A Quick Take on Factor-Based Investing

Factor investing is gaining ground in the Indian investment spectrum, albeit slowly and steadily.

Factor-based investing is a strategy for choosing equities or other asset classes based on attributes associated with higher returns, such as macroeconomic indicators, a company’s size, or industry. It is also referred to as smart beta or strategic beta.

Generally, there are two main types of factors: macroeconomic and style. Macroeconomic factors: These include the general risks affecting asset classes such as economic growth, inflation rate, emerging markets, real rates, credit and liquidity, to list a few.

Style factors: These are risk factors specific to the asset class and include volatility, momentum and value. A few of the primary style-based factors generally considered include the quality of the company, value, low volatility, momentum, dividend yield, and company size, among others.

Investors and asset fund managers use active and passive investing strategies to pick stocks for better returns.

While active investing relates to actively choosing the stocks in the mutual fund based on research and analysis, passive investing, involves parking money in index funds with the exact composition of a benchmark index.

Factor investing is more objective and evidence-based. The past performance of an asset class is thoroughly analysed concerning the selected factors.

This way, an investor can look forward to improving portfolio outcomes, reducing volatility and enhancing diversification, which is essential for long-term wealth creation.

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