Should you invest in low-volatility funds amid high market volatility?
MUMBAI: The stock markets have been experiencing heightened volatility amid selling by foreign portfolio investors, downgrades to corporate earnings, and slower economic growth. The Nifty 50 has corrected over 10% since 27 September 2024.
Low-volatility funds aim to reduce the impact of market volatility by investing in a basket of stocks that tend to be less volatile. These are passive funds that track low-volatile indices. The funds invest in stocks included in a low-volatility index, which picks stocks on the basis of volatility scores rather than business fundamentals. Volatility is calculated as the standard deviation of daily price returns for the past one year.
In the recent market scenario, funds tracking the Nifty 100 Low Volatility 30 have beaten the Nifty 50 in six-month and one-year periods. The low-volatility funds have delivered 6% returns in a six-month period, while the Nifty 50 has delivered 4% returns. The Nifty 100 Low Volatility 30 has delivered 22% returns in a one-year period, beating the Nifty 50's 19% returns.
“The low-volatility strategy tends to do well when markets are volatile or flat. However, when markets are bullish, these strategies tend to underperform significantly," said Kavitha Menon, founder of Probitus Wealth.
“Investors can use low-volatile strategies in conjunction with other strategies such as momentum," she added.
“Momentum strategy will help investors keep in touch with that side of the market, which is outperforming, doing well, while the low-volatility basket will help the investor ensure a certain part of their portfolio remains less volatile," said Anish Teli, managing partner of QED Capital Advisors.
When investing in low-volatility indices, remember that the index focuses
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