Passive funds and specialised investing

Just as the stock market moves in cycles, businesses, themes, and investing strategies also exhibit cyclicality. If you can catch them, you may be in for a treat.

But how do you target these cycles? Enter sectoral funds, thematic funds, and smart beta funds.

Sectoral funds focus on specific sectors like IT, while thematic funds invest in overarching themes, such as manufacturing. Smart beta funds combine active and passive investing strategies, tracking an index like a passive fund and incorporating active investment attributes like momentum and quality.

However, these specialised strategies carry risks. The fund manager could make wrong bets and the sector or trend could see a reversal in fortune.

You could partially offset these risks through passive funds (subject to other risk factors). Passive funds simply track an underlying index and seek to generate returns as per that. You are not exposed to a fund manager's discretion anymore.

Moreover, when these specialised strategies are integrated with passive funds, such as index funds or exchange-traded funds/fund of funds, they typically provide a relatively cost-effective way as compared to actively managed funds to access these specialised strategies.

For example, the Nifty Smallcap250 Momentum Quality 100 Index aims to track the performance of 100 small-cap stocks that are selected from the Nifty Smallcap 250 index based on the combination of momentum and quality factors. By investing in passive funds tracking such an index, you may seek to get underlying index returns.

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