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equity investing: What should an investor know about AI, Robo and Algo-based equity

In the last few years, the way we invest has rapidly evolved with the emergence of new approaches, thanks to technology.

Financial planning and equity-based investment have always been challenging tasks for new investors. With thousands of companies to evaluate and hundreds of parameters to consider before making an investment decision – the complexity of the process is high and there is risk involved in investing in stock markets.

Today, with the help of technology, even those who do not have a complete understanding can invest in the equity markets.

However, one needs to be careful as there are different technology-based investment options, and each serves a purpose.

Robo-based Investing
It is an automated investment service that offers financial solutions to you based on algorithms and mathematical rules after analyzing your specific needs. It is more on the advisory side.

Robo-advisory companies help you plan your goals, build a portfolio, etc. They look at your overall financial goals and are not specific to equity. When it comes to equity investment, they recommend low-cost ETFs or mutual funds.

Although, in theory, Robo-advisors are meant to work with minimal human input, in practice, most Robo-advisors are simplistic and human intervention is there while providing advisory, especially if you are looking for direct equity investment.

Even though you want to use technology, you are not doing it completely, and hence it does not serve the purpose, and in some cases, the mix of the human brain and machine’s intelligence may not give the best results to investors.

Algo-based Investing
This is more for traders than investors. If you want to place multiple trades, you can use Algo-based trading. Algorithmic trading uses computer programs that follow a defined set of instructions (or algorithm) to place a trade. These are superior to humans as they can generate profits at a speed and frequency impossible for a human trader.

However, there are limitations to it. They may not be able to anticipate major falls or rises due to market news. For example, recently, the RBI surprised the market with an unplanned rate hike. The market crashed within minutes.

A human trader can predict the outcome of such events better than Algo-based trading. Algo-based trading can cause heavy losses to an investor in such situations. They are a good trading option but not full proof, and investors/traders should understand the risk before using them.

AI-based investing
AI enables machines to imitate intelligent human behaviour to solve complex problems. AI-based investing helps investors pick stocks based on their risk profile and investment horizon, it also analyses investing behaviour of investors. AI proves to be a differentiating factor to generate Alpha for investors. Also, unlike Robo-advisory, AI-based investing can recommend specific stocks and customise portfolios for each individual investor.

For example, if you want to invest Rs 50,000 today in the market, an AI-driven platform will scan all the stocks on millions of data pointers and select ones with maximum upside potential.

A month later, after seeing your gains, your friend decides to invest the same amount – AI will recommend different stocks to him. It will depend on his risk profile and investment horizon. Hence, AI-based equity investment is completely personalized and there are no generalized solutions. Also, there is zero human intervention in the stock selection.

Based on the above information, it is clear that all three options are different, and investors must not confuse among them. Robo-based is more on the advisory side, and companies using Robo-advisory are still using human skills. Algo-based trading is helping traders, but it has its limitations.

If you want to invest in mutual funds or ETFs, you can spend some time online or watch some videos, and you can pick a fund to invest in. However, the same is not true with direct equity. It requires deep understanding and analysis. AI-based investment platforms offer better solutions to investors’ specific needs and problems.

(The author is Founder and CEO, Jarvis Invest)

Read More: equity investing: What should an investor know about AI, Robo and Algo-based equity

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