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Are you becoming more interested in investing in index funds and fulfilling your goals? As of July 31, 2023, the total Assets Under Management (AUM) under index funds stood at Rs.1.8 lakh crore in India up from Rs. 94,589.50 crore in July 31, 2022 i.e. almost 90% up in one year.

So, why are investors getting hooked on index funds? Let’s find out.

1. Ease of understanding

Picking the right mutual fund is crucial for achieving investment returns. However, everyone only has a little time and know-how of the funds to select the right fund. Here comes index funds, which mirror specific market indices and invest in the same underlying assets as the market index and in the same proportion. This helps the investors easily acquire knowledge of the underlying assets and helps in tracking the fund’s performance by comparing it with the market index itself.

2. Lesser expenses

The fund managers of index funds do not have to pick the underlying securities, such as stocks or bonds, for the fund, nor do they have to reallocate the assets from time to time. Due to this reason, the expense ratio of index funds is lower than actively managed funds, where the fund manager has all the responsibilities and rights to choose the underlying assets and change them according to market conditions.

3. Correlated returns

Since the index funds replicate the market index it follows, the returns of the fund are positively correlated with the movement of the index. For instance, suppose an index fund mirrors the Nifty 50, and the index rose by 10% in the month. Look at the Nifty 50-linked index fund. You will find that the price of one unit of the mutual fund, i.e., Net Asset Value (NAV) of the fund, had also increased by around 10% in the same period. This makes tracking the performance of the funds easier for investors.

4. No fund manager’s bias

Fund managers decide the underlying assets of any mutual fund except for index funds. Here, the fund manager must maintain the exact ratio of each underlying security as per the benchmark index. For instance, if an index fund is linked to the Nifty 50, then the fund manager has to invest in the same fifty stocks that are in the Nifty 50 index. Moreover, the ratio of each stock has to be the same in the fund as in the index. This leads to no fund manager’s bias, which helps investors get returns similar to the index.

5. Index funds’ investment strategy

Most of the mutual funds try to outperform the benchmark index they track. However, the index funds investment strategy is not to beat the benchmark but rather to replicate it. This makes the index funds suitable for investors looking for returns similar to the index.

6. Tracking error

Every mutual fund has a benchmark index that is used to measure the fund’s performance. In actively managed funds, the fund manager aims to beat the returns the benchmark indices offer.

However, the index fund aims to match the benchmark’s returns. The difference between the fund’s and benchmark’s returns is called the tracking error. We can say that the index fund with a low tracking error has done better at replicating the underlying index than an index fund with a higher tracking error.

7. Different types of index funds

Index funds can be categorised based on the type of the underlying benchmark index. There are:

Broad market index funds are linked to broader indices such as Nifty 50 and S&P 500.

Market capitalisation index funds are linked to indices comprised of companies’ stocks falling under certain market capitalisation.

Smart Beta Index Funds are linked to indices that follow certain factors or investment strategies. There are also thematic index funds linked to indices with specific investment themes and strategies.

Sector-based index funds are linked to indices with stocks of any particular sector, for instance, Nifty IT or Nifty Bank.

Debt Index Funds are linked to bond indices or any other fixed-income indices.

Commodity Index funds are linked to indices having commodities in them, such as the Gold Index.

Wrapping up

Index funds have emerged as a powerful tool for achieving financial goals. Their simplicity, low expenses, and ability to deliver correlated returns with benchmark indices make them popular among investors.

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Are you a Non-Resident Indian (NRI) considering settling down in India? If so, there are several essential things to keep in mind before making a move.

In this article, we’ll explore some of the critical financial things NRIs should consider when settling in India.

But first, let us talk about the RNOR status.

A Non-Resident Indian’s status transforms from “non-resident” to “Resident but Not Ordinarily Resident (RNOR)” when they move permanently back to India. RNOR is essentially a temporary status granted to NRI returning to India before becoming legal citizens.

To have the RNOR status, you must have resided outside India for at least 729 days out of the previous seven fiscal years, or you must have been an NRI for nine of the ten financial years prior.

However, after three years, you automatically become a regular Indian citizen, and your income and gains on investments are taxed accordingly.

Bank Accounts:

Undoubtedly, bank accounts are the first thing you need to handle when you come back to India.

As an NRI, you might have a Non-Resident External (NRE) account or Non-Resident Ordinary (NRO) account. These are rupee-denominated accounts that can be opened in the form of savings, current or term deposits. NRO accounts let NRIs handle their income earned in India, whether rental income, dividend or interest. An NRE account is used for parking foreign earnings, which are free to be repatriated.

But now that you are back in India, you will have to convert your NRE/NRO account to a regular savings account. It is important to convert your account, as a delay can cause trouble.

Fixed Deposits:

When we talk about fixed deposits, as an NRI, you might hold NRE/NRO FDs or FCNR Account (Foreign Currency Non Resident) deposit accounts.

In the case of NRE/NRO FDs, you have to convert them to regular fixed deposits, just like the savings account with a guaranteed interest rate. However, the interest would be taxed according to your income tax bracket.

FCNR deposit is a type of account that enables non-resident Indians to park money in a foreign currency and earn tax-free returns. These deposits range from one to five years for specific currencies such as USD, Australian and Canadian dollars, Sterling pounds, Yen and the Euro. You might hold it till maturity. But if you desire to keep holding the foreign currency, you will need to convert it into a resident foreign currency (RFC) account.

Mutual funds

If you already have mutual fund investments in India, you must notify your bank of the shift in your residency status as soon as feasible. By doing this, you can make sure that any modifications to your mutual fund assets, such as liquidations or top-ups, go off without a hitch.

Stock investment

If you have a Portfolio Investment Services (PIS) account, you will have to close your account and open a regular brokerage, or Demat account meant for regular residents.

Insurance policies

After you return to India, you must buy insurance policies covering your life and health. The reason for this is that insurance policies purchased in another country will not be valid in India.

Physical assets:

You can continue holding your investments, such as land and buildings, even after becoming a resident individual. As per Section 6(4) of FEMA, you can keep your foreign assets without seeking any permission from the Reserve Bank of India or any other regulatory body. It doesn’t require any planning on your part. When you become a resident of India, you will have to pay income tax on your overseas property income.

Conclusion:

Settling down in India as an NRI can be an exciting but daunting prospect. However, by taking the time to prepare and plan, you can ensure a smooth transition and a successful move.

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Quant funds, also known as quantitative funds, are a type of mutual fund that combine the principles of mathematics, data, and computer science to build an investment portfolio or a fund. These funds use algorithms to analyse vast amounts of data to identify trends, uncover correlations, and make investment decisions. Quant funds are relatively new, but they are quickly growing in popularity due to their ability to provide better returns than traditional funds.

In this article, we talk all about Quant Funds.

How Quant Funds operate

Quant funds rely on investing techniques that are algorithmic or systematically programmed. As a result, they don’t base their investment decisions on human managers’ expertise, wisdom, or viewpoints.

Various quant-based models have different trading signals, such as economic data and company news. Quant funds develop complex models around momentum, quality, value, and financial strength, utilising their custom algorithms created employing cutting-edge technologies.

Different money managers have their quant investment framework. For example, V-L-R-T​ is the investment framework for Quant Mutual Fund. V stands for valuation, L for liquidity, R is risk appetite, and T is time which is being aware of the cycles that control the interaction of the other three elements.

Unlike an actively managed fund, where the fund manager plays an active role in researching and taking investment decisions, the quant fund manager only implements any small-scale portfolio adjustments that are to be made. The fund manager’s daily responsibilities are restricted to keeping an eye on the fund’s performance and ensuring the portfolio is in line with the model’s predictions.

Much of the quant model’s labour-intensive testing and simulation is done before the quant fund is introduced, and the fund manager oversees the model’s improvement over time as the markets change.

It is known as quantitative investing. They are also known as quantitative funds since they utilise quantitative analysis rather than fundamental analysis.

The emergence of quant funds and the rise in the number of big data-related solutions was spurred by more accessible access to a wider variety of market data. The data sets that quant fund managers may deal with have greatly expanded thanks to advancements in financial technology and rising innovation in automation, providing managers with ever more robust data feeds for a more exhaustive examination of scenarios and time horizons.

Types of Quant Funds

In India, quant funds often use “single factor” or “multi-factor” based models, which are intended to narrow the fund’s investing universe down to a “model portfolio” based on these characteristics.

Single-factor quant: These are the most prevalent type of quantitative method. These have typically revolved around ratios that include valuations expressed through P/E, P/B, and dividend yield, etc., quality expressed through ratios like return on equity and return on capital employed, etc., or volatility expressed as Standard Deviation and Beta.

The companies belonging to the investment universe are ranked and chosen based on one or more of these variables individually. The shortlisted companies will be featured in the final portfolio.

Multi-factor quants:

Due to the market’s complexity and volatile nature, there isn’t a single method, approach, or point of view that can consistently outperform others. Many factors are constantly interacting with one another in many ways. And this gives rise to a multi-factor quant model.

These models incorporate two or more elements intended to produce a finer result regarding greater returns and generally reduced risk. As a result, these components are thoroughly tested to determine if they work well together and are continually assessed to make adjustments as new information becomes available.

Benefits of Quant Mutual Funds

Here are some of the benefits of investing in a Quant Mutual Fund:

Data-Driven Decision Making: Quant funds use data and sophisticated algorithms to analyse market trends and make investment decisions as per the fund’s mandate. As a result, the fund is free from emotional biases that might sometimes impact traditionally actively managed funds.

Increased Efficiency: As these funds are based on algorithms, they can analyse vast amounts of data in real time and quickly make changes as per the current events and market movements.

Potential for Higher Returns: Quant funds use advanced techniques to identify and capitalise on market inefficiencies. Their shorter reaction time also allows them to take quick investment calls, potentially leading to higher returns for investors over the long term.

Professional Management: Just like a regular mutual fund, a quant fund is also managed by experienced fund managers who use their expertise and technology to make informed investment decisions.

Disadvantages of Quant Mutual Funds

It’s important to note that while quant mutual funds have many benefits, they also have disadvantages. Here are some of them:

Difficult for investors to understand: As we have seen earlier, quant mutual funds rely on complex algorithms and data analysis to make investment decisions. This complexity can make it difficult for investors to understand how their investments are being managed.

Dependence on technology: These funds rely heavily on algorithms to make investment decisions. It can result in the underperformance of the fund if the algorithms set by the fund manager are flawed.

Lack of human judgment: While the lack of emotions from investment decisions might be a positive factor, the lack of human judgment in the decision-making process can result in missed opportunities or poor investment decisions.

Linked to market: Just like regular mutual funds, quant mutual funds are also subject to market risk and can experience losses if the market performs poorly. Additionally, funds might also underperform compared to their peers in the fund category.

List of Top Quant Funds

Many fund houses have launched quant funds under the thematic fund category.

Here are some of the top-performing quant funds:

Quant Flexi Cap: Quant Flexi Cap is the top performer in the flexi cap category in the three-year and five-year horizon with 35.58% and 17.95% returns as on 10^th Feb 2023. NIFTY 500 TRI is the benchmark of the fund. This fund has assets worth ₹990 crores as on 31^st Jan 2023. The fund has a higher portfolio turnover of 84% compared to its peers.

Quant Quantamental Fund: This fund is a thematic fund that can be compared to other quant funds of the different fund houses. This fund is ranked third in terms of its one-year return of 17.43%.

Nippon India Quant Fund: Nippon India’s Quant Fund ranked 10^th out of 35 funds in the thematic fund category with a one-year return of 5.96%. The fund has delivered a three-year return of 17.81%. The AUM of the fund is ₹35 crores.

Quant Focused Fund: The fund is the top performing actively managed large cap fund with a three-year return of 22.95% return. It also has a stellar performance with a 10-year return of 17.40%.

Conclusion:

Quant Funds are gaining popularity among investors as they are performing better than their peers. The working of these funds is more complicated than traditional funds, but the easiest way to understand a quant fund is to think about a fund that employs algorithms to determine which stock is likely to outperform the market by considering the various factors that make up the model.

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