Smart beta funds, funds that have a weighting methodology that is different from, the Nifty 50 or the Sensex which are weighted on a market capitalization basis.

In the this video, we shall get a detailed look into this growing category of funds with a lot of data and studies that can help us all sides of the argument

Topics Covered:
00:00 Introduction
00:57 What is a factor?
03:37 Smart beta funds in india
04:56 Return & Risk
11:23 Merits and concerns
13:30 Should you invest in Smart beta funds?

👉What is a Factor?
A factor is a broad characteristic that often explains a stock’s return or its inclusion in a particular basket.

For example - market capitalization or size of the company is a popular factor and forms the basis for the creation of the Nifty 50, Sensex, Midcap 150, Smallcap 250, and other indices. Similarly, there are many other factors like value, momentum, quality, low risk etc. that can be used in isolation or as a combination to create some really unique basket of stocks .. an approach that is also known as factor investing.

Every analyst, every fund house would have a different model to define what is momentum, what is quality, and what is value. In quite the same way, a particular company need not be labeled under just one factor

A lot of popular & well-run companies, they can be tagged under two or more factors at the same point in time. In fact, a lot like how a company can fit within two or more factors many of these smart beta investing models use a combination of factors.

👉 Merits
1. It is a relatively transparent approach to investing and a lot easier to understand when compared to the active style of investing
2. It is a rules-based methodology that significantly reduces emotions and subjectivity, which would otherwise have eaten into investor returns.
3. the risk management where a combination of the right factors can help with diversification and in reducing portfolio volatility
4. Smart beta funds tend to have an expense ratio that is a lot lower than an actively managed fund

👉 Concerns:
1. These strategies have not been properly tested through a persistent bear market
2. While back-testing often shows impressive results .. the actual results may not always follow the same pattern

👉 Should You Invest in Smat-Beta Funds?
In our opinion, factor strategies can play a progressive role in an investor’s portfolio .. and why not?

1. Smart beta funds are a smarter alternative to market capped index funds
2. They are cheaper than actively managed funds
3. They promise returns in excess of the benchmark
4. They have diversification benefits which can temper down a portfolio’s risk
5. These quant models are evolving and will continue to get better over time

Actually, this last point is the key and if done well, we think smart beta funds will get a lot more attention, and investments. We really won’t be surprised if smart-beta funds or these strategies take up anywhere from 15 to 25% of an investor’s portfolio in a few years from now.

But having said this, it will still be important to keep track of these funds and that’s because
1. The markets, the sectors, and the companies within these sectors are constantly changing
2. There is higher industry participation in this area with mutual funds, PMS companies, high-frequency traders, fintech all lining up newer offerings in this space
3. With more computing power we can and should expect 100s of new factors to emerge in the future.

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