Smart beta investing, or factor investing, involves selecting companies based on details like quality, value and momentum and weighing them in a portfolio based on such elements.
"Instead of a small-cap 250 ETF (exchange traded fund), a filtered approach selects 100 high-quality, high-momentum stocks after excluding illiquid companies for the final portfolio," according to Siddharth Srivastava, Fund Manager, Mirae Asset.
Referring to the Mirae Asset Nifty Smallcap 250 Momentum Quality 100 ETF, Srivastava said: "Through this portfolio, we'll be able to capture the upside momentum because we're using momentum as a factor and provide firm steadiness."
The fund, he said, offers:
Exposure to themes that don't have adequate representation in large- and mid-cap sectors.
High growth prospects as companies are in a relatively early stage.
Combining Momentum & Quality
Momentum refers to buying stocks that have performed well recently, assuming that outperformers of the recent past are also going to be outperformers in the future, according to Salonee Sanghvi, Founder, My Wealth Guide.
The benefits of combining momentum and quality, according to her, are:
Momentum helps capture short-term gains.
Quality provides long-term stability.
Combining would provide alpha while still maintaining the downside.
"It works mainly because of investor behaviour and can by itself have a high drawdown, especially in a turbulent market," she said.
Sanghvi said small-cap funds are more volatile and fall more during bear markets. "These funds perform better than large or midcaps during bull markets."
Smart beta exchange-traded funds are forms of passive investment with elements of an active fund management approach for the said smart beta index, according to Amit Bivalkar, founder of Sapient Finserv.
Factors used for the analysis of smart beta ETFs are quality, growth, volatility and equal weight.
"If you want to enter a passive fund, but with an active fund management approach through factor investing, then those kinds of investors should go into smart beta," he said.
Sanghvi had a few words of advice for investors. "One needs to look at ones asset allocation based on their risk-taking ability and duration of holding," she said. "One can look at a 25 to 30% allocation towards such a strategy within the overall small cap allocation."
"The effectiveness of such strategy depends on the effectiveness of the factors in the live market and the ever-changing correlation with the market," Sanghvi said. "These funds are only for knowledgeable investors and not for those who are looking for income or capital preservation."
Query 1: I have a Rs 1.5 lakh SIP in the HDFC Balanced Advantage Fund to balance the volatility in my portfolio. Is it a good balanced-advantage fund?
Additionally, I have other mutual fund holdings along with a Rs 2.24 crore PMS. How can I achieve a minimum Rs 4 crore corpus before I retire in 4 years?
Name: Narayan, age: 47 years
Amit Bivalkar: Over a period of time, all funds typically return, over the same period, absolutely similar returns. It has more to do with the objective of the fund and how it has managed volatility in the recent past. If you look at March 2023, (the) index was at the same level.
So, you should actually gauge the fund. How is it doing in the flat market, in a bear market and in a bull market? And then take a call on that.
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