Machine learning and artificial intelligence (AI) have also forayed into the mutual fund space. Mutual funds governed by machine learning and artificial intelligence algorithms are known as quant funds. Over the last couple of years, quant funds have witnessed an increasing adoption among Indian investors. These unique yet lesser-known mutual funds allocate their assets based on a pre-defined algorithm. The fund manager has no role in asset allocation. However, unlike index funds, quant funds are not free from the fund manager. Mutual funds managers monitor and design the model used for picking the stocks for the quant mutual fund portfolio.
If you want to know more about this exciting mutual fund category, read this quick guide:
What are quant mutual funds?
A quant mutual fund is a fund comprising of securities chosen through numerical data compiled by quantitative analysis. These mutual fund portfolios are built by customized machine learning and AI models that pick investments according to a pre-defined algorithm. These are non-traditional and passive investments, and the fund manager does not have a say in the decisions about the portfolio. The entry and exit of the security investments are also decided by an automated program, unlike actively managed mutual funds.
Even though fund managers do not directly role the quant mutual funds, they replicate the model suggested by the algorithm or program. Further, they monitor and design the model that picks the mutual fund portfolio options and ensures the portfolio performs as per the model outcomes.
The fund manager conducts fundamental holistic research about the companies and sectors in passive mutual funds before investing. Alternatively, in quant mutual funds, the selection of securities is based on quantitative techniques, including trend analysis, statistical modeling, data computing, and more.
Why should you invest in quant mutual funds?
- No human bias: Security selection in a quant mutual fund portfolio is based on an algorithm. Hence, the portfolio selection is objective and not subjective to human preference like an actively managed fund, where the fund manager picks the securities for your portfolio.
- Predictable outcomes: Quant mutual fund portfolios follow a standard and pre-defined process for selection and functioning. This makes the results from such portfolios predictable and explainable.
- Scalable: Models behind the quant mutual fund portfolios are launched after considerable research and testing. This makes them significantly scalable.
- Less risk: Generally, quant mutual fund algorithms pick less volatile securities (especially stocks). Moreover, quant models also have inbuilt checks to assess sector or stock concentration, ensuring diversification and reducing portfolio risk. You can invest in quant funds through the SIP (Systematic Investment Plan) mode to lower your risk further.
Before investing in quant funds, it is also critical to know that these mutual funds are also subject to empirical bias because the statistical models governing the security selection in such funds are based on historical data. Therefore, as an investor, it is wise to carefully study the model used by the quant mutual fund before investing.