A quant fund may be almost a new concept in India. Quant Fund may be a sort of open-end fund which is being managed using quantitative analysis and AI (Artificial Intelligence).
As you might know or aware that mutual funds are managed by the fund managers. A fund manager invests money based on supported research analysis and investment strategies. this suggests that, investment decision in such a fund or open-end fund is influenced by human intelligence. Human minds are susceptible to make mistakes. this gives options birth to a new and interesting type fund called Quant Funds.
What is Quant Fund?
A quant fund is one kind of open-end fund . The investment decision in these quant fund isn’t taken by any human being. the decision for this is taken by software programs that are based on some things like predictive models, hidden patterns, statistical techniques, and quantitative chemical analysis . The predictive model is a known because the quant fund model. Quant fund models are supported by back-tested data.
The followers of the quant fund say that the scope of human error during this fund is extremely less and almost negligible hence these sort of fund is probably going to perform better. However, as these funds work on historical data and AI it cannot handle unprecedented events. This fund features a similar risk profile of the thematic fund.
How do Quant open-end fund Works?
Quant open-end fund works on the predefined algorithms and historical data. the massive diverse data & information are stored at the backend computational system of this fund. This fund makes use of the newest technologies like data science and AI to process and analyze large data in generating meaningful information.
The quant system behind this fund selects the simplest available option that’s likely to get an honest future return. The buy and sell decisions are given supported academically researched and sophisticated decision-making systems. This fund restricts the selection of stocks supported the model. The quant fund model generally eliminates the involvement of any type human sentiments or emotions when buying & selling stocks in portfolio.
The quant model to perform quantitative chemical analysis using the computer-based model are often either outsourced or are often designed by the fund house internally.
The method employed by the quant fund for the choice of equity is given below.
Analysis of Past Economic data like GDP, rate of interest , market condition like index return.
- Classification of stocks.
- Usage of Machine Learning and AI algorithm to predict the factor combination which will outperform within the forthcoming month.
- Create Optimal Stock Portfolio.
- Estimate Market Direction.
- Hedge/Buy Optimal Portfolio.
- Repeat the above sequence.
The factors used for the prediction are Alpha, Value of stock supported ROCE, PE ratio, Quality of stock supported ROE, EPS and dividend earning ratio.
A bit famous or popular Quant Mutual Funds in India:
DSP Quant Fund
DSP Quant fund may be a new fund that was launched six months back. As per fund’s objective, the stocks are selected, weighed and rebalanced using various stock screeners, factor-based getting scores and an optimization formula/es, that aims to reinforce portfolio exposures to factors representing good investing principles like growth, value, and quality within risk constraints.
As it may be a new fund historical performance detail isn’t available. But, the thing is that, this fund has given good return since inception.
Tata Quant Fund
Tata Quant Fund is recently launched. Objective of this fund is to get medium to future capital appreciation by investing in equity selected supported quant model. it’s new quant fund and no much historical data available to compare as on 30th Jan, 2021.
Nippon India Quant Fund
Nippon India’s Quant Fund is planning to get capital appreciation by investing in a portfolio of stocks selected supported the quant model. 99.85% of overall allocation of this fund is equity and remaining can be the pretty cash component.
If we look at the historic five years of data, this category of fund is unable to perform and have generated poor returns compared to it’s benchmark.
Should you invest in Quant Mutual Funds?
At the primary instance, the Quant open-end fund seems to be a lucrative investment option. However, before deciding about investing during this fund you ought to check out the positive and negative side of this fund. Details are given below.
- This fund reduces or eliminates human error, bias, and emotions which tends to happen in any case.
- Leverage the strength of AI (AI) for investment strategy formulation.
- Consistency in strategy.
- Disciplined investment process claim to offer high returns.
- Restricted choice of stock supported model and algorithm.
The success is predicated on the quant model and analysis performed.
As analysis is completed supported historical data, this fund can’t handle complex market conditions.
The model should be constantly updated supported evolving market realities.
There is no proof or firm evidence that these quant funds can reliably outperform over time.
Looking at benefits and disadvantages you want to have made up your mind about the quant fund. Based on the research, these funds are slightly new and risky for investments. there’s no established diary available for these sorts of funds. it’s not yet become a matured investment product. An investor should stand back from quant funds as of now. If you’re highly influenced by this fund you’ll allocate 5% of the equity portfolio during this fund. As this fund is out there in multiple categories you ought to be absolutely sure about selection of category.