Smart-beta trumps active funds over all 7-year cycles in mid, small-cap segments - expert explains

Smart-beta investment strategies have consistently beaten actively managed mid- and small-cap mutual funds across all 7-year rolling return periods, according to a new performance analysis. The results strengthen the case for rules-based passive investing, particularly for long-term investors seeking higher returns at lower costs.

The Nifty Midcap 150 Momentum 50 index emerged as a standout, outperforming mid-cap mutual funds 100% of the time over every 7-year window. More notably, in 60% of those periods, it beat the average mid-cap fund by over 6% annually.

“These numbers clearly show that systematic factor-based strategies like momentum can deliver more consistent returns than active managers in the mid-cap space,” said Famy Rasheed, an expert in passive investing and equity markets.

The Nifty MidSmallcap 400 Momentum Quality 100 index displayed a similar pattern, beating mid-cap funds every time and small-cap funds in all observed periods as well—typically by 2–6% annually. Meanwhile, the Smallcap 250 Momentum Quality 100 index outperformed small-cap funds in 98% of 7-year periods, also delivering annual excess returns of 2–6%.

Smart-beta strategies differ from traditional mutual funds and market-cap-weighted index funds by using predefined, rules-based selection criteria rather than manager discretion or simple company size. These strategies focus on proven performance factors such as value, momentum, quality, or low volatility—characteristics that have historically contributed to long-term outperformance or risk reduction.

“Smart beta is about removing emotion and bias from the investment process,” Rasheed explained. “Instead of relying on a fund manager’s intuition, you follow a transparent set of rules that pick stocks with desirable traits.”

Another key benefit lies in cost and diversification. Since these strategies do not rely on active management, they typically come with lower expense ratios. At the same time, by deviating from market-cap weighting, smart beta portfolios offer exposure to underrepresented segments of the market.

“For example, traditional indices tend to overweight large-cap stocks simply because of size,” Rasheed said. “Smart beta approaches can balance that by giving weight to quality small- and mid-cap companies that might otherwise be ignored.”

With increasing demand for low-cost, high-return alternatives, smart-beta strategies—especially those blending momentum and quality factors—are proving to be strong contenders in India’s evolving investment landscape.