As hostilities between India and Pakistan escalate, investors should consider smart beta funds to protect the downside risks and generate alpha. These funds choose stocks based on factors such as low risk and steady growth, instead of just size like market-cap indices do.
Factor-based portfolios can outperform during uncertain environments and help investors earn better returns for the amount of risk taken. Smart beta funds have shown stronger risk-adjusted returns and lower drawdowns in stress periods. Moreover, the rebalancing mechanism also instills a systematic discipline, effectively buying low and trimming high.
In volatile markets, smart beta funds can help generate alpha by avoiding emotional decision-making. Soumya Sarkar, co-founder, Wealth Redefine, says, unlike regular index funds, smart beta funds do not just follow the biggest companies and instead focus on factors that perform better over time. “This helps reduce risk and improve returns, giving an investor a better chance to grow money even when the market is uncertain,” he says.
In times of heightened geopolitical tensions, conventional investment approaches often leave portfolios overly exposed to swings in sentiment. Puneet Sharma, CEO, Whitespace Alpha AIF, says smart beta funds offer a structured approach to capturing long-term return premiums embedded in factors like quality, low volatility, and value. “These strategies tilt portfolios toward stocks with consistent fundamentals or stability, reducing the emotional bias often seen in active stock picking.”
Investment strategy
In the current market, smart beta funds are using key parameters such as low volatility, high dividend yield, value (cheap but strong stocks), quality (good profits, low debt), and momentum. Nirav Karkera, head, Research, Fisdom, says, quality focuses on profitability, stable earnings, and low debt; low volatility screens for stocks with stable price movements; and value identifies stocks trading at attractive valuations relative to fundamentals. “Multi-factor approaches that blend these can offer a more balanced and resilient portfolio, smoothening performance across different phases of the market cycle,” he says.
A low-volatility smart beta fund tends to hold defensive stocks, which often decline less in bear markets, thereby providing downside protection. Similarly, a value-oriented smart beta fund avoids expensive stocks that are more prone to corrections. Over time, by reducing drawdowns and capturing consistent factor premiums, these can offer superior risk-adjusted returns compared to traditional indices. “Think of smart beta as a core allocation, not a trade. When embedded within a well-designed portfolio, they bring transparency, discipline, and often, resilience,” says Sharma.
Key considerations
Investors should evaluate the underlying factor strategy. It’s important to know whether the fund focuses on a single factor or uses a multi-factor approach, as this affects performance consistency. Sonam Srivastava, founder, Wright Research PMS, says investors should understand which factor a smart beta fund is targeting and whether it aligns with their risk profile and market outlook. “They should note that not all factors outperform at the same time. Momentum may underperform in sideways markets, while value could lag in growth-led rallies.” Investors should consider factor cyclicality and turnover as some smart beta strategies require frequent rebalancing, which may introduce transaction costs.
