MATTER OF FACTOR

FACTOR FUNDS CAN COMPLEMENT MARKET-CAP-WEIGHTED INVESTMENTS BY TARGETING SPECIFIC CHARACTERISTICS

- NACHIKET KELKAR

Typically investors look at mutual funds from their size (large-cap or mid-cap or small-cap), sector and theme. Of late, however, a new kind of investing style is gaining traction. Factor-based investing has been growing in developed markets. But, it is now seeing a flurry of activity in India. Many asset management companies have launched factor-based schemes over the past year or so.

Factor-based funds are a type of active funds, but they tilt the portfolios towards certain stock characteristics to achieve specific risk and return objectives. For instance, one scheme may be more focused on quality of the stocks, while another may buy stocks based on their recent momentum. Yet another scheme could be investing in stocks focused on value. There are also schemes that are focused on stocks that have low volatility over a period.

There are several factors or investment styles like value (price-to-earnings ratio or price-to-book ratio), quality (strong fundamentals like profitability, management, earnings growth), low volatility, momentum (strong price movement in recent times), size, and dividend yield (good track record of dividends).