Factor Investing in India

Factor Investing in India: What Works, When, and Why

What if you could improve your investment outcomes not by chasing the next hot stock, but by following a disciplined, research-backed strategy already used by some of the world’s largest investors? That’s exactly what factor investing aims to do.

Rather than relying on predictions or market sentiment, factor investing systematically builds portfolios around proven characteristics, called factors, that have been shown through decades of global and local data to enhance risk-adjusted returns. These include value (undervalued stocks), momentum (recent top performers), quality (financially strong companies), and low volatility (stable-price stocks). This approach helps investors tilt their portfolios toward traits that historically drive long-term performance.

The best part? You no longer need advanced tools or global accounts to invest this way. Indian investors can now access factor-based strategies through NSE/BSE-listed smart beta indices, as well as mutual funds and ETFs designed around these factors, making it easier than ever to invest using a rules-based, data-driven framework.

In this article, we’ll break down how each factor, such as value, quality, momentum and volatility works, when it tends to perform best, and what real-world data says about its effectiveness in the Indian market. Whether you’re new to this concept or looking to sharpen your strategy, you’ll come away with a clear understanding of how to make factor investing work for you.

Value Investing: Looking for Bargains

Value investing is about identifying fundamentally strong companies that are temporarily undervalued by the market, essentially, buying quality businesses at a discount. These stocks typically trade at lower price-to-earnings (P/E) or price-to-book (P/B) ratios, or offer higher dividend yields compared to their peers. Think of it as shopping for high-quality items during a sale.

In India, this strategy is represented by indices like the Nifty 500 Value 50, which selects companies based on valuation metrics. Since 2021, value investing has emerged as one of the best-performing factor strategies in India, particularly during post-COVID economic recovery phases and broader market rebounds. These periods often see investors shift their focus from hype to fundamentals, favouring undervalued, stable companies.

While value stocks may underperform during tech-driven rallies or prolonged market corrections, they tend to outshine in turbulent markets due to their defensive nature. Historically, value strategies have shown lower drawdowns and higher resilience compared to momentum or quality-focused approaches, making them a reliable long-term core allocation for investors seeking both stability and upside.

Momentum Investing: Riding the Winners

Momentum investing is based on a simple yet powerful idea: stocks that have performed well recently tend to keep performing well, at least in the short term. Typically, momentum strategies look at price performance over the past 6 to 12 months, often adjusted for volatility, to identify the strongest trends.

In India, this approach is captured by the Nifty 200 Momentum 30 index, which tracks the top 30 companies within the Nifty 200 based on their risk-adjusted momentum. It’s a strategy that tends to shine in bull markets, making it attractive for more aggressive investors seeking to capitalise on strong upward trends.

However, momentum comes with higher risk. It can quickly reverse during sharp corrections or market rotations, something investors experienced during the market pullback from late 2024 to early 2025, when previously high-flying stocks saw steep declines.

To address this volatility, some newer mutual funds have come up that combine earnings momentum with traditional price momentum. This hybrid approach aims to improve consistency and reduce drawdowns, offering a more balanced way to harness the power of momentum investing.

Quality Investing: Prioritising Financial Strength

Quality investing focuses on owning companies with strong, stable fundamentals, those that consistently deliver high return on equity (ROE), maintain low debt levels, and demonstrate steady earnings growth. These businesses tend to be more resilient, making quality a preferred strategy during times of market uncertainty or economic stress.

In India, this style is tracked by the Nifty 200 Quality 30 index, which selects only the most financially sound companies from the broader Nifty 200 universe. The goal is to create a portfolio built on corporate strength and reliability, rather than market momentum or valuation discounts.

Investor interest in quality has grown in recent years, particularly during periods of high inflation, global instability, or slowing growth, as investors look for safety without giving up on equity exposure. Quality stocks often provide better downside protection and more stable returns during volatile market phases.

Low Volatility: Reducing the Ups and Downs

Low-volatility investing aims to minimize risk by selecting stocks with the most stable price histories. These stocks may not shoot up quickly, but they rarely crash hard either.

The Nifty 100 Low Volatility 30 and Nifty 500 Low Volatility 50 indices provide exposure to this strategy. These indices prioritize price stability, which can be especially helpful in market downturns.

In early 2025, this factor outperformed all others as market volatility spiked. While low-volatility may underperform during bull runs, it serves as a valuable portfolio anchor for conservative investors or those closer to financial goals.

What Actually Works in India?

If you’re looking for a single “best” factor in India, the truth is, there isn’t one. Indian markets, like global ones, move in cycles. Each factor, value, momentum, quality, and low volatility, has periods when it leads and times when it lags. That’s why relying on a single factor can expose you to timing risk, while combining multiple factors can offer more consistent outcomes.

In India, one of the most effective combinations over recent years has been value and momentum. Value tends to perform well during economic recoveries or when fundamentals regain investor focus, while momentum thrives in strong, trending markets. When used together, they can complement each other, capturing upside while smoothing out some of the volatility.

Meanwhile, factors like quality and low volatility may not always top performance charts, but they play a vital role in managing downside risk, especially during market drawdowns or macroeconomic uncertainty. Their role is more defensive, helping to reduce portfolio shocks and support long-term compounding.

Ultimately, factor investing in India isn’t about chasing what worked last year. It’s about building a disciplined, data-driven strategy that balances growth with resilience, through bull markets, corrections, and everything in between.

Conclusion

Factor investing gives Indian investors a structured, long-term approach to wealth creation, without needing to time the market. Since no single factor leads at all times, diversifying across styles is essential.

In India, the value–momentum combination has consistently delivered strong results, while quality and low-volatility help cushion downside risk. You don’t have to choose just one, mutual funds and ETFs now make it easy to build a tailored, multi-factor portfolio.

It’s not about prediction, it’s about discipline, transparency, and a long-term mindset. Factor investing may not be flashy, but with consistency, it works.

Reference

Prasad Iyer

[Certified Financial Planner – CFP CM]