Factor investing offers an increasingly important framework for equity allocation, driven by distinct drivers of returns. Rather than tracking the market passively, factor indices tilt towards characteristics (such as low volatility, momentum, value and quality), each of which behaves differently across market cycles.
The BSE Low Volatility Index, for instance, tracks the 30 least volatile stocks within the BSE LargeMidCap universe, selecting and weighting them based on historical price variability. This results in a portfolio tilted towards relatively-stable, cash-generative businesses across sectors such as financials, consumer and healthcare. Current key constituents include Reliance Industries, HDFC Bank, Bharti Airtel, ICICI Bank, SBI and TCS.
Momentum strategies target stocks exhibiting sustained price strength, value focuses on relatively-inexpensive stocks based on fundamentals, and quality emphasises profitability and balance sheet strength. Together, these approaches illustrate that equity returns can be accessed through multiple, distinct pathways.
Dispersion in outcomes
Over longer timeframes, factor strategies in India have showed meaningful dispersion in outcomes. Despite its defensive construction, the Low Volatility Index has delivered superior returns when compared with headline equity indices over long holding periods.
Momentum and value, though, have been able to achieve significantly better absolute returns. This divergence is a result of the underlying drivers of each factor. Momentum benefits from persistent market trends and tends to perform well in directional markets. Value gains during cyclical recoveries and re-rating phases, while quality and low volatility prioritise volatility and consistency over aggressive outperformance.
The real differentiator
Where factors differ more clearly is in their risk profiles. Low volatility stands out for its conservative characteristics, exhibiting lower variability than the market and tending to participate less in draw-downs. This makes it comparable, in some respects, to conservative large-cap investing, but with a more explicit focus on risk control.
Despite investing in stocks trading at cheaper valuations, Value represents the most aggressive end of the spectrum. While it has historically generated high returns over full cycles, it has also been associated with higher volatility and deeper pullbacks, reflecting its cyclical nature.
A useful illustration of how these differences play out is the Covid-led crash in 2020. During this period, the Sensex experienced a draw-down of roughly 38 per cent, while low-volatility strategies declined materially less, by around 30 per cent. This was consistent with their lower downside capture (around 0.7). Value strategies were the most impacted, with materially-deeper draw-downs of over 60 per cent, before rebounding strongly in the subsequent recovery phase. The episode highlights how factor behaviour can diverge sharply during stress events, underlining the role of diversification across factors.
Risk-adjusted outcomes
When returns are viewed alongside risk, the trade-offs become clearer. Momentum has combined strong returns with favourable efficiency metrics. Low volatility and quality, while delivering moderate returns, have done so with better downside control, resulting in competitive risk-adjusted outcomes.
The growing availability of factor-based index funds and ETFs has made it easier for investors to access these strategies. Products, today, span individual factors as well as blended approaches that combine multiple styles. Rather than viewing any one factor as universally suitable, a combination of factors can help create more resilient portfolios across market cycles.
An extension of this approach is the rise of multi-factor strategies, which combine two or more factors. The rationale is straightforward: Since factor performance tends to rotate across market cycles, blending them can help smooth return outcomes and reduce dependence on any one factor. For instance, the defensive characteristics of low volatility and quality can help cushion draw-downs, while momentum and value can contribute to return enhancement during trending or recovery phases. While multi-factor strategies may not outperform the best-performing single factor at any point in time, they aim to deliver more consistent performance across varying market environments, making them a practical approach for diversified equity exposure.
The author is a SEBI registered investment advisor. The views are the author’s and does not reflect the opinion of bl.portfolio
Published on June 13, 2026