Quantitative investing is gaining traction amongst the investors, as it offers rule-based systematically managed thematic momentum strategy for one’s portfolio. Quantitative investing eliminates the investor concerns and avoid risks related to active stock selection, decisions influenced by behavioural biases, etc.

Quant funds are a special kind of mutual funds whose asset allocation, including stock picking, is decided based on a predefined set of rules. Quant funds apply rule-based investing to shortlist and build a portfolio of stocks. In such funds, the fund manager’s role is minimal as it uses a number of pre-determined filters to pick stocks in the portfolio.

When it comes to investing, many investor prefer to invest in a portfolio that offers a systematic approach and prevents any investment decision based on behavioural biases.

Rule-based investing is one of the ways that prevents human bias while investing. It selects stocks based on pre-defined model that uses various parameters. The portfolio created with the help of quant model is adaptive and updated based on the prevailing market conditions to ensure minimisation of risk and optimisation of return. Quant models can be back-tested across multiple scenarios to check the sanity and objectivity of the strategy.

IIFL Mutual Fund has launched IIFL Quant Fund. It is an open-ended equity scheme investing based on quant theme.

On the launch of this fund, Mr Manoj Shenoy, CEO at IIFL AMC said, “The Passive+ approach that the fund follows is based on multiple quantitative factors that have been back-tested and historically proven to improve stock selection capabilities. The model has a fundamental basis with parameters clearly laid out and relies on a defined process while applying the same across a set of comparable stocks.”

Table 1: Details of IIFL Quant Fund

Type An open-ended equity scheme investing based on quant theme. Category Thematic Fund
Investment Objective The investment objective of the scheme is to generate long-term capital appreciation for investors from a portfolio of equity and equity related securities selected based on quant theme. However, there can be no assurance or guarantee that the investment objective of the Scheme would be achieved.
Min. Investment Rs 1,000/- and in multiples of Re 1 thereafter. Additional purchase Rs 1,000/- and in multiples of Re 1 thereafter. Face Value Rs 10/- per unit
SIP/STP/SWP Available
  • Direct
  • Regular
  • Growth
  • Income Distribution cum Capital Withdrawal Option
Entry Load Not Applicable Exit Load 1% if redeemed/switched out, on or before 12 months from the date of allotment
Fund Manager Mr Parijat Garg Benchmark
Issue Opens: November 08, 2021 Issue Closes: November 22, 2021

(Source: Scheme Information Document

What will be the investment strategy for this scheme?

IIFL Quant Fund aims to invest in high-quality stocks (secular and defensive) and capture the passive plus investment strategy where stock selection happens systematically, without any human bias. The scheme will adopt a S.M.A.R.T strategy (Systematically Managed Active Rule based Thematic momentum strategy).

The investment process will be based on thematic momentum strategy. This strategy optimizes momentum factor under certain portfolio constraints. First step will be to review the investment universe of Top 200 companies by market cap and liquidity listed on the National Stock Exchange (NSE) or Bombay Stock Exchange (BSE). Then screening of stocks will be done basis SCDV framework, liquidity and size of the firm.

Once screening of list of stocks is done, each stock will be updated with their momentum factor score. The momentum score will be calculated using stock price and total returns over a period, usually a year, for each stock. The entire portfolio construction process will be fully systematic – starting from screening to the final portfolio generation. The fund house will use its proprietary quantitative models to calculate factor scores. The factor construction will be continuously reviewed and methodology will be based on academic literature and internal research.

The scheme will follow a passive plus investment approach that aims for investment universe of top 200 stocks by market cap and liquidity. It defines momentum based on past returns, adjusted for risk. It has additional filters for selecting quality momentum stocks; and allocates adequate weights with maximum exposure to risk-adjusted momentum while limiting exposure to single security or sector. The scheme will have a periodic rebalancing and review to generate optimal returns.

Under normal circumstances, the asset allocation will be as under:

Table 2: Asset Allocation for IIFL Quant Fund

Instruments Indicative Allocation (% of net assets) Risk Profile
Minimum Maximum High/Medium/Low
Equity or *Equity Related Instruments 80 100 Medium to High
Debt and money market instruments 0 20 Low to Medium
Units issued by REITs & InvITs 0 10 Medium to High

(Source: Scheme Information Document

Who will manage the IIFL Quant Fund?

Mr Parijat Garg will be the dedicated fund manager for this scheme.

Mr Parijat Garg is Fund manager and Senior Vice President at IIFL Asset Management Limited. He is a CFA and computer science engineer from IIT Bombay and has over 13 years of experience in the financial services industry including algorithmic trading, stock broking, and financial data services. Prior to this, he was associated with Quadeye Securities LLP as a portfolio manager and Tower Research Capital (India) as a quant analyst. Currently, Mr Garg has no other schemes under his management.

Fund Outlook – IIFL Quant Fund

IIFL Quant Fund aims to invest in high quality stocks and follow a momentum-based investment strategy to gain higher risk-adjusted returns. The scheme will invest in outperforming stocks of the BSE 200 universe, but will also look for companies with high return on equity.

This scheme follows passive plus investment approach and offers systematic and rules-based stock selection decisions. The quantitative model picks stock based on momentum theme with in-built quality filters (stocks that show secular or defensive characteristics) and risk management tools (sector and stock constraints).

IIFL Quant Fund will follow the strategy that is fully systematic and rules-based and therefore the stock selection will not be swayed by emotions. This strategy will eliminate the risk of any decisions taken by the fund manager based on behavioural biases and stock selection process is managed systematically.

The scheme will invest in unique proposition of a fundamentally driven quantitative approach that has diversified portfolio across sectors and across market caps, which aims to outperform across market cycles. This strategy would help investors to diversify their portfolio of mutual funds through novel approach of investing.

However, being a thematic fund, one of the risks associated with this quant model theme is the time it may take for a quant model to adapt to new developments in market conditions and the economic dynamics. This could lead to delayed decision making towards the portfolio and may lack to provide you with the best possible returns.

IIFL Quant Fund is suitable for investors seeking to invest in an active portfolio of stocks screened, selected, weighted and rebalanced based on a predefined momentum factor model. However, investors should ensure that they have a high-risk appetite and a long investment horizon of at least 5-7 years.

This article first appeared on PersonalFN here

Leave a Reply

Your email address will not be published. Required fields are marked *