Published Jun 6, 2026 4 Min Read

Introduction

Factor investing focuses on choosing investments based on measurable characteristics called factors. These factors, such as value, momentum, quality, size, and low volatility, have historically influenced investment returns across different market cycles.

  • Five common factors: Value, momentum, quality, size, and low volatility.
  • Smart beta funds: Follow factor-based rules instead of traditional market-cap weighting.
  • Multi-factor investing: Combines two or more factors to reduce dependence on a single factor.
  • Risk levels: Factor-based funds can carry different risk profiles and should be assessed using the SEBI-mandated riskometer.
  • Investment access: SIP investments start from Rs. 100 per month on the Bajaj Broking website.
  • Fund choice: Investors can choose from 4,000+ mutual fund schemes across equity, debt, hybrid, ELSS, and thematic categories.

You can start your mutual fund investment journey on the Bajaj Broking website by completing KYC, exploring 4,000+ schemes, and investing through SIP or lumpsum modes.

What is factor investing?

Factor investing is an investment strategy that selects securities based on specific characteristics that may influence long-term performance. These characteristics are known as investment factors.

Instead of choosing investments solely based on company size or sector, factor investing looks at measurable traits such as value, quality, momentum, or volatility. The goal is to build a portfolio that captures these characteristics systematically.

Many investors use factor investing to create a more disciplined investment process and reduce emotional decision-making.

Which type of factor investing is right for you?

Factor investing can be grouped into two broad categories.

Factor investing typeDescriptionObjectiveSuitable for
Single-factor investingFocuses on one factor onlyCapture returns from one characteristicInvestors with a strong factor preference
Multi-factor investingCombines multiple factorsImprove diversificationInvestors seeking balanced exposure

Single-factor strategies may outperform during certain market conditions but can underperform when that factor falls out of favour.

Multi-factor investing attempts to balance this risk by combining different investment factors in one portfolio.

What are the factors of factor investing?

Several factors have been studied extensively in financial markets.

FactorWhat it looks forKey characteristicPotential benefit
ValueUndervalued securitiesLower valuation ratiosPotential for price appreciation
MomentumSecurities with rising pricesStrong recent performanceTrend participation
QualityFinancially strong companiesStable earnings and healthy balance sheetsBetter resilience
SizeSmaller companiesLower market capitalisationHigher growth potential
Low volatilityLess price fluctuationStable price movementsReduced portfolio volatility

Value factor

The value factor focuses on investments that appear cheaper relative to their fundamentals. Investors expect these securities to eventually move closer to their fair value.

Momentum factor

Momentum investing selects securities that have shown strong recent performance. The idea is that existing trends may continue for a period.

Quality factor

Quality investing focuses on companies with strong finances, stable profits, and efficient management.

Size factor

The size factor typically targets smaller companies that may offer higher growth opportunities than larger, established businesses.

Low-volatility factor

Low-volatility investing focuses on securities that experience smaller price swings compared to the broader market.

How factor investing and smart beta funds work

Smart beta funds combine features of passive and active investing. They follow predefined rules to select and weight securities based on specific factors.

Unlike traditional index funds that usually weight stocks according to market capitalisation, smart beta funds may assign weights based on value, quality, momentum, or other factors.

FeatureTraditional index fundSmart beta fund
Stock selectionMarket-cap basedFactor-based rules
Weighting methodMarket capitalisationFactor methodology
ObjectiveTrack market indexCapture factor premiums
Portfolio constructionBroad market exposureTargeted factor exposure

Smart beta funds offer a structured way to implement factor based investing without selecting individual stocks.

Why do investors use factor investing?

Factor investing offers several potential advantages.

Benefits

  • Provides a rules-based investment approach.
  • Reduces emotional investment decisions.
  • Helps target specific return drivers.
  • Can improve portfolio diversification through multi-factor investing.
  • Available through smart beta funds and factor-based mutual funds.

Risks

  • Factors can underperform for extended periods.
  • Past performance does not guarantee future returns.
  • Some factors may become crowded during market trends.
  • Market conditions can affect factor effectiveness.
  • Returns remain market-linked and are not guaranteed.

When evaluating risk, always review the SEBI-mandated riskometer, which categorises schemes as Low, Low to Moderate, Moderate, Moderately High, High, or Very High.

SEBI regulates mutual funds in India, while AMFI promotes ethical and transparent industry practices.

How do you use factor investing in a portfolio?

You can add factor investing to your portfolio through mutual funds, exchange-traded funds, or smart beta funds. The process is straightforward and can be completed online.

  1. Complete your KYC using valid PAN and identity documents as required by SEBI.
  2. Identify your investment objective, such as growth, stability, or diversification.
  3. Evaluate factor-based mutual funds using the fund objective and factor methodology.
  4. Review the scheme's SEBI riskometer before investing.
  5. Choose SIP or lumpsum investment mode based on your preference.
  6. Invest through the Bajaj Broking website and track holdings through the Dashboard, Portfolio, Orders, and MF Profile sections.
  7. Monitor factor performance periodically and rebalance if required.

Conclusion

Factor investing is a structured investment approach that focuses on characteristics that may influence long-term returns. Common factors include value, momentum, quality, size, and low volatility.

You can access factor-based mutual funds and smart beta funds through various investment platforms. Before investing, evaluate your goals, risk tolerance, and investment horizon, and review the scheme's SEBI riskometer. You can also explore 4,000+ mutual fund schemes and start SIP investments from Rs. 100 per month on the Bajaj Broking website.

Frequently asked questions

What is factor investing?

Factor investing is an investment strategy that selects securities based on specific characteristics, known as factors, that may influence long-term returns. Common investment factors include value, momentum, quality, size, and low volatility. Many smart beta funds use factor investing rules to build portfolios systematically rather than relying only on market-cap weighting.

Does factor investing work?

Factor investing has been widely studied and used by institutional and retail investors globally. Different factors have historically delivered periods of outperformance, but results vary across market cycles. Since returns are market-linked, factor investing does not guarantee profits. On the Bajaj Broking website, you can compare mutual fund options that may follow different factor-based approaches.

What are the 5 main factors in factor investing?

The five widely recognised factors in factor investing are value, momentum, quality, size, and low volatility. Value targets undervalued securities, momentum focuses on price trends, quality emphasises financially strong companies, size targets smaller firms, and low volatility seeks more stable investments. Many multi-factor investing strategies combine several of these factors to improve diversification.

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Disclaimer

Bajaj Finance Limited (“BFL”) is an NBFC offering loans, deposits and third-party wealth management products.

The information contained in this article is for general informational purposes only and does not constitute any financial advice. The content herein has been prepared by BFL on the basis of publicly available information, internal sources and other third-party sources believed to be reliable. However, BFL cannot guarantee the accuracy of such information, assure its completeness, or warrant such information will not be changed.

This information should not be relied upon as the sole basis for any investment decisions. Hence, User is advised to independently exercise diligence by verifying complete information, including by consulting independent financial experts, if any, and the investor shall be the sole owner of the decision taken, if any, about suitability of the same.

Disclaimer

Bajaj Finance Limited ("BFL") is registered with the Association of Mutual Funds in India ("AMFI") as a distributor of third party Mutual Funds (shortly referred as 'Mutual Funds) with ARN No. 90319

BFL does NOT:

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Disclosure
: Bajaj Finance Limited (BFL) is a distributor of Mutual Funds with ARN - 90319 and distributes mutual funds of Bajaj Finserv Asset Management Limited (BFSAMC). BFL receives commission towards distribution of mutual fund products. BFSAMC is a group company of BFL, carrying business on arm’s length basis without any conflict of interest and in accordance with the prevailing law / regulation.