Last Updated on October 1, 2023 at 7:43 pm
The SEBI MF categorization rules have many loopholes. Among these, there is no limit on the number of thematic funds an AMC can offer (unlike large cap, mid cap etc). This is the reason for increased thematic NFOs, some of them being quantitative mutual funds aka quant mutual fund. In this article, we discuss what these are and if we can invest in them.
First of all, when the term quantitative mutual fund is abbreviated as quant mutual fund, it is not a reference to the AMCs quant mutual fund or quantum mutual fund. With that out of the way, let us start from the basics.
What is a quant mutual fund? A mutual fund that either completely or partially uses quantitative rules to determine its asset allocation and/or its portfolio is a quant mutual fund. These rules can be based on measures associated with the broad market or a company (eg. PE or PB) or technical indicators like moving averages or fancier metrics.
Join 32,000+ readers and get free money management solutions delivered to your inbox! Subscribe to get posts via email! (Link takes you to our email sign-up form)
🔥Enjoy massive discounts on our robo-advisory tool & courses! 🔥
Is a NIfty or Sensex ETF or index fund a quant mutual fund? Yes. Technically it would be hard to dispute that although few appreciate it. Market capitalization indices like Sensex, Nifty 50, Nifty Next 50 etc are completely rule-based both in the stock selection and allocation of weights. That is as quantitative as it gets! However, we tend to assume only those with “fancier” rules are quant mutual funds.
What are some quant mutual funds in India? All market capitalization based index funds and ETFs are quant funds. All dynamic asset allocation funds are typically quant mutual funds. Examples are DSP Dynamic Asset Allocation, IDFC Dynamic Equity, Motilal Oswal Dynamic Fund Some balanced advantage funds like ICICI Balanced Advantage are partially quant-based funds. A multi-asset fund like ICICI Multi-asset is also partially quant-based.
All factor-based or smart-beta ETFs and index funds are quant funds: Equity-weight indices from DSP (NIfty 50), Sundaram (Nifty 100) and Principal (NIfty 100), Edelweiss ETF – Nifty 100 Quality 30, ICICI Pru Nifty Low Vol 30 ETF, ICICI Pru NV20 ETF, Kotak NV 20 ETF, Nippon India ETF NV20 and SBI ETF Quality.
Then there are the newer “thematic funds” like SBI Minimum Variance Fund, DSP Quant Fund, Tata Quant Fund which are paraded around as if they are the only quant funds with a lot of mumbo-jumbo about AI, machine learning, neural networks. We shall refer to them as thematic quant funds.
To get an overview of normal indices, smart-beta indices, index funds and ETF options available, the reader may consult this talk.
Can we invest in Quantitative Mutual Funds?
Thematic Quant Funds: First, we need to recognise that an AMC would do anything to get AUM, even ridiculing their own fund management teams. If they want to launch a NIfty or Sensex fund, they would have no problem talking about how difficult it has become for active funds to beat index funds: DSP Nifty 50 Index Fund & DSP Nifty Next 50 Index Fund: Avoid & Watch
If they want to launch a quant fund, they have no problems saying normal active funds managers are subject to emotional, behavioural bias. This, when their portfolios are loaded with normal active funds. This is like parents saying, we have decided to make a new baby because our existing ones are flawed.
Second, we need to understand that these thematic quant funds revel in withholding full details of what they are trying to do. While they are within their rights to do so, investors must recognise that the NSE and BSE have all kinds of smart-beta indices (see my talk above) that would cover a good chunk of the strategies advertised by these funds.
They could have simply created a low-cost index fund based on these indices. Instead, some of them choose to start ETFs – which are barely traded and should be avoided -and some of them start actively managed quant funds to gain profit. This alone is enough to reject thematic quant funds.
Dynamic Asset Allocation Funds: Here the asset allocation rules are well known. Security selection though is active. They either pick stocks or invest in other funds (fund of funds). Clearly this is a lesser evil and mature investors who prefer lower risk (during a bull run) can consider these: Do not invest in dynamic equity funds if you wish to chase returns. Also see: Dynamic Mutual Funds vs Balanced Mutual Funds
However, AMCs have a tendency to suddenly change the asset allocation rules. Maybe because they do not work or the fund is drawing in AUM. DSP Dynamic Asset Allocation fund did this. They suddenly removed yield gap from its rules and replaced it with 50 and 200 DMA. IDFC dynamic equity removed 200 DMA from its rules and stuck to PE! Old rules are here: IDFC Dynamic Equity Fund: Investment Strategy Analysis. Also, L&T Dynamic Equity Fund removed its PE-based rules!
Franklin Dynamic PE fun has an excellent track record: NIfty-like returns with almost 50% lower risk: Want to time the market with Nifty PE? Learn from Franklin Dynamic PE Fund. They too suddenly decided to include PB into the rule mix from Oct 2019. This is too arbitrary for comfort.
Balanced advantage funds: These are actively managed funds with a quant component (in some of them). So face the standard active fund risk of sustained underperformance.
Smart-beta (strategic funds, only ETFs as of now): These are subject to data-mining risks as noted here: Data Mining in Index Construction: Why Investors need to be cautious. The random changes in investment strategy mentioned above and hocus pocus associated with thematic quant funds could well be examples of data mining.
Data mining here refers to, cherry-picking investment strategies, presenting results over a narrow time period, inadequate backtesting, flawed backtesting among others. Essentially it is analysis with a conflict of interest. Ps. Conflict of interest is everywhere even in academia. For example, a PhD student eager to get a degree. So there should be no surprises when hundreds of crores of profit are involved!
The only quant fund that an investor can safely invest in is one based on a low volatility index. This guarantees lower risk and may outperform (say, the Nifty) from to time. This is not available as an index fund and is unlikely to be.
Therefore the only quant fund an investor can safely choose is a normal Sensex, NIfty or Nifty Next 50 index. It may seem hard to believe, but they are quant funds too!
🔥Enjoy massive discounts on our courses, robo-advisory tool and exclusive investor circle! 🔥& join our community of 7000+ users!
Use our Robo-advisory Tool for a start-to-finish financial plan! ⇐ More than 2,500 investors and advisors use this!
Track your mutual funds and stock investments with this Google Sheet!
We also publish monthly equity mutual funds, debt and hybrid mutual funds, index funds and ETF screeners and momentum, low-volatility stock screeners.
- Do you have a comment about the above article? Reach out to us on Twitter: @freefincal or @pattufreefincal
- Have a question? Subscribe to our newsletter using the form below.
- Hit 'reply' to any email from us! We do not offer personalized investment advice. We can write a detailed article without mentioning your name if you have a generic question.
Join 32,000+ readers and get free money management solutions delivered to your inbox! Subscribe to get posts via email! (Link takes you to our email sign-up form)
About The Author
Dr M. Pattabiraman(PhD) is the founder, managing editor and primary author of freefincal. He is an associate professor at the Indian Institute of Technology, Madras. He has over ten years of experience publishing news analysis, research and financial product development. Connect with him via Twitter(X), Linkedin, or YouTube. Pattabiraman has co-authored three print books: (1) You can be rich too with goal-based investing (CNBC TV18) for DIY investors. (2) Gamechanger for young earners. (3) Chinchu Gets a Superpower! for kids. He has also written seven other free e-books on various money management topics. He is a patron and co-founder of “Fee-only India,” an organisation promoting unbiased, commission-free investment advice.Our flagship course! Learn to manage your portfolio like a pro to achieve your goals regardless of market conditions! ⇐ More than 3,000 investors and advisors are part of our exclusive community! Get clarity on how to plan for your goals and achieve the necessary corpus no matter the market condition is!! Watch the first lecture for free! One-time payment! No recurring fees! Life-long access to videos! Reduce fear, uncertainty and doubt while investing! Learn how to plan for your goals before and after retirement with confidence.
Our new course! Increase your income by getting people to pay for your skills! ⇐ More than 700 salaried employees, entrepreneurs and financial advisors are part of our exclusive community! Learn how to get people to pay for your skills! Whether you are a professional or small business owner who wants more clients via online visibility or a salaried person wanting a side income or passive income, we will show you how to achieve this by showcasing your skills and building a community that trusts and pays you! (watch 1st lecture for free). One-time payment! No recurring fees! Life-long access to videos!
Our new book for kids: “Chinchu Gets a Superpower!” is now available!
Must-read book even for adults! This is something that every parent should teach their kids right from their young age. The importance of money management and decision making based on their wants and needs. Very nicely written in simple terms. - Arun.Buy the book: Chinchu gets a superpower for your child!
How to profit from content writing: Our new ebook is for those interested in getting side income via content writing. It is available at a 50% discount for Rs. 500 only!
Do you want to check if the market is overvalued or undervalued? Use our market valuation tool (it will work with any index!), or get the Tactical Buy/Sell timing tool!
We publish monthly mutual fund screeners and momentum, low-volatility stock screeners.
About freefincal & its content policy. Freefincal is a News Media Organization dedicated to providing original analysis, reports, reviews and insights on mutual funds, stocks, investing, retirement and personal finance developments. We do so without conflict of interest and bias. Follow us on Google News. Freefincal serves more than three million readers a year (5 million page views) with articles based only on factual information and detailed analysis by its authors. All statements made will be verified with credible and knowledgeable sources before publication. Freefincal does not publish paid articles, promotions, PR, satire or opinions without data. All opinions will be inferences backed by verifiable, reproducible evidence/data. Contact information: letters {at} freefincal {dot} com (sponsored posts or paid collaborations will not be entertained)
Connect with us on social media
- Twitter @freefincal
- Subscribe to our YouTube Videos
- Posts feed via Feedburner.
Our publications
You Can Be Rich Too with Goal-Based Investing
Published by CNBC TV18, this book is meant to help you ask the right questions and seek the correct answers, and since it comes with nine online calculators, you can also create custom solutions for your lifestyle! Get it now.Gamechanger: Forget Startups, Join Corporate & Still Live the Rich Life You Want
This book is meant for young earners to get their basics right from day one! It will also help you travel to exotic places at a low cost! Get it or gift it to a young earner.Your Ultimate Guide to Travel
This is an in-depth dive into vacation planning, finding cheap flights, budget accommodation, what to do when travelling, and how travelling slowly is better financially and psychologically, with links to the web pages and hand-holding at every step. Get the pdf for Rs 300 (instant download)