Smart Beta Funds are revolutionising investment strategies by offering a more tailored approach to capturing market inefficiencies, according to a whitepaper from Nippon India AMC.
Unlike traditional passive investments that track broad market indices, Smart Beta Funds, the paper notes, are designed to track strategy indices with specific methodologies intended to enhance returns and manage risks.
This innovative approach, it adds, allows investors to customize their strategies based on various market segments or investment themes, and could potentially lead to a better performance compared to conventional indices.
Beta, the report explains, measures "the volatility or systematic risk" of a security or portfolio in comparison to the market." For instance, stocks with a high Beta are more volatile than the overall market, while those with a low Beta exhibit less volatility.
Smart Beta strategies in India employ various approaches such as Value, Growth, Quality, Momentum, Dividend Opportunities, Alpha, Low Volatility, and Equal Weight.
These strategies cater to different investment goals. For example, the Value strategy targets undervalued stocks with the potential for price correction, while the Growth strategy focuses on high-growth stocks poised for capital appreciation.
Meanwhile, the Quality strategy focuses on strong fundamentals, aiming for stability and consistent returns. The Momentum strategy is based on ongoing price trends, and the Dividend Opportunities strategy seeks high dividend yields for regular income.
The Equal Weight Smart Beta strategy
The report was launched on the side lines of the NFO launch of Nippon India Mutual Funds Nifty 500 Equal Weight Index Fund.
The Equal Weight strategy allocates "an equal amount to each of the 500 stocks," ensuring diversified exposure across large caps, mid caps, and small caps.
According to the whitepaper, this approach has outperformed the Nifty 500 Index, delivering a 56 percent return over the past year compared to 39 percent for the Nifty 500. This performance, the paper noted shows the potential of Smart Beta strategies to provide superior returns by addressing market inefficiencies effectively.
Arun Sundaresan, Head ETF, Nippon Life India Asset Management explained that under their equal weight strategy, all the Nifty 500 stocks will have equal weight, which is 0.2 percent each.
In terms of performance, the NIFTY 500 Equal Weight Index, he explained, has shown strong results, delivering close to 17 percent CAGR during the last decade compared to 14.2 percent from the NIFTY 50.
Sundaresan added that while the strategy has a higher component of mid- and small-cap which implies a high-risk, relatively more high-risk, high-return kind of a profile it also offers a unique form of diversification that is not typically found in other market products.
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