Passive? Active? Or a Thoughtful investor?

I always enjoy the webinars hosted by Quantum Mutual Fund - not only because I helped start this unique experiment to build an institution based on competence, integrity, and transparency - but mainly because a Quantum MF webinar is educative and informative. As is the case with other entities that I helped create (www.Equitymaster.com or www.PersonalFN.com or www.HelpYourNGO.com ) the focus of Quantum MF is: to inform, educate and enlighten - and offer the solutions we have built to solve the problems faced by customers.

Take www.Equitymaster.com as an example. The stockbrokers hire research analysts to write reports on companies. These often result in a 'BUY' signal because the broking house wants you to transact so that they can make a commission from your trade. That commission is a revenue for the broking house which, in turn, pays the salary of the research analyst. That model is built to ensure there is constant activity - or churn - which is music to the bank account of the brokers and the 'sell-side research analysts. Equitymaster is not a broker, and their independent research is available for a subscription to interested investors - much like subscribing to a newspaper or a magazine. Once you have bought the subscription for the magazine it is of little consequence to the publisher of the magazine if you did or did not buy any of the products advertised inside the magazine. Investors are made to believe that they get the sell-side research reports for free - that is not true. There is a 'hidden cost.' The constant daily updates and suggested trades result in frenzied activity with high commissions paid by the investor to the brokerage house. Equitymaster gives you research at a known, subscription price. Whether you buy zero shares, one share or 1,000 shares of any stock does not change the amount of money that Equitymaster earns from you.

In a similar fashion www.HelpYourNGO.com has compiled data and information on +600 NGOs across India and enlightens the donors on the work done by the NGOs. But, unlike Equitymaster - which earns its revenues by way of subscriptions from the subscriber - HYNGO earns a fee from the NGO for hosting their information on the website. Any NGO can host its information on the website. The fee paid by the NGO to HYNGO is not based on the 'score' given to the NGO but is a function of the money the NGO received via HYNGO's efforts. There is a lack of transparency and trust and HYNGO is solving that by placing the power of information in the hands of the donors via a simple - but powerful - engine. Try it out

And as a reader of this column and a follower of PersonalFN, you are already aware of the immense benefit of www.PersonalFN.com which has a treasure trove of information on things that you worry about every day: your money - whether it is home loans, education loans, auto loans, insurance, investing for tax planning, or deciding which of the hundreds of mutual funds you should invest your savings in.

Why is Quantum Mutual Fund launching a passive fund?

At the webinar hosted by Quantum Mutual Fund on July 22nd to launch their unique Nifty ETF Fund of Funds, attendees posted these interesting comments and observations:

1. Attendee A: The flagship fund is still underperforming with no improvement there (this is a reference to the Quantum Long Term Value Fund). All 15 years Ajit said Bogle told him that he will not invest in Index like Nifty... now suddenly turn and new gyaan.....disappointing

2. Attendee B: Your Quantum long term value fund returns are always less when compared to category returns or when compared to peers for a similar fund. Pls comment.

3. Attendee C: I am an investor in QLTEF (the Quantum Long Term Value Fund) since 12 years but it is not even able to give a return as per NIFTY leave any surplus, simply adding more funds does not make sense let your scheme talk louder than your words is all I say

4. Attendee D: u guys have always been telling that the Indian index is a more skewed constitution & composition that doesn't truly represent and hence so far u always used to put it down & how come suddenly it picked up your soft corner? What changed in a short time your thoughts?

5. Attendee E:...also in comparison to your own QLTEVF & QEFoF returns performance, the index nifty 50 has given less only since inception so it proves actively managed funds perform better than passive funds right? so why passive funds now when Indian markets are still growing & evolving and not yet mature like western markets?

6. Attendee F: What is the big technique or science behind going after NIFTY 50 in wealth creation instead of finding the right gem for large value creation which would be much higher than usual so-called large companies or behemoths of India.....?

Normally, I listen to every illuminating webinar hosted by Quantum Mutual Fund and their sincere and competent fund managers as an attendee. But some of the comments listed above were suggesting that Quantum - and Ajit - had, in a worst- case interpretation, misled or lied to investors or, at the very least, Quantum MF had drifted from its core principles and objectives.

Nothing can be further from the truth.

And so I requested the moderator of the Quantum MF webinar to allow me to speak and address the doubts or concerns raised. This is the essence of my response to the comments from some of the attendees:

1. Quantum MF continues to focus on what is best for the investor - always will!

2. We launched the Quantum Long Term Equity Value Fund in March 2006 - and have launched a series of funds not to divert your attention from the Value fund but to help you achieve a goal. In the eyes of the public, the Value fund remains our flagship product because that is what we had started doing first and that is what the firm's track record was based on. Yes, the Value fund will always have a special place in our hearts because it was the foundation of the success of Quantum. Having said that, the fact is that any investor who invests in only one style of an equity fund is taking a large risk. There will be long periods of time when one specific style (such as value, growth, mid-cap, small-cap) may not perform well - as many of you have experienced from being investors in the Quantum Long Term Equity Value Fund. For a non-professional, non-financial investor to place all their eggs in one basket is not wise. The largest pensions and sovereign wealth funds in the world invest their capital with dozens of fund managers with a mandate to invest in a range of asset classes from equity to private equity to real estate to infrastructure to bonds. These large institutions have dozens - and sometimes hundreds - of individuals whose sole responsibility is to allocate capital to the right manager for the right asset class. An individual investor may have far less capital than the large pension funds or sovereign wealth funds - but our belief is that you must be able to access solutions based on the same principles of a diversified investment.

3. Given our belief that investors must invest in a range of mutual funds following different 'investing styles' to attain a balance of risk, volatility, safety, and return we methodically built the building blocks - the green, yellow, blue, white, black, and red Lego pieces that your children use to build things:

   • In April 2006 - one month after the launch of the Quantum Long Term Value Equity Fund, we launched the Quantum Liquid Fund as an alternative to keeping your money in a Savings Bank account. Since its launch 16 years ago, the average return has been 6.76% - did your savings bank account give you a higher return?

   • in 2008 we launched the Quantum Nifty ETF; this was to prove that the actively managed Quantum Long Term Equity Value Fund would do better than the Quantum NIFTY ETF. Over the past 5,117 days of trading since July 18, 2008, till July 22, 2022, the Value Fund has outperformed the Quantum Nifty ETF by approximately 185% over the 14 years or approx. 2.75% per annum on average over the past 14 years. The nearer- term return numbers are terrible with only sporadic periods of 'outperformance' as the Value style followed by Quantum failed - more on this below.

   • in 2009 we launched the Quantum Equity Fund of Funds (where we select 6 to 10 equity mutual funds across different styles of investing from the +400 equity mutual funds that exist in the market - a unique offering to simplify life). Since Inception, the numbers are good (13.1% compounded annualised average returns v/s 12.9% for the broader BSE 200 Index and 12.4% for the narrower Nifty) but the near-term numbers are poor. On a risk-adjusted return basis, when one computes the volatility of the Equity Fund of Fund with the Indices, it shows some merit.

   • in 2008 we launched the Quantum Gold ETF and then its wrapper, the Quantum Gold Fund in 2011

   • in 2012 we launched the Quantum Multi Asset Fund (as an alternative to locking up your money in a 3-year FD), and

   • in 2019 we launched the Quantum ESG India Fund, for those investors who wanted a portfolio which was not harmful to the planet or to people and communities; a portfolio investing in companies where the management and the founder were not only focused on the p = profit motive.

The launch of these funds is not linked to the performance of the Value fund - these were independent and deliberate decisions to build a solution for you.

Each of the above funds has an established track record for you to analyse and review.

Each fund has processes in place which can gauge the predictability of the behaviour of the performance. For example, when every other fund house was greedy for yield to show better NAVs, they used their liquid funds to invest in high-risk assets which ended up in disastrous outcomes and required a bailout and assistance from RBI and SEBI. The 'predictability of our performance' ensures that the Quantum Liquid Fund will perform poorly when the 'risk-on' fund managers start investing in instruments issued by questionable real estate companies. And we know that Quantum Liquid Fund will do well when there is a flight to safety - as there was in March 2020 - when investors will appreciate the fact that the processes put in place ensured that the fund managers at Quantum were not in a 'risk-on' mood and stayed level-headed. No flashing outside the off stump - this is not a T20 game; it's your savings.

But there was one piece of the puzzle still missing. Just as we had built a wrapper for the Quantum Gold ETF, we needed a wrapper for the Quantum Nifty ETF. Hence, the launch of the Quantum Nifty 50 Fund of Funds.

Now all the building blocks are ready.

The 12 20 80 (baaraa, bees aur assi) has been launched, try it out by clicking here.

It has taken years to build as each of the underlying funds were nurtured, tweaked, and prepared to be part of the bigger picture.

Imagine, within 5 minutes of using the 12 20 80 (baaraa, bees, aur assi) tool you can:

1. keep aside money for the difficult times in the low-risk Quantum Liquid Fund,

2. invest in gold - which has proven to give better returns than stock markets in times of uncertainty and financial, social, or political stress, and

3. invest in 6 to 10 equity mutual funds managed by other fund houses,

4. see the costs of your investment choices as you try this easy-to-use tool and determine what works best for you.

The beauty is that all of this is on one reliable platform built by the investor-focused Quantum Mutual Fund.

Passive. Active. Or Thoughtful.

The 12 20 80 (baaraa, bees aur assi) has been launched in two versions.

There is the 'Active' choice which consists of the funds actively managed by a team of fund managers and analysts.

After the launch of the Quantum Nifty Fund of Funds, the 'Passive' choice is ready.

Over the past 7 years, there have been criticisms that actively managed funds (whether they are value style or growth style) do not outperform an Index or an ETF. That is a valid fact, and the data does support the headline accusation. While there are many reasons why this is so - take out Reliance and Adani and see how well the Index has performed - nothing has 'improved' in the way the indices are being constructed. To respond to the query on what has improved in the Index the answer is: very little. If John Bogle were alive, he would probably write the same email he sent me in 2010: it is a bad index with changes made too often - but not being a fan of active he will not invest in the value fund either.

Personally, I remain sceptical of the indices because they consist of the winners, and the success stories. And there is no evaluation of how these managements and founders achieved that success - no analysis of the poor practices that many companies adopt to get ahead in business. So, my allocation to Quantum Mutual Funds will remain significantly in the active box of 12 20 80 (baaraa, bees, aur assi) with a sprinkling of the Quantum Nifty Fund of Funds to salute my colleagues at Quantum for painstakingly building out an idea that was started a decade ago.

A Note on Value and 'Value with Values'

For those who wish to be investors only in the Quantum Long Term Value Equity Fund, I have a one-word advice: Don't.

I learnt value investing from Tom Hansberger - the cofounder of Templeton, Galbraith, & Hansberger which pioneered the idea of value investing outside the US. In 1993, Franklin bought TGH, and the firm is now known as Franklin Templeton. In 1997, I met Tom and moved to the US and was groomed by him to take over his new company, Hansberger Global Investors. But setting up a mutual fund in India was my dream - which was realised in 1996. When we launched the Value fund in India, we added a new dimension to the traditional 'value' investing which focused only on numbers. We added a dimension of avoiding managements and promoters who were not trustworthy or who adopted questionable business practices. This was called the 'Integrity Screen'. Nearly 20 years later the world began to talk about ESG - and we also evolved a more robust version of the Integrity Screen. Value, like beauty, as has been pointed out to me, lies in the eyes of the beholder. There is no one definition of 'value'. There is also no one definition of 'values' or 'ethics'. Hence, when I am told 'you lag your peers' I don't know what this peer group is. Are they 'value' investors? Is there a definition of value the same as ours? Does their definition of 'value' reflect in the PE Ratio of the stocks they own in their underlying portfolio? Do they have an 'Integrity Screen' equivalent?

And, of course, in a world where interest rates are zero or sub-zero 'value investing' will always lag 'growth investing'. Money is what you fool around with when it has no cost to it. This fooling leads to the outrageous valuations you saw in recent IPOs. When money has a price to it - an interest rate that is a real alternative to making wild bets in a 'free money' era, it is called capital. Capital that can earn a sensible interest rate is no longer a monopoly money. Capital is allocated diligently because there is a penalty for making an error in the allocation. Capital has the option to earn a meaningful interest rate from a risk-free government bond whereas money and play money with a zero-interest rate have no option but to do stupid things.

None of this is an excuse. None of this is a defence for 'poor performance'. But the message to you is that it adds to the conclusion that you should NOT be an investor in one style of investing, in one approach, in one asset class, as you allocate your savings to build long- term wealth.

Despite my love for value investing, I have diversified my own investments in the QMF complex. This is an approximation of my holding as of July 2022.

May you stay Thoughtful and Deliberate and make balanced investment decisions for your family and you to enjoy as you embark on your journey of protecting your capital as you enhance your wealth - do try the 12 20 80 (baaraa, bees, aur assi). And tell me what you think about it...

Ajit Dayal is the Founder of the Quantum Group which includes Quantum Mutual Fund and PersonalFN. Ajit has over 35 years of research and investment experience. An avid writer and speaker, Ajit has been profiled and interviewed by many international and local newspapers, magazines, TV channels and radio shows and is never shy of speaking The Honest Truth. Sign up here to get The Honest Truth delivered every week into your mailbox. It will change the way you think about your investments.