Maximizing gains while minimizing risks: The smart beta advantage
Index investing is a simple and low-cost passive investment strategy which aims to mirror the returns of an underlying index like Nifty 50 or Nifty 100.
Traditional indices v/s Smart beta indices
One of the most widely followed and tracked domestic equity indices – the Nifty 100 index is constructed using the 100 largest companies based on market capitalization. Market capitalization is determined by multiplying a company’s stock price with the number of its shares available in the market. While this market cap-weighted index is a great way to passively take exposure to Indian equity markets, it has its drawbacks in the form of few large companies dominating the index, thus increasing concentration risk and volatility.
Best MF to invest
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View Details» <div data-placement=«Mid Article Thumbnails» data-target_type=«mix» data-mode=«thumbnails-mid» style=«min-height:400px; margin-bottom:12px;» class=«wdt-taboola» id=«taboola-mid-article-thumbnails-113589795»>Factor-based smart beta indices aim to overcome these downsides of traditional capitalization-weighted indices by constructing their portfolios based on alternate factors like value, momentum, size, quality or low volatility instead of market capitalization.
These indices are a hybrid between active and passive investing as they passively invest in constituents of the underlying index but based on a set of predetermined rules. For example, when low volatility criteria are applied to the Nifty 100 stocks and the least volatile 30 stocks are picked from it, the Nifty 100 Low volatility 30 index is obtained. The least volatile stocks receive the highest weights. Higher volatility stocks get lower
