What Are Smart Beta Funds?
You have probably heard of index funds already. These are funds that track an index by investing in the same stocks as in the index, that too in nearly the same proportion. By doing so they attempt to imitate the performance of the index. As a result, they are categorised as passively managed funds.
In contrast, smart beta funds do not follow the same proportion of stocks as the index, though they invest in the same stocks. This is because, although they invest in the same stocks as the index, they want to outperform the index by choosing the proportion of stocks as per their future potential rather than their present conditions. As a result, they are seen as a more actively managed fund than simple index funds.
Know More About What is an Index Fund?
Smart beta funds follow a set of rules-based investment strategies. These strategies tend to not mirror the original structure of the index and are mindful of the changing market conditions. The strategies are based on specific investment factors, such as value, quality, low volatility, or momentum. As a result, smart beta funds are also known as factor-based funds or strategic-beta funds.
For example, a value-based smart beta fund would likely consider factors that help find out which stocks in the fund are currently undervalued and then make disproportionately higher investments in those stocks that are undervalued.
How Do Smart Beta Funds Work?
As mentioned before, smart beta funds follow a unique set of rules-based investment strategies that go beyond the traditional market cap–based methodology. While index funds allocate a higher share of the fund to the stocks of companies with higher market cap, a smart beta fund considers other factors such as PE Ratio, dividend yield, solvency ratios, revenue growth rate, etc.
For example, a low volatility smart beta fund might invest in stocks with low beta i.e. stocks whose price moves less relative to the movements in the overall market. Similarly, a momentum smart beta fund might invest in stocks that have been outperforming the market recently. Some smart beta funds focus on a single factor, while others focus on multiple factors.
Overall, the smart beta fund will always try to allocate funds to stocks in such a way that the risk-adjusted return from the fund will be higher than the returns from the index itself.
Smart Beta Funds With Multiple Factors
Some smart beta funds focus on multiple factors. For example, a multi-factor smart beta fund might invest in stocks that have low price-to-earnings ratios, high dividend yields, and strong balance sheets.
You may consider multi-factor smart beta funds if you are trying to factor in multiple risks and strengths of stocks while creating your investment strategy. By investing in stocks that meet multiple criteria, multi-factor smart beta funds offer a more realistic approach and increase the chances of a better performance.
Best 5 Smart Beta Funds
As such, which fund is best for you depends on how the risk and return profile of the fund fits into your overall portfolio and risk appetite. However, going by 1 year returns as of October 18, 2023, the following are some of the top smart beta funds available:
| Name of the Fund | 1 Year Return |
| Motilal Oswal S&P BSE Enhanced Value ETF Fund | 56.57% |
| Nippon India ETF Nifty Dividend Opportunities 50 | 29.46% |
| Mirae Asset Nifty 100 Low Volatility 30 ETF | 26.83% |
| HDFC Nifty 200 Momentum 30 ETF | 24.53% |
| HDFC Nifty 50 Value 20 ETF | 23.56% |
How To Buy Smart Beta Funds on Angel One?
Follow these simple steps to buy a smart beta fund on Angel One:
- Click on ‘ETFs’ on the HOME page of the Angel One mobile app.
- Under ‘ETF Categories’, click on ‘VIEW ALL ETFs’.
- On the next page, scroll the categories to the right to find ’Smart Beta’.
- Sort the list of smart beta funds by ETF price or returns from the option ‘SORT BY’.
- Click on the fund you are interested in and check out its details and charts.
- If you like the ETF, click on ‘BUY’.
- Choose the order type i.e. either one-time payment or SIP.
- Place the order and the ETF will become a part of your portfolio.
Advantages of Smart Beta Funds
Compared to traditional index funds, smart beta funds can potentially generate higher returns, reduce risk, and improve diversification.
The following are some of the key advantages of investing in smart beta funds:
- Higher returns – Smart beta funds aim at outperforming the index that they are based on. Therefore, they consider multiple factors beyond market cap in order to allocate funds to stocks as per their likelihood of higher returns. Thus, smart beta funds are better positioned to earn returns higher than the benchmark index.
- Reduced risk – Since smart beta funds consider multiple factors, they also account for the various risks that the stocks may face in terms of both the fundamentals of the company as well as trends in the stock market. Therefore, smart beta funds may be less risky to invest in than traditional index funds.
- Lower fees – Although they are more actively managed than traditional index funds, smart beta funds tend to have lower fees than other funds that are even more actively managed.
Disadvantages of Smart Beta Funds
The following are some of the disadvantages of smart beta funds:
- Smart beta funds may have lower liquidity and higher volatility than traditional index funds. As a result, there is a certain degree of liquidity risk attached to these funds.
- Moreover, it may happen that a smart beta fund does not outperform the market in certain situations or timelines.
- Since they base their strategy on factors beyond the market cap, smart beta funds are more complex to understand.
Should You Invest In Smart Beta Funds?
Whether or not you should invest in smart beta funds depends on your individual investment goals and risk tolerance. Smart beta funds can be a good option for investors who are looking for a way to potentially outperform the market while reducing risk. However, it is important to do your research and understand the risks involved before investing in any smart beta fund.
Conclusion
Smart beta funds stand somewhere between passively managed index funds and funds that are actively managed. If you are interested in investments in smart beta ETFs or smart beta mutual funds, open a free Demat account with Angel One and start investing today!
FAQs
What is beta in the stock market?
Beta in the stock market means the value by which the stock price changes due to a movement in the prices of the overall stock. It is helpful in understanding how closely the volatility of a stock is influenced by the volatility in the overall stock market.
Which is the best smart beta fund in India?
Whether a smart beta fund is the best or not depends more on whether it is suited to your overall portfolio. For example, if it is a low-risk fund then it is appropriate if you want to balance your high-risk portfolio with it.
Where can I buy smart beta funds?
You can easily buy smart beta funds on Angel One. Simply open the ETF portal on the Angel One mobile app from the HOME page and filter your search for ETFs based on the ‘Smart Beta’ category. You will find a list of smart beta funds to invest in.
Are smart beta funds risk-free?
No, smart beta funds do carry significant risks. It really depends on the index that it is tracking and the decision of the fund manager related to the allocation of funds. Like any stock market index, smart beta funds are also susceptible to market forces.
Do smart beta funds have high tracking error?
Smart beta funds, by definition, do not adhere to the allocation of weights in an index as per market capitalisation only. Therefore, its performance is bound to differ from the index it is based on. However, how well it outperforms the index depends on the market forces and the capability of the fund manager to adjust the structure of the fund.
