What are Quant Funds

What are Quant Funds?

Quant Funds

Investments are handled by fund managers in a wealth and asset management firm. They are supported in evaluating complex and voluminous data by teams of research analysts. When it comes to buying shares and allocating funds, investment strategies are used. Human judgement is involved in any investment choice, no matter how well-structured it is.

On the other hand, in the Quant funds, securities are chosen based on numerical data compiled through quantitative analysis. Hence, quant funds are considered as passive funds or non-traditional funds.

What Are Quant Funds?

Quantitative funds or quant funds invest in securities using computer-based and statistical quantitative models. The involvement of humans is exceedingly small in this. To assess investments, they are formed with customized models and software programs. These funds claim that selecting assets based on inputs and computer programs help fund firms reduce the costs and losses associated with human fund management, they use complex methods to analyze and make investment decisions.

The portfolio is only reviewed and reshuffled regularly by fund managers. Under such a style of investment, a correct approach of data is followed. Usually, fund houses have their proprietary model for selecting stocks. These models include P/E, P/BV, Development, earnings, financial ratios, and stock performance in comparison with its peers. However, it involves a lot of data crunching, meaning the imported and stored data in a system is referred to as crushed data. This method takes away the manager's ability to choose a stock. The machine chooses it only when the stock meets the parameters.

For Example: In other mutual fund schemes, investors consider the expertise and experience of the fund manager as the performance of the scheme is mainly dependent on the decisions taken by the fund manager. In quant funds you do not have to worry about the manager that they will quit, and your investment might suffer later. There is no need to worry about the human mistakes that you might experience in investing in normal mutual funds. Also, there is no human bias in quant funds.

Why should investors consider Quant funds?

The fact that quant funds make objective decisions is the key reason to trust them. There is no Subjectivity and human prejudice. There is still space for temptation and mistakes, no matter how skilled or well-qualified the fund managers are. In volatile markets, some fund managers may change their positions. Others, based on their prejudices, may interpret economic factors differently. Quant funds have logical checks in place to ensure that the amount is invested in the right stock or the right sector. There might also be checks on the quantity purchased and sold. This gives the surety that the best decisions are made.

Quant funds have grown in popularity because of increased access to a wider variety of market data, as well as the increasing number of solutions centered around the use of big data.

Large asset managers are increasing their investment in quantitative solutions as fund managers fail to exceed market averages over time. The overall quant fund offerings in the investment sector are rounded out by smaller hedge fund managers. Quant fund managers, overall, seek out highly competent individuals with advanced degrees in math and programming.

What are the various types of quant funds?

Indexation:In this form of investment, the portfolio is not churned regularly. This method is passive in nature and the investors are aware of the investment mandate because it is based on the predefined guidelines.

Black Box:The process and rationale of investment are not disclosed to investors in these types of funds. The best way to judge the fund is to look at its past or historic performance.

Factor Models: These funds, unlike index funds, are actively managed. The investment strategy is focused on potential stock performance drivers.

What are the advantages of Quant funds?

• As quant funds are based on objective decision making, they are free of human emotions, errors, and biases.

• Quant funds focus on actual sources of return rather than investing in favored asset classes. Hence, they ensure better risk management.

• In comparison with human analysis, system-based quant funds have the ability to handle massive computations for asset selection and allocation.

• They identify historic correlations and hidden patterns by deploying Artificial Intelligence and Machine Learning features and hence the prediction of markets, stocks and asset classes is enhanced.

What are the limitations of Quant funds?

• As the strategies in quant funds are set up and programmed by humans, their effectiveness is limited by the team's ability to create models.

• They are based on historical evidence, and past performance. Hence, they do not guarantee future results.

• They must be designed in such a way that they can easily adjust to changing economic conditions or markets, or they will not provide the best returns.

Do quant-based funds have more say in the future of the mutual fund industry?

Mutual fund industry in India is rapidly developing and adopting various methodologies from the developed markets. Many industry experts are of the opinion that quant based mutual funds are going to gain more say in the industry as it becomes more difficult for the actively managed fund managers to beat their benchmark indices.

International quant funds have given a plenty of returns. Artificial intelligence has already started impacting the Indian financial sector.

In India there are few funds that operate on quant model and they collectively manage assets close to ₹ 1,000 crore. But time is not far away when quant based funds also have a significant mark in Indian mutual fund industry.

Below is the list of top performing Quant funds:

Scheme NameSince Inception Return1 Year Return3 Year Return5 Year Return
DSP Quant Fund20.12%64.95%--
Nippon India Quant Fund7.92%63.07%11.45%13.94%
Tata Quant Fund 1.45%43.01%--
SBI Equity Minimum Variance Fund17.22%64.92%--

How are investors taxed on earnings from quant funds?

• Short Term Capital Gains are taxed at the rate of 15%

• If the mutual fund units are sold after 1 year from the date of investment, ₹ 1 Lakh in the financial year are exempt from tax and gains over ₹ 1 Lakh are taxed at the rate of 10%

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Quant funds are effective in eliminating the bias that often comes with active fund management. Some investors are of the opinion that quant funds are amongst the most innovative and highly technical offerings in the investment world. Since quant funds can work well for large caps and deep markets, investors are recommended to have portion of their portfolio is allocated for quant funds. However, investors are advised to do proper research and make their investment decisions based on their financial goals and risk appetite.