Motilal Oswal Nasdaq 100 FoF vs ETF

Personal finance
1

Hello

The 5 yr rolling returns of Motilal Oswal Nasdaq 100 Fund of Fund looks to better than that of Motilal Oswal Nasdaq 100 ETF

Edit: For anyone reading this later the above statement is incorrect. FoF performs a little worse than Motilal Oswal Nasdaq 100 ETF

I checked for the period 12 Jan 2018 onwards. Can one conclude that the former is a better option?

2

Following this post.

3

The fund of fund invests directly in the ETF. It does not own the stocks in it’s own capacity. The mutual fund is just literally buying ETF units on your behalf.

So you will be paying expense ratio of ETF + Mutual fund if you go mutual fund way.

4

Thank you.

This is the first time I encountered a MF that invests in ETFs.

Below is my understanding of index mutual fund vs ETF. Please correct if any of it (or my conclusions) are incorrect.

Index funds charge their expense ratio to the daily current value of your investment. Every investment is at a specific NAV.

Pure ETFs (not MFs that invest in ETFs) have no expense ratio (or very small expense ratio). Since ETFs are traded and so their values can drift higher or lower than the iNAV. The overheads are mainly the trading charge.

So as long as one purchases ETFs at prices close to the iNAV they will give better returns than index funds over 5/8/10 years.

One other question: I have read that ETFs are more liquid than MFs. Are all ETFs traded in sufficient volumes that one can sell easily ?

5

This is the first time I encountered a MF that invests in ETFs.

Actually, a lot of index funds do that. The same fund house will have an ETF and they just invest everything there, to reduce management of money, since now the ETF has to manage everything. The only thing they do is provide a way to invest in ETFs for people without demat account.

Zerodha Fund House’s new liquid mutual fund also invests in it’s own liquid ETF.

Pure ETFs (not MFs that invest in ETFs) have no expense ratio

All ETFs have expense ratio. No will will manage and invest your money for free. Motilal Nasdaq ETF has expense ration of 0.58% p.a… This is mentioned on their website. Invest Online in Motilal Oswal Nasdaq 100 ETF

Also MFs that invest in ETFs are not ETFs. They are mutual funds choosing to invest in ETF instead of holding stocks and trading on their own (very convenient for them haha, just give all the money to the ETF and let them handle it). Usually it is the same AMC managing the ETF as well as the Mutual fund, not like they are separate entities with different rules.

When you invest in mutual fund that invests in ETFs, the good thing is less fluctuation since there is no trading or intraday. You get a simple NAV and less headache. You can also decide to hold the MF units in demat/non-demat mode as per personal preference.

But expense ratio becomes a teeny bit more, which is what you pay for the convenience of investing in MF route. Your initial expense ratio is deducted by MF before it goes to the ETF, which then deducts it’s own expense ratio.
The difference is not much. If you prefer to segregate investments vs trading, you can pay that.

An ETF is exactly like a mutual fund, it is just traded between buyers and sellers on the stock markets. Mutual Fund units cannot be traded. When you “sell” MF units, the buyer is the MF company itself, which then has to sell your units worth of stocks to give you your money back. I don’t understand liquidity issue in MFs since there is no option of the MF AMC rejecting your sell order.

On Zerodha Varsity, there is a specific paragraph on Motilal’s Nasdaq ETF’s NAV vs price premium issues here - Exchange-traded funds (ETF) – Varsity by Zerodha

You can read about ETF liquidity there in section 29.7. I do not have knowledge on ETF liquidity.

6

Thanks.

In this instance the MF investing in the ETF i.e.
Motilal Oswal Nasdaq 100 Fund of Fund Direct Growth says that their expense ratio is 0.18%

Which is lower than the 0.58% charged by Motilal Oswal Nasdaq 100 ETF Regular Growth

So in this case an MF that is investing in ETF (i.e. the Motilal FoF) is charging a lower expense ratio. Don’t know how.

I confirmed Motilal Oswal Nasdaq 100 ETF - though it has ETF in the name invests in stocks as per the index

From the SID page 27

Instruments:
“Securities constituting NASDAQ-100 Total Return Index”

7

So in this case an MF that is investing in ETF (i.e. the Motilal FoF) is charging a lower expense ratio. Don’t know how.

  1. ETF is charging 0.58%.

  2. MF is charging 0.18% to send put your money to the ETF. Your same money (after deduction of MF charges) will get charged at 0.58% again when it reaches the ETF.

Approximate example for simplification, assuming expense ratio is deduced fully daily:

  1. You put ₹1000 into Motilal FoF. It is reduced to 99.82 because of expense ratio of Motilal FoF.
  2. The Motilal FoF invests your 998.2 into the ETF just like you would. It takes the 998.2 and clicks the buy button and buys whatever ETF units it can with that much money.
  3. ETF then deducts 0.58% as it’s charges, before updating it’s NAV. So your net has reduced even further now

Your net investment = 992.4

This is one expense ration on top of the other. FoF expense ratio does not replace the ETF expense ratio.

8

Whoa! So the number they declare as Total Expense Ratio is the specific fund’s ratio and there could be more underneath. This is good to know.

Thanks a ton.