Mutual Funds: Use quant funds as diversification tool

These funds use statistical models to reduce portfolio volatility and manage their exposure to market risk

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These funds use statistical models to reduce portfolio volatility and manage their exposure to market risk

Given the volatility in the markets, individuals can look at quant funds, a rule-based investment approach. Fund managers of these funds use mathematical and statistical techniques to make investment decisions and use the power of predictive analysis to take a call on future trends. These funds use statistical models to reduce portfolio volatility and manage their exposure to market risk.

Quantitative funds are dynamic and their tactical nature is highly beneficial in volatile times. They have provided similar or better returns but with lower risks as compared to traditional active funds. Moreover, they are not correlated to the traditional funds and can add value by diversifying the investor’s portfolio. To reduce the risk of losses from any one security, quant funds frequently diversify their portfolios across various securities and asset classes.

However, investors should look at quant funds not as a substitute to regular discretionary funds but as a source of additional diversification. Investors must check their risk tolerance, the fund objectives, and the fund’s track record before choosing a quant fund. Vivek Sharma, director (strategy) and head of investments, Gulaq, a part of Estee group, says quant funds tend to have lower fees as compared to their active counterparts as they are more passive investments.

Near-term volatility

Every fund house and fund management has a process based on which they build the portfolio. Harshad Chetanwala, co-founder,, says that equity funds managed by quant funds do have reasonably high allocation in Adani Group when compared with other fund houses as a percentage of their assets under management. “We have to leave index funds as they are passively managed based on the market capitalisation. Considering these are actively managed funds, the fund house may rework its strategy; hence investors may look at near-term volatility in these funds till the portfolio is diversified further,” he says.

Quant funds have been among the top performers for a couple of years and have outperformed the benchmark and their peers within the category. “This gap of outperformance is likely to reduce considering the impact on Adani Group shares,” says Chetanwala.

Factors to consider before investing

Investors must analyse the quant fund’s prior performance data and take into account how it has fared in comparable market environments. They should also assess the risk-adjusted returns of the fund. Moreover, they should be aware of the quantitative fund’s investment technique and strategy, including the securities it invests in and the mathematical models and algorithms it uses to determine which investments to bet on.

Sonam Srivastava, founder and CEO, Wright Research, says investors should investigate the background and credentials of the fund’s management team and their track record. “In order to establish whether the quant fund’s fees and expenses are reasonable and in line with industry norms, investors should compare them to those of other funds that are similar to the quant fund,” she says and adds that investors must evaluate the fund’s level of risk and take into account the portfolio’s diversity.

Investors should carefully read the fund’s risk disclosure statement and be aware of the dangers of investing in quantitative funds, such as the possibility of market volatility and the risk that an algorithm or model would fail. “They should think about the fund’s liquidity, how simple it is to acquire or sell shares, and how this may affect their ability to access their money during times of market stress,” says Srivastava.

All quant funds are not the same. Some quant funds are limited in their scope as they consider only a single factor such as momentum or value to select stocks. Vivek Sharma says there is an inherent risk in single factor quant funds. “Single factor models have been known to produce cyclicity in returns and underperform for long duration, sometimes for years,” he says and adds that a good quant fund is one which considers multiple factors to select stocks. “Multi-factor quant funds have much more stable and consistent performance as compared to single factor funds.”

What should investors do?

As a thumb rule, one must try to diversify across fund managers and fund houses. Harshad Chetanwala says 15-20% in one fund house at the time of investment is fine. “This will help you to reduce the risk of being overdependent on a particular fund or fund house. Some investors would have just looked at top performing funds and invested, which would have resulted in higher allocation in these funds. Diversifying across funds and fund houses can help investors avoid this issue,” he cautions.


 These funds use statistical models to reduce portfolio volatility and manage their exposure to market risk

 For the last couple of years, quant funds have been among the top performers, outpacing the benchmark and their peers within the category

They tend to have lower fees compared to their active counterparts