Paramesh: Hey Niranjan, I read in the paper recently that BSE has launched some new indices, something called “factor indices”? What are they? Sounds too technical.
Niranjan: Ah, yes! BSE launched four new smart beta indices based on factors: value, momentum, quality, and low volatility. These are part of something called factor investing. Mutual funds are launching schemes that track these indices.
Paramesh: Never heard of it. I thought investing just meant picking good stocks or investing in mutual funds like the Nifty 50 index fund.
Niranjan: Yes da. But factor investing is a slightly advanced method. Instead of blindly following market-cap-based indices like Nifty 50 or Sensex, factor investing builds a portfolio based on specific “factors” that have historically delivered better returns.
Paramesh: So these “factors” are like special powers of stocks?
Niranjan: Haha, in a way, yes! Factors are characteristics: being undervalued, showing strong momentum, having high quality, or showing low volatility. These help in picking stocks expected to perform well in different market conditions.
Paramesh: Can you explain one or two in simple words?
Niranjan: Sure. Take the value factor. It picks stocks that are cheap compared to their actual worth; like those with low price-to-earnings or price-to-book ratios. It tends to do well during economic recoveries or when interest rates are rising. But it may underperform in fast-moving bull markets.
Then there’s momentum. It chooses stocks that have been rising recently, expecting the trend to continue. It performs well in strong rallies but can fall hard when the market turns.
Paramesh: Sounds interesting! But, what if I don’t like taking too much risk?
Niranjan: Then look at low volatility and quality factors. Low volatility includes stocks that don’t fluctuate much; very helpful during market crashes. Quality focuses on companies with strong profits, low debt, and stable fundamentals. It gives steady returns and cushions downside risk.
Paramesh: So these are like ready-made portfolios?
Niranjan: Exactly! Just like Nifty 50 index funds, these factor indices can be tracked through mutual funds and ETFs. Fund houses like Axis, Motilal Oswal, Nippon India, and ICICI Prudential offer smart beta funds based on these strategies. Earlier, most tracked NSE indices, but now with BSE joining in, you’ve got more variety.
Paramesh: But do these really perform better than regular index funds?
Niranjan: In many cases, yes. For example, in 2024, momentum-based smart beta funds gave returns of 35 per cent, while the Nifty 50 returned only 13 per cent. But remember, single-factor strategies can underperform for long periods. The value factor, for instance, started performing well only in 2022 after a dull phase from 2017 to 2021.
Paramesh: So, I can jump from one factor to another based on results, right?
Niranjan: No, no! Frequently switching between factors can ruin your returns. You need to stay invested in a chosen factor for at least 7–10 years to see the full benefit.
Paramesh: Alright, last question: how do I choose the right one?
Niranjan: It depends on your risk profile. If you’re conservative, start with low volatility or quality. If you’re okay with moderate risk, try value or even equal weight. And if you’re aggressive, go for momentum or alpha; but be prepared for sharp ups and downs. Multi-factor funds are also available.
Paramesh: Thanks Niranjan! You made it so simple. I’ll check out these options and may be start with a low volatility fund.
Niranjan: Good idea. Start slow, stay disciplined and always think long-term!
Published on June 14, 2025
