New Delhi: Regardless of the type of investment, the purpose behind it is almost always the same: to make a profit. Any rational investor would aim to maximize the profit from their holdings. Although every investor has their own investment style, there is an investment method that can provide a guaranteed return on investment if followed strictly.

The method in question is called “Factor Investing”. It’s a term that’s been around for a while now, but isn’t very commonly used or practiced.

What is Factor investing?

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Factor investing is an investment approach that involves targeting specific drivers of return across all asset classes. Investing in factors can help improve portfolio results, reduce volatility and increase diversification.

We were joined by Rajiv Shastri – Director and CEO, NJ Asset Management, who broke down the concept for us. “Factors are like features, just how you would look at the features of a car or a phone before buying one, factors are the features of a stock.” He added that based on certain characteristics of a particular stock, you need to decide if the stock is good for your portfolio.

What are these factors?

There are broadly 5 factors that contributed significantly to a stock’s performance, Shastri said, naming these factors as quality, value, momentum and low volatility and size (of the company ). He added that the size factor is not fundamentally applicable to India.

The quality of a stock is reflected through indicators such as the company’s low indebtedness, stable profits and constant growth. The value factor indicates that undervalued companies are a better avenue for investment than overvalued companies. This means that the company’s stock price does not reflect potential growth or is priced low relative to its fundamental value.

The momentum factor, Shastri said, is the easiest to implement in India as you only need to know the price data to implement this factor. The momentum style factor indicates that stocks that are already appreciating should continue to appreciate. In other words, investors should look for stocks that have performed well recently. The momentum can be unstable, a stock that shows positive momentum can turn around and start showing negative momentum, so investors should be careful when applying this factor.

When it comes to volatility, investors should look for low volatility stocks. If the stock price fluctuates too much over a short period of time, the stock is not necessarily the best choice.

On a closing note, Shastri said there are lessons we can adopt abroad; techniques that need to be learned and data collection that needs to develop in the country.

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