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Tata Capital > Blog > How does Smart Beta help bridge the Gap between Passive and Active Fund Management?

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How does Smart Beta help bridge the Gap between Passive and Active Fund Management?

How does Smart Beta help bridge the Gap between Passive and Active Fund Management?

Investing your hard-earned money without a game plan is akin to throwing it in the air, hoping it will multiply on its way down. Investment strategies are the cornerstone of mindful and successful investing that doesn’t just help your money grow, but also helps you build and maintain a balanced portfolio that withstands the ravages of time.

One such investment strategy is Smart Beta investing. What makes this strategy especially worth your attention is that it works to bridge the gap between active and passive fund management, both popular in their own right, but each ideal for a select group of people. If you’re looking to learn more, keep reading.

What is Smart Beta Investing?

To understand what is Smart Beta investing, we first need to understand active and passive investing. Active investing refers to when fund managers take a proactive approach to investing. They do their independent research and create portfolio with an aim to beat the market..

On the other hand, Passive investing aims to  mirror a particular benchmark or index. It involves investing in a larger market index or subset with the goal of replicating market performance rather than beating it.

Now, coming to Smart Beta investing. This offers you the best of both worlds by aiming for higher returns and diverse investments with lower risk. It provides you with a systematic, rules-based approach specifically designed to capture market inefficiencies while also maintaining the transparency and cost-effectiveness of passive investing.

Critical Components of Smart Beta

Here are some key components of Smart Beta Investing:

  • Factor Exposure: Smart Beta strategies help you gain exposure to specific factors that have performed well in the past or are low-risk. These factors can include value, quality, momentum, low volatility, and size.
  • Rules-Based Approach: Smart Beta follows algorithms and rule-based approach, unlike a spontaneous one followed by Active investing. This reduces the influence of human biases and promotes consistency in investment decisions.
  • Cost-Efficiency and Transparency: Like Passive investing, Smart Beta investing is relatively less costly as compared to Active investing and offers significant transparency as well.

How Does Smart Beta Bridge the Gap Between Active and Passive Fund Management?

Smart Beta fund management bridges the gap between Active and Passive fund management by taking the positives of both strategies and combining them into one..

Smart Beta fund management considers the following factors in its approach:

  • Value: Smart Beta fund management invests in companies that have features indicating it is undervalued relative to its fundamentals. These types of companies have a strong tendency to appreciate in value once the market recognises them.
  • Quality: Smart Beta investing invests in companies that are believed to offer better returns in the future as against other companies that have offered stable returns, lower debt-to-equity returns and consistent profitability.
  • Low Volatility: Smart Beta investing means selecting companies that exhibit lower volatility in returns as compared to the larger market. The aim is to mitigate or manage the overall portfolio risk.
  • Momentum: This strategy involves investing in stocks which are showing upward price trend and selling when they lose momentum.

Final Thoughts

Smart Beta Investing is a unique investment strategy that combines the best of Active and Passive investing. It offers you the high returns aimed for by Active investing with the security promised by Passive investing.

Be sure to assess your investment portfolio and financial goals to decide whether Smart Beta investing is for you. And if you need professional guidance, turn to Tata Capital Wealth.

We offer a wide array of customised investment, protection, and financing services that meet the financial needs of you and your family. To learn more about our offerings, visit the Tata Capital Wealth website today!

Build Your Wealth with Expert Guidance from Tata Capital!

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