The "90/10" Solution for Your Equity Exposure

25 JANUARY 2018

Investors who have heard me speak at the Path to Profit educational seminars conducted by Quantum Mutual Fund or other similar seminars are puzzled when I state:

  • "I suggest that investors, who don't have time to research individual stocks but want exposure through equity mutual funds, should place 90% of their equity investments in mutual funds managed by other fund houses and only 10% in the Quantum Long Term Equity Fund. And, if you insist you really love me so much, okay- never invest more than 20% in the Quantum Long Term Equity Fund! And place 80% in the funds created by other fund houses."

"Why", many have wondered, "is Ajit giving us this suggestion to invest with other fund managers?"

The reason has been my awareness that there are many ways to achieving good financial returns in the stock markets.

There are many investment approaches.

In Quantum Mutual Funds, I helped create one specific "style" of investing: the value approach.

As an individual, I like the "value-style" approach to investing. It suits my personality; it matches with my controlled approach to taking risk! As I have told audiences, when I invest in equity mutual funds, I prefer to see my portfolio have an investment of 80% to 90% in the Quantum Long Term Equity Fund and 10% to 20% in mutual funds managed by other fund managers. That is because I am a "value" person....you may not be...you don't have to be....

There are hundreds of funds out there and, before you plead helplessness on "how do I know which fund is good for the larger 80% to 90 of the portfolio?" let me calm you by saying that, while I was involved in the early days of Quantum Mutual Fund, they set up a fantastic vehicle for that very purpose: The Quantum Equity Fund of Funds (QEFOF).

QEFOF is a basket of funds selected by the investment team at Quantum AMC with inputs and research from PersonalFN - a company that I also helped create. The tax treatment of QEFOF is a slight dampener since it is classified as a debt fund by the income-tax authorities (even though it holds only equity funds). Maybe one day some finance minister will realise that 8 eggs in a basket does not evolve into a chicken. For now, a long term investor pays a 20% capital gains tax but gets the benefit of indexation.

Tax treatment aside (and please note that tax laws can and do change so never buy anything for a future expected tax benefit because it may no longer exist when you wish to sell that asset), the suggestion to many to consider a 90/10 or 80/20 split between QEFOF (a proxy for good funds managed by other fund houses) and QLTEF would have resulted in the following portfolio.

Table 1: A diversified equity portfolio helps!
  Time Period Rs 100 in only Quantum LT Eq Fund Rs 100 in only Quantum Eq Fund of Funds Rs 100 with 90% in QEFOF and 10% in QLTEF Rs 100 with 80% in QEFOF and 20% in QLTEF
A End July 2009 till
End Dec 2017
364.3 336.0 339.8 QLTEF helped
343.3
B The Modi Boost:
End August 2013 till End Dec 2017
221.6 261.5 255.0 QLTEF hurt
249.3

Inception Date: 13-Mar-2006 for QLTEF and 20-July-2009 for QEFOF
Returns calculated as on 29-Dec-2017
Tax calculations have been ignored but, since this data is based on NAV, all other expenses have been taken into account for those investors who have made investments into the Funds directly.
Source: QuantumMF fact sheets, www.PersonalFN.com

At one level, the data (Table 1, Section A) indicates that Quantum Long Term Equity Fund has done better since the start month of the launch of the QEFOF basket (July 2009). An investment only in QEFOF would have had the lowest returns amongst these 4 options.

The two products have had a common existence for about 102 months.

Interestingly, about 50% of the time (since September 2013) we have been in an era that can be best described as The Modi Boost. After the rot and decay of the Congress-led UPA rule (Dear Bhakts, waiting to troll your venom please read with open eyes and open mind that I do criticize the Congress!), the nomination of Narendra Modi as the Prime Ministerial candidate of the BJP in September 2013 (and Raghuram Rajan's appointment as the Governor of the RBI to steady the INR), have given the markets a tremendous boost.

During this period of the past 52 months, investing more in QLTEF (the 80/20 ratio) would have hurt that portfolio (Table 1, section B). A 90/10 mix, with less of QLTEF, would have done better. An investment only in QEFOF would have had the best returns amongst these 4 options.

Sensible investing by individuals - who don't follow the market on a regular basis, but fully comprehend the opportunities that investing in shares has to offer - works best when you diversify your equity investments across fund management styles and across fund houses. Investing in 8 to 10 equity mutual funds (or just 2 products if you like the concept of QEFOF and can live with the tax irritation) managed by a few fund houses will be sufficient.


Suggested allocation in Quantum Mutual Funds (after keeping safe money aside)

Quantum Long Term Equity Fund and Quantum Equity Fund of Funds Quantum Gold Fund
(NSE symbol: QGOLDHALF)
Quantum Liquid Fund
Why you
should own
it:
An investment for the future and an opportunity to profit from the long term economic growth in India A hedge against a global financial crisis and an "insurance" for your portfolio Cash in hand for any emergency uses but should get better returns than a savings account in a bank
Suggested allocation 80% in total in both; Maybe 20% in QLTEF and 60% in QEFOF 20% Keep aside money to meet your expenses for 6 months to 2 years
Disclaimer: Past performance may or may not be sustained in the future. Mutual Fund investments are subject to market risks, fluctuation in NAV's and uncertainty of dividend distributions. Please read offer documents of the relevant schemes carefully before making any investments. Click here for the detailed risk factors and statutory information"
Name of the Scheme This product is suitable for investors who are seeking* Riskometer
Quantum Long Term Equity Fund
(An Open-ended Equity Scheme)
  • Long term capital appreciation and current income
  • Investments in equity and equity related securities of companies in S&P BSE 200 index.
https://www.quantumamc.com/images/Moderately_High.jpg
Investors understand that their principal will be at Moderately High Risk
Quantum Gold Fund
(An Open-ended Exchange Traded Fund- Gold)
  • Long term returns
  • Investments in physical gold.
Quantum Liquid Fund
(An Open- ended Liquid Scheme)
  • Income over the short term
  • Investments in debt / money market instruments
https://www.quantumamc.com/images/low-risk.jpg
Investors understand that their principal will be at Low risk
Disclaimer: The Honest Truth is authored by Ajit Dayal. Ajit is Founder of Quantum Advisors Pvt. Ltd and Quantum Asset Management Company Pvt. Ltd. The views mentioned above are of the author only. Data and charts, if used, in the article have been sourced from available information and has not been authenticated by any statutory authority. The author, Equitymaster, Quantum AMC and Quantum Advisors do not claim it to be accurate nor accept any responsibility for the same. Please read the detailed Terms of Use of the web site.

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2 Responses to "The "90/10" Solution for Your Equity Exposure"

Ajay

Jan 31, 2018

As long as FOF is treated as Debt fund and taxed, its not worth considering it.

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Roshni

Jan 25, 2018

Recently I read a not-so-recent article and one sentence started with 'Devotees of the fund house ...', where fund house was of course Quantum. Little by little (or article by article) I understand why 'devotees' ! :)

I am reminded on reading this article that I have received no explanation from anywhere (not even Google swami!) for why a fund of fund is treated as a debt fund. Well, now it is just a matter of curiosity but still it'd be good to know. Who has the answer?!

Regards,
Roshni

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