Is Midcap Smart Beta Funds the New Key to Higher Return?

Understanding smart beta funds and their usefulness for midcap investment

Midcap Smart Beta Funds

Funds that invest in mid-cap stocks are considered a good long-term option for mutual fund investors. There are actively managed mid-cap funds while there are others that follow the movement of an index. The index for mid-cap funds to mimic would be the likes of the Nifty Midcap 150. The choice is often between a passively managed fund like an index fund, or an actively managed fund. However, Smart Beta funds offer a middle ground.

Also Read: Looking more than 10% returns in a year - investing in balanced advantage funds

What is Smart Beta Fund?

Smart Beta fund takes a benchmark index and tries to exploit better growth opportunities within it. A Nifty 50 smart beta fund, for instance, may cherry-pick 20 stocks from the Nifty 50 using a thematic pattern. Such a fund scheme may also pick ETFs instead of stocks. While the 50 stocks included in Nifty 50 are selected based on their market capitalisation, the smart beta fund will consider the value, volatility, alpha etc. It will look at criteria like the return on capital employed of the 50 stocks, their dividend yield, and PB and PE ratio, to name a few. 

The price return of the stocks may be used to derive momentum scores after adjusting volatility. The Edelweiss Nifty 150 Momentum 50 fund, for instance, limits the stocks with no derivative contracts to 15%, to keep the momentum score realistic. A particular stock has a cap of 5% or five times its weightage in the Nifty Midcap 150. The fund is rebalanced biannually. 

Also Read: These low volatility stocks are popular among conservative hybrid funds, do you hold any of these stocks

Is it the answer to high-return expectations?

In the years leading up to the 2008 economic crisis, thematic fund schemes saw universal popularity. Smart beta funds may create a similar wave in the mutual fund market if their popularity continues. However, experts believe that smart beta should be a portfolio diversifier at best, rather than being your sole investment strategy. 

If you choose a low volatility-based smart beta fund now, your fund may not perform as well as a regular midcap or midcap index fund would when there is a broad-based rally in the market. Index funds invest continuously, irrespective of the market situation. So, your index fund contribution will invest even when a stock is undergoing a correction. A smart beta fund manager, on the other hand, may choose not to invest when the market is plummeting. As a result, you may miss out on averaging opportunities.

Also Read: Multi cap PMS strategies have delivered 21% in last 5 years

That said, smart beta is an innovative investment technique that allows managers to manoeuvre within a passive strategy. While investing solely in smart beta midcap funds may not be ideal due to changes in market conditions, it can be considered for a portion of your long-term equity investment.

Disclaimer: This article is intended for general information purposes only and should not be construed as investment or legal advice. You should separately obtain independent advice when making decisions in these areas.

Source

https://economictimes.indiatimes.com/mf/analysis/can-midcap-smart-beta-funds-offer-better-returns/articleshow/95394575.cms

https://www.moneycontrol.com/news/business/personal-finance/35-smart-beta-funds-how-to-choose-the-one-that-works-for-you-9491871.html

Funds that invest in mid-cap stocks are considered a good long-term option for mutual fund investors. There are actively managed mid-cap funds while there are others that follow the movement of an index. The index for mid-cap funds to mimic would be the likes of the Nifty Midcap 150. The choice is often between a passively managed fund like an index fund, or an actively managed fund. However, Smart Beta funds offer a middle ground.

Also Read: Looking more than 10% returns in a year - investing in balanced advantage funds

What is Smart Beta Fund?

Smart Beta fund takes a benchmark index and tries to exploit better growth opportunities within it. A Nifty 50 smart beta fund, for instance, may cherry-pick 20 stocks from the Nifty 50 using a thematic pattern. Such a fund scheme may also pick ETFs instead of stocks. While the 50 stocks included in Nifty 50 are selected based on their market capitalisation, the smart beta fund will consider the value, volatility, alpha etc. It will look at criteria like the return on capital employed of the 50 stocks, their dividend yield, and PB and PE ratio, to name a few. 

The price return of the stocks may be used to derive momentum scores after adjusting volatility. The Edelweiss Nifty 150 Momentum 50 fund, for instance, limits the stocks with no derivative contracts to 15%, to keep the momentum score realistic. A particular stock has a cap of 5% or five times its weightage in the Nifty Midcap 150. The fund is rebalanced biannually. 

Also Read: These low volatility stocks are popular among conservative hybrid funds, do you hold any of these stocks

Is it the answer to high-return expectations?

In the years leading up to the 2008 economic crisis, thematic fund schemes saw universal popularity. Smart beta funds may create a similar wave in the mutual fund market if their popularity continues. However, experts believe that smart beta should be a portfolio diversifier at best, rather than being your sole investment strategy. 

If you choose a low volatility-based smart beta fund now, your fund may not perform as well as a regular midcap or midcap index fund would when there is a broad-based rally in the market. Index funds invest continuously, irrespective of the market situation. So, your index fund contribution will invest even when a stock is undergoing a correction. A smart beta fund manager, on the other hand, may choose not to invest when the market is plummeting. As a result, you may miss out on averaging opportunities.

Also Read: Multi cap PMS strategies have delivered 21% in last 5 years

That said, smart beta is an innovative investment technique that allows managers to manoeuvre within a passive strategy. While investing solely in smart beta midcap funds may not be ideal due to changes in market conditions, it can be considered for a portion of your long-term equity investment.

Disclaimer: This article is intended for general information purposes only and should not be construed as investment or legal advice. You should separately obtain independent advice when making decisions in these areas.

Source

https://economictimes.indiatimes.com/mf/analysis/can-midcap-smart-beta-funds-offer-better-returns/articleshow/95394575.cms

https://www.moneycontrol.com/news/business/personal-finance/35-smart-beta-funds-how-to-choose-the-one-that-works-for-you-9491871.html

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