Look Beyond Ratings and Returns - Think S.M.A.R.T.

Posted On Wednesday, Dec 06, 2023


Investment decisions based on past returns may not be prudent as it may not be indicative of the potential or future returns, particularly in the case of a market-linked investment avenue, such as mutual funds. Remember that today's top-performing funds might not maintain their position tomorrow. Similarly, high star ratings or rankings prescribed to mutual funds, may not necessarily generate good returns. It’s possible that the 4 or 5-star rated fund that you added to your portfolio today may lose some of its stars (the sheen) if its performance lags in the future.

You should not trust only the star ratings of mutual funds. You need to understand the process behind star rating process before forming any judgment.

“Investors should always keep in mind that the most important metric is not the returns achieved but the returns weighed against the risks incurred. Ultimately, nothing should be more important to investors than the ability to sleep soundly at night.” – Seth Klarman (an American billionaire, hedge fund manager, and author).

You see, most mutual fund ratings and rankings are given on basis of historical performance (the quantitative data – mainly returns and risk ratios).

What could be the right approach then?

As a thoughtful and sensible investor wanting to be successful, you should rely on a holistic process that considers both, quantitative and qualitative parameters backed by research to pick the right mutual fund schemes out there.

Broadly, here are some parameters you should give weightage to when zeroing in on mutual funds for your portfolio:

Equity market is cyclical

Returns or performance track record should be the last thing to be considered.

"The essence of investment management is the management of risks, not the management of returns," said Benjamin Graham, the father of value investing.

At Quantum Mutual Fund we follow this principle unfailingly with the endeavour to manage, your, the investors’ hard-earned money. This makes us prudent asset managers (and not gatherers).

1. Systems and Processes

Note that Systems and Processes make the investment framework robust, as opposed to leaving asset management to the judgement of the fund manager and his team. This includes:

• The philosophy of the fund house,

• The efficiency in managing the investors' hard-earned money,

• The average experience of the fund manager,

• Also qualitative aspects such as ethics and standards.

2. Market Cycle Performance

A true test of an equity mutual fund is during the bear market phase. This, in a sense, separates the men from the boys. The Market Cycle Performance, therefore, is a critical parameter to consider. For instance, if we compare Quantum Long Term Equity Value Fund performance during bull & bear market phase as against benchmark, we find that it exhibits resilience, idisplaying its ability to manage the downside risk better.

Table: Quantum Long Term Equity Value Fund’s Performance v/s S&P BSE 500- TRI

Scheme Name

Bull Phase

Bear Phase

Bull PhaseBear PhaseBull PhaseBear PhaseBull Phase
09-Mar-09 To 05-Nov-1005-Nov-10 To 20-Dec-1120-Dec-11 To 03-Mar-1503-Mar-15 To 25-Feb-1625-Feb-16 To 14-Jan-2014-Jan-20 To 23-Mar-2023-Mar-20 To 30-Nov-23

Quantum Long Term Equity Value Fund


Category Average - Value Funds


Benchmark S&P BSE 500 – TRI


Direct Plan and Growth Options considered.
Returns herein are point-to-point and in %.
Returns over 1 year are compounded annualised.
Past performance is not indicative of future returns.
Data as of November 30, 2023
(Source: ACE MF)
This should be read in conjunction with the complete fund performance given below. Bear market is when markets have corrected over 20% from the highs and remain so for a while while Bull markets are new market high. The phases are selected to depict market cycles.

The table above demonstrates how the Quantum Long Term Equity Value (QLTEVF) has managed downside risk better than its category average and the S&P BSE 500 Total Return Index (TRI) in the bear market phases.

However, in the bull phases where value investing gained focus, like during the global financial crisis of 2008-09 and the lows of the 2020 COVID-19 pandemic -QLTEVF has done reasonably well amid market recovery. Since its inception in March 2006, QLTEVF has generated a CAGR of 13.7% vis-à-vis 12.6% CAGR of the S&P BSE 500 Total Return Index (as of November 30, 2023). The outperformance has come with disciplined research and investment process.

3. Asset Management Style

Keep in mind, that much of the performance of a mutual fund scheme depends on Asset Management Style. This could vary from fund house to fund house and scheme to scheme. A value-style equity fund should not be compared with a growth-style equity fund.

It is necessary to duly recognise the investment style and strategy followed, as well as the portfolio characteristics:

• The P/E, the dividend yield of the portfolio,

• The weightage of the top 10 holdings in the portfolio (which highlights the concentration risk),

• The weightage to top 5 sectors,

• The portfolio turnover, and so on) of the schemes under consideration.

A fund must stick to its investment mandate to achieve the stated investment objective.

4. Risk and Reward

To deliver returns or achieve the investment objective, a fund exposes its investments to certain levels of risk. For every level of additional return, a mutual fund scheme generates, there is risk. Risk and Reward are two sides of the coin. Most rating agencies or institutions do cover risk ratios, viz. Sharpe, Sortino, Treynor, and Standard Deviation in the star rating/ranking process to evaluate the risk-adjusted returns.

Quantum Mutual Fund has an Integrity screener to look at the qualitative aspects of risk, wherein the fund management team considers aspects such as

•The reputation of the founder, the CEO,

•The independence of the board,

•The corporate governance practices, etc.

5. Performance Track Record

Performance track record ensures that the analysis done so far is translating into better returns. Here rolling returns (6-month rolling, 1 year, 3 years, 5 years, 7 years, and since inception) need to be considered to assess the value or wealth generated by the fund over the long term.

Apart from the above, make sure you are adding mutual fund schemes in congruence with your risk profile, broader investment objective, the financial goal/s you are addressing, and the investment horizon, to add not just the best but also the most suitable ones for you. It is important to stay invested for a long term - don't get impressed by ratings and rankings, rather build investments by strategically diversifying your portfolio for risk-adjusted returns in the long term.

Asset Allocation offers your portfolio the correct mix of stability, growth and protection. An easy approach to adopt is Quantum Mutual Fund’s DIY 12|20:80 Asset Allocation Strategy: So when selecting a mutual fund, while returns are an indication of the fund’s past performance, the qualitative aspects would help recognize the future potential. Check out our Asset Allocation Calculator to help allocate your investments across equity, fixed income and gold in just a few clicks.

Your Investment of ₹10,000 would have performed as below table with respect to benchmarks.

Performance of the SchemeDirect Plan
Quantum Long Term Equity Value Fund - Growth Option
 Current Value ₹10,000 Invested at the beginning of a given period
PeriodScheme Returns (%)Tier 1 - Benchmark# Returns (%)Tier 2 - Benchmark## Returns (%)Additional Benchmark Returns (%)##Scheme (₹)Tier 1 - Benchmark# Returns (₹)Tier 2 - Benchmark## Returns (₹)Additional Benchmark Returns (₹)##
Since Inception (13th Mar 2006)13.69%12.66%12.67%12.36%97,28082,83582,96478,949
November 29, 2013 to November 30, 2023 (10 years)13.76%15.58%15.22%13.86%36,35342,60041,26836,667
November 30, 2016 to November 30, 2023 (7 years)11.83%15.70%15.49%15.46%21,88527,76627,41427,359
November 30, 2018 to November 30, 2023 (5 years)12.76%16.00%15.48%14.46%18,23421,01520,54619,649
November 27, 2020 to November 30, 2023 (3 years)19.00%20.21%19.08%16.27%16,87417,39716,90915,738
November 30, 2022 to November 30, 2023 (1 year)16.16%13.44%11.21%7.59%11,61611,34411,12110,759

#S&P BSE 500 TRI, ##S&P BSE 200 TRI, ###S&P BSE Sensex.
Data as of Novemeber 30, 2023.
Past performance may or may not be sustained in the future.
Load is not taken into consideration in scheme returns calculation.
Different Plans shall have a different expense structure.
Returns are net of total expenses and are calculated on the basis of Compounded Annualized Growth Rate (CAGR).
#with effect from December 01, 2021 Tier 1 benchmark has been updated as S&P BSE 500 TRI. As TRI data is not available since inception of the scheme, benchmark performance is calculated using composite CAGR S&P BSE 500 index PRI Value from March 13, 2006 to July 31, 2006 and TRI Value since August 1, 2006.
##TRI data is not available since inception of the scheme, Tier 2 benchmark performance is calculated using composite CAGR S&P BSE 200 index PRI Value from March 13, 2006 to July 31, 2006 and TRI Value since August 1, 2006
The Fund is managed by Christy Mathai and George Thomas. Sorbh Gupta has been managing the fund since December 1, 2020. George Thomas has been managing the fund since April 1, 2022.
Click here to view other funds managed by them.

Product Labeling
Name of the SchemeThis product is suitable for investors who are seeking*Riskometer of schemeRiskometer of Tier I Benchmark
and Tier II Benchmark

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 Very High Risk

Investors understand that their principal will be at Very High Risk

*Investors should consult their financial advisers if in doubt about whether the product is suitable for them.

For latest riskometer, investors may refer to the Monthly Portfolios disclosed on the website of the Fund www.QuantumAMC.com.

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.

Mutual Fund investments are subject to market risks read all scheme related documents carefully.

Above article is authored by Quantum.

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