Definition
Factor Investing
Factor investing is the systematic targeting of securities with specific measurable characteristics, called factors, that academic research has linked to higher long-run risk-adjusted returns.
The best-known factors are value, momentum, quality, low volatility and size. In India, factor strategies are available through factor indices (such as Nifty and BSE factor series), factor ETFs and quant mutual funds, letting investors tilt toward characteristics rather than picking individual stocks.
Factor returns are cyclical: value can lag for years before rebounding, while momentum can crash sharply. This is why multi-factor models combine several factors to smooth the ride. Factor investing sits between passive indexing and active management, and is the engine behind most smart-beta products.
Related terms
- Smart BetaSmart beta refers to rules-based index strategies that weight securities by factors or alternative metrics rather than by market capitalisation, aiming to improve returns or reduce risk versus a plain cap-weighted index.
- Multi-Factor ModelA multi-factor model combines several return factors, such as value, momentum, quality and low volatility, into a single framework to score and weight securities, diversifying across drivers of return.
- Value FactorThe value factor is the tendency, documented in long-run data, for relatively cheap stocks, measured by ratios like price-to-earnings or price-to-book, to outperform expensive ones over time.
- Momentum FactorThe momentum factor captures the tendency for stocks that have performed well recently to keep outperforming in the near term, and recent losers to keep lagging, over horizons of roughly three to twelve months.
Plain-English explainer from The Dispatch Investors Encyclopedia. General information, not financial advice.