The utility of factor investing in building your equity portfolio
₹273.5 trillion as on June this year, 68.3% is in large-cap stocks (top 100 stocks), 16.6% is in mid-cap stocks (101 to 250 stocks) and 15.1% is in small cap stocks (beyond 250). Another issue is that all m-cap approach portfolios, including large-, mid-, and small-cap, are correlated, offering lesser diversification to investors within the equity portfolio.
This provides an opportunity for investors to allocate based on other factors such as momentum, low volatility, value, and quality, which have low correlation across different market cycles. The mutual fund industry has launched various factor-based funds that track different Nifty indices, such as momentum, low volatility, quality, and value.
Now let’s define the factor-based index strategies to understand how stocks are classified, based on each factor. ‘Nifty200 Momentum 30’ Index aims to track the performance of the top 30 companies within the universe of Nifty 200, determined based on its past six-month and 12- month price returns, adjusted for volatility.
The Nifty Low Volatility 50 Index aims to measure the performance of the least volatile stocks based on standard deviation of daily price returns for last one year. Nifty100 Quality 30 index includes top 30 companies from its parent Nifty 100 index, selected on quality scores based on return on equity (RoE), financial leverage (debt to equity Ratio) and average change in earnings, that is EPS (earnings per share) growth, analysed over the previous five years.
The Nifty500 Value 50 index consists of 50 companies from its parent Nifty 500 index, selected based on their ‘value’ score determined on earnings to price ratio (E/P), book value to price ratio (B/P), sales to price ratio (S/P) and dividend yield. In
. Read more on livemint.com
