Equity as an asset class, when compared to other asset classes, tends to be more volatile in nature, and many investors seek to invest in equities to beat inflation and create wealth over the long term.
However, investors are finding it challenging to sustain high market volatility while investing in equities due to current geopolitical uncertainties, where markets have corrected rapidly. When it comes to investing in equities, volatility cannot be completely eradicated, but it may be significantly reduced by taking certain measures.
Investors may opt for low volatility strategies, which indicates that a security’s value does not fluctuate dramatically and tends to be more steady. Low-volatility investing aims to provide better risk-adjusted returns over time with less volatility. You may consider investing in passively managed Index fund/ETFs that focuses on stocks with the lowest volatilities.
Kotak Mahindra Mutual Fund has launched Kotak Nifty 100 Low Vol 30 ETF. It is an open-ended scheme replicating/tracking the NIFTY 100 Low Volatility 30 Index. The scheme is a good starting point for any investor who’s looking for maximum wealth creation with minimal risk in a highly volatile market. The low volatility strategy tends to be the most effective during weak market conditions.
Table 1: Details of Kotak Nifty 100 Low Vol 30 ETF
| Type | An open-ended scheme replicating/tracking NIFTY 100 Low Volatility 30 Index. | Category | Exchange-traded fund |
| Investment Objective | The investment objective of the scheme is to replicate the composition of the NIFTY 100 Low Volatility 30 Index and to generate returns that are commensurate with the performance of the NIFTY 100 Low Volatility 30 Index, subject to tracking errors. However, there is no assurance that the objective of the scheme will be realized. | ||
| Min. Investment | Rs 5,000 and in multiples of Re 1/- thereafter. | Face Value | Rs 10/- per unit |
| Entry Load | Not Applicable | Exit Load | Nil |
| Fund Manager | Mr Devender Singhal Mr Satish Dondapati Mr Abhishek Bisen |
Benchmark Index | NIFTY 100 Low Volatility 30 Index (Total Return Index) |
| Issue Opens | March 04, 2022 | Issue Closes | March 16, 2022 |
(Source: Scheme Information Document)
The investment strategy for Kotak Nifty 100 Low Vol 30 ETF will be as follows:
To achieve the investment objective, Kotak Nifty 100 Low Vol 30 ETF will follow a passive investment strategy with investments in stocks in the same proportion as in the NIFTY 100 Low Volatility 30 Index.
The investment strategy would revolve around reducing the tracking error to the least possible through rebalancing the portfolio, taking into account the change in weights of stocks in the index and the incremental collections/redemptions from the Scheme.
The scheme may take exposure to equity derivatives of the index itself or its constituent stocks when equity shares are unavailable, insufficient, or for rebalancing in case of corporate actions for a temporary period. While these measures are expected to mitigate the above risks to a large extent, there can be no assurance that these risks would be completely eliminated.
A small portion of the net assets will be held as cash or will be invested in debt and money market instruments permitted by the SEBI/RBI including TREPS or in alternative investment for the TREPS as may be provided by the RBI, to meet the liquidity requirements under the Scheme.
Under normal circumstances, the Asset Allocation will be as under:
Table 2: Asset Allocation for Kotak Nifty 100 Low Vol 30 ETF
| Instruments | Indicative Allocation (% of net assets) | Risk Profile | |
| Minimum | Maximum | High/Medium/Low | |
| Equity and Equity related securities covered by the Nifty 100 Low Volatility 30 Index* | 95 | 100 | Medium to High |
| Debt & Money Market Instruments# | 0 | 5 | Low to Medium |
*Exposure to equity derivatives of the index itself or its constituent stocks may be required in certain situations wherein equity shares are unavailable, insufficient or for rebalancing in case of corporate actions for a temporary period etc. The gross position to such derivatives will be restricted to 5% of net assets of the scheme. This will also include various derivatives and hedging products to reduce the risk of the portfolio, in the manner permitted by SEBI from time to time.
#Debt instruments shall be deemed to include securitised debts (excluding foreign securitised debt) and investment in securitised debts may be up to 50% of Debt and Money Market instruments. This will also include margin money for derivative transactions.
#Money Market instruments includes commercial papers, commercial bills, treasury bills, Government securities having an unexpired maturity up to one year, call or notice money, certificate of deposit, usance bills, and any other like instruments as specified by the Reserve Bank of India from time to time.
(Source: Scheme Information Document)
About the Benchmark
The NIFTY100 Low Volatility 30 Index aims to measure the performance of 30 stocks in NIFTY 100 with the lowest volatility in the last one year. The NIFTY 100 index represents the large market capitalisation segment of the market.
The securities are selected from the NIFTY 100 index and should be available for trading in the derivative segment(F&O). The selection of securities and their weights in NIFTY100 Low Volatility 30 is based on volatility. The volatility of the securities is calculated as the standard deviation of daily price returns (log-normal) for the last one year.
Here’s the list of top 10 constituents by weightage and sector representation under the index as on February 28, 2022:
(Source: NSE Nifty 100 Low Volatility 30 Index)
Note that the index rebalancing is undertaken on a quarterly basis.
Who will manage Kotak Nifty 100 Low Volatility 30 Index?
Mr Devender Singhal, Mr Satish Dondapati, and Mr Abhishek Bisen will be the fund managers of the scheme.
Mr Devender Singhal will be managing the equity portion of the portfolio. He holds a BA (Hons) in Mathematics and PGDM in Finance. He has over 18 years of experience in equity research and fund management. Before Kotak AMC, he has worked with the PMS divisions of Kotak, Religare, Karvy, and P N Vijay Financial Services.
At Kotak Mutual Fund, Mr Singhal currently manages Kotak Asset Allocator Fund, Kotak PSU Bank ETF, Kotak Debt Hybrid Fund, Kotak Nifty ETF, Kotak Banking ETF, Kotak Sensex ETF, Kotak NV 20 ETF, Kotak India Growth Fund Series 4, Kotak Nifty Next 50 Index Fund, Kotak Equity Saving Fund, Kotak IT ETF Fund, Kotak Multicap Fund, Kotak Nifty 50 Index Fund, Kotak Nifty Alpha 50 ETF and Kotak Midcap 50 ETF.
Mr Satish Dondapati has over 13 years of experience in managing ETFs. He holds an MBA (Finance) degree, and he joined Kotak Mutual Fund in March 2008 in the Product Department. Before joining Kotak AMC, he was in the MF Product Team of Centurion Bank of Punjab. At Kotak AMC Mr Dondapati currently manages, Kotak Sensex ETF, Kotak PSU Bank ETF , Kotak Nifty ETF, Kotak Banking ETF, Kotak NV 20 ETF, Kotak Gold ETF, Kotak IT ETF, Kotak Nifty Next 50 Index Fund, Kotak Nifty 50 Index Fund, Kotak Nifty Alpha 50 ETF and Kotak Midcap 50 ETF.
Mr Abhishek Bisen will be managing the debt portion of the portfolio. He holds a BA Management and an MBA in Finance. Before Kotak AMC, he has worked with Securities Trading Corporation Of India Ltd. under the Sales & Trading division for Fixed Income Products apart from doing Portfolio Advisory. His earlier assignments include 2 years of merchant banking experience with a leading merchant banking firm.
At Kotak Mutual Fund, Mr Bisen currently manages Kotak Bond Fund, Kotak Gilt fund, Kotak Debt Hybrid Fund, Kotak Gold Fund, Kotak Gold ETF, Kotak Equity Savings Fund, Kotak Equity Hybrid Fund, Kotak Balanced Advantage Fund, Kotak NASDAQ 100 Fund of Fund, Kotak Nifty 50 Index Fund, Kotak Nifty Alpha 50 ETF and Kotak Midcap 50 ETF.
Fund Outlook – The Kotak Nifty 100 Low Volatility 30 Index
Kotak Nifty 100 Low Volatility 30 ETF aims to mirror the performance of the Nifty 100 Low Volatility 30 Index, where the index construction is based on the “Low Volatility” within the universe of the Nifty 100 Index, subject to tracking errors. The fortune of these schemes will depend on the performance of the underlying index.
The underlying index consists of 30 large-cap stocks from the Nifty 100 universe with the lowest price volatility over the last year. The scheme offers investors a tool for diversification that aims to limit the downside risk of market volatility by investing in less volatile stocks with stable businesses.
Being an exchange-traded fund, the scheme will follow a passive investing approach and reduce stock selection risk, but this could pose a concentration risk due to limited exposure to 30 lower-volatility stocks.
However, do note that the scheme will be prone to high market volatility due to 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 Nifty 100 Low Volatility30 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, Kotak Nifty 100 Low Volatility 30 ETF is suitable for investors looking to take exposure in relatively stable companies with low volatility within the universe of the Nifty 100 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
