IIFL Quant Fund NFO

IIFL Mutual Funds has launched Quant Fund NFO from 8^th November 2021 onwards. The subscription closes on 22^nd November 2021. The scheme reopens for continuous purchase/sale from 6^th December 2021. This is an open-ended mutual fund scheme. The minimum lump sum amount to be invested is Rs. 1000 and NAV of the fund is Rs. 10 during NFO period. There shall be no entry load, but the exit load is 1% if redeemed within 12 months. Benchmark is S&P BSE 200 TRI. Maximum TER is capped @ 2.25%. Name of the Fund Manager is Mr. Parijat Garg.

After understanding the basic information let’s have a look at the reasons why one should invest in the IIFL Quant Fund NFO-

1. The fund offers a diversified portfolio across sectors and market caps. With a quantitative approach, the fund’s aim is to outperform across market cycles. 
2. The fund is based on SMART Strategy that’s Systematically Managed Active Rule Based thematic momentum strategy whereby the investors can diversify their mutual fund portfolio. 

How does the SMART Strategy work?

Following certain portfolio constraints, this strategy optimizes momentum factor. It reviews the Top 200 companies by market cap and liquidity listed on NSE (National Stock Exchange) or BSE (Bombay Stock Exchange). Stocks are screened based on SCDV framework. Where S stands for Secular-meaning the secular businesses have demonstrated the ability to generate returns consistently. C stands for Cyclicals, includes businesses that are cyclical and economy sensitive and are more capital intensive as well. D means Defensive, businesses which show lesser profit growth and high ROE. And V means Value Traps meaning-the businesses which generate value in a short term but will trap the investment if you hold it for a longer period. 

Once the list of stocks is screened, each stock is updated with their momentum factor score. It is calculated using stock price and total returns for each stock, over a period, which is usually a year.

The investment objective of IIFL Quant Fund NFO-

Based on a quant theme, the aim of this NFO is to create a long-term capital appreciation for investors from an equity and equity related securities portfolio. The investment objective of the scheme cannot be assured nor guaranteed. 

Allocation Pattern

Major risk factors

These mainly include,

1. The rule-based approach on medium to long term may not work. 
2. The investment in derivatives is up to 25% making it a high-risk investment.
3. The investment up to 10% in REITs and InvITs also make it a high-risk investment. 
4. The 20% allocation in debt instruments means it has interest rate risk, liquidity risk, default risk and reinvestment risks.

A quant fund which that has existed for more than 10 years has lowest fund size and raises concerns for investors to be cautious. 

If we study the past performance of Quant theme based mutual funds, we can find that there is only one fund having ten plus years of performance which is Nippon Quant Fund with AUM size of Rs.31 Crores. It should be noted that SMART Strategy based funds got a good response in the recent past but except for Axis Quant Fund, there aren’t many such funds getting investor’s attention and are able to gather less than Rs.50 Crores of AUM. Nippon Quant Fund’s one-year returns were as high as 54%, five-year annualized returns were 14%- and 10-year annualized returns were 12%.The quant theme-based strategy can vary from fund to fund. Quant funds provide moderate returns in the medium to long term. Basically, such funds are meant for high-risk investors seeking moderate returns.  

Quant funds operate based on a set of rules and free from fund manager bias, yet the way their stock selection is made is not transparent. Investing and portfolio construction of these funds are carried out with minimal human intervention using Artificial Intelligence. The extent of human error is almost eliminated. Emotional and other behavioral biases too can be avoided. F

The fund managers can make minor changes to the model when required. The models use past data and variables like trading value, beta, yield, volume, liquidity, momentum, alpha, etc. to arrive at a future price. There are Quant Quanta mental Fund, SBI Equity Minimum Variance Fund and Tata Quant Fund working on this model. It is difficult to compare them against the benchmark indices, but S&P BSE 200 or Nifty 200 total return Index are better yardsticks to compare with. Each of the funds use a model ‘propriety’ stock selection method and these methods are not transparent. 

As an investor you should understand fund model and assess the benchmark for its performance comparison. Qualitative and intangible parameters like business ethics and efficiency of the board should not be missed out while investing.

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Krishna Rath is a SEBI Registered Investment Adviser, and since 2015 has been educating netizens on investments and insurance. Krishna is a fee only SEBI RIA and is Odisha's first SEBI RIA. With background in IT, Krishna is changing the advisory space with new innovations in AdvisoryTech.

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