Choosing the Right Index for Your Factor Fund Investments
Investing in Factor Indices: A New Approach to Portfolio Performance
Factor investing, a strategy that chooses investments based on specific criteria known to impact portfolio performance, is gaining traction among investors in India. This approach infuses certain factors into the index construction, altering the orientation of traditional indices.
One such example is the Nifty100 Low Volatility 30 index, which picks 30 less-volatile stocks from the Nifty 100 basket of large-cap stocks. This index has shown a better average 5-year rolling returns and lower volatility compared to the Nifty 100, delivering better risk-adjusted returns by prioritising less volatile stocks within the top 100 companies [1][3].
Another notable factor index is the Nifty Alpha 50, which selects 50 stocks from the top 300 stocks by market capitalization. This index has demonstrated wide outperformance over the Nifty LargeMidcap 250 index, targeting investors with long-term horizons comfortable with equity market volatility [4].
The Nifty50 Value 20, on the other hand, focuses on value stocks from the Nifty 50. It uses metrics like the price-to-earnings ratio, the price-to-book ratio, dividend yield, and return on capital employed to pick 20 value stocks from the Nifty 50 index, aiming for steady returns with lower valuation risk compared to the parent Nifty 50 [2].
Investors seeking to invest in these factor indices can do so via a platform that offers commission-free investing and features like ETM Ranking and portfolio health check-up. The Nifty100 Low Volatility 30 index fund options include Bandhan Nifty100 Low Volatility 30 Index Fund, HDFC NIFTY100 Low Volatility 30 ETF, ICICI Prudential Nifty 100 Low Volatility 30, Kotak Nifty 100 Low Volatility 30 ETF, Mirae Asset Nifty 100 Low Volatility 30 ETF, and Nippon India ETF Nifty 50 Value 20. For the Nifty Alpha 50, options include Bandhan Nifty Alpha 50 Index Fund and ICICI Prudential Nifty50 Value 20 ETF. For the Nifty50 Value 20, HDFC NIFTY50 Value 20 ETF is an available index fund option.
Notably, when considering risk-adjusted performance, the order of the indices was: Nifty 100 Low Volatility 30, Nifty Alpha Low Volatility 30, Nifty Alpha 50, and Nifty50 Value 20. This suggests that these modified indices are meant to do better than their parent indices in terms of returns, or diversification, or volatility, etc.
In a performance comparison of these factor indices, Nifty Alpha 50, Nifty Alpha Low Volatility 30, Nifty 50 Value 20, and Nifty 100 Low Volatility 30 outperformed their parents, offering investors a new avenue for portfolio optimisation. The Nifty Alpha Low Volatility 30 index, for instance, is a multi-factor index that combines alpha and low volatility, picks stocks from the Nifty 100 and Nifty Midcap 50 indices, and has a mid-cap tint.
In conclusion, factor investing offers a promising approach for investors seeking to enhance their portfolio performance. By choosing investments based on specific criteria, investors can potentially achieve better risk-adjusted returns, higher long-term capital appreciation, or lower volatility, depending on their investment goals and risk tolerance.
References: [1] Nifty100 Low Volatility 30 vs Nifty 100 and Nifty 50 [2] Nifty50 Value 20 [3] Nifty100 Low Volatility 30: A Deep Dive [4] Nifty Alpha 50: A Deep Dive
Investors looking for mutual funds that employ factor investing strategies can consider the Nifty100 Low Volatility 30 index fund or the Nifty50 Value 20 ETF, both of which aim to provide better risk-adjusted returns by focusing on less volatile stocks and value stocks, respectively. Finance-savvy individuals interested in leveraging factor indices for portfolio optimization might also find the Nifty Alpha 50 or the Nifty Alpha Low Volatility 30 index attractive, which have demonstrated strong performance over their parent indices.
