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What Are Quant Based Mutual Funds? Should You Invest in Them?

Mutual funds are an investment vehicle for pool funds those sharing a common investment objective. The capital raised by the fund house is invested in a diversified portfolio of securities. The investment objective of most mutual fund schemes is to achieve long term capital appreciation. If you invest for the long term, you automatically minimize your investment risk and maximize your overall capital gains. A mutual fund manager, depending on the scheme’s risk profile, may choose to invest in asset classes, commodities, currencies, sectors / industries etc. A mutual fund generally invests in equity, debt, gold, real estate, government bonds, income bonds, money market instruments like commercial papers, treasury bills, etc.

The performance of a mutual fund scheme depends on the performs of all the assets that come under that scheme.

What are quant funds?

Quant funds are passively managed funds who investment strategy is based on a predefined AI algorithm. Since these funds usually follow an investment strategy that is backed by artificial intelligence, there is very less chance of human emotion getting involved in the scheme’s performance. As you may be aware, AI technology has become omnipresent and with quant funds, it has step foot in the world of mutual fund investing as well. A quant fund builds its portfolio of stocks based on a pre-established AI algorithm. The AI software gathers numeric data through quantitative analysis based on which the fund choose and invests in a diversified portfolio of company stocks.  The fund manager has very little participation as most of the investing is algorithm based. Stocks are chosen only if they fit in the criteria set forth by data driven model. The main purpose of quant funds is to allow the scheme to perform with minimum interference of human intelligence.

Should I invest in quant funds?

Quant funds are a high risk investment scheme. Investors who have a high risk appetite should consider investing. Others should avoid investing their hard earned money. Even if you are someone who carries a high risk appetite, there are a few things that you should consider before determining whether quant funds are ideal for them:

Investment objective – Does the investment objective of the quant fund aligns with that of yours? If yes, then you can consider adding quant funds to your mutual fund portfolio. It is essential for investors to clearly understand the investment objective of the scheme before investing. Not every mutual fund scheme may hold the potential to help with your specific goals.

Investment horizon – The investment horizon of a quant mutual fund is minimum 5 to 7 years. These funds predominantly invest in equity and equity related instruments. We all know that equity markets fluctuate and hence performance of quant funds may get affected by market vagaries. Only if you have a long term investment horizon, only then you should consider investing in quant funds.

Expense ratio – Quant funds carry a low expense ratio since these are passively managed funds that work on an AI algorithm backed investment strategy. Since there is very little active participation of the fund manager, the expense ratio of quant funds is lower than other actively managed mutual fund schemes. An expense ratio is nothing but the recurring costs which the management has to bear for running the fund house. A low expense ratio will not affect your long term capital gains that gravely.

You can even start a monthly SIP to ensure that you continue investing in quant funds on a regular basis for the long run.


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