Factor-based funds are funds that use single factor or a combination of factors to build a portfolio with specific characteristics. For example, a fund focusing on low volatility factor, will follow certain pre-defined rules to pick stocks that score high on low volatility. These funds track an underlying index, where stocks get included and excluded as per their scores. However, these funds cannot be termed as passive funds, as fund houses work with the index provider to build these rules. There are multi-factor funds that use combination of low volatility and alpha factor (i.e. stocks outperforming benchmark returns). Value, quality and momentum are other factors used by fund houses.