Factor Investing in India: What are Momentum, Value, Quality, Size and Volatility?

Introduction

Before investing in a stock, most of us do the usual checklist. We look at past returns, check analyst ratings, maybe read a few research reports or often go by what friends or relatives recommend. But have you ever wondered what are the factors that actually drive the returns of stocks?

Stocks move for many reasons. Some stocks do well because they’re undervalued, others because they’ve been gaining momentum, and a few because they belong to companies with strong fundamentals. What if you could invest based on these underlying traits rather than just the stock’s name or hype?

That’s exactly where Factor Investing comes in.

Factor investing helps investors go beyond surface-level metrics and focus on specific characteristics that have historically driven stock performance, like value, momentum, quality, size, and volatility. Instead of relying on gut feeling or popularity, it uses data and discipline to build smarter, more resilient portfolios.

These characteristics are called "factors". In other words, identifiable drivers of stock performance can be called factors. Going with this definition, almost anything could be a factor if a relationship and correlation can be established between the factor and stock performance. For example, beyond the traditional 5-factor Fama-French model, other factors that have been researched include ESG and sentiment.

Let’s Understand the Factors One by One

1. Value – The “Buy Low” Factor

The value factor is built on one timeless principle: buy good businesses at reasonable prices. It focuses on stocks that appear undervalued relative to their fundamentals — measured through metrics like Price-to-Earnings (P/E), Price-to-Book (P/B), or Dividend Yield.

The idea is that markets often overreact to short-term setbacks pushing prices below their intrinsic worth. Value investors capitalize on this overreaction, patiently waiting for prices to realign with fundamentals.

Take ITC — a stock that was long ignored by investors for years despite consistent profits, strong cash flows, and a solid dividend yield. While the market chased high-growth tech names, ITC quietly traded at low valuation multiples (low P/E and P/B ratios).

2.  Momentum – The “Winners Keep Winning” Factor

Momentum investing rests on one simple observation — what’s doing well, often continues to do well. This factor identifies stocks that have delivered strong returns over the recent past (usually 6–12 months) and builds a portfolio around those stocks.

It’s rooted in behavioral finance: confirmation bias, anchoring, disposition effect, and bandwagon effect are the cognitive biases that create persisting trends. By systematically following momentum, investors can benefit from these short- to medium-term patterns.

However, momentum strategies require discipline. They tend to shine in bull markets but can face short-term reversals when market sentiment changes abruptly. In India, the Nifty 200 Momentum 30 Index is one of several momentum indices that try to capture the momentum factor.

3.  Quality – The “Strong Fundamentals” Factor

The quality factor is all about business strength and stability. It focuses on companies with high, consistent profitability and strong balance sheets. Typical indicators include high Return on Equity (ROE), low debt-to-equity, and consistent cash flows.

High-quality companies tend to navigate economic downturns better because their earnings and cash flows are less volatile. This factor helps investors stay invested in firms that are efficient and resilient, rather than chasing short-term performance.

In India, ICICI Prudential Nifty 200 Quality 30 ETF is an example of a fund that gives exposure to the quality factor.

4.  Low Volatility – The “Smooth Ride” Factor

What if a portfolio could have lower risk and higher returns compared to the overall market? The low volatility factor tries to build on this idea by selecting stocks that show relatively stable price movements, even during market turbulence.

These stocks may not deliver spectacular gains during rallies, but they protect portfolios better during downturns — resulting in superior risk-adjusted returns over time. This makes them a popular choice for investors who prefer lower volatility in their equity portfolio.

Funds like ICICI Prudential Nifty 100 Low Vol 30 ETF follow this approach, aiming for a smoother compounding journey rather than chasing aggressive growth.

5.  Size – The “Small but Mighty” Factor

The size factor focuses on small companies, which historically have delivered higher long-term returns than large caps. The reason is simple — smaller firms have more room to grow and can react faster to emerging opportunities.

However, this growth potential comes with higher volatility. Small-cap stocks are more sensitive to market sentiment and liquidity conditions. Still, for investors with a long-term horizon and higher risk tolerance, size exposure can add meaningful alpha to a portfolio.

In India, this factor is accessed through small-cap funds, though some smart beta indices also include a size tilt in their construction.

Recently, there’s been a noticeable shift among high-net-worth investors in India. According to a Moneycontrol report, nearly half of the new PMS (Portfolio Management Service) launches this year are quant or factor-based, using data-driven models instead of human judgment. These strategies have started outperforming traditional discretionary funds, especially in volatile markets. The trend signals a growing preference for rule-based, emotion-free investing — the same principle that drives factor investing.

What is Smart Beta and How Is It Related to Factor Investing?

Traditional index funds replicate a market index, like the Nifty 50, giving each stock weight based on its market capitalization. This means larger companies automatically dominate the portfolio, regardless of their fundamentals or valuations.

Smart Beta, on the other hand, takes a smarter route. It still follows an index-based (passive) approach, but instead of weighting stocks by size, it uses alternative rules — often derived from factors such as value, quality, momentum, or low volatility.

Think of it as the middle ground between active and passive investing:

• Passive, because it tracks an index and doesn’t rely on a fund manager’s judgment.

• Active, because it intentionally tilts the portfolio towards factors that enhance returns or reduce risk.

In simple terms, Smart Beta = Factor Investing in Action. Most smart beta ETFs in India — like the UTI Nifty 200 Momentum 30 ETF or ICICI Prudential Nifty Alpha Low Vol 30 ETF — are designed using these very factors. They allow retail investors to access sophisticated, data-backed strategies that were once available only to institutional or quant investors.

While factor investing is a great way to quantify and control the exposure to various factors in a portfolio, it should be noted that even factors go through cycles, and every factor may not outperform in different time frames.

Key Takeaways

Factor investing is changing the way investors look at markets. Instead of chasing short-term returns or following the crowd, it helps identify why certain stocks perform better — whether it’s due to strong fundamentals, undervaluation, momentum, or stability.

By combining these factors, an investment advisor can help investors build diversified portfolios that are more data-driven and disciplined. Smart Beta ETFs have made this approach accessible to everyone — not just fund managers or HNIs.

As India’s markets mature and more factor-based indices and ETFs emerge, investors now have the tools to go beyond the traditional “buy and hold the index” mindset. The goal is simple — earn better risk-adjusted returns by understanding what truly drives performance.