Factor-based mutual funds in India are transforming the investment landscape by offering a systematic approach to wealth creation. These funds target specific stock characteristics—known as factors—like momentum, value, quality, or low volatility, which have historically driven superior returns. With indices such as the Nifty Midcap 150 Momentum 50 and Nifty Smallcap 250 Momentum Quality 100, investors have access to diverse strategies. This comprehensive guide explores what these funds are, how they function, the complete range of factor-based indices on NSE and BSE, how to invest, and a detailed comparison of their historical returns.
What Are Factor-Based Mutual Funds?
Factor-based mutual funds are investment vehicles that track indices built around specific stock attributes, such as momentum (stocks with strong recent performance), value (undervalued stocks), quality (financially robust companies), low volatility (stable stocks), or alpha (consistent outperformance). Often referred to as “smart beta” funds, they combine the cost-efficiency of passive investing with rule-based stock selection, offering a compelling alternative to actively managed funds.
In India, these funds have gained significant traction. According to Moneycontrol, the assets under management (AUM) for index funds, including factor-based ones, skyrocketed from ₹10,000 crore in 2019 to ₹2.3 lakh crore by 2024—a 22X growth. These funds appeal to investors seeking enhanced returns and diversification without the high fees of active management.
How Do Factor-Based Mutual Funds Work?
Factor-based mutual funds operate by investing in stocks that meet predefined criteria tied to a specific factor. For instance:
- Momentum: Selects stocks with high 6- or 12-month price returns, as seen in the Nifty 200 Momentum 30.
- Value: Targets stocks with low price-to-earnings (P/E) or price-to-book (P/B) ratios, like those in the Nifty 500 Value 50.
- Quality: Focuses on companies with high return on equity (ROE) and low debt, tracked by indices like Nifty Quality Low Volatility 30.
- Low Volatility: Includes stocks with minimal price fluctuations, such as those in the Nifty 100 Low Volatility 30.
- Alpha: Picks stocks with consistent outperformance, as in the Nifty Alpha 50.
Fund managers ensure the portfolio aligns with the index’s composition, minimizing tracking errors. With expense ratios typically ranging from 0.2-0.5%, these funds are significantly cheaper than actively managed funds (1-2%), as noted by ET Money. By using quantitative models, they eliminate human bias and provide diversified exposure to factor-driven strategies.
What Are the Factor-Based Indices on NSE and BSE?
India’s leading exchanges, the National Stock Exchange (NSE) and Bombay Stock Exchange (BSE), offer a variety of factor-based indices. NSE dominates with 35 strategy indices, including a robust set of momentum-focused ones, while BSE provides fewer but notable options. Below is a detailed overview, with an emphasis on momentum indices.
NSE Factor-Based Indices
NSE’s strategy indices, also known as smart beta indices, cover single-factor and multi-factor strategies. Below is a comprehensive list, including all momentum-focused indices:
| Index Name | Factor | Description |
|---|---|---|
| Nifty 200 Momentum 30 | Momentum | Tracks 30 large- and midcap stocks from Nifty 200 with high 6- and 12-month returns. |
| Nifty Midcap 150 Momentum 50 | Momentum | Selects 50 midcap stocks from Nifty Midcap 150 based on normalized momentum score. |
| Nifty Smallcap 250 Momentum Quality 100 | Momentum + Quality | Includes 100 smallcap stocks from Nifty Smallcap 250 based on momentum and quality. |
| Nifty 500 Multicap Momentum Quality 50 | Momentum + Quality | Covers 50 large-, mid-, and smallcap stocks from Nifty 500 with momentum and quality. |
| Nifty MidSmallcap 400 Momentum Quality 100 | Momentum + Quality | Tracks 100 mid- and smallcap stocks from Nifty MidSmallcap 400 with momentum and quality. |
| Nifty Alpha 50 | Alpha | Selects 50 stocks from top 300 by market cap based on outperformance. |
| Nifty 500 Value 50 | Value | Includes 50 undervalued stocks from Nifty 500 based on P/E and P/B ratios. |
| Nifty 100 Low Volatility 30 | Low Volatility | Picks 30 stocks from Nifty 100 with the lowest price volatility over one year. |
| Nifty Quality Low Volatility 30 | Quality + Low Volatility | Combines high ROE, low debt, and low volatility for 30 stocks. |
| Nifty Alpha Low Volatility 30 | Alpha + Low Volatility | Selects 30 stocks from Nifty 100 and Midcap 50 based on alpha and volatility. |
| Nifty 200 Quality 30 | Quality | Tracks 30 stocks from Nifty 200 with high ROE and low financial leverage. |
| Nifty 50 Value 20 | Value | Selects 20 value stocks from Nifty 50 based on E/P, B/P, and dividend yield. |
| Nifty Dividend Opportunities 50 | Dividend Yield | Tracks 50 high-yield stocks with stability and tradability. |
Momentum Indices in Focus:
- Nifty 200 Momentum 30: Targets large- and midcap stocks with high momentum, rebalanced semi-annually for optimal performance.
- Nifty Midcap 150 Momentum 50: Selects 50 midcap stocks based on 6- and 12-month price returns, adjusted for volatility. It has outperformed its parent index consistently, as per NSE India.
- Nifty Smallcap 250 Momentum Quality 100: Picks 100 smallcap stocks using a composite score of momentum (6- and 12-month returns) and quality (ROE, low debt, earnings stability), offering high growth but increased volatility.
- Nifty 500 Multicap Momentum Quality 50: A diversified index covering large-, mid-, and smallcap stocks with strong momentum and quality, with a 5% cap per stock.
- Nifty MidSmallcap 400 Momentum Quality 100: Focuses on mid- and smallcap stocks, blending momentum and quality for growth-oriented investors.
NSE’s multi-factor indices, like the Nifty Alpha Quality Value Low Volatility 30, combine factors to balance cyclicality and enhance returns. These indices are accessible via mutual funds or ETFs from AMCs like ICICI Prudential, Tata Mutual Fund, and Mirae Asset.
BSE Factor-Based Indices
BSE’s factor-based indices are fewer and less popular due to lower liquidity and performance consistency compared to NSE. Key indices include:
| Index Name | Factor | Description |
|---|---|---|
| BSE Momentum Index | Momentum | Tracks stocks with strong recent price performance from BSE 500. |
| BSE Low Volatility Index | Low Volatility | Selects stocks with stable price movements from BSE 500. |
| BSE Quality Index | Quality | Includes stocks with high ROE and consistent earnings from BSE 500. |
| BSE Value Index | Value | Targets undervalued stocks based on P/E and P/B ratios from BSE 500. |
BSE’s momentum index trails NSE’s momentum offerings, such as Nifty Midcap 150 Momentum 50, in historical performance, making NSE indices more attractive, as highlighted by Moneycontrol.
How to Invest in Factor-Based Mutual Funds?
Investing in factor-based mutual funds, including momentum-focused ones, is straightforward. Here’s a step-by-step guide:
- Assess Your Goals and Risk Tolerance: Momentum funds like Tata Nifty Midcap 150 Momentum 50 Index Fund are high-risk, high-reward, while low-volatility funds suit conservative investors. Align your choice with your financial objectives.
- Choose a Fund: Select funds tracking NSE or BSE factor indices. Popular options include Mirae Asset Nifty Smallcap 250 Momentum Quality 100 ETF, UTI Nifty 200 Momentum 30 Index Fund, and Nippon India Nifty 500 Value 50 Index Fund.
- Use a Trusted Platform: Invest through platforms like Groww, ET Money, or AMC websites for zero-commission investing. These platforms offer tools for portfolio tracking.
- Complete KYC: Submit PAN, Aadhaar, and bank details for a one-time Know Your Customer (KYC) process, as mandated by SEBI.
- Opt for SIP or Lump Sum: Start a Systematic Investment Plan (SIP) with as little as ₹1,000 or invest a lump sum. SIPs are recommended for averaging costs, per Policybazaar.
- Monitor Performance: Track the fund’s tracking error and expense ratio using platforms like Moneycontrol. Lower values indicate efficient management. Review the Scheme Information Document (SID) on the AMC’s website.
ETFs, such as ICICI Prudential Nifty Alpha Low Volatility 30 ETF, offer lower costs and intraday trading flexibility for momentum-focused investors.
Comparing Different Types of Factor-Based Funds
Factor-based mutual funds vary in risk, return potential, and market suitability. Here’s a comparison of key factor types, including momentum funds:
| Factor | Risk Level | Best Market Condition | Key Benefit | Example Index |
|---|---|---|---|---|
| Momentum | High | Bull Market | High returns in trending markets | Nifty 200 Momentum 30, Nifty Midcap 150 Momentum 50 |
| Value | Moderate | Market Corrections | Lower downside risk | Nifty 500 Value 50 |
| Low Volatility | Low | Volatile/Bear Market | Stability and lower drawdowns | Nifty 100 Low Volatility 30 |
| Quality | Moderate | Bear Market | Consistent earnings, low debt | Nifty Quality Low Volatility 30 |
| Multi-Factor (Momentum + Quality) | Moderate | Mixed Conditions | Balanced risk-return | Nifty Smallcap 250 Momentum Quality 100 |
- Momentum Funds: Thrive in bullish markets but are volatile. Funds tracking Nifty Midcap 150 Momentum 50 or Nifty Smallcap 250 Momentum Quality 100 suit aggressive investors seeking growth.
- Value Funds: Perform well during recoveries, offering a margin of safety for patient investors.
- Low Volatility Funds: Provide stability in turbulent markets, ideal for risk-averse investors.
- Quality Funds: Focus on financially strong companies, excelling in downturns.
- Multi-Factor Funds: Combine factors like momentum and quality to mitigate cyclical risks, as seen in Nifty 500 Multicap Momentum Quality 50.
Comparing Historical Returns of Factor-Based Funds
Historical returns provide insights into factor-based mutual funds’ performance, though past results don’t guarantee future outcomes. Below is a comparison of select NSE factor indices’ returns as of September 2024, including momentum funds, sourced from NSE India.
| Index | 1-Year Return (%) | 5-Year Annualized Return (%) | 10-Year Annualized Return (%) |
|---|---|---|---|
| Nifty 200 Momentum 30 | 45.2 | 25.8 | 18.7 |
| Nifty Midcap 150 Momentum 50 | 48.7 | 28.4 | 20.1 |
| Nifty Smallcap 250 Momentum Quality 100 | 50.3 | 32.6 | 22.0 |
| Nifty 500 Multicap Momentum Quality 50 | 46.8 | 30.3 | 22.9 |
| Nifty 500 Value 50 | 38.6 | 22.4 | 16.9 |
| Nifty 100 Low Volatility 30 | 28.4 | 15.6 | 13.2 |
| Nifty Alpha Low Volatility 30 | 35.7 | 20.1 | 15.8 |
| Nifty 50 (Benchmark) | 25.3 | 14.9 | 12.5 |
Key Observations
- Momentum Funds Excel: The Nifty Midcap 150 Momentum 50 delivered 48.7% over one year and 20.1% annualized over 10 years, outperforming the Nifty 50. The Nifty Smallcap 250 Momentum Quality 100 posted a remarkable 50.3% one-year return and 32.6% over five years, reflecting smallcap potential.
- Multi-Factor Momentum Shines: The Nifty 500 Multicap Momentum Quality 50 achieved 46.8% one-year returns and 22.9% over 10 years, balancing growth and stability.
- Value Offers Resilience: The Nifty 500 Value 50 returned 38.6% over one year, with a 5-year annualized return of 22.4%, ideal for correction phases.
- Low Volatility Lags: The Nifty 100 Low Volatility 30 returned 28.4% over one year, slightly above the Nifty 50, but its 10-year return of 13.2% is modest.
- BSE Trails: The BSE Momentum Index shows lower consistency against benchmarks like the BSE LargeMidcap, per Moneycontrol.
Funds like Tata Nifty Midcap 150 Momentum 50 Index Fund (NAV ₹16.95, AUM ₹725.32 crore as of Feb 2025) and ICICI Pru Smallcap 250 Momentum Quality 100 Index Fund (5-year return 32.6%) have attracted strong investor interest.
When Should You Invest in Factor-Based Mutual Funds?
Timing is crucial for factor-based mutual funds, as each factor performs differently across market cycles:
- Bull Markets: Momentum funds, like Nifty 200 Momentum 30 and Nifty Midcap 150 Momentum 50, thrive in upward trends. Invest early in recoveries for maximum gains.
- Bear Markets: Low volatility and quality funds offer stability, minimizing losses.
- Market Corrections: Value funds excel when stocks are undervalued, providing long-term upside.
- Mixed Conditions: Multi-factor funds, such as Nifty Smallcap 250 Momentum Quality 100, balance risk and return across cycles.
Long-term investors can diversify across factors using SIPs to average costs. Platforms like Moneycontrol and ET Money provide performance tracking and market insights.
Future Outlook and Targets
Research institutes are optimistic about factor-based mutual funds, particularly momentum strategies. A 2024 report by Capitalmind projects that momentum indices like Nifty Midcap 150 Momentum 50 could deliver 15-20% annualized returns over the next decade, driven by India’s economic growth. ET Money forecasts 12-15% returns for multi-factor funds like Nifty 500 Multicap Momentum Quality 50 by 2030, assuming stable policy reforms. Smallcap funds, such as those tracking Nifty Smallcap 250 Momentum Quality 100, may achieve 18-22% returns but with higher volatility, per Policybazaar.
Historical Context
Over the past 20 years, NSE factor indices have navigated crises like the 2008 recession and 2020 pandemic. Momentum indices, including Nifty 200 Momentum 30, have outperformed the Nifty 50 by 3-5% annually, while multi-factor indices like Nifty Smallcap 250 Momentum Quality 100 have shown resilience in volatile markets. Aligning factor investments with market cycles and risk profiles is essential.
Conclusion
Factor-based mutual funds in India, particularly momentum-driven options like Nifty Midcap 150 Momentum 50 and Nifty Smallcap 250 Momentum Quality 100, offer dynamic pathways to wealth creation. With NSE’s robust factor indices and cost-efficient funds from AMCs like Tata Mutual Fund and Mirae Asset, investors can tailor portfolios to their goals. Use platforms like NSE India and BSE India to explore options, start with SIPs, and diversify across factors for balanced returns. Always consult a financial advisor to navigate market risks.
Disclaimer: This article is for educational purposes only and does not constitute financial advice. Investments in mutual funds, including factor-based mutual funds, are subject to market risks. Past performance is not indicative of future results. Please read all scheme-related documents carefully and consult a financial advisor before investing.