Globally, passive investing strategies are gaining much attention with a proliferation of products and growing assets under management. India too has started on that path as we see more investors warming up to the idea of investing via index funds and ETFs which is now moving into its next phase of evolution with the introduction of smart beta passive investing strategies


In this video, Shankar Nath examines the pros and cons of one such popular smart beta strategy which is then based on the concept of low volatility investing


What’s included in this video?
00:00 Introduction
01:07 WHAT IS LOW VOLATILITY?
02:54 NIFTY 100 LOW VOLATILITY 30 INDEX
07:13 PERFORMANCE OF NIFTY 100 LOW VOLATILITY 30 INDEX
09:51 ETMONEY OPINION

Resources:
How the index is constructed
https://www.niftyindices.com/docs/def...


👉WHAT IS LOW VOLATILITY?
Volatility denotes the upward or downward movement of the stock market or an individual stock. This means low volatility can be best described as security, asset, or fund whose value does not fluctuate dramatically but nevertheless changes in value at a steady pace over a period of time.

Two ways of measuring volatility
Standard deviation .. which looks at the volatility of a stock on its own. This means if the price tends to go up and down often over time then it will have a high standard deviation
Beta - Takes into account the relationship between a stock’s price movement and the movement of the market as a whole


This is quite a major difference because some volatility based index strategies work based on standard deviation while others work based on beta


👉NIFTY 100 LOW VOLATILITY 30 INDEX
The Nifty 100 Low Volatility 30 Index was launched by NSE Indices to measure the performance of the least volatile securities in the large market cap segment


Valuation metrics: LV30 index has starkly different valuations when compared to other relevant indices. With regards to PE Ratio, the Nifty 50, Nifty 100 and Nifty 200 indices are somewhere between the 33 to 35 mark while the Nifty 200 Momentum 30 index displays an even higher PE ratio of 41. We observed that the LV30 PE ratio is presently much lower at around 25.

Diversification - LV30 index offers a diversified offering as compared to a Nifty 50 or Nifty 100 because of two reasons

a) the Nifty 50 and Nifty 100 are weighted on a market capitalization basis while the LV30 is on a volatility basis
b) the rebalancing of the LV30 happens every quarter based on a volatility score … which means one can expect the sectoral distribution and companies to change dramatically every quarter unlike the case with a broad market index

Distribution of Weights: The distribution of weights across the companies is pretty uniform at 2 to 4% which might give us a feeling of it being almost like an equally weighted index based on volatility scores

👉 PERFORMANCE OF NIFTY 100 LOW VOLATILITY 30 INDEX
The concept of low volatility investing is based on cushioning the potential damage of a sudden market downturn. This is then done by using stocks that are less volatile to such situations. The objective here is not to give an aggressive top-of-the-chart performance.


In volatile years with big ups and downs, we see the low volatility investing strategy doing much better than the broader indices. This sort of shows a pattern wherein in periods of sudden downturns as expected, the LV30 index strategy performs quite well. The performance data also shows that the LV30 does not perform well in rising markets.


This means like any index strategy you will have periods where this strategy overperforms and will underperform.


When compared to the benchmark Nifty 100 index the Low Volatility 30 index seems to show a better cushioning of the downside which, in turn, leads to better long term performance
👉 ETMONEY OPINION
This index to carries some advantages and disadvantages
Advantages:
1.The index consists of only blue chips which can be comforting to most investors
2. since it invests only in blue chips .. there is low liquidity risk .. so that’s good
3. The returns can be expected to be less volatile
4. Its a system so there are no biases in the selection of companies


Disadvantages:
The Index can underperform in a non-volatile market
This strategy is is interest-rate sensitive
Back-tested nature of its creation

#ETMONEY #LowVolatility #mutualfunds

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