What Is Factor Investing?
IPL 2026 is in full swing – and if you have watched any match this season, you already understand factor investing. A winning team is never built around one type of player. You need a consistent opener, an aggressive middle-order bat, a bowler for pressure situations, and a finisher for the final overs. Each player is selected for a specific role – and together, they cover each other’s weaknesses.
Factor investing works exactly the same way in your portfolio. Instead of simply buying the largest companies or trusting a fund manager’s gut feel, factor investing selects stocks based on specific, measurable characteristics – called factors – that have historically delivered stronger returns over long periods.
Think of it as sitting between two familiar approaches. Like an index fund, it follows pre-defined rules – no guesswork. But unlike a plain index fund, it tilts toward specific stock characteristics rather than simply owning every company based on size. Four factors have been widely studied in Indian equity markets: Momentum, Value, Quality, and Low Volatility.
The Four Factors - Simply Explained
Momentum – The Trend Follower
Stocks rising strongly tend to keep rising – for a while.
Like a batsman in great form – you back him because confidence carries forward. But momentum can reverse sharply when conditions change.
Value – The Patient Contrarian
Buy good businesses the market has temporarily priced too cheaply.
Like backing Yuvraj Singh after his cancer comeback – unfashionable at the time, but those who held on were rewarded enormously.
Quality – The Stability Seeker
Own financially strong, well-run businesses that hold up through all conditions.
Like picking dependable players for difficult pitches – they may not be flashiest, but rarely let you down when it matters.
Low Volatility – The Smooth Rider
Invest in stocks that move less – and fall less during market declines.
Like a balanced team that may not score fastest, but never collapses dramatically under pressure.
Each factor has its season. Momentum thrives when market trends are strong. Value does well in recovery phases. Quality shines during uncertainty. Low Volatility holds up best when markets are falling. And no single factor outperforms in all conditions – which is the most important insight in this article.
What The Data Shows - 21 Years Of Evidence
Between April 2005 and March 2026 – covering multiple crashes, recoveries, and everything in between – here is how each factor performed: The table below compares major factors and broader market indices across daily rolling return periods between April 2005 and March 2026.
| Index | Median Rolling Return* (%) | Negative Observations (%) | Maximum Drawdown(%) | |||
| 3 Year | 5 Year | 10 Year | 3 Year | 5 Year | ||
| Nifty 500 Low Volatility 50 – TRI | 16.12 | 15.83 | 15.43 | 0.41 | 0.00 | -48.26 |
| Nifty 500 Quality 50 – TRI | 16.93 | 16.77 | 16.15 | 3.20 | 0.03 | -53.60 |
| Nifty 500 Momentum 50 – TRI | 19.80 | 21.95 | 20.10 | 3.55 | 1.66 | -70.24 |
| Nifty 500 Value 50 – TRI | 17.14 | 14.28 | 14.75 | 18.42 | 3.65 | -66.06 |
| Nifty 100 – TRI | 13.17 | 13.54 | 12.97 | 2.86 | 0.03 | -61.08 |
| Nifty Midcap 150 – TRI | 17.82 | 16.41 | 16.64 | 9.59 | 0.87 | -72.89 |
| Nifty Smallcap 250 – TRI | 16.64 | 13.67 | 14.32 | 17.11 | 7.36 | -75.56 |
| Nifty 500 – TRI | 13.54 | 13.62 | 13.30 | 6.21 | 1.01 | -63.71 |
What This Tells Us
Every factor has outperformed the plain Nifty 100 and Nifty 500 over long periods. Momentum gave the highest returns – but also suffered the steepest fall. Low Volatility and Quality delivered strong returns with far fewer down periods. The pattern is clear: higher return potential comes with higher risk. No single factor wins in all conditions.
The Leadership Keeps Changing - Every Single Year
Here is the most important table in this article. It shows which factor came first and last each year from 2016 to 2026:
| 2016 | 2017 | 2018 | 2019 | 2020 | 2021 | 2022 | 2023 | 2024 | 2025 | 2026* |
| Value 23.3 | Momntm. 69.51 | Low Vol. 7.20 | Nifty 100 11.44 | Quality 27.30 | Momntm. 76.86 | Value 23.16 | Value 62.60 | Momntm. 26.51 | Value 16.66 | Value -3.87 |
| Midcap 5.47 | Smallcap 58.47 | Nifty 100 3.39 | Nifty 500 8.64 | Smallcap 25.55 | Smallcap 61.48 | Low Vol. 7.31 | Smallcap 49.09 | Smallcap 26.42 | Low Vol. 15.51 | Low Vol. -10.58 |
| Nifty 500 4.68 | Midcap 55.73 | Nifty 500 -1.55 | Momntm. 8.61 | Midcap 25.12 | Value 54.66 | Nifty 100 4.94 | Momntm. 47.71 | MIdcap 23.76 | Nifty 100 9.79 | Quality -11.07 |
| Nifty 100 4.66 | Value 47.02 | Quality -2.01 | Low Vol. 8.17 | Low Vol. 24.10 | Midcap 46.48 | Nifty 500 4.25 | Midcap 44.61 | Quality 23.03 | Nifty 500 7.25 | Midcap -12.99 |
| Low Vol. 1.91 | Nifty 500 37.65 | Momntm. -10.88 | Quality 1.80 | Momntm. 20.87 | Nifty 500 30.95 | Midcap 3.91 | Quality 41.95 | Value 19.25 | Midcap 5.46 | Momntm. -13.06 |
| Quality 0.54 | Quality 33.62 | Midcap -12.49 | Midcap 0.58 | Nifty 500 17.7 | Quality 29.14 | Smallcap -2.64 | Low Vol. 33.44 | Nifty 500 16.00 | Quality -3.41 | Nifty 500 -14.02 |
| Smallcap 0.52 | Nifty 100 32.88 | Value -26.42 | Smallcap -7.59 | Nifty 100 15.97 | Nifty 100 26.03 | Quality -2.82 | Nifty 500 26.91 | Low Vol. 15.99 | Smallcap -6.30 | Smallcap -14.19 |
| Momntm. -1.55 | Low Vol. 31.74 | Smallcap -26.54 | Value -13.87 | Value 8.14 | Low Vol. 20.11 | Momntm. -7.59 | Nifty 100 21.24 | Nifty 100 12.87 | Momntm. -8.04 | Nifty 100 -14.27 |
Note:
1) The above data is presented in % terms.
2) The following indices were utilized to represent the returns for the various factors and broader market segments:
Momentum: Nifty 500 Momentum 50 TRI
Smallcap: Nifty Smallcap 250 TRI
Midcap: Nifty Midcap 150 TRI
Quality: Nifty 500 Quality 50 TRI
Low Volatility: Nifty 500 Low Volatility 50 TRI
Value: Nifty 500 Value 50 TRI
Nifty 500: Nifty 500 TRI
Nifty 100: Nifty 100 TRI
Look at Momentum – it was the best performer in 2017 (+69.5%) and 2021 (+76.9%), but the worst in 2022 and 2025. Value led in 2016, 2022, 2023, and 2025, but was the worst performer in 2019 and 2020. Not one factor stayed on top.
The lesson for investors is clear: chasing last year’s best-performing factor is one of the most reliable ways to underperform. The factor you buy at the top of its cycle is often the one about to hand leadership to someone else.
The investor who tries to predict which factor leads next is playing a game with no consistent winner. The investor who owns multiple factors is playing a different game entirely.
Why Combine Factors?
Since no single factor outperforms in all conditions, combining multiple factors helps reduce dependence on any one strategy. When Momentum is struggling, Quality or Low Volatility may be holding up. When Value is out of favour, Momentum may be running. Together, they provide a more balanced experience across full market cycles – and make it far easier for investors to stay the course.
Factor investing is not a short-term strategy. It is a long-term, rules-based, data-backed approach that has delivered meaningful results over 21 years of Indian market history. The strength lies not in identifying the best factor today – but in staying invested through all cycles and letting disciplined, diversified exposure compound steadily over time.
Speak to your MF distributor to understand how factor-based funds can be incorporated as part of a well-structured, long-term equity portfolio suited to your specific financial needs.
Mutual Fund investments are subject to market risks, read all scheme related documents carefully. Data sourced from ACEMF. Rolling return analysis covers April 2005 to March 2026. Past performance does not guarantee future returns. All data and illustrations are for educational purposes only.
