How AI helps fund managers invest in mutual funds

An AI-powered mutual fund leverages artificial intelligence and machine learning (ML) to enhance investment decision-making, portfolio construction, and risk management. Unlike traditional funds, which rely primarily on human expertise and fundamental analysis, AI-powered funds combine human oversight with advanced algorithms to process vast datasets, identify patterns, and execute strategies with speed and precision.

“JioBlackRock’s fund, for instance, employs BlackRock’s Systematic Active Equity (SAE) approach, which integrates AI with alternative data sources such as consumer behaviour trends, social media sentiment (e.g., from X posts), satellite imagery, and supply chain metrics alongside traditional financial data like earnings reports and price-to-earnings ratios,” explained Atul Shinghal, Founder and CEO, Scripbox. 

“These algorithms analyse thousands of data points in real time to identify undervalued stocks, predict market trends, and optimise portfolio allocations across market caps. Human fund managers oversee the process, ensuring alignment with the fund’s objectives and SEBI regulations,” he added.

The AI system continuously analyses extensive market data, including financial statements, news sentiment, macroeconomic indicators, and stock price trends, to identify real-time opportunities and risks. This innovative method minimises human bias, enabling the fund to adjust its exposure across different market capitalisations based on current market conditions.

"For instance, if the AI models indicate a greater growth potential in mid-cap stocks compared to large-cap ones, the system can quickly rebalance the portfolio accordingly. Additionally, AI-enhanced risk management tools monitor volatility and correlations, protecting against potential downturns," says Dr. Abdul Hameed A, Professor & Associate Dean – Alliance School of Business.

Benefits for investors

For retail and institutional investors, AI-powered mutual funds offer several advantages. It can offer superior returns. “The ability to process vast datasets and react swiftly to market changes may lead to better risk-adjusted returns compared to traditional funds,” said Shinghal. It can provide diversification. The flexibility to invest across market caps, combined with AI’s data-driven insights, ensures broad exposure tailored to market conditions.

"For investors, this means a possibility of enhanced returns through intelligent diversification and proactive decision-making. The primary benefit lies in its ability to capitalise on opportunities throughout the entire market in line with shifting economic cycles. Essentially, an AI-powered mutual fund combines human insight with machine intelligence to provide a more agile and data-driven investment journey," adds Hameed.

Additionally, it may help reduce the expense ratio, making these funds accessible to a wide range of investors, particularly tech-savvy millennials and Generation Z.

Also, Sebi’s proposed guidelines on AI in financial markets emphasise explainability, ensuring investors understand how AI-driven decisions are made.