Investors with a high-risk appetite can look at quant funds which eliminate the risk of fund manager decisions going wrong. The data-driven approach of these funds can execute trades quickly and gain from thin price differentials to generate higher capital appreciation.
These funds offer advantages in mitigating the effects of market volatility and emotional investing. Reliance on algorithms and models eliminates the influence of human emotions and prevents impulsive reactions from fund managers.
These funds can be described as market capitalisation and sector-agnostic flexi-cap funds where fund management decisions are majorly driven by a set of established rules. These funds are among the top performers for a couple of years and have outperformed the benchmark and their peers.
Of the eight such funds, Quant Quantamental Fund has given a return of 56% in one year followed by 360 ONE Quant Fund and Nippon India Quant Fund at 49% and 35%, respectively. Over a period of three years, Quant Quantamental Fund has given a return of 29%. In fact, two fund houses —SBI Mutual Fund and Motilal Oswal Mutual Fund — are expected to launch their quant funds. Going ahead, more asset management companies will launch such funds for two primary reasons: future-proofing their product proposition and completing their product suite to capture a new wave of investors’ interest.
Sonam Srivastava, founder and fund manager, Wright Research, says quant funds have exhibited promising results in recent years. “This algorithmic approach offers a compelling alternative to traditional fund management, potentially mitigating emotional bias and identifying subtle patterns that human analysis might overlook,” he says.
In quant funds, no human intervention is required for investment selection and related decisions. Anil Rego, founder and fund manager, Right Horizons, says at the optimal cost, the fund will mitigate the risk and losses related to human management. “The quant-based model investments will generate excess returns based on the model designed by the fund management,” he says.
More ideal for savvy investors
A comprehensive evaluation of risk tolerance and personal investment goals are important factors to incorporate quant funds into a long-term investment strategy. Nirav Karkera, head, Research, Fisdom, says quant funds are best for those whose personal investment style matches the fund’s decision-making framework. “Such funds are most ideal for relatively savvy investors having the willingness and ability to understand the nuances in the fund’s framework,” he says.
Similarly, Feroze Azeez, deputy CEO, Anand Rathi Wealth, says only those with a high-risk appetite and a long-term investment horizon should consider quant funds. “This is a very new sector in India, and we are yet to understand how these models will work in case of severe volatility,” he says.
What to consider before investing
Before investing in quant funds, investors must analyse the specific data points and algorithms employed by the model to understand the fund’s risk-reward profile. Due to the intricate nature of the models, a strong understanding of financial concepts is recommended. “Investors must be prepared to actively monitor the fund’s performance, particularly during periods of significant market shifts. This vigilance allows for informed decisions about adjusting their investment strategy if necessary,” says Srivastava.
Investors must note that while quant funds effectively eliminate the chances of a wrong decision driven by fund managers’ emotions, it also eliminates the chances of a correct decision being made through personal experience.“Considering the position of Indian markets in the maturity cycle, it may be too early to compare quant funds with actively managed ones. Actively managed funds still hold significant merit and advantages,” says Karkera.