When you hear “the index”, most investors think of the NIFTY50 or the NIFTY500. As marketcapweighted composites of the largest companies in India, they represent how the Indian stock market is doing.
But did you know the NSE has 96 indices of six different types? This post focuses on factor investing in India, Nifty Strategy Indices, a category that has grown prolifically in the last few years, with 27 different indices.

 Does factor investing in India beat buying and holding the market, i.e. the NIFTY50 or one of the other broad market indices?
 Which is the best factor investing strategy in India? Which factors (if any) offer potential for outperformance, i.e. are some factors better than others?
 As a corollary, do multifactor strategies outperform singlefactor strategies?
Here’s our comprehensive analysis of factor indices in India.
The NSE site describes Strategy Indices as “designed based on quantitative models/investment strategies to provide a single value for the aggregate performance of a number of companies.” That is close to how we think about “Factor Investing”. A simpler way of thinking about factor or quantitative investing is
Factor Investing is about defining a characteristic (also called factor or set of factors), and consistently applying a set of criteria to buy a diversified portfolio of stocks that share that characteristic.
Read our ELI5 explanation of what is factor investing here in the section titled unsurprisingly “What is factor investing?”
From the 27 indices in this NSE category, removing nonfactorbased indices like the Nifty50 USD Index and the NIFTY 50 Futures Index, we are left with 18 either single / multifactor indices or smartbeta indices. Of these 18, we removed 4, which had more recent index start dates making them unsuitable for comparison. The remaining 14 have start dates going back to April 2005, giving us a decent (though not great) time horizon of 16 years over which to compare them and the broad market indices.
Our objective, to answer:

 Does factor investing beat buying and holding the market, i.e. the NIFTY50 or one of the other broad market indices?
 Which factors (if any) offer the best potential for outperformance, i.e. are some factors better than others?
 As a corollary, do multifactor strategies outperform singlefactor strategies?
We are using the terms “factor strategy” and “factor index” interchangeably though they are not. A strategy is an overarching quantitative investment philosophy, while these NSE indices are one interpretation of those strategies. For example, when constructing a strategy that buys cheap or value stocks, you could use Price to Book, Price to Earnings, EV / EBIT or many other metrics or even a combination to arrive at your list of stocks. The outcome will vary depending on the implementation.
However, one of the tests of whether a factor offers real potential for outperformance is if it offers similar results when implemented in different ways. Hence you see various momentum smallcases, each applying their own version of momentum that have all, in general, done reasonably well over the last 1824 months.
Simply buying the Nifty is the easiest way for any investor to allocate to Indian equities. So, whether any active strategy, fundamental or factorbased, is worth the cost in terms of time and effort depends on its effectiveness in beating that benchmark return.
Factor Indices versus the Nifty
Charts below show just that. What per cent of the time in the last 16 years did each of the indices beat the Nifty on 1 and 3year trailing returns.
How to read the above two charts: The higher the percentage of time a factor strategy beat the NIFTY, the better chance it offers outperformance. Also, you want to see the numbers for any strategy improve when going from 1 to 3year rolling returns.
Most factor strategies except Nifty500 Value 50 and Nifty High Beta 50 improve their chances of beating the NIFTY over longer time horizons with six indices doing so more than 75% of the time.
Nifty Midcap and Smallcap indices, Nifty50 and 100 Equal Weight, Nifty500 Value 50 and Nifty High Beta 50 appear as the weakest strategies when compared to the simple buy Nifty and Hold strategy.
Factor Indices have done well relative to the Nifty
The chart below shows cumulative performance of ₹1,000 invested in each of the indices on 1st April 2005
Mouse over the individual lines on the chart and pause to see them more clearly.
Let’s face it. This is a chart crime. Cumulative equity curve charts spanning decades are of little use at the best of times because they struggle to convey relative performance, especially when ending values are multiples of start values. This chart, on account of having 17 portfolios spanning 16+ years, is even less insightful.
Except, to make a few suggestions:
 Over nearly 16 and a half years, all but two factor indices outperformed the NIFTY50 and the mid and smallcap indices (the lines in red). We’ll need to look at the data differently to get a sense of whether all of the outperformance is meaningful
 If there is one place you do NOT want to be, it seems to be the NIFTY High Beta 50 index
 Though not as disastrous as High Beta, Value seems to have been the other clear underperformer
 Momentum, a combination of Alpha with Low Volatility and Midcap Quality, seem to have done the best
A marginally better way to visualise the same chart is to plot the yaxis on a log scale. This highlights percentage changes over absolute values, which helps see how the different indices did over time.
I did say marginally better.
Comparing Calendaryear Returns
Here’s the same information sliced by calendaryear returns.
Colour codes indicate yearwise relative performance. Green: Relatively better than the group that year. Red: Worst that year.
The rows are arranged with the broad market indices at the top, the equalweight smart beta indices, and the factor indices. Within those, singlefactor indices are at the top, with the multifactor indices at the bottom of the table.
In the yearwise performance table, we also included NIFTY50 Value 20, NIFTY100 Liquid 15, and the NIFTY100 Quality 30 indices even though they have inception dates in 2009 or later. The grey cells indicate the years where these indices did not have yet exist.
What yearwise returns show
 Whether plain index, mid/small caps, value or alpha or momentum or quality, Equity strategies largely move together. In bad years like 2008 and 2011, no strategy avoided significant drawdowns. The degree of movement varies, but the direction tends to be the same. But then again, in 2013, 2018, and 2019, there was quite a range in returns.
 Nifty HighBeta 50 underperformance in the cumulative chart is not from one bad year but a series. It was the worst performer for quite a few years. Interestingly it also has several deep greens meaning it was also the best or one of the best performers in a few years. A useful reminder that the odd year of big outperformance doesn’t mean much if it comes with years of big underperformance as well
 The first two charts showed the Nifty200 Momentum30 index as the best cumulative performer, but interestingly it was not the topperforming factor in any given year. But it was also not the worst performer in any given year.
 Nifty500 Value 50 was the top performer in four out of 16 years: 2007, 2009, 2014 and 2016. And yet, it ended as the 2nd worst performer over the entire duration. It was also the worst performer in 4 years: 2005, 2006, 2018 and 2020
 You’d expect strategies that combine factors to have the best of all worlds. But results are mixed
 The AlphaQualityLow Vol combination did decently well yet underperforming pure Momentum (Nifty200 Momentum 30) and Nifty Midcap 150 Quality 50.
 The AlphaQualityLow VolValue combination struggled. Clearly, the Value factor in the mix pulled down overall performance.
 Multifactor indices did see lower drawdowns in 2008 compared to the other indices.
 However, the Nifty Alpha LowVol index is one the strongest performers in the group, meaning combining some factors makes more sense than others.
A strategy that can avoid beign relatively horrible yeartoyear consistently has a great chance of being one of the top performers over the long term. Internalising this unintuitive fact can have an outsized positive impact on longterm investor returns.
Finding the strongest factors
By now, it’s clear that most factor indices barring two have done better than the large, mid, and smallcap indices over a reasonable length of time. We want to identify now the bestperforming factors in the mix of indices we started with.
We’ll try looking at the data in a few different ways to form our conclusions.
Chart shows which index was the best and worst performer over 1 and 3 years for what percentage of the 16 years. Each doughnut totals 100.
Here’s what you can make of these odd couple of rolling return charts (mouseover any individual strategy to highlight its corresponding values in the best and worstperforming pie):
 Regular indices (Nifty 50, Nifty Midcap 150, and Nifty Smallcap 250) are tiny slivers on both charts. This means the factor indices outperform just buying and holding the index almost all of the time.
 The number of roughly equal slices in the bestperforming 1year rolling return chart shows how on a 1year timeline, any number of strategies can outperform. But on a 3year timeline, you see the strong strategies become bigger slices of the overall pie.
 Nifty High Beta 50 stands out as a horrendous performer on all timelines. But even that manages to be the bestperformer 5% of the time on a oneyear basis. Think about that the next time you see a chart announcing a great 1year performance
 Nifty500 Value 50 is the best 3year return index 15% of the time, only behind Nifty200 Momentum 30 and Nifty200 Quality 30. And yet, the value index is one of the worst overall performers in this set. The difference is that while the Momentum and Quality indices don’t feature on the worst performers pie, the value index did the worst on 3year returns 7% of the time.
A quick thought experiment:
Timeline 1: In 2022, your portfolio ends the year +15%. Your peer group makes +22%. In 2023, your portfolio corrects 15%. Your peer group corrects 22%
Timeline 2: In 2022, your portfolio ends the year +22%. Your peer group makes +15%. In 2023, your portfolio corrects 22%. Your peer group corrects 15%
If these are your only options, which timeline do you want to be on?
This is not a trick question. In both timelines:
 Both you and your peer group end lower than where you started in 2022. Down years do a surprising amount of damage
 +15%/15% does better than the +22/22% return profile. The sequence doesn’t matter
The best outcome of two notsogreat ones: Timeline 1
Most likely outcome: Investors jump from timeline 1 to 2 after year 1 of “underperformance”.
How much time a strategy spends at the bottom of the table has more impact on longterm performance than how much time it spends at the top of the table.
The chart shows how much time each index spent relative to the others on a 3year rolling return from 2005 to 2021.
We also added a few more broad market indices, the NIFTY 100, 200, 500, just in case they have a different story to tell from the other market cap indices. They don’t.
For a strategy to be promising, it should spend a decent amount of time in the top quartile (rightmost light green bar) and hopefully the bulk of the rest of its time in the middle of the pack and almost no time in the bottom quartile. The chart above has been ordered in increasing order of time spent in the bottom quartile.
Broad market cap indices like the NIFTY 50, 100, 200 all spent considerable time in the bottom quartile of performance in addition to some time in the top quartile.
For example: the NIFTY50 was in the top quartile 18% of the time, in the middle of the pack 41% of the time, and in the bottom quartile the remaining 41% of the time. 18 + 41 + 41 = 100. The NIFTY AlphaLow Vol index on the other hand spent 64% of the time in the top quartile, 28% in the middle of the pack, and the remaining 8% in the bottom quartile.
The bestperforming indices, NIFTY Alpha Low Vol, NIFTY200 Momentum 30, were the bestperformers a lot of the time. But they were also bottom quartile for a little bit of the time. Imagine entering one of those strategies and finding you’ve been outperformed by almost everything else at the end of three years.
The Low Volatility indices shine at not being the worst for any considerable stretches of time and even manage to be among the top performers some of the time. For this reason we believe low volatility allocation makes a great addition to a momentumonly holding.
By now we have written off the NIFTY High Beta 50 index completely so its 94% time spent in the bottom quartile is not even surprising. The other poor indices are the NIFTY Smallcap 250, NIFTY50 Equal Weight and NIFTY100 Equal Weight. All three of them were in the top quartile for a relatively small period of time and a lot of time in the underperforming bottom quartile.
Bringing it all together
If historical CAGR were an accurate reflection of what’s to come, investment decisions would be easy. Order by historical CAGR and go allin on the topranked investment option. If you don’t need the money for the next 10+ years, AND you are certain of the outcome, it would not matter that it trails the index for a significant period of time or sees drawdowns far greater than the index.
But since we don’t know the future, we look at historical metrics, not just of return, but also of volatility, maximum drawdown, periods of time that it underperforms not just the NIFTY but the universe of investment options.
The table below brings together the performance metrics of Nifty factor indices and compares them with the most common benchmark indices. The best factor indices offer clear outperformance versus the Nifty with similar or better volatility and drawdowns and are consistent in staying out of the bottom quartile by performance.
Scroll to the right to see all columns or click the link below the table to view this full screen.
If the table above does not display correctly, click here
The NIFTY Alpha Low Vol and NIFTY200 Momentum 30 are clear outperformers in this set of indices and so it can be tempting to go allin on them. However, remember that for about 10% of the last 16 years, they were in the bottom quartile in terms of threeyear return performance.
Even with the “best” investment strategies, a willingness to tolerate underperformance for stretches of time is the price of admission.
One way to develop the stomach for those inevitable stretches of underperformance is to partially allocate to a Low Volatility strategy which is rarely the best performer but also rarely the worst performer.
Finally, a reminder that in this post, we evaluated NSE’s implementations of these factors and not necessarily the “best” possible implementation of the Value, Quality, Alpha, Momentum factors.
How to invest in Factor Indices?
“Books on stockpicking are easier to write because there are always great stories when it comes to individual companies: fascinating tales of greatness and woe that end wonderfully for the sage stock picker who is the hero of this tale. Factors don’t have madeforTV endings. Success is measured by less thrilling statements like, “and then the factor had a +1 standard deviation decade,” versus discretionary stockpicking stories that end with “and then the company I invested in invented the iPod!” – Foreword: Your Complete Guide to FactorBased Investing
Factors do not make for stirring narratives about how company X has exceptional management and sustainable competitive advantages (aka moats) that will allow it to continue growing faster than its competition and also maintain healthy profit margins. And so until last year there were no mutual funds tracking any factor index.
That has changed first with the launch of the UTI Nifty200 Momentum 30 fund followed by the two others by ICICI Prudential tracking the Low Volatility and the AlphaLow Volatility indices.
Table below shows the three funds available today.
We wrote about the ICICI Prudential Nifty Low Vol 30 ETF when it launched in March 2021
We expect this list to grow much longer over the next 12 years as more AMCs launch funds tracking factor strategies.
Mutual funds do not incur capital gains taxes when they rebalance their portfolios making them costefficient mechanisms to invest in factor strategies.
At Capitalmind, we have two active factor strategies, called Capitalmind Momentum and Capitalmind Low Volatility strategies.
Capitalmind factor portfolios built on Momentum and Low Volatility, are variations of the core concept used by the NSE indices but meant to offer better riskadjusted returns. The portfolios are available to Capitalmind Premium members and also available on smallcase for standalone subscriptions.
Select Nifty Factor Index Constituents
Have questions? Comments? We’re on Twitter @capitalmind_in or reach out directly to the author @CalmInvestor