Smart-beta funds: How to pick and choose?

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Subscribe to enjoy similar stories. MUMBAI : Smart-beta funds track alternative indices that are variations of regular market indices like the Nifty 50, Nifty 200, or the Nifty 500. These indices are designed to follow specific investment factors such as value, momentum, low volatility, or quality.

Instead of the regular index, where the highest weight is given to the stock with the largest market capitalization, the smart-beta index gives the highest weight to the stock that scores the highest on the specific factor. At the Mint Money Festival 2024, which took place on 22 November in Mumbai, Siddharth Srivastava, head ETF-product and fund manager, Mirae Asset Mutual Fund, explained how smart-beta funds work and can help investors during different phases of the market. Markets go through different phases, and each factor tends to respond differently to different market phases.

“Before the global financial crisis, the best-performing factors were alpha and value. During the global financial crisis, the best-performing factor was low volatility. In 2014, alpha did well.

Then, around the time of covid-19 outbreak, the best factor was quality. During market recovery, value was the top-performing factor," Srivastava said. In 2007, the alpha delivered 91.8% returns, while the value delivered 109% returns before the 2008 financial crisis.

These factors don’t necessarily follow any diversified strategy. “Different factors aim to capture different market trends. For example, momentum and alpha factors follow trend-investing.