When it comes to investing, most investors are familiar with two kinds of investment styles; Active Investing where the fund manager decides what to buy and what to sell, and passive funds where the investor funds simply follow an index like the Nifty 50 or Nifty 500.
But there’s a third category that falls between these two approaches that has been gaining attention – Smart Beta Funds. These funds are cost efficient, while also offer the potential for higher returns like active funds.
Now that we have your attention, let us dive into this topic.
What are Smart Beta Funds?
At its core, Smart Beta Funds are rule based investment strategies. Unlike Active Funds that invest based on the fund manager’s view on market, or Passive Funds that simply aim to replicate indices like Nifty 50, Nifty 500 which in turn are invested in companies based on Market Capitalisation.
Smart Beta Funds follow a set methodology or factor/s and then invest in securities. The biggest advantage? They reduce the role of human bias and emotion led investing. The funds don’t invest in a stock because the fund manager feels it will do well. It invests in a stock because it fits the rulebook.
How are they different from Active and Passive Funds?
Investments and the Investment Performance of the Active Funds depend heavily on the skills and the decisions of the fund management team. Costs of managing the fund are also higher due to active management.
Passive Funds track broad market indices like Nifty 50, Nifty 100, Nifty 500 which are exposed to companies based on their market capitalisation.
How do Smart Beta Funds Work?
Smart Beta Funds pick their stocks based on certain rules or factors that can be quantified. An important thing to note here is that the factors or rules should be quantitative in nature as the investment decision is made on certain conditions being satisfied.
Some popular factors include:-
Momentum:- Invests in securities that have performed better than their peers in a specific period as they are expected to outperform in the near term.
Value:- Looks to invest in stocks that are undervalued as per fundamentals.
Quality:- Looks to invest in companies that have strong balance sheets, high profitability and low debt.
Low Volatility:- Looks to invest in securities that have less price fluctuations and are stable.
Alpha:- Looks to invest in stocks that are expected to generate higher returns than their benchmark.
Smart Beta Funds track indices like Nifty Alpha 50, Nifty 100 Low Volatility 30, Nifty200 Momentum 30 which are Factor Indices investing based on the specific factors. What’s interesting is these funds are not bound to follow a single factor. These funds can also invest based on multiple factors to balance risk and reward. Popular multi-factor indices are Nifty Alpha Low Volatility 30, Nifty500 Multicap Momentum Quality 50.
Performance of Smart Beta Funds vs Traditional Indices
We compared the performance of some Smart Beta or Factor Indices to understand how they have panned against the traditional market cap based indices like Nifty 100 and Nifty 500. Here is a table comparing these indices
| Particulars | Nifty 100 | Nifty 500 | Nifty Alpha 50 | Nifty200 Momentum 30 | Nifty100 Equal Weight |
| 1Y Trailing Returns | -5% | -5% | -18% | -20% | -8% |
| 3Y Trailing Returns | 12% | 14% | 17% | 15% | 15% |
| 5Y Trailing Returns | 17% | 19% | 26% | 20% | 20% |
| 7Y Trailing Returns | 11% | 12% | 19% | 15% | 12% |
| 10Y Trailing Returns | 12% | 13% | 18% | 17% | 12% |
| Standard Deviation | 16.26% | 16.23% | 24.43% | 19.30% | 19.69% |
Source: Investing.com, NiftyIndices, EduFund Internal Research
Trailing Returns as on 30th August 2025
Notice how these indices have delivered relatively better returns than the traditional indices over time. Due to the factor based investment, these indices were able to outperform these indices by a sustainable margin.
However, the recent returns (1Y Returns) have been significantly poor than the traditional indices. So yes, Smart Beta Funds do have an edge over traditional indices over the long term but the risk is also equally higher during bad phases of the markets. This is proved by the higher standard deviation of these indices.
We also plot down the 10Y performance of these indices against each other to understand how they would have grown in a portfolio of an investor.
Source:EduFund Internal Research, Investing.com, NiftyIndices
Notice how comfortably the Nifty Alpha 50 and Nifty200 Momentum 30 Index have outperformed the Nifty 100 and Nifty 500 Index while the other indices have relatively outperformed them. And if you also notice, the volatility is also higher as the recent drop in value of the indices have shown.
The Rise of Smart Beta Funds in India
Globally, Smart Beta ETFs and funds have been around for more than a decade. In India, they are still relatively new but gaining traction quickly. As of September 2025, the number of strategy indices in Nifty is 48 and in BSE it is 20.
More and more AMCs are also launching funds and ETFs that follow these indices suggesting there is a growing market of the same. And as investors become more aware, they are looking for options that are cost effective and also deliver performance, Smart Beta Funds are expected to play a much larger role in the Indian Mutual Fund space.
Who should consider Smart Beta Funds?
Here are a few reasons why Smart Beta Funds can make sense in your portfolio:
1. Rule Based Investing: Take emotions out of investing decisions, following a systematic strategy.
2. Potential for Higher Returns: Factor based investing offer a potential for earning higher returns by taking little higher risk than the traditional investing.
3. Diversification: Provides exposure beyond traditional market cap based indices. Certain factors also offer diversification benefits by stabilising portfolio and reducing overall portfolio volatility.
4. Cost Efficiency: Smart Beta Funds are usually cheaper than active funds while offering more than plain passive funds.
Final Thoughts
Smart Beta Funds offer a middle path in investing. They give you the cost efficiency of passive investing with a blend of stock-picking like active strategies. They are not the magic pills to high returns but if chosen wisely and held with patience, they can be powerful tools for long-term wealth creation.
People Also Ask
1. Are Smart Beta Funds active or passive?
Smart Beta Funds are offered under both styles of investment. Passive Smart Beta Funds follow Factor Indices and replicate them. Active Funds are called factor funds, investing based on factors being followed.
2. Are Smart Beta Funds risky?
Yes, Smart Beta Funds aim to deliver higher returns than the traditional indices and can be riskier than traditional indices. But certain factor indices like Low Volatility specifically aim to reduce risk and try to be less volatile than the traditional indices.
Disclaimer: The data in this presentation are meant for general reading purpose only and are not meant to serve as a professional guide/investment advice for the readers. This presentation has been prepared on the basis of publicly available information, internally developed data and other sources believed to be reliable. Whilst no action has been suggested or offered based upon the information provided herein, due care has been taken to endeavor that the facts are accurate and reasonable as on date. The information placed on the presentation is for informational purposes only and does not constitute as an offer to sell or buy a security. The Company reserves the right to make modifications and alterations to the content available on the presentation. Readers are advised to seek independent professional advice and arrive at an informed investment decision before making any investment. The EduFund platform & the website is owned, operated and maintained by Helena Edtech Private Limited, a company incorporated under the laws of India. An affiliate of the Company, i.e. Edubillions Tech Private Limited is registered with AMFI as mutual fund distributor bearing the registration number ARN258733. Investment in securities market are subject to market risks, read all the related documents carefully before investing. The valuation of securities may increase or decrease depending on the factors affecting the securities market.
About the author
Niraj Satnalika
Head Of Research,EduFund
Dr. Niraj is a finance professional with 12+ years of experience and is part of the founding team at EduFund. He’s worked with Goldman Sachs, CRISIL and Sakal Media in roles spanning investment management, research and leadership. With a PhD in Finance from IIT Bombay, he brings deep expertise in valuation, governance and education planning. When he’s not teaching or writing, you’ll find him cooking or going on long drives.
