Only One? - The Honest Truth By Ajit Dayal
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Investing in India - Honest Truth by Ajit Dayal
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24 DECEMBER 2011


Nirodh - for those of that generation before Pooja Bedi aroused the Trojan in us - espoused the cause of Two through their "Hum Do, Humare Do".

Brad Pitt and Angelina Jolie- and our home grown Lalu Prasad Yadav - did not feel it necessary to stop at only two children. A confession: I belong to the "one of four" club.

In a very different context, Anna Hazare had a comment: Only One?

Well, while owning "Only One" mutual fund is not a good idea, owning twenty or thirty is a bad idea. But owning eight to ten mutual funds may be a better idea.

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Simple products, simple resolutions

Most New Year resolutions last a few days.

Most corporate objectives last a few months and then they get diluted as the company faces a choice of "growth and profits" v/s "what is right". In the financial services sector, there must be a handful of companies focused on doing the right thing. And, no - don't look for them on Wall Street or Mid-Town Manhattan or wherever they have moved their offices to.

After nearly six years as a mutual fund house, Quantum has only one diversified equity product: The Quantum Long Term Equity Fund. And while there is a variant of that in the Tax Saving product, it is a "variant". The process for selecting stocks in the Tax Saving Fund is what it is in the Quantum Long Term Equity Fund. So, in reality, we have only one equity diversified fund.A conscious decision.

Quantum AMC also launched an Index Fund that tracks the NSE-50 Index but this, as I have often said, is for those who wish to make tactical or speculative "bets": long term investors may find that the frequent changes to the underlying Indices - and the transaction costs of mirroring those changes - will ensure that the Index fund will almost certainly under-perform the underlying Index it is trying to mimic. 100% of Index funds and ETFs that mirror an index by definition have to underperform their benchmark indices in the long run. But 100% of actively managed funds (where the manager consciously selects stocks that may or may not be in the Index) do not underperform their benchmark indices. Some actively managed funds actually do better - investors have a chance to invest those funds.

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We are, Quantum Mutual Fund, a fund house that works on a set philosophy - the same philosophy reflected in the Honest Truth - Non-commissions, Transparent Costs, Basic Products, Long Term Investing!

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One Large and One Small?

In order to give investors access to a wider choice of investment management styles that are adopted by various mutual fund houses, Quantum AMC launched the Equity Fund of Funds.

Money raised in this Fund is invested in the mutual funds of those fund houses which Quantum assesses to be fit enough to deserve your money. No money is invested in the Quantum Long Term Equity Fund. So, yes, this is a very powerful "Only One" but it deserves a small dose of "one more". Investors looking for exposure to the stock markets via equity mutual funds should, in my opinion and subject to their own risk assessments and tolerance, invest in 2 funds: a 80% to 90% allocation in Quantum Equity Fund of Funds (this will end up in a basket of equity funds managed by other fund houses) and a 10% to 20% allocation to Quantum Long Term Equity Fund. Ask your advisor or financial planner to show you how this mix has performed over various time periods relative to their peer groups before you make any decisions.

Focusing on the fact (and it is a fact) that long term investors require simple, long term investment vehicles, Quantum AMC has shied away from launching:

  • Sector funds - what is hot in one year, can remain dead for the next five years. Even a long term investor like me sees no merit in such frivolous products;
  • Thematic funds like Elephant or Tiger - however, given the sleepiness and arrogance of most governments at the central, state, and municipality levels, a SNAIL fund (Sleepy Nonsensical Arrogant Individuals unLimited) may be a good idea;
  • Small Cap or Mid-Cap funds - the better name for such funds would be "Roll the Dice" fund. It takes a lot of effort, planning, discipline, absence of family fights and luck for a small cap company to become a mid-cap company. And then for a mid-cap company to become a large cap company requires more of the same - on a larger scale! There are thousands of casualties along the way as small caps aspire to grow. And, guess what, they are using your savings to fund this unknown journey! Given that an Infosys or an HDFC happens once every decade and the disappointment of a Finolex, Suzlon, Pantaloon, or an Educomp (just to name a few) happens once every week, the odds are against you in this casino game. Investors should invest in funds where the manager has a clearly identified and predictable process. One day, if Quantum AMC discovers what it takes to identify a small cap to be the next Infosys or HDFC, we would launch such a fund. Until then I believe the best way to describe it is a "roll the dice". If you feel lucky and have that urge to gamble, put 1% to 5% of your equity investments in such a fund. But look out, dear investor! Given the decline in the markets every stock may become a small cap! Beware: the Quantum Long Term Equity Fund may morph into that small cap fund!J
Simple living, simple investing

Not everyone can live in a small room and take on the power of the arrogant.

Not everyone can be a Mahatma.

And not everyone can find the "Oneness" which the spiritual teachers preach.

No, "Only One" would not have worked for Italian magnate and ex-Prime Minister Berlusconi with his fabled parties and multiple choices.

An "only One" simpler investment policy would not work for the distribution channels and private client teams at the banks. They carry a multitude of products to shock and awe you into submission. Simplicity means lower fees for them.

But, guess what? A simpler approach to investments with long term allocations to fixed income, equities, and gold - in a mix that reflects your needs and your ability to take risks - may work for you. Spend some time on understanding the philosophy and approach of every fund house and the various products they offer - and why they offer them.

Simplify your life, simplify your investments- and enjoy many New Years!


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
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% 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"


Disclaimer: The Honest Truth is authored by Ajit Dayal. Ajit is a Director at 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. To write to Ajit, please click here.


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4 Responses to "Only One?"

Harshawardhan Agarwal

Dec 29, 2011

Hi Ajit,

I have been a keen follower of Quantum and your Reports.I would like to know why don't you have a mid or a small cap fund when you have paid subscription products like Hidden Treasure from Equity master and MidcapSelect from Equity master.Dont you think it will make better sense for a Long term mutual fund investor.

Awaiting your reply at the earliest.

Regards,

Harshawardhan Agarwal

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Hari

Dec 26, 2011

The honest truth is that Equitymaster is no different from any other brokerage houses or half baked market analysts who show up every day on TV channels. IMHO..long term invesment philosophy is a gimmick misused to the core by equitymaster team. There are numerous examples from your reommendations in the last 2-3 years to support it.My lat request to EM team, please don't claim that you guys a different,unabiased,honest,etc.

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Public Voice

Dec 26, 2011


Refreshing to see that equitymaster does not edit comments as the one above by Mr. B. Subramaniam .

I don't believe or accept what he has to say as i find Equitymaster gives sensible advice. Although i must say some of the mass mailers that your CEO , Mr Goel sends out tend to follow a hard sales/mktg approach with loads of clutter.

U should consider simplifying your mktg mails as well :-)

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B.Subramaniam

Dec 24, 2011

Dear Ajith,
You have mislead a lot of people by saying index would be at 30000 and later covered it up by stating it was subject to that info that was wrong.
Thus u stated since the data availble to you was not correct you are innocent. Ha Ha what stupid excuse.

now please come out of your tortoise shell and state if the index will hold at these levele.Atleast show some spine.
anyway this year is ending so i wish you can make take up some new career other than trying to predict the markets.
if you five me your home address maybe i can send you benjamin grahams books just to get you started up in life.

Honest truth ha ha.Truth is farhest from honest my friend in life.
well i will make a prediction index in 2013 will be above 23000 at some point.try to beat this

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