Quantum Mutual Fund: Hum woh nahi hain

29 APRIL 2020

The AMFI ad campaign is spot on: Mutual fund sahi hai.

Mutual funds are, indeed, a great way for investors to channel their savings for long term investments and to generate returns. Theoretically, individuals who are not well-versed in the art of investments entrust their savings to professionals whose job it is to understand the world of investments and help the individual navigate towards the ultimate nirvana: savings invested methodically over the years across a diverse range of asset classes will give the individual their life goals, the better life they seek on retirement....

The mutual fund industry has had some wonderful innovations to its credit, of which the SIP (Systematic Investment Plan) or the Switch (moving from one fund to another within the same mutual fund house) are noteworthy and have made millions of investors feel safer as they were converted into long term investors.

But, as the man with the mace in the tweet below suggests, the way mutual funds in India are launched, marketed and (mis)sold has always led to a crisis for investors. Individuals flock to the mutual fund houses with a bagful of savings and a mountain of trust. What they are left with is a deep distrust and helpless anger. Yeh sahi hai.

It is not that the professionals working in the mutual fund industry are dumb. On the contrary, all the glorified tags that enhance their paycheck - MBA, CFA, CA - adorn their business cards. Without doubt those who work in the mutual fund industry are extremely smart and competent people.

The problem with the industry is that it has converted the profession of managing the wealth of an investor to an engine for multiplying the wealth of the fund managers and CEOs, even if it is at the cost of the decimating the savings of their clients.

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SEBI scrutinises those who apply to launch mutual funds primarily on two criteria and vets applicants to see if they are:

(1) fit and proper, and

(2) have the required capital to sustain the operational running of a mutual fund.

In terms of safeguards, there are many. SEBI has built a robust - and some would argue, onerous! - set of guidelines on how to ensure that mutual funds are safe and that investors capital cannot be siphoned off. We are all familiar with the Mutual Funds Are Subject To Market Risk mantra at the end of every advertisement. We can practically sing it as a lullaby as we pat our children to sleep!

But there is one thing that SEBI cannot regulate: "character".

The late John Bogle, the founder of Vanguard, wrote a book called "Character Counts" which was essentially a collection of his speeches and talks to his colleagues at Vanguard over the decades.

Many investors read the Annual Reports and letters penned by legendary investors Warren Buffet and Charlie Munger - but very few even know about the existence of "Character Counts". That is a pity.

Quantum Mutual Fund: we are not like that only.

Quantum Advisors, which I founded in 1990 - before the term FII or FPI was coined - has been managing money for international institutional investors in India for decades. We were keen to make available our investment solutions sets to HNI and retail investors in India.

In December 2005, we received our AMC license. In February 2006 we launched the Quantum Long Term Equity Value Fund - our first product for retail investors and the first zero-load fund from India's Direct-to-Investor house.

Now that you have this background and know that we are not some young kid on the block but one of the pioneers of the evolution of the modern Indian stock markets, we pose the question: Quantum Mutual Fund house has a "local" track record of 14 years and the parent Sponsor has a track record of 20 years, why is it that we have assets of less than Rs 1,000 crore when the larger fund houses have assets of Rs. 3,00,000 crore? Why are the larger fund houses 300x larger than us?

Is it because of a first mover advantage that the other fund houses had?

Quantum was, admittedly, the 29th Fund house to get an AMC license from SEBI so there were 28 others who were early and had time to establish their roots.

Is it because we are not good at our work and are incompetent?

Quantum's long term record (and investing in mutual funds is a long-term story) is very respectable. More on that in a while....

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Integrity - or lack of it?

Well, the answer is that we refused to adopt opaque and unethical business practices. While we were still planting the seeds of our AMC "business", the other fund houses had spread their tentacles around the investors' wallet and dug deep into their pockets with years of inter-twined deals with the banking channels which accounted for 70% of all distribution in the country. The manchineel tree has sweet fruits - but it can kill you.

When we launched our first mutual fund product in February 2006 we were the ONLY fund house that refused to pay commissions to banks and distributors to help us raise AuM for the funds.

Let me be clear on this: We have nothing against anyone making money from a business or profession and encourage private enterprise. However, the problem for us was that the amount of commission that the mutual fund house was willing to pay large banks like HDFC Bank and ICICI and multiple distributors was not disclosed to investors.

This meant that when your relationship manager suggested a mutual fund for your portfolio, you as an investor had no idea whether the mutual fund was being suggested to you because it was, indeed, good for your portfolio - or whether a particular mutual fund was paying a high distribution commission! In many countries such practices are illegal but, in India, it was the norm.

In addition to this, the mutual funds played another dirty game. The commission that they paid on older funds was lower than the commission they paid on new funds. So, guess what they did?

The mutual fund CEOs took the old funds, placed a new cover on it, gave it a new name - and then teamed up with their distribution partners to launch a "new" fund. The mutual fund houses became a recycling factory - but one with polluted ethics. The distributor made you exit from a fund (they collected a part of the exit fee you paid!) and then got you into the "new fund" and collected money from you (not that you knew it!) in the form of a higher commission. It was a mechanism to deplete your wealth.

The CEOs, the fund managers and the marketing teams at the mutual funds and the distribution companies did pretty well out of it.

To be fair, it was not illegal.

From our perspective it was unethical and immoral.

When SEBI finally acted and shut down this (mal?)practice, the mutual fund industry protested and used all their lobbying power in New Delhi to fight the proposed changes by SEBI. But SEBI stayed firm and protected investors.

Since Quantum Mutual Fund was never part of this dubious arrangement, no relationship manager at HDFC Bank or ICICI or the other banks and distributors told you that we exist. And if you did, by chance, happen to hear about Quantum Mutual Fund and asked the relationship managers about us their response would be dismissive: Quantum Mutual Fund is new, or, Quantum Mutual Fund is small. And then they would proceed to place your savings in some fund which ensured they got a great commission.

Competence: It's small, but it performed.

Size has nothing to do with performance.

All performance is a function of risk and return.

The higher the risk you are taking, the more likely you are to get a higher return.

Conversely, if you are getting a higher return, you are more likely taking a higher risk.

There is the rare instance of investing in something which gives you outsized returns for a relatively small risk - think the IPO of Infosys in 1992.

There is the more common instance of investing in something where you took outsized risk and ended up negligible returns or large losses - think of Reliance Power's IPO in January 2008.

What is true for an individual stock or security is also true for investing in mutual funds - which is nothing but a basket of many securities.

Take the case of the Multi-Asset Fund.

Many of the peers in the hybrid category, which include multi asset and balanced funds, built their portfolios as if they were equity funds. The tax advantage of being labelled an equity fund and having more than 65% of the Fund's investments in equity at every point in time made it an easy sell. But the underlying risk of a high equity exposure removed the buffers available to investors in a market downturn: and we have had 17 such COVID-like downturns over the past 26 years. (Black Swan, Black Crows and Fund lies)

The investors thought they were buying a "diversified" fund with exposure to gold, debt, and equity. A typical investor does not - and is not expected to - look deep into the reasons for the returns that a fund generates. When groups who plaster planet earth with their brand names tell you something, many tend to believe them. Woh to sahi hi hoga. But these funds were like the manchileen tree with sweet fruits but a dangerous core. With their large exposure to equity, these "mis-sold" funds did well in the boom times. Returns were good and they never flagged the risks they were taking besides the statutory Mutual Funds are subject to market risk lullaby....

And, when the market collapsed, the funds destroyed capital. And faith.

Contrast this with the Quantum Multi-Asset Fund, where I have invested some of my money.

Table 1: When the large AuM funds could not beat the small.

Fund with Inception Date/Benchmark AuM (Rs crore) 10 year 5 year 3 year 1 year
Quantum Multi Asset (July 11, 2012) 16 NA 5.50% 3.33% -3.42%
Benchmark, Customised   NA 7.04% 7.08% 2.05%
Benchmark of Competitor Na 7.58% 4.54% 1.88% -12.94%
ICICI Pru Multi Asset Fund 9,023 8.27% 2.25% -2.86% -21.27%
HDFC Balanced Advantage Fund 32,369 7.26% 2.62% -1.94% -25.28%
Note: Performance as of March 31, 2020; All returns are compounded annualized;
Source: PersonalFN.com; CRISL

The Quantum Multi Asset Fund gave boring, steady returns and underperformed these race horses when the stock markets were booming. When the markets fell recently, sure it lost money - but a lot less. A multi-asset fund is not supposed to behave like a race horse and then like a donkey. It is supposed to give you some returns in good times (generally speaking, better than the returns in an FD with a bank) and protect your capital on the decline. When all the crows come squawking at your window as they tend to - 17 times in 24 years.

The Quantum Multi Asset Fund invests in other funds managed by Quantum AMC and has these stated diversification ranges which it adheres to:

  1. It can invest 25% to 65% of its corpus in debt;
  2. It can invest 25% to 65% of its corpus in equity;
  3. It can invest 10% to 20% of its corpus in gold.

Because of this balanced and diversified approach to investing it has limited upside and limited downside. The fund can never be a star performer when everyone is focused on returns and forgets to realise the risk in the portfolio. The fund will be a star performer when risk whacks us on the head to remind us that it exists - and risk always did and always will.

Though it currently has a small AuM, (no one heard of us because banks and distributors did not "sell" us), the Quantum Multi Asset Fund has the capacity to absorb over Rs. 20,000 crore of AuM. Yes it can have inflows of another Rs. 19,984 crores and not change its underlying risk-return characteristic!

Your car has a capacity of how much petrol it can take, the cement factory has a capacity to make, for example, one million tonnes per annum - anything over the stated capacity will cause a performance, quality, or overflow issue. So, if investors made the switch today - right now - and moved all their money from the largest multi-asset fund and the largest balanced fund to Quantum Multi Asset Fund, it could replicate the current portfolio on which it has built its track record. Those looking to let a professional mutual fund manager decide how much of their invested money should be in the three very different asset classes of equity, debt and gold - and still wish to get better returns than an FD - should review how they have selected their balanced and multi-asset funds. (With the recent decline in markets, the returns of the multi asset funds has been below that of FDs but recognize this is being measured in a bear market.)

Character Counts!

Quantum's AUM has grown slowly because we have lived by the words of John Bogle, the founder of Vanguard. We believe that character counts. In an environment like today - when most people are walking around with a mace to settle scores with their mutual fund house - what matters is trust.

We have never been willing to be part of the opaque, dishonest and highly questionable pact that existed for decades between the mutual fund houses and the banks where your money was sold to the highest bidder. That principled stand hurt us. This act of being the only fund house to challenge the system and fight for investors whose names, addresses, birth dates and joys in life we will never know - but know that we fought for a fair world for them - reduced the AuM we had in our funds. Money is transitory. When you are locked down in your home, the material does not matter beyond a point. Values do.

It was only after SEBI forced transparency in the distribution system and put in place rules to eliminate this dishonesty that we began to happily work with the distribution channels. To share with them our views, to help them become better at their work and be your Certified Financial Guardians - people you can trust.

This commitment to character is what has cost us AuM.

But that is fine. The desire to build a successful and sustainable business cannot be built on a foundation of quicksand.

The failure of the mutual fund industry is its lack of character, its absence of a moral compass. SEBI granted the mutual fund industry a license to set up an "Asset Management Company". The mutual fund industry shamelessly converted that to an Asset Gathering License.

It is an honour and a privilege to help an investor reach their financial goals with the steady guiding hand of experienced fund managers at the helm of mutual funds navigating the uncertain world of investments for sustainable, long term returns.

But it is a breach of fiduciary responsibility when the fund managers, with the guidance and knowledge of their CEOs, use the savings of that investor as a proxy to further their financial gains.

This is where the distinction between a mutual fund selling its products to unsuspecting investors and a mutual fund educating its investors so that the investors can make their own buying decisions comes to the forefront.

As a founder of the Sponsor of Quantum AMC, the investment manager of Quantum Mutual Funds, I can say this: I may have left the Boards of the Quantum companies in 2017 but our Charter of Principles is ingrained in our daily interaction with our growing number of long-term investors.

It is this that distinguishes us from many of the others: hum woh nahi hai.

Stay Safe. Stay Healthy. Stay Invested - with the right fund house!

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

Quantum Long Term Equity Fund, Quantum Equity Fund of Funds, Quantum ESG India Fund Quantum Gold Fund
Quantum Liquid Fund
Why you
should own
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 15% in QLTEF and 75% in QEFOF and 10% in Q ESG 20% Keep aside money to meet your expenses for 12 months to 3 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"
Disclaimer: The Honest Truth is authored by Ajit Dayal. Ajit is Founder of Quantum Advisors Pvt. Ltd. which is the Sponsor of Quantum Asset Management Company Pvt. Ltd – the Investment Manager of the Quantum Mutual Funds. Ajit is also the Founder of Quantum Information Services which owns Equitymaster and PersonalFN. The views mentioned herein are that of the author only and not of Quantum Advisors, Quantum AMC or Equitymaster. The information provided herein is compiled on the basis of publicly available information, internally developed data and other sources believed to be reliable by the author. The information is meant for general reading purpose only and is not meant to serve as a professional guide / investment advice for the readers. Readers are advised to seek independent professional advice and arrive at an informed investment decision before making any investment. Whilst no specific action has been suggested or offered based upon the information provided herein, due care has been taken to endeavour that the facts are correct, accurate and reasonable as on date. None of the Author, Quantum Advisors, Quantum AMC, Equitymaster, their Affiliates or Representative shall be liable for any direct, indirect, special, incidental, consequential, punitive or exemplary losses or damages including lost profits arising in any way on account of any action taken basis the data / information / views provided in The Honest Truth.

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13 Responses to "Quantum Mutual Fund: Hum woh nahi hain"

Niraj Kapasi

Apr 29, 2020


I have been a admirer of Ajit Dayal and Quantum since probably 2007-2008 and have investments in Quantum Mutual Funds and also a subscriber to Equitymaster.

While your USP has been lower expense ratio, not floating too many funds and transparency in not giving commissions, a Investor apart from these also needs returns and returns that are promised. I know that MF's do not guarantee or promise returns but the philosophy of Value Investing which will protect the downside in a falling market.

Other funds, even with higher expense ratios have given better returns than Quantum and have protected from the downside better. In 2008 and 2013, QLTEF protected against the downside but not in 2020. If you look at the NAV, the returns guven by QLTEF over the last 5 or 7 years is close to Zero.

There is something wrong in your philosophy and process for making investments.

While you need to maintain your transparency, you need to definitely improve returns both in your funds and your Equitymaster recommendations.


Like (8)


Apr 29, 2020

Dear Ajit,

You are one of the pioneers in the Indian mutual fund industry who has changed its workings in the good way. You have talked and implemented direct mutual funds, much before any other fund house dreamed of.

There is a huge gap in the industry at present and that is high quality index products. Its getting popular with each passing day. Beating the indexes has become a tough job for fund managers. Since you're a Bogle fan, I'm baffled at what is stopping quantum from adding up index funds in its products portfolio. The anemic AUM growth in quantum is worrying as an existing investor and as a result sustainability is questioned. The index products in both equity and debt side will add the needed strength.

Motilal Oswal fund house, a late comer in the scene has taken tremendous strides in the indexing area. There is still a huge gap in the indexing industry, one of them is trust. There is high trust capital Quantum is having among its loyal clients and word-of-mouth promotion. You can use this opportunity to launch multiple index funds. The focus should be on local indexes as well as international indexes. Try to tie up with the vanguard to bring their products. It will be a huge hit, and AUM will start flowing in from all directions into quantum fund house.

thanks and regards

Like (3)

manish patel

Apr 29, 2020

Ofcourse, Aap Woh Nahi Hain,,, but only character does not satisfy investor like me who invested in QTLEF since its inception and saw how fast this crash erode my entire wealth. So, it performance also count with characteristics. As a result I entirly get off from the fund and not sure, whether I will back again to invest QTLEF. Hope you continue with charatsertics that you had but must improve your portfolio charaterstics of QTLEF, so that investor who sat and stay in for last 14-15 years has not get out like me and lost the faith in fund eventhough having Honesty.

Like (10)
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