Quantum Long Term Equity Fund was launched in February 2006 as India's first direct to investor mutual fund product. The 1st calculation of the NAV of Quantum Long Term Equity Fund was March 13, 2006 (the Inception Date).
Not using distributors in an environment where every fund house did use distributors to "sell" their mutual funds to investors was heresy.
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We have often written about the fact that using a distributor or using a financial advisor is, per se, not a bad practice.
Our argument was on 2 fronts:
We wrote about this often not because we were against the distribution channels, but only because we wished there to be more transparency for the investors as they made decisions on how and where to invest their savings.
- all fees and incentives paid to the distribution channel should be disclosed. In the annual accounts of the Quantum Long Term Equity Fund (and other mutual funds) the fees of the asset management company, the custodian, the registrar, the accountants are all disclosed - why not that of the distribution channel? The disclosure of fees would allow the investor to see whether there was any link between the funds being recommended and the fees earned by the commission agents.
- Armed with information on fees paid for the commission agents (for filling in forms, collecting cheques, and giving advice), the investor could make a judgement call on whether the typical 2% to 6% fees that went out of the investor's pockets to the distribution channels was worth the advice and services received - or was there scope for improvement.
Of course, with the recent SEBI guidelines that prohibit all fund houses from paying commissions to distributors, what we practiced is no longer a heresy. It is a law.
The low cost option of Quantum Mutual Funds
Quantum Long Term Equity Fund was positioned as the Fund that will make more of your money work for you. Since there will be no distribution costs, more of your money will find its way to the investments for which the Fund was designed.
So, why does Quantum Tax Saving Fund - and its sister product, the Quantum Long Term Equity Fund - still have an expense ratio of 2.5% - at the top end of the allowed range (see Table 1)?
Table 1: Is Quantum a 'high cost' fund?
|Peer Comparison of ELSS Funds source is www.PersonalFn.com
||Top 10 Stocks (%)
|Expense Ratio (%)
The above table came in via email from a reader.
- Quantum Tax Saving has been in inception since December 2008, hence comparable data is not available
- NAV data as on Sept 4, 2009. Returns over 1-Yr are compounded annualised
- Risk and risk adjusted return ratios for the funds are taken over a 3-yr period
- Average AUM and Top 10 stock holdings are as on July 31, 2009
- Expense Ratio as on March 31, 2009
"While Quantum is not mentioned here" said the puzzled reader, "the charges for Quantum TSF are 2.5 %. Why are your charges the highest in the industry? Given the fact that you do not pay commission / aggressively market the same the charges should be far lower."
(Note: Quantum was not mentioned in the original table because, as a matter of policy we don't let PersonalFn show any analysis on Quantum Funds. This is because I am a common founder shareholder in both entities. PersonalFn will not recommend any Quantum Fund to their clients, their clients have to ask for it - we wish to avoid any conflicts of interest. Also, the Quantum Tax Saving Fund was launched in December 2008 and does not have a long track record so it has no performance data to be included in the table).
The complaint is legitimate: if we have no distribution costs, why are our costs as a percentage of total assets we manage so high?
Is Quantum a high cost fund house?
Well, the answer lies in the fact that there are certain fixed costs and some variable costs for running a mutual fund.
There are fees to the registrar and transfer agents, lawyers, custodians, and the asset management fees.
As the assets increase, as the fund size increases, even though some of these costs may increase, they get spread over a larger asset base and the costs - when expressed as a percentage of total assets under management - start to decline.
So, with an asset base of Rs. 84 lakhs, the Quantum Tax Saving Fund has an expense ratio of 2.5% or about Rs 2.1 lakhs.
Two questions arise from this:
Well, I cannot make a precise estimate of what the expense ratio of Quantum Tax Saving Fund would be if we had assets under management of Rs 41,773.4 million - or Rs 4,177.34 crore (as one of the existing funds has in Table 1 above).
- can I make an estimate of what the Quantum Tax Saving Fund's costs would be if the total assets under management in the Fund were Rs 13,952 million or Rs 1,395.2 crore (this is the average size as measured by the assets under management of the five Funds listed in Table 1 above)
- If the other fund houses listed in Table 1 have expense ratios of 2.18% to 2.50% and if these include distribution commissions, what would the "true" costs have been if these fund houses did not have any distribution commission to pay?
But I can say this: our asset management fees (now at 1.25% and a part of the 2.50% expense ratio for the Quantum Tax Saving Fund) would definitely decline to about 1.01%
By law, we charge lower asset management fees as the funds under management increases.
So, if this lower asset management fee was the only benefit we could give you from size, the expense ratio would have declined from 2.5% to 2.25% - the second lowest number when compared to other Funds listed in Table 1 above. And if I could estimate some more economies of scale from a higher AuM, my costs may decline even further.
Table 2: What if Quantum Tax Saver Fund was a larger fund?
|Maximum investment management fees, as prescribed by SEBI
||Assets under management
||If Quantum Tax Saver had Rs 4,177.34 crore, our fees would be....
||Less than Rs 100 crore
||Rs 1.25 crore
||Above Rs 100 crore
||Rs 40.77 crore
||Rs 42.02 crore
Strange, isn't it - even though many funds are much larger than Quantum Tax Saving Fund (one of them is 4,900 times the size of Quantum Tax Saving Fund), they don't seem to be enjoying any economies of scale.
Or, to put it another way, the investors in the largest Fund is paying the same expense ratio as investors in the much smaller Quantum Tax Saving Fund!
So, two conclusions from this:
This note has focused on the expense ratios and not on the investment style or risks and returns associated with the different funds.
- while Quantum Tax Saving Fund is indeed a 2.5% 'high cost' fund the fact that it has no distribution fees to pay means that it is geared to have lower costs as its size increase. But to see this built-in benefit, you need to invest in it and make the Fund larger! Just as, if you want a good political system, you need to vote in the good people as politicians. J
- maybe the real question should be, "how come other fund houses with larger funds still charge such high expense ratios? And how much of this is due to payments to the distribution channels?"
I have replicated the table as it came to me in the email from a reader, but I did add notes at the bottom. And I have deleted the names of the Fund houses.
What is true for Quantum Tax Saving Fund is true for all our funds, including the Quantum Long Term Equity Fund.
We are geared up as a low-cost fund house.
Though this will only be visible beyond a size.
But, boy, if we had Rs 41,773.4 million (Rs 4,177.34 crore) under management in the Quantum Tax Saving Fund, we would not be having an expense ratio of 2.5% - that is for sure!
Come, read the Offer Documents carefully, analyse the facts, and switch over to the Quantum Mutual Funds and enjoy the benefits of the low-cost structure that we have built.
Your larger investments in the Quantum Mutual Funds will benefit you!
Suggested allocation in Quantum Mutual Funds (after keeping safe money aside)
||Quantum Long Term Equity Fund
||Quantum Gold Fund
(NSE symbol: QGOLDHALF)
|Quantum Liquid Fund
|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
||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"
Note: The Honest Truth is authored by Ajit Dayal. Ajit is a Director at Quantum Advisors Pvt Ltd and Quantum Asset Management Company Pvt Ltd.. Views expressed in this article are entirely those of the author and may not be regarded as views of the Quantum Mutual Fund or Quantum Asset Management Company Private Limited. To write to Ajit, please click here.