What are Quant Based Mutual Funds?

Quant mutual funds are a category of mutual funds where investing patterns are formed with hardly any human involvement. This is achieved via artificial intelligence (AI) and algorithmic trading. As a consequence, they mitigate the element of human inaccuracy in speculation like emotional and other behavioral biases.


Now that you know the meaning of quant funds, let us dive into their dynamics, associated shortcomings, and if investors should include them in their portfolios.


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How does Quant Based Mutual Fund Work in the Market?


A quant mutual fund bases its investment judgments on sophisticated mathematical models. Managers identify investment opportunities using algorithms. Nowadays, investors prefer quantitative research as AI systems provide reports within minutes after analyzing billions of market data .

The automated system can also determine the entry and exit points. However, quant funds in India are not entirely bereft of a fund manager. As of today, only index funds run on complete automation.

The fund managers are in charge of monitoring and developing the portfolio strategy from the beneficial options suggested by the automated system. In addition to mutual funds, some hedge fund managers apply quantitative models to create new portfolios. These funds narrow down a portfolio of equities using rule-based investing.


Quant Funds – Working Process


The fund manager’s involvement in such funds is limited because the fund picks stocks portfolio using several predetermined filters. Periodically, the fund managers examine the model and, if required, make changes.


According to a survey by Morningstar in 2015, 65% of alpha stems from broad market variables such as value, momentum, yield, volatility, liquidity, and size (mainly quantitative factor-based investing). In contrast, the remaining 35% comes from best stock selection (fundamental analytics & human judgment).


Because their management techniques deviate from human fund managers, quant funds in India are sometimes categorized as alternative investments. These funds often operate at a reduced cost since they do not require as many traditional analysts and portfolio managers to function.


 However, because of the increased securities turnover, their trading expenses tend to be higher than those of typical funds. They are generally more complicated than regular funds, and commonly target high net-worth clients or have stringent fund entry criteria.


Some investors regard them as among the most creative and technically advanced options in the financial market. They cover a broad spectrum of themed investing strategies and frequently use some of the industry’s most state-of-the-art technology.


Because of the complexity of their models, some of the best quant funds keep a careful watch on risk management. Most strategies begin with a benchmark and then weigh sectors and industries in their models. This gives the funds some control over diversification.


What are the 6 Major Quant Mutual Funds in India?


There are six quant funds in India – DSP Quant Fund, ICICI Prudential Quant Fund, Nippon Quant Fund, Quant Quantamental Fund, SBI Equity Minimum Variance Fund and Tata Quant Fund. These six best quant funds together control Rs 990 crore worth of assets. Lately, quant-based funds in the form of smart-beta funds have been introduced, which use either a small subset (equal weight/low volatility) or multiple parameters such as quality, size, etc.


  • DSP Quant Fund


DSP Quant Growth fund avoids firms with huge debts, inefficient capital allocation, or stocks with a high volatility index. Companies are examined in the second stage based on variables such as quality (return on equity, earnings, etc.), value (dividend yield, free cash flow yield, etc.), and growth (estimated earnings growth, etc.). Following that, each chosen stock is correctly weighted to decrease stock and sector concentration and liquidity risk.


  • ICICI Prudential Quant Fund


To select equities, ICICI Prudential Quant Fund employs a three-step methodology. In the first stage, it removes those stocks that don’t fulfill the parameters’ requirements. In the second stage, it shortlists firms based on economic, fundamental, and technological aspects. Finally, it computes a composite score for each business by assigning equal weights to each characteristic and constructs a 30-60 stocks portfolio.


  • Nippon Quant Fund


Nippon India Quant Funds is an actively managed fund that invests in equities using a proprietary system-based approach. The model shortlists 30-35 stocks from the S&P BSE 200 index using a screening method at predetermined periods, i.e. quarterly. Stocks are chosen based on valuation, earnings, price, momentum, and quality.


  • Quant Quantamental Fund


Quant has introduced a new fund called Quantamental Fund, which selects companies using a combination of fundamental, quantitative, predictive, and behavioral analytics. The fund would invest up to 20% of its assets in foreign stocks. It employs the Valuation Liquidity Analytics, Risk Appetite Analytics, and Time (VLRT) framework to choose equities. When deciding on stock allocation, it considers a variety of indicators such as liquidity, market breadth, equity flow, volatility indices, equity ETF flows, selling intensity, risk appetite, bearish bets, fear index, and long buildup indicator, and so on.


  • SBI Equity Minimum Variance Fund


This SBI Equity funds invests in a diverse basket of firms in the Nifty 50 Index to reduce portfolio volatility. The metrics utilized for stock selection and weighting are risk and factor-based criteria such as portfolio volatility, correlation, and covariance.


  • Tata Quant Fund


Tata Quant Growth Direct Fund employs a multi-factor investing strategy. It has Artificial Intelligence modules that adjust factor strategy dynamically based on market conditions. The fund examines historical economic data such as GDP and interest rates and market circumstances such as index returns. 


It employs a machine-learning algorithm to forecast which factor combination will outperform in the coming month. It rebalances the portfolio regularly based on the most recent economic and market data. This fund promises to be adaptable in portfolio selection, learning from changing economic and market situations and making its conclusion regarding the ideal portfolio.


What are the Key Attributes of Quant Mutual Funds?


In the past few years, the credit for tremendous popularity of quant based funds goes to big data solutions and easy access to an excellent range of market data. When presented with a lot of quantitative information, they are still efficient and accurate.


The paradigm shifts in technological innovation, especially automation, have also had a strong influence on the rise of quant funds by extending the quantity of data on which they can work. It allowed them to get sufficient feeds to analyze possibilities and susceptibility thoroughly. Quants employ proprietary models to improve their chances of outperforming the market.


  • Predictable Outcomes


The outputs are typically predictable and highly observable because the portfolio follows a conventional model (similar to a McDonald’s outlet). Also, unlike other actively managed mutual funds, they are not reliant on individual investment managers’ market outlook.


  • Scalable


Because they are designed following extensive testing and prototyping, they are proven to be scalable. Designs are exclusively made for a specific market with an intent to scale the market.


  • Empirical bias 


These models are solely based on historical data analyzed by verified statistical tools. As a result, market disturbances or unexpected variable movement (such as inconsistency in capital flows or false movement due to incorrect data inputs) may cause them to act differently and produce undesirable results. 


  • Risk of Black Box approach 


Fund managers are highly protective of their plans, and they rarely discuss the design or workings of the same. Because they are sometimes cloaked in secrecy, quant funds lack clarity for investors compared to regular funds.


What are the Risks of Investing in Quant Mutual Funds?


Once a model is built, quant mutual funds adhere to the strategy’s recommendations. In extraordinary cases, such as a corporate takeover, they act by adding or deleting stocks. It is entirely process-oriented and devoid of fund management bias.


  • It’s either heavy gains or losses


The process must be visible to investors or else it can be tampered. Behind every successful quant fund, there is another one that fails too. Unfortunately for their credibility, any collapse can lead to heavy losses.


  • Qualitative aspects are overlooked


Quant-based models rely only on pre-defined parameters for stock selection. If a high-potential stock does not meet this criteria, the model will reject it. Furthermore, the model may overlook qualitative information like managerial quality, internal procedures, and other non-quantifiable assets. The fund managers of an actively managed plan, on the other hand, can capture such nuances through their skill, research, experience, and instinct.


  • New market-patterns are not immediately recognised


Equity markets are inherently volatile. As a result, the quant-model will take time to acknowledge new market patterns. This lag in adjusting will result in a delay in action which may impact returns.


  • Can still be prone to inaccuracies


These funds aim to minimize human interaction in the screening process to mitigate the negative consequences of numerous behavioral biases. However, the model was created by humans, so they are anyways prone to inaccuracies.


  • Same decisions taken by many investors


Many people believe that as AI technology advances, quant-based models will be the way to invest in the future. However, with automated systems reaching the same conclusion, all the investors would take the same decision which might affect the financial market.


  • History doesn’t always have to repeat


Even the best quant funds can fail because they draw inferences primarily from previous events, which don’t always have to repeat. While a skilled quant team will regularly add new features to the models to forecast future occurrences, it isn’t easy to foresee the future with 100% accuracy. These funds might become overburdened when the economy experiences above average volatility. Because the signals come so fast, high turnover can result in hefty commissions and taxable events.


  • Not viable for short-term investments


Quant based  funds can be risky if they are touted as bear-proof or based on short-term tactics. Forecasting downturns with derivatives and stacking leverage can be risky. A single incorrect turn can trigger implications, which often make the headlines.


How does an average quant fund perform?


Thousands of trading signals are available in quant active fund programming and quantitative algorithms, ranging from economic data points to trending global asset values and real-time corporate news.


Quant funds are also recognized for developing complex models based on momentum, quality, value, and financial strength via proprietary algorithms created by robust software programmers.


Because of the gains they have made over the years, these funds have sparked a lot of curiosity in investment circles. However, according to research by Institutional Investor, the gains have been reducing since 2016. The equity quant index increased by 10.2% in 2010, 15.3% in 2011, 8.8% in 2012, 14.7% in 2013, 10.4% in 2014, and 9.2% in 2015.


KYC Required To Invest In Quant Mutual Fund


KYC is an abbreviation for ‘Know Your Customer.’ It aids in verifying an investment with the necessary documents. SEBI has established rules for KYC. Before investing in a SEBI-registered mutual fund company, an investor must complete the KYC procedure. 

A KYC form will include your identification, residence, financial condition, employment, and demographics.

Kuvera can help you with your KYC. Resident Indians and PIOs residing in India must provide the following KYC documents:


  • Photograph
  • Address evidence for Pan Card (Aadhar Card (Both Front & Back) / Driving License/ Passport/ Voter ID Card)
  • Letter of Authorization for KYC: Please write “I authorize Kuvera to perform my mutual fund KYC” on a piece of paper and sign underneath it.
  • Selfie Video: Face the camera for 5 seconds and record a video.


Should you invest in quant mutual funds?


Quant funds are only appropriate for long-term investors because the model’s strategy may take time to pay off fully. If you understand the underlying risk, they can be a part of  your portfolio, with total ownership not exceeding 10-15%.


Actively managed and diversified equity funds have performed well in generating fair alpha for investors. As a result, to get the best risk-adjusted returns, you should consider investing in a well-diversified portfolio of actively managed equity funds using the ‘Core & Satellite’ strategy.


The ‘Core’ holding should account for around 65-70% of your stock mutual fund portfolio and should include a Large-cap Fund, Flexi-cap Fund, and Value Fund/Contra Fund. The portfolio’s ‘Satellite’ holdings, including a Mid-cap Fund and an Aggressive Hybrid 


Quant Funds, can range between 30-35%.By correctly picking schemes and structuring the portfolio between the Core and Satellite sections, you will be able to bring stability to the portfolio while strategically increasing its returns.




  • Should I invest in a quant active fund?


This fund has always outshone others. In active funds, multi cap funds form a major portion of investment in India by standing at 93.18%. This is followed by 37.24% in big size companies, 13.46% in mid cap stocks, and 28.38% in small cap stocks.


  • How safe is it to invest in quant based mutual funds?

Compared to other mutual funds, quant mutual funds have shown excellent potential for long term investment options.


  • Who manages quant mutual funds?

According to the Investment Management Agreement, the Trustee Company has designated the quant Money Managers Limited to look after the mutual funds.


  • Which are the best quant funds to invest?

Quant tax plan fund, quant active fund, quant equity fund, quant mid cap fund and quant-flexi cap fund  are some of the best options available. These schemes are known for suggesting well-diversified portfolios of companies with the aim of generating capital gains.


  • Is the quant multi-asset fund a risky investment?

Yes. Compared to other quant mutual funds, the risk element is high in quant multi-asset funds. It’s a grouping of asset classes like cash, gold, real estate, equities and bonds used as an investment. Apart from this, quant multi-asset fund has 10.3% investment in debt and government securities.


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