As equity markets around the world unravel against a backdrop of escalating geopolitical tensions, rising interest rates and spiralling inflation, many investors are worried by the intensified market volatility. One of the first moves by budding investors during unfavourable market phases is to pause their equity investment to protect the portfolio from further downside. However, this does not help from a long-term perspective.
Investors strive to invest in equities to beat inflation and build long-term wealth despite the fact that equities tend to be more volatile than other asset classes. However, many investors are finding it difficult to sustain high market volatility while investing in equities given the headwinds in play. The returns on equity investments are influenced by a wide range of factors. The most prevalent factors are Alpha, Value, Momentum, and Low Volatility.
Factor investing can assist boost diversification, lower volatility, and improving portfolio performance. Investors today have the option of single-factor investing or multi-factor investing. Single factor-based strategies are cyclical 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.
Investors who are averse to market volatility may consider products where low volatility is one of the primary criteria while putting together a portfolio. Also, investors seek to invest in high alpha generating stocks in the portfolio for optimal returns. This is where offerings based on two factors – Alpha and Low Volatility come into the picture.
One such offering which combines both these factors is the Nifty Alpha Low Volatility index. Recently, fund houses have been offering a variety of investment products that are based on factors such as Alpha and Low volatility. Aditya Birla Sun Life Mutual Fund has launched Aditya Birla Sun Life Nifty Alpha Low Volatility 30 ETF. It is an open-ended exchange-traded fund tracking Nifty Alpha Low Volatility 30 TRI. The index is designed to reflect the performance of stocks selected basis the combination of alpha and low volatility.
Table 1: Details of Aditya Birla Sun Life Nifty Alpha Low Volatility 30 ETF
| Type | An open-ended exchange-traded fund tracking Nifty Alpha Low Volatility 30 TRI | Category | Exchange-traded fund |
| Investment Objective | The investment objective of the Scheme is to generate returns that are in line with the performance of the Nifty Alpha Low Volatility 30 Index, subject to tracking errors. The Scheme does not guarantee/indicate any returns. However, there can be no assurance that the objective of the Scheme will be achieved. |
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| Min. Investment | Rs 100/- and in multiples of Re 1 thereafter. | Face Value | Rs 10/- per unit |
| Entry Load | Not Applicable | Exit Load | Nil |
| Fund Manager |
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Benchmark Index | Nifty Alpha Low Volatility 30 TRI. |
| Issue Opens: | August 12, 2022 | Issue Closes: | August 25, 2022 |
(Source: Scheme Information Document)
The investment strategy for Aditya Birla Sun Life Nifty Alpha Low Volatility 30 ETF will be as follows:
Aditya Birla Sun Life Nifty Alpha Low Volatility 30 ETF will be managed passively with investments in stocks in a proportion to the weightage of these stocks in the Nifty Alpha Low Volatility 30 Index.
The underlying index follows a multi-factor strategy and the top 30 stocks are selected and weighted based on a 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 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.
Rebalancing of the scheme shall also be carried out whenever there is a change in the underlying index or any change due to Corporate action concerning the constituents of the underlying index within 7 calendar days. The Scheme may also invest in cash and debt/ money market instruments, in compliance with regulations to meet liquidity and expense requirements.
Under normal circumstances, the asset allocation will be as under:
Table 2: Asset Allocation for Aditya Birla Sun Life Nifty Alpha Low Volatility 30 ETF
| Instruments | Indicative Allocation (% of net assets) | Risk Profile | |
| Minimum | Maximum | High/Medium/Low | |
| Equity & Equity related instruments constituting Nifty Alpha Low Volatility 30 TRI | 95 | 100 | Very High |
| Cash, Money Market & Debt instruments | 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 the combination of Alpha and Low Volatility. It intends to counter the cyclicality of a single factor index strategy and provides investors with 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 Aditya Birla Sun Life Nifty Alpha Low Volatility 30 ETF?
Mr Lovelish Solanki and Mr Pranav Gupta will be the designated fund managers for this scheme.
Mr Lovelish Solanki holds MMS (Finance) and BMS (Finance) degrees. He has an overall experience of over 10 years in Trading and Dealing. Prior to this, he was associated with Union KBC Asset Management Co. Limited as Equity/Equity Derivatives – Trader and Edelweiss Asset Management Co. Ltd.
At ABSL AMC, Mr Solanki currently manages Aditya Birla Sun Life Index Fund, Aditya Birla Sun Life Arbitrage Fund, Aditya Birla Sun Life Gold ETF, Aditya Birla Sun Life Nifty ETF, Aditya Birla Sun Life Gold Fund, Aditya Birla Sun Life Balanced Advantage Fund, Aditya Birla Sun Life Equity Savings Fund, Aditya Birla Sun Life Sensex ETF, Aditya Birla Sun Life Nifty Next 50 ETF, Aditya Birla Sun Life Banking ETF, Aditya Birla Sun Life Nifty Smallcap 50 Index Fund, Aditya Birla Sun Life Nifty Midcap 150 Index Fund, Aditya Birla Sun Life Nifty 50 Equal Weight Index Fund, Aditya Birla Sun Life Nifty Healthcare ETF, Aditya Birla Sun Life Nifty IT ETF, Aditya Birla Sun Life Silver ETF Fund of Fund, and Aditya Birla Sun Life Nifty Next 50 Index Fund.
Mr Pranav Gupta completed his Master in Management Studies- Finance from N.L Dalmia Institute of Management Studies and Research. He has over 4 years of experience in the capital market across segments such as derivative sales trading and Alternative Research. Prior to joining Aditya Birla Sun Life AMC Limited, he was part of the Alternate Research and Strategy department at Centrum Broking Limited and has also worked with OHM Stock Broker Pvt. Ltd.
At ABSL AMC, Mr Gupta currently manages Aditya Birla Sun Life Nifty 50 Index Fund, Aditya Birla Sun Life Nifty ETF, Aditya Birla Sun Life Sensex ETF, Aditya Birla Sun Life Nifty Next 50 ETF, Aditya Birla Sun Life Banking ETF, Aditya Birla Sun Life Nifty Smallcap 50 Index Fund, Aditya Birla Sun Life Nifty Midcap 150 Index Fund, Aditya Birla Sun Life Nifty 50 Equal Weight Index Fund, Aditya Birla Sun Life Nifty Healthcare ETF, Aditya Birla Sun Life Nifty IT ETF, Aditya Birla Sun Life Silver ETF Fund of Fund, and Aditya Birla Sun Life Nifty Next 50 Index Fund.
Fund Outlook – Aditya Birla Sun Life Nifty Alpha Low Volatility 30 ETF
Aditya Birla Sun Life Nifty Alpha Low Volatility 30 ETF will predominantly invest in stocks in the same proportion as in the Nifty Alpha Low Volatility 30 Index to generate parallel returns, subject to tracking errors.
The scheme is passively managed and follows a multi-factor strategy that provides exposure to two factors under a single index. Investors can benefit from the 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.
The fortune of this scheme will depend on the performance of the underlying index. Although the scheme offers the benefit of a multi-factor investing strategy, it is still prone to high market risks and concentration risks due to limited exposure.
Additionally, 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 impact the scheme’s performance and the portfolio may face intensified volatility in the near term.
Thus, Aditya Birla Sun Life Nifty Alpha Low Volatility 30 ETF is suitable for investors looking to take exposure to companies with 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 and your investment objectives align with the fund.
This article first appeared on PersonalFN here
