BackQuant funds are meant for savvy investors
Tata Mutual Fund is the latest to offer a quant fundTata Quant Fund uses artificial intelligence and machine learning for picking stocks
PremiumMany believe that unbiased stock picking by machines is the future of investment. A few fund houses have experimented with quant funds where algorithms pick the stocks. However, returns from these funds have been a mixed bag.
Tata Mutual Fund is the latest to offer a quant fund. Tata Quant Fund uses artificial intelligence and machine learning for picking stocks. The new fund offer closed on 17 January but it’s an open-ended fund in which you can still invest.
Typically, quant-based schemes have a data-driven approach to pick stocks. They create a stock-picking model using various parameters. The model then selects stocks that match the parameters. The idea is to free stock-picking from human intervention.
In these funds, the fund manager usually focuses on the robustness of the model and keeps a check on whether the model is working optimally or needs tweaking.
MIXED PERFORMANCE
As of now, there are only three quant funds, including Tata Quant. In the last six months, DSP Quant Fund has given an annualized return of 15.98% compared to 7.96% from the benchmark, the S&P BSE 200 TRI as on 21 January. The fund was launched in June 2019 and is yet to complete a year.
Nippon India Quant, which was launched in February 2005, has given a return of 8.69% over seven years compared to 12.43% from the benchmark, according to data from Value Research. It has not been able to beat the benchmark even over five-, three- and one-year periods.
Quant funds fall behind actively-managed funds— multi-cap and large-and-mid-cap—as well despite having slightly lower expense ratios. Kotak Standard Multicap Fund, the scheme with the biggest assets under management (AUM) in the category and which tracks the same benchmark, has given 16.04% over seven years. In the short-term, six months, it gave 8.88%. Mirae Asset Emerging Bluechip, the biggest scheme in the large- and mid-cap category, has seven-year returns at 22.63% and six-month returns of 12.97%.
The expense ratios of the existing quant funds are between what exchange-traded funds (ETFs) and actively managed funds charge. DSP Quant (regular) has an expense ratio of 1.23% and Nippon India Quant (regular) charges 0.95%.
Both have not been able to attract investors. DSP Quant’s AUM is ₹148 crore as on 31 December 2019, and Nippon India Quant’s ₹24 crore.
Who should buy?
Quant funds make sense for savvy investors. “They use highly specialized and sophisticated strategies. Only investors who understand stock valuation methods, different stock picking styles, the behaviour of markets in different cycles and derivatives, should look at quant funds," said Tarun Birani, founder and CEO, TBNG Capital Advisors Pvt. Ltd.
Even then, at best, experienced investors can allocate 5% of their equity portfolio to three-four such theme- or strategy-based funds. These could include quant funds and even factor-based ETFs such as those which track Nifty 50 Value 20 (NV20) index.
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