How does factor investing lead to alpha returns?

by Financial Express

Published On Dec. 30, 2022

In this article

Factor investing is gaining traction in the Indian market as investors seek excess returns by focusing on specific stock characteristics, or factors. In this article from Financial Express , Sonam Srivastava, Founder, Wright Research, talks about factors, such as value, momentum, quality, size, and volatility, that have a track record of outperformance and are easily understandable for regular investors.

By constructing diversified portfolios based on these factors, factor investing strategies offer reduced risk and volatility compared to traditional index-based investments like the Nifty 50. This approach can generate alpha returns through portfolio diversification and the identification of undervalued assets. Incorporating factors into investment strategies has the potential to deliver higher returns than approaches that overlook these factors.

“A “Factor” is a differentiating characteristic of a stock that delivers excess returns. These factors are deep-rooted rationales for outperformance that have lasted over decades.”

- Sonam Srivastava, Founder, Wright Research

Here’s a gist:

  • Factors are differentiating characteristics of stocks that deliver excess returns and have lasting outperformance.

  • Factor investing strategies are well-diversified baskets of stocks based on factors such as value, momentum, quality, size, and volatility.

  • Factor investing can lead to alpha returns by providing diversification and capturing returns from mispriced assets.

  • It reduces portfolio risk and volatility compared to traditional index-based investments.

  • Factors like value, momentum, quality, size, and volatility are commonly used in factor investing.

  • Other factors considered include yield, low correlation, and sustainability.

  • Performance depends on the portfolio creator, but diversification, risk targeting, and dynamic deallocation can make these strategies safer.

  • A multi-factor approach can compound returns and outperform the market with better risk management.

Read the full article here on Financial Express.

To learn more about Factor Investing check out these articles

  1. What is Factor Investing?
  2. What are the different types of Investing Factors?
  3. Unveiling the Nuances of Factor Investing: A Balancing Act of Risks and Rewards
  4. Can Factor Investing provide higher returns?
  5. Multi Factor Investing
  6. Complete guide to Factor Investing & Wright Balanced Multifactor Portfolio

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