Explained: How smart beta funds work and what investors should know before investing
As investors look beyond traditional index funds, smart beta strategies are gaining traction by combining passive investing with factor-based stock selection, aiming for better risk-adjusted returns at lower costs, as reported by ETBureau.
Smart beta funds combine elements of both active and passive investing strategies. They aim to outperform the market or achieve specific investment objectives without relying solely on traditional methods.
They use predefined rules or strategies to select and weigh stocks, rather than simply mirroring an existing market index like most passive funds. Some popular smart beta strategies include Nifty 200 Momentum 30 Index Funds, Nifty 100 Low Volatility 30 Index Funds, and Nifty 200 Quality 30 Index Funds.
Smart beta funds use rule-based strategies to target factors such as value, quality, momentum and low volatility. They reduce reliance on fund manager decisions and typically cost less than actively managed funds.
Smart beta strategies can underperform traditional indices for extended periods. Although a smart beta fund may hold many stocks, its factor-based rules can result in high exposure to particular sectors, concentration in certain types of companies and greater exposure to a specific group of stocks.
Smart beta funds may be suitable for investors who want to diversify beyond traditional indices and gain exposure to factor-based investing, have a long investment horizon of at least five to seven years, understand factor cycles, and prefer a rules-based approach to investing.
Wealth managers believe investors should not allocate 100% of their portfolio to such strategies. Instead, they can use smart beta funds to complement their existing portfolio of active and passive investments.
