The use of Quant Mutual Funds in India

The quant mutual funds are making an entry in India. After Lotus India AMC has launched a Quant Mutual Fund, Reliance Mutual Fund has converted its index fund to a quant fund. ET says:

Reliance Quant Plus Fund  will invest at least 90 per cent of the assets in an actively managed portfolio of 11 to 15 stocks  from S&P CNX Nifty index on the basis of a mathematical model. The model will shortlist stocks on the basis of stock price movement and financial/valuation aspects, the fund house said. 

I don’t mind these quant funds but converting an index fund into a quant fund surprised me. I still don’t know why index funds are not treated at par in India. This also brings me back to a point I have made earlier- Are our markets getting efficient? If they are we should perhaps be seeing active funds being converted to a passive fund, not the other way round.

Moreover, the conversion is not to an active fund but a quant fund. The recent Phelps article and Mint edit points the dangers of these quant models and financial engineering.

Above all these funds are being offered to the retail investors!! Do they expect a retail investor to understand these funds? The Lotus Fund has about 230 cr of assets under management. I don’t know how much is retail but it is scary. Lotus also has a tax saver fund based on quant models.

These funds would say we disclose the information and the investor can decide whether to invest or not. I don’t really agree as financial literacy is low worldwide and people don’t understand even simple concepts of finance (even high literate ones). This paper points how investors’ investment in equity markets increases with sensex where it should be the other way round. So to expect them to understand a mathematical model is asking for too much.

It will be better if we concentrate on basics and simpler mutual fund schemes. Alternatively, these funds should only be for institutions and not retail.

5 Responses to “The use of Quant Mutual Funds in India”

  1. Deepak Shenoy Says:

    I would disagree – these funds can be used by retail who understand them, and the sophistication among investors is increasing. But this is not a sophisticated fund. It’s a long only fund that has zero hedging, plus they restrict themselves to nifty stocks (what a waste of effort). It’s like running a race facing backwards with your legs tied.

    Still, better quant models can be used to generate better quality returns. That means hedging, risk adjustments and appropriate testing – remember, quant models are decried as a whole but it’s not quant, it’s the application that is faulty. Modelling is used everywhere, even in insurance, and that is quite a valid business – so is quant.

  2. Amol Agrawal Says:

    It will be a useful exercise to see how models fare in insurance industry. So far the focus in on hedge funds, mutual funds. Very little research has been done on models of insurance inductry. Whatever the sophistication of the model, it is at best limited. It only works in good times and fails miserably in bad times. You just can’t predict how stock prices are going to move, no matter what your model is.

    As far as the Quant MF selling to retail is concerned, majority of investors don’t understand the fund mechanics. They invest on the basis of the return generated. They may be getting sophisticated but that is a very little percentage. And quant funds can’t be understood by the best brains. Like what you say – “It’s a long only fund that has zero hedging, plus they restrict themselves to nifty stocks”. How many would understand that statement? And if they don’t what is the point of selling to the retail investor??

  3. lvs Says:

    Do you know what percentage of funds in India use mathematical models?

  4. Soham Das Says:

    @Ivs,

    If you ask me, then till now only two… Indian Investment scenario is still languishing in stone age when you compare with int’l hubs like Zurich,Madrid, York or London…

    Quant Funds are no doubt a rare phenomenon in India, when just last April DMA was allowed.

  5. The Wall Street Culture that led to crash « Mostly Economics Says:

    […] over MF expenses. There is hardly any reporting of returns after netting expenses. There is hardly any advertisement for passive funds/index funds. The tracking error of index funds I am told is quite high which also […]

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