The Indian equity markets are highly volatile due to the recent geopolitical situation. In current times of geopolitical uncertainties, where markets have corrected sharply, many investors are seeking to sustain the high market volatility while investing in equities.

Investors aiming to grow wealth in the long term in this volatile market scenario may consider investing passively managed index fund/ETF that focuses on stocks with the lowest volatilities. Low-volatility investing aims to provide better risk-adjusted returns over time while also reducing portfolio volatility; it is a relatively effective way to invest in equities.

The S&P BSE Low Volatility Index consists of 30 companies from the S&P BSE LargeMidCap index with the lowest volatilities, as measured by standard deviation. Low-volatility stocks generally tend to hold up better when markets decline rapidly.

Looking at the current market scenario, Motilal Oswal Mutual Fund, one of the prominent AMC in India with funds across all major segments, has launched two schemes with a Low-volatility investing approach ‘Motilal Oswal S&P BSE Low Volatility ETF and Motilal Oswal S&P BSE Low Volatility Index Fund.’ These are open-ended funds replicating/tracking the S&P BSE Low Volatility Total Return Index.

On the launch of this fund, Mr Navin Agarwal, MD & CEO at Motilal Oswal Asset Management Company, said, “Motilal Oswal AMC is one amongst the largest AMC in India to have passive funds across major key segments. We will continue to increase our product basket with a wide variety of options for investors. The Motilal Oswal S&P BSE Low Volatility Index Fund is a good starting point for an investor who’s looking for maximum wealth creation with minimal risk in a highly volatile market.”

Commenting on the NFO launch, Mr Pratik Oswal, Head of passive funds at Motilal Oswal AMC, said, “Research has shown that the strategy of buying low-volatility stocks tends to outperform the broad market over the long-term. The low volatility strategy tends to be the most effective during weak market conditions. Investors that are worried about the volatility in equity markets could consider investing in our low-cost Low Volatility ETF & Index Fund.”

Table 1: Details of Motilal Oswal S&P BSE Low Volatility ETF

Type An open-ended fund replicating/tracking the S&P BSE Low Volatility Total Return Index. Category Exchange-traded fund
Investment Objective The investment objective of the scheme is to provide returns that, before expenses, correspond to the total returns of the securities as represented by S&P BSE Low Volatility Total Return Index, subject to tracking error. However, there is no guarantee or assurance that the investment objective of the scheme will be achieved.
Min. Investment Rs 500 and in multiples of Re 1/- thereafter. Face Value Rs 10/- per unit
Entry Load Not Applicable Exit Load Nil
Fund Manager – Mr Swapnil Mayekar
– Mr Abhiroop Mukherjee
Benchmark Index S&P BSE Low Volatility Total Return Index
Issue Opens March 04, 2022 Issue Closes March 16, 2022

(Source: Scheme Information Document

Table 2: Details of Motilal Oswal S&P BSE Low Volatility Index Fund

Type An open-ended fund replicating / tracking the total return of S&P BSE Low Volatility Total Return Index. Category Index fund
Investment Objective The investment objective of the scheme is to provide returns that, before expenses, correspond to the total returns of the securities as represented by &P BSE Low Volatility Total Return Index, subject to tracking error. However, there can be no assurance or guarantee that the investment objective of the Scheme would be achieved.
Min. Investment Rs 500 and in multiples of Re 1/- thereafter. Additional Purchase Rs 500/- and in multiples of Re. 1/- thereafter. Face Value Rs 10/- per unit
Plans
  • Regular
  • Direct
Options
  • Growth
Entry Load Not Applicable Exit Load
  • 1%- If redeemed on or before 15 days from the date of allotment.
  • Nil- If redeemed after 15 days from the date of allotment.
Fund Manager – Mr Swapnil Mayekar
– Mr Abhiroop Mukherjee
Benchmark Index S&P BSE Low Volatility Total Return Index
Issue Opens March 04, 2022 Issue Closes March 16, 2022

(Source: Scheme Information Document

The investment strategy for Motilal Oswal S&P BSE Low Volatility ETF and Index Fund will be as follows:

Both Motilal Oswal S&P BSE Low Volatility ETF and Index Fund will follow a passive investment strategy and seek to invest in the constituent of the S&P BSE Low Volatility Total Return Index in the same proportion (weights) as the index and track the benchmark index.

The investment strategy would involve offering investment returns that are similar to the total returns of the S&P BSE Low Volatility Total Return Index before fees/expense and subject to tracking error. The scheme follows a smart-beta strategy: it will offer exposure to a diversified portfolio of relatively stable companies within the Large and Midcap segment by investing into the S&P BSE Low Volatility Index constituents.

The investment strategy would revolve around reducing the tracking error to the least possible point through regular rebalancing of the portfolio, taking into account the change in weights of stocks in the Index as well as the incremental collections/redemptions in the Scheme.

Both these schemes aim to invest in the constituent of S&P BSE Low Volatility Total Return Index, in the range of 95% to 100%. The scheme would also invest in units of Liquid/ debt schemes, debt, and money market instruments, in the range of 0% to 5%.

Under normal circumstances, the Asset Allocation will be as under:

Table 3: Asset Allocation for Motilal Oswal S&P BSE Low Volatility ETF

Instruments Indicative Allocation (% of net assets) Risk Profile
Minimum Maximum High/Medium/Low
Constituents of S&P BSE Low Volatility Index 95 100 Very High
Units of Liquid/ debt schemes, debt and money market instruments 0 5 Low

(Source: Scheme Information Document

Table 4: Asset Allocation for Motilal Oswal S&P BSE Low Volatility Index Fund

Instruments Indicative Allocation (% of net assets) Risk Profile
Minimum Maximum High/Medium/Low
Constituents of S&P BSE Low Volatility Index 95 100 Very High
Units of Liquid/ debt schemes, debt, and money market instruments 0 5 Low

(Source: Scheme Information Document

About the Benchmark

The S&P BSE Low Volatility Index is designed to track the performance of the 30 companies in the S&P BSE LargeMidcap with the lowest volatilities, as measured by standard deviation.

The S&P BSE Low Volatility Index aims to track the performance of stocks with lower volatility on a risk-adjusted basis over the medium to long-term periods by adopting a simple and transparent approach to volatility reduction.

Here’s the list of top 10 constituents by weightage and sector representation under the index as on February 28, 2022:

list

(Source: Motilal Oswal S&P BSE Low Volatility ETF and Index Fund PPT

Note that the index rebalancing is undertaken semi-annually based on data for six months i.e., March and September.

Who will manage Motilal Oswal S&P BSE Low Volatility ETF and Index Fund?

Mr Swapnil Mayekar and Mr Abhiroop Mukherjee will be the designated fund managers for these schemes.

Mr Swapnil Mayekar will be managing the equity portion of the portfolio. He has over 11 years of experience in fund management and product development and has completed a Master of Commerce in (Finance Management). Prior to joining Motilal Oswal Asset Management Company Ltd., he was associated with Business Standard as Research Associate.

At Motilal Oswal AMC, Mr. Mayekar currently manages Motilal Oswal Nasdaq 100 Fund of FundMotilal Oswal Nifty Bank Index FundMotilal Oswal Nifty 500 FundMotilal Oswal Nifty Midcap 150 Index FundMotilal Oswal Nifty Small cap 250 Index FundMotilal Oswal Midcap 100 ETF and Motilal Oswal M50 ETFMotilal Oswal Nifty 50 Index Fund and Motilal Oswal Nifty Next 50 Index Fund.

Mr Abhiroop Mukherjee will be managing the debt component of the portfolio. He is a B. Com (Honours) graduate, holds PGDM (Finance) degree, and has over 13 years of experience in Debt and Money Market Instruments, Securities trading, and fund management. Before joining Motilal Oswal AMC as Associate Vice President – Debt and Money Market Instruments, he has worked with PNB Gilts Ltd. as an Assistant Vice President – Debt and Money Market Instruments.

At Motilal Oswal AMC, Mr. Mukherjee currently manages Motilal Oswal Ultra Short Term FundMotilal Oswal Liquid FundMotilal Oswal 5 Year G -Sec ETFMotilal Oswal 5 Year Gsec Fund of FundMotilal Oswal Focused 25 FundMotilal Oswal Midcap 30 FundMotilal Oswal Flexicap FundMotilal Oswal Long Term Equity FundMotilal Oswal Dynamic FundMotilal Oswal Nasdaq Fund of FundMotilal Oswal Equity Hybrid FundMotilal Oswal S&P 500 Index FundMotilal Oswal Asset Allocation Passive Fund of Fund – Conservative and Motilal Oswal Asset Allocation Passive Fund of Fund – AggressiveMotilal Oswal MSCI EAFE Top 100 Index Fund and Motilal Oswal NASDAQ Q 50 ETF

Fund Outlook – Motilal Oswal S&P BSE Low Volatility ETF and Index Fund

Motilal Oswal S&P BSE Low Volatility ETF and Index Fund aims to mirror the performance of the S&P BSE Low Volatility index, where the index construction is based on the “Low Volatility” within the universe of S&P BSE LargeMidcap Index. The scheme endeavours to hold a diversified portfolio of stable companies within the Large and Midcap segment, subject to tracking errors. The fortune of these schemes will depend on the performance of the underlying index.

The low volatility investment strategy involves buying stocks which have higher stability in price movements based on past returns. The underlying index i.e., S&P BSE Low Volatility TRI, has seen significantly smaller declines during tail events, providing good downside protection. The underlying index has lower exposure to sectors with higher volatility, such as Financial Services, IT, Oil, and Gas. The scheme offers investors lower volatility as compared to the market and showcases lower drawdowns than broad-based indices during market crashes.

Both the schemes will be passively managed and reduce the risk of stock selection, but the limited exposure to 30 lower volatility stocks could pose a concentration risk. Although the scheme invests in “Low volatile” companies that generally have a lesser impact of market volatility, it is still prone to high market risks related to the volatile nature of equities.

In addition, the looming threat of omicron variant plus RBI’s stance of monetary policy normalization amidst the inflationary pressures and the recent geopolitical tensions between Russia-Ukraine with a surge in crude oil prices may pose a risk to the economic growth. This may weigh down the S&P BSE Low Volatility Index and its top constituents. The margin of safety appears to be narrow, and a clear direction for the equity market from the current elevated levels is unknown. These, among many other factors, may affect the scheme’s performance, and the portfolio may face intensified volatility in the near term.

Thus, these schemes are suitable for refined investors looking to take exposure in relatively stable companies with low volatility within the universe of S&P BSE LargeMidcap Index. Ensure that you hold a high-risk appetite, a long investment horizon to sustain market volatility, and an investment objective that aligns with the fund.

This article first appeared on PersonalFN here


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