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What is Factor Investing? All You Need to Know

Let’s consider an analogy to understand this better -

What does a perfectly balanced diet look like for you? Ideally, the perfect diet for you has been designed considering your age, current health condition, pre-existing diseases, and goals. Similarly, the ideal investment avenue for you can help fulfil your financial goals while considering different constraints like income, investment horizon, and risk profile. For many mutual fund investors, it is not as simple to target investments and balance risk and return as it may seem. This is where the concept of factor investingcomes in.

Before we explain a factor fund, let us help you understand factor investing first.

What is Factor Investing?

Factor investing refers to the investment strategy used to select assets based on specific attributes or ‘factors’ like inflation, economic growth, credit, and company size, to name a few. Investors who would like to follow certain factors tend to identify specific characteristics in securities.

You should also know that factors are often combined to build portfolios with the expectation of generating higher returns than their benchmark. This investment strategy can help generate returns, enhance diversification, and better manage risk.

At large, there are two main types of factors associated with the possible returns of a mutual fund scheme -

Style factors that explain the risk and return in each asset class. Example: momentum, quality of stocks, dividend yield. etc.

Macroeconomic factors that cover the risk across multiple asset classes. Example - Inflation and changes in the interest rate

What are Factor Funds?

Extending the same concept of factor-based investing into the mutual fund universe -

Factor-based mutual funds are investment funds that specifically target and emphasise certain factors or characteristics believed to drive investment returns. These factors can include attributes like value, size, momentum, quality, and low volatility etc.Factor-based investing aims to systematically capture the returns associated with these factors while potentially trying to enhance portfolio performance or managerisk.

Benefits of Factor-Based Investing in Mutual Funds

Sometimes mutual fund investors make guesses about the market flow before investing money. Since factor investing involves making decisions based on certain quantifiable metrics, it can be considered a more reliable approach to investing in mutual fund schemes.

Using this strategy, you can explore mutual fund schemes that are otherwise ignored due to human bias.

Since investment decisions are based on different factors, it can help you filter out mutual funds depending on your life goals or objectives.

Who Can Invest in Factor Funds?

You can consider investing in factor funds if you want to follow specific factors along with higher transparency In other ways, you can also use these funds to tilt a portion of your portfolio to augment its performance.

While pursuing factor-based investing, remember that factor timing is very difficult and need not be attempted. You may invest in these funds if you have the patience to stay invested long-term.

Is Factor Investing Suitable for You?

Several factors determine the performance with mutual fund investments, one of which is your knowledge about a fund’s suitability to your particular portfolio. If you have done the required research and want to take the risk related to investing in factor funds, you can do so at your discretion.

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Disclaimer:
This is an investor education and awareness initiative by Nippon India Mutual Fund.
Helpful information for investors: All Mutual Fund investors have to go through a one-time KYC (know your Customer) process. Investors should deal only with registered mutual funds, to be verified on SEBI website under 'Intermediaries/ Market Infrastructure Institutions'. For redressal of your complaints, you may please visit www.scores.gov.in . For more info on KYC, change in various details & redressal of complaints, visit mf.nipponindiaim.com/investoreducation/what-to-know-when-investing This is an investor education and awareness initiative by Nippon India Mutual Fund.

The information herein is meant only for general reading purposes and the views being expressed only constitute opinions and therefore cannot be considered as guidelines, recommendations or as a professional guide for the readers. The document has been prepared on the basis of publicly available information, internally developed data and other sources believed to be reliable. The sponsor, the Investment Manager, the Trustee or any of their directors, employees, associates or representatives (“entities & their associates”) do not assume any responsibility for, or warrant the accuracy, completeness, adequacy and reliability of such information. Recipients of this information are advised to rely on their own analysis, interpretations & investigations. Readers are also advised to seek independent professional advice in order to arrive at an informed investment decision. Entities & their associates including persons involved in the preparation or issuance of this material shall not be liable in any way for any direct, indirect, special, incidental, consequential, punitive or exemplary damages, including on account of lost profits arising from the information contained in this material. Recipient alone shall be fully responsible for any decision taken on the basis of this document. Language Disclaimer:
While utmost care has been taken in translating the article into respective regional language(s), in case of any confusion or difference of opinion, article available in English language should be deemed as final. The article provided herein is meant only for general reading purposes and the views being expressed only constitute opinions and therefore cannot be considered as guidelines, recommendations or as a professional advice for the readers. The document has been prepared on the basis of publicly available data/ information, internally developed data and other sources believed to be reliable. The sponsor, the Investment Manager, the Trustee or any of their directors, employees, associates or representatives (“entities & their associates”) do not assume any responsibility for, or warrant the accuracy, completeness, adequacy and reliability of such information. Recipients of this information are advised to rely on their own analysis, interpretations & investigations. Readers are also advised to seek independent professional advice in order to arrive at an informed investment decision. Entities & their associates including persons involved in the preparation or issuance of this material shall not be liable in any way for any direct, indirect, special, incidental, consequential, punitive or exemplary damages, including on account of loss of profits arising from the information contained in this material. Recipient alone shall be fully responsible for any decision taken on the basis of this article. "ABOVE ILLUSTRATIONS ARE ONLY FOR UNDERSTANDING, IT IS NOT DIRECTLY OR INDIRECTLY RELATED TO THE PERFORMANCE OF ANY SCHEME OF NIMF. THE VIEWS EXPRESSED HEREIN CONSTITUTE ONLY THE OPINIONS AND DO NOT CONSTITUTE ANY GUIDELINES OR RECOMMENDATION ON ANY COURSE OF ACTION TO BE FOLLOWED BY THE READER. THIS INFORMATION IS MEANT FOR GENERAL READING PURPOSES ONLY AND IS NOT MEANT TO SERVE AS A PROFESSIONAL GUIDE FOR THE READERS."

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