How To Make High Profits With A Low Risk Investment Portfolio?

Low volatility investing requires investors to go for non-glamorous, stable equity than exciting bumps and bounces.

Equity market in India has often been perceived as a game station for the adults. It has been a puzzling yet very alluring field for the veteran as well as the uninitiated investor. Market participants become devotees of the people successful at wealth creation in the stock market and worship them, turn their books into bestsellers and closely try to follow their portfolio and/or investing strategy.

In an efficient market, delivering consistent outperformance by following any investment strategy should be difficult. But, we know that market participants across the world commit systematic behavioural errors. Those who focus on investment process can guard themselves against such errors and earn superior returns without taking higher risks.

In low-risk anomaly, low-risk stocks earn higher returns than high-risk stocks and the market. This is counter-intuitive and contrary to the established theory of risk and return. To get higher returns, you have to take higher risk—you must have heard this before. What if I tell you that it is possible to earn higher returns without taking higher risk and without losing too much sleep? Yes, you heard it right. Higher returns are possible without higher risk.

Paradox of low risk, high return

While a positive risk-return relationship holds across the asset classes, it turns on its head within the asset class. Within equity as an asset class, low-risk stocks earn higher returns compared to high-risk stocks. This relationship prevails irrespective of how risk is measured. Low-risk stocks outperform in falling and range-bound markets and underperform in rapidly rising markets. They fall less during the falling or range-bound market and hence bounce back faster. This is winning by losing less. This win is not very visible at a point of time, but it creates more wealth over a market cycle.