ICICI derivatives fund rides volatility wave

FUND SPEAK

Buy low, sell high. With this strategy, ICICI-Prudential's Equity and Derivatives Fund Wealth Optimizer Plan has succeeded in converting the high volatility in the equity markets to its advantage.

"We keep adding stocks when the market is in a correction and reduce our exposure as it goes up," said Nimesh Chandan, fund manager of the scheme.

This strategy has helped the fund to act like a parachute in a falling market. On the flipside, however, the fund will underperform the benchmark indices in a fast-rising market, Chandan added.

When the benchmark indices fell 15 per cent in the February-March period this year, the fund's damage was limited to 5.8 per cent. While on the way up later, the fund was close to giving similar returns, he said.

Currently, the Sensex is over 15,000-mark and the hedge ratio is 30 per cent, which is the maximum it has hedged since its launch. The fund has been altering the hedge ratio at different market levels.

Hedge ratio is reduced in an attractive market to capture the upside and it is enhanced in an expensive market to protect the downside, Chandan said.

The hedge ratio is based on a mix of quantitative and qualitative factors such as forward P/E ratio of the index, risk-free rate of return, equity risk premium and even market sentiments. Unhedged exposure to equity will not go beyond 5 per cent of its portfolio.

Equity & Derivatives Fund by ICICI Prudential was one of the first derivatives-based mutual funds which hit the market after the Sebi allowed fund houses to use derivatives for hedging against risk and portfolio rebalancing, last year.

Under the rules, fund houses can hedge for potential losses from cash positions by derivatives products.

With the volatility in the domestic equity market expected to grow, the strategy by the Wealth Optimizer Plan is to use the volatility to its advantage, while adopting a fundamental approach towards investing in companies.

The scheme, which collected Rs 1,140 crore through its new fund offer (NFO) last December, has grown to Rs 1,181 crore now.

The ICICI-Pru scheme, which is benchmarked against Crisil Balanced FundIndex, also applies the golden rule of selecting stocks which have strong fundamentals. The fund manager said he has increased exposure to the banking and pharmaceutical sectors. The agro-chemical and retail sectors also are expected to generate a better growth.