Factor investing: Unlocking market secrets with value, momentum, and quality
Read this | Indian investors are discovering the power of factor investing Though it feels new, factor investing has been around for a long time. What’s changed is the rise of financial products, like factor-based indices and mutual funds, that explicitly follow specific factors. Historically, fund managers would optimize for different factors at various points in the market cycle.
Today, with increasing emphasis on discipline and style commitment, investors are demanding products that stick to a particular style — allowing them to better manage exposure across cycles. In India, certain factors are more popular, and we’ll take a look at a few. Value investing is probably the most well-known, advocated by legends like Warren Buffett and Benjamin Graham.
Imagine your frugal uncle who always finds the best deals, whether groceries or vacations. That’s value investing — buying stocks for less than their intrinsic worth. Value investors focus on metrics like price-to-earnings and price-to-book ratios.
Value stocks offer two main benefits: First, they tend to rise as their price reflects their true worth. Second, they provide a margin of safety during downturns since they’re typically undervalued. However, value investing isn’t always in vogue.
During growth sector hype, value stocks might seem like yesterday’s news. But when the euphoria fades, value stocks often stand strong. Next, I’ve nicknamed the momentum factor the ‘hot wheels’ factor.
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