Are Low Volatility Stocks Right For A Turbulent Market?

Until a few months ago, momentum-driven stocks were the darling of the market, generating impressive returns for investors. However, the tables have turned, and stocks with low volatility have emerged as the new winners. Strategy indices that track defined factors have revealed that low volatility stocks have outperformed their peers, even in a negative return environment. The article explains the concept of low volatility and how this can be of benefit to investors in the current market conditions 

The Indian stock market has been witnessing significant turmoil in recent months, leaving investors scrambling to adjust their strategies. The fall in the stock market is driven by a confluence of global and domestic factors, shaking investor confidence. Global market weakness, particularly the sharp sell-off in U.S. equities post the inflation number has played a significant role. Rising U.S. Treasury yields have made equities less attractive, as the 10-year bond yield surged to multi-months highs. 

This rise in yields increased the borrowing costs, triggering a shift away from riskier assets like stocks. Additionally, geopolitical tensions, especially the Israel-Hamas conflict, have heightened uncertainty, pushing investors toward safer havens like gold and bonds. These global concerns spilled over into the Indian markets, exacerbating the sell-off. On the domestic front, heavy foreign institutional investor (FII) outflows worsened the situation, with FIIs selling over ₹16,000 crore worth of Indian equities in just five days. 

Weak December earnings further dented sentiment, prompting sell-offs. Despite a correction in the market, valuation remains a concern in certain pockets, such as Small-Cap and Mid-Cap stocks which contributed to this fall. As the market landscape continues to evolve, it’s essential to identify the key qualities that can help investors navigate these choppy waters. There are certain pockets of the stock market that have withstand this fall in a better way. The chart below shows that companies with low volatility have performed better than many others. 

In this article, we will delve into the importance of low volatility stocks, and explore how these factors can generate better returns in the current scenario. 

The Rise of Low Volatility Stocks
Until a few months ago, momentum-driven stocks were the darling of the market, generating impressive returns for investors. However, the tables have turned, and stocks with low volatility have emerged as the new winners. Strategy indices that track defined factors have revealed that low volatility stocks have outperformed their peers, even in a negative return environment. 

Understanding Low Volatility
So, what exactly is low volatility in stocks? In simple terms, it refers to the degree of variation in a stock’s price over time. A low volatility stock is characterised by a relatively stable price movement, with minimal fluctuations in the short term. This stability is often measured using metrics such as beta, standard deviation, and volatility ratios. 

1. Standard Deviation

• Volatility is often measured using standard deviation, which quantifies the dispersion of a stock’s returns around its average return.
• A low standard deviation means the stock’s price movements are relatively stable and predictable, indicating low volatility.
• For example, if a stock has a standard deviation of 5 per cent compared to the market’s 15 per cent, it is considered low volatility. 
   

2. Beta

• Beta is another common measure of volatility. It compares a stock’s price movements to the overall market (usually represented by an index like the Nifty 50).
• A beta of less than 1 indicates that the stock is less volatile than the market. For example, a stock with a beta of 0.7 is considered low volatility because it typically moves 70 per cent as much as the market. In the current situation, when the market is showing a bearish trend, this character of the stocks arguers well. 
   

3. Historical Price Movements

• Low volatility stocks tend to have smaller daily, weekly, or monthly price swings compared to high volatility stocks.
• These stocks often exhibit steady growth or consistent returns over time, avoiding sharp peaks and troughs. 
   

4. Sector and Industry Characteristics

• Stocks in certain sectors, such as utilities, consumer staples, or healthcare, are often associated with low volatility because their businesses are less sensitive to economic cycles.
• These sectors provide essential goods and services, which tend to generate stable cash flows and consistent performance. 
   

5. dividend-Paying Stocks

• Many low volatility stocks are dividend-paying companies. Their consistent dividend pay-outs can attract investors seeking stability, which in turn reduces price fluctuations. 

Why Low Volatility Matters 

• Risk-Averse Investors: Low volatility stocks are attractive to risk-averse investors who prioritise capital preservation and steady returns over high-risk, high-reward investments.
• Portfolio Stability: Including low volatility stocks in a portfolio can reduce the overall portfolio risk and smooth out returns during market downturns.
• Behavioural Factors: Research has shown that low volatility stocks often outperform high volatility stocks over the long term, a phenomenon known as the low volatility anomaly, which essentially means a lower fall implies lower return to recoup the earlier loss. For example, a stock that fell by 33 per cent needs to rise by 50 per cent to break even and a stock that has fallen by 50 per cent needs to rise by 100 per cent to reach the earlier level. 
   

In summary, low volatility in stocks is defined by smaller price fluctuations, lower standard deviation, and a beta of less than 1. These stocks are typically associated with stable sectors, consistent performance, and lower risk, making them appealing to conservative investors. The Indian stock market’s recent correction (down ~15 per cent from its September 2024 peak) has reignited interest in low volatility strategies. These stocks, characterised by stable price movements and robust fundamentals, have historically shielded investors during downturns while delivering steady returns. Let’s explore how these stocks perform in volatile markets, with historical parallels and current examples. 

Historical Context: Low Volatility During Past Corrections 

1. 2021–2022: The 18.4 Per Cent Nifty 50 Drawdown
Between October 2021 and June 2022, the Nifty 500 plunged 17.9 per cent amid post-pandemic inflation, geopolitical tensions, and Federal Reserve rate hikes. 

During this period, low volatility sectors like IT and pharmaceuticals outperformed. For example, Infosys and Sun Pharma declined by only ~12 per cent and ~9 per cent, respectively, compared to the broader market’s 18 per cent drop. The Nifty Low Volatility 50 index fell just 14.8 per cent, showcasing resilience compared to high-beta sectors like real estate (-28 per cent). 

2. 2020: Pandemic Crash
During the March 2020 crash, low volatility stocks such as Hindustan Unilever and Nestlé India rebounded faster. While the Nifty 50 dropped 38 per cent, these stocks recovered within months, with HUL gaining 25 per cent by late 2020. In the broader market, Nifty 500 saw a drop of 31.43 per cent while Nifty 500 Low Volatility 50 dropped by 21.52 per cent. 

3. 2023–2024: Sectoral Divergence
In 2023, while the Nifty 50 faced 6–7 per cent correction, stable sectors like utilities (NTPC) and consumer staples (ITC) saw minimal volatility. For instance, ITC’s average daily volatility remained below 1.5 per cent, compared to small-cap stocks averaging 3–4 per cent swings. 

Current Market Correction (2024–2025): Low Volatility in Action
Since September 2024, the Nifty 50 has corrected little more than 12 per cent, but the pain has been uneven:

1. Worst Performers: High-beta sectors like energy, infrastructure and paint have collapsed by more than 20 per cent due to demand slowdowns.

2. Low Volatility Outperformers:

• The Nifty Low Volatility 50 index declined only 12–13 per cent, outperforming the Momentum 50 index (-18 per cent). n Despite broader market turbulence, Setco Automotive performed better in financial terms with improvement in operating margins and increase in top-line while and Bajaj Healthcare’s turnaround story saw outperformance and positive return in the last six months.
• As regards export-driven IT and pharmaceutical sectors, TCS and Aarti Pharma Labs fell less, benefiting from global demand and stable earnings. 

Lessons from the Past and Present

1. Avoid High-Debt Stocks: During the 2022–2024 corrections, high-debt firms like Vodafone Idea fell 60–70 per cent, while low-debt peers like Infosys declined by a modest
10.2 per cent.
2. Focus on Quality Metrics: Stocks with ROCE greater than 20 per cent recovered faster post-corrections. 

Conclusion: Navigating Uncertainty with Low Volatility 

History shows that low volatility stocks are not just defensive plays but long-term compounders. During the 2020–2024 period, the Nifty Low Volatility 50 index delivered 134 per cent improvement, outperforming the Nifty 500’s 118 per cent. In the current correction, sectors like IT, pharmaceutical and utilities continue to offer stability. For investors, the mantra should be about prioritising stability over speculation. As the market recalibrates, low volatility strategies will likely remain a cornerstone of risk-adjusted returns.