Why you should consider Quant Funds for your portfolio?

What is quantitative investing?

Quantitative investing or quant is a rule based investment strategy that uses mathematical and statistical techniques to make investment decisions. Since quant investments are based on computer algorithms, there is very limited human intervention in quant investing.

What are quant funds?

Quant funds are thematic equity mutual fund schemes which use quantitative investment strategies. Though the investment strategy of quant funds are driven by mathematical / statistical model based computer algorithms, quant funds are actively managed schemes. The fund managers of quant schemes are responsible for developing the quantitative (mathematical / statistical) models and reviewing the models on a periodic basis. The fund managers may also make updates to quantitative models from time to time.

How are quant funds different from passive funds?

Quant funds are active funds. Active funds aim to beat the market benchmark index and create alphas for investors. Passive funds like ETFs and index funds, on the other hand, track a market benchmark index. Passive funds do not aim to beat the index. Historical data shows that quant funds have been able to beat the market benchmark and create alphas for investors.

Benefits of quant funds

• Fund managers are human beings and all humans have emotions. No matter how objective a person tries to be in decision, there can be situations where his / her decisions are biased by emotions. For example, a fund manager may want to hold on to an underperforming stock based on his / her convictions. While convictions should be based on objectivity and analytical reasoning, sometimes it can also be biased by emotions.


• To err is human. Fund managers can make errors of judgment despite his / her best effort and intentions. Even globally renowned investment gurus have admitted that they made errors in judgements at times.


• A computer algorithm has no emotions and hence do not suffer from any behavioural biases. Machine driven investment decisions based on set of clearly defined quantitative rules are always objective based on the parameters of the model.


• Computer algorithms do not make human errors and therefore are more accurate in making mathematical calculations.


• With advances in information technology, computer software can handle very large datasets. Therefore, quant funds can use more data to test their investment hypothesis or strategy versus a fund manager who may have to rely more on experience and judgement in making investment decisions.


• Many investment experts and fund managers have said that stock picking is more of an art than a science. Quant investing is more of science and mathematics; it follows a more consistent and systematic (rule based) investment approach, which may benefit the investor in the long term.

Misconceptions of quant funds

There are many misconceptions about quant investments in India. Most of these misconceptions stem from lack of knowledge about these funds.

• Many retail investors believe that success in stock markets in India depend on stock tips, market grapevine, insider knowledge etc. However, historical data shows that quant funds have been able to beat the market benchmark.


• Many retail investors fear that quant funds are more risky and may suffer more losses in market crashes. The reality is that quant funds have inbuilt risk management strategies in their algorithms.


• Finally, there hasbeen scepticism about use of computer technology to replace conventional processes in past. However, more than 20% of hedge funds (by AUM) are currently use quant investing (source: SigTech). A survey of hedge fund managers has suggested that this percentage is expected to go up significantly in the short to medium term, especially among institutional investors. Like other tech related trends, quant investing is likely to gain more popularity in the future and early adopters may stand to gain.

Quant funds

Quant fund was introduced in India for the first time in 2005, but quant funds have really taken off after 2019. SEBI has permitted quant funds as a thematic category. In India, quant funds have nearly Rs 2,000 crores of AUM (source: Advisorkhoj Research, as on 31^st October 2022). While it is still a relatively new and small category, as far as AUM is concerned, it has the potential to grow rapidly in the future based on global trends.

How to select Quant Funds?

• Look at the fund’s track record before investing in a quant fund. Though cost is a factor, you should not select Quant funds purely on the basis of costs; the fund’s track record is more important since these are active funds. You should evaluate a scheme’s track record over long investment period (e.g. 3 years or more).


• You should have long investment horizons for quant funds. Quant strategies are based on long term data and may require long investment horizons to play out.


• Different Quant Funds have different investment strategies. It is important for investors to understand the investment strategy of the scheme before investing.


• Investors should refer to the Scheme Information Document (SID) to understand the investment strategy and risk factors. You should also consult with your financial advisor to know more about Quant Funds and see if they are suitable for your needs.