“If one sticks to the fundamentals of maintaining a proper balance between risk and return, an actively managed fund has a better chance of delivering better returns than a passively managed fund.”
Jimmy Patel, CEO, Quantum Asset Management, A Chartered Accountant by profession, Mr. Jimmy Patel holds the position of a Chief Executive Officer with Quantum Asset Management Company Private Limited. Mr. Patel’s journey in the financial industry began more than two decades ago. With a rich experience of nearly 21 years and a Stellar Performance Award to his credit, Mr. Patel sets an exemplary example of excellence. He is an epitome of knowledge with a deep understanding of critical business drivers in the financial services organization. Having served as a member of multiple AMFI committees, he is highly compliance driven. Jimmy has worked in various capacities in areas of financial accounting, operations, budgeting, controls & profit planning, corporate restructuring, administration of accounts, sales and marketing, and compliance. At Quantum, he has outlined some award worthy processes and his efforts have rewarded well. Jimmy has few more feathers in his cap of educational qualification. He holds a Bachelors Degree in Commerce and Law. Prior to joining Quantum AMC, Jimmy worked with Edelweiss Asset Management Limited, JM Financial Asset Management Pvt. Ltd, Principal Group (USA), Tata Mutual Fund and ICICI OneSource.
Quantum Asset Management Company Private Limited (Quantum AMC), founded by Ajit Dayal, was started in 2006. Quantum Asset Management Company is India’s first dedicated, direct-to-investor mutual fund house and offers 8 simple and easy-to-understand schemes across all 3 asset classes i.e. equity, debt and gold.
Replying to Anil Mascarenhas of IIFL, Jimmy Patel says, “If one sticks to the fundamentals of maintaining a proper balance between risk and return, an actively managed fund has a better chance of delivering better returns than a passively managed fund.”
Give us a brief overview of the MF industry?
The mutual fund industry in India opened up for foreign participation and thereby serious competition in 1993. We currently have around 44 fund houses in the country today offering products across equity, debt and gold asset classes. Some have taken the ETF route (Benchmark, now Goldman Sachs) while others have gone for a mix of actively and passively managed funds. Quantum Mutual Fund, established in 2005, has been and continues to be the only fund house to go direct to investor, all other fund houses go the distributor route.
The mutual fund industry is a barometer for the health of the economy. If the economy does well so do mutual funds and vice versa. Right now till the economy doesn’t stabilize and corporate faith is not restored in the India growth story, we see the industry yo-yoing in a band given the fact that the economy will remain ‘in limbo’ till the government decides to restore measures to improve the economy.
The awareness of mutual funds to the population at large remains abysmally low. This needs to change and fund houses need to do the best they can, given the available resources, to spread investor awareness and education. With the advent of the internet much has changed about the way we purchase anything, let alone mutual funds, innovations in the internet and mobile space and making investing more convenient and easier is what will drive the industry forward.
Why are retail investments through mutual funds failing to pick up well?
We believe that retail investors have not been given the complete picture transparently by agents and distributors, as a result of this; the retail investor has now become investment shy and does not want to put his moneys in equities or equity mutual funds. Most of the investors, due to either being misguided by parties with vested interests, tend to buy when the markets are high and sell when the markets are low instead of the other way around. Repeated bad experiences like this have led to the loss of investor confidence in stocks and mutual funds. So even when it is time to invest, most of the retail investors need convincing which could lead to the loss of the optimal opportunity of buying at the right time.
What are the opportunities and challenges for the industry?
The India growth story is both the mutual fund industry’s greatest opportunity and its greatest challenge. The penetration of the awareness of mutual funds needs to go beyond the top few cities and go deep into the Tier 2 and Tier 3 cities too. With a burgeoning population and continually rising expectations, the youth need to be guided about mutual funds and the fact that they are excellent vehicles for investment. Investors in Tier 2 and 3 cities tend to invest easily in real estate and gold, this needs to change, through a focus on investor education and technology to bring mutual funds to the people living there. Tapping this segment effectively is a huge opportunity for mutual funds.
Deeper penetration becomes therefore a great challenge, in order to convince people that Mutual Funds are good vehicles of investment either someone has to physically go to the people and increase awareness and resolve their concerns, or use technology. Videos and video conferences can be used to address people and resolve their doubts, however this is where infrastructural bottlenecks tend to creep in, with inadequate bandwidth of power and internet in these regions, having a physical presence then could become the only option. The issue is in a vast country like India how feasible is it to open branches across all Tier 2 and 3 cities? Can one AMFI branch, for example, at a nodal location play this role? This is a puzzle for the mutual fund industry as a whole to solve and that too quickly, if the industry is to grow to its potential.
What is the investment philosophy of your fund house?
The investment philosophy of the fund house is simple. We look to build a portfolio of stocks with broad exposure to various sectors; reflecting three broad themes: domestic consumption, exports and infrastructure. Regular meetings are held to review ideas and approve value stocks for the database.
Our Investment Criteria – Value the business of the company, the environment in which it operates, the management, and their long-term goals, can the financials support the long-term goals?
Analyze: The stock price based on fundamentals relative to its peer group, its history, and the market.
PER, PCF, P/BV, Div Yld, EV/EBITDA.
Buy: if current price meets our minimum valuations of our estimate of long-term value
Sell: Current price is greater our estimate of long-term value or we have a changed view of management or a changed view of business
Stock has to be under active coverage, average daily trading volume of US$ 1 million
Strict adherence to Buy / Sell limits.
We are indifferent to whether a stock we own is in the BSE-200 Index or not.
We do not make sector calls. We make stock calls that lead to certain sector weights.
Generally, the minimum holding in any one stock is 2% and the maximum is 6%.
With a range of 25 to 40 stocks our average holding is 2.5% to 4.0% per stock
What is your AUM? At what rate has it been growing?
How many SIP investors do you have in your MFs? What is the average size?
At Quantum Mutual Fund we always advise our investors to start small and invest for the long term. Hence SIP becomes the perfect vehicle for new investors to come into our fund and we try and see if we can convince them to continue their SIPs. As on Dec 2013 we have approximately 8,900 active SIPs across all our funds. We believe that the SIP route is ideal in the long run for investors since they can benefit from rupee cost averaging and don’t need to panic every time there are changes in the market.
Given the market conditions, would you suggest active or passive investments?
From an investor’s perspective - it depends on the track record of the fund. If the fund has been able to maneuver through volatile markets then the investor should trust the fund manager to do his job (relatively passive). If the investor is confident about his own ability of being able to time markets then he can decide himself (active). If the investor cannot do the latter then he can choose a passive option.
From our philosophy perspective, we always believe in passive investments through active portfolio management since we have a team based approach which we trust to pick the right instruments at the right time and at the right price. We also believe that if one sticks to the fundamentals of maintaining a proper balance between risk and return, an actively managed fund has a better chance of delivering better returns than a passively managed fund.
Your outlook on the market?
Equity markets are already factoring a business cycle turnaround; however, corporate earnings are yet to reflect the same. If the earnings cycle remains subdued you may see equity markets correcting. However, these are near term issues over the long term we remain bullish on Indian equities.
As a fund house we are firm believers in the India growth story, we have a young and educated population with growing aspirations that will drive the economy in the future. We hence look out for companies that have their basics in place, are nimble enough to innovate to capture the attention and fulfill the aspirations of this growing segment. How companies embrace technology will also be a telling factor since the new generation seems to be completely clued on to the latest innovations and embrace technology a lot faster than someone from previous generations.
How do you see macro-economic situation panning out over the next few quarters?
The macro economic situation will improve as many projects which have been stuck due to the seeming policy paralysis are close to getting clearance. Electricity generation is expected to increase further with fuel supply agreement signed between Coal India and power generation companies. Gas production is expected to increase in the coming months as prices will double from April 2014. The other factor is the improvement in growth outlook in the developed markets which should help exports. It is hoped that rupee depreciation will lead to compression of imports and led to lower current account deficit.
Your view on interest rates.
Mr. Raghuram Rajan has announced a rate hike of 25 bps in the REPO rate. For us, Interest rates are expected to remain stable as the RBI governor has indicated, further rate hikes are not necessary if inflation follows the trajectory which Mr. Rajan and his team envisage. Monetary policy could be a little more ‘relaxed’ if inflation falls further from these levels. Interest rates from these levels should remain range bound with the ten year trading around 8.70 – 9 % levels in the coming months. Short term rates are expected to remain stable in near term with the 5 year trading in the range of 8.4 – 8.6 levels in the coming months. The spread is expected to remain in the range of 60 to 80 basis points over comparable government securities.
How are you reading the political situation in the country. Are you confident of a stable government after the elections?
As a fund house, we did a very interesting study. If you look at the growth rate of India’s GDP over the last three decades (since 1980) the GDP growth rate seems to be completely unrelated to who we have at the center. We have had a single party, a coalition, then a different coalition, a government for 13 days and a government that has been in power for the last 8 years etc. irrespective of who occupies the chair at the center, what is most important is that the policies of that government are not regressive and continue to encourage growth. No government at the center would want the growth rate to dip hence we are not that concerned about the outcome of these elections.
What the industry hopes for is a strong government that starts to clean up the policy cobwebs that seems to have grown over the last few years, something that will revitalize the industry and not just focus on agriculture and providing free food. India needs to become a preferred investment destination not only for the FIIs and foreign investors but also our own domestic companies. Red tape needs to be cut and the process of setting up a business and conducting it needs to be smooth and uniform.
India’s Achilles heel is clearly infrastructure. Appropriate policies and faster clearances for infrastructure projects will also go a long way in restoring the faith of the domestic and foreign companies to start investing heavily in India. All the government needs to do is to provide this platform. We have enough companies who will want to invest in India, thereby making the India growth story a reality.
From the regulatory front, what changes would you suggest?
Will be restricting my views to the MF industry here, SEBI has been regulating the Mutual Fund industry since 1996. They have come up with a lot of rules, especially in the recent past that are aimed at benefitting the retail investor. Be it the tremendous focus on investor education or the abolishing of entry loads or the crediting of the exit loads back into the scheme (all of these were incidentally practiced by Quantum Mutual Fund since our inception in 2006).
The only regulation that has us a little puzzled is the minimum net worth regulation that SEBI is contemplating. We believe that having this regulation will be counterproductive to what SEBI is planning to achieve by wanting to keep only ‘serious’ “big” players in the industry. Having a high networth is no indicator of seriousness, what needs to be considered is the performance of the fund, if a fund has consistently underperformed its own benchmark then the fund house needs to be pulled up for that. The logic is simple, when you go to a doctor you don’t see how rich he is but judge his reputation in his field!
When it comes to reaching out to investors, media campaigns by insurance companies have high recall unlike MFs. Do you think the industry needs to improve its communication?
Good question, though there have been good mutual fund ads too! Think that ad campaigns are subjective, what one thinks is great could be terrible for the other. This is why we believe there is always scope to improve communication.
The Mutual Fund industry faces certain ‘restrictions’ that insurance doesn’t face. E.g. we cannot hire a celebrity to endorse our products nor can we speak of our fund rankings and ratings. The best we can do is focus on investor education, which means we need to keep things very simple.
What is your advice to those who wish to invest in mutual funds? Few factors investors should keep in mind while choosing a MF?
The advice to investors is to not get swayed by market movements and delay their investments. Instead, they should start investing in Mutual Funds as it offers a wide spectrum of investment products to suit their investment needs and allows diversification of risk with the help of a professional fund manager to take care of their hard earned savings.
Following are some of the factors which will help you to select an appropriate mutual fund:
Identifying investment goals and objectives
Before investing in any fund, an investor must first identify his or her goals for the money being invested. Are long-term capital gains desired or investment is done for a shorter period? Will the money be utilized for short term expenditures like a family vacation or to supplement a retirement that is decades away? It is very important that you always check whether the fund’s investment objective mentioned in the offer document is aligned with your investment objective or not.
Your Risk Tolerance
You must also consider the issue of risk tolerance. Are you able to afford and accept swings in portfolio value or are you more of a conservative investor? Identifying risk tolerance is as important as identifying a goal.
Select Funds with Low Expense Ratios and Low Portfolio turnovers
You should always choose a fund with a lower expense ratio and a lower portfolio turnover. Expense ratio is the measure of what it costs to an investment company to operate a mutual fund. Remember, higher the expense ratio, a larger portion of your money is deducted as a fees by the AMCs, therefore this affects your returns as less of your money is invested in the market. Similarly Portfolio Turnover is the measure of how frequently assets within a fund are bought and sold by the managers. If the portfolio is churned many times during a year, the fund will incur higher transaction costs, which means a further impact on the amount you have invested in the fund. Hence look at funds which have lower expense ratios and lower portfolio turnover.
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