Beyond Large Cap and Small Cap: What Are Multi-Factor Funds?

In 2025, three asset managers launched multi-factor equity funds within a short span of time: Sundaram Multi-Factor Fund, Bandhan Multi-Factor Fund and Franklin India Multi-Factor Fund. All three use the BSE 200 TRI as their benchmark. The timing is not a coincidence. It reflects a gradual shift in India’s mutual fund industry toward more structured and systematic ways of managing equity portfolios.

What Is a Multi-Factor Fund?

Multi-factor investing is based on a simple idea. Different types of stocks perform better at different points in the market cycle. Sometimes, inexpensive stocks outperform. At other times, companies with strong balance sheets lead. In certain phases, stocks that have already been rising continue to do well. Instead of betting on just one style, multi-factor funds combine several such characteristics in a single portfolio. The goal is not to chase one theme but to reduce dependence on any one approach.

Unlike traditional active funds, which rely heavily on the judgment and conviction of a fund manager, multi-factor funds use predefined rules to select stocks. These rules rank companies based on measurable characteristics such as profitability, valuation or price trends. The portfolio is then built according to these rankings. This reduces the role of emotion and personal bias in stock selection.

However, even though all three funds fall under the same label, their design is not identical.

The Three Multi-Factor Funds in India 

Aspect	Franklin India Multi-Factor Fund	Sundaram Multi-Factor Fund	Bandhan Multi-Factor Fund
Overall Approach	Broad research-driven quantitative framework	Clearly structured four-style framework	Adaptive and evolving multi-factor model
Main Focus	Combines fundamentals, earnings trends and price behaviour	Combines growth, quality, value and momentum	Combines value, quality, momentum, low volatility and size
Stock Universe	Flexible across market capitalisations	Restricted to top 250 companies	Restricted to top 250 companies
Style Adjustment	Systematic allocation driven by multi-factor scoring	Allows some style tilt depending on market conditions (model-driven, not discretionary)	Model-driven factor shifts
Risk & Structure	Risk integrated during portfolio construction	Balanced structure with moderate turnover	More flexible, includes size and low-volatility tilt

Although all three funds are classified as multi-factor, their implementation varies. Franklin resembles a broader research-driven quantitative platform. Sundaram follows a structured and disciplined allocation model. Bandhan adopts a more flexible and academically explicit approach that includes additional styles like low volatility and size.

Multi-Factor vs Traditional Active Funds

To understand the broader significance of these funds, it is useful to compare them with traditional active funds. Traditional funds depend heavily on the experience and skill of the fund manager. Decisions about which sectors to favour or which stocks to buy are influenced by economic outlook, company interactions and market judgment. Performance can vary significantly depending on the manager’s ability to read the market correctly.

Multi-factor funds attempt to reduce this dependence on individual judgment. Instead of relying on conviction, they rely on a consistent process. This makes them less personality-driven and more system-driven. The advantage is that the strategy remains disciplined even when markets become volatile. The limitation is that the outcome depends entirely on whether the model continues to work as expected.

Multi-Factor vs Quant Funds

It is also important to distinguish multi-factor funds from quant funds. All multi-factor funds use quantitative methods, but not all quant funds are multi-factor. Quant funds may use broader and more dynamic strategies that adjust exposure based on volatility, liquidity or macroeconomic signals. They may actively increase or reduce market exposure depending on changing conditions.

Multi-factor funds, on the other hand, usually remain invested in equities and focus on combining different stock characteristics rather than timing the market. In simple terms, multi-factor funds diversify styles within equities, while quant funds may actively adjust overall exposure.

What the Early Returns Tell Us

At this stage, none of the three funds has completed a full market cycle. They have not yet faced prolonged downturns or generated multi-year performance data. Early results for Bandhan and Sundaram are promising, but short-term outperformance does not establish long-term reliability.

Funds	Date of Inception	Returns since Inception
Sundaram Multi-Factor Fund	30 July, 2025	4.9%
Bandhan Multi-Factor Fund	23 July, 2025	12.41%
Franklin India Multi-Factor Fund	28 November, 2025	2.46%

The real test will be how these funds behave during corrections and whether they can deliver consistent performance across different phases of the market.

The Change in the Mutual Fund System

The rise of multi-factor funds in India reflects a broader trend toward more institutional and process-driven investing. Investors are increasingly looking for approaches that reduce reliance on star managers and provide diversified exposure within equities. Multi-factor funds fit into that demand.

Whether they prove superior to traditional active funds will depend on how they perform through different phases of the market. For now, they represent a thoughtful evolution in portfolio construction rather than a guaranteed breakthrough.

Disclaimer: This content is for educational purposes only; please conduct personal research and consult a qualified investment advisor before making any investment decisions.

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