'Many funds in India will follow factor-based investing in 5-10 years'

Factor investing, a widely recognised strategy in global markets, is now steadily gaining traction in India. Bhavesh Jain, co-head of factor investing at Edelweiss Mutual Fund, anticipates a significant shift in the investment landscape over the next 5-10 years, expecting many traditional funds to transition towards rule-based and factor-driven approaches. In this insightful interview, Jain breaks down the concept of factor investing, discusses how he leverages various factors in his investment strategy and highlights the potential challenges. Additionally, he shares the strategic outlook and exit approach of Edelweiss Recently Listed IPO Fund. Here's the edited excerpt. As the co-head of factor investing at Edelweiss AMC, can you explain what is factor investing and how is it different from traditional strategies? In equity markets, most people are aware of various investment styles, such as growth and value. However, factor investing may come across as a sophisticated investment style primarily focused on numbers. For investors, the main ingredients to make returns are quality, growth, value, momentum or volatility. At Edelweiss Mutual Fund, we refer to these styles as 'factor investing'. Simply put, if you have to choose between two stocks that are similar in every aspect, you should choose the one growing faster. This is because a stock with faster growth is likely to yield higher returns in the future. So, growth is a factor here. Similarly, if two companies are giving similar returns, you will prefer the one with lower volatility. In this case, we take volatility into account. Again, if you're trying to find a multi-bagger between a company with a market cap of Rs 20 lakh crore or Rs 2,000 crore, you would choose the company with a lower market cap. Therefore, size plays a significant role in stock selection. Factor investing is a well-known phenomenon in global markets. In our markets, it has seen great acceptance in the last 3-4 years. But I think in the next 5-10 years, you'll see many funds changing the traditional investment style and moving to more rule-based and factor-based investing. What key factors do you focus on? How do you determine thei