Indians have started lapping up a relatively lesser-known type of investment option—factor funds.
Inflows into such schemes have surged as awareness grows about this style of stock selection that tracks attributes like size, value, momentum, growth, low volatility, and quality to offer better returns.
The assets under management for the category jumped from ₹7,050 crore to ₹26,363 crore in the year through July, reflecting a significant increase in investor interest, said Feroze Azeez, deputy chief executive officer at Anand Rathi Wealth. “The best-performing fund in this category delivered around 80%, while the worst-performing fund achieved about 25%.”
“The rise in inflows and the launch of new funds—49 in total, with 9 introduced this year—indicates that this investment style has picked up considerable traction,” said Azeez.
Factor-based investing has been globally recognized since the 1960s as stock-pickers looked for traits that could deliver better risk-adjusted returns than traditional strategies.
Simple beginnings
In India, it began with simple size factors like Sensex, Nifty, and mid-cap, and gradually transitioned to single-factor funds focused on quality, value, alpha, and momentum, said Bhavesh Jain, co-head-factor investing, Edelweiss Mutual Fund.
Simply put, strategic indices on the NSE, such as Nifty50 Value 20, Nifty100 Low Volatility 30, Nifty200 Quality 30, Nifty Alpha 50, and Nifty200 Momentum 30, are all based on specific factors.
These indices have returned 15-38% gains so far in 2024 compared to the benchmark Nifty 50’s 12% rise.
Now, there are multi-factor funds such as alpha-low vol and size-quality-momentum in the passive segment, while asset managers are launching actively managed factor-based schemes, said Jain.
According to Nirav Karkera, head of research at Fisdom, while this investing approach has always been a part of Indian investment styles, it was not utilised as a distinct category.
Reliant on factors
The performance of such investing style relies on the factor the fund focuses on.
“For a couple of quarters before the general election, momentum was performing well. But as bouts of volatility increased alongside valuation concerns, low volatility and quality have started taking centre-stage in terms of risk-adjusted performance as well as investor interest,” Karkera said. Essentially, he said, factor-based funds are cyclical in nature.
Even during bear phases, when it is not easy to identify winners, the factor strategy can pick stocks with better alpha—faring better than a pre-determined benchmark—using alpha computing based on one-year trailing price, said Shaily Gang, head-products, Tata Asset Management.
According to Gang, both alpha and momentum tend to outperform in a bull phase. While alpha typically performs well in a steadily rising market, momentum tends to excel in an upward-trending market that is choppy or volatile, she said. “It is best to have both factors in an investor’s portfolio.”