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Rule-based investing can give high returns, lower risks

Personal Finance | Published on Aug 11th 2017 | Comment(s) 0
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Equities have generated an average post-tax annualised return of 17% in the past 15 years. This return is much higher than other assets such as Fixed Deposits, Gold and Real Estate. However, equity investing presents unique challenges. Choosing the best investments out of the 4000+ stocks is a challenge for even the most seasoned investment expert.

When investing decisions rely more on emotions rather than hard facts, it results in retail investors buying high and selling low. Even, investment experts are prone to bias. Investment experts interpret financial data and global events through the lens of their investment philosophy. Investors have to digest lots of information and react to news events on a daily basis. However, not all events have a material impact on the long-term investment outlook of a stock.

Artificial intelligence is a way of dealing with information overload and biased thinking. A rule-based approach towards investing is an approach with clearly defined rules that maximises returns while also controlling risk. Artificial Intelligence tests investment theories to find the rules that pick the best stocks for an investor to buy. Those rules are tested in millions of combinations to find the combination that gives the best returns with the smallest possible loss.

Moreover, with automation and artificial intelligence, it is possible to analyse the complete equity universe to find more opportunities than a traditional manual setup. In addition, integrating a rule-based approach with a robo-advisory platform gives users a customised investment plan that meets all their needs.

Globally, assets under management in rule-based investment products like Smart Beta ETFs alone crossed 592billion$ by June 2017. Amongst the most successful hedge funds in the world, AQR and Renaissance Technologies have been using the rule-based approach for decades to generate higher compounded returns than traditional mutual funds. Joel Greenblatt, a highly successful US fund manager and a proponent of rule-based investing was able to generate a return of 31%. These investors have even outperformed legendary investors such as Warren Buffet.

Until recently, rule-based investment tools and robo-advisory were not available to Indian investors. But now, brokers and advisory services have begun offering such products to individual investors. With the growing adoption of rule-based investing, retail investors now have the ability to earn market-beating returns with lower risk.

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