All You Need to Know About Quant Funds

Are you looking for an automated investment? Do you seek a mutual fund with a lower expense ratio? You may consider putting money in quant funds. It picks stocks using advanced statistical and mathematical models and could generate a higher return than active funds. You may find quant funds depending on automated programmes to make investment decisions. However, the mutual fund manager designs and tracks the mathematical model that offers the portfolio choices. Should you invest in quant funds?

What are quant mutual funds?

You may find the quant fund picking stocks or making investment decisions through predetermined rules based on a mathematical model. It is a smart beta investing strategy, as it identifies different factors that reduce the downside risk or result in outperformance of investments. 

You could find the fund manager selecting securities and timing the entry and exit of investments in an actively-managed mutual fund. However, the quant fund’s manager depends on an automated statistical or mathematical model to select the right buy. 

Quant funds do not follow a passive investment strategy fully as compared to index funds. It may have built-in checks on stock and sector concentration, which distinguishes it from index funds that track a market index. However, you may find quant funds having a lower expense ratio as compared to active funds. 

Why invest in quant funds?

You may diversify your portfolio with quant funds to achieve your long-term financial goals. It invests predominantly in stocks and could generate a higher return than debt mutual funds over some time. However, you may invest in quant funds only if it matches your risk profile. 

You could find quant funds picking stocks of companies with consistent performance over some time. The mathematical model eliminates firms with high debt and selects stocks of companies that can generate a higher return than peers. You have quant funds following a consistent strategy across different market conditions. 

You could put money in quant funds if you don’t want a fund manager to manage your investment actively. It follows a rule-based format and picks stocks depending on price trends, fundamentals and other vital factors. Your investment isn’t affected by the investment style of the fund manager.

Should you invest in quant funds?

You may consider diversifying your portfolio with quant funds if you are a savvy investor. However, you could build exposure in a staggered manner up to a maximum of 10% of your portfolio.

You could invest in quant funds to eliminate human intervention from the investment process. For example, you may find the fund manager of an active fund vulnerable to behavioural biases. It is an irrational belief or behaviour that could influence the decision-making process of the mutual fund manager. 

You may pick quant funds over active funds if you seek an investment with a lower expense ratio. It follows a passive investment strategy to an extent and charges lower fees than an actively managed fund. However, the fund manager designs and monitors the mathematical model compared to an index fund that mirrors a market index such as BSE Sensex and the Nifty 50.

You could put money in quant funds if you are a conservative investor who seeks to diversify the portfolio beyond index funds. However, you may not be willing to invest in active funds as it doesn’t match your risk appetite. You could put money in an automated investment such as quant funds with a lower expense ratio than active funds.

You may invest in quant funds if you are a savvy investor who understands the stock market. It is not an appropriate investment for a beginner in mutual funds. However, it would help if you stayed invested in quant funds to benefit from the investment strategy for the long term.  

Advantages of quant funds

• Quant funds are an automated investment as compared to an actively-managed mutual fund. You will find the investment decision process faster, as buy and sell choices are made by a mathematical model rather than a mutual fund manager.
• You may find quant funds a better investment option as compared to index funds. It caps your investment in stocks and sectors, reducing concentration risk.
• Quant funds encourage emotion-free investment in the stock market. You may follow an automated investment strategy that is consistent with the investment objectives of the mutual fund.
• You may find quant funds processing large volumes of data using advanced mathematical models. It could reduce errors when making investment decisions and generate a higher return than actively-managed mutual funds.
• Quant funds follow a pre-programmed model that offers strategic consistency across different market conditions. It picks stocks of companies that have performed consistently over some time. However, the fund manager of an active fund may change the investment style when stock markets crash.

Disadvantages of quant funds

• You may avoid quant funds if this is your first time in the stock market. Moreover, it is not suitable for investors who regularly book profits in the share market.
• Quant funds are a popular investment in developed countries. However, many investors in India don’t put money in quant funds.
• You may struggle to find quant funds with a good track record of performance over some time. Moreover, past performance doesn’t guarantee that the fund would do well in the future.
• Quant funds follow strategies that depend on historical data. It is vulnerable to black swan events such as the coronavirus pandemic.
• The managers of quant funds do not interact with the companies’ management where they put your money. You may find the mathematical model picking stocks and creating a portfolio without human interaction.

Should you invest in quant funds if you are a beginner in mutual funds?

You will find quant funds investing primarily in stocks. You may consider the investment only if it matches your risk tolerance. Moreover, you must thoroughly understand the concept before putting money in quant funds.

You may avoid quant funds if this is your first time in mutual funds. It invests mainly in equity instruments and is suitable for sophisticated investors who have a thorough understanding of the stock market. 

You may invest in mutual funds only after checking the track record over three to five years. Moreover, quant funds are relatively new in India, and you may find it challenging to pick the right investment if you are a beginner in mutual funds. 

You could invest in quant funds if you seek a passive investment as compared to active funds. However, you must invest your money only if you understand the concept of automated investments. You may find quant funds underperforming active funds in a bull market and doing well during periods of low volatility. In a nutshell, you may diversify your portfolio with quant funds in a staggered manner to achieve your long-term financial goals. 

For any clarifications/feedback on the topic, please contact the writer at cleyon.dsouza@cleartax.in