Posted on Friday, May 15, 2020
Amid tensions in equity markets, debt funds are back in the news for all the wrong reasons. Do you think investors will lose trust in mutual funds?
In my last article that I had written, when markets fell sharply owing to the impact of Covid-19, I had said that the world has indeed changed. While the equity markets was already seeing inflated equity prices without earnings growth and debt markets had witnessed series of events post IL&FS default which created a trust deficit for investors, the deadly virus has now only added to the trouble.
This is the time for mutual funds to stand by their investors, which is only possible for AMCs who have always prioritized investors’ interest. The ongoing debt crisis is nothing but an unfortunate case of yield hunting and choosing funds that doesn’t match with investor risk appetite. Quantum has always emphasized on the fact that the fundamental responsibility of a liquid fund is to keep your money safe and liquid. Quantum Liquid Fund will always prioritize safety and liquidity over returns. We follow the SLR investment philosophy (Safety, Liquidity and Returns) for managing the fixed income funds at Quantum. We realized that achieving all three - high safety, high liquidity and high returns is not easy.
How do we do that? Simple – by investing only in government securities and few top AAA rated PSUs which are selected after careful assessment of their credit quality. Both Quantum Liquid Fund and Quantum Dynamic Bond Fund do not take any private credit exposure. Over time, as we have learnt from various liquidity and macro-economic shocks, especially of 2007-08 and 2012-2013, and have tightened our investment mandate.
During these testing times I would urge you to stay calm, stay invested, and keep focusing on your goals. However you might consider re-evaluating risk in your debt portfolio.
We are not only investing in good quality instruments but have also increased our communication with the investor so that the investor is very clear on the risk and return of the particular product.
How will a further extension to lock-down impact economy? If recession is round the corner, what according to you should an investor do?
We have already seen the domino effect of COVID – 19 jerking economies around the world in the past two months. Given the sudden pause and probably the biggest pause ever in the businesses, this slowdown has had the biggest impact on economies. So, we might have some difficult quarters ahead of us. With a hit on GDP growth, jobs/unemployment the consumption pattern which is already ruptured might further take a hit. Our assumption is the GDP growth this year is likely to be flat or negative and probably do a 4% growth next year. These assumptions are based on a 60 day lockdown and migrant laborers coming back to work. These numbers will undergo some change as a stimulus package has just been announced by the government. We will come back to you with fresh assessment as the details are made available.
As a disciplined investor, what is expected from you is that while you stick to your long term goals you also build a contingency fund. In a quest to achieve all their financial goals, many times I have come across investors who won’t anticipate the need to have a contingency plan just until they need it.
Park your money, ideally around 6 months – 1 year of monthly expense in a Liquid fund. Job loss or no job loss, pay cut or no pay cut; everyone has to plan for emergencies.
Remember, the first step towards prudent financial planning is to get yourself a term insurance if you are an earning member of your family and the second step is to save for contingencies. Then follows investing for your long-term goals. If you do this, trust me, come recession, come what may…you will have nothing to worry!
My portfolio was heavy on equity allocation and suffered a lot during this market crash. Please suggest some advice.
Volatility is the nature of markets, correction was due, if your goals are long term and you do not need this money now then there is no need for you to worry, simply stay invested.
In case if you have an SIP, market fluctuations actually works in your favor.
But more importantly I would like to stress on the importance of asset allocation. If you think you have learned the lesson hard way, it is your time to prudently diversify your portfolio. By diversifying I don’t mean in different equity schemes, but in asset classes other than equities like debt and gold.
If you have a considerably low risk appetite, or would like to invest some money in a fund that allocates your money in not just one or two but three asset classes then you could consider investing in Quantum Multi Asset Fund of Funds – a fund that invests in different schemes of Quantum.
How will this help?
Assets, due to their differing risk and return characteristics, respond differently to the ups and downs of economy. Typically, when interest rates are low, debt gives lower returns but equity will be outperforming; when the equity markets are down, debt would be a source of stable returns; in times of uncertainty, cash and gold will rule and so on.
Refer the table below that ranks the best to worst performing indexes per calendar year from top to bottom:
Thus investing your money in a diversified portfolio with multiple imperfectly correlated asset classes (equity, debt, gold) can prove to be the easiest way to help you sail through the ups and downs of market peacefully. Plus you don’t really have to worry about re-allocating your money every time, a professional fund manager does it for you.
To put things in perspective, if you had an all-equity portfolio worth Rs 1,00,000 at the start of the new decade, you're probably down a painful 28% to 72k as of March end, which means you'll need a whopping 39% gain to recover from the recent carnage. And based on how unpredictable and bearish things are at the moment, you'd agree that those kinds of spectacular gains are pretty far out in the future. On the flip side, if your portfolio at the start of 2020 was divided between equities, debt and gold in 40:40:20 ratio, the current value would stand at 92k requiring a much lesser 8.7% gain to be whole again. The results would be even better if the portfolio tactically had an even lower allocation of 30% to overpriced equities, with the portfolio losing only 4.9% of its value in this crisis and rebounding to the original value with a mere 5.2% return.
You can consider to know more and invest in Quantum Multi Asset Fund of Funds.
In addition to considering diversifying into different asset classes, you should also take a relook at your equity allocation. Our generally suggestion is that large cap funds should be larger proportion of your equity allocation and small and mid cap should have relatively lower allocation.
Given that the volumes in mid cap and small cap stocks tends to be limited, a surge or withdrawal in flows tends to have a disproportionate impact on the share price, thus increasing the risk in your equity portfolio.
|Name of the Scheme||This product is suitable for investors who are seeking*||Riskometer|
|Quantum Liquid Fund|
An Open Ended Liquid Scheme
|• Income over the short term |
•Investments in debt / money market instruments
Investors understand that their principal will be at Low risk
|Quantum Dynamic Bond Fund |
An Open Ended Dynamic Debt Scheme Investing Across Duration
|• Regular income over short to medium term and capital appreciation |
• Investment in Debt / Money Market Instruments / Government Securities
Investors understand that their principal will be at Moderate Risk
|Quantum Multi Asset Fund of Funds |
An Open Ended Fund of Funds Scheme Investing in schemes of Quantum Mutual Fund
|• Long term capital appreciation and current income |
• Investments in portfolio of schemes of Quantum Mutual Fund whose underlying investments are in equity , debt / money market instruments and gold
Investors understand that their principal will be at Moderately High Risk
Subbu's Solution is authored by I. V. Subramaniam. I. V. Subramaniam is a director of Quantum Asset Management Company Private Limited. The responses expressed here are strictly for information and explanation purpose only. The responses are meant for general reading purpose and not to be considered as an investment advice / recommendation. The responses are not intended to be an offer or solicitation for the purchase or sale of any financial product or instrument or units of the Mutual Fund. Readers are advised to seek independent professional advice and arrive at an informed investment decision before making any investments. The Sponsor, The Investment Manager, The Trustee, their respective directors, employees, affiliates or representatives shall not be liable for any direct, indirect, special, incidental, consequential, punitive or exemplary damages, including lost profits arising in any way from the information contained in the responses.Risk Factors: Mutual Fund investments are subject to market risks, read all scheme related documents carefully.
Please visit - www.QuantumMF.com to read Scheme Specific Risk Factors. Investors in the Scheme(s) are not being offered a guaranteed or assured rate of return and there can be no assurance that the scheme's objective will be achieved and the NAV of the scheme(s) may go up or down depending upon the factors and forces affecting securities markets. Investment in mutual fund units involves investment risks such as trading volumes, settlement risk, liquidity risk, default risk including possible loss of capital. Past performance of the Sponsor / AMC/ Mutual Fund does not indicate the future performance of the Scheme(s). Statutory Details: Quantum Mutual Fund (the Fund) has been constituted as a Trust under the Indian Trusts Act, 1882. Sponsor: Quantum Advisors Private Limited. (liability of Sponsor limited to Rs. 1,00,000/-) Trustee: Quantum Trustee Company Private Limited. Investment Manager: Quantum Asset Management Company Private Limited (AMC). The Sponsor, Trustee and Investment Manager are incorporated under the Companies Act, 1956.
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