InCred Wealth, February 06, 2025
Types of Investment Strategies #4: Low Volatility Investing
Welcome to our blog series on investing styles, in this series, we explore various approaches to investing breaking them down into simple, digestible insights.
Whether you're a seasoned investor or just starting out, understanding different investing strategies can make a world of difference in achieving your financial goals.
In our last blog, we discussed 'Alpha Investing'; now, we are putting our focus on 'Low Volatility Investing', which as a strategy aims at creating stable returns with lesser risks. Less is more sometimes.
Let’s get started.
What is Low Volatility Investing?
Low Volatility investing emphasizes low-volatility stocks, typically measured through standard deviation. The premise being lower-volatility securities might produce smoother returns through diversification across individual holdings during certain periods of time.
Traditional thinking equates to higher risk with a higher return, and research findings indicate that low-volatility stocks have performed extremely well compared to high-volatility stocks over the long run while at the same time bringing increased portfolio risk to acceptable levels.
How Low-Volatility Investing Works.
Low-volatility investing is about placing funds in those securities that have had considerably lower swings in price previously, but the major principles of this investment style are as follows:
- 1) Stability comes first: The stocks with lower historical price fluctuations are emphasized, leading to smoother rides in investments.
- 2) Risk-Adjusted Returns: Instead of seeking high-risk, high-reward stocks, the aim is to maximize returns relative to risks.
- 3) Defensive Sector Allocations: Since low-volatility stocks tend to lean toward consumer staples, utilities, and healthcare sectors, they are not highly affected in both bull and bear cycles.
- 4) Factor-Based Investment: Many investors utilize indices like Nifty100 Low Volatility 30, Nifty Low Volatility 50, Nifty500 Low Volatility 50, or factor-based funds tracking low-volatility stocks.
Advantages of Low Volatility Investment
This strategy is characterized by several advantages:
- 1) Reduced risk with steady returns: The strategy is based on avoiding highly volatile stocks to secure the portfolio against extreme loss events, ensuring a smooth returns curve.
- 2) Performance during Bear Markets: Stocks with low volatility tend to outperform the market, meaning this risk management strategy allows your portfolio to maximize your investments by outperforming other stocks even during bearish times.
- 3) Compounded Growth Over Time: While low volatility may not generate spectacular returns in the short run, it can generate solid long-term returns by compounding.
Challenges of Low Volatility Investing
- 1) Despite its merits, this approach does have certain disadvantages.
- 2) Preferably moderate growth: Low-volatility stocks are risky-assets which do not witness big surges in a price; this may lead to their deduction in strong bull markets.
- 3) Sector concentration & high sectoral exposure may cause limited diversification, especially in low-volatility stocks with major investments directed toward the defensive sector.
- 4) Change in market trends: Just because the stock has exhibited low volatility in the past doesn't mean future prices will remain stable.
The following summarizes ways of executing Low Volatility Investing:
- 1) Invest in Low-Volatility Funds: You can buy and sell in low-volatility funds: a variety of mutual funds and ETFs tracking low-volatility indices are available, which provide an easy avenue to this investing strategy.
- 2) Screen for Low-Volatility Stocks: Focus on stocks with historically low beta (below 1), steady earnings, and solid fundamentals.
- 3) Diversify Across Sectors: While defensive stocks are more often found in low volatility investing, diversification in industries can offset returns.
- 4) Invest for the Long-Term: Low volatility investing works best in the time span of extended horizon in which compounded growth earns returns.
Who is Low Volatility Investing For?
This strategy is suitable for:
- 1) Conservative Investors looking for lower risk and steady returns.
- 2) Retirees & Income Seekers who do not desire extreme price swings but want stable investments.
- 3) Long-Term Investors who favor preservation of wealth while still being able to realize stable compounding.
In summary,
The essence of Low Volatility Investing follows the long game of stability above speculation. While it doesn't guarantee a great deal of short-term gains, through the steady accumulation of risk-adjusted returns it is arguably one of the best strategies for an anxious mind and heart.
So, is Low Volatility Investing just right for you?
If you appreciate consistency, lower risk, and growing wealth in time, this could be a perfect addition to your investment portfolio.
Keep updated for further insights in our investing series!
Read More
January 23, 2025
Welcome to our blog series on investing styles! In this series, we explore various approaches to investing
January 17, 2025
Explore the "Quality Style" of investing, focusing on identifying strong, resilient companies for long-term growth and stability.
December 11, 2024
Hybrid funds have gained significant popularity, with a 74% surge in their assets over the past year, offering a blend of equity, debt, and other assets like gold and real estate, providing a balanced approach to growth, stability, and risk management.
December 04, 2024
Unlock the potential of unlisted and Pre-IPO equities with insights and discover how early investments in companies like Tata Technologies and Nazara Technologies can yield significant value, along with the risks to consider.
September 04, 2024
Value investing focuses on buying stocks that are undervalued by the market. Investors analyze a company’s fundamentals, aiming to buy at a discount and hold until the stock reaches its true worth.