Quant-based funds emerge as new battleground for mutual fund investors

Although quant and factor strategies are expanding rapidly, investor participation held back by their complexity and inconsistent returns

While investors continue to spar over the virtues of active versus passive investing, fund houses are quietly constructing a powerful middle path — products that borrow from both worlds without fully belonging to either.

 

Over the past two-three years, factor funds, also known as rule-based or smart beta strategies, have surged to the forefront of new fund launches.

 

What was once a niche category has now become a major area of experimentation for asset managers looking to offer systematic, lower-cost strategies without giving up the sophistication of active investing. 

Today, the market hosts nearly 150 factor-based schemes, each built around well-studied drivers of returns such as value, momentum, quality, low volatility, and alpha. And, the momentum is only accelerating: In the past year alone, close to 50 new schemes have been rolled out as fund houses race to create differentiated offerings in a crowded products landscape. 

The pipeline for new offerings in this segment is vast. The rules-based framework opens up almost endless permutations, allowing fund houses to mix and match factors in ways that were previously impractical within traditional active strategies. Beyond single-factor products, the industry is now experimenting with multi-factor blends and customised rule sets tailored to different market cycles.

 

There is also ample room to scale these strategies across the market-cap spectrum — from largecaps to mid and smallcaps — giving fund houses multiple levers to differentiate products.

 

The advent of flexicap formats has expanded this universe even further, enabling managers to apply factor rules without being constrained by predefined size buckets.

 

A glimpse of this innovation came earlier this year when DSP Mutual Fund introduced the first passive flexicap scheme anchored in the quality factor — signalling how fund houses are beginning to push the boundaries of what passive, factor-driven investing can look like.

 

Most of the action in factor investing has so far been concentrated on the passive side, where fund houses are collaborating closely with index providers to design new, rule-based benchmarks. The trend is visible in the rapid expansion of NSE’s Strategy Indices suite — its collection has grown from 23 to 36 over the past two years, reflecting the appetite for increasingly granular, factor-driven exposures. BSE’s index arm, too, has been building out a wide array of similar strategy indices, giving asset managers an even broader menu of building blocks to craft passive factor funds.

 

Rise of active factor funds

 

While active factor investing isn’t entirely new — traditional value funds have embodied the idea for decades — mutual funds have only recently begun to explore the full spectrum of active, factor-driven strategies. The turning point came in 2023, when Samco Mutual Fund launched the industry’s first active momentum fund, signalling that fund houses were ready to move beyond the confines of passive smart beta products.

 

Since then, interest has accelerated. Over the past year, players such as Kotak, ICICI Prudential, Union Mutual Fund, Motilal Oswal, and Nippon India have rolled out their own active factor offerings. The evolution continued in 2025 with the debut of the first active quality funds, introduced by WhiteOak Capital and ICICI Prudential, marking another milestone in the broadening of India’s factor-fund landscape.

 

According to industry observers, the surge in smart beta strategies is being driven by two powerful forces: The growing pressure on fund houses to differentiate their offerings, and the diminishing scope for consistent alpha generation within traditional active funds.

 

“Fund houses are likely to keep pushing this space. With active equity funds facing tighter alpha opportunities, especially in largecaps, and plain-vanilla index funds becoming highly competitive on cost, asset management companies (AMCs) in India are looking at smart beta as the next area of differentiation,” said Nehal Meshram, senior analyst – manager research, Morningstar Investment Research India.

 

As new fund houses are entering the smart beta space, existing ones are getting into complicated strategies. Multi-factor funds is the latest sub-category in the smart beta space with four launches — those from Mirae Asset, Sundaram, Franklin India and Bandhan — in the last one year. Axis’s Multi Factor Passive Fund of Funds (FoFs) is the only scheme with a track record of more than a year.

 

Multi-factor funds combine two or more investment factors into a single strategy to solve the problem of cyclical performance of individual factors.

 

There are also quant funds that function based on quantitative strategies. Most of these schemes in India take a multi-factor approach.

 

The trend is leading more and more asset managers to set up data teams and invest in data and technology. “Many of them have built internal data teams, partnered with index providers, or are experimenting with factor-based indices such as quality, low-volatility, and momentum,” Meshram added.

 

Rising quant integration

 

Quant skills are rapidly becoming table stakes for asset managers — even for schemes that don’t carry a ‘quant’ label, says Bhavesh Jain, cohead factor investing, Edelweiss MF. He explains the growing use of algorithms in active schemes across equity and hybrid categories.

 

Edelweiss MF is among the few fund houses that manage all or select schemes largely through factor-based models. Quant MF, NJ MF, Samco MF, and Shriram MF manage some or all of their active equity and hybrid schemes largely through quantitative models.

 

Some new players and those awaiting licence are starting out or are expected to venture into the space as rule-based asset managers. Capitalmind MF is one of them. “We believe that with the growing availability of data, a large part of decision making should be aided by a rules-based approach,” said chief executive officer (CEO) Deepak Shenoy.

 

Lack of traction for factor and quant funds

 

While factor funds are growing in numbers, they have failed to garner investor interest. The assets under management (AUM) of the 130 schemes that fall under the factor or quantitative umbrella (excluding active value funds) is just around ~67,000 crore.

 

Experts attribute the slow uptake to two underlying challenges — the cyclicality in their performances and the limited investor understanding due to their complexity. In addition, they generally rank lower compared to diversified equity schemes in risk-adjusted returns.

 

“Most factor funds follow a passive approach that depends heavily on historical data, and past trends do not always hold up in changing market conditions. While the ideas behind value, momentum or low volatility sound scientific, many factor indices show higher volatility with standard deviation often between 15 and 30. Their returns also move in cycles, which makes it hard for investors to experience consistent long-term outcomes,” said Feroze Azeez, joint CEO, Anand Rathi Wealth.

 

Madhu Nair, CEO at Union AMC, said the fact that past data is at the core of investment models, any structural shift in the market can lead to performance lag. “Quant models may lag during turning points because they rely on historically trained signals. Market regimes often change faster than models can adapt,” he said.

 

According to Vishal Dhawan, founder & CEO of Plan Ahead Wealth Advisors, the lack of long-term track record and investor awareness coupled with lower distributor commissions in passive funds add to the problems for these schemes. “The lower investor awareness of how these schemes work and the relatively lower track records across cycles of these schemes are also issues. In addition, the relatively lower expense ratio in these schemes may make it less attractive for it to be marketed and sold aggressively,” he said. However, he sees the possibility of their performance issues being addressed by multi-factor funds.

 

Citing the example of developed markets, Karthik Kumar, fund manager at Axis Mutual Fund, said the category will ultimately gain traction in India.

 

“Given that we, as a market, are still young, we expect some of the same trends to play out over time. Factor or model-driven strategies are a great way of taking exposure to certain styles while also ensuring that there is no style drift over time,” he said.

 

Quantitative capabilities becoming crucial for asset managers

 

Quantitative abilities are increasingly becoming crucial for fund houses, irrespective of whether they want to launch active factor schemes or not. The growing need is arising out of the expanding investment universe, shortening of market cycles and rising competition.

 

“The role of quantitative methods in both active and passive strategies is expected to grow meaningfully over time. With the advent of artificial intelligence (AI) and more sophisticated analytical tools, precision and efficiency will increase. This will enable fund managers to manage the expanding Indian-listed universe more effectively,” said Chintan Haria, principal - investment strategy, ICICI Prudential AMC.

 

According to Prateek Nigudkar, senior fund manager at Shriram AMC, the ability to analyse large datasets, model factor behaviour, track risk exposures in real time, and test investment hypotheses with statistical rigour provides a clear edge to any fund house investing in these capabilities.

 

Fund houses are also exploring the possibilities of using AI in fund management. One fund house now even has an AI Officer.

 

Nishant Pradhan, chief AI officer at Mirae Asset Investment Managers (India), said, AI can aid in functions across research, risk management, portfolio analytics and provide inputs related to investor demand and their behaviour.