Two prominent mutual fund houses – ICICI Prudential Mutual Fund and DSP Mutual Fund – have filed draft offer documents of their quant-based schemes with Sebi for its approval. Many mutual fund advisors believe quant-based mutual funds are the future of the Indian mutual fund industry. Are you wondering what these schemes are? Or wondering whether you should invest in these schemes?
Quant-based mutual fund schemes have a data-driven approach to stock selection. There is a model that automatically selects stocks, based on various data points. The human intervention is limited to the review and reshuffling of the portfolio in these schemes. Fund houses follow their own in-house developed model, determined by factors like earnings, price to book value, P/E, growth, valuations etc, for stock selection.
Mutual fund advisors and financial planners believe that quant-based mutual fund schemes would make their presence felt once it becomes difficult for the actively-managed mutual funds to beat their benchmark by huge margins due to TRI and other changes. “In a market like ours where we are seeing a lot of disruptions, and AI-based fund with no human bias towards time-tested stocks can do wonders. Internationally quant models have proven themselves. We believe in India, the time when quant funds becoming main stream is not far,” says Suresh Sadagopan, Founder & Chief Financial Planner, Ladder7 Financial Advisories. “It is not a matter of if, it is a matter of when,” adds Sadagopan.
Indian mutual fund industry already has some mutual fund schemes that use AI and set algorithms to partially select stocks. However, these schemes or their investment strategy is yet to make an impression in the minds of investors. For example: Quant Mutual Fund, as a fund house, follows set AI rules for stock selection in their portfolios but there is intervention from the fund management team also. However, Reliance Quant Fund is totally managed on the quant-based approach.
“The approach eliminated any human bias from the management. Every 45 days, the data is churned by the system and based on the earnings growth, valuations and price momentum, it selects a set of 30 stocks from BSE 200 Index. This is a totally evidence-based model,”says Ashutosh Bhargava, fund manager, Reliance Mutual Fund. Bhargava takes care of Reliance Quant Fund.
Quant-based mutual fund schemes, known globally as multifactor funds, have an edge over regular passively-managed mutual fund schemes like index schemes and Exchange Traded Funds. Unlike index schemes, schemes that use the quant-based investment approach do not hug the index and are actively managed. This investment approach brightens their chances of outperforming index funds. These schemes are also low cost like the index funds.
Let us see how the quant-based scheme in India has performed and how much it charges. Reliance Quant Fund has been around since 2008. Earlier, it was called Reliance Quant Plus. However, the scheme changed its investment approach in 2018, informed Bhargava. According to the Reliance Mutual Fund’s website, the scheme has offered 11.43 per cent in three years and 11.03 per cent returns in five years. The benchmark returns during the same period were 14.32 per cent and 15.11 per cent respectively. While a regular actively-managed diversified scheme charges around 2 per cent, Reliance Quant Fund charges only 0.98 per cent.
Critics of quant-based approach says the biggest plus of these schemes, absence of human bias, could also become a liability. “Software cannot predict the mood of the market after a policy change. Only a fund manager can do that. So, in spaces like mid cap and small cap where there is a lot of subjectivity, this model might not work. But in a large cap space, this model might be revolutionary as we have seen in international funds,” says Vidya Bala, Head of mutual fund research at FundsIndia.
Vidya Bala believes that the success of these schemes in India will depend on the type of strategy the particular schemes follow. Ashutosh Bhargava believes that quant-based schemes are also a great tool to diversify in the Indian market.“Since we majorly invest on the basis of interesting narratives or past pedigree of the fund managers these schemes are not very popular. However, style diversification is generally missing in Indian fund management and a very few can manage both value and growth styles with equal efficiency. These schemes thus add good diversification for investors,” says Ashutosh Bhargava