Want more MF options? Think about Factor Investing

Remember CAPM, or the Capital Asset Pricing Model — the bedrock of the science of stock returns that you were taught at B-School? Well, the world has since moved on, and a significant number of ‘factors’ besides just systematic risk are proven to be at play in shaping the ‘yield curve’ on your corpus.Welcome to the world of ‘factor investing’.Factors are definitional characteristics — value, quality, growth or momentum — that are sort of common to a set of stocks, helping explain their potential returns and risks. As factor funds are gaining traction, experts believe HNIs and family offices could allocate at least 5% of their equity portfolios to factor funds.“Most of the large-cap actively-managed funds are finding it difficult to outperform the benchmark, while a passive fund will not outperform due to the expense, making investors look for smart beta strategies which combine active and passive fund strategies,” said Prashant Joshi, co-founder, Fintrust Advisors.As markets trade at elevated valuations and uncertainty on corporate earnings continue to linger, financial planners believe investors could use smart beta strategies.“At this moment, when the markets are at a lifetime high and the uncertainty still lingering around due to Covid, one can go for factors like low volatility and quality in the short to medium term,” said Joshi. His picks are SBI ETF Quality and ICICI Prudential Nifty Low Vol 30 ETF, respectively.“Data over the years have shown that smart beta indices through its rule-based approach attempt to provide better risk-adjusted returns than the traditional options such as an index fund,” said Chintan Haria, head (product), ICICI Prudential MF.Financial planners point out that Nifty Alpha 50 consistently performed well across various upcycles, followed by Nifty 200 Momentum 30. During downcycles, the Nifty Low Volatility 50 and Nifty 200 Quality 30 performed well. While these funds have expense ratios higher than passive funds, they are much lower than those at actively managed funds.Some of the common single factors used to build these indices are quality, value, alpha and low volatility. A combination of two or more factors results in multi factors like quality-low volatility and alpha-quality-low volatility.Some of the common factor funds are the likes of DSP Equal Weight Nifty 50, ICICI Pru Nifty Low Vol 30 ETF and FOF, Kotak NV 20 ETF, Nippon India ETF NV20, Principal Nifty 100 Equal Weight Fund. There have been a number of NFOs in the recent past which include Aditya Birla SL Equal Weight Nifty 50, UTI Nifty 200 Momentum 30 and ICICI Prudential Nifty Low Vol 30 FOF. 83186563

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