Equity as an asset class tends to be more volatile compared to other asset classes. Many equity investors are alarmed by the increased market volatility given the backdrop of escalating geopolitical tensions, rising interest rates, and spiralling inflation. As a result, investors are seeking low volatility strategies, which endeavours to invest in securities whose value does not fluctuate dramatically and tends to be more steady. Low-volatility investing can cushion the portfolio during sharp market moves and provide better risk-adjusted returns over time.
Factor investing follows stock selection based on specific factors and is a unique yet simple strategy to invest in mutual fund schemes. Alpha, Value, Momentum, and Low Volatility are the most prevalent factors. Factor-based investing can increase diversification, reduce volatility, and enhance the performance of your portfolio. Investors who are averse to market volatility may consider mutual fund schemes where ‘low volatility’ is the key consideration when building a portfolio.
Low Volatility Index decides on the entry and exit of stocks through a well-defined and disciplined approach. The Nifty100 Low Volatility 30 Index has a distinct investment process; less volatile stocks get higher weightage, and highly volatile stocks get lower weightage. It provides investors with the benefit of relatively higher diversification and lesser volatility.
IDFC Mutual Fund has launched IDFC Nifty100 Low Volatility 30 Index Fund. It is an open-ended scheme tracking the Nifty100 Low Volatility 30 Index. The underlying Nifty100 Low Volatility 30 Index follows an investment strategy designed to choose the least volatile stocks.
Table 1: Details of IDFC Nifty100 Low Volatility 30 Index Fund
|An open-ended scheme tracking Nifty100 Low Volatility 30 Index
|The investment objective of the scheme is to replicate the Nifty100 Low Volatility 30 index by investing in securities of the Nifty100 Low Volatility 30 Index in the same proportion/weightage with an aim to provide returns before expenses that closely correspond to the total return of Nifty100 Low Volatility 30 Index, subject to tracking errors. However, there is no assurance or guarantee that the objectives of the scheme will be realised, and the scheme does not assure or guarantee any returns.
|Rs 5,000 and in multiples of Re 1/- thereafter.
|Rs 10/- per unit
|Mr Nemish Sheth
|Nifty100 Low Volatility 30 TRI
|September 15, 2022
|September 23, 2022
(Source: Scheme Information Document)
The investment strategy for IDFC Nifty100 Low Volatility 30 Index Fund will be as follows:
IDFC Nifty100 Low Volatility 30 Index Fund will be managed passively with investments in stocks in proportion to the weights of these stocks in the Nifty100 Low Volatility 30 Index.
The investment strategy would revolve around reducing the tracking error to the least possible through rebalancing the portfolio, considering the change in weights of stocks in the index as well as 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 will be completely eliminated.
A small portion of the net assets will be invested in Debt securities and money market instruments, including G-Sec/T-Bills/Cash Management Bills and CBLO/Repo/Reverse Repo, Certificate of Deposits (CDs), Commercial Paper (CPs). Any other securities/instruments as may be permitted by the SEBI from time to time, subject to regulatory approvals, if any.
Under normal circumstances, the Asset Allocation will be as under:
Table 2: Asset Allocation for IDFC Nifty100 Low Volatility 30 Index Fund
|Indicative Allocation (% of net assets)
|Securities belonging to the Nifty100 Low Volatility 30 Index
|Debt & Money Market instruments
|Low to Medium
(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 the 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 August 30, 2022:
Note that the index will rebalance quarterly in March, June, September, and December.
Who will manage IDFC Nifty100 Low Volatility 30 Index Fund?
The designated fund manager for this scheme is Mr Nemish Sheth. He is a B.com graduate and has completed Post Graduate Diploma in Management studies – Finance and has an overall experience of 12 years in the financial services industry. Prior to joining IDFC AMC, he was associated with Nippon Life India Asset Management Ltd. and ICICI Prudential Asset Management Company Ltd. as a Dealer handling execution of Equity, Arbitrage, and ETF trades.
At IDFC Mutual Fund, Mr Sheth currently manages, IDFC Arbitrage Fund – Equity portion, IDFC Equity Savings Fund – Equity portion, IDFC Nifty 100 Index Fund, IDFC Nifty Fund, IDFC Nifty200 Momentum 30 Index Fund, IDFC Sensex ETF, and IDFC Nifty ETF.
Fund Outlook – IDFC Nifty100 Low Volatility 30 Index Fund
IDFC Nifty100 Low Volatility 30 Index Fund aims to mirror the performance of the Nifty100 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. The Low Volatility Index has outperformed major indices with lower volatility.
Although the scheme provides a better risk-adjusted return strategy by investing in stocks with lower volatility, it is still prone to high market risk. It could pose a concentration risk due to limited exposure to 30 lower-volatility stocks. Additionally, the persistent repercussions of the geopolitical tensions, spiralling inflation and the hike in policy rates to curb demand and control inflation may cause a significant risk to economic growth. 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, IDFC Nifty100 Low Volatility 30 Index Fund 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