IndiaInfoline Mutual Funds Fund Manager Speak

Jimmy A Patel, CEO, Quantum Mutual Fund

Anil Mascarenhas / 15:24, 17-Jan-12

Jimmy A Patel, Chief Executive Officer, Quantum Mutual Fund, Jimmy Patel has close to 2 decades of experience in the financial services sector, and has held various key management roles. Along with holding a Chartered Accountant’s degree, Mr. Patel has also completed his L.L.B. from the University of Mumbai.

 

Quantum Mutual Fund (QMF) was launched in 2006 as India’s first direct to investor mutual fund and currently manages 7 funds viz - Quantum Long Term Equity Fund, Quantum Tax Saving Fund, Quantum Liquid Fund, Quantum Gold ETF, Quantum Index ETF, Quantum Equity Fund of Funds and  Quantum Gold Savings Fund.

 

Replying to Anil Mascarenhas of IIFL, Jimmy Patel says, “The precise mix of equity, fixed income and gold--either directly or via mutual fund investments--is a function of every investor’s needs, the time horizons, and the ability to withstand sharp and sudden erosions in investments.”

 

Brief us about Quantum fund’s investment philosophy. To what extent has it changed over the years?

As a direct-to-investor mutual fund house, we believe in working primarily for the investor’s advantage and work by the motto “Profit with Process”. Apart from offering simple to understand products at reasonable values, our investment philosophies are as follows:


Disciplined and long-term approach: While the markets may rise or crash, what stands by an investor’s portfolio is long term thinking. We will gain only when we are not constantly worried about the stock’s performance and other small issues. We spend hours researching a company’s background and buy intorespected managements with high corporate ethics, and hence we should be sure that it is going to create value for the investor in the long run. 


No Star Fund Manager – While fund managers may change, the investor’s money is entrusted with the AMC. And so, we do not believe in patting the backs of just one individual star. Instead, we follow a team approach wherein our fund managers work along with our research team to ensure that your portfolio is never compromised.

 

Simple Products – Any investor must be clear about what product he is investing in. And that means simple clear-cut products which cater to the basic investment objectives of the investor. That’s the reason why we have launched only 7 basic funds till date. Our product portfolio aims to help you spread your investments across different yet important asset classes. We have not launched sectoralor thematic funds as they make very little sense to us.

 

Ignore market tip-offs: With the backing of a disciplined process and well managed research methodology, we turn a blind eye to market tips and forecasts. We stand by our fund’s portfolio and do not to churn the portfolio based on market rumors.

 

How is your business model different from the others?

We are India’s first “direct-to-investor” mutual fund house which means we walk a path that is quite different to the others in the mutual fund industry. We have nothing against distributors- we believe that everyone needs to get paid for their work they do- but those payments need to be revealed. While we do welcome distributors to recommend our products, we are against the opaque and biased commission system that is prevalent in the industry at the moment.

 

We have always ensured that there is transparent communication with our investors at all steps. This brings in clarity among investors and they can consequently choose to compare and invest with us.

 

Apart from being the first mutual fund house to come to investors directly, we understand how difficult and time consuming it is to complete elaborate paperwork, and to depend on a distributor. And hence, we have embraced technological advancement and introduced India’s first completely paperless online investment platform which allows financial as well as non financial transactions.

 

Quantum Mutual Fund will continue to focus on the original intentions behind managing a mutual fund; to ensure that the investors get:

  • Simple products that work for their benefit,
  • Low cost products and fee that add value to their portfolio
  • Constant communication with investors, while maintaining transparency in our operations.

As a direct-to- investor mutual fund, our reach may be small.

 

What factors would increase appetite for investing in mutual funds?

Many mutual fund houses are churning out various innovative product features that they feel are valuable for the investor. These include introducing funds based on new asset classes, dynamic asset allocation and capital protection oriented funds. However, what will truly increase the investor’s appetite for investing in mutual funds are simple thoughts that will help investing easier for them. These could be in the lines of:

  • Launching simple easy-to-understand products that “actually” help the investor.
  • Introducing better investment process such as an online process so that their investment process in made easy and hassle-free.
  • Better transparency in the system, including disclosures by distributors and mutual funds. This makes it easier for the investor to take a decision while choosing mutual funds as an investment option.
  • Regular investor education programs should be carried out so that the basic concerns and doubts that investors face can be ironed out.
  • Lowered expenses and more flexibility while investing in mutual funds.

Which are the sectors are you bullish and bearish on?

We are sector-agnostic, which itself states that we do not look at the upside or downside of the markets while choosing the right stocks. When our research team builds a portfolio, they do not look at the sector to which the stock belongs. Instead, the focus remains on purchasing the stock at the price we feel is right. So, if we do not find a good stock at proper valuations, we prefer sitting on cash than wrongly investing the investor’s money on wrong stocks.

 

In 2008, the main asset classes that were badly hit were from sector and thematic based funds since they remain heavily concentrated on particular sectors or themes. So, in case of a real estate crash, that particular thematic fund carries higher risks of a downfall than a diversified fund which invests in a variety of sectors. We have hence not launched any sector or thematic funds as we feel they tend to add too much risk to the portfolio of the investor.

 

Brief us on your fund’s performance. What can MF investors expect from Quantum in the coming months? (new fund offers etc)

At Quantum, we feel that every investor seeks simplicity and easy access to their investments. Hence, we introduced a completely paperless online investment platform which investors easier access to their financial transactions and non-financial needs. In addition, we recently launched our prepaid card and the Visa enabled debit card facility which makes the investor’s investment journey affordable, easier and more convenient.

 

We consciously try to understand our investor’s needs and try to meet them by bringing valuable products and through superior service.

 

Have corporate earnings been in line with your expectations?

 According to a recent analysis by Crisil Research, corporate earning in India is expected to decline slightly by 2% in the third quarter of this financial year. The corporate earnings are expected to fall by 2%points to 17.7% due to increased interest costs and marked-to-market losses in the third quarter. There is a possibility that companies with substantial debt on their balance sheets will be hurt by rising interest costs and depreciation of the Rupee. Companies with substantial export earnings such as IT services companies, bulk drug exporters, pharma companies that focus on formulations exports, and oil exploration companies with low proportion of debt on their balance sheets, stand to gain from a weak Rupee as their profitability will improve.

 

The market for a variety of reasons may choose to ignore the earnings in the short term and these returns may not come true. In the end however, the markets cannot ignore these earnings. Historically the returns from investing in equity in India have seen a CAGR return of 17%.

 

Given the growth rate of 7% in the GDP and an inflation of 6%, earnings in India should probably grow by 13%. If we are able to choose slightly better companies, then the return after taking into account dividend returns should be in the range of 15 %to 17% per cent.  Also, holding equity for the long term attracts zero capital gains tax, while a 10% fixed income return will attract tax. However, the investor may have to hold on to the security for more than a year.

 

Market expectations about corporate earnings are muted as the numbers are expected to reflect the impact of higher interest rates and the consequent slowdown in capex.

 

Give us your take on the macro-economic environment locally and globally.

We live in an era of lower trade and financial barriers. While that allows us to be a more globalized economy, it also forces us to be less localized. 2012 will also see an election in France and a change of guard in China. In India, 5 states--the equivalent of the population of Germany and France will head for the polls. The uprisings in the Middle East and Russia and the recent succession of a nuclear North Korea are all additional uncertainties each throwing up their own butterfly effects.

 

Without political support and the ability to hoard, the price of daily essentials-- food, clothing, real estate etc. should decline. At a portfolio level, investors should seek shelter in companies with low or zero debt; in fixed deposits with safe companies, preferably PSU banks; and probably also look at investing in gold.

 

While macro-economic parameters are favorably poised to raise the stock market, some major worries stare us in the face. The precise mix of equity, fixed income and gold--either directly or via mutual fund investments--is a function of every investor’s needs, the time horizons, and the ability to withstand sharp and sudden erosions in investments. An investor who wants to profit from any market, should stay disciplined, and not panic.

 

Every fund manager would give enough reasons to buy a mutual fund. For investors, when is an ideal time they should look at exiting a mutual fund?

One can never really time the market, and hence there is nothing like the right stage to invest. You should not depend on the market’s upswing and downslides. The only point to remember is to plan your investment in such a way that you meet your financial goals with a long term approach.

 

It is always the right time to invest, as long as you are aware of the reasons for investing and your investments are based on your comfort levels. Mutual funds are just vehicles that help you allocate your investments across stock markets, bonds and commodities.

 

If a scheme changes its style and investment objective midway, then it would no longer assist your financial objectives and risk profile. So, holding on to the fund will not bring any value to your portfolio. Investors usually commit the mistake of viewing mutual funds as stocks and hence only invest into equity schemes and thereby speculate on timing. There are times when debt and commodity funds do well while equity funds perform badly. Hence, it is important that you remain steadfast to your goals, follow a disciplined method of asset allocation and consciously diversify your portfolio into various available financial instruments.

 

What books have you been recently reading? Any key takeaways?

While I am currently reading market related magazines, books written by John Bogle especially ‘Common Sense on Mutual Funds’ is a must read and opens every mutual fund investor’s eyes to the industry. 

 

What advice would you give retail MF investors in the present situation?

It is very difficult to say where the markets are going but given the uncertainty in many quarters, the equity markets appear to be the worst hit. It also looks like the outlook will turn worse before gaining again.

 

Concerns of high fiscal deficit, inflationary pressures and rising interest rates, made investors in India-focused equity funds extremely anxious and caused them to pull out a huge chunk of investment from the funds. While the numbers may look staggering, we look at this as a small deterrent in the future markets.

 

We are not advising that retail investors completely stop investing given the present situation. Instead, they should realize their risk taking capacity and look at investing in a long term fund which is backed with solid performance. If you have a limited risk appetite, you should remain invested in short term instruments such as liquid funds and other related schemes which give decent returns.

 

Another good option for retail investors would be to add gold ETFs to their portfolios. Since they do not carry high costs like making and locker charges, and can be transacted easily on the stock market, they are also becoming well-known investment options for investors from smaller cities also.  

 

What are some of the key concerns investors may be having? What is your reply on the same?

India-focused equity funds was the worst performer among the emerging markets and witnessed an outflow of $4.08 billion in 2011, according to data compiled by the international fund tracking firm EPFR Global.

 

Investor appetite for risk is a concern before deciding or choosing the investment platform. And his concerns are justified because:

  • Widespread corruption in the government and corporate divisions has made the investor fearful about the future, which has led to a decline in investments. 
  • Earnings reflect true picture
  • Investor concerns on growing inflation, falling currency prices, market crash and a probability of another recession hitting them are also reasons for low investments.

How do you view the commodity space? View on gold?

Being the only currency whose supply is highly constrained, we believe that gold is rightly increasing in value. In simple words, gold is simply adjusting to the changes seen in global monetary conditions. When a central bank increases their money supply, the price of other currencies adjusts upwards. This is true for all currencies, including gold. We should view gold as a monetary asset rather than a commodity. Given the current economic backdrop where governments are struggling with problems like rising deficits and unsustainable debts, it is indeed logical for gold prices to increase in value.

 

Over the long term, we can clearly see that gold prices are trending upwards. The macro-economic and supply-demand drivers point to a continued increase in gold prices. Demand from consumption centers, such as India and China largely seem to be on a firm footing. Investment demand has been robust and is likely to continue to grow, lending support to gold prices. We do not believe that there is a ‘bubble’ developing in gold, as the relatively high prices seen recently are supported by fundamental factors.

 

The uncertain macroeconomic environment and looming inflationary threat over a long term reiterates the need for gold in one’s portfolio. This seems to be a good time to make a strategic allocation to gold, as it is the counterweight to paper money, which is continuously losing credibility as a store of value. 

 

What initiatives are you doing in terms of Investor Education.

As a direct to investor mutual fund house, it is essential that we regularly interact with our investors and readers. Our main motive is to introduce the reader to the world of mutual fund investing and try to educate him on how investing is not as difficult as it is made out to be. We currently offer them the following investor education programs:

 

Path to Profit: We are doing many Events to educate investors about Mutual Fund Industry. We have initiated an Event called ‘Path to Profit’ in many cities across India, where we meet our existing and potential investors, and solve their queries on Market related issues. Our Fund Managers too address the meets thus giving investors a chance to personally interact with them about the fund, the outlook etc.


Quantum Equity Direct (QED) web magazine: We send the QED to the people who are interested in investing. We add interesting articles based on simple investing methods and habits, where we talk about the industry as well as try to make investments much easier for the investors. We want people to understand the reason behind their investment, by getting to know our values and philosophy rather than blindly investing.  This especially holds true in some cases, since we consciously follow the path of creating wealth for our investor through long term investments.


Quantum View: They are monthly views on the market which are shared by our fund managers on their respective fields namely Equity, Debt and Commodities.


Golden Truth: This column where investors and readers alike get the global essence of gold’s performance and happenings. It tries to educate investors about the importance of holding gold in one’s portfolio.


Office activations: We visit various corporate offices, meet corporates from non-financial backgrounds and educate them on mutual fund investing.


Investor Education Literature Launches: The best way to educate the investor is through material that they can take home and read in their free time. And so, we introduced Quantum’s very own comic book which explains mutual fund investing through a comic story format and Quantum Theory of Investment which looks at busting the investment myths that readers usually have in their minds.