What is the Significance of Factor Investing?

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With more than three million individual securities and multiple asset classes in the global market, it is a challenge to create the right mix for an investor’s portfolio. However, few factors have been explored by academicians which help in determining the adjusted risk-return profile of security.

These factors are persistent and broad, allowing investors to critically examine the security as per their diversification goals.

Emerging technologies are giving an edge to investors by expanding their data source and assessing the factors in real-time.

Ascertaining the factors that affect the return on securities can help in creating an optimum portfolio as per the need and risk profile of an investor. Extensive research indicates that these factors drive returns because of risk-taking character and non-rationality of investors at the same time across the globe and structural impediments.

Risk-bearing behaviour results in additional returns or underperformance in few markets. Structural impediments stand for the restrictions in some countries to access certain securities, simultaneously creating investment opportunities for another investor. The behavioral biases create a pool of opportunities with different investors having different views about a security.

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