NFO review: SBI Equity Minimum Variance Fund, aiming for less volatility

The fund intends to deploy investors’ money in such a way that when the markets fall the fund shouldn’t fall in proportion

Priyanka Bharati Mar 6, 2019

Portfolio VolatilitySBI Mutual Fund has introduced a thematic fund – SBI Equity Minimum Variance Fund. This NFO, which opened for subscription on March 2, will close on March 12, 2019; The fund will reopen within five business days from the date of allotment.

The investment objective of the scheme is to provide long term capital appreciation by investing in a diversified basket of companies in the Nifty 50 Index while aiming for minimising the portfolio volatility. The fund follows the minimum variance strategy. The strategy weight the stocks within index to minimise the volatility of the portfolio. The strategy also looks at the correlation and covariance of the stocks to optimise the portfolio for the given risk level.

The fund house says: “Popular market indices are generally market capitalisation weighted –A company which is bigger in size/market cap, tends to get higher weight. Over a period of time certain stocks/sectors may get disproportionate weight in the index, as they grow in size.” Investing optimum weightages in stocks would help the fund manager to protect his portfolio in volatile times. In simpler terms it means this fund intends to deploy investors’ money in such a way that when the markets fall, fund shouldn’t fall in proportion and the stock weightages decided with minimum variance strategy should provide a cushion to the portfolio.

Asset Allocation and Strategy

Under normal circumstances, the asset allocation of the Scheme would be as follows:

Instruments Indicative allocations (% of total assets) Risk Profile
Equity and Equity related instruments 90-100% High
Debt and Money Market Instrument including units of mutual fund 0-10% Low to Medium

SBI Equity Minimum Variance Fund is benchmarked against NIFTY 50 Index. Nifty 50 TRI Index has delivered -0.35% returns over 1-year period and 14.20 % over 3-year period as per data available as on 31st January 2019.

The fund will be compared against other thematic funds in the industry. There are currently 17 live thematic funds which are managing AUM over Rs 11,000 Cr. This category has delivered -4.36% returns over one-year period and 11.79% returns over 3-year period. Which are way lower than returns delivered by large cap category 4.52% for 1-year period and 13.92% for 3-year period.

Other SBI equity schemes use the top-down or bottom-up approach and use the qualitative parameters for the portfolio construction. However, the given scheme will use the quantitative approach at pre-determined intervals to decide stock selection. This fund is a combination of active and passive strategies so plain comparison against peer thematic funds won’t be fair. The fund invests only in stocks of Nifty 50 index (a passive fund strategy), but it also uses the minimum variance strategy of choosing stocks (an active fund strategy). How this promising strategy fares vis-à-vis its peers will be an interesting case to observe.

The fund house differentiates minimum variance strategy stating it endeavours to provide a less risky portfolio but is different from low volatile portfolio strategy.

Minimum Variance Strategy Low Volatility Strategy
Aims to reduce the portfolio risk Aims to invest in Low volatility stocks
Based on historical volatility, covariance and correlation of the stocks vis-à-vis other stocks in the index Based on historical volatility of the stock
Weightages based on portfolio optimization Weightages decided as per the volatility rank
All the constituents of an index may qualify for inclusion in portfolio (as the portfolio is optimized for a given level of risk) Fewer stocks in a index may qualify to be included in the portfolio

The fund will be managed by Raviprakash Sharma. He has over 19 years of experience in Indian Capital Markets in various capacities. Currently he is managing several other funds like SBI-ETF Gold, SBI Nifty Index Fund, SBI-ETF SENSEX, SBI Gold Fund, SBI-ETF Nifty Bank, SBI-ETF BSE 100, SBI-ETF Nifty Next 50, SBI – ETF Nifty 50, SBI – ETF SENSEX NEXT 50 & SBI-ETF Quality.

Tax Impact

Being an equity fund it will be eligible for long term capital gains tax of 10% for equities if held for more than one year and gains exceeding Rs 1 lakh. And short-term capital gains tax of 15% will be levied for less than 1 year holding period.

Key features of the Fund,

NFO Period – 2nd March 2019 to 12th March 2019

Type of Scheme – An Open Ended Equity Scheme following minimum variance theme

Benchmark – NIFTY 50 Total Return Index

Min Application Amount – Rs 5,000/- and in multiples of Re 1/- thereafter.

Plans and options – Regular & Direct Plans Under which following Options are offered

  • Growth
  • Dividend (Reinvestment, Payout & Transfer)

Exit Load (as a % of Applicable NAV) –

  • For exit within 1 year from the date of allotment – 1 %
  • For exit after 1 year from the date of allotment – Nil.

Risk Profile – High Risk

Investor Suitability -This product is suitable for investors who are seeking

-Long term capital appreciation.

-To generate income by investing in a diversified basket of companies in Nifty 50 Index while aiming for minimising the portfolio volatility.

Rupeeiq Take: Prima facie SBI minimum Variance Fund looks like a dynamically managed diversified equity fund, but considering it will only invest in stocks from Nifty 50 index we would think of this fund as a pseudo passive fund. The fund has a quantitative methodology, it will never consider the market direction, economic growth or any other macro aspects. We believe it is suitable for investors who would want to explore a blend of active and passive strategies. Advisable investment horizon would long term i.e. at least five years and more. A small allocation to this fund may benefit investors in tiding over the market volatility.

Priyanka Bharati

Priyanka Bharati is a senior personal finance analyst with RupeeIQ. She can be reached on [email protected]

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