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. There are a variety of factors that affect the returns on equity investments. For instance: Value, Quality, Low Volatility, Momentum, etc. Factor investing can help improve portfolio performance, reduce volatility, and increase diversification. Knowing the factors that drive returns in your portfolio can help you to choose the right mix of assets and strategies for your portfolio.

Single factor-based strategies exhibit cyclicality and may underperform during certain market phases. However, the cyclical component of single factor indices can be mitigated by selecting stocks based on a combination of multiple factors.

Nifty Alpha Low Volatility Index consists of top 30 stock across sectors and market capitalization. These stocks are selected based on factor score of Alpha (50%) + Low Volatility (50%) using the previous one year’s pricing. The alpha factor helps in identifying stocks with high growth potential. 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 investing in stocks with these two factors.

Nippon India Mutual Fund has launched Nippon India Nifty Alpha Low Volatility 30 Index Fund. It is open-ended scheme replicating/ tracking Nifty Alpha Low Volatility 30 Index).

Table 1: Details for Nippon India Nifty Alpha Low Volatility 30 Index Fund

Type An open-ended scheme replicating/ tracking Nifty Alpha Low Volatility 30 Index). Category Index Fund
Investment Objective The investment objective of the scheme is to provide investment returns closely corresponding to the total returns of the securities as represented by the Nifty Alpha Low Volatility 30 Index before expenses, subject to tracking errors. However, there can be no assurance or guarantee that the investment objective of the Scheme will be achieved.
Min. Investment Rs 1,000/- and in multiples of Re 1 thereafter. Additional Purchase Rs 1,000/- and in multiples of Re 1 thereafter. Face Value Rs 10/- per unit
  • Regular
  • Direct
  • Growth
  • Income Distribution cum capital withdrawal Plan
Entry Load Not Applicable Exit Load Nil
Fund Manager Mr Mehul Dama Benchmark Index Nifty Alpha Low Volatility 30 TRI.
Issue Opens: August 01, 2022 Issue Closes: August 12, 2022

(Source: Scheme Information Document)  

The investment strategy for Nippon India Nifty Alpha Low Volatility 30 Index Fund:

Nippon India Nifty Alpha Low Volatility 30 Index Fund is a passively managed index fund that aims to invest in stocks in the same proportion as the Nifty Alpha Low Volatility 30 Index.

The underlying index follows a multi-factor strategy and top 30 stocks are selected and weighted based on factor score of Alpha (50%) + Low Volatility (50%). Stock weights are capped at 5% or 5 times the weight of the stock in the index based only on free float market capitalization.

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 AMC does not make any judgments about the investment merit of Nifty Alpha Low Volatility 30 Index nor will it attempt to apply any economic, financial or market analysis. The Scheme will invest at least 95% of its total assets in the securities comprising the Underlying Index. The Scheme may also invest in cash & cash equivalents and money market instruments to meet the liquidity and expense requirements.

Under normal circumstances, the asset allocation will be as under:

Table 2: Asset Allocation for Nippon India Nifty Alpha Low Volatility 30 Index Fund

Instruments Indicative Allocation (% of net assets) Risk Profile
Minimum Maximum High/Medium/Low
Securities constituting Nifty Alpha Low Volatility 30 Index 95 100 Medium to High
Cash & cash equivalents and Money Market instruments, Reverse repo and / or Triparty Repo on Government securities or Treasury bills and/or Schemes which invest predominantly in the money market securities or Liquid Schemes 0 5 Low to Medium

(Source: Scheme Information Document)  

About the benchmark

NIFTY Alpha Low-Volatility 30 Index is designed to reflect the performance of a portfolio of stocks selected based on top combination of Alpha and Low Volatility. It intends to counter the cyclicality of single factor index strategy and provides investors a choice to take exposure to multiple factors through a single index product.

The Index consists of 30 stocks selected from NIFTY 100 and NIFTY Midcap 50. The weight of the stocks is derived from Alpha and Low Volatility factor scores with individual stock weight capped at 5%.

Here’s the list of top 10 constituents by their weightage and sector representation under the index as of July 29, 2022:

(Source: NSE Nifty Alpha Low Volatility 30 Index)  

Note, that the index will rebalance semi-annually in June and December.

Who will manage Nippon India Nifty Alpha Low Volatility 30 Index Fund?

The designated fund manager for this scheme is Mr Mehul Dama. He is a Chartered Accountant (CA) and a B.com graduate with an overall experience of 17 years in the financial services industry. Before joining Nippon India AMC, he was associated with Goldman Sachs Asset Management (India) Private Limited as Vice President – Controllers, Benchmark Asset Management Company Private Limited as Assistant Vice President – Operations / Controllers, and Lovelock & Lewes as Assistant Manager.

At Nippon India AMC, Mr Dama currently manages Nippon India ETF Consumption, Nippon India ETF Dividend Opportunities, Nippon India ETF Gold BeES, Nippon India ETF Infra BeES, Nippon India ETF Nifty 100, Nippon India ETF NV20, Nippon India ETF PSU Bank BeES, Nippon India ETF Sensex, Nippon India ETF Shariah BeES, Nippon India Index Fund – Nifty Plan, Nippon India Index Fund – Sensex Plan, Nippon India Gold Savings Fund, Nippon India ETF Nifty Midcap 150, Nippon India Junior BeES FoF, Nippon India ETF Sensex Next 50, Nippon India ETF Nifty IT, Nippon India Nifty Smallcap 250 Index Fund, Nippon India Nifty Midcap 150 Index Fund, Nippon India Nifty 50 Value 20 Index Fund, Nippon India Nifty Auto ETF, Nippon India Silver ETF Fund of Fund and Nippon India Nifty Pharma ETF.

Fund Outlook – Nippon India Nifty Alpha Low Volatility 30 Index Fund

Nippon India Alpha Low Volatility 30 Index Fund will predominantly invest in stocks in the same proportion as in the NIFTY 100 Low Volatility 30 Index to generate parallel returns, subject to tracking errors.

The scheme follows a multi-factor strategy and provides exposure to two factors through single index product thus benefitting from combination of both Alpha and Low Volatility factors i.e. potential for growth and stability. It eliminates the non-systematic risks like stock picking and portfolio manager selection, via rule-based investing in the 30 stocks at a lower expense ratio.

Being an index 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 alpha generating lower-volatility stocks.

However, do note that the persistent repercussions of the Russia-Ukraine conflict, spiralling inflation and the RBI’s recent announcement to hike policy rates again by 50 basis points to curb demand and control inflation may cause a significant risk to the economic growth and continue the prevailing high market volatility. The margin of safety appears to be narrow and the clear direction for the equity market from the current elevated levels is uncertain. These factors among others may weigh down the underlying index and its top constituents which may impact the scheme’s performance and the portfolio may face intensified volatility in the near term.

Thus, Nippon India Nifty Alpha Low Volatility 30 Index Fund is suitable for investors looking to take exposure in companies with a growth potential and lower volatility within the universe of the Nifty 100 and Nifty Midcap 50 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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