How this NFO from ICICI Pru MF contains downside better

As markets get more volatile, funds that contain downside better could bring a balancing factor to your portfolio. ICICI Pru Nifty 100 Low Volatility 30 Fund (Low Vol 30) could be just what the doctor ordered. Launched as an ETF (Exchange Traded Fund) in mid-2017, the NFO of the ‘Fund of funds’ (FOF) of this ETF is open until April 6. The FOF will, nevertheless, reopen for investments shortly afterwards. The advantage of the FOF structure is that it allows investors to take exposure without worrying about the liquidity of the ETF as also take the SIP route to investing. Investors who don’t have a high appetite for risk can sign up for this fund.

Complementary to Nifty 100

The selection of the stocks for the Low Vol 30 index is based on their volatility score. Volatility is calculated as the standard deviation of daily price returns for the last one year. The top 30 stocks from the Nifty 100 index with least volatility form part of the Low Vol 30 index. Additionally, these securities should have a minimum listing history of one year and be available for trading in the derivative segment as well. The Low Vol 30 index is reviewed on a quarterly basis.

A look at the current composition of the Low Vol 30 index shows that it complements the Nifty 100 well. Defensive segments of the market, such as consumer goods and IT — known to contain losses — constitute 26 per cent and 16 per cent respectively in this index. Besides, dividend yield stocks — which investors turn to in volatile market phases for some cushion from a fall — are also prominent in this index. The index holds 3-4 per cent each in Power Grid, Indian Oil and NTPC, which are consistent dividend payers. On the other hand, the Nifty 100 index is tilted towards cyclicals and utilities such as financials and oil and gas, with Reliance Industries and the HDFC twins among the top holdings. The Low Vol 30 index trumps the Nifty 100 in terms of PE (24.5 times vs 39.5 times for Nifty 100 as of end February 2021), dividend yield (1.89 % vs 1.08 % for Nifty 100) and standard deviation (25.7 vs 30.76 for Nifty 100) too. SD here is calculated as average daily SD for the last one year, annualised.

Restricted losses in bear markets

Back-tested data available for the Low Vol 30 index from April 2005 shows that the fund has contained losses vis-à-vis the Nifty 100 TRI and the Nifty 50 TRI in absolute bear markets such as those witnessed in 2008 and 2011. Expectedly, its track record in bull markets is mixed. For instance, it has not outperformed its plain vanilla counterpart in bull markets such as 2017, though it did do so in 2014. However, true to its label, it displays better consistency in returns. On a one-year rolling return basis over three, five and ten-year periods, the Low Vol 30 index trumps the Nifty 50 as well as the Nifty 100 by 1.1-3.3 percentage points.

On a point- to-point basis, over three- ,five- and ten-year periods, the Low Vol 30 index has beaten the average returns of large-cap funds by 1.2-3.5 percentage points. Investors with low to medium risk appetite can consider this smart beta fund over actively managed large-cap funds that entail higher expense ratios.

Other points

With the Low Vol 30 ETF, trading volume has been a concern. Average daily turnover was just ₹61 lakh in the past year. The FoF structure helps overcome this challenge. At 0.42 per cent as of end-Feburary 2021, the expense ratio of the ETF is on the higher side when compared to most. The expense ratio for the regular plan of the FOF is at 0.6 per cent. However, this number is comfortably lower than for actively managed funds.

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