Factors - Risk and Returns

Can equity factors be timed?

Last week, we explored if it is possible to reduce momentum’s crash risk and whether factors themselves exhibited momentum that could be timed.

Reducing Crash Risk in the Nifty Alpha Indices

In a 2012 paper, Momentum has its moments, Barroso and Santa-Clara outline a way in which historical volatility could be used to reduce momentum crashes. Can it be used to reduce the crash risk of NSE’s Alpha Indices?

Turns out that you can!

Using historical volatility (std. dev.) reduces drawdown risk in Alpha indices. But it comes at the cost of reduced overall returns over buy-and-hold over certain holding periods. However, given the magnitude of the dodge in 2008 and 2016, it is well worth the effort (and cost) if it helps keep the discipline.

Factor Momentum Everywhere

Do factors themselves exhibit momentum? Can systematically buying whatever factor/style that out-performed recently result in enhanced results?

Turns out it does!

We tested a long-only portfolio with five of the strongest factors – Momentum, Quality, Low-volatility, Value and Small-cap. The strategy was to go long whatever factor had the best returns over the last 12-months, 6…12 months and the previous month.

The Factor Momentum portfolio handily beat the NIFTY 50 index.

If you are interested in these strategies, do let us know!


Given increased interest in index investing, we tried to answer a basic question: given a choice between NIFTY 100 and NIFTY 500, which one is “better?”

Right now, NIFTY 100 based ETFs are a lot cheaper than the NIFTY 500 based ones. So, should investors pay-up for the larger portfolio?

The answer is No. Unless NIFTY 500 based ETFs/funds achieve fee and liquidity parity with the NIFTY 100 based ones, investors are not missing out on anything by sticking with the mega-caps.

Does the tail-end add value?

Happy Holidays!