Skip to main content

NOW, COMPUTER IS YOUR FUND MANAGER

Lotus MF launches India’s first quant mutual fund scheme

If you do not trust the abilities of a fund manager to consistently pick winning stocks, perhaps you would trust a computer to do the same. That’s what quantitative – or quant funds worldwide do – instead of allowing their fund managers to do stock-picking, they pick stocks based on a quantitative analysis by computer-based models. This is one of the growing breed of mutual funds (MF); in the US, the assets under management of quant funds are at $1.9 billion in 2007, up from $0.2 billion in 2003. Expect quant funds to slowly reach Indian shores as Lotus India MF has launched India’s first quant fund, called Lotus India Agile Fund (LIAF).

The formula
LIAF is an equity fund that will be passively managed and run purely on the basis of a mathematical formula devised by the fund house. For starters, it will consider only those scrips with a market capitalisation and floating stock equivalent to or more than the least market capitalisation and floating stock of Nifty index, respectively. Further, scrips must have a price history of at least one year and should belong to a sector whose scrips are present in Nifty.

Based on the stocks that the above filer will throw up, LIAF will pick up the top 11 stocks after running a formula. It will invest nine per cent in all these 11 scrips, in equal proportion, and the remaining one per cent in cash. In other words, LIAF will have only 11 scrips. As LIAF is an open-ended fund, any subsequent inflows will be equally distributed into these 11 stocks. LIAF will run the formula at the end of every month and rebalance its portfolio subsequently.

If the formula run in a particular month throws up a fresh list of stocks, different from the ones LIAF presently folds, LIAF will exit all its existing holdings and invest in the fresh list so generated. Lotus MF did not reveal the formula that would help pick these 11 stocks. “Revealing the formula would give away the scheme’s way of management, and that any other fund house could easily duplicate the scheme”, says Rajiv Shastri, Head-business development and strategic initiatives, Lotus MF.

Should you invest?
Unlike diversified equity funds, quant funds are passive. However, they are more active than index funds and try and generate returns in access of market returns by means of devising a smart formula that the fund hopes would work across market conditions. And therein lays the trick. Note that although the formulae are computer-based, they are devised by the fund management team and therefore do not completely eliminate the human element.

So, how do you analyse a quant scheme’s worth when it does not have a track record? Lotus back-tested this formula and ran a simulated scheme (based on the same selection criteria) from 1998 up to date. LIAF returned 26.31 per cent one-year rolling returns over a period of six years, as against Nifty’s 11.09 per cent, for the period ending September 30. It replicated its success over Nifty during the 2000 stock market crash and the subsequent lean period as well.

Having tasted success for the past 10 years gives us confidence that LIAF should do well over a long time. Invest.

Comments

Popular posts from this blog

US-64 DRAWS TO A CLOSE; WHAT SHOULD YOU DO?

As the country oldest mutual fund scheme, now US-64 Bonds, are set be redeemed, it’s tough to find an equally alternative investment. There are some that come closeThe oldest mutual fund scheme in India, Unit Trust of India (UTI)’ Unit Scheme – 64 (US-64), will soon be no more. After more than 40 years of existence, curtains will fall on the US-64 bonds that mature on 31 May 2008. UTI has already sent out letters to all bond-holders about the redemption; investors are told to submit their original certificates, take their money back and leave.

For investors like Kolkata-based, Kumaresh Mukherjee, 72 it’s the end of an era. Soon after he retired from Philips India, he invested his provident fund corpus in fixed – return instruments like company fixed deposits. An electrical engineer by profession, in 1995 he also invested Rs 12 lakh or around one-third of his retirement corpus in the erstwhile US-64. After years of above-average returns, then trapped doors and turmoil that shook the Ind…

Pay Credit Card Bills Through ATMs

Tired of being ignored by ICICI Bank credit cards by being left out of their premium services despite being a loyal customer, I got myself a new credit card by HDFC Bank. It's another thing that HDFC Bank promised me a gold card with a higher spending limit, but then threatened to give me a silver card. When I strongly protested to their ways, they issued me a gold card, but with a much-lower-than-promised spending limit. I think the credit card companies ought to be made more accountable through stricter laws that are widely publicised (I recently read an RBI advertisement in the paper that if a credit card company rejects your application for a credit card, it has to give the reasons in writing; I never knew that!!!) and ought to made to pay for promising one thing, but delivering something totally different. SBI Cards too chased me for a month last year and promised to give me a platinum card with a high spending limit. What I finally got was a much-watered down Gold Card with …

My first ever Rajdhani experiance

As a kid, the Mumbai-New Delhi Rajdhani Express used to be this legend that I dreamt often. Although train travel was an integral part of my childhood, Rajdhani remained a distant dream. A dream that only zipped past me at 120 km/hr overtime I saw it. A dream that announced it arrival from a great, great distance by the sounds of twin diesel locomotives and its generator cars at either sides of the rake. A sound that was as intimidating to rail enthusiasts like me as a Bullet motorcycle is to a biker. In those days, it used to be hauled by two diesel locomotives so that it wouldn't need to spend much time at Vadodra station changing its locomotives. One of the two diesel locos would detach itself from the train and the other one who simply haul it al the way to Delhi. When I used to go to Valsad during some of my summer holidays at my cousin's house, it was a ritual. Take a picnic basket, leave the house at sharp 6, go to the yard just before the station, position ourselves on…