Imagine tracking two Nasdaq-100-focused mutual funds in your portfolio. Both invest in the same index, both aim to mirror the performance of the U.S. tech-heavy Nasdaq-100. Yet, when you check their one-year returns (as of December 18, 2024), you notice something surprising:

• Kotak Nasdaq-100 FOF: 35 per cent
  
• Motilal Oswal Nasdaq-100 FOF: 56 per cent

That's a 21-percentage-point difference, with Motilal Oswal delivering 60 per cent higher returns than Kotak. How can such a large gap exist for funds tracking the same index? Let's break it down.

ETF premiums: The key factor

The difference comes down to where these funds invest in:

• Kotak Nasdaq-100 FOF puts money into the iShares Nasdaq 100 UCITS ETF, which is traded in global markets.
• Motilal Oswal Nasdaq-100 FOF invests in the Motilal Oswal Nasdaq-100 ETF, traded in India.

Here's where things get interesting:
Indian ETFs like the Motilal Oswal Nasdaq-100 ETF are currently trading at higher prices than their actual value (called a premium). This is because regulatory limits in India on how much mutual funds can invest in foreign markets have already been breached. As a result, there are very few options available for investors to gain exposure to international stocks, driving up demand for Indian-listed ETFs like Motilal's.

In contrast, the iShares ETF that Kotak invests in is traded globally, where prices tend to follow the actual value of the Nasdaq-100 index. Kotak's returns also include the benefit of the Indian rupee weakening against the U.S. dollar, which boosts the returns of funds invested in foreign markets.

Should you chase higher returns?

Motilal's higher returns might look tempting, but they are mainly driven by the higher price of its underlying ETF, which could drop if demand decreases or regulations change. This means the returns might not stay this high in the future.

For long-term investors, what matters most is how the Nasdaq-100 index performs, rather than short-term gains caused by unusual price differences.

The takeaway

The big difference in returns between Kotak and Motilal Oswal Nasdaq-100 FOFs shows how things like market demand, pricing, and regulations can impact mutual fund performance. If you're investing in international funds, don't just look at the numbers—understand what's driving those returns. It'll help make smarter choices.

Also read: Nasdaq hits 20,000: Are you feeling FOMO?

This article was originally published on December 19, 2024.