IIFL Quant Fund NFO review: Should you invest?

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© Sunil Matkar IIFL Quant Fund NFO review: Should you invest?

IIFL mutual fund (MF), has launched a new scheme that is just its second in the equity category. The new scheme is the IIFL Quant Fund. Although the fund house has been around since 2011, its current offering is only the IIFL Focused Equity fund. On the other hand, IIFL has a much larger presence in the PMS and AIF spaces, which cater to high net-worth investors. It manages worth Rs 25,000 crore and Rs 32,000 crore, respectively, under the segments mentioned earlier.

With heavy competition in the mutual fund industry, will IIFL MF succeed?

What is the scheme about?

A quant or a smart-beta fund (in industry parlance) uses a combination of rules to pick investment ideas.

As a set of rules guide the fund’s investment decisions, there is no active fund management involved in taking buy or sell calls.

The IIFL Quant Fund will follow a momentum-based investing strategy. It will invest in the outperforming stocks of the BSE 200 universe, but will also look for companies with high return on equity. “We look for companies that have had RoEs of over 15 percent,” says Parijat Garg, fund manager at IIFL MF.

“In the long-term, if you see what has created most value in Indian markets, it has been a combination of growth and momentum in terms of pure factors. So, that is what we are starting with,” says Anup Maheshwari, chief investment officer, IIFL MF.

What works

The IIFL Quant Fund will stick to a 3 percent limit on each stock investment at the time of rebalancing its portfolio, which will take place every six months.

So, at the time of rebalancing, even stocks that have outperformed will be brought back to 3 percent allocation. The scheme is not an equal-weight fund, so some stocks might still have a smaller allocation.

“This will give better diversification to the scheme and limit the impact on the portfolio if any stock starts to see deep corrections,” Garg points out.

The fund will try to keep sector weights within a reasonable range of weights in the S&P BSE 200 Index and not align those with the S&P BSE Momentum Index. Sector weights can be lopsided in the momentum index as weights of outperforming sectors keep rising, since the strategy is designed to capture that.

The fund will be benchmarked against the S&P BSE 200 Total Return Index (TRI).

“Momentum-based funds amplify the prevailing market outlook, which has the potential to do quite well in Indian markets as growth investing has done better in India than value investing,” says Anubhav Srivastava, partner and fund manager at Infinity Alternatives.

What doesn’t

The fund portfolio will get re-balanced every six months. So, the scheme may take some time to adjust the portfolio if stock prices of certain companies start to lose momentum and witness price declines.

At the same time, there could be a certain delay in identifying new stock picks on the way up. Such delays could lead to periods of underperformance.

While the fund will follow rules that will limit its concentration to certain stocks and sectors, the scheme portfolio will still be exposed to stocks and sectors that are in favour. Vishal Dhawan, founder and chief financial planner of Plan Ahead Wealth Advisors, says that stock prices of in-favour companies can also be the ones to correct the most when stock markets go through periods of sharp volatility.

Moneycontrol’s take

The fund house has done well so far with its sole equity fund. The IIFL Focused Equity has generated compounded annualised returns of 17.5 percent since its launch in 2014. However, a quant fund is still a new category in the MF industry. IIFL Quant is a momentum fund, but one that will stick to certain limits on its stock allocations. Investors may be better off waiting for the fund to build a track-record before considering the scheme. The NFO is open till November 22, 2021.