DSP Mutual Fund’s new fund offer (NFO) — DSP Quant Fund — is open for subscription until June 3. Being an open-ended fund, the scheme will also reopen for ongoing purchase shortly after the NFO closes.

Investment strategy

A quant fund is one in which the investment decision or the stock selection is done according to predetermined rules based on a statistical or mathematical model. Unlike active funds where a fund manager chooses his/her investments and the timing of entry and exit, quant funds rely on an automated programme to make these decisions.

The model DSP Quant follows will choose stocks based on parameters such as return on equity, earnings growth consistency, earnings prospects, dividend yield and free cash flow yield. It will weed out highly leveraged companies, volatile stocks and those with undesirable management actions.

The fund will be benchmarked to the BSE 200 TRI and will invest in equity and equity-related instruments (including derivatives) to the extent of 100 per cent. Going by the information made public by the fund house, DSP Quant will have a large-cap-oriented portfolio. The holdings are expected be rebalanced twice every year. The fund will likely follow a buy-and-hold strategy, and will suit investors who have an investment horizon of at least seven years.

The fund will be managed by Anil Ghelani, who is currently Head of Passive Investments and Products.

Pros and cons

The most important advantage of using a pre-programmed model to select stocks is that it eliminates human bias and subjectivity. Using a model also allows consistency in strategy across market conditions. Often, in bearish or volatile markets, active fund managers are forced or tempted to cut positions in certain stocks or shift their investment styles. Since a quant fund follows a somewhat passive strategy, expenses are lower than active funds. Quant funds can also have built-in checks on sector and stock concentration, something which passive funds that mirror indices do not have.

All is not rosy though. Unlike in developed markets such as the US, there isn’t much of historical data available in India to build a robust model that has been tested over several market cycles. DSP Quant, for instance, was back-tested from September 2005 to March 2019.

Elimination of human bias does not automatically guarantee high returns.

The model may not work all times. According to DSP MF, the quant fund may underperform during sentiment-driven/euphoria-based rallies or on market reactions based on actual or expected changes in policies/regulations. The fund house also says that turnaround stories may not be captured by the model as the historical numbers may be poor.

Quant funds are a nascent category in India. There is only one other quant fund in the market — Reliance Quant Fund. But its track record is not inspiring.

However, since each quant fund follows a unique style of investing, each may need to be judged based on its own merits and demerits.

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