Picking Stocks With Low Volatility: A simple, but effective strategy?

Published: May 18, 2018 at 10:11 am

Can we beat indices like the Nifty Next 50 (NN50) by simply picking stocks with low volatility?! Regular readers may be aware that I am running a series on the NN50. In the fourth and final part (for now), we compare Nifty 50, (N50), NN50, NIfty low volatility and the NIfty multi-factor indices in search of the holy grail of investing: higher reward at lower risk!

I would strongly urge you to take some time this weekend to read the first three parts: Part one: Warning! Nifty Next 50 is NOT a large-cap index! Part two: Are Nifty Smart Beta (strategic) Indices better than the Nifty Next 50?Part three: How new stock investors can quickly start investing using NIFTY Multi-Factor Indices

Before we begin, here are some definitions so that we can all start on the same page. N50: 50 stocks with the highest market capitalization. NN50: 50 stocks with top 51st to 100 market cap. In both these indices, stocks with higher market cap have a higher weight. Nifty low volatility 50: 50 stocks with lowest last 1Y volatility from top 300 market cap stocks. Nifty 100 low volatility 30: 30 stocks with the lowest volatility among NIfty top 100 (= N50+ NN50). In both these indices, stocks with lower volatility have a higher weight.

Nifty strategic index or a smart beta index is one in which stocks are chosen by one or more methods of stock selection instead of simple picking stocks by market capitalization. So by investing in a smart beta index, we combine both active and passive methods of investing.  Four methods are used:

1: Alpha is a measure of risk-adjusted outperformance with respect to NIfty 50 and the MIBOR* three-month bond rate representing the risk-free return.


2: Low volatility: a measure of how much monthly stock returns deviation from average (standard deviation)

3: Quality: Stocks with high Return on equity (ROE), low Debt equity ratio (D/E) and high Profit After Tax (PAT) in the last three financial years

4: Value: stocks with high ROCE (Return on Capital Employed), low PE, low PB and high Dividend yield (DY) in the last financial year

NIfty Multi-factor indices

These are constructed with above four metrics:

1. NIFTY Alpha Low-Volatility 30  = 50% alpha + 50% low volatility

2. NIFTY Quality Low-Volatility 30 = 50% quality + 50% low volatility

3. NIFTY Alpha Quality Low-Volatility 30 = 1/3 Alpha + 1/3 Quality + 1/3 Low Vol

4. NIFTY Alpha Quality Value Low-Volatility 30 = 25% Alpha + 25% Quality + 25% Value + 25%Low Volatility

For more details consult:  How new stock investors can quickly start investing using NIFTY Multi-Factor Indices

N50 vs NN50 vs low-vol vs Nifty multi-factor: 10-year rolling return

So we shall consider every possible 10-yer window from 2004-5 or earlier. This gives a minimum of about 770 data points for each index. Naturally, this is a small time period, but this is the picture as of now. We will keep reviewing the situation periodically.

picking stocks with low volatility: Nifty indices

N50 vs NN50 vs low-vol vs Nifty multi-factor: 10-year rolling risk (standard deviation)

Please take some time to look closely at both graphs. I can only arrive at this conclusion: Choosing stocks with low volatility is a simple, but effective way to beat the NN50 in terms of risk and reward! Even here, all one needs to do is to look for low volatility among top 100 market cap stocks and choose a few (check other metrics if you are worried). Else simply track the low volatility index. Naturally, we have looked at a small time window, but this to me this looks pretty promising.  Intuitively, low volatility implies a company that grows slowly with no sudden developments – good or bad.

Check out Freefincal stock investing resources

50 stocks with solid earnings power: Ability to self-fund and create value

Automated Earnings Power Stock Analysis With Screener.in data

Download the Freefincal Excel Stock Screener: Version 2

Indian Stock Screener: Google Sheets Edition

Resources: How To Screen Identify Good Stocks

 

Do share if you found this useful

Our new course!  Increase your income by getting people to pay for your skills! More than 585 salaried employees, entrepreneurs and financial advisors are part of our exclusive Facebook Group! Learn how to get people to pay for your skills! Whether you are a professional or small business owner who wants more clients via online visibility or a salaried person wanting a side income or passive income, we will show you how to achieve this by showcasing your skills and building a community that trusts you and pays you! (watch 1st lecture for free). One-time payment! No recurring fees! Life-long access to videos in an exclusive Facebook Group!   
Use our Robo-advisory Excel Template for a start-to-finish financial plan! Now with a new demo video!  More than 640 investors and advisors use this!
Our flagship course! Learn to manage your portfolio like a pro to achieve your goals regardless of market conditions! More than 2525 investors and advisors are part of our exclusive Facebook Group! Get clarity on how to plan for your goals and achieve the necessary corpus no matter what the market condition is!! Watch the first lecture for free!  One-time payment! No recurring fees! Life-long access to videos in an exclusive Facebook Group! Reduce fear, uncertainty and doubt while investing! Learn how to plan for your goals before and after retirement with confidence.
My new book for kids: “Chinchu gets a superpower!” is now available!
Both boy and girl version covers of Chinchu gets a superpower
Both boy and girl version covers of Chinchu gets a superpower.
Most investor problems can be traced to a lack of informed decision making. We have all made bad decisions and money mistakes when we started earning and spent years undoing these mistakes. Why should our children go through the same pain? What is this book about? As parents, if we had to groom one ability in our children that is key not only to money management and investing but for any aspect of life, what would it be? My answer: Sound Decision Making. So in this book, we meet Chinchu, who is about to turn 10. What he wants for his birthday and how his parent’s plan for it and teach him several key ideas of decision making and money management is the narrative. What readers say!
Feedback from a young reader after reading Chinchu gets a Superpower (small version)
Feedback from a young reader after reading Chinchu gets a Superpower!
Must-read book even for adults! This is something that every parent should teach their kids right from their young age. The importance of money management and decision making based on their wants and needs. Very nicely written in simple terms. - Arun.
Buy the book: Chinchu gets a superpower for your child!
How to profit from content writing: Our new ebook for those interested in getting side income via content writing. It is available at a 50% discount for Rs. 500 only!
Did you know? We have more than 1000+ videos on YouTube to explore! Join our YouTube Community!

Want to check if the market is overvalued or undervalued? Use our market valuation tool (will work with any index!), or you buy the new Tactical Buy/Sell timing tool!
We publish mutual fund screeners and momentum, low volatility stock screeners .every month.
About the Author Pattabiraman editor freefincalM. Pattabiraman(PhD) is the founder, managing editor and primary author of freefincal. He is an associate professor at the Indian Institute of Technology, Madras. since Aug 2006. Connect with him via Twitter or Linkedin Pattabiraman has co-authored three print books, You can be rich too with goal-based investing (CNBC TV18), Gamechanger, Chinchu Gets a Superpower! and seven other free e-books on various money management topics. He is a patron and co-founder of “Fee-only India,” an organisation to promote unbiased, commission-free investment advice. He conducts free money management sessions for corporates and associations based on money management. Previous engagements include World Bank, RBI, BHEL, Asian Paints, Cognizant, Madras Atomic Power Station, Honeywell, Tamil Nadu Investors Association, IIST Alumni Association. For speaking engagements, write to pattu [at] freefincal [dot] com
About freefincal & its content policy Freefincal is a News Media Organization dedicated to providing original analysis, reports, reviews and insights on developments in mutual funds, stocks, investing, retirement and personal finance. We do so without conflict of interest and bias. Follow us on Google News. Freefincal serves more than three million readers a year (5 million page views) with articles based only on factual information and detailed analysis by its authors. All statements made will be verified from credible and knowledgeable sources before publication. Freefincal does not publish any paid articles, promotions, PR, satire or opinions without data. All opinions presented will only be inferences backed by verifiable, reproducible evidence/data. Contact information: letters {at} freefincal {dot} com (sponsored posts or paid collaborations will not be entertained)
Connect with us on social media
Our publications

You Can Be Rich Too with Goal-Based Investing

You can be rich too with goal based investingPublished by CNBC TV18, this book is meant to help you ask the right questions, seek the correct answers, and since it comes with nine online calculators, you can also create custom solutions for your lifestyle! Get it now. It is also available in Kindle format.
Gamechanger: Forget Startups, Join Corporate & Still Live the Rich Life You Want Gamechanger: Forget Start-ups, Join Corporate and Still Live the Rich Life you wantThis book is meant for young earners to get their basics right from day one! It will also help you travel to exotic places at a low cost! Get it or gift it to a young earner.

Your Ultimate Guide to Travel

Travel-Training-Kit-Cover-new This is an in-depth dive analysis into vacation planning, finding cheap flights, budget accommodation, what to do when travelling, how travelling slowly is better financially and psychologically with links to the web pages and hand-holding at every step. Get the pdf for Rs 199 (instant download)
Free android apps