The Boring Index That Has Quietly Made Money

Low-volatility investing rarely attracts the kind of attention that follows small caps, momentum stocks or the latest market theme. Yet the numbers suggest that this relatively uneventful corner of the market has quietly held its own and, over several periods, done better than the broader indices it tracks. 

Since the Indian equity market turned in September 2024, both the Nifty 500 and Nifty 100 have slipped into negative territory. The Nifty 500 declined 1.7%, while the Nifty 100 fell 2.9%. 

The Nifty 500 Low Volatility 50, however, moved in the opposite direction, gaining 0.47%. 

A short period of outperformance alone says little about an investment strategy. But when the comparison is extended across rolling periods and major market declines, low-volatility indices show a more interesting pattern. 

They have historically delivered competitive returns while experiencing somewhat smaller swings. The trade-off appears during powerful bull markets, when their defensive characteristics can leave them behind.

Low volatility has held up over longer periods

Instead of selecting just one start and end period, ET Money has analysed the performance on rolling basis to gauge the performance of the strategy over various investment horizons. 

Rolling returns of five-year period for the Nifty 100 Low Volatility 30 were 15.82% per annum against 15.1% of the Nifty 100 index. 

The difference was more pronounced in the case of the two broader market indices. 

Returns of five-year rolling period for the Nifty 500 Low Volatility 50 stood at 17.16% against 16.2% of the Nifty 500 index. 

However, when the period was reduced to three years, the gap widened between the two sets of indices. 

Returns of three-year rolling period for the Nifty 100 Low Volatility 30 stood at 17.42% against 15.19% of the Nifty 100. 

In case of broader market indices, Nifty 500 Low Volatility 50 offered annual returns of 19.79% against 17.44% of the Nifty 500. 

The figures indicate that low volatility’s recent resilience was not confined to the market weakness seen since September 2024. 

The ride was also less volatile

Returns form only one aspect of the analysis. 

The low-volatility index showed relatively low standard deviation, which is one of the most common metrics used in evaluating the volatility of returns. 

For instance, during the five years under observation, the standard deviation of the Nifty 100 was 3.2, while that of the Nifty 100 Low Volatility 30 was 3.1. 

This was even more noticeable in case of the broader market indices. 

While the standard deviation of the Nifty 500 was 4.0, that of the Nifty 500 Low Volatility 50 was 3.5. 

In other words, the low-volatility index did not beat its historical performance through greater volatility. 

The real test was during the times when the markets fell significantly. 

The 2008 crisis showed where the strategy can help

During the global financial crisis of 2008-09, the Nifty 500 TRI lost 64%. 

The corresponding low-volatility index also suffered a major decline, but its fall was smaller at 48%. 

The pattern repeated during the Covid-driven market crash in 2020. 

The Nifty 500 TRI declined 38%, while its low-volatility counterpart fell 29%. 

Low volatility therefore did not eliminate losses during either crisis. Investors still experienced substantial drawdowns. 

What it did was reduce the scale of those declines. 

That difference matters because avoiding part of a major fall can influence the amount of recovery required before a portfolio returns to its previous level.

The protection comes at a cost

The traits that may protect an investment in a downturn may turn out to be a drawback when there is a surge in the markets. 

ET Money found that there have been four instances in the past 10 years where the Nifty 500 has rallied more than 30%. 

In the time period between February and September 2016, the Nifty 500 had rallied 32.7% as against 28.1% for the Nifty 500 Low Volatility 50, with a margin of 4.6 percentage points. 

From December 2016 to January 2018, the overall Nifty 500 gained 48.8% while the low volatility index gained 41.5%. 

The largest disparity occurred during the recovery following the market crash of Covid times. 

Between March 2020 and October 2021, the Nifty 500 rallied 158.5%. The Nifty 500 Low Volatility 50 gained 114.9%. 

The low-volatility strategy lagged behind by 43.6 percentage points during one of the most explosive market rallies over the given time period. 

Things were quite different in the case of the rally between March 2023 and September 2024. 

During this rally, the Nifty 500 went up 75.1% whereas the low volatility index gained 79.2%, with a margin of 4.1 percentage points. 

Overall, however, the low-volatility index underperformed the Nifty 500 in three of the four major bull-market periods examined.

Low volatility is not the same as low risk

The historical crash data also makes an important distinction clear. 

A low-volatility index is still an equity investment. 

A 48% decline during the global financial crisis and a 29% decline during the Covid crash are significant losses. The strategy reduced the drawdown compared with the broader index, but it did not protect investors from market risk altogether. 

Its role is better understood through relative behaviour. 

When markets became particularly turbulent, the historical declines were smaller. When markets entered powerful rallies, the strategy often captured less of the upside. 

That is the central trade-off behind the approach.

Why the strategy can look boring during a rally

Low-volatility strategies are designed around stocks that have historically displayed relatively smaller price fluctuations. 

That can make them less exciting when aggressive sections of the market are rising rapidly. 

During such periods, investors focused primarily on maximising upside may find the strategy frustrating, particularly when broader indices or more volatile market segments deliver substantially higher returns. 

The Covid recovery illustrates the point clearly. 

A 114.9% gain would ordinarily be considered substantial. Yet it looked modest beside the Nifty 500’s 158.5% rally over the same period. 

Low volatility therefore should not be interpreted as a strategy that is expected to outperform in every market environment. 

Its historical advantage has been more visible when downside protection and consistency are considered alongside returns.

Costs remain broadly comparable with regular index funds

Investors accessing low-volatility indices through index mutual funds also have to account for expenses. 

According to ET Money, expense ratios across major low-volatility index funds ranged from 0.81% to 1.17% at the time of the analysis. 

The source notes that these costs were broadly in line with what investors may already pay for conventional index funds. 

Expenses still matter because even relatively small annual charges accumulate over longer investment periods. 

Actual returns from an index fund may therefore differ from those of the underlying index because of expenses and tracking differences.

A different way to look at index investing

The historical data challenges the idea that an index strategy has to simply mirror the broad market. 

Low-volatility indices alter the composition of the portfolio in an attempt to reduce fluctuations while remaining invested in equities. 

Over the rolling periods examined by ET Money, that approach produced slightly higher five-year returns and a wider advantage over three-year periods compared with the respective broad-market benchmarks. 

It also recorded lower standard deviation and smaller losses during the 2008-09 and 2020 crashes. 

But the strategy’s limitations are equally visible. 

It lagged the Nifty 500 during three of the four major bull runs studied, including a particularly large gap during the post-Covid recovery. 

That makes the historical record less about finding an index that consistently beats the market and more about choosing a different return experience. 

Low volatility has historically traded some participation in powerful rallies for smaller declines when markets became difficult. 

For investors assessing the strategy, that trade-off may be more important than whether it topped the broader index over any single period.