Returns from factor-based investing can be more volatile due to higher retail participation

Factor-based investing is gaining ground in India. Do you see this as a fundamental shift in investor behaviour or a cyclical trend driven by current market narratives?

Factor investing appears to be a fundamental shift rather than a passing trend. Globally, it has long served as a bridge between active and passive investing by offering rules-based exposure to well-understood drivers of returns such as value, momentum and quality. In India, increasing investor awareness, regulatory support and data availability have catalysed this transition. Investors are becoming more outcome-focused and analytical, which naturally leads them toward systematic and evidence-backed frameworks like factor investing.

With ETFs and smart beta strategies becoming more accessible, how should retail investors weigh them against actively-managed funds in today’s environment?

Retail investors should consider smart beta strategies as complementary to traditional active and passive funds. While active funds aim to outperform through discretionary calls and traditional index funds focus on market-cap weighted exposure, smart beta strategies sit in between by offering transparent, low-cost access to specific risk premia. Investors should assess their risk tolerance, time horizon and belief in the persistence of certain factors before deciding allocation. Diversifying across styles and strategies can enhance overall portfolio robustness.

In light of global trade tensions and renewed tariff uncertainty, how do you position factor-based portfolios?

During periods of macro-economic uncertainty like trade tensions, factors such as low volatility and quality tend to demonstrate resilience. These factors typically focus on companies with strong balance sheets, stable earnings and lower price swings, making them better suited to navigate turbulent environments. However, the effectiveness of any factor can be time-varying, so maintaining a diversified factor exposure remains key.

Historically, which factors — value, momentum, quality, low volatility — have worked best in India? Are there notable differences in how these factors behave compared to global markets?

Momentum and quality have shown relatively strong persistence in India, especially during trending or earnings-driven markets. Value has been more cyclical and tends to work well during recovery phases. Compared to developed markets, factor returns in India can be more volatile due to a higher influence of retail participation, liquidity dynamics and sectoral concentration. Hence, factor performance in India often exhibits higher dispersion, requiring local calibration of global models.

How often do you rebalance your factor-based strategies, and what typically drives that churn?

We rebalance our factor-based strategies on a quarterly basis, with the key drivers being company earnings reports. These factors help us adjust our portfolio to ensure it remains aligned with our long-term investment objectives. While various factors influence our decisions, we take a balanced approach, ensuring that no single factor overly dominates. This disciplined rebalancing process helps us stay consistent with our investment philosophy and provides stability, avoiding reactions to short-term market fluctuations. By regularly reviewing earnings and market trends, we ensure that the portfolio adapts as needed while maintaining a steady, long-term focus.

Are you integrating AI or machine learning into your quant and factor models? If yes, how does it influence portfolio construction or signal generation?

AI and machine learning are gaining traction in the investment world, and we recogniSe their potential in enhancing factor-based strategies. While we are not currently leveraging these tools, we are closely monitoring their evolution and evaluating how they might improve areas like signal generation, market regime identification and risk management. Our focus remains on maintaining a disciplined, transparent investment process, but we are open to adopting innovative solutions when they can add real value. As the technology matures, we believe AI could play a larger role in refining our approach and adapting to market changes.

How have your factor-based funds performed across market cycles?

Funds with large -cap and quality bias have done better while funds where size momentum has been a key strategy had a tough time over the last six months.

We believe that a volatile macro conditions along with sentiment-driven market is a key risk to factor performance in short term as factors do take time to adapt to the changing environment.

What sets your factor-based offerings apart from others in the market?

Our factor-based offerings are distinguished by a rigorous, data-driven approach combined with a long-term, strategic focus. We leverage a wide range of high-quality data inputs, including macro-economic indicators, company earnings reports and market trends, to construct our factors. What sets us apart is our emphasis on thorough back-testing, ensuring our strategies are robust and resilient across different market conditions. Our risk management framework is designed to balance returns with risk mitigation, using a combination of factor diversification and systematic monitoring. This disciplined and well-rounded approach provides our clients with a consistent, risk-adjusted performance over time.

As we move through a shifting interest rate cycle, how do factor-based strategies typically behave? Are there specific factors that respond better or worse to rate hikes or cuts?

Interest rate changes can significantly influence factor performance. For instance, value tends to do better during rate hikes, especially when accompanied by inflation, as cyclical sectors often lead the rally. In contrast, low volatility and quality factors may perform relatively well during rate cuts or when growth slows, given their focus on defensiveness and earnings stability. That said, these relationships are not always linear, so it’s important to interpret them in the broader macro context.