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.
- 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?
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
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!
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!
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!
HDFC Top 200 and HDFC Equity together in the same folio!! Interesting!
Normalized NAV movement wrt benchmark
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
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.
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!
Using the risk-return analyser, we have
Again pretty decent
This is an important and easy to understand measure of outperformance wrt benchmark (read more here)
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
A measure of consistency in outperformance
Calculated with: Automated Rolling Returns Calculator
Duration considered: 4 years
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?