Don't Judge a Book by its Cover: Evidence of Returns Based Factor Exposures of Multifactor Strategies in India

Abstract

The number of funds that employ smart beta strategies to generate higher returns for investors has grown in India in recent years. Assessing these funds is challenging due to their diverse factor exposures and relatively short history in the Indian market. This paper uses a contemporary return factor model to analyse a systematically selected sample of funds that follow a multifactor investment approach offered by both traditional asset management companies and fintech platforms. Our results reveal significant variation in the alignment of these funds with multifactor investing principles. Contrary to expectations for disciplined and quantitatively orientated funds, most funds show considerable exposure to idiosyncratic risk rather than systematic factors. These findings suggest that many portfolios are designed to maximise alpha through specific asset exposures rather than factor-based returns. Based on these findings, we identify several policy implications for investors, fund managers, and policymakers. The observed variability in the adherence to multifactor principles underscores the need for transparency in strategy design and execution and the adoption of appropriate benchmarks for performance evaluation.

Keywords: Factors, Investment Strategy, Indian Equity, Multifactor Investing, Smart Beta Strategies, Returns-Based Analysis, Portfolio Management JEL Classification Codes G00, G11, C15

JEL Classification: G00, G11, C15