Size, value, and momentum in Indian Equities

Abstract

A quarter century has elapsed since India embarked on the process of economic reforms in 1991. In this article, we look at the post-reform period of the Indian equity market to understand the performance of various investment strategies based on value, size, and momentum factors (Carhart, 1997; Fama & French, 1993, 1996).Traditionally, investment management consisted of (a) asset allocation (how much to invest in stocks and how much in safer assets like bonds) and (b) security selec-tion (which stocks to buy and sell). The asset allocation decision can be implemented in a passive way: it is possible to buy an indexed fund that provides exposure to equity market without worrying about individual stock picking decisions at all. The second decision (security selection) is inherently a process of active management which involves taking a view on the prospects of individual companies. In recent decades, considerable attention has been focused on factor investing,1 which is an intermediate between asset allocation and security selection. It takes a more disag-gregated view than stocks versus bonds, but it does not go all the way down to indi-vidual stocks. It is not quite as passive as buying an indexed fund, but neither is it as active as picking individual stocks. Factor investing is about tilting the portfolio towards (or away from) a large group of stocks (for example, towards small capi-talization stocks and away from large capitalization stocks). For institutional inves-tors, this perspective often turns out to be the most important one: in a portfolio of hundreds of stocks, individual stock picks tend to become unimportant (they get diversified), while the systematic tilts in the portfolio (the factor exposures) domi-nate performance.