Historically factors have demonstrated superior risk-adjusted returns over the broad-market. This trend has been persistent across global and domestic markets as well as multiple asset classes. Hence they demand an important allocation in your portfolio.
Traditionally, institutional investors, active fund managers and HNIs were the only ones using factors to manage portfolios. However, recent advancements in data and technology have made it possible for all investors to invest in Factor based strategies in a cost-efficient manner through the medium of ETFs and Index funds.
However, it is important to also be mindful of the fact that factor based strategies, much like any other investment strategy, lack an absolute guarantee of returns.
Factor performance tends to be highly cyclical in nature and these cycles can last for many years. Factors may also face higher drawdowns than broad-based indices such as NIFTY500 and NIFTY50. Hence, you may enhance your portfolio performance by allocating factors as a part of your satellite portfolio. So in a nutshell, ‘factor in’ factor based ETFs and Index Funds to add some interesting flavors to your investment portfolio and enhance its returns through a more rules-based decision making process.
We hope that you must have understood what are factors and how to add factors to your portfolio, as it is our constant endeavour at Motilal Oswal to educate & make an ‘investor’ a ‘sound investor’! Happy Investing!
