#INVESTFORGOOD

[Title to come]
Getting Smarter Series – Factor Investing & Smart Beta
[Sub-Title to come]

Date Strictly for Intended Recipients Only

* DSP India Fund is the Company incorporated in Mauritius, under which ILSF is the corresponding share class
Factor Investing
• Factor investing harnesses the power of broad drivers of returns of any asset class to design and
customize portfolio for each investor as per their unique need of risk, diversification and outcome.
• Smart Beta is a sub-set of factor investing and is used interchangeably.
• There are ‘Macroeconomic’ factors like Inflation, GDP employment levels etc. that indirectly impact
companies and hence their stock prices.
• The ones that are widely known are the ‘Style’ factors as explained below

Value Momentum Volatility Quality Growth Size

• To invest in • To buy • Focus on low • Companies • Companies • Research says
assets which current volatility as a with low with higher smaller
are priced winners factor. debt and revenue and companies
below their • Recent out- History stable profit growth outperform
intrinsic performance shows that earnings but could over long
value defined which are an • ROE also have term due to
by valuation likely to investment • Leverage high volatility scale
parameters continue to which is less and low benefits.
• Cash flows
like the perform volatile has a dividend • Premium
following: higher yield owing to
• Price to chance of scanty
earnings delivering analyst
• Price to Book better coverage,
returns lesser
• Price to Sales
overtime. transparency
etc.
etc.

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 Which factor to choose?
Factor (%
2021 2020 2019 2018 2017 2016 2015 2014 2013 2012 2011 2010 2009 2008 2007 2006
returns)
Broad Market 32 18 9 -2 38 5 0 39 5 33 -27 15 91 -56 64 36
Alpha 41 24 10 1 52 6 16 33 10 34 -13 22 62 -67 85 53
Equal Weight 35 19 4 -5 28 7 -5 35 4 32 -26 17 101 -50 55 37
Momentum 54 20 11 -2 58 10 11 50 13 39 -16 20 69 -60 100 44
Quality 26 26 6 9 30 1 2 41 20 31 -10 28 131 -50 50 32
Value 56 8 -14 -26 47 25 -7 79 -14 32 -38 31 133 -57 108 14
Volatility 24 24 5 7 30 3 10 37 7 32 -12 26 93 -42 31 44
Multi-Factor 26 26 4 3 34 6 11 37 14 31 -13 33 96 -48 40 26

• These are back tested returns. Since the life of most ‘Smart Beta’ passive products in India is
short, the availability of actual performance is scanty.
• Factors are cyclical and can keep underperforming simple broad market index funds for long
phases. In India, data shows, outperforming ‘Factor’ changes almost every year. It is possible
that a factor can play out well in a particular phase like inflationary period in India but does not
outperform in other regions.
• It can be suboptimal to choose single factor based only on past performances. An investor can
choose to create a diversified portfolio with multiple factors that are uncorrelated.
Indices considered: -Nifty 500 TRI, NIFTY 100 Alpha 30 TRI, Nifty 50 Equal Weight TRI, Nifty 200 Momentum 30 Index TRI, Nifty 200 Quality 30 Index TRI, NIFTY 500
Value 50 TRI, Nifty 100 Low Volatility 30 TRI, NIFTY Alpha Quality Value Low Volatility 30 TRI
Past performance may or may not be sustained in future and should not be used as a basis for comparison with other investments. It is not possible to invest directly
in an index. Source: MFI . Returns are in % terms.
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Benefits and Concerns

•As smart beta strategies are now indexed which means they are coded within the
Low cost construction framework of an Index. This eliminates the need of the fund manager to
research and analyze each company/sector. Hence these can be offered at lower cost than
active strategies

•If one invests in factors that have low correlation this can offer great diversification to
Diversification traditional portfolio. This means, even when the broad market becomes volatile, a part of
the portfolio can behave differently thereby reducing returns volatility.

•Investing involves emotions and that may work against our favor sometimes. Traditional
No human bias investing can reflect human bias of the Fund Manager. This can be eliminated with rules-
based ‘Smart Beta’ investing.

•An investor can choose to increase and decrease risk in a measured way according to their
Risk Management appetite. Like momentum strategies tend to have high volatility while a low volatility
strategy could reduce certain types of risks.

Along with the mentioned merits of factor investing, there are certain concerns:
• There is insufficient data available to gauge the actual performance of these strategies.
• Data mining and back testing these strategies requires new age technological infra and coding
capabilities.
• Live strategies can have impact cost, slippages which are different than back-tested model returns.
• Factor premiums can reduce over time with large flows coming in as market gets more efficient.
• Factors can underperform for a very long time and investors can lose patience ending with sub-optimal
returns.

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 #INVESTFORGOOD

Disclaimer: In this material DSP Investment Managers Pvt. Ltd. (the AMC) has used information that is publicly available, including
information developed in-house. Information gathered and used in this material is believed to be from reliable sources. The AMC
however does not warrant the accuracy, reasonableness and / or completeness of any information. The above data/statistic are
given only for illustration purpose. The recipient(s) before acting on any information herein should make his/their own investigation
and seek appropriate professional advice. This is a generic update; it shall not constitute any offer to sell or solicitation of an offer
to buy units of any of the Schemes of the DSP Mutual Fund.

Mutual Fund investments are subject to market risks, read all scheme related documents carefully.