Chintan Haria, Principal – Investment Strategy at ICICI Prudential AMC, sheds light on how these funds function and their role in a balanced investment strategy.
Strong performance during volatility
“Low-volatility funds have shown consistent resilience in various market conditions,” said Haria.
Highlighting historical data, he noted that in FY23, while the Nifty 50 TRI fell by 0.6%, the Nifty 100 Low Volatility 30 TRI delivered a 3.8% gain.
He explained that these funds effectively balance risk and return, offering investors stability during market downturns. “Even in periods of concentrated rallies, such as February 2018 to December 2019, the low-volatility index’s 4.9% return was close to the Nifty 50 TRI’s 6.8%, showcasing their ability to participate in market recoveries.”
Should investors exit during market rebounds?
Exiting low-volatility funds when markets recover might not always be the best strategy, according to Haria. “These funds provide consistent risk-adjusted returns and experience lower drawdowns, making them valuable for long-term investors,” he said.
For those seeking to enhance returns during rebounds, Haria suggested exploring other smart beta strategies.
“Momentum funds can capitalise on market uptrends, quality funds focus on financially strong companies, and value funds target undervalued stocks with rebound potential. A diversified approach across smart beta strategies is ideal,” he added.
Tax and long-term considerations
Switching funds during rebounds could lead to additional tax liabilities and transaction costs. Haria emphasised the long-term benefits of low-volatility funds.
“These funds are designed to provide steady returns across market cycles. For instance, over 10 years, the Nifty 100 Low Volatility 30 TRI delivered a CAGR of 15.65%, outperforming the Nifty 100 TRI (13.99%) and Nifty 50 TRI (13.45%),” he said.
He advised investors to combine low-volatility funds with other strategies during market recoveries rather than redeeming them entirely.
How much to allocate?
The ideal allocation to low-volatility funds depends on an investor’s risk appetite and financial goals.
“For conservative investors, allocating 30% to 50% of their equity portfolio to low-volatility funds can provide the stability they need,” Haria suggested.
For moderate or aggressive investors, he recommended a smaller allocation, around 10% to 20%, to serve as a stabiliser while retaining growth potential.
“Low-volatility funds can act as the foundation of a diversified portfolio, complementing strategies like momentum, value, or quality funds,” he added.
Final thoughts
Low-volatility funds remain a robust choice for investors seeking stability and steady returns amidst fluctuating markets.
While their upside potential may moderate during sharp rebounds, their resilience and long-term performance make them a valuable part of a well-rounded portfolio.
As Haria summarised, “Balancing these funds with other smart beta strategies ensures both stability and growth.”
