When youin ‘actively’ managed , houses appoint fund managers to manage them. They aim to beat the market based on their ability to select and time the . However, investors in such also face the risk of earning lesser money than that of the market – if the underperforms.
At the other end of the spectrum arethat are ‘passively’ managed by only tracking the market indices. It reduces the risk of underperformance and matches market returns.
Is there a middle ground? That’s what smart betaposition themselves to be. It claims to offer the benefit of passive combined with some of the advantages of the active ones. It hopes to maximize returns for investors or reduce risk through scientific construction of .
How do they work?
Theseessentially follow a traditional popular index – 50 or 100. However, it tags along a rule-based system for selecting stocks into the which in turn might exhibit certain metrics or behaviours.
Some are intuitively appealing. For instance, it could be equal-weighted index as against the usual free-float market-capitalisation weighted indices of national stock exchanges. The traditional indices have a tendency to give higher weightage (or share) in the index to stocks that have already had a run up in its prices.
This is because market capitalisation is a function of price (stock price x outstanding shares). So, you might end up buying stocks when they are high and not lower.
In contrast, equal-weighted index of50, no more than two percent in each of the 50 stocks. So, profits get booked automatically as stock prices rise beyond a point.
Similarly, there arethat curate stocks from the traditional indices based on stock’s fundamentals, quality and price volatility. Multiple filters such as earnings growth, price-to-earning ratio or volatility are applied to shortlist a that fits the fund’s mandate.
Are thesereally smart?
There are many smart indices launched by the stock exchanges and smart betapassively track them. While some are available as ( ) and traded in the stock exchanges, others could be purchased from the as a -of- . -of- structure essentially takes care of two issues – poor liquidity in and the need to have a .
Usually, the annualof smart beta are lower than actively managed (2-2.5 percent). Among the smart beta , have the lowest expense ratios in the range of 0.2-0.4 percent, while it is about 1 percent for .
While smart beta funds have a long history in developed markets. In India, it is not so. In the last one year, none of the funds managed to beat its respective benchmark. DSP Equal Nifty 50 Fund (regular) gave a return of -14.1 percent as against -13.3 for its benchmark.
While smart betahave a long history in developed markets. In India, it is not so. In the last one year, none of the managed to beat its respective benchmark. DSP Equal 50 (regular) gave a return of -14.1 percent as against -13.3 for its benchmark. While some experts peddle back-tested data to prove supremacy of smart beta , it is prudent to wait for at least one market cycle to check its real smartness.
Efficient Market still ahead
While Indian equity markets are getting efficient, fund managers still have a role to play. More than 50 percent of large-cap prudently picking good-performing equity funds.managed to outperform S&P BSE 100 TRI ( Index) in the last five years. There is still scope for earning higher returns than the market by
Jury Not Out
Moreover, theseought not to be your core . They don’t promise to do well under all market conditions. While some outperform during secular bull markets, others do well in a bear phase. With no long-term history of its actual performance, retails investors are advised to cool their heels, till the jury is out.