Multi-Factor Investing: The Powerful Way to Beat Market Uncertainty

• Date : January 21,2026

Imagine you're packing for a long trip with unpredictable weather. Would you only take a raincoat or just sunglasses? Probably not. You’d pack smart; carry an umbrella, a jacket, maybe even a pair of sandals or shoes, so that you’re ready for whatever comes your way in the trip. That’s exactly how multi-factor investing works. It’s about preparing your portfolio for all kinds of market weather, whether it is upturns, downturns, and everything in between.

Just like a seasoned traveler knows it’s not right to rely on a single forecast, a wise investor knows not to rely on a single factor. Markets change, and with them, the winners and losers among investing styles change too. Enter the world of factor investing, and more importantly, multi-factor investing, where blending different strategies which helps investors avoid the traps of short-term trends and emotional decision-making.

Understanding Factor Investing

Starting with the basics of what is factor investing?

Factor investing is a strategy that selects stocks based on specific characteristics or factors that have driven returns based on the past data. Think of these factors like personality traits of stocks. The most common ones include:

Single-factor portfolio targets one investment factor, such as:

• Quality Factor: It identifies companies that have strong financial health with potential for growth over the long-term. The main focus is to identify and invest in high-quality companies rather than simply investing in cheap or undervalued stocks.
• Value Factor: It is a fundamental concept in factor investing that refers to the practice of selecting stocks that appear to be undervalued relative to their intrinsic value. The core belief of this strategy is that the market will ultimately discover its true potential, which raises the stock price.
• Momentum Factor: Momentum factor investing works on a very basic principle: stocks that have recently performed well tend to keep performing well. In simple terms, it is a time-based strategy where investors buy stocks with rising prices and sell those with declining trends.
• Low Volatility Factor: It targets stocks that have historically showcased minimum price fluctuations, expecting to provide a smoother investment journey.

Each of these factors brings a unique advantage, but none of them works all the time in the market. And that’s the problem with relying on just one factor.

Why Single-Factor Strategies Don’t Work Consistently

Just like no single outfit suits all weather in that long trip, no single factor consistently outperforms across all market conditions. Each factor has its cycle of highs and lows:

• Value may outperform during recovery periods but struggle when growth stocks are in favor.
• Momentum may lead during market rallies but may not work in sudden reversals.
• Quality outperforms in uncertain times and gives stability but might lag in aggressive bull runs.
• Low volatility protects during market falls but may underperform in high-growth environments.

This constant chasing of recent winners and abandoning of the factors behind leads to emotional decision-making and high portfolio churn, which may fade investors long-term returns. The emotional ups and downs of single-factor investing can test an investor’s patience. This is why many investors end up exiting at the wrong time which is buying high and selling low; despite the underlying strategy being sound.

The Behavioural Trap of Chasing Factors

Investor psychology plays a big role in the underperformance of single-factor strategies. Behavioral biases such as recency bias, herd mentality, and loss aversion which can push investors to chase the latest winning factor. For instance:

• After a phase of strong returns from momentum, many investors follow it and expect the trend to continue.
• When value factor or quality factor underperforms for a while, investors abandon it, even if the fundamentals still remain sound.
• Investors avoid low volatility stocks in bull markets due to fear of missing out on bigger gains.

This constant chasing of recent winners and abandoning the existing factors which they are holding leads to emotional decision-making and high portfolio churn, which hurts long-term returns. The emotional ups and downs of single-factor investing can test an investor’s patience. This is why many of them end up exiting at the wrong time by buying high and selling low; despite the underlying strategy being strong.

What is Multi-Factor Investing?

Multi-factor investing combines multiple investment factors such as quality, value, momentum and low volatility into one strategy. This approach aims to balance out the individual weaknesses of each factor while retaining their strengths.

Rather than chasing the factor that worked best last year (and possibly missing the next winner), multi-factor investing ensures that you’re always holding a diversified blend of strategies. This helps deliver more consistent returns, reduces volatility, and improves investors’ chances of staying invested through different market conditions.

Benefits of Multi-Factor Investing

• Diversification Benefit: By combining different factors like quality, value, low-volatility, and momentum, a multi-factor portfolio helps spread risk across different market environments.
• Smoother Investment Experience: It cushions the impact of individual factor underperformance, helping avoid sharp ups and downs.
• Timing the market: Investors don’t have to guess which factor will take the lead next. A multi-factor approach keeps you positioned for multiple outcomes.
• Improved Risk-Adjusted Returns: Historical data shows multi-factor portfolios often offer better Sharpe ratios, with lower volatility and drawdowns.
• Emotion-Free Discipline: As a rule-based strategy, it supports rational, long-term decision-making and reduces the temptation for reactive changes. 

Does Multi-Factor Investing work in India? 

India’s market is evolving, and with it, so are investment solutions. Multi-factor funds in India are designed to offer:

• Simplicity: One fund that does the heavy lifting by blending value, quality, momentum, and low volatility. That is giving the benefit of all the factor benefits in one fund.
• Diversification: Reduces overexposure to one style or market cycle.
• Efficiency: Removes the need for individual investors to time factors.
  
  

Performance Snapshot: Multifactor vs. Single-Factor Portfolios

Source: NSE,NJ AMC's Smartbeta Research Platform. Data is for the period 30th September, 2006 to 31st December, 2025. Past performance may or may not be sustained in the future and is not an indication of future return.

Backed by Data: Correlation Tells the Story

Historical performance clearly reflects factor rotation. For example, if you look at the correlation matrix among major factor indices over 20 years (from April 2005 to December 2025), you’ll see how differently these factors move:

Source: Internal Research, CMIE, NSE, NJ AMC's Smartbeta Research Platform. Data is from the period 1st April 2005 to 31st December 2025. Past Data may or may not be sustained in the future and is not an indication of future return.

The correlation data above highlights a critical insight for investors: different factor strategies behave differently across market conditions. For instance, the negative correlation of -0.06 between the Quality and Value indices suggests that these two factors often move in opposite directions. This means when one is underperforming, the other could potentially be outperforming, helping reduce overall portfolio volatility.

Similarly, while Quality and Low Volatility show a moderate positive correlation (0.61), indicating some overlap in their performance patterns, it's still not high enough to negate the diversification benefit. Even Momentum, known for its aggressive return profile, has a modest correlation with other factors like Low Volatility (0.13) and Quality (0.32), further proving that these styles capture different market behaviors.

The Multi-Factor MQVLV 50 TRI index, which combines Quality, Value, Low Volatility, and Momentum, shows a balanced and diversified correlation profile with each factor. Its correlations range from 0.20 (with Value) to 0.71 (with Quality), showcasing that it leverages the collective strength of these strategies without over-relying on any single one.

This is the true power of multi-factor investing, which is achieved by combining factors that don’t move in perfect sync. It smooths out returns, reduces the impact of any one factor’s underperformance, and offers a more stable ride across market cycles. This type of diversification is not just about holding more funds, but also about holding the right mix of strategies that work differently and complement each other over time.

Which Multi-Factor Strategy Works For You?

The beauty of multi-factor investing lies in its adaptability. Based on your risk profile:

• Aggressive investors can gain from exposure to momentum and value.
• Moderate investors benefit from balanced exposure across all four factors.
• Conservative investors may prefer a tilt toward low volatility and quality.

By blending these factors, multi-factor funds avoid extremes. They won’t always top the performance charts, but importantly, they rarely sit at the bottom either. That consistency builds trust and patience,e which are two vital ingredients in long-term investing.

Conclusion

If investing feels like chasing the weather, multi-factor investing is your all-weather gear. Instead of putting all your trust in a single strategy, this approach ensures you’re prepared for whatever the market gives investors, be it ups or downs.

A multi-factor strategy equips investors portfolio with better risk management, smoother returns, and stronger discipline. It simplifies decision-making and helps investors stay invested for the long term while creating wealth. In a world of shifting market dynamics and emotional pitfalls, multi-factor investing gives investors a structured, data-driven path to grow wealth steadily and smartly.

FAQs

Q1) What is multi-factor investing in simple terms?
It’s a strategy that combines multiple investment factors like value, quality, momentum, and low volatility into one portfolio.

Q2) What is a multi-factor fund?
A mutual fund that blends several factors such as quality, value, momentum, and low volatility to build a more balanced and consistent investment portfolio.

Q3) Why are single-factor funds riskier?
Because each factor works differently across cycles, relying on just one exposes you to higher volatility and the need to time the market.

Investors are requested to take advice from their financial/ tax advisor before making an investment decision.

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