ICICI Prudential IT ETF – Review
ICICI Prudential mutual fund is planning to launch IT ETF that would open for subscription on August 12, 2020. Covid-19 has impacted many businesses including IT sector. Major large IT companies in India have announced its Q1 FY21 results that indicate stagnant business growth. Major impact is expected to see coming quarters when their customers spend would be re-planned / reduced considering covid-19 crisis. What are the issue details of the ICICI Prudential IT ETF? Who can invest in this ETF now?
What are Exchange Traded Funds (ETFs)?
Wikipedia defines ETF as “an exchange-traded fund is an investment fund traded on stock exchanges, much like stocks. An ETF holds assets such as stocks, commodities, or bonds and generally operates with an arbitrage mechanism designed to keep it trading close to its net asset value, although deviations can occasionally occur”.
Issue details of ICICI Prudential IT ETF
This is an open-ended scheme replicating / tracking NIFTY IT Index.
This scheme would open for subscription on August 12, 2020.
This scheme would close for subscription on August 17, 2020.
Since this is an open ended scheme, it would again open for subscription after the initial ETF period of 5 working days.
Minimum investment is Rs 5,000 and in multiples of Rs 1 there-off.
The NAV of the ETF is Rs 10 per unit during the initial subscription.
There is no entry load to invest in this ETF.
There is no exit load in this ETF.
This scheme is classified as high risk scheme.
Scheme total expense ratio (TER) is estimated at 1%.
What is the investment objective of the ICICI Prudential IT ETF?
The investment objective of the scheme is to provide returns before expenses that closely correspond to the total return of the underlying index subject to tracking errors.
There is no assurance or guarantee that the investment objective of the scheme will be realized.
Who is eligible to invest in this mutual fund scheme?
All residential Indians, mutual fund schemes, HUFs, companies and NRIs can invest in this scheme.
What is the benchmark for this scheme?
The benchmark for this scheme is NIFTY IT TRI Index.
What is the allocation pattern in this ETF scheme?
This ETF invests in the following:
1) Equity and equity related instruments that are part of underlying IT index (including warrants carrying the right to obtain equity shares).
2) It would invest in derivatives like, Stock / Index Futures, Stock / Index Options and such other derivative instruments permitted by SEBI.
3) Units of debt schemes / ETFs, subject to applicable regulations.
4) TREPs, Repo and Reverse Repo, Cash & Cash equivalents.
What does NIFTY IT Index contain?
The index is designed to reflect the behavior of companies engaged in activities such as IT infrastructure, IT education and software training, networking infrastructure, software development, hardware, IT support and maintenance etc. The base date of the index is January 1, 1996. Currently it constitutes 10 companies. Here is the list and their weight age in IT index as on August 8, 2020.
Why to invest in the ICICI Prudential IT ETF?
Here are a few reasons to invest in such ETF schemes.
1) The information technology sector is a consistent performer in the last few decades. This is expected to continue in future too.
2) Since this is an ETF, you can buy or sell such ETFs on NSE during market hours. Hence this is a liquid investment.
Some key risk factors you should consider before you invest in such funds
One should consider some of these risk factors / negative factors before investing.
1) This ETF focuses on a single sector (i.e. IT Sector) and this is like sector mutual fund. Investing in single sector is a HIGH RISK.
2) Major Indian IT giants have started publishing their Q1 FY21 results. One could see that work from home have impacted only to a smaller extent in their margins. This is majorly due to mass layoffs, salary cuts and cost optimizations which companies have adopted till now. This would provide relief for short term strategy. However, how long customer IT spend would continue in this model needs to be carefully analyzed. In coming quarters, companies under this sector may face severe margin pressure if customers would take a U turn on their spending.
4) You can refer complete risk factors of investing in this particular scheme in SID / KIM / NFO prospectus.
How is the Performance of NIFTY IT Index?
Now, let us look at the performance of the NIFTY IT Index. Total returns includes dividends, interest and rights received by the share holders (if any).
Here is the last 10 years chart of the NAV value movement of the NIFTY IT Index. If you observe, the index has fallen to 2018 or 2016 levels during covid-19 (Mar/April-2020) – check the red line which I have marked. Means, your hard earned money would have given zero returns in the last 2-4 years if you would have seen during this downfall level. This is the RISK of investing in single sector. However, it has recovered now as stock markets have risen in the last 3 months (surprisingly with no change in fundamentals).
Should you invest in the ICICI Pru IT ETF?
The ICICI Prudential IT ETF invests in underlying stocks of the NIFTY IT index. This invests in a single sector, i.e. IT sector, hence it is high risk. This sector needs to be watched for the next couple of quarters. While there is no doubt that technology sector would be one of the best bets for medium to long term, however, in the short term, one may see slower growth. If you are a high risk investor and willing to invest in medium to long term, you can invest in this scheme. If you are low risk investor, you should avoid this scheme.
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Very good information.