NFO Pick – ICICI Prudential Equity Minimum Variance Fund)

18 Nov 2024 , 10:30 AM

WHY MINIMUM VARIANCE FUND?

The logic of a minimum variance fund is to focus on companies that can give predictable growth and predictable returns. Two stocks or two portfolios with similar returns in the last one year can be entirely different. Given a choice between a 25% returns with 15% variance and 25% returns with 30% variance; which would you choose. Intuitively, you would choose the first one because your effort is to maximize the return per unit of risk and that is much easier in the first fund than in the second fund. Why risk matters a lot more today?

There are several reasons why risk has taken centre stage in recent times. For instance, with the valuations well above the average and solid returns on the Nifty in the last 1 year, the focus has shifted to risk-reward ration. The heightened geopolitical tensions due to West Asia conflict has also added to this shift. While the markets appear to have held up, the FPI flows are faltering and earnings growth is also slowing. This is the time when investors cannot be obsessed with returns alone. Risk has to become an integral part of investing. By choosing a minimum variance strategy, your automatic approach is to reduce the risk.

HIGHLIGHTS OF THE ICICI PRU EQUITY MINIMUM VARIANCE FUND

Here are some of the highlights of the ICICI Prudential Equity Minimum Variance Fund.

• It will be an equity oriented scheme with focus on the Nifty 50 stocks. However, the list will be pruned to focus on stocks with low volatility and low variance from the mean.
• The fund aims to generate alpha not just by a bottom-up approach to stock selection, but also to minimizes and mitigates the risk factor which hinders returns in the long run.
• Being a core Nifty 50 portfolio, there is an element of diversification that is in-built into the portfolio with the focus shifting from pure returns to risk-adjusted returns.
• To sum up; the portfolio will comprise of large caps with low volatility, with high liquidity and where the current valuations are reasonable. The focus is on lagged performance.

HOME TRUTHS ABOUT THE MINIMUM VARIANCE FUND

There are some misconceptions about risk and return in India. Here is a series of myth-busters about the idea of minimum variance fund.

• It is a myth that only the defensive sectors have low variance of returns. This list keeps change on a regular basis. In the last 20 years, Cement, FMCG, Healthcare, and industrials have gone from volatile to less volatile stocks. At the same time, Energy, BFSI and Technology have seen variance going up for the funds.
• Low variance may not always imply low returns. For instance, if you look at the last 20 years, then 60% of the times, the Nifty 100 Low Volatility 30 TRI has outperformed the Nifty 100 TRI. That is quite reassuring for investors in the low volatility or low variance theme, as shown in this NFO.
• There is one more observation about the low variance index. It captures most of the upsides in the market, but tends to outperform even when the Nifty is underperforming. The low variance approach has not only worked across time, but promises to outperform across different zones too.

WHO SHOULD INVEST IN ICICI PRU EQUITY MINIMUM VARIANCE FUND?

Here are some of the characteristics of investors who would be looking at investing in the ICICI Prudential Equity Minimum Variance Fund.

• It is suited to investors who are looking to the fund for long term appreciation in the market with managed risks.
• Many investors are interested in the equity assets, but are worried that the heightened volatility may force them to miss out. For such investors, the fund can be useful.
• If you want to focus your portfolio on solid frontline stocks with good dividend yield and robust cash flows.

HOW LOW VOLATILITY HAVE PERFORMED IN INDIA?

The ICICI Prudential Equity Minimum Variance Fund is a thematic equity large cap fund NFO with focus on stocks with the lowest volatility on a relative basis. Hence, taking the Large Cap or Nifty index funds as a proxy would protest against the basic theme of low volatility. Hence, we have taken passive low volatility funds benchmarked either to the Nifty Alpha Low Volatility 30 Index or benchmarked to the BSE Low Volatility Index. We have considered the 1-year returns and returns since inception as these funds are of fairly recent origin. There are a total of 10 such low volatility funds in India as captured in the table below.

Scheme Name	Return (%) 1-Year	Return (%) Launch	Daily AUM (₹ in Crore)
ICICI Prudential Nifty Alpha Low- Volatility 30 ETF	32.57	22.44	1,585.76
Nippon India Nifty Alpha Low Volatility 30 Index Fund	31.70	23.53	1,103.83
Kotak Nifty 100 Low Volatility 30 ETF	25.99	18.46	150.39
Mirae Asset Nifty 100 Low Volatility 30 ETF	25.95	28.33	28.5
HDFC NIFTY100 Low Volatility 30 ETF	25.79	22.43	13.83
ICICI Prudential Nifty 100 Low Volatility 30 ETF	25.68	15.10	3,336.68
Bandhan Nifty100 Low Volatility 30 Index Fund	24.34	19.61	1,330.51
Motilal Oswal BSE Low Volatility ETF	23.23	18.81	82.85
UTI BSE Low Volatility Index Fund	21.97	18.18	527.32
Motilal Oswal BSE Low Volatility Index Fund	21.56	18.12	98.28

Data Source: AMFI

The table above provides the performance and corpus of the 10 low volatility passive funds based on 1-year returns (ranking) and on returns since inception. Low volatility passive funds in India have a total AUM of ₹8,258 Crore. We have ranked these funds on 1-year returns; although the returns since inception have also been provided.

• Let us first look at the returns on the passive low volatility funds over a 1-year period. On a 1-year returns basis, these funds generated maximum returns of 32.57% and minimum returns of 21.56%, which is limited variation in returns. The average returns over a 1-year period was 25.88%, which is fairly impressive for a passive index fund with focus on low volatility as a theme.
• Let us turn to the returns on the passive low volatility funds since inception. On this parameter, these funds generated maximum returns of 28.33% and minimum returns of 15.10%, which is fair variation once again. The average returns over this fluid period was 20.50% CAGR, which is good. However, there could be wide variations in the time frame.

The funds listed above are passive funds benchmarked to a low volatility version of the index. Hence, the focus has only been to mirror the index returns rather than to beat the index and earn alpha. However, the ICICI Prudential Equity Minimum Variance Fund is an active fund that seeks to use the low volatility theme to actually beat the index and generate alpha for its unit holders.

GLANCE AT THE ICICI PRUDENTIAL EQUITY MINIMUM VARIANCE FUND NFO

Here are key details of the ICICI Prudential Equity Minimum Variance Fund NFO.

• The NFO opened on November 18, 2024 and closes on December 02, 2024. The NFO is being offered at ₹10 per unit.
• Being an active low volatility equity fund, the ICICI Prudential Equity Minimum Variance Fund is classified as Very High Risk on the SEBI Risk-O-Meter. This is due to its dominant equity exposure (85-100%), and entry into equity markets at a Buffett Ratio of 147%.
• The investment objective of the fund is to beat the underlying benchmark index Nifty 50 TRI by using low-volatility as the theme within the large cap stocks. There is no guarantee on returns.
• There will be an exit load of 1.00% of the redemption price, if units are redeemed within 1 year from the date of allotment. There is no exit load beyond 1 year. However, the ideal minimum holding period should be 5-7 years to realize maximum benefits.
• The ICICI Prudential Equity Minimum Variance Fund will offer regular and direct plans. In terms of the options, the fund offers the growth and the IDCW plan to investors.
• Vaibhav Dusad will be the overall fund manager for the ICICI Prudential Equity Minimum Variance Fund, while Nitya Mishra will handle the overseas investments.
• The minimum investment amount in the NFO will be ₹5,000 and multiples of ₹1 and additional purchases will be ₹1,000 and in multiples of ₹1.
• Under the new tax rules effective from July 23, 2024; STCG will be taxed at 20% Plus 4% cess, while LTCG will be taxed at 12.5% Plus 4% additional cess.

The ICICI Prudential Equity Minimum Variance Fund offers a combination of a Nifty portfolio with a low variance theme; improving the risk-reward trade-off for the fund investors.