Equity markets have seen their fair share of turbulence in recent months. From geopolitical tensions to economic slowdowns, volatility has become the norm rather than the exception. For many investors, especially those with moderate risk tolerance, the sharp ups and downs can be unnerving. This is where low volatility mutual funds have found relevance.
These funds aim to offer equity exposure with a smoother investment experience, shielding investors from steep losses during downturns, even if it means compromising a bit on upside during bull runs.
What makes low volatility funds different?
Unlike traditional equity funds that chase growth or market-cap-weighted returns, low volatility funds focus on stocks that have historically exhibited more stable price movements. Think of companies with steady earnings, consistent demand, and defensive business models like FMCG giants, IT services leaders, and healthcare firms.
Indices such as the Nifty100 Low Volatility 30 are constructed by selecting the 30 least volatile stocks from the Nifty 100 based on one-year price fluctuations. The idea is simple: if a stock’s price doesn’t swing too wildly, it’s more likely to hold up during market corrections.
Real world performance
When markets dropped from their September 2024 peak, the Nifty100 Low Volatility 30 Index declined by 15.1%. In comparison, its broader parent index, the Nifty 100, lost 15.7%. The difference might look small, but during more severe corrections, the gap widens. For instance, the Nifty200 Momentum 30 was down 31% in the same period, and Nifty Alpha 30 dropped 26%.
Even going back further, low volatility indices have demonstrated their value and resilience during stressful periods like early 2020 during the COVID crash and more recently from October 2021 to early 2023. While they don't outperform every year, they tend to perform better when markets turn negative.
Who are these funds meant for?
Low volatility strategies aren't designed to maximize returns in bullish markets. Instead, they help maintain portfolio stability. For investors who struggle to stay invested when markets get rough, or those nearing financial goals and can’t afford deep losses, these funds act as a buffer.
They are also suitable for those looking to start SIPs in equity funds but are hesitant due to market unpredictability. Low volatility funds can serve as a diversification tool, helping spread risk across more stable companies.
They often translate into a lower psychological burden, increasing the chances of staying the course.
How can you invest in them?
There are several mutual fund schemes available today that follow low-volatility strategies. Most of them track the Nifty100 Low Volatility 30 Index or the BSE Low Volatility Index. These are offered in both ETF (Exchange Traded Fund) form and as Fund-of-Fund (FoF) structures.
ETFs are cost-effective but require a demat and trading account. They also don’t support SIPs or STPs. On the other hand, Fund-of-Fund options, such as the ICICI Prudential Nifty Low Vol 30 ETF FoF, allow SIP investments and are accessible to a wider base of investors without the need for a demat account.
Do lower risk investments mean lower returns?
It’s a common assumption that lower risk leads to lower reward. However, low volatility funds have often delivered better ‘risk-adjusted’ returns than broader indices. Over longer periods, such as a 10-year rolling return analysis, these funds have managed to clock around 15% annualized returns.
The key here is consistency. By avoiding sharp drawdowns, portfolios have more room to compound over time without the need for dramatic rebounds to recover losses.
Tax treatment
If you invest in a low volatility mutual fund structured as an FoF that invests in equity ETFs, it qualifies as an equity-oriented scheme under Indian tax laws. This means short-term capital gains (under 1 year) are taxed at 15%, and long-term gains (above 1 year) are taxed at 10% after an exemption of ₹1 lakh annually.
Low volatility = Peace of mind
Low volatility mutual funds won’t top the performance charts in a runaway bull market, but they offer something equally valuable peace of mind. Their ability to reduce portfolio stress during downturns can help investors stay invested and improve long-term outcomes.
For those looking to balance growth with stability, especially in today’s uncertain environment, allocating a portion, say 15–20%, of one’s equity portfolio to low volatility or multi-factor funds can be a smart move. These aren’t flashy products, but they’re built to endure.
Disclaimer: The information provided in our blogs is for informational purposes only and should not be construed as financial, investment, or trading advice. Trading and investing in the securities market carries risk. Always conduct your own research and consult with a qualified financial advisor before making any investment decisions. Past performance is not indicative of future results. Copyrighted and original content for your trading and investing needs.
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