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Beyond Market Caps: Unveiling Factor Investing with Mutual Funds in India

16 May 2024 - Tushar
Reading time about 7 minutes

Traditionally, investors have focused on diversification by building portfolios with a mix of large, mid, and small-cap stocks. While this approach offers stability, factor investing presents a compelling alternative strategy for potentially boosting returns and managing risk.

Factor Investing with Mutual Funds

What is Factor Investing?

Factor investing goes beyond just company size. It involves identifying and capitalizing on specific characteristics, or factors, that have historically driven equity returns. These factors can include:

  • Value: Investing in stocks that appear undervalued based on traditional metrics like price-to-book ratio.
  • Momentum: Focusing on stocks that have experienced strong price appreciation in the recent past.
  • Quality: Selecting companies with strong financials, profitability, and low debt levels.
  • Low Volatility: Investing in stocks with historically lower price fluctuations.
  • Size: This factor remains relevant, with some strategies focusing on smaller companies with higher growth potential.

How Can You Access Factor Investing in India?

The good news is that factor investing is becoming increasingly accessible to Indian investors through mutual funds. Here are two primary ways to participate:

  • Index Funds that Track Factor-Based Indices: These funds passively track indices designed to capture specific factors. For example, the Nifty 50 Value 20 Index targets value stocks within the Nifty 50 universe.

  • Actively Managed Factor Funds: Here, fund managers utilize their expertise to identify and invest in stocks that exhibit desired factor characteristics.

Benefits of Factor Investing with Mutual Funds

  • Diversification Beyond Market Cap: Factor investing offers a way to diversify beyond just company size, potentially enhancing risk-adjusted returns.
  • Potential for Enhanced Returns: Some factors, like value, have historically outperformed the broader market over the long term.
  • Reduced Risk: Low volatility factor funds can help manage portfolio volatility, offering a smoother investment journey.
  • Convenience and Professional Management: Mutual funds provide a convenient and professionally managed way to access factor investing strategies.

Funds Based on Value Factor

Scheme Name 1 month Absolute Returns(%) 3 month Absolute Returns(%) 1 year CAGR Returns(%) 3 year CAGR Returns(%) 5 year CAGR Returns(%) 10 year CAGR Returns(%)
Nippon India Nifty 50 Value 20 Index Fund 1.26 0.36 32.02 19.13 - -
ICICI Pru Nifty50 Value 20 Index 1.28 0.37 - - - -
Motilal Oswal S&P BSE Enhanced Value Index Fund 4.69 4.29 91.71 - - -
UTI Nifty 500 Value 50 Index Fund 4.56 7.34 89.42 - - -

Funds Based on Momentum Factor

Scheme Name 1 month Absolute Returns(%) 3 month Absolute Returns(%) 1 year CAGR Returns(%) 3 year CAGR Returns(%) 5 year CAGR Returns(%) 10 year CAGR Returns(%)
Bandhan Nifty 200 Momentum 30 Index Fund 5.49 9.04 64.49 - - -
HDFC NIFTY200 Momentum 30 Index 5.55 - - - - -
ICICI Pru Nifty 200 Momentum 30 Index Fund 5.49 8.99 64.26 - - -
Kotak Nifty 200 Momentum 30 Index Fund 5.52 8.99 - - - -
Motilal Oswal Nifty 200 Momentum 30 Index Fund 5.51 9.03 65.16 - - -
UTI Nifty 200 Momentum 30 Index Fund 5.53 9.1 65.95 - - -
Tata Nifty Midcap 150 Momentum 50 Index Fund 7.14 10.15 69.73 - - -
Edelweiss Nifty Midcap150 Momentum 50 Index Fund 7.18 10.28 70.21 - - -
Samco Active Momentum Fund 1.9 -2.86 - - - -
quant Momentum Fund 2.3 8.25 - - - -

Funds Based on Quality Factor

Scheme Name 1 month Absolute Returns(%) 3 month Absolute Returns(%) 1 year CAGR Returns(%) 3 year CAGR Returns(%) 5 year CAGR Returns(%) 10 year CAGR Returns(%)
DSP Nifty Midcap 150 Quality 50 Index Fund 4.05 4.2 32.83 - - -
UTI Nifty Midcap 150 Quality 50 Index Fund 4.05 4.22 32.72 - - -
Motilal Oswal SP BSE Quality Index Fund 4.25 6.17 46.29 - - -
DSP Nifty Smallcap250 Quality 50 Index 0.53 1.26 - - - -
Edelweiss Nifty 100 Quality 30 Index 2.23 2.65 28.49 - - -

Funds Based on Low Volatility Factor

Scheme Name 1 month Absolute Returns(%) 3 month Absolute Returns(%) 1 year CAGR Returns(%) 3 year CAGR Returns(%) 5 year CAGR Returns(%) 10 year CAGR Returns(%)
Bandhan Nifty100 Low Volatility 30 Index Fund 0.55 -0.35 28.68 - - -
Motilal Oswal S&P BSE Low Volatility Index Fund 0.92 4.71 35.51 - - -
Nippon India Nifty Alpha Low Volatility 30 Index Fund 2.77 4.71 47.63 - - -
UTI S&P BSE Low Volatility Index Fund 0.96 0.48 35.96 - - -

Things to Consider Before Investing

  • Factor Performance Cycles: Different factors tend to outperform at different points in the market cycle. Be prepared for potential underperformance of certain factors in the short term.
  • Higher Expense Ratios: Actively managed factor funds may have slightly higher expense ratios compared to traditional market-cap based funds.
  • Long-Term Investment Horizon: Factor investing strategies are best suited for investors with a long-term investment horizon, as they can smoothen out short-term fluctuations.

Is Factor Investing Right for You?

Factor investing can be a valuable tool for investors seeking to build a more diversified and potentially higher-performing portfolio. However, it’s crucial to understand your risk tolerance and investment goals before incorporating factor-based funds into your strategy. Consulting a financial advisor can help you determine if factor investing aligns with your financial objectives.

By understanding factor investing and how it can be accessed through mutual funds, you can unlock new possibilities for optimizing your investment portfolio in the dynamic Indian market. Remember, thorough research and professional guidance can help you make informed investment decisions and navigate the exciting world of factor investing.

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