SBI Mutual Fund recently launched the SBI Quant Fund.
Its new fund offer (NFO) opened on December 4, 2024, and will close on December 18, 2024.
Currently, 11 fund houses manage quant funds with assets worth Rs 9,013.6 crore.
What are quant funds?
Quant funds adopt a systematic, rules-based approach to stock selection and portfolio management.
They don’t rely on fund managers to make investment decisions.
“They utilise mathematical models and algorithms to guide their investment decisions,” says D.P. Singh, deputy managing director & joint chief executive officer, SBI Mutual Fund.
Experts compare them to self-driving cars.
“Like self-driving cars, these funds also run autonomously on pre-programmed instructions with minimal human oversight.
"A human takes over only in rare cases, when something unexpected happens,” says Arun Kumar, head of research, FundsIndia.
These funds are predominantly large- or flexicap-oriented.
How do they work?
Quant funds define a stock universe and then apply specific filters.
“They might, for instance, only include stocks with at least a five-year track record, and market cap and return on equity (RoE) above a threshold limit,” says Kumar.
Next, individual stocks’ weights in the portfolio are decided.
“These could be decided based on criteria such as valuation ratios, profitability growth, liquidity, price performance, etc.,” says Kumar.
Portfolios are rebalanced at predetermined intervals. Fund managers intervene only in extreme situations.
No human biases
The rule-based methodology makes these funds objective in their approach.
“Quant funds eliminate emotional biases and subjectivity,” says Singh.
Algorithms also allow for swift responses to market changes, ensuring adaptability.
Such funds tend to be consistent.
“With a human fund manager at the helm, in case of underperformance, there is always the risk that they could change their style,” says Kumar. Quant funds are devoid of this risk.
“The focus on identifying high-quality companies with lower volatility results in better risk-adjusted returns relative to the market over the long term,” says Harish Krishnan, co-chief investment officer (Co-CIO) and head equity, Aditya Birla Sun Life Asset Management Company (AMC).
These funds have better sell discipline. “If the stock hits the signals, it moves out of the fund,” says Krishnan. Additionally, quant funds typically have lower expense ratios.
Flawed model, poor results
A rigid, rules-based approach can hinder adaptability.
“Funds that blindly stick to rules may not react appropriately to market developments where fund manager discretion is called for,” says Kumar.
The quality of the underlying model is crucial: a flawed model can lead to poor results.
“A set of rules that does well in current market conditions may become outdated in a few years as markets evolve, unless updated,” says Kumar.
New quant funds are often marketed using back-tested data.
“A model that has yielded good back-tested results may not perform as well in actual market conditions,” says Kumar.
Execution challenges, such as the non-availability of stocks at the price suggested by the model (due to liquidity issues), can affect performance.
Many quant funds also have a limited track record.
Who should invest?
Quant funds are ideal for investors with a quantitative bent.
“Those who prefer a data-driven, analysis-based approach should go for them,” says Singh.
Krishnan highlights their suitability for long-term wealth builders who can tolerate market volatility.
Cost-conscious investors may also find them appealing.
Kumar recommends waiting until a fund develops a three-to-five-year track record.
He also warns against going for funds with frequent rule changes or high human intervention.
