AUM (Assets Under Management) of Smart Beta Funds is less than 1 billion dollars in the Indian Market compared to over 1.3 trillion dollars AUM in the Global Market. Smart beta funds track an index, but they are based on additional factors on which the stocks from the index can be included in the portfolio.
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Smart Beta Funds(SBFs) are rule-based factor investments, which fall under the category of ETFs. They are the improvised versions of traditional ETFs and are considered liquid funds.
Smart Beta Funds are relatively new in the Indian market and were first launched 6-7 years ago. While in the global market, Smart Beta Funds started getting popular after the 2008–2009 crisis. The statistics from Statista Research Development showed that 68 percent of investors in the US had AUM in the Smart Beta funds, while 50 percent of investors in Europe and 69 percent of investors in China had AUM in the Smart Beta funds as of May 2022.
Smart Beta Funds (SBFs) used a combination of both passive and active investment methodologies. The Smart beta Strategies are based on a single or combination of different strategies in a portfolio such as Equally Weighted Factors, High-dividend, alpha, momentum, low volatility, fundamental weight, or high qualities. Investors combine these strategies to improve their returns and beat the market by reducing human emotions and subjectivity in these decision-making investments.
Advantages of investing in the Smart Beta Funds
- Low Cost of investment compare to active funds
- Increased returns compared to Traditional ETFs.
- Transparent like Index strategies
- It is a combination of active and passive techniques of investment
- Can use various strategies to diversify investment portfolios and reduce volatility.
- Factor-based Investment creates a smart beta Index.
- It can outperform benchmarks
Through a strategic combination of various factors can give you better returns.
Cons to investing in the SBFs
- They have a lower trading volume so liquidity is also not high.
- As Smart Beta funds are new in India, it is difficult to buy or sell funds.
- Compare to traditional ETFs, they can be riskier and have a longer period of underperformance.
- It has higher fees than Passive Index funds.
- It has a high expense ratio compared to traditional ETFs.
NOTE: Smart Beta funds have shown an annual increase of over 21 percent globally in the past few years. In the Indian market, smart beta funds are slowly gaining a strong position.
Some of the better-performing Smart Beta ETFs to watch for out in India are :
- Edelweiss ETF – Nifty 100 Quality 30
- ICICI Pru NV20 ETF
- Kotak NV20 ETF
- ICICI Pru Nifty Low Vol 30 ETF
- Nippon India ETF NV20
- Sundaram Smart Nifty 100 Equal Weight Fund
- Principal Nifty 100 Equal Weight Fund
- DSP Equal Nifty 50 Fund
As smart beta funds are a relatively new concept, investors are hesitant to invest in them. Yet it has gained huge popularity in the Indian market for investors who want decent returns but not too much risk. But it is also important to track this market closely, as new factors can emerge. Also, for new investors, the experts advise sticking to the asset allocations rather than beta funds, as the data to compare and analyze the performance of these funds is still limited.