Factor investing in India is a strategic approach to enhance portfolio returns by targeting specific drivers of performance, such as value, momentum, or quality. factor-based funds are gaining momentum. How does it work, and should you dive in? Let’s break it down.
What Is Factor Investing?
Factor investing is a strategy that involves targeting specific characteristics, or “factors,” believed to drive higher returns. Common factors include:
- Value: Investing in undervalued stocks with strong fundamentals, like PSU banks.
- Momentum: Focusing on stocks with upward price trends, e.g., tech firms.
- Quality: Selecting companies with robust financial health,like HUL.
- Low Volatility: Targeting stocks with stable price movements,like FMCG.
By concentrating on these factors, investors aim to achieve better risk-adjusted returns compared to traditional market-cap-weighted strategies.
Benefits: Enhanced Returns and Diversification
- Enhanced Returns: Factor-based strategies have historically outperformed traditional market indices.
- Diversification: Incorporating multiple factors can also reduce portfolio risk.
- Systematic Approach: A rules-based methodology minimizes emotional decision-making.
Risks and Taxation:
Factor investing in India isn’t risk-free. Single-factor funds can also underperform—value lagged in 2024’s growth rally, per IBEF. Momentum faces sharp reversals; a 5% Nifty dip in 2024 hit momentum funds by 8%, per Value Research. High turnover in momentum strategies also raises transaction costs. Taxation follows equity rules: 20% short-term gains (under 1 year), 12.5% long-term (over ₹1.25 lakh), per SEBI. Moreover, factor funds require 5-7 year horizons to smooth cyclicality.
Considerations Before Investing:
- Market Cycles: Different factors perform better in varying market conditions.
- Costs: Factor-based funds may also have higher expense ratios.
- Research: Investors should conduct thorough research or consult financial advisors before investing.
Conclusion:
Factor investing offers a disciplined, high-potential approach to wealth creation, balancing risk and reward. By understanding and implementing the factors, investors can also potentially achieve superior risk-adjusted returns. Hence, it’s vital to consider individual financial goals, risk tolerance, and market conditions when adopting this strategy. Ready to optimize your portfolio? Explore more fund insights now!
– Ketaki Dandekar (Team Arthology)
Read more about Factor Investing here – https://www.investopedia.com/factor.asp