How SEBI's Mutual Fund Categorization Brings Positive Change to QLTEF

Recently with SEBI circular Categorization and Rationalization of Mutual Fund Schemes effective, most of our funds have undergone a change in their classification and type of scheme (uniform description) in terms of the SEBI circular. Among all the schemes, Quantum Long Term Equity Fund (QLTEF) had the most interesting change. So much so, that we couldn’t stop ourselves from thanking SEBI for introducing this in the first place.

What was the change?

The scheme Quantum Long Term Equity Fund which was earlier “An open-ended equity scheme” which is following value style of investing is now “An Open Ended Equity Scheme following a Value Investment Strategy”.

According to the circular a value fund is a scheme that follows a value style of investment strategy. Minimum investment in equity & equity related instruments – 65% of total assets.

So, fine. Why do we at Quantum consider this as a blessing in disguise?

Simple, because now we can officially call QLTEF a Value Fund.

Since past year or so the fund has been holding cash for a reason known to all – Valuations. Absence of correct valuations for stocks we are looking at is resulting in high cash.

Atul Kumar, Head – Equity and Fund Manager of QLTEF says that “Our portfolio of QLTEF will rise when markets are reasonably priced, but we under-perform when the market valuations look stretched. We have been communicating the same to our investors over many years. On a longer-period of time, we will try to provide risk-adjusted returns beating the scheme benchmark returns. But there will be periods when markets are extremely frothy. In such times, we are likely to under-perform the benchmarks and some of our peer funds.”

But the markets are heading up?? If the market sees value why is not QLTEF?

To answer this let us say there are two types of growth – 1. That is only based on sentimental and 2. that is supported by Earnings growth of the stock prices. What we are looking for is the 2nd type of growth. Currently earnings growth are not reflected in the rise in the share price. If, let’s say the Share price is Rs. 1000 of stock A, as per our research driven process the actual share price, the true value of the share should be around Rs. 600. In such a scenario we are finding it difficult dear investor to pay your money for something that is so overpriced.

So at least do we review enough?

Yes, the research team at Quantum is always looking for a right opportunity to invest. There is a predetermined Buy and Sell limit for each stock actively covered by our research team. The limits are decided based on sustainable cash flow generating ability of a company and its long term valuation bands. Once a stock hits our buy limit it finds its way into our portfolio and once it hits our sell limit it exits our portfolio. We continue to focus on the basics like meeting companies and visiting suppliers and customers to ensure we do not miss anything in our research.

As amazing as it sounds, this process tries to ensure that our investors get the most of equity market in the long run and mitigate risk.

But there is a downside to this…

The fact that QLTEF might underperform whenever the market is up and we don’t know for how long. There are two types of investors in this case, the ones who have full faith in our fund performance & its management and the ones who are in the Hamlet type situation “to trust or not to trust”. However the good part is that at many occasions when we get questioned for our performance, it is the later type of people who answer these questions. We are overwhelmed! It is for all these questions, all these hopes and belief that our Fund Managers prudently manage QLTEF.

We remain positive on Indian equities over the long term. However, we are cautious in the near term. Markets have seen a significant rally not supported by earnings growth, so the only conclusion we can reach is that sustainable upside in Indian equities is limited in the near term. That mentality is reflected by the high cash levels held in our schemes. We suggest that investors who are looking to make a lump sum investment should stagger their investments, though SIP investors do not need to change their investment allocation plan.

Name of the Scheme & Primary Benchmark	This product is suitable for investors who are seeking*	Risk-o-meter of Scheme
Quantum Long Term Equity Value Fund An Open Ended Equity Scheme following a Value Investment Strategy	• Long term capital appreciation • Invests primarily in equity and equity related securities of companies in S&P BSE 200 index.	Investors understand that their principal will be at Moderate Risk

Disclaimer, Statutory Details & Risk Factors:

The views expressed here in this article / video are for general information and reading purpose only and do not constitute any guidelines and recommendations on any course of action to be followed by the reader. Quantum AMC / Quantum Mutual Fund is not guaranteeing / offering / communicating any indicative yield on investments made in the scheme(s). The views are not meant to serve as a professional guide / investment advice / intended to be an offer or solicitation for the purchase or sale of any financial product or instrument or mutual fund units for the reader. The article has been prepared on the basis of publicly available information, internally developed data and other sources believed to be reliable. Whilst no action has been solicited based upon the information provided herein, due care has been taken to ensure that the facts are accurate and views given are fair and reasonable as on date. Readers of this article should rely on information/data arising out of their own investigations and advised to seek independent professional advice and arrive at an informed decision before making any investments. Please visit – www.quantumamc.com/disclaimer to read scheme specific risk factors.

Above article is authored by Quantum.

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