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Factor-based funds had been the market's poster boys over the past four years. Whether it was Momentum, Alpha, Low Volatility or Quality, these funds consistently beat their parent indices, earning fanfare and inflows.
But the recent correction has been a wake-up call.
Factor funds, especially those launched post-2020, just faced their first real-world downturn. And they didn't hold up well.
Despite the promise of smart, data-driven strategies, all the factor funds underperformed their parent indices.
If you check the table below, you'd see that Momentum and Alpha strategies, which dazzled investors in bull markets, were the worst hit. While Low Volatility and Value factors showed relatively better resilience, they still trailed.
How factor indices performed during the recent market downturn
| Factor index | Absolute returns | Parent index returns | Market beta | Current AUM (₹ Cr) |
|---|---|---|---|---|
| Nifty 100 Low Volatility 30 | -10.40% | -9.50% | 0.78 | 5,475 |
| Nifty 50 Equal Weight | -10.20% | -7.90% | 1.04 | 5,464 |
| Nifty 50 Value 20 | -13.10% | -7.90% | 0.92 | 1,596 |
| Nifty 200 Momentum 30 | -23.50% | -9.80% | 1.33 | 10,647 |
| Nifty 200 Quality 30 | -15.30% | -9.80% | 0.86 | 849 |
| Nifty Alpha 50 | -21.90% | -10.50% | 1.57 | 915 |
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For each factor category, we selected a single index -- avoiding multiple-factor overlaps -- and chose the one with the highest AUM to ensure broader investor representation.
Performance measured from September, 2024- April, 2025 Assets as of March, 2025 Market beta calculated on a daily basis of sensitivity of a factor against its parent index |
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What does past performance suggest
While it's clear that all factor indices were hit this time, historical backtested data tells a more nuanced story. The numbers show that their performance varies when there's a market downturn.
When we checked how each of the factor indices performed when the Nifty fell over 15 per cent in the last 15 years, here's what we found:
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Defensive factors like Low Volatility and Quality generally cushioned losses better than the market in earlier corrections.
- Aggressive factors like Momentum and Alpha tend to fall harder than the market.
How factor indices reacted to previous market corrections
| Index | GFC Crisis (2008) | Post GFC Crisis (2011) | Yuan Devaluation (2016) | Covid Pandemic (2020) | RBI Interest rate hike (2022) |
|---|---|---|---|---|---|
| NIFTY 100 | -61.00% | -28.90% | -20.60% | -37.90% | -16.80% |
| NIFTY100 LOW VOLATILITY 30 | -48.00% | -14.20% | -12.00% | -30.40% | -15.30% |
| NIFTY 50 | -59.50% | -27.20% | -21.70% | -38.30% | -16.40% |
| NIFTY50 EQUAL WEIGHT | -57.50% | -29.10% | -24.40% | -37.40% | -17.00% |
| NIFTY50 VALUE 20 | -24.20% | -20.00% | -29.40% | -16.30% | -1,630.00% |
| NIFTY 200 | -63.50% | -30.50% | -20.60% | -37.90% | -17.30% |
| NIFTY200 MOMENTUM 30 | -67.50% | -25.10% | -15.70% | -30.80% | -26.90% |
| NIFTY200 QUALITY 30 | -54.20% | -10.00% | -13.50% | -28.10% | -17.70% |
| NIFTY 500 | -63.40% | -31.00% | -20.10% | -37.80% | -17.50% |
| NIFTY ALPHA 50 | -78.20% | -26.40% | -12.80% | -34.00% | -22.70% |
| Only market falls that took place post 2007 were taken into consideration as some factor indices mentioned above were launched then | |||||
Having said that, factor indices usually reward patient investors. Based on five-year rolling returns, they have typically outperformed their parent indices and broader markets in the long run.
Factor funds do well in the long run
| Particular | Parent index | % outperformance from parent index | % outperformance from Sensex | 5 Year median Rolling Return |
|---|---|---|---|---|
| NIFTY100 LOW VOLATILITY 30 | NIFTY 100 TRI | 96.80% | 81.30% | 15.80% |
| NIFTY50 EQUAL WEIGHT | NIFTY 50 TRI | 45.70% | 45.90% | 12.60% |
| NIFTY50 VALUE 20 | NIFTY 50 TRI | 95.40% | 96.00% | 15.70% |
| NIFTY200 MOMENTUM 30 | NIFTY 200 TRI | 98.80% | 93.70% | 19.60% |
| NIFTY200 QUALITY 30 | NIFTY 200 TRI | 86.80% | 81.40% | 16.80% |
| NIFTY ALPHA 50 | NIFTY 500 TRI | 77.20% | 74.00% | 19.80% |
Difference between theory and practice
In the long run, factor indices have done well. There's no denying that.
In fact, some factor indices have fallen less than the market in previous corrections. But those were based on backtested data.
In other words, since most factor funds were launched only after 2020, the recent downturn was their first real-world stress test. Before that, the performance was largely theoretical, based on simulations and backtests.
Your takeaway
Backtested success doesn't always translate to the real world.
Going forward, investors should approach factor-based funds with cautious optimism. They should remember that while their long-term performance looks good on paper, their returns can be lumpy. Strong phases may be followed by long stretches of underperformance.
As a result, factor funds should only complement your core portfolio.
Also read: Can factor-based funds dethrone large-cap funds?
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