Smart-beta funds: A guide to balancing your portfolio

Tailor-made strategies will help you navigate the market cycles better and optimize returns

- Jash Kriplani

Smart-beta funds track alternative indices that are variations of regular market indices such as the Nifty 50, Nifty 200, or the Nifty 500. These indices are designed to follow specific investment factors, including value, momentum, low volatility, and quality. Instead of regular indices, wherein the highest weight is given to the stock with the largest market capitalization, the smart-beta index gives the highest weight to the stock that scores the highest on a specific factor.

At the Mint Money Festival 2024, which took place on 22 November in Mumbai, Siddharth Srivastava, head Exchange-Traded Fund (ETF)-product and fund manager, Mirae Asset Mutual Fund, explained how smart-beta funds work and can help investors across the different phases of the stock market. For example, he explained how during bull markets, a smart-beta fund with a momentum focus might outperform by capitalizing on trending stocks, while during downturns, a fund targeting low-volatility stocks can help limit losses by holding steadier companies.

Factors and cycles Markets go through different phases, and each factor tends to respond differently to different market phases. "Before the global financial crisis, the best-performing factors were alpha and value. During the global financial crisis, the best-performing factor was low volatility. In 2014, alpha did well. Then, around the time of covid-19 outbreak, the best factor was quality. During market recovery, value was the top-performing factor," Srivastava said.