What is Low Volatility Investing?

Low volatility investing involves shares or funds that move less in price than the broad market. In other words, these are stocks that do not swing wildly with every market fluctuation. The objective of the low volatility factor investing is simple. If you invest in less volatile shares, you will experience the benefit of getting more stable results over the longer term.

This strategy is based on what is known as the "low volatility anomaly." The traditional finance theory states that more risk translates into more reward. However, research has found that often low-volatility stocks outperform high-risk stocks after adjusting for risk.

 

How Does Low Volatility Investing Work?

Here are some characteristics of stocks that attract investors to this strategy:

• Selecting Low-Volatility Stocks: You first have to choose the stocks that have shown lower volatility and whose prices don't fluctuate dramatically.
• Diversification: To reduce the risk of investing, you must buy stocks from different industries from diversification.
• Low Beta: It measures the volatility of a stock against the market. A beta of less than 1 defines lower volatility.
• Stable Performance: The low-volatility segment constitutes a company with stable earnings and sound fundamentals.
• Sector Exposure: Utilities, consumer staples, and healthcare form a larger share of the low-volatility stocks.

 

NIFTY 100 Low Volatility 30 Index

The NIFTY 100 Low Volatility 30 Index perfectly represents low volatility factor investing in India. This index consists of 30 stocks selected from the NIFTY 100 universe based on volatility. Simply put, it represents the least volatile stock among India's biggest firms. Here are more reasons why the index deserves your attention:

• Diversification: It has constituents from a mix of sectors and is diversified.
• Stability: The selection criteria ensure the inclusion of stocks that have shown resilience during market turmoil.
• Risk-Adjusted Returns: The index has provided returns through the years with limited drawdown during the market corrections.

 

Does Low Volatility Investing Work?

Low volatility investing is not about getting the highest returns. It is about managing risk and obtaining consistent growth. In bull markets, low-volatility stocks may underperform significantly as high-growth stocks take over the scene. However, they tend to excel during bear markets or periods of economic uncertainty, thereby protecting portfolios from significant losses.

For example, the NIFTY 100 Low Volatility 30 Index has relatively lower drawdowns in market declines than broader indices such as the NIFTY 50. This investment is a solid choice for conservative investors or those nearing retirement for whom capital preservation is important.

 

Conclusion

Low-volatility investing suits investors who prefer low risk, more stability, and a long-term outlook. It does not involve timing the market but staying put through the ups and downs. Low volatility investing, nonetheless, protects against substantial losses while providing respectable returns.