HDFC NIFTY 100 Low Volatility Index Fund: A Smart Option to Manage Risk
Jun 26, 2024
HDFC Mutual Fund, the third largest fund house in the country by AUM, has joined the bandwagon by launching the HDFC NIFTY 100 Low Volatility Index Fund. Earlier this Mirae Asset Mutual Fund, ICICI Prudential Mutual Fund, and ICICI Prudential Mutual Fund too launched passive funds tracking the NIFTY 100 Low Volatility Index.
Volatility, as you know, is an integral part of the equity market. In other words, it is an unchangeable rule in the market. In the journey of wealth creation with equities as an asset class, high volatility is worrying and increases the risk for you, the investor.
In such a scenario, having exposure to a low volatility index reduces the risk. The HDFC NIFTY 100 Low Volatility Index Fund is an open-ended scheme replicating/tracking the NIFTY100 Low Volatility 30 Index Total Return Index (TRI).
The investment objective of the HDFC NIFTY 100 Low Volatility Index Fund is to generate returns that commensurate (before fees and expenses) with the performance of the NIFTY100 Low Volatility 30 Index (TRI), subject to tracking error.
However, there is no assurance that the investment objective of the Scheme will be achieved.
Only up to 5% of the total assets of the Scheme may be invested in debt & money market instruments as well as units of debt mutual fund schemes. These will be made as cash or cash equivalents for liquidity purposes.
The scheme will benchmark its performance against the NIFTY100 Low Volatility 30 Index Total Return Index (TRI).
While aiming to achieve the stated investment objective, the investment strategy would revolve around reducing the tracking error to the least possible through regular rebalancing of the portfolio, taking into account the change in weights of stocks in the Index as well as the incremental collections/redemptions in the Scheme.
Since the Scheme is an index fund, it will be passively managed and only invest in securities constituting the underlying benchmark index.
The NIFTY 100 Low Volatility 30 Index is a smart beta index that aims to measure the performance of the low-volatile securities in the large market capitalisation segment. The securities of this index are from the NIFTY 100 index and are available for trading in the Futures & Options (F&O) segment.
The NIFTY 100 Low Volatility 30 Index has representation across sectors (see Table 1) and currently its top constituents include companies such as ICICI Bank, HUL, Asian Paints, ITC, Titan, Britannia industries and so on.
Table 1 & 2: Sector Representation and Top Constituents of NIFTY 100 Low Volatility 30 Index
(Source: NSE Indexogram Factsheet)
The selection of securities and their weights in NIFTY 100 Low Volatility 30 are based on volatility. The volatility of securities is calculated as the standard deviation of daily price returns (log-normal) for the last one year. This index is re-balanced quarterly in March, June, September and December to determine the entry and exit of stocks.
How HDFC NIFTY 100 Low Volatility Index Fund would reduce the downside risk?
The graph below is testimony of how the risk is reduced with exposure to the NIFTY 100 Low Volatility TRI.
Graph 1: Performance of the NIFTY 100 Low Volatility 30 TRI v/s. NIFTY 100 TRI and NIFTY 50 TRI during market stress
Data as of May 31, 2024.
Note the historical examples above are not exhaustive and are for illustration purposes. Past performance may or may not be sustained in the future and is not a guarantee of any future returns.
(Source: NSE Indices Ltd. Internal calculations of HDFC Mutual funds and as presented in the investor presentation)
During major stress events for the equity markets, such as the Global Financial Crisis (GFC), the taper tantrum that followed, the COVID-19 pandemic, and geopolitical tensions the NIFTY 100 Low Volatility 30 TRI has displayed better resilience than the NIFTY 100 TRI and NIFTY 50 TRI.
Here's another graph that shows that the NIFTY 100 Low Volatility 30 TRI has seen similar or lower drawdowns during stress events or phases of the equity market.
Graph 2: Drawdowns of the NIFTY 100 Low Volatility 30 TRI v/s NIFTY 100 TRI and NIFTY 50 TRI
Data as of May 31, 2024.
Past performance may or may not be sustained in the future and is not a guarantee of any future returns. HDFC AMC/Mutual Fund is not guaranteeing or promising or forecasting any returns.
(Source: NSE Indices Ltd. Internal calculations of HDFC Mutual funds and as presented in the investor presentation)
And do note that low volatility does not mean low returns. In fact, the table below shows that over various time periods and since the base date of April 1, 2005, the NIFTY 100 Low Volatility 30 TRI has clocked better returns than the NIFTY 100 TRI and NIFTY 50 TRI.
Table 2 and Graph 3: Returns of the NIFTY 100 Low Volatility 30 TRI v/s NIFTY 100 TRI and NIFTY 50 TRI
Data as of May 31, 2024. Apr 01, 2005, has been chosen as the base date since all 3 indices have values from this date onwards.
Past performance may or may not be sustained in the future and is not a guarantee of any future returns. HDFC AMC/Mutual Fund is not guaranteeing or promising or forecasting any returns.
*CAGR: Compounded Annual Growth Rate
(Source: NSE Indices Ltd. Internal calculations of HDFC Mutual funds and as presented in the investor presentation)
Even on rolling returns, the NIFTY 100 Low Volatility 30 TRI has fared well with a lower standard deviation than NIFTY 100 TRI and NIFTY 50 TRI, thus the return-risk ratio (which is Average Rolling Returns divided by the Std. Deviation of Rolling Returns) has also been better.
Table 3: Average Rolling Return Across Time Periods and Risk Ratio
Calculations based on the Based on daily rolling returns of NIFTY100 Low Volatility 30 TRI, NIFTY 100 TRI and NIFTY 50 TRI.
Return Period: Apr 1, 2005, to May 31, 2024, for the abovementioned indices, since all 3 indices have values from Apr 1, 2005, onwards.
Return Risk Ratio = Average Rolling Returns/Std. Deviation of Rolling Returns.
Past performance may or may not be sustained in the future and is not a guarantee of any future returns. HDFC AMC/Mutual Fund is not guaranteeing or promising or forecasting any returns.
(Source: NSE Indices Ltd. Internal calculations of HDFC Mutual funds and as presented in the investor presentation)
Here's what Mr. Navneet Munot, the Managing Director & CEO of HDFC Mutual Fund said in a press release when launching this fund:
"We remain committed to delivering excellence in Index Solutions, leveraging our 20+ years of expertise in this space. We are excited to introduce HDFC NIFTY100 Low Volatility 30 Index Fund, which provides investors a simplified way to deal with market volatility."
Infographic: Reasons to consider the HDFC NIFTY100 Low Volatility 30 Index Fund
(Source: HDFC Mutual Fund presentation)
HDFC NIFTY 100 100 Low Volatility 30 Index Fund will be managed by Mr. Nirman Morakhia along with Mr. Arun Agarwal.
Mr. Morakhia has over 16 years of experience in equity dealing and has been with HDFC Asset Management Company Ltd. since March 2018. Before that he worked for over a decade with Mirae Asset Global Investment Management India Pvt. Ltd. He holds a bachelor's degree in management studies (BMS) and an MBA in financial markets. At HDFC Mutual Fund he manages various other passively managed schemes and other schemes at the fund house.
Mr. Agarwal has a collective experience of over 25 years in equity, debt and derivative dealing, fund management, internal audit and treasury operations. He has been working with HDFC Asset Management Company now for over a decade (since September 2010). Mr. Agarwal is a commerce graduate (B.Com) and a Chartered Accountant (CA). He co-manages various other schemes at the fund house.
HDFC NIFTY 100 100 Low Volatility 30 Index Fund is available for subscription during the New Fund Offer period from June 21, 2024, to July 5, 2024, and has both Regular Plan and Direct Plan for investment (each offering the Growth option only).
The minimum investment amount is Rs 100/- and in multiples of Re 1 thereafter for lumpsum and Systematic Investment Plan (SIP).
Note if you are considering investing in this scheme, make sure your risk appetite is high (although the scheme tracks the smart beta index), ready to ride on the passive style of investing (to keep cost low), and have an investment horizon of around 5 years.
To know more about Kotak NIFTY 100 Low Volatility 30 Index Fund download and read the Scheme Information Document and Key Information Memorandum.
Happy Investing!