What is low volatility investing?

Bonds have an inverse relationship with interest rates, tending to fall when rates rise. Investors could then lose money if they sell a bond for less than what they paid for it. Profit and prosper with the best of Kiplinger’s advice on investing, taxes, retirement, personal finance and much more. Most of the remaining portfolio is in highly rated corporate debt from rock-solid companies like Bank of America (BAC) or JPMorgan Chase (JPM). When looking at the portfolio’s geography, Japan leads with about 27% of assets, followed by Switzerland at 14% and the U.K.

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It is important in portfolio management because it helps reduce portfolio volatility, improve risk-adjusted returns, and preserve capital during market downturns. Low-volatility investing is gradually gaining acceptance due to consistent real-life performance over more than 15 years, encompassing both bull and bear markets. While many academic studies and indices are based on simulations going back years, some research spans over 90 years, showing low-volatility stocks outperform high-volatility stocks in the long run (see image). Since low-volatility securities tend to lag during bull markets and tend to reduce losses in bear markets, a full business cycle is needed to assess performance. Over shorter time periods, such as one year, Jensen’s alpha is a useful performance metric, adjusting returns for market beta risk.

How does low volatility investing perform in a bullish or bearish market?

In this blog, we will examine the pros and cons of low volatility investing. In addition, we will also investigate if this strategy actually offers you a better risk-reward tradeoff and how the NIFTY 100 Low Volatility 30 Index stands in comparison to broad market indices such as NIFTY 50, SENSEX, etc. Also referred to as statistical volatility, historical volatility (HV) gauges the fluctuations of underlying securities by measuring price changes a roadmap to continuous delivery pipeline maturity over predetermined time periods. It is the less prevalent metric compared with implied volatility because it isn’t forward-looking.

Beta

Beta compares a stock’s movement to the average trend in the market and can be used to assess a stock’s value. A stock with a beta of 1.0 is no more or no less volatile than the overall market. The NIFTY 100 Low Volatility 30 index is a 100% equity index and includes risks that are similar to that of other equity products. And that is the reason why this index is rightfully tagged as one having Very High Risk in the SEBI defined riskometer.

Performance Of NIFTY 100 Low Volatility 30 Index

• If you’re not keen on doing a lot of legwork to find low-volatility investments, you can get good exposure to them through mutual funds and exchange-traded funds (ETFs) that invest exclusively in these types of stocks.
• A FREE assessment that tells you what kind of investor you are, your risk tolerance levels, and a lot more.
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• A low-beta stock is below 1.0 and is potentially less volatile or risky compared to the overall market, but it will typically generate lower returns.
• With about 122 holdings, it effectively diversifies company-specific risk.
• It’s up for debate as to whether these ETFs consistently perform any better than the market as a whole.

For instance, the top holding within the NIFTY 50 has a 9 to 10% weightage and then it keeps on reducing gradually. However, with the LV30 index, the distribution of weights across the companies is pretty uniform at 2 to 4%. However, in the case of the LV30 index, the financial sector contributed only 5.7% weightage. Firstly, all the stocks in the NIFTY 100 index with a minimum listing history of 1 year are selected. Then those stocks which are available for trading in the derivatives segment (F&O) get picked. Conversely, a stock with a beta of 0.9 has moved 90% for every 100% move in the underlying index.

• If a stock has a beta of less than 1.0, for instance, that theoretically means it’s less volatile than the S&P 500; if it’s greater than 1.0, the stock is more volatile.
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• Most specifically, look at the years 2008, 2011, and 2015 which were negative years for most major indices.
• The top 10 holdings account for about 25.74% of total assets under management.
• Finance Strategists has an advertising relationship with some of the companies included on this website.

For simplicity, let’s assume we have monthly stock closing prices of $1 through $10. A financial professional will offer guidance based on the information how old do you have to be to buy stocks answered provided and offer a no-obligation call to better understand your situation. The articles and research support materials available on this site are educational and are not intended to be investment or tax advice.

How can the low-volatility factor complement other factor strategies in a diversified portfolio?

Certain stocks are considered more stable and have lower volatility because their share prices aren’t as negatively affected by shifts in the market. Low volatility investing can be a great strategy for risk averse investors who want to Trading central participate in the market. In terms of advantages, the index consists of only large-cap stocks which can be comforting to most investors. Two, since it invests only in large-cap stocks, there is low liquidity risk. And finally, it is a system so there are no biases in the selection of companies.