Quant Funds

  Quant funds are a type of mutual fund that use data-based models for selecting stocks in the portfolio. Here, stocks are selected on the basis of pre-defined rules. A data-driven approach is followed in this method of investing, where human intervention is limited to designing the approach and the model. Quant funds are at a nascent stage in India, but offer a wide scope for diversification of investing strategies in one’s portfolio.

A fundamental data-based approach is used by setting parameters to arrive at a portfolio for informed decision-making. The criteria may include a combination of parameters across investing styles such as Quality, Growth and Value, which creates a good balance. For example, value parameters will score stocks based on factors such as, Price to Earning (P/E), Price to Book Value (P/B) and Dividend yield (D/P) parameters. Similarly, quality parameters include Return on Equity (ROE) and Debt-to-Equity (D/E) ratio. Growth parameters may include Earning Per Share (EPS) variability in the previous 5 years, etc.

After eliminating stocks from a larger universe as per the pre-defined criteria, stocks are scored along each of the parameters, and further weighted or sized using risk measures, sectoral limits, liquidity, and other important factors.

Apart from stock selection, these funds typically rebalance the portfolios periodically and also on an ad-hoc basis, that is, whenever the need arises. 


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