India’s mutual fund landscape has entered a fresh phase of innovation and sophistication with the rise of multi-factor mutual funds. As investors demand strategies that can withstand unpredictable market swings, fund houses are turning to this new breed of quantitative products to deliver smoother, more consistent returns. Here’s a detailed exploration of how multi-factor mutual funds are taking center stage and what they mean for everyday investors.
Key Highlights
Multi-factor mutual funds in India are managing an estimated ₹49,000 crore in assets as of June 2025, with roughly 120 “factor” schemes now in the market.
Most funds still focus on single-factor strategies, but a growing subset actively incorporates multiple investment factors such as momentum, value, quality, and low volatility.
Leading new launches include Bandhan Multi-Factor Fund and Sundaram Multi-Factor Fund, both using data-driven models to craft portfolios of large and mid-cap stocks.
The Nifty500 Multifactor MQVLv 50 Index—built on momentum, quality, value, and low volatility—has delivered annualized returns over 27% in the past five years, demonstrating multi-factor resilience.
Understanding Multi-Factor Funds
Multi-factor funds are a further evolution of “smart beta” or “factor” investing. Instead of sticking to a single stock characteristic, these funds blend several proven investment factors:
Momentum: Stocks with upward price trends.
Value: Undervalued stocks with attractive fundamentals.
Quality: Companies with stable earnings and sound governance.
Low Volatility: Stocks that experience less price fluctuation.
Other factors like growth or size are sometimes included as well.
A multi-factor approach combines these traits to create portfolios that perform more steadily across market cycles. Instead of betting on one theme, it hedges bets across several—for example, when momentum lags during corrections, value or low volatility might cushion the fall.
How These Funds Work
Quantitative models are used to screen and score stocks based on several factors.
Each factor is given a specific weight (often equally).
The top-ranked stocks across these combined factors are picked for the portfolio, usually 50–65 from indices like Nifty 500 or the universe of large- and mid-cap stocks.
The portfolio is rebalanced regularly—sometimes monthly or quarterly—to reflect changing factor scores and maintain the desired mix.
Notable recent launches, such as Bandhan Multi-Factor Fund, leverage proprietary scoring systems and strict risk controls. The funds are structured as open-ended schemes, allowing retail investors to invest and redeem as per their needs. A tangibly low exit load (0.5% for early redemption) also encourages participation.
Why Multi-Factor Is Trending in 2025
Yearly inflows into multi-factor funds leapt to ₹3,655 crore in FY2025, compared to just ₹556 crore the previous year.
Rising volatility and the uneven performance of single factors (like value, which may lag during growth cycles, or momentum, which struggles in sideways markets) have pushed investors toward more balanced, adaptive products.
Multi-factor indices have demonstrated smoother returns over unstable periods, attracting both retail and sophisticated investors seeking a less turbulent ride.
Regulatory encouragement for passive and systematic investing is boosting the appeal of such products in India’s maturing mutual fund market.
Key Advantages
Superior Diversification: By combining several factors with low correlation, these funds spread risks more effectively than single-theme products.
Consistent Returns: The strategy aims to mitigate the boom-bust swings of any one factor underperforming.
Data-Driven Discipline: Reliance on quantitative research reduces human bias, offering a systematic approach to stock selection.
Points of Caution
Limited History: Most multi-factor funds in India are new or have limited performance records, making it challenging to evaluate their effectiveness across multiple market cycles.
Complexity: The sophistication of factor models means investors need to understand what they are buying and set realistic expectations.
Not a Substitute for Asset Allocation: While multi-factor funds offer diversification across stocks, they do not replace true asset diversification across classes like bonds or gold.
What Sets Multi-Factor Apart from Other Diversified Funds?
Not the same as multi-cap funds, which spread investments across different sizes of companies.
Not identical to multi-asset funds, which allocate money across equities, bonds, and other asset classes.
Focused instead on combining stock selection styles within equities, driven by data, and responding automatically to shifts in the market landscape.
Outlook
India’s rapidly growing mutual fund industry—with assets hitting ₹72 lakh crore—may see an increasing share captured by multi-factor products. As investor education improves and fund houses continue launching sophisticated, adaptive solutions, multi-factor mutual funds are set to play a key role for both discerning and first-time equity investors looking beyond traditional approaches.
Sources: The Hindu Business Line, Economic Times
