Smart-beta funds aim for smarter returns, but do they really deliver?

The funds mix rules and market insights, offering diversification but not assured gains. Here's how to use them

- Jash Kriplani

A new breed of funds is reshaping how investors think about indexing. Called smart-beta funds, they aim to capture the efficiency of passive investing while borrowing the strategy of active management.

Like passive funds, they track indices. But unlike plain-vanilla index funds that mirror market capitalization, these are guided by a specific set of rules linked to investment styles or factors such as value, momentum, alpha, quality, or low volatility.

These indices-carved out of regular market-cap-based ones-are rebalanced periodically (every three or six months) to drop stocks that no longer qualify and add those that do.

However, smart-beta strategies don't always beat traditional passive ones. Their success depends heavily on market conditions. For instance, momentum factor may underperform when markets are consolidating or correcting, but may do well in other scenarios. Additionally, these strategies have sectoral tilts, meaning the performance of certain sectors can significantly influence how they behave.

That's why these funds are best used for additional diversification or as tactical investments-not as replacements for traditional index funds or actively-managed funds in your core portfolio. Here's a closer look at how these funds work and what can investors expect from various smart-beta strategies.

How they've fared

Not all smart-beta strategies are created equal-and this year's numbers show it.

The value and low volatility (low vol) factors have been standout performers in 2025. The Nifty 500 Value 50 Index is up 14.04% year-todate, while the Nifty 500 Low Volatility 50 Index has delivered similar gains of 14%, comfortably outperforming the Nifty 500 Index, which rose about 7% during the same period. (Data as of 31 October 2025.)