Desai said smart beta funds are similar to index funds but follow pre-decided rules and algorithms based on factors like momentum, quality, value or low volatility. Unlike traditional index funds that are market-cap driven, smart beta funds use factor-based strategies across different market capitalisations.
He highlighted that all types of equity investors can consider smart beta funds, but the time horizon and risk appetite are key. Aggressive investors looking at momentum or alpha strategies should be ready for higher volatility and invest with a seven to ten-year horizon. Conservative investors can opt for low-volatility smart beta products.
Desai believes momentum strategy currently offers an opportunity. “Playing contra is the best way to make money,” he said, pointing out that momentum has underperformed in recent years and may see upside in the next bull cycle. Over the long term, he noted, momentum strategies have delivered strong rolling returns compared to other smart beta categories.Read Here | Fund managers raise largecap exposure, stay cautious on sector bets: Morningstar
However, he cautioned that smart beta funds come with risks. Since these funds stay fully invested and do not take cash calls like active managers, drawdowns can be sharp during market corrections.
On portfolio construction, Desai advised against having only smart beta funds. “Technically speaking, you really don’t require more than 5-6 equity funds,” he said, adding that 15% to 40% allocation to smart beta funds within a diversified portfolio is reasonable.
He also advised investors to declutter portfolios during bull markets and review underperforming funds over a five to seven year period.
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