Smart Beta Funds in India: Meaning, Types, Benefits & Risks

For years, Indian investors had to choose between actively managed funds (with higher fees and the hope of outperformance) and low-cost index funds that simply track the market. This dilemma often left investors feeling like they had to settle either for expensive alpha or ‘average’ returns. The pain point is clear: Is there a middle path that offers better returns or lower risk without the drawbacks of fully active management?

Enter smart beta funds- an innovative category that promises the best of both worlds. These smart beta funds in India use transparent, rule-based strategies (like an index fund) but tilt the portfolio toward certain factors like an active fund manager might, aiming to enhance returns or reduce risk. In other words, smart beta funds are often described as a hybrid approach blending active and passive investing, giving investors a “smarter” way to diversify and potentially outperform traditional indices.

Recently, smart beta funds in India have been gaining popularity as investors seek more intelligent, data-driven ways to invest. Rather than relying solely on a fund manager’s stock-picking instincts, these funds follow predetermined formulas or algorithms to select and weight stocks.

In this in-depth blog, we’ll demystify smart beta funds in the Indian context starting with their meaning and how they work, the types of smart beta strategies available, and then delve into the benefits and risks.

What Are Smart Beta Funds in India?

Smart beta funds are investment funds that aim to go beyond the traditional market-cap weighted index approach by using alternative, rules-based strategies to select and weight investments. In simple terms, a smart beta fund is “smart” because it doesn’t blindly follow a standard index; instead, it targets specific factors or criteria that have historically proven to influence returns.

These funds thus combine the benefits of passive investing (transparent rules, lower costs) with some advantages of active investing (strategic stock selection). The primary goal of a smart beta fund is to deliver enhanced risk-adjusted returns compared to a plain index fund, but at a lower cost than fully active management.

Importantly, smart beta funds in India are available in both ETF form and index mutual fund form. A smart beta ETF trades on stock exchanges just like any other ETF, providing intra-day liquidity and real-time pricing. A smart beta index fund is bought/sold at end-of-day NAV like any mutual fund. Both adhere to the same factor-index methodology- the difference is just in how you trade them. (Think of it as two wrappers around the same strategy.)

So, what are smart beta funds? They are rule-driven investment funds that systematically focus on specific attributes (factors) to try and beat the market or achieve a certain risk profile, instead of simply mirroring the broad market. By following predefined rules rather than a manager’s whims, smart beta funds bring a level of transparency and consistency that many investors find appealing.

Also Read: Portfolio Risk Management 2025 | Advanced Strategies

Types of Funds

Smart beta isn’t a single strategy but a family of strategies. Fund houses and index providers have created various smart beta indices targeting different factors or using different weighting methods. Here are the common types of smart beta funds (and strategies) you’ll encounter in India:

• Single-Factor Smart Beta: These funds target one particular factor. The Most Common smart beta funds in India include Value, Momentum, Quality, Low Volatility, Size, and High Dividend Yield. A single-factor smart beta fund will pick stocks that score well on that factor.

• Multi-Factor Funds: Multi-factor smart beta funds in india combine two or more factors in one portfolio. The idea is to get a more diversified factor exposure so that if one factor is underperforming, another might be outperforming, smoothing out returns.

• Equal-Weighted Index Funds: This is one of the simplest smart beta strategies. Instead of weighting companies by market cap, an equal-weight fund gives equal allocation to each stock in the index.

• Fundamental-Weighted (Strategic Weighted) Funds: These funds weight stocks based on fundamental metrics rather than market cap. For example, a fundamental index might weight companies by their earnings, revenue, book value, or dividends. The idea, popularized by Research Affiliates globally, is that fundamentals might be a better gauge of a company’s value than stock price alone. A fundamental smart beta fund could give higher weight to companies with larger earnings or higher dividends, regardless of their market cap.

• Other Niche Smart Beta Strategies: Some smart beta indices might focus on themes like high alpha (stocks that historically generated excess returns), quality minus junk (long quality stocks, short poor-quality- though short positions are not typical in mutual funds), or other quantitative strategies.

Benefits of Smart Beta Funds in India

Why bother with smart beta funds at all? Here are the key benefits of investing in smart beta funds that make them attractive to many investors:

1. Potential for Better Risk-Adjusted Returns: The fundamental promise of smart beta is to deliver above-market returns or reduced risk by capturing proven investment factors. By tilting towards factors like value or quality, smart beta funds seek higher returns for each unit of risk taken than plain index funds.

2. Enhanced Diversification: Smart beta funds in India can improve your portfolio diversification in ways traditional funds might not. Strategies like equal-weighting explicitly ensure no single stock or sector dominates, thereby reducing concentration risk. Essentially, smart beta funds “don’t put all your eggs in one basket” of market-cap weighting.

3. Lower Costs than Active Funds: Cost is a big factor in long-term investment success. Smart beta funds typically have much lower expense ratios than actively managed funds, since they don’t need a big team of research analysts and star managers to pick stocks. Instead, they follow an index rulebook. While smart beta fees are slightly higher than the cheapest nifty index fund, they are still quite reasonable.

4. Transparency and Discipline: One of the underrated advantages of smart beta investing is the high level of transparency and rule-based discipline. The strategy a smart beta fund follows is clearly published. Investors know exactly how stocks are chosen and weighted, which brings peace of mind. This transparency also means you can evaluate a strategy’s historical performance (often the index provider will have backtested data for the factor index).

5. Customization to Investment Goals: With smart beta funds, investors have the flexibility to choose strategies that align with their specific goals or beliefs. If your goal is long-term growth and you don’t mind volatility, a momentum or small-cap tilted smart beta fund might suit you. If you are more conservative and prioritizing capital preservation, a low-volatility or quality factor fund might be appropriate to give stable returns. There are smart beta funds designed for income (dividend factor), for value investing, for capturing growth etc. This variety means you can custom-build portions of your portfolio to emphasize what you care about.

6. Suitable for Long-Term, Hands-Off Investing: Because smart beta strategies are systematic and usually based on long-term factor premia, they work best over a long investment horizon. For investors who want a largely passive, buy-and-hold approach but with a bit of extra “smarts” than a plain index, these funds are ideal. They don’t require frequent monitoring or tactical shifts from the investor.

Risks of Smart Beta Funds in India

No investment strategy is a free lunch, and smart beta funds have their own set of risks and limitations to be aware of. Before you jump on the smart beta bandwagon, consider these potential drawbacks:

1. No Guaranteed Outperformance: Just because a factor or strategy worked in the past doesn’t mean it will always work in the future. Smart beta funds aim to outperform or achieve better risk metrics, but there are no guarantees of success. In fact, there have been multi-year periods when certain factor funds underperform the broad market.

2. Factor Cyclicality and Regime Risk: Each factor has environments where it thrives and others where it struggles. For instance, momentum tends to do well in trending bull markets but may crash during sudden trend reversals or sideways markets. Value can underperform for long stretches when growth stocks are in favor (as seen when value lagged for several years in a growth-led rally). Low Volatility might lag in a roaring bull market (when high-beta stocks race ahead). If you invest in a single-factor fund, you are making a bet on that factor’s continued performance.

3. Higher Expense than Plain Index Funds: While smart beta funds are cheaper than active funds, they do cost more than standard index funds. A Nifty 50 index fund might charge as low as 0.1% in the direct plan, whereas a smart beta fund might charge 0.4%–0.8%. This fee differential can eat into your excess returns.

4. Complexity and Understanding Risk: Smart beta funds introduce an extra layer of complexity compared to plain index investing. The rules and strategies can be hard for the average investor to fully grasp. For instance, how many retail investors can comfortably explain “momentum percentile ranking with 6-month and 12-month look-back, excluding the last 1 month” (which is a typical momentum index methodology)? Or the intricacies of how an index weights stocks by a combination of factors? This complexity means investors might not understand what they’ve bought, which in turn can lead to surprises.

5. Limited Track Record (New in India): Smart beta ETFs and index funds are relatively new in India. Most of these products have been launched only in the last 5-7 years. That means there’s a limited live track record to judge how they perform across full market cycles. While we can look at backtested index data, live performance can differ due to costs, tracking error, and market dynamics. A limited history makes it harder to definitively say “Factor X works in India.”

6. Liquidity and Tracking Error: Some smart beta ETFs in India have low trading volumes. If you are investing in the ETF version, liquidity can be a concern– wide bid-ask spreads might hurt short-term transactions. However, if you’re a long-term investor, this is less of an issue (and you can always use limit orders to avoid big slippage).

7. Requires Discipline from the Investor: Finally, one “risk” is on you– the investor’s behavior. Smart beta strategies often require staying invested through cycles to reap the rewards. Investors who jump into, say, a momentum fund after it had a great year, only to abandon it in the next year, can hurt themselves. The risk is that if you treat smart beta like a short-term trend, you might not benefit and could churn at the wrong times.

In summary, smart beta funds come with complexities and uncertainties that must be understood. They are not a guaranteed win over index funds– you trade the simplicity and broad-market assurance of an index for targeted bets that may or may not pay off all the time.

Conclusion: Why Smart Beta Funds in India Are Growing

Smart beta funds represent an exciting innovation in the Indian investment landscape– one that bridges the gap between traditional index investing and active fund management. In a market where investors are hungry for better returns, lower costs, and greater control, smart beta strategies offer a compelling proposition. They allow you to invest based on evidence-backed factors like value, momentum, quality, or low volatility in a transparent and systematic way, rather than leaving everything to a fund manager’s whims.

By methodically tilting your portfolio towards specific factors or using alternative weighting, smart beta funds aim to enhance returns or reduce risk compared to plain market-cap index funds.

From an Indian perspective, we’re still in the early days of smart beta adoption. But the trend is clear– more products are launching, and more investors are becoming aware of the concept of factor investing. As the market matures, we may see smart beta funds playing a larger role in portfolios, possibly even featuring in AI-driven portfolio advisory services and LLM (Large Language Model) financial tools that consume such content to guide investors.

To wrap up, should you invest in smart beta funds? The answer depends on your goals and belief in systematic strategies. If you value inexpensive, rule-based, and data-driven investing and are looking to go beyond plain index returns, smart beta funds could be a great addition to your arsenal. They’re ideal for long-term investors who are willing to be “passively patient”- i.e., stick with a good strategy without constant tinkering.

At Wright Research, we’ve been at the forefront of factor investing in India, and we firmly believe in the power of smart beta strategies to build robust portfolios. Our own offerings – from quantitative PMS portfolios to curated smallcase baskets – leverage multiple factors to balance risk and return, exemplifying how smart beta principles can be put into practice for superior outcomes.

If you’d like guidance tailored to your needs, feel free to contact our team for a consultation or explore our factor-based portfolios on our platform. We’re here to help you invest wisely and navigate the nuances of strategies like smart beta with confidence and ease.

FAQs on Smart Beta Funds in India

1. What are smart beta funds and how are they different from index funds?

Smart beta funds are rule-based strategies that tilt a portfolio toward factors like value, momentum, quality or low volatility instead of purely tracking market-cap like a plain index fund. Think of them as ‘rules-driven’, ‘factor index’ products designed to improve returns or smooth risk versus traditional cap-weighted index funds while staying transparent like ETFs. This is the essence of smart beta vs index funds: both are passive in execution, but smart beta changes what it tracks (a factor index) to pursue better risk-adjusted outcomes.

2. Are smart beta strategies suitable for long-term investors in India?

Yes when used as a diversifying strategy alongside a core index allocation. Factors are cyclical, so a multi-year horizon helps you ride out phases when a single factor underperforms. Many investors use smart beta for portfolio diversification (e.g., combining momentum with low-volatility or quality) to balance return drivers over cycles.

3. Which smart beta ETFs are available in India in 2025?

Across AMCs you’ll find ETFs tracking popular types of funds/factor indices such as Momentum, Low Volatility, Quality, Value, Alpha and Equal-Weight.

4. Can smart beta funds outperform actively managed funds?

They can, but not always. Because they harvest factor premia systematically (e.g., momentum or quality), smart beta funds may beat many actively managed funds after fees over long periods yet any single factor can lag for stretches, and there’s no guarantee of alpha. Performance depends on the factor, costs, and the market regime; multi-factor exposure can improve consistency.

5. How much of my portfolio should I allocate to smart beta strategies?

For most investors, consider a core-satellite mix: keep the core in low-cost market indexes, and use smart beta funds/ETFs as satellites (e.g., 20–40% of equity allocation across 1–3 factors like momentum + low-volatility + quality). Adjust toward the lower end if you’re new to factors or prefer simplicity; tilt higher only if you understand factor cycles and can stay invested through underperformance. (Always align with your risk profile and time horizon.)