New Delhi, Nov. 9 -- A new breed of funds is reshaping how investors think about indexing. Called smart-beta funds, they aim to capture the efficiency of passive investing while borrowing the strategy of active management.

Like passive funds, they track indices. But unlike plain-vanilla index funds that mirror market capitalization, these are guided by a specific set of rules linked to investment styles or factors such as value, momentum, alpha, quality, or low volatility.

These indices-carved out of regular market-cap-based ones-are rebalanced periodically (every three or six months) to drop stocks that no longer qualify and add those that do.

However, smart-beta strategies don't always beat traditional passive ones. Their success dep...