Do smart-beta funds make you more money than index funds?

A brand-new school of investing

Traditionally, there are two routes to investing: Active and passive. However, a new category of funds, called smart-beta funds, has emerged in recent years.

Growing popularity

56 such funds, including quant funds, have been launched in the last 4 years. Their AUM has increased from a mere Rs 1,245 crore to Rs 19,912 crore in just 3 years.

What are smart-beta funds?

They are a blend of active and passive funds. These funds adopt a passive strategy of tracking an index and apply the investing rules of active fund management.

Factors involved in a smart beta strategy

It picks stocks from an index based on the following factors: Value, Volatility, Momentum, Quality, Size, Dividend

Example of a smart-beta fund

Let’s take the Nifty 200 Momentum 30’s example. It looks at all 200 companies in the index and picks 30 with the strongest ‘momentum’.

Smart-beta funds: Their performance

These funds have been a mixed bag so far. Let’s look at their performance through table.

The hits

Some smart-beta funds like Nifty 200 Momentum 30, Nifty 50 Value 20 and Nifty 100 Low Volatility 30 have beaten their parent indices 90-100% of the time.

The misses

Nifty Alpha 50, Nifty 100 Quality 30 and Nifty 100 Equal Weighted have largely trailed their parent index.

Smart-beta funds are moody, too

Additionally, these funds can be cyclical and underperform simple and broad index funds for extended periods.

Example of these funds being cyclical

Take a look at the Value category. Although it topped the charts in the last three calendar years, it was at the bottom in 2019 and 2020. In fact, it shed 13.7 per cent in 2019.

Momentum has done well in the last three years

The Nifty 200 Momentum 30 has beaten its parent index but It has to complete a market cycle of 5-7 years before there can be any sort of judgement.

Our Verdict

- These funds are new - They need to undergo a full market cycle - They are cyclical, hence riskier - So, stick with diversified active or passive equity funds for now

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