Choosing an Index Fund: A Guide to Your Best Options from Factor Funds
In the bustling world of Indian stock markets, factor investing has emerged as a popular strategy for investors seeking to maximize returns. This approach involves choosing investments based on specific criteria that are known to impact portfolio performance.
One of the most significant trends in factor investing in India is the focus on mid-cap and small-cap indices. These indices, such as the Nifty Midcap 150 and Nifty Smallcap 250, have been the best performers in recent years, with annualized returns of around 20-21%. Notable examples of funds tracking these indices include the Aditya Birla Sun Life Nifty Midcap 150 Index Fund and Motilal Oswal Nifty Midcap 150 Index Fund [2].
On the other hand, large-cap indices like the Nifty 50 and Sensex offer stable, steady returns, typically around 13-15% over a 5-year period. These indices are suitable for investors seeking exposure to blue-chip stocks with lower risk. Funds like HDFC Index Fund - Nifty50 Plan and ICICI Prudential Nifty Index Fund are representative of this category [3][5].
Sectoral factor investing also holds relevance in India, with high-growth sectors such as technology, renewable energy, and pharmaceuticals and healthcare expected to deliver superior returns in 2025. These sector exposures are often reflected in factor indices or thematic funds emphasizing these domains [1].
Beyond these, other notable factors include quality, value, size, momentum, and low volatility. For instance, the Nifty100 Low Volatility 30 index picks 30 less-volatile stocks from the Nifty 100 basket of large-cap stocks, offering better average 5-year rolling returns, lower volatility, and better risk-adjusted performance compared to the Nifty 100 [6].
The Nifty Alpha Low Volatility 30 index is another multi-factor index that combines alpha and low volatility, giving 50% weight to each factor. It picks stocks from the Nifty 100 and Nifty Midcap 50 indices and has better average 5-year rolling returns but higher volatility compared to the Nifty LargeMidcap 250 index [6].
In addition, the Nifty100 Low Volatility 30 index and the Nifty100 Quality 30 are similar in concept, but the latter picks 30 quality stocks instead of low-volatility ones [6].
Smart-beta investing, which means the construction of indices based on one or more factors, is another application of factor investing. This method changes the orientation of traditional indices by infusing certain factors into the index construction [4]. A prime example of this is the Nifty Alpha 50 index, which selects 50 stocks from the top 300 companies by free-float market cap based on their 'alpha' or outperformance [7].
In summary, the best performing factor indices in India combine mid/small-cap market segments with exposure to fast-growing sectors like technology and renewable energy for investors seeking higher returns in 2025. Whether it's the stability of large-cap indices or the potential growth of sectoral indices, factor investing offers a diverse range of opportunities for investors in India.
References:
- Factor Investing in India: Trends and Opportunities
- Top Performing Mutual Funds in India: 2025 Edition
- Best Large-Cap Funds to Invest in 2025
- Understanding Smart Beta: A Guide for Investors
- HDFC Index Fund - Nifty50 Plan
- Nifty100 Low Volatility 30 and Nifty100 Quality 30
- Nifty Alpha 50 Index
Mutual funds that track mid-cap and small-cap indices, such as the Aditya Birla Sun Life Nifty Midcap 150 Index Fund and Motilal Oswal Nifty Midcap 150 Index Fund, are popular choices for investors seeking higher returns in India. Additionally, smart-beta investing, a method of constructing indices based on factors like quality or low volatility, is another application of factor investing in the Indian market.
