Smart Beta Funds In India: Passive Investing With a Twist

Passive investing in stock market securities can help you beat the market rate of return while assuming an extra bit of risk. With more effort and research, passive investing can be an excellent tool by which you can create wealth through disciplined investing. A prime example is smart beta funds, which blend the simplicity of index funds with the precision of active strategies. 

You can include smart beta funds as part of your portfolio, as these could be critical in attaining financial milestones since they are built on factors like value, momentum, and quality, and have the potential to beat the benchmark indices. 

Let us explore how smart beta funds work and whether you should include them in your portfolio. 

What Are Smart Beta Funds?

Smart beta funds are hybrid investment vehicles that blend the benefits of both active and passive investment strategies. Hence, these funds aim to provide a higher return without assuming too much risk. Unlike traditional index funds that track market-cap-weighted indices like the Nifty 50, Smart Beta Funds follow a rules-based approach using predefined factors such as value, momentum, quality, low volatility, or size. 

These funds are managed passively (in terms of execution). Still, the stock selection is based on the factors mentioned before, thereby providing a structured yet potentially high-yielding alternative compared to conventional index-based funds. 

How Smart Beta Strategies Work

1. Index Construction Rules:

The traditional index funds mimic different stock indices such as Sensex, Nifty 50 or Nifty Next 50, depending on the fund’s objectives. These funds allocate the investment in various assets (equities) in the same proportion as they are in the indices. 

However, smart beta ETF strategies are different and may include equal weighting, fundamental metrics, or factor scores based on value, momentum, quality, or volatility. The objective is to select the stocks systematically rather than mimicking an index’s performance. 

2. Multi Vs. Single Factor

There is no restriction on the factor chosen for a smart beta fund. As in factor investing India strategies can be built around a single factor (like low volatility or quality) or combine multiple factors for diversification. Generally, the objective is to balance out the cyclical impact of individual funds, reducing volatility and enhancing the consistency of returns. 

Types Of Smart Beta Funds In India

There are numerous examples of smart beta funds in India. The concept is comparatively new, and hence, there are only a few limited options available currently. However, with the popularity of the concept, many new asset management companies are looking to float their own smart beta funds in the near future. 

1. Nifty Alpha 50 Index Funds: Focus on stocks with the highest returns (alpha) in the recent past. Ideal for momentum-seeking investors.

2. Nifty Low Volatility 30 Index Funds: Invest in 30 large-cap stocks with the lowest volatility. Suitable for risk-averse investors seeking stable returns.

3. Nifty Quality 30 Index Funds: Track fundamentally strong companies with consistent earnings, low debt, and high return on equity.

4. Multi-Factor Funds (e.g., Nifty Alpha Quality Low Volatility 30): Combine three or more factors like alpha, quality, and low volatility for balanced risk and return.

5. International Smart Beta ETFs: Indian investors can also access global factor-based ETFs, offering exposure to U.S. and European markets with themes like value, size, and dividend yield. You can invest in these through an international brokerage or a P-note structure.

Smart Beta Vs Traditional Index Funds

Smart beta funds have lived up to expectations and have consistently outperformed different benchmarks, including the Nifty50. This is largely because of the smart beta strategies adopted by these funds compared to the proportionate investment strategy of index funds. Traditional index funds follow a market-cap-weighted approach, meaning stocks with the highest market value have the most influence on returns. For example, in the Nifty 50 index, heavyweights like Reliance or TCS dominate the movement.

Smart Beta Funds, in contrast, apply alternative rules for stock selection and weighting. Instead of relying solely on size, they focus on factors like value, quality, or low volatility, which historically have shown potential to outperform the broader market, especially during specific market cycles.

Here is an example of the comparison of Mirae Asset Nifty 100 Low Volatility 30 ETF returns compared with Nifty 50 (smart beta vs index fund):

Source: Mirae Asset Fund Document¹

The chart indicates that the smart beta fund has consistently outperformed the benchmark index, though the trend of returns (based on the market volatility) is quite similar. 

Is Smart Beta Suitable For You?

Smart Beta Funds are best suited for investors seeking better-than-market returns without the high costs of active funds. If you have a moderate-to-high risk appetite and a long-term investment horizon, these funds can offer enhanced performance through disciplined, rules-based strategies. However, do consider smart beta performance 2025 before making an investment decision, and remember that past performance does not indicate future returns. 

They are ideal for investors who believe in passive investing but want to tilt their portfolios toward proven factors like quality or momentum. However, returns can be cyclical, meaning factors may underperform in certain phases. 

That is why Smart Beta works best when integrated into a broader, diversified asset allocation plan, rather than as a complete replacement for traditional index funds. The bottom line is that you should be ready to assume a bit more risk and have a rather long-term perspective for your investments. 

Risks And Diversifying With Fixed Income

Smart beta mutual funds carry risks like factor underperformance, overfitting based on historical data, and tracking errors. Strategies like value or momentum may lag during certain market cycles. 

To manage this, investors should limit smart beta exposure to a portion of their portfolio and balance it with fixed income instruments. Allocating 15–25% to smart beta and the rest to stable assets can help reduce volatility and ensure overall portfolio stability.

Conclusion

Smart Beta Funds offer a strategic edge for passive investors seeking better returns with factor-based discipline. While not without risks, they can complement a long-term portfolio when used thoughtfully alongside traditional equity and fixed income investments. There are many asset management companies offering smart beta funds, and a few of them have consistently outperformed the benchmark indices. However, it is always advisable to conduct your own research before deciding to invest in such funds. 

FAQs On Smart Beta Funds

1. Are smart beta funds risky?
Yes, they carry factor-specific risks. If a chosen factor (like value or momentum) underperforms the broader market, returns may suffer. They're less volatile than active funds but riskier than traditional index funds.

2. Which is the best smart beta fund in India?
Popular options include Mirae Asset Nifty 200 Alpha 30 ETF and Nippon India Nifty 500 Quality 50 Index Fund. The best fund depends on your investment goals and risk tolerance.

3. How are smart beta funds taxed?
Short-Term Capital Gain (STCG) (<12 months): 20% flat rate on gains; no exemption.

Long-Term Capital Gain (LTCG) (?12?months): Exemption up to INR 1.25 lakh; gains exceeding that are taxed at 12.5%. These rates take effect for holdings sold on or after July 23, 2024. Previous rates (15% STCG / 10% LTCG with INR 1 lakh exemption) apply if sold before that date.

References:
1. Mirae Asset, accessed from: https://www.miraeassetmf.co.in/docs/default-source/product-guides/note---low-volatility-strategy-jan-2025.pdf?utm

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