Passive investing is a strategy focused on maximizing returns by minimizing both costs and trading frequency. Rather than attempting to outsmart the market through frequent buying and selling, passive investors aim to replicate the performance of a market index—a representative basket of securities designed to mirror the overall market or a specific segment of it.
A market index is essentially a portfolio constructed to track the performance of a particular market segment, such as equities or bonds. In equities, indices are formed by selecting companies that share certain characteristics or factors—such as size, quality, value, yield, momentum, or low volatility—and calculating an index value based on their prices or market values.
S&P 500: A Multifactor Market Index
The S&P 500, the world’s most influential equity index by assets benchmarked, exemplifies this approach. Its construction relies on three primary factors:
- Size: Companies must have a minimum market capitalization of $20.5 billion. As a market capitalization-weighted index, larger companies exert a greater influence on the index’s value.
- Liquidity: Each constituent must demonstrate high liquidity, specifically at least 100% annual turnover of its float shares, ensuring ease of trading without significant price impact.
- Quality: Companies are required to have posted positive earnings in each of the previous four consecutive quarters, reflecting financial stability and operational strength.
By integrating these criteria, the S&P 500 operates as a multifactor portfolio—selecting for size, liquidity, and quality—to reliably mirror the performance and risk profile of the broader U.S. equity market.
Indian Equity Market: Gaps and Opportunities
In India, the passive investment industry—currently managing approximately ₹8.6 lakh crores in Nifty-based indices (including ETFs and index funds)—is overwhelmingly dominated by size-based indices (~97%). This creates a landscape where most portfolios are heavily weighted toward the largest companies, limiting differentiation and innovation.
Equity Mutual Funds (EMFs), which manage US $420bn (excluding passive funds), are typically benchmarked to these size-based indices. As a result, fund managers are compelled to construct portfolios that closely resemble the index, restricting their ability to generate significant alpha. Over the past decade, the average long-term post-expense CAGR across fund categories has been ~13-19%, with active strategies often struggling to consistently outperform their benchmarks.
Portfolio Management Services (PMS), while outperforming size-based indices, come with higher management fees; and its only accessible to HNIs and UHNIs.
Calathea’s Solution: CalmAlpha
At Calathea, we believe the passive investment industry is ripe for innovation. Drawing on experience in private markets, we recognize that a company’s true economic value stems from its ability to generate and sustain earnings/free cash flow growth over time. With this philosophy, we have developed CalmAlpha, a methodology that leverages Quality and Relative Momentum to identify companies with the highest probability of stable EPS growth.
CalmAlpha is designed as a cost-effective, passive multi-factor product, suitable for both retail and HNI clients. Unlike existing NSE and BSE multi-factor indices, CalmAlpha’s methodology is more robust.
Addressing Common Questions
- How does CalmAlpha differ from NSE/BSE multi-factor indices?
CalmAlpha offers a more rigorous approach, focusing on factors that have demonstrated persistent outperformance. - Why hasn’t the mutual fund industry embraced factor-based products?
Multi-factor portfolios constitute just ~3% of India’s passive market, largely because distributor incentives are low due to reduced fees. - What about PMS and active managers?
While many new-age PMS and active managers employ similar methodologies, their strategies remain discretionary, and fees are higher. - Does Risk profile remain similar?
While the CalmAlpha portfolio exhibits a higher standard deviation (Risk) compared to the relevant size-based index, it also delivers a higher Sharpe ratio. This indicates that despite experiencing greater volatility, CalmAlpha provides better risk-adjusted returns, rewarding investors who remain committed through challenging market periods. - Differentiation between CalmAlpha and other Quant products/active portfolio management
Most available quant products are multi-factor portfolios, though the depth and selection of factors assessed vary across offerings. Our primary differentiators are:
(a) Transparency – We will fully disclose the CalmAlpha methodology, ensuring investors understand how portfolios are constructed and managed;
(b) True Passive Implementation – The portfolio is managed strictly according to the predefined and disclosed methodology, with no manual intervention or discretionary overrides;
(c) Low Cost – Our proposed fee structure aligns with passive investment principles.
Our journey
CalmAlpha’s methodology has been curated, tested, and deployed on proprietary capital over the past three months. We have applied it to the NSE 500 universe and will track following envisioned products:
- CalmAlpha Nifty 100
- CalmAlpha Nifty Midcap 150
- CalmAlpha Nifty Smallcap 250
- CalmAlpha Nifty 500
Though the ideal way to launch would be via Mutual Fund but dreams do take time to come true.
We plan to launch asset management offerings via Smallcase and PMS soon. To scale our impact and manage risk, we are seeking capital to support legal compliance, operations, and awareness-building for CalmAlpha.