Driving on a road with steep slopes may cause a car to drastically switch from high top speeds to almost coming to a halt. A flat road, however, is likely to have a comparable or even higher average speed while being less risky.
This is the core principle on which the Low Volatility factor works. It provides a mechanism for investors to control risk while generating similar or superior investment returns relative to the market over the long run.
Factor Investing based on Low Volatility comprises of buying stocks with low historical volatility measured using indicators such as beta and standard deviation.
While traditional finance theory suggests that excess returns can only be generated by taking on extra risk, the low volatility factor contradicts this statement. Over the long term, not only have indices based on the low volatility factor reduced portfolio risk vs the benchmark, they have done so while also delivering excess returns over and above benchmark returns.
Source/Disclaimer: S&P BSE; Performance as of close of 30-Nov-06 to 30-Nov-21. Performance results have many inherent limitations and no representation is being made that any investor will, or is likely to achieve. Past performance may or may not be sustained in future.
If you are someone who doesn’t like wild up and down swings in your portfolio, consider allocating to the low volatility factor. Index Funds and ETFs tracking indices such as the S&P BSE Low Volatility Index offer a cost-efficient exposure to the Low Volatility Factor.
We hope that you must have acknowledged the concept of Low Volatility, as it is our constant endeavour at Motilal Oswal to educate & make an ‘investor’ a ‘sound investor’! Happy Investing!
