Low-variance funds tend to have smaller drawdowns during market corrections, making them appealing for risk-averse investors or those with a long-term focus or those who are new to investing.
Variance is taking center stage in the stock markets as volatility increases and market conditions become more unpredictable. This heightened variability reflects a more uncertain environment, where traditional patterns of steady growth are giving way to greater unpredictability and risk. The Nifty 50 index has corrected by more than 10% since 27th September 2024.
In recent times, portfolios are getting tilted towards risk compared to returns for various reasons. Investors, driven by past performance, a higher risk appetite and the pursuit of greater growth potential, are allocating more towards riskier assets like mid and small-cap stocks. All segments of market have rallied but more so the Midcap & Smallcap space. The ongoing rally in the equity markets has driven the country's market capitalisation to GDP ratio to 147%, significantly higher than the historical average of 94%. This surge indicates a sharp increase in market valuations relative to the overall economy.
Corporate earnings are moderating due to rising input costs and tightening liquidity, while geopolitical tensions add further uncertainty. Despite this, India라이브 바카라 long-term growth remains promising, supported by strong tax revenue, fiscal consolidation, declining impaired loans, rising disposable incomes and a favorable environment for private capital expenditure.
Foreign Portfolio Investors (FPIs) have been reducing their holdings in Indian equities, particularly in large-cap stocks. However, if this trend reverses, large-cap stocks could outperform, benefiting from increased foreign interest and enhanced market stability.
In such market conditions, low-variance funds, which focus on stable, low-volatility stocks, especially large-cap companies, can help mitigate risk while offering steady returns, without the excessive risk associated with mid-cap or small-cap funds. Large-cap companies have a combination of stability, high cash flows, financial strength, good corporate governance and growth potential, making them an attractive option for investors seeking to minimise risk while still benefiting from the equity market's long-term upside.
Low-variance funds tend to have smaller drawdowns during market corrections, making them appealing for risk-averse investors or those with a long-term focus or those who are new to investing. With smaller fluctuations in value, investors may be less likely to panic sell during downturns, which often leads to missing out on market recoveries.
Low-variance funds provide consistency and can offer strong long-term growth, with empirical evidence showing that low-volatility funds often outperform higher-risk counterparts in risk-adjusted returns over the long term, as they typically experience smaller declines during market downturns. E.g. Nifty 100 Low Volatility 30 TRI has outperformed the broader Nifty 100 TRI 60% of the time from 2005 to CYTD.
Low-variance funds can act as a stabilising force in a diversified portfolio. While other higher-risk assets may experience large swings, low-volatility investments can help balance out the overall portfolio performance and reduce its overall risk.
For investors looking to reduce the impact of market swings, this stability can provide peace of mind. Consistent, moderate returns can compound over time, leading to strong long-term growth without the stress of major losses.
Low-variance funds provide an appealing option for investors who value stability, long-term growth and lower risk, making them a solid choice for risk-averse individuals or anyone seeking to avoid large swings in their portfolio. By incorporating such funds into a diversified investment strategy, you can smoothen the ride, reduce impulsive emotional investment decisions and ultimately build wealth in a more consistent manner.