However, upon reviewing their performance, he found that their returns vary significantly from year to year. While the alpha index outperformed in 2024, value led in 2023 and 2022. With so much variation in performance, how should retail investors like Singh choose a factor index fund or exchange-traded fund?
A market cap-based index selects and assigns weights to stocks based on market cap, favouring larger companies. In contrast, factor-based indices select and give weights to stocks based on specific characteristics, like momentum, value, quality, and so on.
Ability to outperform
Market cap-based funds mirror index returns. Factor funds have the potential to outperform broader market indices. They also have lower expense ratios than active funds.
"These funds do not carry fund manager risk," says Deepesh Raghaw, a Securities and Exchange Board of India (Sebi)-registered investment adviser (RIA). The risk of poor fund manager decisions or change of manager does not affect them.
Spells of underperformance
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