Unlocking the Power of Factor-Based Investing: A Data-Backed Approach for Consistent Returns in India

In today’s fast-evolving investment world, factor-based investing has emerged as a highly effective strategy, particularly in the Indian markets. Unlike traditional stock selection, this method identifies and captures performance premiums by focusing on specific factors—such as value, momentum, quality, and low volatility—proven to outperform in the long term. This approach isn’t speculative; it’s backed by years of data, and thanks to indices like those offered by NSE India, we can now measure and track these factors within Indian markets.

What is Factor-Based Investing?

Factor-based investing involves building a portfolio around certain attributes that are historically linked with higher returns. The most common factors include:

1. Value: Investing in stocks that trade below their intrinsic value. The Nifty 500 Value 50 Index is a great example, which captures the performance of the 50 most undervalued stocks within the Nifty 500 universe. Companies in this index typically have low price-to-earnings (P/E) and price-to-book (P/B) ratios, making them attractive to value investors.

2. Momentum: Riding the trend. Stocks that have shown strong price momentum continue to perform. The Nifty 200 Momentum 30 Index tracks 30 high-momentum stocks within the Nifty 200 universe, delivering robust returns during trending markets.

3. Quality: Companies with strong financials and stable earnings are considered high-quality. The Nifty 100 Quality 30 Index focuses on financially stable firms and has historically delivered superior risk-adjusted returns.

4. Low Volatility: Aiming for stability, the Nifty Low Volatility 50 Index includes stocks with the least price volatility, making them a safe bet during turbulent times.

5. Alpha: Stocks that outperform the market due to superior fundamentals. The Nifty Alpha 50 Index identifies high-alpha stocks that generate excess returns over the benchmark, combining elements of outperformance with calculated risk.

Performance Backed by Data from Indian Markets

The Nifty 500 Value 50 Index has been a standout performer, offering a consistent value premium over the broader market. For instance, between 2015-2023, the index outperformed the Nifty 50 Index by approximately 4-5% annually during periods of market correction, proving that undervalued stocks can rebound strongly during recovery phases.

Similarly, the Nifty 200 Momentum 30 Index has consistently outperformed its parent index by 3-4% annually, showcasing that following the trend in the Indian market pays off.

In times of heightened volatility, the Nifty Low Volatility 50 Index has provided downside protection with up to 20% less risk compared to broader indices, making it ideal for risk-averse investors.

Why Factor Diversification Matters

One of the key strengths of factor-based investing is diversification across different market conditions. Factors often perform differently depending on the economic cycle:

- During the 2020 pandemic-led market crash, low volatility and quality stocks provided downside protection as these companies had strong fundamentals.

- As the market recovered post-pandemic, momentum and value stocks saw significant upside gains.

By blending multiple factors—such as value, momentum, and low volatility—you can create a more resilient portfolio that adapts to shifting market dynamics.

Accessibility to Indian Investors

Thanks to factor-based indices from NSE India, this strategy isn’t limited to institutional investors. With ETFs like ICICI Prudential Nifty Low Volatility 50 ETF and Axis Nifty 500 Value 50 ETF, retail investors can access factor-based strategies at low costs. For seasoned investors with higher capital to invest, we can leverage experts on the "Smallcase" platform and select managers who design portfolios specifically around factor-based strategies.

Looking Ahead: Factor Investing in India’s Growing Markets

As India’s economy continues to grow, factor-based strategies will remain pivotal in achieving strong, risk-adjusted returns. Dynamic factor allocation—adjusting factor exposure based on market conditions—will be key to maximizing returns while managing risks.

Conclusion: A Smarter Way to Invest

Factor-based investing has proven its ability to outperform traditional methods in Indian markets. With decades of research and real-world data, factors like value, momentum, and low volatility have demonstrated superior returns while mitigating risk. For investors looking to optimize their portfolios, factor-based investing offers a reliable, data-driven approach.

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Leveraging these factors ensures you are not just chasing trends but building a robust, long-term strategy backed by proven market data.

Reference :

• https://www.nseindia.com/products-services/indices-strategy
• https://www.youtube.com/watch?v=LZGYwwOqJRU&t=282s