Quant funds will become popular in the coming years with an increase in the development of AI and machine learning. In India few fund houses which offer quant funds are Nippon, TATA, and DSC.
Quant funds are based on selected parameters and rules. There is no human intervention and a fund manager relies on an automated program for making decisions. To the fund house, the quantitative model is the propriety and use data points like PE, PBV, earnings, and ratios to evaluate the stocks with its peers.
Amid the decade’s worst market rout, Nippon India Quant Fund that offered lackluster returns for years outperformed its peers in 2020, and the secret behind it lies in its investment model.
Compared to a 27% decline for the benchmark S&P BSE Sensex, the nation’s smallest 12 –year-old Nippon India Quant Fund dropped about 15% this year. As per the data compiled by Bloomberg shows, the sector as a whole clocked an average loss of about 19% and the fund fared better than 9 out of 10 equity mutual fund plans.
Ashutosh Bhargava, who manages the Rs20.9crore ($2.8 million) fund said in an interview, that the Nippon model places half of the emphasis on growth and quality factors while picking stocks. The fund had increased its investments in the stocks of IT companies and consumer goods makers since the lockdown started in March. But, once the valuations for consumer-oriented companies was at its peak level, the model dropped in favor of manufacturers involved in pharmaceutical. Out of the eighteen Nifty50 companies, just five which reported quarterly results so far have beaten analyst estimates.
Quality and Growth
This measures how fast a company increases its profit and how efficiently it uses its capital. The quant fund’s model placed a 30% weight for momentum, and at 20%, value is the influential factor.
Established in 2008 as the Reliance Quant Fund, now called Bhargava’s fund, was the first of its kind in India, averaged an annual return of about 1.8% over the past five years, compared with about 3.1% for the Nifty.
In view of the financial planners, investors with an appetite for risk should invest in such a fund. First-time equity investors should use index funds or diversified equity mutual funds to build their equity allocation.
