ICICIDirect has introduced a new product. It’s called the ETF Intelligent Portfolio (EIP). We took an in-depth look to see if you should consider it.
ICICIDirect will act as a advisory managing your investments. The EIP will help you in creating a portfolio with a mix of equity, debt and gold. All made up of ETFs (Nifty ETF, Nifty Midcap 150 ETF, Long Term Gilt ETF and Gold ETF).
Portfolios: EIP gives you three standardized portfolio viz. Aggressive, Moderate and Conservative.
The portfolio are customizable, so you can change weightages from these standard allocations.
Minimum Investment starts with Rs 1,000. Subsequent investments can be SIPs or lump sum with multiples of Rs 1,000.
Rebalancing: Happen when any or all components deviate from their initial weights by +/- 2.5% (minimum Rs 250). This means the higher weight ETFs will be sold and reinvested in lower weightage ETF. Deviations will be monitored on daily basis.
Fees: 0.15% of the average portfolio value in the quarter. Roughly works out around 0.60% per year.
Brokerage: For initial buys, brokerage will be charged along with other charges (STT, CDSL charges etc). No brokerage for rebalancing (other transaction charges will be applicable). Brokerage will apply to redemptions.
How Does It Work?
Decide the Risk Profile you want to choose. Aggressive, Moderate and Conservative are the standard options you get. You can customise the options according to your risk appetite.
Once the goal and weightages are set, you start with a minimum cash inflow of Rs 1,000.
ICICI Direct will prompt you to buy the ETFs according to your weightages.
The portfolio will be monitored on daily basis.
If there is a deviation in weightage of any ETF by +/- 2.50%, ICIC Direct will sell the overweight ETF and reinvest in lower weight ETF.
Every Quarter 0.15% of the average portfolio value for the quarter is deducted as fees.
When you sell, brokerage on the sell and the fee till the period will be deducted.
What returns can I expect?
ICICI Direct shows backtests for this product from Jan 3, 2011 to Jun 13, 2019 for a lump sum investment at a start. The back test numbers are as follows.
The aggressive portfolio was re balanced 13 times with an average 5-year rolling return of 13.11% and spread of 7.91% (worst) to 17.28% (best).
The moderate portfolio was re balanced 16 times with an average 5-year rolling return of 11.49% and spread of 7.28% (worst) to 14.39% (best).
The conservative portfolio was re balanced 12 times with an average 5-year rolling return of 9.67% and spread of 7.06% (worst) to 11.32% (best).
Note that all the ETFs were not available for the entire period of the backtest. They considered the Total Returns Index (TRI) for those periods.
What’s Good About This?
Portfolio Diversification: If you go with the aggressive or moderate portfolio, you will be investing in a diverse set of 200 stocks coupled with fixed income gilt and little exposure towards gold. This combination gives you a wider diversification across different asset classes.
Maintains Diversification All The Time: Regular rebalances help in maintaining your portfolio diversification all the time.
Benchmark Indices Risk Unlike Its Components: Portfolio consists of the benchmark Indices like Nifty 50 and Nifty Midcap 150, the portfolio taking a severe beating is limited until some extraordinary events affect the whole market. To know more about why index funds are better read the article titled “The Rise of Index Funds in India, And How You Can Take Advantage Of It”
Low-touch Investing: Passive investors who don’t want to worry about daily vagaries of the market.
More expensive than DIY: 0.60% of average AUM is lower than actively managed mutual funds but higher than if you bought the component ETFs separately. Note the 0.60% is in addition to expense ratios charged by ETFs. For instance in ICICI Nifty 50 ETF directly than you incur a expense ratio of 0.05% of the investment.
Note: We have changed ICICI Prudential gold ETF to SBI Gold ETF as expense ratio of ICICI Prudential Gold ETF is 0.7% vs 0.5% for SBI gold ETF
Brokerage Charges a dampener At ICICI Direct: ICICI Direct charges a minimum of 0.55% of the traded value as the brokerage. ICICI Direct has said it will not charge any brokerage for buying or rebalancing the portfolio. However, brokerage is applicable at sale (if you want to exit and generate liquidity, for any reason). Something about paying close to 1% of your investment as brokerage in this day of discount brokers like zerodha is not quite right.
Option For PSU Debt ETF: ICICI Direct only offers the gilt ETF for now. Other options like Bharat Bond ETF (PSU firms debt) offer a basket of govt backed PSU debt which is just one level below the gilt in term of risk with better yield.
Rebalancing frequently: Rebalancing every time there is a 2.5% deviation means you’re consistently selling winners and buying losers. Would have been good to see backtests of how broader tolerance ranges would have impacted returns.
Liquidity is Concern: The daily traded volumes of the ETFs in the portfolio are not encouraging. The volumes of the ETFs traded today are ICICI Nifty (Rs 48.5 Lakhs), Nippon Midcap 150 (Rs 22 lakhs), Nippon India Gilt (Rs 3.82 lakhs) and ICICI Prudential Gold (Rs 9.64 Lakh). Now assume if you want to invest Rs 25 lakhs in the product as a lump sum, you need to either stagger your buys are need to put a market order (buying at higher prices and in turn will create divergence in NAV and market price). The same is true while selling.
ICICI EIP is a product for the hands-off passive investor. Investing in benchmark ETFs across different asset classes makes it less risky than investing in individual portfolios. The blended returns might not perform extraordinarily but will help reduce volatility. Automatic rebalancing gives a seamless experience, without worrying about markets going up or down.
All of this comes with a cost; 0.60% of your portfolio per year.
If you don’t want the headache of doing it yourself, are already clients of ICICI Direct (which means you are okay with fees and brokerage), then this product might work for you.
Just hope your orders don’t go to market on days with low liquidity, in which case you’d be buying at a premium and selling at a discount to NAV.
Both the problems, Cost, and liquidity, can be handled by investing in an equivalent basket of index funds and rebalancing at periodic intervals. But for those who like to stay as hands-off as possible, this is worth a dekko.
Note: At Capitalmind Wealth, we run a similar portfolio, what we call the Market Portfolio (70% India top 100, 30% US Nasdaq 100) with a 0.25% of AUM as fee. This means we have a slight conflict when reviewing such a product, but are unbiased in our view of the pros and cons.