Factor Investing In Mutual Funds

Outlook Money recently hosted a webinar as part of its “Investment Made Easy” series, spearheaded by ICICI Prudential Asset Management Company. The session, moderated by Versha Jain, featured experts Mr. Chintan Haria, Principal Investment Strategy at ICICI Prudential AMC, and Mr. Pratik Sinha, Director, Deep Wealth a seasoned advisor with extensive experience in asset management.

Understanding Factor Investing

Versha Jain kicked off the session by explaining the concept of factor investing.

Mr. Haria elaborated on the principles of factor investing, stating: “Factor investing is about selecting stocks based on defined factors such as momentum, alpha, low volatility, and value”. He emphasised that it blends passive and active management strategies, thereby offering a diversified approach to mutual fund investments.

The Mechanics of Factor Investing

The session delved into how factor investing is implemented in mutual funds. Mr. Haria highlighted that factor-based funds follow a rule-based methodology where stocks are selected and weighted according to specific factors. He also noted that factor investing strategies are becoming popular in India.

Mr. Sinha provided further insights, explaining, “Mutual funds already have quant-based funds that consider factors to form portfolios on the active side. Passive funds, on the other hand, replicate indices based on defined parameters, offering transparency and predictability to investors.”

Benefits and Risks of Factor Investing

The experts discussed the benefits of factor investing, emphasising its transparency. “The transparency in factor investing allows investors to see exactly where their money is going”, said Mr. Haria. Talking about the risk, he explained, “Different factors work in different market conditions”, and shared that value investing shines when the market is undervalued and recovering, while momentum investing performs well in trending markets.

Practical Tips for Investors

Mr. Sinha recommended a long-term view, stating, “Factors provide premiums over the long term, so it’s crucial not to take a short-term view”.

Mr. Haria added that factor investing is suitable for all types of investors. “Even those new to investing can start with factor-based funds. It’s about understanding the factors and aligning them with your risk profile and investment goals.”

Future Trends in Factor Investing

Looking ahead, the experts identified emerging trends in factor investing. Mr. Sinha predicted more innovative products and customised offerings in the market, allowing investors to build diversified portfolios using factors. He noted, “Portfolio construction using factors can help align investments with risk profiles more accurately.”

Conclusion

The webinar concluded by highlighting that factor investing reduces human bias, and provides diversification. It’s essential for investors to have a long-term perspective and understand the market cycles and risk factors involved.

As the “Investment Made Easy” series continues, Outlook Money remains committed to providing valuable insights and practical advice to help investors navigate the complexities of mutual fund investments. Stay tuned for more episodes to enhance your financial knowledge and investment strategies.

Disclaimer: The information set out above is included for general information purposes only and is not exhaustive and does not constitute investment or tax advice.

Mutual Fund investments are subject to market risks, read all scheme-related documents carefully. Investors are requested to review the prospectus carefully and obtain expert professional advice with regard to specific legal, tax and financial implications of the investment/participation in the scheme