Sharp swings in equity markets often test investors’ patience and risk appetite. While some investors seek to benefit from market volatility, others look for strategies that may help reduce fluctuations in their portfolios without giving up equity exposure altogether.
Low-volatility have emerged as one such option.
These funds invest in stocks that have historically experienced smaller price swings than the broader market. While they remain exposed to equity market risks, they seek to cushion the impact of market downturns by focusing on relatively stable companies.
What are low-volatility mutual funds?
Low-volatility mutual funds are equity funds designed to invest in stocks that have historically shown lower price fluctuations than the broader market. They use statistical measures such as standard deviation and beta coefficients to identify stocks with more consistent price movements over time.
Their portfolios typically favour companies with consistent earnings, strong business models and a track record of navigating market volatility. Although they aim to reduce fluctuations, these funds continue to invest in equities and are therefore subject to market risks.
Recent years have seen heightened market volatility due to geopolitical tensions, inflation, changing monetary policies and economic slowdowns. These conditions have increased investor interest in strategies that seek to limit losses during market declines while providing a relatively smoother investment experience. For investors who prioritise capital preservation over aggressive growth, they may offer a relatively steadier equity investment approach.
How do low-volatility funds work?
Low-volatility funds build portfolios around stocks that have historically exhibited lower volatility than the broader market. They use statistical measures such as standard deviation and beta to identify companies with relatively stable price movements.
The portfolios generally tilt towards companies with consistent earnings, established business models and a history of weathering market fluctuations. Some strategies simply favour relatively stable companies, while others use minimum-variance models to reduce overall portfolio volatility
According to Rhishabh Garg, CEO, FundsIndia.com, low volatility is one of several proven, alongside quality, value, momentum and dividend yield, that have historically delivered strong long-term outcomes despite going through phases of underperformance.
However, this downside protection comes with a trade-off. During strong market rallies, these funds may underperform because they typically avoid high-volatility stocks and have relatively lower exposure to sectors such as technology, small-cap companies and emerging investment themes that often lead bull markets.
Who should invest in low-volatility mutual funds?
Low-volatility mutual funds may suit investors who want equity exposure but are uncomfortable with sharp market swings.
According to Garg, these funds can be suitable for first-time equity investors, retirees drawing down their savings and individuals approaching a financial goal within the next three to five years.
“Low-volatility funds suit investors who want equity exposure but can’t stomach the full swing of the market,” Garg said.
He added that the strategy has also delivered competitive long-term returns. According to FundsIndia’s research, the Nifty 100 Low Volatility 30 Index outperformed the Nifty 50 across all major time periods as of end-May 2026, delivering a CAGR of 13.1% versus 9.5% over three years, 11.7% versus 9.9% over five years, 13.6% versus 12.5% over 10 years, and 14.9% versus 12.1% over 20 years.
Against the Nifty 500, the low-volatility index was marginally behind over the three- and five-year periods but outperformed over the 15- and 20-year horizons.
“The story isn’t about giving up returns for safety. It’s smoother compounding that still keeps pace over the long run,” Garg said.
He added that rather than relying on a single investment factor, investors may benefit from diversifying across different styles such as low volatility, quality, value, momentum and dividend yield, so that is not dependent on any one strategy remaining in favour.
For investors seeking equity exposure without experiencing the full impact of market volatility, low-volatility mutual funds may offer a more measured investment approach. While they may not deliver the highest returns during strong market rallies, they are designed to help investors stay invested through periods of uncertainty by aiming to reduce portfolio fluctuations.