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

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

 

Want to conduct a sales-free "basics of money management" session in your office?
I conduct free seminars to employees or societies. Only the very basics and getting-started steps are discussed (no scary math):For example: How to define financial goals, how to save tax with a clear goal in mind; How to use a credit card for maximum benefit; When to buy a house; How to start investing; where to invest; how to invest for and after retirement etc. depending on the audience. If you are interested, you can contact me: freefincal [at] Gmail [dot] com. I can do the talk via conferencing software, so there is no cost for your company. If you want me to travel, you need to cover my airfare (I live in Chennai)

Connect with us on social media


Do check out my books


You Can Be Rich Too with Goal-Based InvestingYou can be rich too with goal based investing

My first book is meant to help you ask the right questions, seek the right answers and since it comes with nine online calculators, you can also create customg solutions for your lifestye!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 want My second book is meant for young earners to get their basics right from day one! It will also help you travel to exotic places at low cost! Get it or gift it to a youngearner

The ultimate guide to travel by Pranav Surya

Travel-Training-Kit-Cover This is a deep 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 ₹199 (instant download)

Create a "from start to finish" financial plan with this free robo advisory software template


Free Apps for your Android Phone

All calculators from our book, “You can be Rich Too” are now available on Google Play!
Install Financial Freedom App! (Google Play Store)
Install Freefincal Retirement Planner App! (Google Play Store)
Find out if you have enough to say "FU" to your employer (Google Play Store)

About Freefincal

Freefincal has open-source, comprehensive Excel spreadsheets, tools, analysis and unbiased, conflict of interest-free commentary on different aspects of personal finance and investing. If you find the content useful, please consider supporting us by (1) sharing our articles and (2) disabling ad-blockers for our site if you are using one. We do not accept sponsored posts, links or guest posts request from content writers and agencies.

Blog Comment Policy

Your thoughts are vital to the health of this blog and are the driving force behind the analysis and calculators that you see here. We welcome criticism and differing opinions. I will do my very best to respond to all comments asap. Please do not include hyperlinks or email ids in the comment body. Such comments will be moderated and I reserve the right to delete the entire comment or remove the links before approving them.

One thought on “Picking Stocks With Low Volatility: A simple, but effective strategy?

  1. Stocks which are part of an Index might get excluded and new stocks are included later, what would happen then Professor? And what about Qualitative analysis? Can we really rely on Quantitative analysis alone?

Comments are closed.