Factor-based index mutual funds are the latest fad among investors. Mutual fund houses are launching a variety of factor-based funds, also known as smart-beta funds, such as value, momentum, quality, and low-volatility.
These index funds are based on the National Stock Exchange (NSE)’s factor indices. The fund house picks stocks based on these indices and decides the weight of the stocks in the mutual fund. Thus, the fund manager’s assessment of the weight of the stocks is crucial in factor-based funds.
Value Index Funds
These funds are based on the NSE’s Nifty 50 Value 20 Index. The stocks are picked on the basis of their value. The stock is selected on the basis of their fundamentals, such as profit to equity ratio and profit to book ratio. They aim to maximise smart beta of the fund, by investing in diversified stocks, which hold value and have strong fundamentals.
Momentum Index Funds
These stocks are picked from the NSE’s Nifty 200 Momentum index. Momentum-based funds aim to invest in stocks, which have rallied or have shown consistent momentum, based on their six or 12 months’ price returns. The fund manager assigns weightage to the stocks based on this acumen and judgment of the stocks. The list of momentum funds is updated on a half-yearly or yearly basis. The fund also timely exits a stock when that particular stock loses momentum.
Quality Index Funds
These funds pick stocks from indices, such as Nifty 100 Quality 30 and Nifty Midcap 150 Quality 50. The stocks are picked on the basis of their quality as based on a score, which is established by analysing the last five years’ return on equity (ROE), financial leverage (debt/equity ratio), and earnings (EPS) growth variability. Factors, such as profitability, stable earnings, and lower leverage are taken into consideration while picking these stocks. These indices are rebalanced semi-annually.
Low-Volatility Index Funds
The fund house picks stock from the Nifty 100 Low-Volatility 30 index. These mutual funds are funds of funds (FoF) from the NSE’s Nifty 100 Low-Volatility 30 exchanged-traded funds (ETF ). Some fund houses have also launched their low-volatility mutual funds. These FoFs and mutual funds aim to invest in the stocks, which have the lowest volatility. The stocks with the highest standard deviation of the stock returns over the one-year period, is the least volatile stock.
Dividend Yield index Funds
These funds choose a dividend yield-based criteria to filter stocks. They invest in the top stocks which have the highest dividend yield, which is the ratio of dividend paid by a stock to the share price. The stocks are picked based on their dividend yields. Both income distribution capital withdrawal (IDCW) and growth options are available in these mutual funds.
