Low volatility: hold the 30 calmest stocks in the NIFTY 500

The idea

The “low-volatility anomaly” is one of the best-documented puzzles in finance. Theory says riskier stocks should earn more, yet in many markets the calmest stocks have earned about as much as the market, or more, with much smaller falls. One common explanation: many investors chase exciting stocks and avoid dull ones, leaving the dull ones cheap.

We wanted to know whether a plain version works on Indian stocks when it’s tested honestly: on the stocks that were actually in the NIFTY 500 at each point in time, including the ones that later failed, with costs.

The rules

• Universe: NIFTY 500 stocks, point-in-time: on each date, only stocks in the index on that date. A holding is sold if its stock leaves the index; the cash waits for the next rebalance.
• Volatility: how much a stock’s price moved day to day over the last year (the standard deviation of its daily returns over 252 trading days). Stocks need a year of history.
• Each quarter, on the last trading day of March, June, September and December: hold the 30 stocks with the lowest volatility, in equal weights. Stocks leaving the list are sold, new ones bought, and every holding is reset to an equal share.
• Fills: at the next trading day’s open. Cost: 0.15% per side, on the amount traded.
• No stop-loss, no target, no market timing: always fully invested.

The backtest

Data: NIFTY 500 stocks, 1 January 2014 to 3 July 2026 (12½ years), about 31 new holdings a year.

(Calmar is CAGR divided by the worst peak-to-trough drawdown. The NIFTY 500 figure is the price index; the backtest’s stock prices exclude dividends too, so the comparison is like for like.)

Year by year, against the index:

*2026 to 3 July. It made money in 12 of the 13 calendar years and beat the index in 7.

The pattern is what you’d hope for from a defensive portfolio: ahead in flat or falling years (2015, 2018, 2025), behind in strong rallies (2017, 2021, 2024).

Robustness tests

All on the same engine; the first row is the headline result above.

• Costs barely matter. About 31 new holdings a year, so tripling the cost takes off under 1% a year.
• The return edge faded. 16.1% against 12.3% for the index in 2014–2019, but 14.2% against 14.1% in 2020–2026. The shallower drawdowns held up in both halves.
• No magic numbers. Every setting we tried landed between 14% and 16% a year with a drawdown of about −26% to −28%.
• The start date matters for the edge, not the character. From later starts it beat the index by only 0.1% to 1.6% a year, but the drawdown stayed at −26% against the index’s −38%.
• Not dependent on a few stocks. We measure each holding in percentage terms: its gain as a share of the portfolio when it was bought. On that basis the five biggest contributors, mostly consumer staples held for many years, produced about a fifth of the growth. Without them the return would have been about 11.6%, still clearly profitable.

Risks

• It still falls. −26% in the March 2020 crash: calmer stocks fall less, not never. It is always fully invested.
• It lags in strong rallies. In 2017, 2021 and 2024 it trailed the index by 4% to 8%. Years like that test your patience.
• The return edge may be gone. Since 2020 it has matched the index rather than beaten it.
• Sector tilt. The calmest stocks cluster in a few defensive sectors, especially consumer staples, so the portfolio is less diversified than 30 names suggest.

Pros & cons

Pros

• Simple, fully mechanical quarterly routine.
• Passed all eight checks on survivorship-free data, net of costs.
• About a third smaller worst drawdown than the index, in both halves of the history.
• Robust to the number of stocks, the volatility window, the rebalancing frequency and costs.

Cons

• Little or no return edge since 2020.
• Trails the index in strong bull years.
• Concentrated in a few defensive sectors.

Our verdict

It passed all eight of our checks. Holding the NIFTY 500’s 30 least volatile stocks earned about 15% a year over 12+ years, net of costs, against about 13% for the index, with a worst drawdown of −26% against −38%.

The honest summary is “index-like returns with smaller falls”, not “beats the index”. Most of the extra return came before 2020, and from later start dates the edge was small. The key question is whether you value the smoother ride enough to accept lagging the index in strong rallies.