Smart beta funds have been steadily gaining popularity as a mutual fund category in recent years. These funds operate as passive investment tools, typically tracking indices that select stocks using specific strategies. These strategies may include criteria such as low volatility, quality metrics like return on equity and debt-equity ratio, momentum, and dividend yield.
Several Asset Management Companies (AMCs) have introduced smart beta funds in recent years. As of February 13, there are approximately 56 smart beta funds managing assets worth Rs 15,996 crore. These funds aim to outperform traditional index funds or Exchange-Traded Funds (ETFs) by intelligently selecting stocks based on the underlying index’s construction.
For example, the Nifty 50 Value 20 (NV20) index selects just 20 stocks out of the Nifty 50 based on value criteria. These niche indices, curated by the National Stock Exchange (NSE), provide benchmarks for smart beta funds to outperform broader market indices. However, it’s essential to remain patient with smart beta funds, as their strategies may take time to deliver results.
While these funds have performed well in recent years, they may not outperform in all market conditions, and there will be challenging periods. Smart beta indices often have different portfolio compositions compared to broader indices. For instance, the Nifty Midcap 150 Momentum 50 Index allocates a higher percentage of its stocks to sectors like healthcare and financials compared to the Nifty Midcap 150 Index.
This divergence is due to the strategy’s focus on selecting stocks demonstrating relative outperformance. Despite their potential benefits, smart beta funds remain relatively small in size, with only a few schemes exceeding Rs 1,000 crore in assets under management. Experts believe that as demat account penetration increases, ETFs are likely to become more popular, with many mutual funds introducing index funds or Fund-of-Funds (FoFs) versions of existing smart beta ETFs.
For new investors, it may be prudent to observe how smart beta funds perform through market cycles before investing. However, investors with well-established portfolios who seek to reduce fund manager risk may consider allocating a small portion to smart beta funds, depending on their preferred index strategy. While not entirely passive, investing in smart beta funds can be rewarding with patience.
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