Investing fundamentals: Examining multi-level mutual funds within the Indian marketplace
In the dynamic world of Indian mutual funds, multi-factor investing has emerged as a popular strategy, offering several advantages over single-factor investing. This approach, which invests across at least three asset classes with a minimum of 10% allocation to each, provides improved diversification, lower concentration and portfolio volatility, greater adaptability to changing market environments, and potentially better risk-adjusted returns [1][3].
Recently, funds such as Bandhan and Sundaram have been launched, employing active management and quantitative models to juggle multiple factors. However, due to the lack of historical performance data, it's challenging to evaluate their consistency across different market cycles [2].
Multi-factor funds diversify investments across multiple factors, aiming to achieve superior risk-adjusted returns, often evaluated through metrics such as the Sharpe ratio [1]. This strategy contrasts with single-factor funds, which may be more susceptible to the performance and volatility of one factor or asset class.
One of the key benefits of multi-factor investing is its ability to adapt to market changes. By spreading investments across factors, fund managers can balance exposure across assets that tend to perform differently under various market conditions. For instance, if equities are overvalued, allocations may be shifted towards debt or gold, which typically offer more stability [1].
Moreover, multi-factor investing addresses the limitations of single-factor strategies by combining multiple factors, leveraging low correlation between different factors for diversification benefits. However, it's important to note that this strategy involves complex factor combinations and relies heavily on back-tested models, which may not hold up in future [3].
Single-factor strategies, while focusing narrowly on one investment style or asset, carry risks due to factor cyclicality. For example, momentum surged in 2021 but lost steam in the following year, while Alpha was out of favour in 2022 but outperformed in 2024 [3].
Multi-factor investing caters especially well to beginners and investors with limited capital who seek diversified exposure without having to invest separately in multiple funds [3]. One example of a multi-factor fund is the Axis Multi Factor Passive FoF, which allocates equally across four factors by investing in in-house factor funds or those from other fund houses [2].
In summary, multi-factor mutual funds in India offer a diversified approach that can provide improved risk-adjusted returns, lower portfolio volatility, and greater adaptability to changing market environments. While they involve complex factor combinations and rely on back-tested models, they address the limitations of single-factor strategies by combining multiple factors for better diversification benefits.
- In the Indian mutual fund market, multi-factor investing has become popular for its potential to offer better risk-adjusted returns compared to single-factor investing.
- Multi-factor funds, such as Axis Multi Factor Passive FoF, diversify investments across various factors for a more balanced exposure to assets that perform differently under varying market conditions.
- Technology plays a role in multi-factor investing as fund managers utilize active management and quantitative models to juggle multiple factors.
- For investors with limited capital or starting out, multi-factor mutual funds provide diversified exposure without requiring separate investments in multiple funds.
- While multi-factor investing offers benefits, it's crucial to acknowledge the complexity of factor combinations and the fact that these strategies rely on back-tested models, which may not consistently perform in the future.
