Artificial intelligence and automation were deemed to be the future. Well, the future has now arrived, and you find them in almost every sector and industry, and that includes mutual funds. While the investor earlier had the option of choosing between active funds and passive funds, now they have another option, quant funds. Quant funds are known to be an amalgamation of both active and passive investing. Let us find out more about these funds.
What is a quant fund?
Quant funds are a new addition to the wide range of mutual fund products already available in India. These are open-ended schemes that build their underlying portfolio using a predefined mathematical computer-based algorithm. In most scenarios, the stocks are picked by a fund manager, but here the stock selection is purely algorithm based with no scope for human biases. No other mutual fund follows this type of asset allocated which is based on a defined set of norms. Like mentioned earlier, quant funds are a combination of active and passive investing and unlike ETFs and index funds where there is very little participation of the fund manager, quant funds do have active participation of the fund manager.
How do quant funds work?
When it comes to active mutual funds, the fund managers decide which stocks to hold on to and which ones to sell. But in the case of quant funds, the entry and exit of securities are computer based. The fund manager is given the task of designing the predefined investment strategy that will automatically pick stocks to help the quant fund achieve its investment objective. Since the entire portfolio is built using an algorithm, the is no scope for any human error.
What are the pros and cons of investing in quant funds?
Like all other mutual fund schemes, quant funds have their positives and negatives too. One of the biggest advantages which quant funds have is that investors need not worry if the fund manager quits or makes mistakes or diverts from the quant fund’s investment objective.
Also, just because there are no human biases that don’t mean that the quant fund will always deliver or outperform other schemes. Quant funds are generally designed keeping in mind the fund’s past performance and we all know that the scheme’s past performance may or may not replicate its current and future performance.
Since the quant fund will be designed to pick stocks that have growth potential and have delivered decent returns in the past, the algorithm will automatically omit stocks that have been underperformers or are highly leveraged. Quant funds are designed in such a way that they can pick the right type of stocks across market cycles, thus offering consistency in their asset allocation strategy. Since these are managed passively, quant funds have a relatively low expense ratio as compared to other actively funds that have a high expense ratio.
Who should consider investing in quant funds?
Since these are equity linked schemes with an investment portfolio majorly consisting of stocks, quant funds may be ideal for investors with a long term investment horizon. Also, equity schemes are highly volatile and can even underperform in the short run. Hence, investors with a very high risk tolerance should consider investing in quant funds. The scheme may or may not be able to achieve its underlying benchmark. Just like any other mutual fund scheme, quant funds do not guarantee capital appreciation. First time investors should consult a financial advisor to understand if quant funds are ideal for their financial goals.
