Understanding Active vs Passive Smart Beta Approaches
From the days of stock picking and high-conviction bets to the rise of passive index funds, the world of investing has constantly evolved. Today, investors are increasingly turning to Smart Beta strategies that offer the best of both worlds: the structure of passive investing and the strategic intent of active management.
Smart Beta investing, positioned between traditional active and passive approaches, uses well-defined rules to target investment factors that have historically driven better risk-adjusted returns. But here’s what often goes unnoticed: even within Smart Beta, how you choose to invest, through an active rule-based mutual fund or a passive ETF/Index fund, can lead to very different outcomes.
What is Smart Beta Investing?
Smart Beta strategies represent a smarter alternative to conventional investing styles by going beyond market-cap weighting. It bridges the gap between passive index investing and active stock selection by following predefined rules to capture time-tested factors like:
- Quality: Financially sound businesses with strong governance.
- Value: Undervalued stocks based on fundamental metrics.
- Momentum: Stocks with strong recent performance.
- Low Volatility: Stocks that exhibit lower price fluctuations.
This disciplined, rule-driven approach is designed to improve risk-adjusted returns while offering greater transparency than traditional active funds.
Smart Beta Strategies: Active vs Passive
While both approaches rely on systematic rules and proven factors, that’s where the similarity ends. The path they take and the flexibility they offer are quite different. The common strategy may be rule-based, but the flexibility in applying those rules makes all the difference.
Active Smart Beta Investing
The Active Smart Beta strategy combines the discipline of rule-based investing with the flexibility of active management. It follows a systematic, factor-based approach, but with one key distinction – fund managers have the discretion to define the rules that guide portfolio construction. This flexibility to tailor and evolve rules enhances the potential of the Active Smart Beta funds to outperform the factor indices over time.
For example, the NJ Flexi Cap Fund employs a Quality-focused multi-factor Smart Beta model. While the stock selection is driven by a defined set of factor rules, the fund managers retain the flexibility to formulate those rules, based on robust analysis and market understanding.
Passive Smart-beta Investing
Passive Smart Beta funds follow a strategy that is entirely rule-based and systematic. These funds are designed to track a specific Smart Beta index, which selects and weights stocks based on one or more investment factors. The fund doesn’t make independent investment decisions; instead, it replicates the composition of the index it tracks.
For example, a fund that tracks the Nifty 500 Quality 50 Index will simply invest in the 50 stocks selected from the index based on the Quality factor. When the index is rebalanced, the fund mirrors these changes. In essence, the strategy of the fund is entirely dependent on the index’s rules, with no active oversight or discretion involved.
Growth of Active and Passive Smart Beta Funds in India
| Summary of Rule-Based Smartbeta Funds | |||||||
| Particulars | Mar-19 | Mar-20 | Mar-21 | Mar-22 | Mar-23 | Mar-24 | Mar-25 |
| Count of Schemes | 2 | 4 | 5 | 8 | 8 | 14 | 21 |
| AUM (In INR CRs) | ₹70.21 | ₹324.83 | ₹990.42 | ₹8,461.56 | ₹6,473.08 | ₹11,316.67 | ₹22,354.74 |
| Y-o-Y Growth in Number of Schemes (%) | - | 100.00% | 25.00% | 60.00% | 0.00% | 75.00% | 50.00% |
| Y-o-Y Growth in AUM (%) | - | 362.65% | 204.90% | 754.34% | -23.50% | 74.83% | 97.54% |
Source: ICRA. Based on proprietary scheme classification of NJ Asset Management Pvt. Ltd. AUM figures are as of Month end. All schemes classified are open ended schemes. No fund classified as Quant or Quantamental is close ended.
| Summary of Passive Smartbeta Funds | |||||||
| Particulars | Mar-19 | Mar-20 | Mar-21 | Mar-22 | Mar-23 | Mar-24 | Mar-25 |
| Count of Schemes | 5 | 5 | 8 | 20 | 41 | 51 | 77 |
| AUM (In INR CRs) | ₹68.12 | ₹96.93 | ₹547.77 | ₹3,748.51 | ₹6,385.42 | ₹15,830.08 | ₹33,870.36 |
| Y-o-Y Growth in Number of Schemes (%) | - | 0.00% | 60.00% | 150.00% | 105.00% | 24.39% | 50.98% |
| Y-o-Y Growth in AUM (%) | - | 42.29% | 465.12% | 584.32% | 70.35% | 147.91% | 113.96% |
Source: ICRA. AUM figures are as of Month end. Only Equity based passive smartbeta funds have been considered. All passive smartbeta funds are open ended funds. No passive smartbeta funds are close ended.
Smart Beta strategies in India have seen notable growth across both active (rule-based) and passive smart beta categories. Active Smart Beta funds, in particular, have gained traction in recent years. From March 2020 to March 2025, the number of active smart beta schemes grew from 4 to 21, and AUM rose from about ₹324 crore to ₹22,354 crore during the same period.
This trend reflects a growing preference for strategies that blend systematic factor exposure with the flexibility to adapt. With their rule-based structure and potential for alpha generation, active Smart Beta funds are emerging as a compelling alternative to traditional active and purely passive factor strategies.
NJ AMC’s Approach to Smart Beta
At NJ AMC, we believe Smart Beta isn’t just about capturing factors, it’s about doing it right, with a clear eye on quality, discipline, and long-term wealth creation.
Our 100% rule-based models follow a robust Smart Beta framework with the flexibility to actively manage rules. This ensures that we maintain the discipline of rule-based investing while retaining the flexibility to adapt and respond to market realities. The result? A more refined investment process aimed at delivering consistent outcomes across market cycles.
Conclusion
Smart Beta has opened new doors for investors looking for a better structure than traditional active and more focus than plain-vanilla passive. While Passive Smart Beta has made these strategies more accessible, it is Active Smart Beta that elevates the approach by combining strategic intelligence with systematic discipline.
For investors, the choice isn’t just about cost or convenience, it’s about how much flexibility and oversight they want in their portfolio. Understanding the difference between Passive and Active Smart Beta could be the key to unlocking better long-term outcomes.
Choose smart. Choose strategically. Choose Smart Beta, the right way.
FAQs
1) What is a smart beta mutual fund?
It’s a rule-based fund that selects and weights stocks using factors like quality, value, momentum, or low volatility. The aim is to improve risk-adjusted returns over traditional market-cap strategies.
2) What is the difference between smart beta funds and active funds?
Smart beta funds use systematic rules to build portfolios based on specific factors. Active funds rely on fund managers’ judgment and discretionary stock selection.
3) Is smart beta active or passive?
Smart beta combines the benefits of both active and passive investing. It follows rules-based strategies like passive funds but can include active elements such as factor selection or filtering.
Investors are requested to take advice from their financial/ tax advisor before making an investment decision.
MUTUAL FUND INVESTMENTS ARE SUBJECT TO MARKET RISKS, READ ALL SCHEME RELATED DOCUMENTS CAREFULLY.
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