Low-volatility index funds, ETFs show lower drawdowns and higher returns

High market volatility in recent months has left many investors seeking options that offer protection against sharp index swings while still allowing for potential gains when markets recover. Low-volatility funds can meet this need. Several asset management companies (AMCs) like Nippon, Axis, SBI, Groww, and ICICI Pru have filed with Sebi for the launch of index funds and exchange-traded funds based on low-volatility indices. Several others like ICICI Pru, Kotak, UTI, Motilal Oswal, HDFC, and Mirae already offer them.

 

“Rising market uncertainty, geopolitical risks, and trade tensions, combined with a shift in investor preference from aggressive growth to better risk-adjusted returns, have prompted fund houses to launch these schemes,” says S Sridharan, founder and chief executive officer, Wallet Wealth.

 

Index constitution

 

Low-volatility indices typically consist of the least volatile stocks within a particular index. For example, the Nifty100 Low Volatility 30 Index includes the 30 least volatile stocks within the top 100 companies by market capitalisation.

 

“Low-volatility funds use simple rules to pick companies that tend to be more stable. They can help smooth out returns during market ups and downs,” says Pratik Oswal, head of passive funds, Motilal Oswal AMC.

 

Perform across market cycles

 

These funds can perform across market cycles. “While they are particularly attractive in turbulent times due to their ability to minimise losses, they also offer steady returns in stable or moderately growing markets. They are a solid choice for investors seeking consistent, risk-adjusted growth across various market cycles,” says Sirshendu Basu, head–products, Bandhan AMC.

 

They can deliver returns with reduced volatility. “Low-volatility funds have typically performed well in the long run by having lower drawdowns. Over a longer investment horizon, this defensive strategy has historically produced alpha over the market,” says Siddharth Srivastava, head–ETF product and fund manager, Mirae Asset Investment Managers (India).

 

Srivastava notes that as of March 31, 2025, over 10 years, the Nifty 50 Index delivered a compound annual growth rate (CAGR) of 12.1 per cent, while the Nifty100 Low Volatility Index posted a CAGR of 13.7 per cent. The Nifty100 Low Volatility 30 Index recorded annualised volatility of 14 per cent, compared to 16.5 per cent for the Nifty50 Index. 

 

Underperform in bullish markets

 

These funds may underperform during bullish phases. “Low-volatility funds often underperform during strong bull markets, causing investors to miss out on significant gains from high-growth stocks. Although the underperformance is not a major concern over the long term, in the short term, fear of missing out (FOMO) can prompt investors to pivot towards riskier, growth-focused investments,” says Basu.

 

Concentration risk is another issue. “As these funds prioritise companies with lower price volatility, they can become concentrated in specific sectors — typically defensive ones — reducing diversification. This sectoral concentration can expose the fund to greater losses if those industries face problems,” says Oswal.

 

Invest for stable returns

 

These funds are well-suited for investors seeking stable returns over long periods. “Investors should have a time horizon of five years plus. These schemes are suitable for retirees seeking stability and steady long-term compounding, and conservative investors aiming to limit downside. One may allocate 10–20 per cent of their portfolio to these schemes,” says Sridharan.

 

Aggressive investors with a high allocation to mid- and small-cap funds may allocate to these funds.

 

“These funds can be part of an investor’s core portfolio. Evolved investors who understand the risk and cyclicality associated with factor investing may go for them,” says Srivastava.