Understanding Single Factor Indices and Their Benefits for Mutual Fund Investors

financialexpress.com:

The Indian financial markets have displayed remarkable resilience in recent years, even amidst a global macroeconomic environment fraught with uncertainty. This resilience can be attributed to a combination of the Indian economy’s strength and favourable policy actions aimed at achieving the ambitious goal of a $5 trillion GDP. Consequently, domestic investments in financial markets have surged, with monthly Systematic Investment Plan (SIP) flows in mutual funds exceeding INR 15,000 crore, accompanied by a growing influx of retail investors.

As markets mature and expand, they tend to become more efficient in pricing information, striving to reflect the fair value of stocks. This evolution has given rise to a phenomenon known as “Index investing” as the likelihood of active management outperforming benchmark indices diminishes. This shift was particularly evident in the Indian markets approximately five years ago when, in 2018, large-cap stocks drove market performance, resulting in more than 90% of mutual fund schemes underperforming benchmark indices like Nifty and Sensex. This prompted the emergence of Exchange-Traded Funds (ETFs) and Index Funds, as investors increasingly began to focus on “Alpha,” or the returns generated by funds in excess of underlying indices.

With the growing popularity of Nifty and Sensex Funds, fund houses such as Navi and emerging players like Zerodha have strategically positioned themselves within the index investing space, mirroring the trajectory of industry giants like Vanguard in developed markets.

Amidst the burgeoning index investing landscape in India, a sub-category is gradually gaining prominence—Factor-Based Index Investments. While this category has already established a firm