Factor investment a smart way to investment: Factor Investing in Mutual Fund is a new and discipline investment strategy, which is different from traditional investment methods. It selects stocks that contain certain features or “factors”, which are historically known for giving better returns. This strategy is not only dependent on market cap weed investment, but also identifies better opportunities by analyzing different factors. This not only provides more returns to investors, but also helps to control the risk. This is why factor investing is gradually becoming popular and is considered an effective option for portfolio management.
What is a factor investment?
Factor Investing is an investment strategy in which shares or securities are selected, which is likely to give good returns. Its purpose is to reduce the risk, which is often hidden in the portfolio of the same shares. Investors adopting this strategy believe that this helps them to make better and sensible investment decisions.
Two types of factor are usually important in factor investment:
1. Macroiconomic Factor: These factor reflect large risks in different asset classes. These include factor like inflation rate, GDP growth and unemployment rate.
2. Style Factor: These factor helps explain returns and risk inside an asset class. This includes growth and value stocks, the company’s market size (MCAP) and the industry sector.
How is Portfolia in Factor Investing?
The factor identifies the common causes affecting the performance of the investing stocks and produces portfolio based on these characteristics. Talking about some common factors affecting the performance of a stock, it can include Momentum, Quality, Value, Growth and Low Volatibility.
Momentum: The shares whose recent price trends are strong, they perform well.
Quality: Companies whose income is stable, the balance sheet is strong and the debt is low.
Value: Stocks that trade lower valuations ratio, such as price-to-earning (p/e) and price-to-book (p/b).
Growth: Companies that continuously increase revenue and profits.
Low Volativity: Shares that reduce prices in prices, causing risk to decrease.
How is the performance of Factor Investing?
According to the report by Edelweiss Mutual Fund, there has been a strong track record of factor investing worldwide. According to data up to March 2024, the total asset of Smart Beta ETFs has reached $ 1.5 lakh crore. Factor Strategy, such as Momentum and Value, is consistently performing better than traditional market cap based ETFs.
Increased scope of factor investment in India
According to the report, factor investing is becoming increasingly popular in India. Smart Beta ETF/Index Funds Asset Under Management (AUM) has increased by about 3 times a year. It increased from Rs 6,863 crore in December 2023 to Rs 37,749 crore in December 2024. Investors are also adopting factor-based funds with traditional investment style, making it a strong investment option.
Benefits of factor investment
Discipline Investment Strategy: This reduces the effects of emotions in investment decisions and shows an investment a disciplined way.
Customized Investment: It prepares portfolio according to investors’ goals and risk -taking ability.
Good returns: Traditional market-cap-based investment attempts to give better returns than strategy.
Risk reduction: This reduces the fluctuations of the portfolio and keeps it strong at the time of the market fall.
Factor Investing is a data-based and systematic method that helps create wealth. It is not only effective in increasing returns but also effectively manages the risk, making it an important strategy for investors in unstable markets.