Higher returns with lower volatility: Select indices beat NSE Nifty 50 in the past year, Beyond thematic indices, strategy indices that focus on low volatility have also outperformed Nifty 50 returns. For example, the Nifty 100 Low Volatility Index has gained 41 percent in one year, but its volatility reading was at 8.84

Select equity market segments have widely outperformed the benchmark NSE Nifty 50 in the last year, but with much higher volatility, exposing investors to a higher degree of risk.

The Nifty PSE and Nifty Defence indices have, for example, delivered a whopping 110 percent and 125 percent returns in the one year to February 2024, which is three times as much as the Nifty 50. The Nifty PSE index has been twice as volatile as the Nifty 50, and the defense index has been three times as volatile. It is measured in standard deviation for the one year to February 2024.

This is traditional wisdom - higher returns come with greater risks. However, there are a few thematic and strategy indices, which have given better returns than the Nifty 50, with lesser volatility.

The themes that focused on MNC stocks, India's (domestic) consumption story, and ESG have delivered excess returns with lower volatility than the key benchmark indices. The Nifty MNC index has risen 38 percent in one year, beating the Nifty 50’s 32 percent rise. It had a volatility reading of 9.72, compared with 9.98 for the Nifty 50.

The ESG index gained 36 percent, with 9.73 volatility, while the consumption index surged 43.81 percent with 9.23 volatility.

Strategy indices with low volatility and excess returns

Beyond thematic indices, strategy indices that focus on low volatility have also outperformed Nifty 50 returns. The Nifty 100 Low Volatility Index has gained  41 percent in one year, but its volatility reading was at 8.84.

Risk aversion at play

"What is interesting about low volatility stocks is that mutual funds have been buying such stocks since last year. This trend is expected to continue and hence I won't be surprised if large-sized, low-volatility stocks continue to do well,” said Darpan Patil, founder of Rupic Consultancy.

“Risk-aversion is at play and hence the low volatility stocks and large-cap mutual fund schemes are in demand even amongst the retail investors."

Siddharth Srivastava, Head – ETF Product and Fund Manager, Mirae Asset Investment Managers explains," In last year, the Nifty100 low volatility 30 index has performed better than its parent Nifty 100 index due to higher allocation to healthcare which has done well and lower allocation to financial services which has underperformed. The Low volatility strategy tends to perform better when the markets are volatile and/or sentiments are weak. It is suited for investors who want more stability and focus on risk-adjusted returns."

What is the Nifty 100 Low Volatility 30 Index?

Nifty 100 Low Volatility 30 index picks 30 stocks with the lowest volatility measured in terms of the standard deviation of daily price returns from the top 100 companies in terms of market capitalization. Thus, all the components are from the Nifty 100 index and should be available for trading in the F&O segment.

Sun Pharma, ICICI Bank, RIL, Nestle, and BOSCH are among the top index constituents in the Nifty 100 Low Volatility 30 index.

Unlike the Nifty 100 Low Volatility index, which ranks stocks based entirely on volatility, the Nifty Alpha Low Volatility 30 index lists stocks based on the combination of Alpha and Low Volatility. The index consists of 30 stocks selected from Nifty 100 and Nifty Midcap 50.

How to take exposure to low-volatility strategy indices?

Several mutual funds have ETFs that replicate the performance of such low-volatility indices. For example, Kotak MF, ICICI Prudential MF, and Mirae Asset MF all offer ETFs that track the performance of Nifty 100 low volatility 30 ETF.