Choose Predictable Investing When Adding Mutual Funds to Your Portfolio

February 28, 2024 Mutual Fund

When investing in mutual funds — or any market-linked investment instrument for that matter — what most of us endeavour for is having some level of certainty of earning predictable positive returns. Don’t we? That is what brings consistency and dependability, which is important in the dynamic world of finance, where quite often uncertainty holds sway.

Also, in this day and age of momentum investing and growth investing, where investors often look at the price of everything and the value of nothing in the endeavour to earn quick returns, ‘Predictable Investing’ is what is needed for sensible wealth creation.

Quantum Long Term Equity Value Fund (QLTEVF) is one such diversified equity fund that offers certainty in an uncertain world. It is born out of a robust research and investment process followed at Quantum Mutual Fund.

It is perhaps the only fund house in India that has demonstrated its ability to predict the two-year forward NAV (Net Asset Value) of its Quantum Long Term Equity Value Fund.

Graph: Predictability of QLTEVF’s NAV

The above graph shows the estimate of the rebased GAV of Quantum Long Term Equity Value Fund – Direct Plan – Growth Option based on the Upside Potential of the portfolio (equal to the sum total of weight of each stock multiplied by the percentage difference between the current market price and the sell limits assigned to each stock in the portfolio by the in-house research teams).
The performance returns are net of fees and expenses, and assuming reinvestment of all dividends and other earnings. The value axis for the graph has been plotted based on a logarithmic scale of 2.
Past performance may or may not be sustained in the future.
Source: Quantum Mutual Fund’s Internal Research, Bloomberg Finance L.P., As of January 31, 2024.
Disclaimer: Quantum Mutual Fund is a group company of Quantum Information Services Pvt. Ltd.
PersonalFN is not in receipt of any commission directly or indirectly for suggesting the scheme.
The securities quoted are for illustration only and are not recommendatory.
Mutual Fund investments are subject to market risks. Read all scheme-related documents carefully.
Speak to your investment advisor for further assistance before investing. 

The graph above is unique, showing the potential of QLTEVF to deliver returns in line with what was estimated by a tested and efficient statistical model. It is evidence of Quantum Mutual Fund’s prowess and a visual testament to the alignment of past estimation with the actual returns.

The graph depicts that in the two massive macro events: the Global Financial Crisis of 2008-09 and the COVID-19 pandemic; when the markets were collapsing in shock and no one knew how the future would shape, QTLEVF was stirred but not shaken. The fund delivered consistent returns with its actual performance being closely in line with the estimation.

Table 1: QLTEVF Has Weathered the Bull and Bear Phases of the Indian Equity Market

Returns expressed are point-to-point in %. calculated using the Direct Plan-Growth option.
Returns over 1-year are compounded annualised.
Data as of January 31, 2024
Please note, that this table represents past performance. Past performance is not an indicator of future returns.
Source: ACE MF, data collated by PersonalFN Research
Disclaimer: Quantum Mutual Fund is a group company of Quantum Information Services Pvt. Ltd.
PersonalFN is not in receipt of any commission directly or indirectly for suggesting the scheme.
The securities quoted are for illustration only and are not recommendatory.
Mutual Fund investments are subject to market risks. Read all scheme-related documents carefully.
Speak to your investment advisor for further assistance before investing. 

The table above reveals how QLTEVF has fared across market cycles or phases (bull and bear). In the bull phase of the Indian equity market after the Global Financial Crisis of 2008-09, (i.e. 9th March 2009 until 5th November 2010) QLTEVF fared better than the benchmark indices. Similarly in the ensuing bear phase, i.e. from 5th November 2010 to 20th November 2011, it fell less than its benchmark indices.

Thereafter in the successive bull phase, it clocked competitive returns (almost in line with its benchmark, the S&P BSE 500 – TRI). When the Indian equity market went through a bear phase again from 3rd March 2015 to 25th February 2016, and later during the COVID-19 pandemic, it fell less than the benchmark indices.

Similarly, in bull phases where value investing got attention, QLTEVF delivered decent returns for its investors. So, the fund has weathered the market cycles well while safeguarding investors’ wealth.

Overall, QLTEVF’s actual performance since inception, after accounting for the expense ratio, has been better than estimated gross returns.

Table 2: QLTEVF: Actual Returns v/s Estimated Gross Returns

*Actual Returns are after the average expense ratio of the Direct Plan of 1.60 % (Gross-includes Taxes). Since Inception. Current Expense Ratio is 1.10 % (Gross-includes Taxes).
The above numbers are for the period 30-Apr-2006 to 31-JAN-2024. CAGR has been computed assuming a rebased starting value of 100 at 30-Apr-2006.
Past performance may or may not be sustained in the future.
Source: Quantum Mutual Fund
Disclaimer: Quantum Mutual Fund is a group company of Quantum Information Services Pvt. Ltd.
PersonalFN is not in receipt of any commission directly or indirectly for suggesting the scheme.
Mutual Fund investments are subject to market risks. Read all scheme-related documents carefully.
The securities quoted are for illustration only and are not recommendatory.
Speak to your investment advisor for further assistance before investing. 

Moreover, when delivering the returns, QLTEVF has not exposed its investors to undue very high. In fact, the fund has managed its risk better compared to its benchmark, the S&P BSE 500 – TRI.

Table 3: QLTEVF Has Exposed Investors to Low Risk and Clocked Decent Risk-Adjusted Returns

Standard Deviation indicates Total Risk and Sharpe Ratio measures the Risk-Adjusted Return. They are calculated over 3 years assuming a risk-free rate of 6% p.a.
Data as of January 31, 2024
Please note, that this table represents past performance. Past performance is not an indicator of future returns.
Source: ACE MF, data collated by PersonalFN Research
Disclaimer: Quantum Mutual Fund is a group company of Quantum Information Services Pvt. Ltd.
PersonalFN is not in receipt of any commission directly or indirectly for suggesting the scheme.
Mutual Fund investments are subject to market risks. Read all scheme-related documents carefully.
The securities quoted are for illustration only and are not recommendatory.
Speak to your investment advisor for further assistance before investing. 

This is the outcome of discipline research, and robust investment processes and systems followed at Quantum Mutual Fund.

Investment Strategy of Quantum Long Term Equity Value Fund

The investment strategy of QLTEVF is to invest in a basket of stocks after using intensive fundamental analysis, both quantitative and qualitative, monitor the portfolio actively but not so as to engage in excessive trading, and control risk by keeping the portfolio adequately diversified (both in terms of the sectors included in the portfolio as well as with respect to the level of concentration of any particular investment).

The primary focus is to invest in companies that are a part of the S&P BSE 200 Index. To recognise the ‘value’ proposition, QLTEVF looks at:

– The business of the company

– The environment in which it operates

– Skills and resources of its management

– Strength of the balance sheet

– Cashflows relative to long-term financial goals

– Fundamental sector criteria

Investments are made in companies whose shares are undervalued when compared to long-term valuation expectations. In this regard, dividend yields, Price-to-Earnings Ratio, Price-to-Cash flow, Price-to-Book Value, and other different measures of share price ratios are evaluated relative to the company’s peer group, its history and overall equity markets.

Note, that the fund does not make sector calls; it makes stock calls. Overall, QLTEVF follows a bottom-up approach for stock picking (as depicted below).

Source: Scheme Information Document

Currently, QLTEVF has 30 stocks in its portfolio, held with high conviction. Thus, QLTEVF maintains a low portfolio turnover ratio. Whenever the fund managers are of the view that the market or certain stocks are overvalued, a certain level of cash-and-cash equivalents are held but derivative strategies are avoided.

Further, market liquidity, which is an important tool to mitigate investment risk, is also looked at carefully.

Table 4: QLTEVF Has Always Held a Very Liquid Portfolio

Source: Quantum Mutual Fund Presentation
Disclaimer: Quantum Mutual Fund is a group company of Quantum Information Services Pvt. Ltd.
PersonalFN is not in receipt of any commission directly or indirectly for suggesting the scheme.
Mutual Fund investments are subject to market risks. Read all scheme-related documents carefully.
The securities quoted are for illustration only and are not recommendatory.
Speak to your investment advisor for further assistance before investing. 

Table 4 above shows that even when the size of the fund has grown, QLTEVF has held a dominant portfolio of its assets in highly liquid stocks. This is expected to be maintained even as the size of the fund, i.e. the Assets Under Management (AUM), grows in years to come.

Other than the quantitative and ‘value’ aspect, QLTEVF also focuses on the ‘values’ aspect of investing with propriety ‘Integrity Screen’ initiated by Quantum Mutual Fund’s sponsor in 1996.

Data as of 29th December 2023. Please refer Scheme Information Document for the complete Investment Strategy.
Source: https://www.quantumamc.com/equity-funds/quantum-long-term-equity-value-fund

The integrity screen helps consider stocks of companies that offer value propositions and growth potential with ethical business and corporate governance practices followed.

As regards selling investments, it’s done when the investment manager believes that the market price of the shares has exceeded its assessment of the long-term value of that company, or if there are adverse changes to that company’s management, prospects or the markets in which that company operates, and there are better investment alternatives available.

QLTEVF by following the above strategy and rationale, has endeavoured to achieve its investment objective, i.e., “to achieve long-term capital appreciation by investing primarily in shares of companies that will typically be included in the S&P BSE 200 Index and are in a position to benefit from the anticipated growth and development of the Indian economy and its markets.”

To sum up…

At present, near the lifetime high of the Indian equity market while you, as an investor, maybe in an exuberant mood and may think of going gung ho — as many of your investments may have made gains — what you need to be is thoughtful and cautious.

Avoid investing in an ad hoc manner or going by what your neighbours, friends, relatives, or colleagues do with their investments. Invest sensibly in line with the asset allocation best suited for you and select mutual fund schemes for your portfolio accordingly.

If you have the stomach for high risk and an investment time horizon of around 5 years or so, you may consider adding a Value Fund to your ‘Core’ equity mutual fund portfolio. A true Value Fund that follows robust investment processes and systems, holds the potential to generate respectable returns vis-a-vis the risk.

Choose predictable investing and be a thoughtful investor.

Happy Investing!

Note: This write-up is for information purposes and does not constitute any kind of investment advice or a recommendation to Buy / Hold / Sell a fund. Mutual Fund Investments are subject to market risks, read all scheme-related documents carefully before investing.

Disclaimer: Quantum Mutual Fund is a group company of Quantum Information Services Pvt. Ltd.

PersonalFN is not in receipt of any commission directly or indirectly for suggesting the scheme.

This article first appeared on PersonalFN here