Mutual Fund Analysis: Quantum Equity Fund of Fund

Mutual Fund selection/management is not rocket science. All it requires is a little time (much less than you can imagine), commonsense and reasonable expectations.

While this simple truth does not dawn on most investors, even budding DIY investors do not seem to have confidence in their choices.

What if,

  • there was a fill-it, shut-it, forget-it option to manage your equity portfolio?
  • all you had to do is to stay calm and continue investments?
  • an 'expert' chose equity funds for you?
  • the possibility of the commission based mis-selling is eliminated (no distributor or fee-based planner involved)?
  • the expense involved is reasonable?

Sounds too good to be true?

Thankfully no!

Enter the Quantum Equity Fund of Funds

The following information is sourced from the scheme information document

Type: An Open Ended Equity Fund of Funds Scheme

Investment Objective: Generate long-term capital appreciation by investing in a portfolio of open-ended diversified equity schemes  of mutual funds registered with SEBI.

AUM  ~ Rs. 3 Crore

Benchmark: BSE 200

Asset Allocation:

Open-ended diversified  equity mutual funds: 100% to 90%

Money Market Instruments 0% to 10%

Expense ratio: 0.5%

Taxation: Like a debt fund. LTCG is taxed at 10% without indexation and 20% with indexation.

There is no free lunch! Is this really such a bad thing for long- term investments, see the performance and decide for yourself. Do remember to factor in the low expense ratio!

Investment Process

1. Fund selection

  • Select all the open-ended equity funds
  • Remove all the funds, which are not categorized as diversified equity funds (such as sector, thematic and global funds) from the above list.
  • From the above list, choose only those funds are considered which have a 3-year track record
  • Remove the funds holding concentrated stock portfolio.
  • Rank the funds based on their performance across time frames.
  • Thereafter, the short-listed funds are evaluated based on qualitative criteria. The qualitative parameters will largely judge the fund on the parameters like fund house’s investment systems and processes, consistency in characteristics of its portfolio among others. Funds that emerge as the top performers shall form part of the final portfolio.

 2. Portfolio Construction

  • The portfolio will have 5 to 10 open-ended diversified equity mutual fund schemes.
  • The Scheme shall not invest more than 20% of its assets in a single scheme with a 3 year track record.
  • The overall exposure in the schemes with a 3-year track record shall not exceed 40% of the Portfolio.
  • The Scheme shall not invest more than 25% of its assets in a single scheme with a 5 years track record.
  • Quantum schemes will not be chosen!

Portfolio

 The fund was started in Aug. 2009. I could get portfolio information only from Sep. 2012. Notice the interesting picks and the fact that the funds have not been changed (at least during this period). Also notice the shift to direct plans!

Quantum portfolio

HDFC Top 200 and HDFC Equity together in the same folio!! Interesting!

Normalized NAV movement wrt benchmark

Quantum Equity Nav

Not spectacular, but considering the state of the markets last few years and the response to the current rally, I would say that is pretty decent.

SIP and Lump Sum Returns

Using the risk-return analyser, we have

Quantum Equity Returns

Pretty decent outperformance, won’t you say?

Surprise, surprise! Notice the good performance when compared with Quantum Long Term Equity (read analysis here). Of course this is before taxes.  Remember to remove about ____%* from the fund of fund return because of taxes.

  • I had earlier written 1%. Srikanth from FundsIndia pointed out that reduction in returns due to taxation will be much more than 1%.

I realized that this is true. However this difference will decrease drastically with increase in investment duration.

For example:

Consider a monthly SIP of 1000 for 9Y. Assume CAGR of 10%.
If an investor continues to hold units for one more year, that is 10Y after start of investment, the corpus in an equity fund is 19.1L.
Post tax return in an equity fund = 10% (obviously!)

The post-tax corpus in a debt fund or fof is 17.17L
Post tax return is 8.175% without indexation.

The difference will be much lower when indexation is considered and with increase in duration.

Yes, taxes will impact corpus and the returns. However, do weigh that against the pros of this strategy.

One cannot eat a cake and expect to hold it too!

Risk-return analysis

Using the risk-return analyser, we have

Quantum Equity Fund of Fund

Again pretty decent

Capture Ratios

This is an important and easy to understand measure of outperformance wrt benchmark (read more here)

Quantum Equity Capture Ratio

Volatile but still have managed to beat consistently. Good downside protection because all the funds in the folio have it!

This was again calculated with the  risk-return analyser

Rolling Returns

A measure of consistency in outperformance

Calculated with: Automated Rolling Returns Calculator

Duration considered: 4 years

Quantum Equity Rolling Returns

Pretty consistent

Impressions

Quantum Equity Fund of Fund has all the elements of a ‘good’ fund.

If you are new to mutual fund investing, and are not sure about which fund to choose, just choose this one fund for your equity allocation.

I think this will do the job. Yes, yes long term capital gains are taxable,

However, considering indexation benefit, and comfort of holding a diversified equity allocation with minimal effort, I would not worry too much about the taxation aspect.

The only negative aspect of this fund is that it mains a high equity allocation at all times. Had its mandate been similar to Quantum Long Term Equity which can have significant debt allocation (currently 32.3%!) depending on market conditions, I think it would have been even better.

What do you think? 

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30 thoughts on “Mutual Fund Analysis: Quantum Equity Fund of Fund

  1. bharat shah

    'The only negative aspect of this fund is that it mains a high equity allocation at all times. Had its mandate been similar to Quantum Long Term Equity which can have significant debt allocation (currently 32.3%!) depending on market conditions, I think it would have been even better.'
    ironically, as i think, that( no significant debt allocation) seems the reason for fof,s better performance than qlte (quantum's very own fund!). that can be seen if you compare the performance as on dt.08-10-13 (the date, since, i believe in hindsight, the running bull phase(?) started). whether high cash-debt allocation is beneficial or not would be proved after sometime, but it is now deteriorating qlte's performance. my thinking is that quanum 's fof is just to show off that its very fund (read qlte) is better than best of its peers!

    Reply
  2. bharat shah

    'The only negative aspect of this fund is that it mains a high equity allocation at all times. Had its mandate been similar to Quantum Long Term Equity which can have significant debt allocation (currently 32.3%!) depending on market conditions, I think it would have been even better.'
    ironically, as i think, that( no significant debt allocation) seems the reason for fof,s better performance than qlte (quantum's very own fund!). that can be seen if you compare the performance as on dt.08-10-13 (the date, since, i believe in hindsight, the running bull phase(?) started). whether high cash-debt allocation is beneficial or not would be proved after sometime, but it is now deteriorating qlte's performance. my thinking is that quanum 's fof is just to show off that its very fund (read qlte) is better than best of its peers!

    Reply
  3. Sanjiv Singhal

    Hi Pattu,

    I don't think the problem is high equity allocation. As I've always maintained, for most people investing for the long term, equity is where they should be. And most salaried people in any case already have significant debt allocation because of EPF.

    The problem with a fund of funds is higher expense because they add another layer of fees (the reason they're often called "Fees on Fees") and an adverse tax treatment in India - long term capital gains is no longer exempt.

    This is why we believe our approach at scripbox.com is superior. It gets you the benefit of scientific selection and "fill it, shut it, forget it" without the negatives of a Fund of Funds.

    Sanjiv

    Reply
    1. pattu

      While I don't disagree with your observations, my point is for the disciplined investors, many simple no-frill choices are available and this is a pretty decent one. Only when people begin to panic, think short term etc. everything goes for a toss.

      Reply
  4. Sanjiv Singhal

    Hi Pattu,

    I don't think the problem is high equity allocation. As I've always maintained, for most people investing for the long term, equity is where they should be. And most salaried people in any case already have significant debt allocation because of EPF.

    The problem with a fund of funds is higher expense because they add another layer of fees (the reason they're often called "Fees on Fees") and an adverse tax treatment in India - long term capital gains is no longer exempt.

    This is why we believe our approach at scripbox.com is superior. It gets you the benefit of scientific selection and "fill it, shut it, forget it" without the negatives of a Fund of Funds.

    Sanjiv

    Reply
    1. pattu

      While I don't disagree with your observations, my point is for the disciplined investors, many simple no-frill choices are available and this is a pretty decent one. Only when people begin to panic, think short term etc. everything goes for a toss.

      Reply
  5. bharat shah

    on other thought for significant debt , cash allocation strategy of qlte many times , i wonder how it could be appropriate/rewarding this strategy when it advocates of investing in businesses instead of price of the company in buffet's way (and really kept high exit load for early redemption) and always having some 20-25 company (read good businesses) in its portfolio and finding no further investment suitability in any of such businesses. on other hand, they keep inviting to no.of offerings for wealth creation through their advisory arm in every market conditions. it would be interesting if you can study the performance of the fund over a period without debt allocation (supposing the a/m allocated to the existing equity shares instead)

    Reply
    1. pattu

      The debt allocation is to lower overall volatility. Let me study a little more about this. Thanks.

      Reply
  6. bharat shah

    on other thought for significant debt , cash allocation strategy of qlte many times , i wonder how it could be appropriate/rewarding this strategy when it advocates of investing in businesses instead of price of the company in buffet's way (and really kept high exit load for early redemption) and always having some 20-25 company (read good businesses) in its portfolio and finding no further investment suitability in any of such businesses. on other hand, they keep inviting to no.of offerings for wealth creation through their advisory arm in every market conditions. it would be interesting if you can study the performance of the fund over a period without debt allocation (supposing the a/m allocated to the existing equity shares instead)

    Reply
    1. pattu

      The debt allocation is to lower overall volatility. Let me study a little more about this. Thanks.

      Reply
  7. Ganesh

    Dear Pattu

    I donot understand why anyone will invest in this FOF. An easy option is to look at the portfolio and directly invest in the MFs in the portfolio. This would save 0.5% expense and capital gains tax. No wonder AUM is just 3 crores

    Reply
    1. pattu

      Investing is all the right attitude and most people don't have it. They will look at the folio make a lot of nose about the presence of HDFC Equity and Top 200 and not follow that as well. For the disciplined investor with reasonable expectations this FOF is as good an option as another other fund.

      Reply
  8. Ganesh

    Dear Pattu

    I donot understand why anyone will invest in this FOF. An easy option is to look at the portfolio and directly invest in the MFs in the portfolio. This would save 0.5% expense and capital gains tax. No wonder AUM is just 3 crores

    Reply
    1. pattu

      Investing is all the right attitude and most people don't have it. They will look at the folio make a lot of nose about the presence of HDFC Equity and Top 200 and not follow that as well. For the disciplined investor with reasonable expectations this FOF is as good an option as another other fund.

      Reply
  9. Adaikkappan Arumugam

    Pattu Sir, Any specific reason why this fund is treated as debt and not like an Equity fund.
    Esp with respect to taxation, had it been an equity fund, LTCG would have been zero right ?

    Reply
  10. Adaikkappan Arumugam

    Pattu Sir, Any specific reason why this fund is treated as debt and not like an Equity fund.
    Esp with respect to taxation, had it been an equity fund, LTCG would have been zero right ?

    Reply

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