Mutual funds: Should every investor consider investing in quant funds? Here are the details

Quantitative (quant) fund offerings have been gaining a steady pace in India over the years. The total assets under management (AUM) of domestic quant funds surged by about 180 times in five years, which stood at ₹ 77, 359 crore as on December 31, 2023.

Simply put, quant funds involve a mix of active and passive investing in mutual funds. Essentially, artificial intelligence (AI) and machine learning (ML) approaches are adopted for fund management.

In quant funds, the stock selection and investment decisions are initiated following a rule-based approach to statistical and mathematical models.

A fund manager’s ability to pick stocks at the time of building a portfolio is not relied upon completely. So, as human interference is minimal in the selection of funds, this assures bias-free investing. However, fund managers are often involved in the design and monitoring of the portfolio.

How are quant funds classified?

Quant funds are generally classified based on quantitative factors, which include value, momentum, yield, volatility, liquidity and size or statistical measures in the model.

In India, the quant fund adheres to single-factor or multi-factor-based models.

Generally, single-factor models are represented as ratios, including price-to-earnings (P/E), price-to-book (P/B), and so on.

The model evaluates the quality using metrics such as return on equity (ROE) and return on capital employed (ROCE). Similarly, statistical phenomena such as volatility using standard deviation or beta are also studied.

At the same time, the multi-factor model approach looks forward to combining two or more factors that seek to deliver better risk-adjusted returns more consistently over a period.

A significant number of quant funds are present in alternative investment vehicles, including portfolio management service (PMS) and alternative investment funds (AIF).

Who should invest in quant funds?

As quant funds adopt specialised techniques for investment selections, those with a high-risk appetite or seasoned investors who are well-versed in stock valuation techniques should invest in quant funds. Also, those with a long-term investment horizon, which could be from five to seven years, can consider investing in quant funds.