At its core, factor investing focuses on specific characteristics, or “factors,” of stocks that have been shown to deliver superior returns than most diversified portfolios achieve. While it is based on rigorous academic research, it is not just about chasing trends. Ajay, who has been riding the momentum factor for the past two years and happily counting his profits, may disagree. But there is a method to this madness.
Read this | Indian investors are discovering the power of factor investing
Although it may seem like something new, factor investing has been around for a long time. What has changed is the rise of financial products, such as factor-based indexes and mutual funds, which explicitly track specific factors.
Historically, fund managers optimised different factors at different points in the market cycle. Today, with an increasing emphasis on discipline and commitment to style, investors are demanding products that fit a particular style, allowing them to better manage exposure across cycles.
In India, certain factors are more popular and we will discuss some of them.
Value investing It’s probably the best-known, championed by legends like Warren Buffett and Benjamin Graham. Imagine your frugal uncle who always finds the best deals, whether on groceries or vacations. That’s value investing: buying stocks for less than their intrinsic value. Value investors focus on metrics like price-to-earnings ratio and price-to-book ratio.
Value stocks offer two main advantages: first, they tend to rise, as their price reflects their true value. Second, they offer a margin of safety during recessions, as they are often undervalued.
However, value investing is not always in vogue. During a growth sector boom, value stocks may seem like a thing of the past, but when the euphoria fades, value stocks often hold strong.
Then I gave him the nickname boost factor The “hot wheels” factor. Momentum-based investing is about riding the wave of rising stocks; its mantra is: “buy high, sell higher.” As the name suggests, momentum-based investing involves buying stocks with strong price trends in the hope that they will continue to rise. It is an exciting approach that has benefited many in India, especially in recent years when trends have largely been upward.
But, like a gambler on a lucky streak, momentum can turn against you. When markets reverse, those who benefit from momentum may find themselves saying, “Easy come, easy go.”
He quality factor is a favourite among seasoned investors who take a long-term view. These are companies with solid fundamentals – stable earnings, low debt and strong balance sheets. Think of them as the trusted CPA that grows your wealth slowly but surely, without drama. Often ranked among India’s top 100 by market capitalisation, these companies offer stability rather than excitement.
Quality stocks tend to shine during market downturns, providing a safe harbor when other investments falter.
And this | Mint Explainer: What are factor funds and how do they work?
Sometimes it’s just smarter to dip your feet in the pool while sipping your favorite drink. low volatility factor is for investors who want to minimize risk and generate returns that are slightly higher than fixed income. Imagine your neighbor who is content with a comfortable life and makes smart investments enough to stay ahead of inflation. These stocks reduce volatility, offering a smoother ride in turbulent markets.
While low-volatility stocks don’t outperform in a bull market, they do offer comfort during downturns.
So, is factor investing your cup of coffee? Tea? Of course. In fact, it is for all investors.
Factors are the foundation of any portfolio, and the beauty of this strategy is that you don’t have to stick to just one. You can combine them. multiple factors depending on your goals and risk tolerance.
Read also | The eternal debate in factor investing: quality versus value
Think of it like an expressive painting: different hues and shades coming together to create a masterpiece. By combining value, momentum and quality, you can optimize your portfolio over cycles for superior risk-adjusted returns. There are also multi-factor indexes and mutual funds that do the heavy lifting, providing a simpler option for investors who prefer not to manage their own allocations.
Nirav Karkera is Head of Research at Fisdom, a wealth technology startup.
Disclaimer:
The information contained in this post is for general information purposes only. We make no representations or warranties of any kind, express or implied, about the completeness, accuracy, reliability, suitability or availability with respect to the website or the information, products, services, or related graphics contained on the post for any purpose.
We respect the intellectual property rights of content creators. If you are the owner of any material featured on our website and have concerns about its use, please contact us. We are committed to addressing any copyright issues promptly and will remove any material within 2 days of receiving a request from the rightful owner.