All about factor based investing

Ankit Singhania, Senior VP and Head of Passive Strategies at UTI Mutual Fund, explained the concept of factor investing during his session at Cafemutual Ideas Fest 2025 (CIF25).

Factor investing—also known as smart beta—seeks to combine the benefits of both active and passive investing. It uses indices that are built using specific factors known to influence stock performance. These indices follow a defined and rules-based approach.

Ankit explained that factor-based investing has grown rapidly. While overall passive funds' assets have grown by 38% CAGR and equity passive funds by 34% CAGR, factor-based funds have grown by 101% CAGR over the last four years. AUM in factor-based strategies has increased from Rs. 236 crore to Rs. 24,000 crore in four years. 

There are five main factor-based strategies available in India and globally. These are momentum, low volatility, alpha, quality, and value. 

Momentum: Focuses on stocks that have performed well recently, based on the belief that strong performance will continue in the near future.

Low volatility: Targets stocks with more stable price movements to build a portfolio with lower risk.

Alpha: Selects stocks that have delivered higher risk-adjusted returns in the past, typically measured using Jensen’s Alpha.

Quality: Focuses on financially sound companies with high Return on Equity (ROE), low debt-to-equity ratios, and consistent earnings growth over five years.

Value: Identifies companies trading below their intrinsic value—i.e., those whose market prices are lower than their fundamental worth.

Over a 19-year period (since 2005), factor-based indices have delivered an annual alpha of around 4% to 6% over broad market indices like the Nifty 50 and Nifty 200.

However, performance varies over time. For instance, quality has been the best-performing factor in FY 2025, while value and alpha led in previous years.

Let’s look at how factors have performed since FY2007:

Different factors perform best in different market conditions

Falling markets: Quality and low volatility typically outperform.

Moderately rising markets: Momentum and alpha tend to do well.

Strong bull markets: Value stocks often shine as they get re-rated.

Rolling Returns Analysis

Ankit also highlighted how factors have performed on a rolling five-year basis:

Momentum: Outperformed Nifty 200 in 99% of observations, with an average alpha of 6%.

Low Volatility: Outperformed Nifty 200 96% of the time, delivering an average alpha of 5%.

Quality: Outperformed Nifty 200 87% of the time.

Value: Outperformed Nifty 200 in only 42% of the periods, suggesting that timing is crucial.

Risk Profile

Despite perceptions, factor-based strategies are not necessarily riskier. Over five-year periods:

Momentum, low volatility, and quality showed beta values close to or below 1 indicating volatility in line with or less than the market.

Low volatility and quality had betas closer to 0.7 underscoring their stability.

You can watch the full session here and other insightful sessions on the Cafemutual YouTube channel.

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