Low Risk Anomaly: Does it work?

I remember my first introduction to finance. ‘Higher the risk, higher the rewards’ were the exact words uttered by the professor as the young minds were trying to contemplate the entirety of it. One brief explanation and all of us were satisfied with the answer. ‘If you want to move upward/earn high in life, you have to take risks’. Time and again we’ve heard versions of these words (if not the exact same thing) being thrown on us. These words then go on to shape students’ brains and most of the decisions that we take in our lives. Calculated risks are what they call it and that’s because taking unnecessary risks don’t make sense at all. Just like falling down a mountain is a way of descending but isn’t always a great choice. You may get to the destination faster but at a huge cost of life. Likewise, you can take a smooth road down the mountain which may take more time but it’ll get you there safe & sound.

Although not entirely false, sometimes it is better to not take risks. This behaviour is explained in behavioural finance by the concept of Low-risk anomaly. The concept takes the high risk/high return concept and dumps it in the garbage. Okay not so dramatically, but what it does say and in most cases, prove, is that even with low risk, one can achieve high returns or better, even generate alpha over high-risk stocks. This just undermines the whole CAPM theory. A number of studies in the field have shown that this strategy has worked in most of the developed economies and so this strategy has caught the eyes of investors everywhere.

Seeing its popularity grow in the US, NSE even launched a Nifty Low Volatility (LV) 50 index on November 19, 2012, comprising 50 of the least volatile stocks out of the top 300 companies listed on the NSE. Similarly, launched on July 08 2016 came the Nifty100 LV 30 consisting 30 of the top 100 least volatile stocks. Along with it NSE also launched the Nifty High Beta 50 index with just the opposite outlook but with the same expectations.  Since these indices have been launched recently, the 5 and the 10 year returns calculated below have been back-tested to get the annualised returns.


A look at the 10-year return of both these indices and comparing them with the benchmark NIFTY 50 will give some pretty disappointing results for high-risk takers. Forget high returns, the Nifty High beta 50 didn’t even give positive returns to its investors while the Nifty LV 50 beat the benchmark with comfortable margins. Both the Nifty100 LV 30 and Nifty LV 50 have had similar returns 

Five year returns tell us the same story with the high beta index still not giving any returns at all. A quick glance at the graph will tell us how similarly both the LV indices move over a long term horizon.

The three-year returns tell us a different story wherein our LV indices haven’t able to beat the index. Some good news for the high beta 50 index but still, returns are in single digits while nifty has given fantastic returns at 20.7%. Notice how similarly the benchmark index and the LV indices move.

For the last year comparison disappointment continues for the high beta index with the most negative returns at 16.5% while the LV indices manage similar returns at around 5.5%. Benchmark still beats every index with double the returns of its nearest competitors.

It is important to note that all the constituents of Nifty100 LV 30 are overlapping with Nifty LV 50 i.e. all 30 companies in the former are a part of the later index which probably explains the similarity of returns between the two indices. NSE hasn’t cared to explain the reason for introducing LV 30 index as there isn’t much of a difference between the two apart from the number of index constituents. The only real difference to note is that the former chooses from a list of top 100 while the latter chooses from a list of 300 stocks with the highest market cap on NSE.

BSE, too, wanted a piece of the pie and launched its own S&P BSE Low Volatility Index on December 03 2015. The index comprised 30 of the least volatile stocks in the S&P BSE LargeMidCap as measured by Standard deviation. There is no high volatility index to compare it with. Keep in mind returns of both these indices are Total Returns (TR) which basically means that dividends, if any, are reinvested in the index as & when distributed by the company.

Calculations for the BSE LV TR index have been back-tested as the index was launched in 2015 and so the returns are hypothetical. The low-risk strategy has worked in our favour providing comfortable margins over and above the benchmark BSE SENSEX.

Looking at the image below aligns with our previous findings of the LV indices at the NSE. Only 5Y and 10Y returns have beaten the benchmark (remember these returns are hypothetical since the index launched in Dec 2015). The LV index hasn’t actually beaten the benchmark since it launched as seen in the 3Y and the 1Y returns. 28 out of the 30 stocks in the index are the same as NSE LV 50 so there are no surprises here.

From the above findings, we observe that the LV strategy hasn’t really worked for short and medium-term returns but rather for the long term (5+ years). Most of the results are hypothetical since none of the LV indices were launched 10 years ago. Thus, it is only to be seen in the years to come whether the indices will hold up to the expectation resulted from success around the world or we’ll see another case of a gap between expectation and reality.

Disclaimer: This is not to be considered financial advice in any manner. Do your research before investing in any of the mentioned assets. Our work is limited to educating the readers regarding the same. I just wanted to check the degree to which the concept of low-risk anomaly works.

Ashish Tekwani
Forerunner- Finvert
(M.Sc. Finance, NMIMS – Mumbai 2018-20)

Connect with Ashish on LinkedIn

2 thoughts on “Low Risk Anomaly: Does it work?

  1. Syed says:

    An truly insightful and well-written piece there, Ashish! Enjoyed reading this piece of analysis, and my intrigue about LV Index’s has indeed increased after reading this. Keeping an eye on both LV index’s and this blog from now on – keep up with the good work!

    Liked by 1 person

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