There’s no doubt that smart beta funds are the new kids on the block. One of the most innovative changes that have swept international markets in recent years has been the rise of smart beta index funds.

These indices differ from traditional market capitalisation-weighted indices by assigning a much higher weight to stocks belonging to particular sectors or economic objectives or themes such as low volatility, alpha, momentum, value and dividends.

What is a smart beta fund?

A smart beta fund is a category of investment funds that use a set of rules called “factors”, which are filters, and parameters to select stocks or bonds that are not part of the traditional market index.

The traditional market indexes like the Nifty 50 and the S&P BSE Sensex are based on the price or market-cap weighted method.

Smart-beta funds may adopt value weighted method or momentum strategy based on which companies are sorted and a portfolio is created compared to widely followed indices.

Active and passive investing

Smart beta funds are noticeably distinct from the other passive products. The use of rules, filters, and parameters separate them from traditional ETF offerings.

Based on the rules and filters securities are chosen instead of simply following an index as traditional index funds do.

Many investors who are savvy may find the plain vanilla index fund or an ETF to be very basic.

Smart beta funds provide a more granular and customised exposure to specific market factors or risk premiums.

Additionally, smart beta funds tend to be on the lower side when it comes to expense ratios.

And last, smart beta funds offer the potential for improved risk-adjusted returns relative to traditional index funds.

In effect, smart-beta funds can be considered the middle ground between active and passive investing. There is an element of active management when it comes to putting together an index, while the rest is passive in nature — be it in terms of expense associated or tracking.

Attributes

As more and more sophisticated investors enter the world of smart beta funds, it’s important to understand what makes these types of funds unique.

Smart Beta funds seek to provide investors with exposure to factors or risk premia that have the potential to outperform the market. This active approach to investing means that smart beta funds have the potential to deliver higher returns.

Another common attribute of smart beta funds is that they often make use of alternative weighting schemes. Rather than weighting each security in the portfolio according to its market capitalisation, smart beta funds employ factors-based mechanisms to arrive at an investment decision. This shift can have a sizeable impact on performance as it often leads to a different type and a more diversified portfolio. Over the long run, such differentiated strategies tend to do well, thereby delivering a positive investment experience compared with traditional indices.

Benefits

One of the main reasons why smart beta funds strike an immediate chord with investors is the hand-picked nature of portfolios. Here are some of the key advantages of investing in a smart beta fund:

Better risk-adjusted returns: One of the main reasons why smart beta funds have gained popularity is because they have the potential to provide better risk-adjusted returns.

Greater diversification: Compared with traditional indices, a smart-beta offering portfolio tends to be much more diversified, thereby providing greater diversification in your portfolio.

More control: An investor has to be clear about the thought process as to which factor he or she needs as a part of his or her portfolio. This flexibility of choice enhances one’s ability to create a well-balanced portfolio in terms of style and market capitalisation.

To conclude, we believe smart beta funds are here to stay and will become a fixture in an investors’ portfolio over the coming years. While making an investment decision, do remember that these offerings must be seen as a part of equity allocation, which is a part of one’s larger asset allocation plan.

The writer is head — product development and strategy, ICICI Prudential AMC

Rent rules

I live in Calcutta in my own house. My wife will live in a rented house in a different city for educational purposes. Can I claim an HRA exemption for the rent I will pay for my wife’s accommodation?

N.N. Iyer, Calcutta

You have to take into consideration the conditions to claim an HRA deduction. First, under section 10(13A) of the Income Tax Act, the residential accommodation for which the employee pays the rent should be occupied by the employee (the section does not talk about any benefits for dependants) and the employee should not own the accommodation for which the rent is paid. Second, suppose an employee does not receive HRA benefits from his employer, but still pays rent to stay, he can claim a deduction under section 80GG. But a critical requirement here is that the employee or spouse or minor child or HUF, of which he is a member, does not own any residential accommodation where the employee currently resides, performs duties of office or employment or carries on business or profession.

Tax grievance

For AY 2017-18 and 2018-19, self-assessment tax (individual) was paid under minor head 300 with the sum being Rs 1,23,370 and Rs 50,000, respectively. The amounts are reflected in 26AS but the CPC while assessing the returns has erred in taking these figures and raised demand with interest. As a result, the refund for AY 2022-23 has been adjusted against the outstanding. It only came to light when the assessment for AY 2022-23 was downloaded. There is no reply even to a grievance on the IT portal.

Ravi Bassi, email

You should keep a printed copy of the complaint. If no action is taken, you may reach the regional grievance redressal officer along with supporting documents, the contact number of whom is available on the income tax website and follow up with the income tax ombudsman if the grievance is still not redressed.

If you have any queries about investing or taxes or a high-cost purchase you are planning, mail to: btgraph@abp. in, or write to: Business Telegraph, 6 Prafulla Sarkar Street, Calcutta 700001.