Algorithms like Machine Learning and Artificial Intelligence have become global buzzwords, influencing almost every industry and altering our perception of the human-machine interface in the country. However, considering the use of these machine interactive languages in a market like mutual funds, which is primarily reliant on human judgments, almost seems exaggerated. But today, AI and machine learning are now being used in the mutual fund sector in the form of Quant Funds.
The Indian capital market was predominantly controlled by active investing over the last several decades, with the fund manager's ability to find top-performing equities as well as the proper sectors being highly coveted. However, as these institutional investors have struggled to outperform benchmarks in recent years, Quant Funds have recently grown in popularity in India. Advocates of these quantitative funds claim that employing inputs and computer algorithms to choose assets helps fund companies reduce the risks and costs related to human fund management. So, let us explore what Quant Funds are, how they work, and if you should invest in them.
What are Quant Funds?
Quant funds are analogous to semi-active and semi-passive investing. Even though it is governed by an algorithm, all ultimate investing decisions are made by the fund manager. This path of action is however determined by a set of norms and investing regulations. The established norms and regulations are based on mathematical and statistical methodologies that use automated algorithms. This entails the risk of arbitrary decisions.
What is Quantitative Investing?
The algorithm in these funds generates a templated portfolio, often called a quantitative fund model portfolio, as an output. A quant model also includes algorithms and actions to be followed. The fund manager then duplicates the model portfolio on a regular basis i.e. monthly or quarterly by making the necessary modifications to the portfolio. This is referred to as Quantitative Investing.
What Led to the Emergence of Quant Funds?
Big data technologies and simple access to a diverse range of market information have contributed to the remarkable popularity of quant-based funds in recent years. Even when confronted with a large amount of quantitative data, they remain efficient and accurate.
Paradigm developments in technical innovation, particularly automation, also had a significant impact on the emergence of quant funds by increasing the volume of information on which they are able to operate. It enabled them to obtain enough feeds to adequately examine possibilities and susceptibility. To boost their odds of outperforming the market, quants use proprietary models.
Features of Quant Funds
- Scalability: Because these are built in a lab environment and often released after extensive testing and development, they are also quite scalable. Typically, the design is based on a certain market and is created to scale the business.
- Predictable Outcomes: The results are often predictable since the quant fund strategy follows a defined methodology and approach. Unlike typical mutual funds, such funds are not reliant on the fund manager's market outlook and aren't based on human judgments.
- Previous Data Analysis: These Quant Fund models are made on historical data and mathematical models that have been proven throughout time. As a result, any market disturbance or unanticipated variable movement may lead them to behave differently. In such cases, it may have unfavorable and unforeseen effects.
- The Black Box Method: Fund managers of these funds are very protective of their strategies, and they rarely divulge their design or operation. When opposed to normal funds, quant funds lack transparency since they are frequently shrouded in obscurity.
- There are No Human Prejudices - The approach and outcomes tend to be fairly objective. As a result, they are not prone to behavioral biases.
Who Should Invest In Quant Funds?
Quant funds are appropriate for investors who want to hold their investments for an extended period of time. This is due to the proposed technique may take considerable time to fully reap the rewards. As a result, investors seeking to book profits while markets are favorable may avoid quant funds.
Furthermore, investors believe that these funds will readily provide significant returns. They do not, however, guarantee any refunds. Minimizing human biases does not guarantee the fund's success. Such funds are based on previous performance and other criteria, which are not accurate predictors of future outcomes. As a result, investors interested in quant funds need to comprehend the level of mathematics and programming involved in such funds.
Types of Quant Investing
Quant funds are classed based on the model's quantitative components or statistical metrics. In India, quant funds use either ‘single factor' or 'multi factor' models. These models are intended to narrow the investment universe of the fund to something like a model portfolio depending on these variables.
What is a Single Factor Quant Model?
In India, it is the most often used quantitative approach. They are generally constructed around these components and represented as ratios such as P/E, P/B, and so on. They evaluate the quality as well, using ROE and ROCE. They also study statistical phenomena like volatility using standard deviation or beta.
These variables differ from one firm to the next. As a result, the final model portfolio will only include top firms. These businesses are ranked and chosen based on one of the aforementioned criteria.
What is a Multi-Factor Quant Model?
Multifactor models express the yield on an investment in terms of the asset's risk in relation to a collection of factors. In general, such models incorporate systematic elements that describe the average returns of a significant number of volatile assets.
Asset owners, investment firms, investment consultants, and financial analysts employ multifactor models for a range of portfolio design, asset management, risk assessment, and general analytical objectives. Multifactor models, as compared to single-factor model types, which are often centered on the market-risk factor, provide more descriptive flexibility and power.
Pros and Cons of Investing in Quant Funds
Following are the advantages of investing in Quant Funds:
- These funds include minimum human intervention and are therefore based on impersonal decision-making. In addition, there is a smaller possibility of mistakes compared with conventional investment.
- As it adheres to a defined investing plan regardless of the volatile market conditions, there is stronger risk control.
- Because of its reliable and passive investing method, this fund is a budget-friendly choice with low management costs.
Following are the disadvantages of investing in Quant Funds:
- Quantitative models only choose stocks based on predetermined parameters. A high-potential stock will be disregarded by the model if it does not satisfy this criterion.
- These investments are based on past results and previous results. Additionally, some models fail to take unforeseen events into account. Consequently, these funds cannot ensure a profit.
- Quantitative funds that claim to be bear-proof or that use short-term strategies can be dangerous. It might be dangerous to use derivatives and leverage in downturn forecasting.
Best Quant Mutual Funds in India
The following table represents some of the best Quant Funds that are currently trending in India. Please note that the provided information has been updated till September 2022 and are subject to changes due to market fluctuations.
| Fund Name | AUM (in INR crores) | Main Features |
| DSP Quant Fund | 1283 |
|
| Tata Quant Fund | 44 |
|
| ICICI Prudential Quant Fund | 63 |
|
| Axis Quant Fund | 1403 |
|
| Quant Quantamental Fund | 55 |
|
Because of the fund's investing philosophy, quant funds are appropriate for long-term investors. It entails a data-driven, methodical strategy that enables objective decision-making. Furthermore, the strategy of these funds may take time to bear fruit. As a result, investors may add these funds to their mutual fund portfolio to diversify it.
With all of the dangers and unpredictability that Quant investing entails, impartiality, reasonable transparency, and decreased costs make for a compelling case. As a result, if you are an investor with a high-risk tolerance and a solid grasp of markets, including this field, you should only undertake quant investing with a lengthy investment horizon commitment.
Is investing in quant funds risky?
In general, quant funds have a track record of providing downside protection and are hence safer, but they do not equal the returns of traditional funds. These funds are better suited to cautious investors.
Why are quantitative funds better than other types of mutual funds?
Quant funds may also make investment choices more quickly than human managers. As a result, they can make purchases more swiftly and profit more efficiently from tiny price differentials, which may not be the case in general mutual funds. However, the yield varies depending on the market conditions.
Who does quant trading?
Quant trading is commonly utilized for high frequency, statistical, leveraged, and automated trading at both the individual and institutional levels.
What exactly are Quant Funds?
Quant Funds are a type of mutual fund in which asset allocation, including stock selection, is governed by a set of rules. A quant-based mutual fund is an investment fund that uses mathematical and statistical approaches, automated algorithms, and advanced quantitative models to make investment decisions and execute transactions.
What is quantitative investing?
Quantitative investing, often known as systematic investing, is a type of investment strategy that employs extensive mathematical modeling, computer systems, and data analysis to determine the best chance of completing a profitable trade. High-frequency trading, algorithmic trading, and statistical arbitrage are a few examples. Quant funds, as opposed to active funds, rely on an automated algorithm to make investing and entry and exit decisions. Human intelligence or judgment is not required for investment selection or associated decisions.
What is Quant Active Fund Investment Strategy?
The Quant Active Fund is a multi-cap fund. Like all other multi-cap funds, this fund must invest at least 25% of its assets in large-caps, mid-caps, and small-cap. It nicely suits Quant’s fund management caps. Philosophy, which applies the VLRT approach for stock selection. VLRT integrates valuation, liquidity, risk, and timing.
This may appear to be a bit complex. Simply put, Quant Mutual Fund claims its methodology is dynamic. The word they frequently use is "unconstrained." It effectively means that their fund selection is industry agnostic. Their clientele is diverse. The fund company is not limited to one type of investing. As a result, they can make decisions quickly.
Is it safe to invest in Quant Mutual Fund's schemes?
Quant Mutual Fund is one of India's oldest asset management firms. However, no AMC can guarantee capital safety regarding market-linked investments like mutual funds. The best you can do is analyze and select a fund that meets your needs while aiming for growth.
Which Quant Mutual Fund strategy is the most suitable for the short term?
‘Short term often refers to an investment period of up to three years. Debt funds are appropriate for such investments, but remember to align your investment horizon with the fund's average portfolio maturity. Choose overnight funds, for example, if the investment lasts only a few days.
Liquid funds are appropriate for investing for up to three months. Low-duration funds hold securities with an average maturity of six to twelve months, whereas short-duration funds hold securities with an average maturity of one to three years.
Should you think about investing in quantitative mutual funds?
Quant Funds are a new concept in India, and while the SEBI allows them as a thematic category in mutual funds, they are a small category. As a result, each of the quant funds previously outlined by various fund houses has its unique set of rules. Investors should learn about each fund concept and analyze the benchmark for performance comparison before investing.
What are the Consequences of Investing in Quant Funds?
The following are the drawbacks of investing in quantitative funds:
- These funds are based on prior performance and historical evidence. Furthermore, some models fail to account for unanticipated events. As a result, these funds cannot guarantee returns.
- Continuous testing is required for the quantitative model to guarantee that it operates optimally.
- This model is based on several assumptions and employs an artificial intelligence methodology. These assumptions do not always hold when market conditions alter abruptly.
What Are the Advantages of Investing in Quantitative ETFs?
The following are the advantages of investing in quantitative funds:
- These funds are based on objective decision-making and do not include human participation. Furthermore, there is a lesser risk of error than in traditional investing. Because of its steady and passive investment technique, this fund is a low-cost option with low management fees.
- There is more muscular risk control because it adheres to a set investing plan regardless of fluctuating market conditions.
- System-based quant funds can handle vast amounts of real-time data for asset allocation computation.
- Rather than investing in a specific asset class, these funds concentrate on actual sources of return. This ensures that the fund's risk management is improved.
How do I increase the amount of my SIP in a Quant Mutual Fund scheme?
You can accomplish this in two ways. The first step is to select the top-up SIP option when you begin investing immediately. This allows you to automatically increase the SIP amount at specified intervals, such as quarterly or annually, by a predefined percentage (say, 25) or amount (say, Rs 2,000). Another alternative is to create a new SIP in the same fund to raise the amount invested.
Are the programs offered by Quant Mutual Fund tax-free?
Capital gains tax applies to all mutual fund investments, both long and short-term, depending on the type of fund and investment duration. The gains you make may be taxable based on the investment term and the scheme type.