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How Quantum Multi Asset Fund of Funds Protects the Downside Risk
The Indian equity markets are on a rollercoaster with the uncertainty surrounding the COVID-19 pandemic. It's been a nerve-racking experience for investors and wealth has been eroded.
As we continue to battle COVID-19 with lockdown 3.0, on a year-to-date basis the S&P BSE Sensex is down -23.9% as of May 5, 2020, (see Table 1 below).
Table 1: Wealth erosion across market cap segments
| Particulars | S&P BSE SENSEX | S&P BSE Mid-Cap | S&P BSE Small-Cap |
|---|---|---|---|
| All-time high (Dates) | 20-Jan-20 | 9-Jan-18 | 15-Jan-18 |
| All-time high level (in points) | 42,273.87 | 18,321.37 | 20,183.45 |
| Level as of Jan 1, 2020 (in points) | 41,306.02 | 14,998.63 | 13,786.69 |
| Level as of May 5, 2020 (in points) | 31,453.51 | 11,391.21 | 10,649.61 |
| YTD Return (%) | -23.90% | -24.10% | -22.80% |
| Correction since the all-time high (%) | -25.60% | -37.80% | -47.20% |
(Source: bseindia.com; PersonalFN Research)
Balanced Hybrid Funds that are supposed to be balanced and protect downside risk have gone on to erode investors' wealth by seldom maintaining a 'fair balance' and displaying unreasonable love and exuberance for equities plus for taxation reason -- to be treated as an equity-oriented fund. (see Table 2 below).
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Similarly, many multi-asset funds that hold the mandate to invest with allocation across three asset classes i.e. equity, debt and gold with minimum 10% in each have posted negative returns (see Table 2 below).
Table 2: Report card of Balanced Hybrid Funds and Multi-Asset Funds
| Scheme Name | AuM (Cr) | 3 Mths | 6 Mths | 1-Yr | 2-Yr | 3-Yr | 5-Yr | P2P Returns: |
|---|---|---|---|---|---|---|---|---|
| Jan 1, 2020 To | ||||||||
| April 30, 2020 | ||||||||
| Balanced Hybrid Funds | ||||||||
| SBI Equity Hybrid Fund | 26,924.55 | -16.80% | -13.20% | -7.90% | -0.50% | 4.50% | -12.10% | |
| ICICI Prudential Equity & Debt Fund | 16,219.25 | -17.20% | -17.10% | -14.07 | -4.40% | 0.50% | 5.80% | -16.10% |
| HCDF Hybrid Equity Fund - Direct Plan | 14,890.78 | -15.20% | -12.70% | -12.20% | -5.50% | -2.10% | 2.70% | -15.00% |
| Aditya Birla Sun Life Equity Hybrid 95 | -19.20% | -19.00% | -17.20% | -9.00% | -3.10% | 3.20% | -17.20% | |
| 6,914.36 | ||||||||
| L&T Hybrid Equity Fund | 5,405.22 | -16.20% | -14.90% | -11.90% | -6.40% | -0.90% | 4.90% | -12.80% |
| Multi Asset Funds | ||||||||
| ICICI Prudential Multi-Asset Fund | 9,022.56 | -14.50% | -14.80% | -12.10% | -4.10% | 1.00% | 5.20% | -13.90% |
| UTI Multi Asset Fund | 564.1 | -11.80% | -10.40% | -6.80% | -3.20% | 0.30% | 2.90% | -7.10% |
| SBI Multi Asset Allocation Fund | 220.63 | -3.60% | -3.20% | -6.20% | 4.20% | 5.60% | 7.60% | -1.70% |
| HDFC Multi-Asset Fund | 198.05 | -10.30% | -6.40% | -4.00% | -0.60% | 2.20% | 5.10% | -8.60% |
| Quantum Multi Asset Fund of Funds | 16.23 | -1.20% | -0.90% | -4.20% | 5.00% | 5.90% | 7.30% | -2.00% |
| Benchmark: S&P BSE Sensex TRI | - | -22.00% | -21.10% | -17.50% | -3.50% | 3.00% | 4.30% | 22.90% |
Growth Option and Direct Plan considered and the peer list is not exhaustive
(Source: moneycontrol.com; advisorkhoj.com; PersonalFN Research)
ICICI Prudential Multi-Asset Fund, HDFC Multi-Asset Fund, and UTI Multi-Asset Fund, in particular, have not lived up to the expectation and the trust evinced by investors (going by their AUM size). Not just are their recent returns amidst the outbreak of COVID-19 crisis unappealing, but even the 3-year and 5-year compounded annulaised return is nothing to vie for. This is because they haven't been able to sensibly allocate to the three key asset classes: equity, debt and gold, and play the investment strategy astutely.
On the other hand, the Quantum Multi-Asset Fund of Funds (QMAFOF) has depicted true balance backed by its sensible investment strategy arrested the downside risk and relatively fared better vis-a-vis its peers over 3-year and 5-year time periods.
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The Quantum Multi-Asset under normal circumstances by maintaining 25%-65% exposure to units of equity schemes (vide Quantum Long Term Equity Value Fund, Quantum Nifty ETF); 25%-65% exposure to units of debt and money market instruments (vide Quantum Liquid Fund, Quantum Dynamic Bond Fund); 10%-20% in units of gold schemes (vide Quantum Gold ETF); and up to 5% in money market instruments, Short-term Corporate Debt securities, Tri-Party Repo, Repo/ Reverse Repo in Government securities and Treasury Bills has been able to generate modest, yet appealing returns than the rest, and mitigated the risk by diversifying across asset classes: equity, debt and gold.
Historically it is proved that all classes never move in the same direction -- up or down -- at the same time. There could be times when certain asset classes perform better than the other and/or show an inverse relation to another (see Table 3).
Table 3: Here's how various asset classes fared per calendar year
*As on 31st March 2020
Past Performance may or may not be sustained in future
(Source: quantumamc.com)
If your multi-asset fund strategically allocates between equity, debt, and gold sensing the pulse of each asset class, maintains balance, and takes calculated risk sensible wealth creation is possible.
In the on-going COVID-19 crisis, equities will remain volatile, but given the sharp correction, there are and will be, enough long-term value-buying opportunities with a decent margin of safety.
Gold in such uncertain times would continue to gain all the attention. Easy monetary policy action and accommodative stance to address growth concerns, a record-high debt-to-GDP ratio, trade war tensions, geopolitical tensions, the potential risk to the inflation trajectory mainly due to food prices, increased stock market volatility, and the U.S. Presidential election in November 2020 are some of the factors expected to work in favour of gold. The precious yellow metal will demonstrate its trait of being a portfolio diversifier, a hedge (when other asset classes fail to post alluring returns), and command a store of value.
And speaking of debt & money market instruments, with exposure to highly rated papers and predominantly government securities, will act as a stabilizer.
A unique aspect of QMAFOF is that it has always taken relative valuations between asset classes into consideration, such as:
- Price-to-Earnings relative to historical averages;
- The relationship between earning yield to bond yield relative to historical averages; and
- Macroeconomic factors prevailing globally and within India
It is this wide-ranging and sensible approach that has helped QMAFOF to protect against the downside risk and reward its investors better than many of its peers. The fund managers, Mr Chirag Mehta (MMS - Finance, M.Com, and CAIA with over 13 years' experience in research and investments) and Mr Nilesh Shetty (B.Com, MMS -Finance, and CFA with collectively 16 years in equity markets), have strategically moved in and out of the aforesaid asset classes wisely recognising their upswings and downswings.
[Read: Why Tactically Invest Across Asset Classes amidst COVID-19 with Quantum Multi-Asset Fund Of Funds]
The choice is completely yours: to stay invested in a 'Balanced Hybrid Fund'/ Multi-Asset Fund that does not show true balance and keep harming your health and wealth; or make a sensible move and switch over to Quantum Multi Asset Fund of Funds that is truly balanced and has sensibly generated wealth for investors without the shrieking experience of a rollercoaster.
Wish to invest in Quantum Multi Asset Fund of Funds? Click here.
Happy Investing!
Author: Rounaq Neroy
This article first appeared on PersonalFN here.
PersonalFN is a Mumbai based personal finance firm offering Financial Planning and Mutual Fund Research services.
Disclaimer:
The views mentioned above are of the author only. Data and charts, if used, in the article have been sourced from available information and have not been authenticated by any statutory authority. The author and Equitymaster do not claim it to be accurate nor accept any responsibility for the same. The views constitute only the opinions and do not constitute any guidelines or recommendation on any course of action to be followed by the reader. Please read the detailed Terms of Use of the web site.
Franklin Templeton Fiasco: Here Is When You Can Expect to Get the Money Back
Many investors park their surplus money in debt schemes in an attempt to earn higher returns than Bank FDs. However the recent incident of Franklin Templeton MF winding down six of its debt schemes has dented investor sentiment and sparked speculation about the safety of their investments.
The news came as a shocker to the investors because the six schemes, the fund house, and the fund manager had a good performance record. Investors in the wound up debt schemes of FTMF are now left with no choice but to wait for the fund house make repayments.
If you are one of them, surely you want to know about the timeline of payouts from the respective schemes.
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Here is what you should know first...
Before returning the money to unitholders, the fund will have to repay the borrowings by the respective schemes that was taken to fund the heightened level of redemptions. Keep in mind that the repayment of borrowings does not impact the value of money to be returned to the unit holders, though it can delay the start of pay out to unitholders.
The repayment of the borrowings that the fund has taken, along with the cash flows it receives in the respective schemes based on the maturity of the underlying securities in the portfolio as well as coupon receipts will determine the payout to the unitholders.
Moreover, the fund will seek pre-payment from issuers of the underlying securities and will look to sell portfolio holdings in secondary market at fair value.
Table 1: Maturity profile of wound up FTMF schemes
| Scheme Name | Investment Objective | Macaulay Duration | Average Maturity |
|---|---|---|---|
| Franklin India Ultra Short Bond Fund | Investing in instruments with Macaulay duration between 3 months and 6 months | 0.38 | 0.44 |
| Franklin India Low Duration Fund | Investing in instruments with Macaulay duration between 6 months and 12 months | 1.17 | 1.45 |
| Franklin India Dynamic Accrual Fund | Investing across duration | 1.97 | 2.71 |
| Franklin India Short Term Income Fund | Investing in instruments with Macaulay duration between 1 year and 3 years | 2.43 | 3.14 |
| Franklin India Credit Risk Fund | A bond fund focusing on AA and below rated corporate bonds (excluding AA+ rated corporate bonds) | 2.36 | 3.38 |
| Franklin India Income Opportunities Fund | Investing in instruments with Macaulay duration between 3 years and 4 years | 3.92 | 5.32 |
(Source: Franklin Templeton Mutual Fund)
Franklin India Ultra Short Bond Fund (FIUBF) and Franklin India Low Duration Fund (FILDF) are the schemes with shorter maturity. If you are an investor in this scheme, you may expect a significant payout within 2-3 years. However, to recover the entire amount you may have to wait up to 5 years.
If you are wondering why a scheme with average maturity of just 0.44 years and 1.45 years will take around 5 years to repay the entire amount?
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Our Co-Head of Research, Tanushree Banerjee, has identified 7 stocks that could do exceedingly well in the coming years riding on a rare economic event.
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And she says those who get into these 7 stocks right now have the chance to make potentially LIFE-CHANGING returns in the long run.
So will you be among those who acts on this opportunity now? Or will you be among those who will kick yourself later not taking action now? The choice is yours.
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------------------------------
This is because the maturity of some underlying securities is much longer (around 4-5 years), even though the schemes belong to low duration category. Additionally, the schemes have borrowings in the range of 6.5% and 8.5% respectively, which have to be repaid first.
Whereas, if you are an investor in Franklin India Dynamic Accrual Fund (FIDA), Franklin India Short Term Income Fund (FISTIP), Franklin India Credit Risk Fund (FICRF), and Franklin India Income Opportunities Fund (FIIOF) your wait will be longer. These schemes primarily invest in medium to long duration securities.
These funds had to sell a number of their short term and liquid securities in the portfolio to meet redemptions. Hence, to get a significant payout from these schemes you will have to wait at least 4-5 years. The year wise expected cumulative cash flows is given in the table below.
Notably, FIIOF is the longest duration fund from among the six funds that have been wound up. It will only be able to repay a very small portion (5%) in the next two years.
Another key reason that could delay the payout from these schemes is the high borrowing rate. FISTIP has 28% of its assets as borrowings, FIIOF has 26%; while FICRF also has significant 16% as borrowings. Furthermore, factors such as credit issues or payment delays faced by any of the investee companies could negatively impact cash flows.
Table 2: Cash flows expected by FTMF across different time period
Many of the securities with longer maturities have regular interim cash flows and features such as interest rate resets or call/ put options, which significantly reduce the effective maturity and the same has been factored into the calculation of the Macaulay Duration.
FTMF said that it would actively explore opportunities with a goal to facilitate repayment prior to the maturity of the portfolio investments. To do this it will seek prepayment from the issuers of the underlying securities and look to sell the securities in the secondary market.
However, the current market scenario is rife with risk aversion and illiquidity. The fact that wound up schemes have high holding of lower rated securities, FTMF will have to wait for the market conditions to go back to normal to liquidate the portfolio at the earliest, without causing value erosion for investors.
[Read: RBI Steps in to Take Some Pain Off Mutual Funds. Will It Help?]
Way ahead for debt fund investors
Keep in mind that debt funds are not risk-free. Investment in debt funds carry various risks relating to liquidity, credit quality, and interest rate. Therefore, before investing in debt funds understand the various risks involved and invest in schemes where the portfolio risk aligns with your own risk appetite and financial objective.
In this market environment, it would be preferable to invest in instruments issued by government and public sector enterprises, and stay away from those having high exposure to private issuers.
At PersonalFN, we arrive at top rated funds using our SMART Score Model. If you wish to select worthy mutual fund schemes, I recommend you to subscribe to PersonalFN's unbiased premium research service, FundSelect.
Additionally, as a bonus, you get access to PersonalFN's popular debt mutual fund service, DebtSelect.
If you are serious about investing in a rewarding mutual fund scheme, Subscribe now!
Author: Divya Grover
This article first appeared on PersonalFN here.
PersonalFN is a Mumbai based personal finance firm offering Financial Planning and Mutual Fund Research services.
Disclaimer:
The views mentioned above are of the author only. Data and charts, if used, in the article have been sourced from available information and have not been authenticated by any statutory authority. The author and Equitymaster do not claim it to be accurate nor accept any responsibility for the same. The views constitute only the opinions and do not constitute any guidelines or recommendation on any course of action to be followed by the reader. Please read the detailed Terms of Use of the web site.
RBI Steps in to Take Some Pain Off Mutual Funds. Will It Help?
Last week the mutual fund industry was jolted by the news of Franklin Templeton MF winding down six of its debt schemes. The fund houses cited high redemption pressure and lack of liquidity due to COVID-19 as the reason behind the move.
There has been a rush of redemption in the debt market due to high volatility and uncertainty caused by the outbreak of pandemic. The stress is more evident in high-risk category of securities where liquidity has dried up. Notably, the schemes that were wound up belonged to the high credit risk category.
The recent FTMF fiasco led RBI to take note of the situation and step up to build confidence in the capital market.
On April 27, 2020, RBI announced the opening of a special liquidity facility (SLF-MF) worth Rs 50,000 crore to ease liquidity pressure on mutual funds.
Under SLF-MF, RBI will conduct repo operation of 90 days tenor at the fixed repo rate. Banks can avail funds under this facility between April 27, 2020 and May 11, 2020 or up to utilization of the allocated amount, whichever is earlier. RBI will review the timeline and amount, depending upon market conditions.
Banks have to utilise the funds availed under this exclusively for meeting the liquidity requirements of MFs by:
- Extending loans, and
- Undertaking outright purchase of and/or repos against the collateral of investment grade corporate bonds, commercial papers (CPs), debentures and certificates of Deposit (CDs) held by MFs.
The liquidity support under this would be eligible to be classified as held to maturity (HTM) even if it goes beyond the 25% limit of total investment in the HTM portfolio.
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Find the Next Crorepati Stock in this Futuristic Industry
And she has agreed to make it available for free for a limited time.
If you've not claimed your free copy, then do so now. It might not remain free for long. One more thing...
Tanushree has also discovered one stock from this futuristic industry... which she strongly believes has the potential to make one Rs 1 crore or more in the long run.
She'll reveal more details about this stock in her 'One Stock Crorepati MEGA Summit'
We expect this to a huge event... with more than 10,000 people attending it LIVE.
You simply can't miss it.
Click Here to Download the Guide & Block Your Seat Now. It's Free.
------------------------------
Will banks come to the aid?
For banks, availing funds at a lower rate (repo rate) and using it to purchase investment grade, which generally carry higher interest, and holding them till maturity seems like a good opportunity, but they may not be as enthusiastic to come to the aid of MFs.
You may recall that few days ago, RBI came out with a similar liquidity window worth Rs 50,000 for NBFCs. Of these, 50% of funds had to be dedicated towards investment in investment grade bonds, commercial paper, and non-convertible debentures small and mid-sized NBFCs and MFIs.
NBFCs who have been dealing with liquidity crunch for quite some time now is one of the worst affected sectors with rising risk of bad loans amid the COVID-19 outbreak.
As a result, the first tranche of the operation worth Rs 25,000 crore conducted few days ago received bids for just Rs 12,850 crore.
Similarly, the stress in debt mutual fund segment is not new - some categories of debt funds have been facing redemption pressure ever since the IL&FS debacle came to light. Banks may be reluctant to lend to mutual funds with higher exposure to lower quality papers, which have been lacking in liquidity.
If banks do lend to MFs it may be limited to those with good quality papers. This will not serve the intended purpose of the facility.
Many mutual funds investing in credit-risk grade securities may have offloaded good quality papers to meet the high redemption and may be now left with only lower quality papers. Risk aversion in banks has magnified due to rising fear of bad loan pile up. Hence, banks may not be keen to accept lower quality papers as collateral.
Besides, some mutual funds may already have high borrowing rate availed to fund redemptions and further borrowing may not be a viable option for them.
Thus, if redemption pressure continues, liquidity strain will continue in schemes carrying higher exposure to lower rated securities. Hence, RBI may have to come out with alternative steps to deal with issue that would infuse liquidity directly to mutual funds rather than relying on banks.
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Our Co-Head of Research, Tanushree Banerjee, has identified 7 stocks that could do exceedingly well in the coming years riding on a rare economic event.
And with the corona crash, this opportunity has only become even more exciting.
And she says those who get into these 7 stocks right now have the chance to make potentially LIFE-CHANGING returns in the long run.
So will you be among those who acts on this opportunity now? Or will you be among those who will kick yourself later not taking action now? The choice is yours.
Full details on these 7 stocks are included in Tanushree's special report. And by acting fast, you can claim a copy of this report virtually FREE.
Click here to find out how you can claim your FREE copy
------------------------------
Word of caution for investors in debt funds
RBI and AMFI have assured investors that stress in capital market is confined to the high-risk debt MF segment at this stage; the larger industry remains liquid.
In the current market volatile and uncertain environment, it would be advisable to stay away from credit risk schemes. However, do not resort to panic selling. Doing that will have an exponentially negative effect on funds, primarily those having exposure to moderate and low rated assets.
Redemption pressure may force the fund managers to sell good quality papers in the portfolio in the secondary market and pile up exposure to low rated assets because it will be difficult to liquidate at fair value.
Keep in mind that debt funds are not risk-free. Investment in debt funds carry various risks relating to liquidity, credit quality, and interest rate. Therefore, before investing in debt funds understand the various risks involved and invest in schemes where the portfolio risk aligns with your own risk appetite and financial objective.
Moreover, choose a fund house that follows prudent investment process and stringent risk-management systems.
In these uncertain times, it would be wise to stick with liquid funds and overnight funds for the debt part of your portfolio as they are highly liquid and carry lower risk.
Our friends at Quantum Mutual Fund have highlighted the secret behind their debt management strategy, which has helped them provide safety and liquidity to investors when it comes to investing in quantum funds. Don't Worry, Quantum Liquid Fund always aims for Safety and Liquidity.
PS: If you wish to select worthy mutual fund schemes, I recommend you to subscribe to PersonalFN's unbiased premium research service, FundSelect.
Additionally, as a bonus, you get access to PersonalFN's popular debt mutual fund service, DebtSelect.
If you are serious about investing in a rewarding mutual fund scheme, Subscribe now!
Author: Divya Grover
This article first appeared on PersonalFN here.
PersonalFN is a Mumbai based personal finance firm offering Financial Planning and Mutual Fund Research services.
Disclaimer:
The views mentioned above are of the author only. Data and charts, if used, in the article have been sourced from available information and have not been authenticated by any statutory authority. The author and Equitymaster do not claim it to be accurate nor accept any responsibility for the same. The views constitute only the opinions and do not constitute any guidelines or recommendation on any course of action to be followed by the reader. Please read the detailed Terms of Use of the web site.
HDFC Mid-cap Opportunities Fund: Focusing on Growth through Quality
Despite the rally we recently witnessed, the market mood continues to be sombre due to the pandemic crisis. FPI outflows from the Indian market persisted in the current month as well, while the recent fiasco at a popular fund house also dented investor sentiments.
It is difficult to predict how this situation will unravel eventually. Though the pandemic has impacted both large and smaller sized companies, small and mid sized companies could be the most affected.
However, quality names even in these segments could perform well over the long run. Therefore, you should stick to only quality names across different market capitalisation and invest via a well managed mutual fund that focuses on growth through diversification.
HDFC Mid-cap Opportunities Fund (HMOF) is one such mid cap fund that looks to invest in mid cap stocks with sound financial strength and reasonable growth prospects.
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Graph 1: Growth of Rs 10,000 if invested in HDFC Mid-cap Opportunities Fund 5 years ago
One of the most popular funds in the midcap category, HMOF's asset size is the largest as compared to its peers. However, HMOF has shown no constrain when it comes to delivering superior performance. The fund has a track record of generating above-average returns across market conditions. Over the last 5 years, HMOF has generated returns at 4.5% CAGR as compared to 1.9% CAGR generated by its benchmark Nifty Midcap 100 - TRI, thus generating an alpha of around 2.5 percentage points CAGR. The fund has made well use of diversification to mitigate downside risk and generate decent lead over the benchmark index.
Table: HDFC Mid-cap Opportunities Fund's performance vis-a-vis category peers
| Scheme Name | 1-year (%) | 3-year (%) | 5-year (%) | Std Dev | Sharpe |
|---|---|---|---|---|---|
| Axis Midcap Fund | -1.59 | 8.24 | 9.09 | 12.99 | 0.22 |
| Invesco India Midcap Fund | -11.6 | 0.54 | 6.89 | 15.17 | 0.12 |
| DSP Midcap Fund | -9.17 | -0.78 | 8.39 | 14.62 | 0.06 |
| Tata Mid Cap Growth Fund | -13.59 | -1.52 | 4.96 | 16.54 | 0.07 |
| L&T Midcap Fund | -17.37 | -3.38 | 6.85 | 15.37 | 0.05 |
| HDFC Mid-Cap Opportunities Fund | -21.36 | -5.32 | 4.54 | 15.11 | 0.01 |
| ICICI Pru Midcap Fund | -27.16 | -7.35 | 1.86 | 14.72 | -0.02 |
| Sundaram Midcap Fund | -23.59 | -8.71 | 2.77 | 15.52 | -0.03 |
| Category Average | -15.71 | -3.5 | 4.38 | 14.62 | 0.05 |
| Benchmark | -25.38 | -9.34 | 1.92 | 18.1 | -0.03 |
Data as on April 28, 2020
(Source: ACE MF, PersonalFN Research)
*Please note, this table only represents the best performing funds based solely on past returns and is NOT a recommendation. Mutual Fund investments are subject to market risks. Read all scheme related documents carefully. Past performance is not an indicator for future returns. The percentage returns shown are only for indicative purposes.
Though HMOF has trailed some of the other popular peers in the mid cap category, it stands strong in the list of mid cap funds. The fund has constantly outperformed the benchmark by a noticeable margin across time periods.
Some of the other top performers in the category are Axis Midcap Fund, Invesco India Midcap Fund, and DSP Midcap Fund.
The fund has not only demonstrated its ability to generate superior returns for its long term investors, but has been reasonable when it comes to managing volatility and curtailing down-side risks. In terms of risk-adjusted returns, HMOF has outperformed its benchmark by a significant margin and also stays ahead of most of its peers.
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Investment strategy of HDFC Mid-cap Opportunities Fund
Categorized as midcap fund, HMOF is mandated to invest minimum 65% of its assets in equity and equity related instruments of mid cap companies. Accordingly, HMOF invests in stocks of predominantly mid-sized companies, which have reasonable growth prospects at acceptable valuations. The fund also holds significant exposure in smallcaps along with moderate exposure in large caps as well as cash and debt.
It follows the bottom-up approach to identify high quality businesses for the long term. The stocks are bought primarily for the strengths of company fundamentals rather than the strength of the macro-economic indicators.
The fund manager resists from following market momentum and holds each of his high conviction stock for the long term.
Graph 2: Top portfolio holdings in HDFC Mid-cap Opportunities Fund
As on March 31, 2020,HMOF held 75 stocks in its portfolio, with no individual stock having exposure of more than 5%.Popular mid cap names like Aarti Industries, Balkrishna Industries, Trent, Ipca Laboratories, and Voltas, etc. appeared in its top portfolio holdings. The top 10 stocks constitute close to 32% of its assets.
The fund's portfolio is primarily skewed towards Banking and Finance sectors which together constitute around 17% of the portfolio. Auto ancillaries, Pharma, Chemicals, and Industrial Products are the other prominent sectors with allocation of around 9-11% each.
Suitability
HMOF's performance over longer time periods has been commendable, where it has generated decent long-term returns for its investors as compared to the benchmark, though it has lagged behind some of its peers. Its focus on timely realization of growth potential of stocks at fair valuation can help it generate strong returns while also minimize the downside risk. However, its aggressive mandate makes it prone to high volatility. This makes HMOF suitable for investors with high risk appetite and a long term investment horizon.
Editor's note: The last few years have not been among the best for equity mutual funds. While most funds have underperformed or are struggling to match the returns of the benchmark, there are few funds that have the potential to constantly generate alpha for its investors. And we have identified five such high alpha generating funds, in our latest report 'The Alpha Funds Report 2020'. Do not miss our latest research finding. Get your access to this exclusive report, right here!
Note: This write up is for information purpose and does not constitute any kind of investment advice or a recommendation to Buy / Hold / Sell a fund. Returns mentioned herein are in no way a guarantee or promise of future returns. As an investor, you need to pick the right fund to meet your financial goals. If you are not sure about your risk appetite, do consult your investment consultant/advisor. Mutual Fund Investments are subject to market risks, read all scheme related documents carefully.
Author: Divya Grover
This article first appeared on PersonalFN here.
PersonalFN is a Mumbai based personal finance firm offering Financial Planning and Mutual Fund Research services.
Disclaimer:
The views mentioned above are of the author only. Data and charts, if used, in the article have been sourced from available information and have not been authenticated by any statutory authority. The author and Equitymaster do not claim it to be accurate nor accept any responsibility for the same. The views constitute only the opinions and do not constitute any guidelines or recommendation on any course of action to be followed by the reader. Please read the detailed Terms of Use of the web site.
Why Tactically Invest Across Asset Classes amidst COVID-19 with Quantum Multi-Asset Fund Of Funds
Coronavirus or Covid-19 is showing no signs of receding. On the contrary, the number of cases is increasing by the day and the situation is rather depressing, as almost every region of the world and country is infected.
Sadly, there is no antidote or a vaccine conclusively developed to fight this deadly pathogen yet. And according to the World Health Organisation (WHO), Coronavirus will be with us for a long time. Most cases are still in the early phase of the epidemic and some countries which were affected early in the pandemic, are now seeing a resurgence in the number of cases, said the WHO Chief.
COVID-19 is truly playing havoc and may be followed with a financial crisis owing to the lockdowns imposed to contain the spread. The risk of global recession undeniably looms large. "This crisis is like no other", as what the International Monetary Fund's (IMF), Chief Economist, Ms Gita Gopinath wrote in the foreword to the World Economic Outlook, April 2020.
Graph 1: The virus has spread even to Indian equities
The graph above depicts the S&P BSE Sensex falling off the cliff and investors' wealth being eroded. Since the all-time high of the S&P BSE Sensex (42,273.87 points made on January 20, 2020), we have fallen more than -25% and overall sentiments seem downbeat and volatility has heightened.
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On a year-to-date basis, Indian equity is down nearly -23.2% (as of April 27, 2020), while gold -- with uncertainty looming around the world -- has exhibited its sheen and demonstrated its trait of safe haven and an effective portfolio diversifier, clocking nearly +5.0% absolute return as of April 27, 2020.
Graph 2: YTD Performance of key asset classes
After the imposition of lockdown to fight COVID-19, the spot market prices were not updated.
*Category average returns of Liquid Funds considered
(Source: bseindia.com, MCX Gold, PersonalFN Research)
The graph above validates the importance of tactical asset allocation. The key lesson here is: all asset classes will not necessarily move in the same direction (up or down) always - over the long-term; some may even move in the opposite direction as what we have seen in the recent past (in the case of equities and gold).
As we (the world) continue to fighting COVID-19 and the aftereffects of it are conceivable, a further correction cannot be ruled out and the bottom is unknown. COVID-19 is likely to impact corporate earnings amidst a time when India is already facing slowdown blues. As people are quarantined, demand would remain muted and inflation risk will begin to surface, particularly in food prices.
So, although the current levels offer a decent value-buying opportunity, skewing your portfolio completely to equity as an asset class could endanger wealth creation. In such times you, as an investor, need to follow tactical asset allocation while you aim to generate wealth.
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Tactical Asset Allocation with Quantum Multi Asset Fund of Funds
To invest sensibly in the current times, you need a Multi-Asset Fund that invests in mainly three asset classes: equity, debt and gold; and is truly balanced.
Among the plethora of Multi-Asset Funds, the Quantum Multi Asset Fund of Funds (QMAFOF) incepted on July 11, 2012, is truly balanced and holds well-diversified portfolio (across the three key asset classes: equity, debt and gold) at all the times -- unlikely many of its peers who swayed by the excess exuberance in equities, lost sense, and eroded investors wealth.
Table 1: Asset Allocation of Quantum Multi Asset Fund of Funds
| Instruments | Indicative allocations (% of Total Assets) | Risk Profile | |
|---|---|---|---|
| Minimum | Maximum | High/Medium/Low | |
| Units of Equity Schemes | 25% | 65% | Medium to High |
| Units of Debt / Money Market Schemes | 25% | 65% | Low to Medium |
| Units of Gold Scheme | 10% | 20% | Medium |
| Money Market instruments, Short-term Corporate debt securities, CBLO, Repo / Reverse Repo in government securities and treasury bills only | 0% | 5% | Low |
The Scheme predominantly invests in the units of Equity, Debt / Money Markets and Gold schemes of Quantum Mutual Fund. Currently, the following schemes are used to gain exposure to a particular asset class:
For equity - Quantum Long Term Equity Value Fund, Quantum Nifty ETF
For debt & money market instruments - Quantum Liquid Fund, Quantum Dynamic Bond Fund
For Gold - Quantum Gold Fund (ETF)
The Units of any other Equity and Debt / Money Markets scheme launched by Quantum Mutual Fund from time to time would be eligible to be part of the above asset allocation components.
Although QMAFOF aims to invest predominantly only in the schemes launched by Quantum Mutual Fund, QMAFOF may seek to invest in the units of similar schemes of other mutual fund houses in case of any investment and regulatory constraints that arise that prevent the Scheme from increasing investments in the schemes of Quantum Mutual Fund.
The investment objective of Quantum Multi Asset Fund of Funds is, "to generate modest capital appreciation while trying to reduce risk (by diversifying risks across asset classes) from a combined portfolio of equity, debt/money markets and gold schemes of Quantum Mutual Fund"
QMAFOF benchmarks it against the Crisil Composite Bond Fund Index (40%) + S&P BSE Sensex Total Return Index (40%) + Domestic price of Gold (20%).
Being a fund of fund, this benchmark is most suitable to compare QMAFOF's performance. The unique combination clubs together the relatively risky assets with other stable asset classes in the portfolio.
Backed by an astute investment strategy, taking the relative valuations between asset classes into consideration such as Price-to-Earnings relative to historical averages; the relationship between earning yield to bond yield relative to historical averages; and macroeconomic factors prevailing globally and within India, the two fund managers of QMAFOF, namely Mr Chirag Mehta (MMS - Finance, M.Com, and CAIA with over 13 years' experience in research and investments) and Mr Nilesh Shetty (B.Com, MMS -Finance, and CFA with collectively 16 years in equity markets), have generated respectable returns for investors.
Table 2: Report card of QMAFOF versus some of its peers
| Scheme Name | AuM (Cr) | Returns since Shri Narendra Modi first took oath as Prime Minister of India on May 26, 2014 | Returns since the all-time high of the S&P BSE Sensex (From Jan 20, 2020 to April 27, 2020) | |
|---|---|---|---|---|
| Absolute Returns | Annualized Returns | Absolute Returns | ||
| SBI Multi Asset Allocation Fund | 220.63 | 65.50% | 8.90% | -4.60% |
| ICICI Prudential Multi-Asset Fund | 9022.56 | 50.50% | 7.20% | -18.90% |
| Quantum Multi Asset Fund of Funds | 16.23 | 49.70% | 7.10% | -4.40% |
| Axis Triple Advantage Fund | 258.6 | 46.90% | 6.70% | -14.30% |
| HDFC Multi-Asset Fund | 198.05 | 36.10% | 5.30% | -14.00% |
| UTI Multi Asset Fund | 564.1 | 28.40% | 4.30% | -12.00% |
Direct Plan considered and the peer list is not exhaustive
(Source: moneycontrol.com)
Even as the equity market is panting for breath attributable to COVID-19 and volatility has intensified, QMAFOF due to its sensible asset allocation to equity, debt and gold through its underlying portfolio, has fared relatively better than some of the peers.
ICICI Prudential Multi-Asset Fund, Axis Triple Advantage Fund, HDFC Multi-Asset Fund, and UTI Multi-Asset Fund, on the other hand, have all eroded investors wealth posting double-digit negative returns (see Table 2) in this downturn. Some of these schemes have fared well during upswings by keeping to the allocation to equities high, but on the downside, they have not managed the risk very sensibly. Investors, as a result, have experienced a roller-coaster ride in the journey of wealth creation.
A multi-asset fund, ideally, is expected to be truly balanced and sensibly allocate its assets whereby the downside risk of one asset class is compensated by the positive returns of the other asset classes.
Here are five good reasons to invest in Quantum Multi Asset Fund of Funds
- You gain from a diversified portfolio across asset class which, in turn, reduces risk and optimizes returns.
- You do not have to worry about portfolio rebalancing; the fund manager will astutely do it for you at regular intervals in the endeavour to achieve the set-out investment objective of the fund.
- Portfolio tracking will be easy for you instead of tracking 10 different schemes
- You will benefit from the lowest expense ratio in the category
- And above all, Quantum Mutual Fund's strong research capabilities across various asset markets - equity, debt and gold, -- with robust investment processes & systems followed at the fund house.
Suitability of Quantum Multi Asset Fund of Funds
QMAFOF is a perfect fund for investors looking to tactically diversify the portfolio with a single fund across equity, debt and gold, plus leave the aspect of rebalancing to the discretion and expertise of the fund manager.
Furthermore, the fund is appropriate for investors seeking long term capital appreciation, who have a moderately high-risk appetite, and an investment time horizon of 3 to 5 years.
It is the best time to invest in the Quantum Multi Asset Fund of Funds. Valuation-wise, Indian equities look attractive and there appears to be a decent margin of safety (with a high return potential if the equity markets ascend).
Similarly, given the uncertainty surrounding the world, gold is expected to display its lustre. The economic uncertainty surrounded by the COVID-19, GDP growth rates being revised downwards, easy monetary policy action and stance followed by central bank across the world, geopolitical tensions, trade tension, and increased stock market volatility are likely to keep spotlights on gold.
Likewise, with credit risk getting amplified, it makes sense to have exposure to a pure Liquid Fund (that does not take exposure to Commercial Papers issued by private entities). Now that policy rates are already lowered by RBI to address growth concerns, it does not make much sense to take exposure to the longer end of the yield curve; it could prove less rewarding and risky (may encounter high volatility) in the foreseeable future. Deploying your hard-earned money is short-end of the maturity curve, would be far better.
By investing in Quantum Multi Asset Fund of Funds, you will be able to balance the risk better with a sensible investment strategy in place.
Just as an excess drug dosage cannot treat COVID-19, your investment portfolio, too, needs just a fair amount of diversification to clock optimal risk-adjusted returns in the journey of wealth creation.
Go ahead and consider investing in Quantum Multi Asset Fund of Funds.
Happy Investing!
Author: Rounaq Neroy
This article first appeared on PersonalFN here.
PersonalFN is a Mumbai based personal finance firm offering Financial Planning and Mutual Fund Research services.
Disclaimer:
The views mentioned above are of the author only. Data and charts, if used, in the article have been sourced from available information and have not been authenticated by any statutory authority. The author and Equitymaster do not claim it to be accurate nor accept any responsibility for the same. The views constitute only the opinions and do not constitute any guidelines or recommendation on any course of action to be followed by the reader. Please read the detailed Terms of Use of the web site.