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 US 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. In fact, Motilal Oswal's FoF delivered 60 per cent higher returns than Kotak. So. how can such a large gap exist for funds tracking the same index? Let's break it down.
Different markets, different outcomes
The difference lies in where these funds invest:
- Kotak Nasdaq-100 FOF invests in iShares Nasdaq 100 UCITS ETF, which trades in global markets.
- Motilal Oswal Nasdaq-100 FOF invests in the Motilal Oswal Nasdaq-100 ETF, traded in India.
ETF premiums: The key factor
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.
Meanwhile, the iShares ETF that Kotak invests in is traded globally, where prices tend to follow the actual value of the Nasdaq-100 index.
Should you chase higher returns?
Motilal's higher returns might be tempting, but they are mainly driven by higher prices of its underlying ETF, which can drop if demand falls or regulations change. This implies returns may not be this high in the future.
Essentially, for long-term investors, what matters most is how the Nasdaq-100 index performs, rather than short-term gains caused by unusual price differences due to demand and supply.
The takeaway
The big return gap between Kotak's and Motilal Oswal's FoFs shows how market demand, pricing and regulations impact funds' performance. If you are investing in international funds, don't just look at the numbers - understand what's driving those returns. It'll help you make smarter investing choices.
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