MUMBAI: With the Nifty 50 correcting more than 11% in March amid the West Asia conflict, low-volatility funds are drawing attention for their ability to cushion investors against sharp market swings. These passive funds track low-volatility indices, investing in stocks selected on the basis of volatility scores rather than underlying business fundamentals.
Over the past six months, funds tracking the Nifty100 Low Volatility 30 Index have declined a little over 4.5%, compared with a more than 7% fall in the Nifty 50 as of May 11. In March alone, these funds fell around 10%, versus the Nifty 50’s decline of over 11%. Over a one-year period, funds linked to the low-volatility index are up more than 3.5%, while the Nifty 50 has slipped 4.4%.
The pattern has held across previous bouts of market turbulence as well.
During the global financial crisis of 2008, the Nifty 50 plunged 56.2% between 8 January and 27 November, while the Nifty100 Low Volatility 30 Index fell 46.2%. In the covid-led crash of 2020, the Nifty 50 lost 37.23% in a single month, compared with a 29.4% decline for the low-volatility index.
Unlike conventional index funds that weight stocks by market capitalization, low-volatility indices select stocks based on volatility scores—measured by the standard deviation of daily price returns over the trailing one year. The least volatile stocks make the cut, while cyclical and high-beta names are largely excluded. High-beta stocks tend to move more sharply than the broader market, rising faster in rallies but also falling harder during corrections.
As of April, the index had a one-year standard deviation of 12.18, compared with 13.59 for the Nifty 50, reflecting its tilt toward steadier businesses. Standard deviation is a commonly used measure of market volatility.
The portfolio is skewed towards defensive and consumer-oriented sectors. Financial services account for 21.17% of the index, followed by healthcare at 16.36% and FMCG at 14.96%. Its beta against the Nifty 50 stands at 0.87 over one year and 0.76 since inception. A beta below 1 indicates the index tends to fall less than the broader market during corrections, though it also tends to lag in sharp recoveries.
“When markets are volatile or moving sideways, low-volatility strategies tend to hold up well. But in strong bull markets, they can lag," said Kavitha Menon, founder of Probitus Wealth.
That is why advisers recommend using these funds alongside, rather than instead of, broader equity exposure. “Investors can use low-volatility strategies in conjunction with other equity funds to diversify their overall portfolio,” she added.
While low-volatility funds can provide some downside protection, advisers say they are best treated as part of a satellite allocation supporting a long-term core equity portfolio.