The Nifty Low Volatility 50 Index (NLV50) is a portfolio of 50 stocks that has the least volatility among all the stocks listed at the NSE. This is referred to as a smart beta strategy.

Considering the way it is constructed, its performance (much of which is backdated) has been quite interesting and I think this can be a suitable benchmark index for multi-cap mutual funds in terms of risk-adjusted returns.

Thanks to Indraneal, who blogs at cognicrafing for helping me understand the composition of its *current* portfolio – 19 large-cap stocks + 30 mid-cap stocks and one small-cap.

However, The index has no specific cap or sector tilt and only depends on volatility – standard deviation of daily returns in the past year (calculated each business day).

The NLV50 (backtested data, excluding dividends) managed to comfortably beat the Nifty with dividends included, but also managed to fall less during the 2008 crash.

I cannot help be amused at the NLV50 is constructed!

- Take the top 300 companies in terms of free float market cap and turnover in the last 6 months
- Ensure the companies have a
- listing history of at least 1 year
- at least 10% of total shares are available for trading (and not held by promoters, govt, trusts etc.)
- 100% trading frequency.
- positive net worth as per last annual audited report.

- Take price adjusted for corporate action and calculate the standard deviation of daily returns for the last year.
- List 50 stocks that have the lowest standard deviation (volatility).
- Stock with lowest volatility gets highest weight.
- upon quarterly review, if an index stock moves out of the top 50, but is still part of the top 100, it is not removed. This reduces churn.
- Rebalancing to preserve weights is also done quaterly.
- There is no cap or sector bias.

This is a snapshot from the NLV50 fact sheet. Although it has a 90%+ correlation with the Nifty, the volatiliey is a good 20-30% lower (as measured by Beta).

However, it is not a suitable index for large-cap mutual funds and indeed, none of the large-caps have managed to beat this! (Happy to share this data on request).

The mid-cap funds have managed to do better, but this is not a pure mid-cap index either. I shall test this out against all multi-cap funds once I prepare the list.

The reason I particularly like this index is performance combined with low volatility. This is a good benchmark for our equity portfolios as well.

**Quantum Long Term Equity vs. Nifty Low Volatility 50**

Using the Analysis: 10-year Lump sum vs 10-year SIP returns sheets, here is how Quantum Long Term Equity fares against this index.

NLV50 has a lower Ulcer index than QLTE. The Ulcer index is a measure of volatility and downside risk or in other words, a measure of investor stress! Lower the ulcer index, lower the stess.

In terms of returns too, QLTE is a bit lower than NVL50. Although a bit more volatile, the fund has managed to beat the index when evaluated from Apr 3rd 2006.

To be continued ….

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Very good analysis of NLV 50 as always

Awaiting continuation post

Can we have an opportunity to look at

Indraneal’s current portfolio – 19 large-cap stocks + 30 mid-cap stocks and one small-cap

Why would I talk about Indraneals portfolio when I am referring to NLV50!! The current portfolio of the index is now linked in the post.

Excellent analysis! How did you or Indraneal arrive at the weight % of the index? It is not given in that pdf. Did you calculate it using the formula of w(i)?

I would be keen to see how S&P BSE Low Volatility Index performs w.r.t. this one? They seem to follow similar methodology but the BSE index has a concentrated portfolio of 24 stocks.

He used 10k to 75k as mid cap and large cap above that. I will look at BSE LV index. Thanks.

Thanks for your reply. I mean to say the Weight %. I can see that HDFC Bank has 3.05%, Grasim Industries 2.95% etc. Did you calculate it using the formula of w(i) as given in the PDF?

NO. Weights were not considered at all.

Sorry. In absence of a link, I got confused with Indraneal’s portfolio instead of NLV 50 list.

No problem.

Very good post, I guess that in long term this index will be in top quartile of multicap fund returns because of the compounding of dividends received

Query: Why do mutual funds dont come up with an index fund based on it

Query: Is it possible to construct a portfolio of direct stocks based on such index

Request: You can also do a comparision of cnx alpha index

Thank you for the excellent analysis again. I would like to know how it compares with Nifty Value 20, on which you had posted earlier. I believe its volatility was also lower than Nifty..But are there any ways of investing in such index measures by small investors like me..I could not gather any ETF floated basis these indexes. I even checked with Indiaratings, and they said it is the choice of the mutual fund, and depends on market demand..

Thanks again

Regards

Aroon

All these fads and theories always sound great on back testing. Sadly, none of these will work on forward testing in the long run.

forward testing – the real proof of the pudding is pump in your $ today and see what you get 5 years later.

1) “Sadly, none of these will work on forward testing in the long run.” We will need to do some backtesting after a few years to determine the validity of such sweeping statements.

As for the real proof, we will know it one way or the other. This is one of the other methods.

Excellent Article Pattu !! thanks for enlightening us …

The various links mentioned in the above article are here …. ( just helping ) as i too was confused as to which section was part of nse site and which might be part of your analaysis

https://www.nseindia.com/products/content/equities/indices/strategic_indices.htm

Under Startegic Indices look for Nifty Low Volatility 50 Index.

thanks again pattu

Are there any ETF or MF based on Nifty Low Volatility 50 Index (NLV50) ? If not, I assume that the available options is construct our own portfolio and adjust based on this index manually? Is that right? Can you let me know? Thanks