Mutual funds take to factor-based investing; bridging active, passive gap

Use parameters such as momentum, company size, and volatility to construct portfolios

The domestic mutual fund (MF) industry is witnessing a shift with factor-based investing, bridging the gap between active and passive approaches.

At least three fund houses now manage active funds using factor-based models, while others are exploring this space through quant and active-momentum funds.

Factor-based investing employs investment models based on factors such as momentum, company size, value, and market volatility, to construct portfolios.

These schemes can be both active and passive, with active offerings using multiple factors and adapting to market cycles.

The factor funds on the active side are also referred to as smart-beta funds.