A Deep Dive Into Factor Investing

Over the last one year the Indian stock markets have displayed strength and resilience by outperforming all the major global equity markets.

Concurrently, factor investing has been thrust into the limelight and is gaining traction among investors. In this special feature, Armaan Madhani helps us delve deep to understand factor investing and explore its history, pros, cons and historical performance in the Indian as well as global capital markets

BlackRock Inc., an American multinational investment company, is a leader in factor investing that launched the first-factor fund in 1971 and has been driving innovation in the category for over 40 years. As per BlackRock, the concept of factor investing is an investment strategy used to select assets based on a specific set of attributes and factors. In simple words, this strategy can also be referred to as a combination of active and passive investment strategies. Investors who want to follow factor investing identify the characteristics they look for in security.

These characteristics are what investors believe in and will indicate the security's success in providing better returns, diversification and reduced risk. There are two main types of factors that have historically been associated with an asset's returns - macroeconomic and style factors. These factors are drivers of returns that impact the returns of assets across different asset classes. Style factors are factors that explain risks and returns within each asset class, whereas macroeconomic factors are factors that explain risks across multiple asset classes. Some common macroeconomic factors include the rate of inflation, GDP growth, political risk, sovereign risk and the unemployment rate.