Equity as an asset class, when compared to other asset classes, tends to be more volatile, scaring away numerous investors. Investors who are new to equity markets are thrown off balance right after their initial encounter with a main correction. Sharp and fast corrections due to black swan events such as Covid-19 (March 2020) is the most current instance exactly where numerous investors saw their portfolio worth plunge deep in red.
Gripped by the worry of facing additional losses, numerous investors even ended up stopping/pausing their SIPs (Systematic invest Plan). But equity markets staged a sharp turnaround recovering all of their lost ground and rallied to new highs, taking each the novice and the seasoned investors by surprise. This is what volatility can look like in equity as an asset class.
Seek lesser volatility in investment journey
Various research have established time and once more that equity investing is one of the optimal methods to beat inflation and produce wealth more than the extended term. However, this journey is not linear in nature but is fraught with several lows and highs, akin to a roller coaster ride. Equity is one asset class exactly where the possibilities of losing income, in the brief term, are quite higher. Also, threat-taking capabilities varies from individual to individual, based on one’s monetary skills and psychological aptitude. During my stint at a major marketplace for monetary goods, an internal analysis showed that an investor has to preserve up with SIP for at least seven years such that the investment tends to make income in all market place situations. So, in order to produce wealth, it is clear that one has to keep invested in equities with a extended-term view.
Behavioural science shows that the decrease the volatility in one’s selected investment solution, the greater are the possibilities of an investor braving instances of correction and remaining invested in the solution. Also, with decrease volatility, the minimum period to make sure that you do not incur losses on SIP investment also comes down. Therefore, it is crucial to look for alternatives exactly where one can invest with decrease volatility.
Ways to lower volatility influence
When it comes to equity investing, volatility can’t be eliminated altogether but can certainly be moderated with particular measures. The initial measure is to refrain from direct investing. Instead opt for SIP in an equity mutual fund. This is mainly because person stocks are more volatile as compared to general fluctuations in NAV of any equity mutual funds. The second measure is to invest in substantial cap organizations only, and the third and final measure is to invest in a scheme which is developed to offer you decrease volatility.
Making peace with equity market place volatility
Though the broader indices such as S&P BSE Sensex, Nifty 50 or Nifty one hundred comprise of organizations across sectors, the index itself tends to be lesser volatile than any particular sector. Here also, the shares of particular organizations inherently have a tendency to be lesser volatile than other folks. Taking cognizance of this truth the National Stock Exchange introduced an index (July 2016) comprising of 30 least volatile shares from Nifty one hundred universe. This index is recognized as “Nifty100 Low Volatility 30 Index”. Since an investor can’t straight invest in an index, mutual fund homes have launched Exchange Traded Funds (ETF) which have such indices as their underlying universe. Since ETFs are listed on stock exchanges, the NAV of these ETFs fluctuates on actual-time basis to reflect movement in the costs of the underlying shares/asset. In July 2017, ICICI Prudential, one of the biggest mutual fund homes in the nation launched ICICI Prudential Nifty Low Vol30 ETF. This ETF was set to mimic the Niftyone hundred Low Volatility 30 Index.
However, the catch right here is that an investor demands a demat and a trading account to invest in/sell ETFs, which can be a limiting issue for many investors. So, as a signifies to make the solution accessible to one and all, ICICI Prudential has announced the launch of Nifty Low Vol 30 ETF Fund of Fund (FOF). The NFO of this FOF is open from March 23, 2021 to April 6, 2021. This FOF will be investing a minimum of 95% of its corpus in the underlying ETF which is the ICICI Prudential Nifty Low Vol30 ETF. By tracking the 30 least volatile stocks in the Nifty one hundred Index, the scheme provides wealth creation possibilities with a decrease level of volatility. As this is an current scheme with properly-established overall performance track record, I think, there is not a great deal threat in applying for this NFO.
Does decrease volatility imply lesser returns?
It is significant to realize that greater volatility does not translate to greater returns. In truth, information shows that more than one and 3 years, Nifty one hundred Low Volatility 30 Index has generated far better threat adjusted return than Nifty one hundred index. So, the return profile of such a solution is in no way inferior to a broader index which comes with greater volatility. The query now is: why really should one invest in funds with greater volatility carrying greater threat of losing income?
Taxation of Equity ETF Fund of Funds
Since this FOF will invest at least 95% of its corpus in an equity-oriented ETF, the FOF will be treated as an equity fund for revenue tax objective. Short-term capital achieve tax will be 15% although extended-term capital gains will be taxed at 10%, post the initial exemption of Rs. 1 lakh.
To conclude, low volatility ETF/ FOF is an optimal investment tool for investors who uncover market place volatility unnerving.
(The writer is a tax and investment specialist and can be reached at [email protected])
Disclaimer: This is the individual view of the author. Please seek advice from your monetary planner just before producing any investment.