Can incorporating the Low Volatility Factor into my portfolio help me achieve steadier returns while managing risk? I understand that low-volatility stocks have historically outperformed high-volatility stocks on a risk-adjusted basis, offering smaller drawdowns, faster recovery, and smoother compounding.
How should I evaluate these stocks using metrics like historical volatility, beta, drawdown history, and stability of returns? Given that these stocks may underperform during bull runs, what is the ideal allocation or strategy for a risk-averse investor seeking long-term capital preservation and emotional discipline during market turbulence?
Advice by Sujit Modi, Chief Investment Officer, Share.Market
When markets experience sharp swings, it is natural for investors to feel anxious or act impulsively, whether by selling in fear or chasing the latest trend. Investors who focus on steady growth and capital preservation should opt for the Low Volatility Factor, as it can prove to be a reliable approach to investing in turbulent markets.
The Low Volatility Factor targets stocks with relatively smaller price fluctuations compared to the broader market. While these stocks may not always lead during bull runs, they tend to hold ground better during corrections, thereby reducing portfolio risk and drawdowns. Their strength has been particularly evident in recent selloffs, where low-volatility stocks not only declined less but also rebounded more quickly than the broader market. Typically, these are not high-growth companies but established businesses with stable earnings and the resilience to withstand market downturns.
This factor is rooted in a market paradox, where lower-volatility stocks often outperform high-volatility stocks on a risk-adjusted basis. This is a contradiction to traditional finance theory, which assumes higher risk yields higher returns.
Low volatility investing focuses on:
> Price Stability: Stocks with smaller day-to-day price movements
> Consistent Returns: Long-term performance with less fluctuation
> Downside Protection: Lower losses during bear phases or market corrections
Incorporating low-volatility stocks into a portfolio helps investors achieve smoother returns, reduce downside risk, and build the confidence to stay invested through market turbulence.
Evaluating Low Volatility Stocks
Low Volatility Factors uses four key measures to identify stocks that demonstrate steady compounding without violent price swings, thereby making them ideal for risk-averse investors:
Historical Volatility: A statistical measure of a stock’s price fluctuations over a fixed time frame.
Beta: A stock’s sensitivity to overall market movement. Lower beta implies less correlation with market swings.
Drawdown History: How a stock has performed during past corrections or crashes.
Stability of Returns: Consistency of monthly or quarterly returns across various market phases.
Low Volatility in Action: Historical Performance vs. High Volatility Stocks
When choosing low-volatility stocks, several essential metrics can guide investor decisions. Share.Market examined data from the Nifty 500 universe between January 31, 2012, and June 30, 2025, providing powerful insights. Stocks were divided into quintiles based on historical volatility, with Q1 representing the lowest-volatility stocks and Q5 the highest.
NAV Returns
This measures the growth of an investment over time. For instance, ₹100 invested in Q1 (the lowest volatility quintile) in 2012 would have grown to ₹753 by June 2025. By contrast, the same amount in Q5 (highest volatility) would be worth ₹352, with the Nifty 500 benchmark reaching ₹672. This demonstrates that steadily compounding low-volatility stocks can accumulate significant wealth by sidestepping major market downturns.
Risk-adjusted Returns
It is not just about how much an investor can earn, but how much risk one takes for each unit of return. Q1 stocks consistently outperformed Q5, delivering better risk-reward profiles, which means that investors enjoyed stronger returns with less stress or uncertainty.
Maximum drawdowns
Drawdown shows the worst decline from a peak. Q1 stocks experienced a max drawdown of -31.24%, while Q5 saw a much sharper drop of -74.63%. Smaller drawdowns mean less capital erosion and fewer sleepless nights for investors.
Days to recover
Q1 stocks took 177 days to recover from their sharpest drawdown, whereas Q5 needed a staggering 1,260 days. Fast recovery times are crucial as they keep investors’ goals on track and reduce the temptation to make emotional decisions at the wrong time.
The study reveals that low-volatility stocks (Q1) have historically delivered higher risk-adjusted returns, lower drawdowns, and faster recovery compared to high-volatility counterparts (Q5).
Why Low Volatility Deserves a Spot in Your Portfolio
While some may view low-volatility stocks as “boring,” the data tells a different story. These stocks may underperform in euphoric bull runs but often protect capital better during crises, leading to smoother compounding over a full cycle.
For traders and investors with 1-3 years of market experience, adopting a Low Volatility Factor strategy offers three key advantages:
Emotional Discipline: Fewer extreme price swings reduce panic selling.
Capital Preservation: Limiting downside helps retain gains over time.
Better Risk-Adjusted Returns: Consistency often beats flashiness in long-term investing.
For investors looking to build a portfolio that compounds with stability, the Low Volatility Factor offers a smart, research-backed path. In a world where uncertainty is the only certainty, staying calm and consistent often wins.