Most investors struggle with one question: what stock to buy. But what if investing wasn’t about finding the next multi-bagger, but about backing a pattern that repeats over time? Factor investing is built on this idea.
Instead of chasing individual stocks, factor investing targets specific traits or investment styles, such as value (undervalued stocks), momentum (stocks that are in an uptrend), or quality (stocks of financially strong companies). Different factors outperform at different points in the market cycle.
Factor investing, in that sense, sits right in the middle of active and passive investing. It doesn’t actively rely on stock-picking calls, but neither does it blindly track market-cap indices. Instead, it follows rules to capture specific investment styles such as value, momentum, quality or low volatility, each of which tends to perform differently across market cycles.
According to data from Mirae Asset Investment Managers (India), the industry's assets under management in factor funds rose to over ₹50,000 crore as of 30 April 2026 from less than ₹1,000 crore five years ago. But historical data shows no single style wins every year.
"No single style has performed consistently. However, they do outperform the market over the long term. Thus, diversifying within different styles protects from style rotation," said Abhishek Tiwari, CEO, PGIM India Mutual Fund.
According to a study by PGIM India Mutual Fund, over the last 10 years, factor indices have delivered annualized returns of 14-19%, against Nifty 50 and Nifty 500 annualized returns of around 12-13%. The return comparison is based on the total return index (TRI), which accounts for both price and dividend gains.
How the factors work
Value identifies stocks that are undervalued or trading below their intrinsic value. Quality focuses on businesses with stronger profitability and healthier balance sheets: high return on equity (ROE), low debt-to-equity ratios, and stable earnings.
Momentum bets on stocks that have been rising—the logic being that stocks in an uptrend tend to continue rising. Because momentum strategies chase trends, they tend to do well in sustained, directional markets.
Low volatility builds a portfolio of stocks that have shown smaller price swings over the last one year.
Equal weight is less an investment style and more a portfolio construction methodology. It assigns the same weight to every stock in the index, regardless of market capitalization, reducing the dominance of a handful of large companies that typically drive returns in market-cap-weighted indices and allowing smaller constituents to contribute more evenly to overall gains.
"Whenever there is a broad-based rally, a depolarised market and when there are active sector rotations—in those scenarios the equal-weight strategy can do well," said Anil Ghelani, head-passive investments and products, DSP Mutual Fund.
Rotation
The data from 2006 to 2026 shows factor leadership tends to rotate. For instance, returns of momentum factor rose sharply in 2006 (60.3%) and 2007 (128.9%), but in 2008 during the global financial crisis, they fell 64.2%. Low volatility, by contrast, was the least hit in 2008 at negative 41.8%. Value, which had gained 109% in 2007, collapsed 56.7% in 2008.
"The trend-driven factors such as momentum and alpha tend to underperform in a sideways market or in a market which is lacking any strong trend,” said Siddharth Srivastava, head ETF-product and fund manager, Mirae Asset Mutual Fund.
The 2009 recovery was almost a mirror image. Value stormed back with a 133% gain as beaten-down, undervalued stocks rebounded. Momentum lagged at 61.3%, and low volatility, which had protected on the way down, participated least on the way up at 90.8%.
The 2018 episode offers another instructive contrast. Markets became sharply polarised that year—a narrow set of large-cap quality names drove most of the gains while the broader market struggled. Low volatility was the only factor to end 2018 in positive territory, returning 6.5%. Value was the worst performer at negative 26.2%, dragged down by its tilt toward cyclicals and PSU names. Momentum corrected 10.7%.
Then came the covid-19 crash of 2020. Quality, which favours companies with robust balance sheets and stable earnings (see: gfx), emerged as the best-performing factor, returning 27.6%, as investors fled to safety.
Value was up just 8.5% that year. But as the recovery took hold through 2021, momentum surged 78.9%, value gained 56.4%, and quality—despite its 2020 resilience—returned only 29.9%.
“Quality factor led in 2020 as investor sentiment chased safer avenues after the Covid-19 crash, but was among the worse performers in 2021 and 2022 as recovery started kicking in and sentiments improved. This cyclicality shows that no single factor can deliver consistent returns in every phase of the market," pointed out Bhavesh Jain, co-head of factor investing, Edelweiss Mutual Fund.
Year-to-date (12 May 2026), in an environment where concerns around market valuations have kept investors cautious, the value factor has been in the positive territory at 5.2%, with quality at 1.6% returns. Momentum (-1.6%), equal weight (-1.2%), and low volatility (-4.9%) are all in the red. The broader market benchmarks—Nifty 500 TRI and Nifty 50 TRI—have returned negative 6.4% and negative 10.4% respectively over the same period.
Sectors inside factors
Each factor carries implicit sectoral or market segment tilts that are not always obvious from the name alone. Each factor is built around a distinct investment philosophy. "Some styles cluster in sectors. Value can lean toward cyclicals; quality and low-vol often tilt toward defensives," Tiwari added.
The value factor is tilted towards PSU and commodity-linked stocks. The low-volatility factor has its tilt towards defensive sectors like FMCG and healthcare
Meanwhile, momentum strategies tend to have sizeable exposure to mid- and small-cap stocks, since these segments move faster in trending markets—helping momentum outperform in rallies, but also making it more vulnerable when sentiment turns.
"Momentum funds also tend to hold large exposure to mid-caps and small-caps. These segments tend to move faster in trending markets, helping these strategies outperform in rallies but also making them vulnerable to sharper corrections when sentiment turns," pointed out Kavitha Menon, founder of Probitus Wealth.
What should investors do?
Given the cyclicality of factor returns, most experts suggest a multi-factor approach, one that blends strategies with opposing tendencies.
"There is a certain cyclicality that comes with these strategies. These can go through periods of underperformance at different points in time. To mitigate this, a multi-factor strategy that combines styles with opposing tendencies can complement each other," Srivastava said.
For example, complementary styles—such as momentum can be combined with low volatility, or value with quality.
Factor funds are not substitutes for a core portfolio. They work best as a diversification layer for investors who have already built a foundation through traditional mutual funds and are now looking to add rules-based funds. A multi-factor fund—or a blend of complementary strategies—can be a more suitable choice.