The Mutual Fund Show: What Is Factor Investing?
Globally, there are four important factor funds—momentum, value, quality and low volatility.
Factor investing funds target specific traits like value or momentum to achieve returns by exploiting market inefficiencies.
Factor investing works in different market conditions, according to Pratik Oswal, head of passive funds at Motilal Oswal Asset Management Company Ltd.
The fund is the second-biggest fund category in the world. "We see a huge opportunity for this segment in India in the next 4-5 years," he said.
He lists the key highlights for factor investing:
Combines active and passive investing.
It is rules-based and transparent.
There are a lot of factor funds today that offer different strategies in the form of a simple index fund or an ETF, he said.
Globally, there are four important factor funds—momentum, value, quality and low volatility.
"Lack of awareness is the big reason why factor funds have not really gained ground in India. There are not many products in the factor funds in India. Plus, customers like to invest in a product that has a track record of at least 3-5 years," Oswal said, while explaining why factor funds are not that popular in India.
While value factor works really well in a recovery market, after a crash, momentum strategy does well in bull markets, he explained.
"Low volatility is the largest bought factor fund globally as essentially the stable companies come under this fund. It works in both bull and bear conditions," he said.
Quality factor looks at the Nifty 200 and selects the 30 companies that are the best quality. The fund does extremely well in bear markets, said Oswal.