New Era in Mutual Fund Strategies : The domestic mutual fund (MF) industry is experiencing a notable shift towards factor-based investing, which merges the benefits of both active and passive (New Era in Mutual Fund Strategies) investment strategies.
A New Era in Mutual Fund Strategies
Currently, at least three fund houses are actively managing funds using factor-based models, with several others exploring this approach through quant and active-momentum funds. Factor-based investing involves the use of specific investment factors—such as momentum, company size, value, and market volatility—to build portfolios. These strategies can be applied in both active and passive funds, with active variants typically utilizing multiple factors to adjust to changing market conditions. On the active side, these funds are often termed smart-beta funds. This approach is also referred to as rule-based or “quantamental” investing, combining quantitative analysis with fundamental research.
A key distinction between active and passive funds lies in stock selection and portfolio weighting. In active funds, the fund manager usually makes the final decisions, whereas factor-based passive funds follow a predefined formula, such as “low volatility,” “dividend yield,” or “momentum.” For example, Edelweiss MF applies this strategy to the equity segments of four active funds, including its balanced-advantage fund, aggressive-hybrid fund, large-cap fund, and the newly launched business-cycle fund, managing approximately ₹16,800 crores in these schemes.
NJ Mutual Fund has utilized factor-based strategies for all its equity and hybrid funds since its inception in 2021. Similarly, Shriram MF adopted a fully factor-based investment approach in September 2023, aligning itself with NJ Mutual Fund. Fund houses that have embraced factor-based investing for their active funds highlight the comparative advantages over traditional stock-picking methods, which primarily rely on fundamental analysis.
“Factor investing addresses various investment challenges, making it particularly suitable in certain funds where it outperforms traditional fundamental investing,” said Radhika Gupta, Managing Director and CEO of Edelweiss MF. She cited their Business Cycle Fund as an example, where the momentum factor aids in quicker sector rotation compared to conventional top-down approaches.
Deepak Ramaraju, Senior Fund Manager at Shriram Mutual Fund, emphasized the efficiency of the “quantamental” approach, noting that it enhances process orientation, speed, and long-term sustainability through data-driven decisions rather than subjective judgments. Shriram MF has seen positive results in its first year, with several funds improving their performance rankings.
According to industry executives, factor-based investing (New Era in Mutual Fund Strategies) is also cost-effective. “These strategies are highly cost-efficient for asset management companies, enabling the management of more assets with fewer resources,” Gupta added, noting that a five-person team at Edelweiss MF manages approximately ₹235,000 crores in assets.
