Smart-beta funds: Easy way to earn more than index funds?

They are two paths to investing: Active and passive . You either put your money on fund managers and pay them higher fees to generate alpha or invest in an index like the Sensex or the Nifty at relatively lower costs. A new category of funds, called smart-beta funds, has emerged. It is a blend of active and passive strategies and aims to pick stocks based on specific factors, such as momentum, value, volatility and quality. How is a smart-beta fund a mix of active and passive funds? These funds adopt a passive fund's market-cap-based index and an active fund's investing rules, or as smart-beta funds call them, 'factors'. Let's take the Nifty 200 Momentum 30's example. It's a smart-beta fund that looks at all the 200 companies in the Nifty 200 and then identifies 30 stocks with the strongest ' momentum '. Similarly, a Nifty 100 Low Volatility 30 fund finds the 30 least volatile stocks among the 100 companies in the Nifty 100. Factors involved in a smart beta strategy Smart-beta funds have six factors or rules to select stocks from a particular index. These factors can be used in isolation or in combination to create a unique basket of stocks. The six factors are as follows: Factor What they mean Value Stocks with lower P/B, P/E, P/S and higher dividend yield are considered. Volatility Stocks with the lowest standard deviation and beta are preferred. Momentum Momentum considers the stock's returns in the last six and 12 months, adjusted for its volatility. It's about stocks rising quickly and with the potential for further success. Quality Companies that have higher return on capital and earnings growth are considered. Companies with lower debt to equity are preferred. Size In this case, stocks are categorised as per their market capitalisation (market cap). For instance, companies with the 100 largest market cap are deemed large-caps.  Dividend Stocks that are expected to combine high dividend yield and price appreciation are considered. Growing popularity Since smart-beta funds have theoretically taken the best of active and passive funds, seeing increasing investor interest