Smart Beta Funds Explained Simply
- editor9196
- 20 hours ago
- 5 min read
by KarNivesh | 08 October, 2025
Investing can be confusing, especially with so many fund types available today. But among the newer investment trends gaining ground in India, Smart Beta Funds have been making a strong mark. These funds combine the simplicity of index investing with the intelligence of active strategies. As of August 2024, Smart Beta Funds in India had a total Assets Under Management (AUM) of ₹21,700 crores, showing how quickly investors are recognizing their potential.
What Exactly Are Smart Beta Funds?
Smart Beta Funds are like a smart blend between passive index funds and actively managed mutual funds. Traditional index funds simply follow a market index like the Nifty 50. Active funds, on the other hand, rely on fund managers to pick stocks they believe will outperform.
Smart Beta Funds sit comfortably in between — they follow a rules-based strategy rather than depending on a fund manager’s personal judgment. These rules are based on certain investment “factors,” such as value, momentum, quality, low volatility, and dividend yield. This approach helps investors get better risk-adjusted returns, meaning they earn more for each unit of risk they take.
How Do Smart Beta Funds Differ From Other Funds?
Traditional index funds invest based on market capitalization — the larger a company, the higher its weight in the index. But Smart Beta Funds use alternative weighting methods like equal weighting or fundamental weighting. This helps avoid overdependence on big companies and spreads risk more evenly.
Smart Beta Funds are cost-effective, too. They usually have expense ratios between 0.25% and 0.75%, cheaper than actively managed funds, which can charge up to 2.5%, but slightly higher than simple index funds, which may cost just 0.05% to 0.15%.
The Five Key Smart Beta Factors
Smart Beta strategies are built around five major factors that influence stock performance. Let’s look at each one simply.
1. Value Factor
This focuses on undervalued stocks — companies that look cheap based on metrics like Price-to-Earnings (P/E) or Price-to-Book (P/B) ratios. Value investing often performs well during market downturns when investors seek safety. In India, examples include HDFC Bank, ITC, and Reliance Industries, which have strong fundamentals and attractive valuations.
2. Momentum Factor
Momentum investing works on the idea that stocks doing well recently will likely keep performing. These funds buy winners and ride the trend until it fades. Momentum funds shine in bullish markets. In India, they hold the largest share of Smart Beta assets — around ₹10,850 crores, or 50% of total AUM.
3. Quality Factor
Quality-based Smart Beta Funds invest in companies with strong financial health, high Return on Equity (ROE), low debt, and steady earnings. These funds are ideal for conservative investors. Companies like Nestle, Hindustan Unilever (HUL), and Kotak Mahindra Bank fit this profile well.
4. Low Volatility Factor
Low Volatility funds focus on stocks with stable prices, aiming for smoother returns and lower downside risk. They perform well in volatile or falling markets. In India, low volatility funds are the second-largest Smart Beta category, managing around ₹7,417 crores in assets.
5. Dividend Yield Factor
Dividend Yield funds invest in companies that regularly pay dividends, offering investors steady income and growth potential. Examples include Coal India, ONGC, and Power Grid Corporation.
How Smart Beta Funds Work
The process begins with a known index like Nifty 50 or BSE Sensex. Then, rules are applied to filter stocks based on specific factors — say, value or low volatility. Once the stocks are chosen, they are weighted using systematic methods rather than market size.
These funds are regularly rebalanced, usually quarterly or semi-annually, to maintain their factor exposure. This systematic, rules-based design removes emotional decision-making, ensuring consistent investment behavior.
Rebalancing and Costs
Smart Beta Funds experience slightly higher portfolio turnover — about 20–30% per year, compared to 3–8% for simple index funds. This means more buying and selling, which could increase transaction costs and tax impact. But this is necessary to keep the strategy aligned with its chosen factors.
Smart Beta vs Traditional and Active Funds
Type of Fund | Cost | Management Style | Goal |
Index Fund | 0.05%–0.15% | Passive | Match market returns |
Smart Beta Fund | 0.25%–0.75% | Rules-based | Beat the market with lower risk |
Active Fund | 1.5%–2.5% | Manager-driven | Outperform benchmarks through skill |
Popular Smart Beta ETFs in India
India now offers several Smart Beta options across different strategies:
ICICI Prudential Nifty 100 Low Volatility 30 ETF – ₹1,464.21 crores AUM, expense ratio: 0.14%, minimum investment ₹1,000.
Mirae Asset Nifty 100 Low Volatility 30 ETF – ₹1,200 crores AUM, expense ratio: 0.25%, minimum ₹500.
HDFC Nifty50 Value 20 ETF – ₹800 crores AUM, expense ratio: 0.35%, focuses on value stocks.
Kotak Nifty 200 Momentum 30 ETF – expense ratio: 0.40%, minimum ₹1,000.
ICICI Prudential Nifty Alpha Low-Volatility 30 ETF – ₹941.05 crores AUM, expense ratio: 0.10%, a multi-factor approach.
Why Smart Beta Funds Are Gaining Popularity
Better Risk-Adjusted Returns:By targeting specific factors like value and quality, Smart Beta Funds can outperform regular indices over time while keeping risk under control.
Diversification:They reduce overconcentration in big companies by using alternative weighting. Investors can even mix multiple factors for balance — when one factor lags, another may lead.
Cost and Transparency:Cheaper than active funds and more transparent, as their rules are public and consistent.
Behavioral Discipline:The rules-based system prevents emotional mistakes like panic selling or chasing short-term trends.
Things to Watch Out For
While Smart Beta Funds are promising, they do come with some risks:
Cyclical Performance: Factors like value or momentum perform differently under varying market conditions.
Higher Turnover: More trading means higher costs and possible tax effects.
Complexity: Investors need to understand how each factor behaves to choose wisely.
Sector Bias: Certain factors may overexpose portfolios to specific sectors, like technology or finance.
How to Invest in Smart Beta Funds
Most Smart Beta Funds in India are available as Exchange Traded Funds (ETFs). You can buy them directly on stock exchanges through your trading account. Minimum investments are usually ₹500 to ₹1,000.
Some fund houses also offer Systematic Investment Plans (SIPs) for Smart Beta Fund-of-Funds, starting at just ₹100 per month, allowing small investors to participate gradually.
Investors can choose Direct Plans (lower cost, no distributor commission) or Regular Plans (through advisors). Those comfortable with self-research should opt for Direct Plans.
Tax and Returns
Smart Beta ETFs are taxed like equity funds.
Short-term gains (under 1 year): 20% tax.
Long-term gains (over 1 year): 12.5% on profits above ₹1.25 lakh per year.
The Road Ahead for Smart Beta in India
Smart Beta investing is growing rapidly, with ₹21,700 crores in total AUM as of 2024. Momentum and Low Volatility funds together make up nearly 84% of the market. Institutional investors like pension funds and insurance companies are leading this trend, but retail participation is also increasing.
Looking forward, the future of Smart Beta will likely include:
AI-based factor strategies that adapt to market changes.
ESG (Environmental, Social, Governance) integration for responsible investing.
Multi-factor funds for smoother long-term returns.
More product choices across equity, debt, and global markets.
Final Thoughts
Smart Beta Funds are redefining how Indian investors approach equity investing. They balance cost efficiency, diversification, and performance potential — giving access to strategies that were once reserved for professionals.
With transparency, flexibility, and the power of data-driven decision-making, Smart Beta Funds offer a smart way to invest for the long term.However, investors should understand the nature of factors, diversify across multiple ones, and use these funds as a satellite portion of their overall portfolio for the best results.
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