Quant-based funds emerge as new battleground for MFs

Although quant and factor strategies are expanding rapidly, investor participation is held back by their complexity and inconsistent returns

- ABHISHEK KUMAR

While investors may spar over the virtues of active versus passive investing, fund houses are quietly constructing a powerful middle path — products that borrow from both worlds without fully belonging to either.

Over the past two-three years, factor funds, also known as rules-based or smart beta strategies, have surged to the forefront of new fund launches. What was once a niche category has now become a major area of experimentation for asset managers looking to offer systematic, lower-cost strategies without giving up the sophistication of active investing.

Today, the market offers nearly 150 factor-based schemes, each built around well-studied drivers of returns such as value, momentum, quality, low volatility, and alpha. And, the momentum is only accelerating: In the past year alone, close to 50 such schemes have been rolled out as fund houses have raced to create differentiated offerings in a crowded products landscape.

The pipeline for new offerings in this segment is vast. The rules-based framework opens up almost endless permutations, allowing fund houses to mix and match factors in ways that were previously impractical within traditional active strategies. Beyond single-factor products, the industry is now experimenting with multi-factor blends and customised rule sets tailored to different market cycles.

There is also ample room to scale these strategies across the market-cap spectrum — from largecaps to mid and smallcaps — giving fund houses multiple levers to differentiate products. The advent of flexicap formats has expanded this universe even further, enabling managers to apply factor rules without being constrained by predefined size buckets.

A glimpse of this innovation came earlier this year when DSP Mutual Fund introduced the first passive flexicap scheme anchored in the quality factor — signalling how fund houses are beginning to push the boundaries of what passive, factor-driven investing can look like.