ICICI Pru Equity Minimum Variance Fund: A New Era of Low-Volatility Investing

ICICI Pru Mutual Fund has launched Fund. It is an open-ended equity scheme following Minimum Variance theme.

In a market environment characterized by volatility and uncertainty, minimum variance funds have emerged as a strategic investment option. These funds aim to create portfolios optimized for lower risk by focusing on stocks with historically minimal price fluctuations.

The approach offers a way to participate in equity markets while reducing the impact of market swings, making it particularly appealing to risk-averse investors. The minimum variance strategy uses quantitative models to select and allocate stocks in a manner that minimizes the overall portfolio's variance.

ICICI Prudential Equity Minimum Variance Fund, a newly launched NFO, brings a unique investment proposition by focusing on a minimum variance strategy.

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What will be the investment strategy for ICICI Prudential Equity Minimum Variance Fund?

ICICI Prudential Equity Minimum Variance Fund will predominantly invest in equity & equity related instruments through a diversified basket with an aim to reduce the portfolio volatility. As a part of low variance strategy, the scheme will invest in Equity & Equity related instruments of companies forming part of Nifty 50 Index. Portfolio would be constructed with an endeavour to maintain the overall variance of the scheme lower than that of the benchmark.

What is Variance?

Variance can be defined as a measure of dispersion i.e., how the stock returns varies from its average returns over a period of time. A stock with low price volatility (or movement) and consistent returns over a period of time are construed to be a stock having low variance.

The parameters used for selecting the stocks will be a combination of factors such as volatility, downside risk, maximum drawdown and upside potential. Minimum Variance Strategy will aim to maintain the risk (volatility of returns) of core portfolio lower than the benchmark. We measure risk based on the historical volatility of the returns. Portfolio of the Scheme will be reviewed on a periodic basis.

The Scheme may also invest up to 20% in overseas markets in equity & equity related instruments. Further, the Scheme may invest in other schemes managed by the fund house or in the schemes of any other Mutual Funds in terms of the prevailing Regulations. As per the Regulations, no investment management fees will be charged for such investments.

How will the scheme allocate its assets?

Under normal circumstances, ICICI Prudential Equity Minimum Variance Fund will hold an allocation of 80% to 100% in Equity & Equity related instruments identified based on Minimum Variance Factor, 0% to 20% in Other Equity and Equity related instruments, 0% to 20% in Debt and Money market instruments, and term deposits (margin money) and 0% to 10% in Units issued by REITs and INVITs.

Should investments in ICICI Prudential Equity Minimum Variance Fund be considered?

ICICI Prudential Equity Minimum Variance Fund is designed for investors seeking a risk-optimized equity investment option. The fund's strategy focuses on minimizing volatility by selecting stocks that exhibit lower historical price fluctuations and optimizing portfolio allocation to reduce overall risk.

This fund is likely to perform well during periods of market uncertainty or downturns, as its design minimizes drawdowns. However, in bull markets, it may underperform high-growth equity funds since its priority is risk reduction rather than maximizing returns.

The minimum variance strategy aims to provide relatively stable returns compared to traditional equity funds. This is particularly appealing for investors who want to participate in the equity market but prefer to avoid excessive volatility. The fund leverages quantitative methods to construct a portfolio with a favourable risk-reward ratio, making it ideal for conservative equity investors.

Despite its minimum variance approach, the fund remains an equity fund and is subject to overall market risks. During periods of sharp market corrections or economic downturns, the fund's value may decline, albeit less severely compared to traditional equity funds. The fund's algorithm may favour specific sectors or stocks based on their low volatility profile, potentially leading to sectoral concentration. This could expose the portfolio to risks if those sectors or stocks underperform.

While the ICICI Prudential Equity Minimum Variance Fund may be a solid choice for conservative investors or those seeking a risk-managed equity exposure, investors should weigh the trade-offs between reduced volatility and potential returns.