The art of investing with lesser volatility

When it comes to equity investing, one of the factors that scare novice and experienced investors alike is volatility. For investors who are not well versed with the market, sharp market volatility can be very unnerving. Often investors are of the view that higher volatility = higher risk. During instances of rapid correction such as the one seen during March 2020, around the onset of the global pandemic, scores of investors witnessed their portfolio value being wiped out in a matter of a few market hours.

As a means to protect one’s portfolio from further losses, investors restored to pausing their SIPs or even redeeming their investments. But equity markets surprised one and all and staged a sharp rebound, recovering all of their lost ground and steadily rallied, taking the benchmark indices to new highs. Stomaching such volatility can be indeed challenging. So, investors across the board tend to grapple with a common question – how can one potentially reduce market risk while maintaining long term return benefits that equity generally provide? That’s like having the best of two worlds – high returns but with low risk.

While this sounds almost impossible there are a few options available in the form of factor-based smart beta products within the mutual fund universe. Globally as well as in India there has been an increased acceptance of factor-based smart beta products among retail investors. Smart beta means using rule-based investment filters to construct a portfolio. Here the securities are chosen based on their ability to meet certain set criteria which are known as factors. The factors based on which indices are available in India are primarily data-centric parameters and low volatility is one of the factors on offer. The attempt here is to provide investors with a better risk-adjusted return.

The latest smart beta offering in the market is the ICICI Prudential Nifty Low Vol 30 ETF FOF. The NFO for the same is underway till April 6, 2021. The aim of the fund is to invest in the 30 least volatile large-cap stocks from the Nifty 100 universe. This FOF will be investing in the ICICI Prudential Nifty Low Vol 30 ETF which replicates the Nifty 100 Low Volatility 30 Index.

As a means to keep up with the changes in the market, the portfolio will be reviewed on a quarterly basis. This ensures that at all points in time, the stocks which are a part of this portfolio is nothing but the least volatile names among the top 100 companies. As a result, this FOF offers wealth creation opportunities with minimal volatility when compared to benchmark indices such as the S&P BSE Sensex and Nifty 50.

Over the last decade, while Nifty 50 delivered 10.1 per cent CAGR, the Nifty Low Volatility 30 index delivered 12.9 per cent CARG. On a total return basis which includes dividends and capital appreciation, the low volatility index generated returns to the tune of 14.9 per cent as compared to 12 per cent return by Nifty 50, during the same period. This clearly shows that having such a product as a part of one’s portfolio ensures that while volatility is minimal, the investor has the opportunity to enjoy outsized returns as well.

by, Mehran Rostam Feffeli, Proprietor, Ethix