The Hindu Business Line : Monitoring simplified!

Bewildered by the sheer number of fund houses and schemes on offer in the equity space? Quantum Mutual Fund offers to simplify the task of selecting the rights funds, through a new Fund of Funds offering. The Quantum Equity Fund of Funds plans to use a scientific selection process (aided by the personal finance Website PersonalFN.com), to sift through the entire set of diversified equity funds and construct a readymade portfolio for an equity fund investor.

What it offers: The Quantum Equity Fund of Funds (FOF) proposes to hold 5-10 funds at any point of time, selected from the entire menu of open end equity schemes. Only diversified equity funds (no sector or index funds), with track records of three years or more will be shortlisted for consideration.

Of this list, funds will be vetted for consistent performance and a diversified portfolio. Qualitative factors such as the fund’s adherence to its objectives, its investment style and its fund management team, will also be weighed in before the final list is arrived at.

The FOF will avoid concentration by holding no more than 20 per cent of its portfolio in a single fund (25 per cent where a fund has a five year record). The minimum holding in a fund is pegged at 10 per cent. Quantum also promises to meet the fund manager every six months and re-balance the portfolio every month. Those equity funds which slip up on the above criteria will be regularly replaced, after review.

The Pluses: Selecting the right funds for your portfolio is of great importance in the Indian context because of the vast gulf that separates the best performing equity funds from the really bad ones. That becomes quite apparent when you consider that the best performing diversified equity fund has generated a whopping 38 per cent compounded annual return over the past five years while the worst one has only managed 12 per cent!

Therefore, if you are an investor who doesn’t have much time to sift through equity funds or track your portfolio regularly; the Quantum Equity Fund of Funds would sit well as your core equity holding.

The monthly re-balancing feature and inputs received from meeting the fund managers every six months are also key value-adds provided by this fund and cannot be easily replicated by an individual investor. Given Quantum Mutual Fund’s unique pro-investor philosophy, one can also be reasonably sure that its fund selection will be unbiased and based on scientific criteria.

The Minuses: Past attempts to run a Fund of Funds in India have not been too successful. Such funds have not recorded outstanding returns through good selection and have moreover suffered from limited investor interest, managing small asset bases.

However, it must be clarified that just a couple of them have had the flexibility to invest across the gamut of funds from rival houses; a good number of FOFs here have tended to invest part or all of their portfolio in schemes managed by the same house, thus curtailing the benefits of this structure.

The other key disadvantage of taking the FOF route to equity investing (as against directly investing in equity funds) lies in the differential tax treatment meted out to such funds. For tax purposes, all FOFs (including equity oriented ones) are treated like debt funds.

That makes them subject to dividend distribution tax, and higher rates of short-term (up to 30 per cent) and long-term capital gains tax (20 per cent with and 10 per cent without indexation). Investors directly investing in equity funds are exempt from dividend distribution tax and long term capital gains tax, and pay only short term capital gains tax on holdings for less than one year.

A double layer of expense ratios and entry loads was another key disadvantage of FOFs, with both the manager of the FOF and the individual schemes it invests in, charging both. However, the recent SEBI decision to waive entry loads on all funds will substantially reduce the costs involved in a FOF.

Quantum’s Equity FOF does not plan to charge any entry load ; exit within a year will entail a 1 percent load

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