Ajit Dayal’s latest article in “The Honest Truth” talks about how Quantum, the mutual fund house he owns, invests in “value”. I don’t know what value is, to be honest, and Ajit rightfully admits that value is different for different people.
But let me be a critic and analyze Quantum’s “Long Term Equity Fund” holdings: (Source: Value Research Online)
Also I notice that this fund has performed miserably against the Nifty BeES, both in the short and long terms. Over the two year period that this fund has been active, the Nifty BEES, an exchange traded fund that tracks the Nifty, has been up much higher. Here’s the analysis:
The difference between a fund that tracks the Nifty and Quantum’s Long Term Equity is nearly 15%, with the Nifty BEES being the better performer. This period has seen two bull momentum, two massive corrections and has had enough “value” and “growth” periods. Yet, Quantum has underperformed by a whopping 15% despite having no entry loads and after two years now, no exit loads.
Why? I think it’s partly because of expenses. While Nifty BeES entry loads are small (typically brokerage costs, about 0.65%) the expense ratio is about 0.8% a year. Quantum charges 2.5% – the maximum chargeable expense – to the fund. Technically that means that even if they do just as well as the Nifty they will be about 3% behind in two years compared to Nifty BeES.
Second, they have not done well in stock picking. I don’t know what their portfolio used to be but they seem to have gotten hit much more than the Nifty. They have been in cash a large part of the time (which is fine) but in spite of that performance has suffered.
I think I would dismiss the “value” argument. And also the myth that lower loads can increase your performance. To give you an example – if the fund underperforms the Nifty by 4% every year, and the Nifty grows at 12% over the next twenty years, a Rs. 100,000 investment in each fund will become Rs. 9.65 lakhs with Nifty BeES and Rs. 4.66 lakhs with Quantum’s fund. The difference is nearly 5 lakhs – You pay Rs. 5 lakhs to stick with Quantum, which gives you 50% lower returns than Nifty BeES..
I think there is value in sticking with the Nifty BeES, for those who don’t want to monitor their investments.
Also read: How Entry and Exit Loads Affect You.
Disclosure: I have no ties with either company and do not benefit if you buy either. I have not received any consideration from anyone including the two parties above to write this article. Any advertisements you may see are provided by Google, over which I have no discretion.