Fund Radar: Factor investing goes big in mid and small caps

Smart beta funds promise data-driven outperformance at lower costs. And the backtests look stunning. But most smart beta funds are untested in the real world. So, are they worth a spot in your portfolio? Smart beta funds are moving into new terrain. For those unaware, these funds apply systematic filters, called factors, like momentum (recent winners), quality (sound balance sheets), value (cheap valuations) or low volatility. Stocks are selected based on these rules, not size or fund manager discretion. Once limited to large caps, they’ve now expanded into the mid and small cap segments, and in growing numbers. Several funds have launched recently, promising rule-based investing with better returns and lower costs than their active peers. Some of the new smart beta funds launched are: Nifty Midcap150 Value 50, Nifty Smallcap250 Quality 50 and several momentum and blended strategies. The pitch is straightforward: transparency, consistency and a data-backed edge. But there’s one big caveat. Most of the eye-catching performance numbers come from back-tested data — they are simulated returns, not real-world returns. That said, the backtests themselves are worth a closer look. Three indices clearly stood out in terms o