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Opinion

All that glitters is not gold, Quantum

Quantum Mutual fund says they are a “different” kind of fund. They have no distributors (you must buy from them or from Personalfn or Equitymaster, their own sites) and say they are a low cost fund. Meaning, you pay no entry load, and no distributor commissions. Plus, they don’t do big advertisements or spend on canvassing money.

On their home page I have noticed some articles. Recently they talked about how your money is looted by “high cost” funds (the ones you regularly hear of such as HDFC Equity or Reliance Vision and so on) – essentially, by charging you for distributor commissions, TV advertisements, billboard costs, etc. through fund management charges. This reduces the total amount of money you have, and therefore your returns.

I agree with them when it comes to entry load. Read my post on How Entry and Exit loads can affect you – where I compare your real returns through ETFs, zero load funds and full-load funds.

But they are wrong when it comes to the whole picture. To give you an example: HDFC Equity fund has more than 4500 cr. under management. The net expense ratio of the fund is 1.83%.

Quantum Long Term Equity fund manages 37 cr. and charges you 2.5%.

For you the story goes like this. If you had 1 lakh in HDFC Equity fund, (ignore the entry load, we’ll come to that later) – the expenses charged to you would have been Rs. 1830. And if you had the same 1 lakh in Quantum long term equity fund, your cost would have been Rs. 2500.

Meaning, Quantum, with all its “low-cost” statements, actually costs you more (on an ongoing basis) than a “high cost” mutual fund like HDFC Equity.

Note: If you had INVESTED the money in the funds one year ago, your story would be different, because entry load for HDFC Equity – 2.25% – would have taken another 2,250 from you making it a worse return. I agree with Quantum on its lower entry load but they compensate by putting in a higher exit load so the next effect is the same if you were to need money today.

Now, how do the 1 year returns compare? Quantum LTEF made 25%. HDFC Equity made 37%. Your one lakh would be worth 1.25 lakhs with Quantum and 1.37 with HDFC Equity. Not only has HDFC charged you lesser as costs, they have also delivered superior returns (so when you consider even that 2.25% entry load, they have done better than Quantum).

Low cost does not necessarily mean better. Sony TVs and Toshiba Laptops are not cheap. And if you still want to go zero load you can choose index funds (like UTI Master Index, UTI Nifty Index etc.) which charge you 0% entry load. (Both those funds returned over 30% last year, and their expense ratios are 0.75%)

Quantum has said that their one year performance is weak because they did not fall that much last year (during the downturn). So when they didn’t fall that much the bounce does not look good. This is a mathematical flaw. If the market went up 50% in one year, you should have made 50% in the last one year (or more, otherwise why should we give you the money).

Just because they lost lesser in the downturn doesn’t mean they should be excused for underperforming when the markets go up. The return difference is so big (nearly 12%!) that it merits concern. To save one or two percent in costs, we are giving up 12% in returns?

Quantum stayed in cash last year during the dip and when valuations were low (at 9000 or so). But they remained in cash even after that. Perhaps that was a mistake. After all, I wouldn’t pay someone else to NOT invest my money, would I? Secondly their calls just haven’t been as good as the others. That’s also ok, every fund manager has his day. And finally, they charge you the maximum amount they can – 2.5% – as management fees.

I think it’s easier if Quantum admitted it as their mistake instead of weaving excuses for their underperformance. And although they try to come across as the low cost fund, their fund can actually costs you more, as we’ve seen in the recent past.

I’ve met Ajit Dayal, the founder of Quantum, during an investor meet in Bangalore. I think he’s a smart chap. But perhaps these guys need to sit down and work out how they must deliver really low cost and high quality returns – like the Vanguard funds in the US. To be honest I think funds from Benchmark (NiftyBeES, Junior BeES etc.) are lower cost than any others I have ever seen, even if you considered brokerage costs.

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