The Mutual Fund Show: Is A Low-Volatility Fund Of Funds Worth Investing?

This post was originally published on this site

KIRTAN SHAH: This isn’t an NFO in that sense, in my opinion is because there is already a fund which is existing in the market on which this fund of fund is coming ahead. This should not be looked at as a common or a denominated NFO like any other NFO which is coming out in the market. Now, predominantly while we are trying to look at the ICICI Nifty Low Volatility 30 ETF, the index has been in existence for four years, the ETF has been in existence for three and a half years but the index because it’s a smart play, it has been reconstituted back to 2005. Now if somebody like me has to look at this product, of course, like Chintan also said this is meant to make sure that investors who are looking at low volatility are the ones who come in this product.

So if you have to look at this particular product I will look at it in three brackets. The first, has the index in itself on which the ETF or the FOF is going to be based, performed well since 2005 or not and because this is a low volatility product has it been able to protect the downside, which to a greater extent is the appeal for which people are going for, in this product. Very importantly because it’s an ETF, how does the tracking error of the fund perform? So, if you look at all of the three data, I think this is a good fund. So, let me give you some stats and data points. While we looked at the constituted index from 2005, we saw a couple of areas where the Nifty fell so let’s say when the Nifty fell, in the calendar year 2008 by 53.1%, this particular product fell only 42.3% on an index level. Similarly, in 2011 when the Nifty 24.9%, this product fell only 12% and in 2015 when Nifty fell 1.3% in the calendar year, this product outperformed with a positive 9.8% return. So, does the index really protect downside? The answer is yes. Now another answer to look at is, can the index also outperform in good times? If we look at calendar year 2009, when Nifty 100 gave 84.9% return this product gave 92.9%. Similarly, there are multiple instances that I can share where this product has also done well when the markets are also going up. So, does it protect the downside and also perform well when the markets are going up? The answer is yes, point number one. Point number two, I think if you look at it from a tracking error point of view, this product has given a tracking error, anywhere in the range of 0.3-0.6%, because this is quarterly rebalancing and there is some buying and selling that will keep happening. From that perspective, if this is going to be quarterly rebalanced, I think a 0.3% or a 0.6% of tracking error is good. So overall, looking at the last 16 years, the returns on this particular product has been 8.4% CAGR versus Nifty 100 of 14.8%. That has come along with lower volatility, so the standard deviation of this product is 18 versus 22 on Nifty 100 and it also protects the max drawdown from a financial year point of view. This index that we are talking about has the maximum drawdown of over 49%whereas for Nifty 100 has a drawdown of 61%. So, looking at all of these three things, I think the index is really meant for somebody who wants to take low volatility and I don’t see a reason why this should not be a fit for somebody who’s looking at low volatile investment in their portfolio.

Related Posts