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‘Indian investors are warming up to factor-based investment strategies’

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With growing awareness around passive investment, Indian investors are now warming up to the idea of ​​factor-based investing strategies than plain-vanilla market beta strategies, said Koel Ghosh, Head – South Asia, S&P Dow Jones Indices, and CEO – Asia Index Pvt. Ltd.

Market beta refers to a standardized return that investors get from investing in market indices such as BSE Sensex 30 and Nifty50. Factor investing refers to an approach targeting stock characteristics that drive the difference in expected returns over the long term. Some of the widely-used investment factors include low volatility, momentum, quality and value.

“Indian market has just started off with multiple factors like value, quality, momentum and low volatility. With this kind of warming up, we could very soon be walking into international space where they are using these factors a lot,” Ghosh said.

“In fact, emerging markets and pan-Asian markets are getting into more factor-based and complicated products, and India is not too far from that,” she added.

She said that while single-factor strategies tend to outperform the market over the long run, blending two or more factors (like low volatility and value) in a portfolio may help deliver smoother excess return across business and market cycles.

Passive investment

The concept of passive investment itself is picking up in India in recent times. The total assets of the passive industry crossed the milestone of ₹6-lakh crore in August, accounting for 15 percent of the ₹39-lakh crore mutual fund industry. Passive investment products include index funds and exchange traded funds (ETFs).

Unlike active mutual funds, passive investment strategy does not require active fund management as these funds simply track an underlying benchmark. Hence, lower management costs. This along with growing awareness, underperformance of active funds are pushing the growth of the passive industry.

Thematic strategy

Ghosh said within index funds, there is enough scope to introduce more thematic strategies including electric vehicles (EVs), AI-related products, Metaverse, Cryptocurrency.

“In Europe, people are participating in the Environmental, Social, and Governance (ESG) because they want to contribute to sustainability as a theme. India will ultimately get there. As a first step, we have moved from plain-vanilla market beta to factor-based investing. If investors are open to new products, then we can move from factors to these themes,” Ghosh added.

She said a lot of education is still needed to be done by index and ETF product providers to create more awareness around passive investing.

Published on

September 22, 2022

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