The current market climate is characterized by unprecedented levels of uncertainty, with market volatility reaching unprecedented heights. Amidst this turmoil, low volatility factor-based mutual funds have emerged as a beacon of stability, containing losses more effectively than both their parent index and other factor-based funds.
- These funds have demonstrated remarkable resilience in the face of market volatility.
- They have contained losses more effectively than their parent index and other factor-based funds.
- Low volatility funds have shown a strong performance in volatile markets.
A close examination of the performance of low volatility funds reveals that they have delivered impressive results, even in the face of unprecedented market volatility. The Nifty 100 Low Volatility 30 index, which tracks 30 stocks from the Nifty 100 that have shown the lowest volatility over the past year, has declined by 15.1 per cent from its peak in September 2024.
| Index | Return |
|---|---|
| Nifty 100 Low Volatility 30 | -15.1% |
| Nifty 100 | -15.7% |
| Nifty200 Momentum 30 | -31% |
| Nifty100 Alpha 30 | -26% |
| Nifty Quality 30 | -19% |
| Nifty200 Value 30 | -16.5% |
These impressive returns are all the more remarkable when compared to the performance of other factor-based indices. The Nifty200 Momentum 30 index, for example, has declined by 31 per cent, while the Nifty100 Alpha 30 index has fallen by 26 per cent.
The Cyclical Nature of Smart Beta
Smart beta funds are designed to outperform traditional market capitalization-based indices in specific market conditions. They passively track indices that are derived from conventional benchmarks using various fundamental, technical, and other filters applied by NSE and BSE.
- Low volatility is one of several smart-beta strategies designed to outperform traditional market capitalization-based indices.
- These strategies are designed to be used in specific market conditions.
- Smart beta funds passively track indices that are derived from conventional benchmarks.
Low volatility is one of several smart-beta strategies designed to outperform traditional market capitalization-based indices. These strategies are designed to be used in specific market conditions, such as uncertain or turbulent markets.
The Performance of Low Volatility Funds
The performance of low volatility funds has been impressive, even in the face of unprecedented market volatility. In the current market climate, the low volatility index has effectively cushioned losses, with a decline of 15.1 per cent in the Nifty 100 Low Volatility 30 index.
“Low volatility strategies tend to outperform during uncertain or turbulent markets. However, these strategies tend to lag during strong bull runs, largely because they avoid high-beta stocks.” – Expert Analyst
The accompanying table shows that during downturns such as those from March 2015 to February 2016, January 2020 to March 2020, October 2021 to March 2023, and the ongoing phase, the low volatility index has effectively cushioned losses.
| Period | Nifty 100 Low Volatility 30 | Nifty 100 |
|---|---|---|
| March 2015 to February 2016 | -21.8% | -23.2% |
| January 2020 to March 2020 | -20.3% | -22.1% |
| October 2021 to March 2023 | -19.5% | -21.3% |
| Ongoing phase | -15.1% | -15.7% |
Should You Invest?
The inherently defensive nature of low volatility funds may result in slower portfolio growth over time. Limited exposure to mid-cap and avoidance of small-cap stocks can restrict further upside potential, especially when compared to other factor-based strategies. However, the strategy’s ability to minimize drawdowns positions these funds to deliver more balanced returns and potentially stronger long-term outperformance.
Multi-Factor Funds: A Better Alternative
Multi-factor funds that incorporate low volatility into their approach may present an even better alternative. By blending multiple factors, they reduce dependency on a single strategy and are better equipped to perform consistently across varying market cycles. At present, five such schemes combining alpha and low volatility are available.
Conclusion
In conclusion, the resilience of low volatility funds in the face of market uncertainty is a compelling reason to consider them for investors who prioritize stability and lower risk. By allocating a portion of their portfolio to these funds, investors can potentially deliver more balanced returns and stronger long-term outperformance. Published on April 12, 2025
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