Quantum Dynamic Bond Fund – NFO Review
Quantum Mutual Fund which is known for being the one and only fund house which started off and still continues to remain Direct Only has now come up with a new fund – Quantum Dynamic Bond Fund.
While most investors prefer the safety and comfort of Fixed Deposits, for investors who are in the highest tax bracket, Debt funds make more sense due to the way its taxed (Long Term, Indexed).
Debt mutual funds come in various categories – Arbitrage / Floating Rate Funds / Fixed Maturity Funds / Gilt Funds / Income Funds / Monthly Income Plans / Short Term Plans / Ultra Short Term Liquidity Plans among others. Now that’s quite a handful for any investor who wants to venture into debt funds.
Before we dive into the debt funds, specifically QDBF, lets see what a fixed deposit provides. A fixed deposit in a bank provides for a guaranteed interest of X% for the amount that is invested. Now, if you invest into a FD today at say 8.5% and a year down the lane, interest rate moves up or down by say 2%, the rate you get does not change one bit. While you shall be happy to have locked in at 8.5% if interest rate falls, if they rise, you may cringe about being locked in at a lower rate. Either way, you have a clear idea about what your end result will be.
Most Debt funds on the other hand are not instruments where they guarantee to provide you with X% returns or even Y% appreciation of capital over Z years.
The biggest risk of any mutual fund is the fact that the view of the fund manager can go horribly wrong. If he expects interest rates to go up, he may like to be invested in bonds with average maturity being as close as possible. On the other hand, if the fund manager believes that the interest rates will soften as we go by, he will try to lock in into bonds that offer him a high rate of interest for the longest possible time.
But like the stock markets, things can go wrong pretty easily. The best example of this was provided by Bond King, Bill Gross when he misjudged the timing and impact of the Federal Reserve’s plan to scale back its asset purchases in 2013, spurring the Pimco Total Return Fund’s biggest decline in almost two decades (Bloomberg)
Hence when one invests into a bond fund, one is betting on the prowess of the fund manager to get his view right and hence be able to provide returns better than what one can do on our own.
Dynamic Bond funds in India has been there for quite some time though most of the funds are pretty new. Only SBI Dynamic Bond Fund has a 5 year track record and hence if you were to try and compare the long term performance of other funds, you may not have much of a history to look into.
At the current juncture, the stock markets having rallied quite strongly is at a stage where it does not make sense to invest more than 50% of one’s funds as our Asset Allocator for May detailed. While this allocation shall change as markets move either higher or lower, unless we see a total crash in equities or companies showcase spectacular growth, its unlikely to cross 75% allocation to equities in the next 1 – 2 years.
Quantum Long Term Equity fund which is their biggest Equity fund has not been among the best funds due to the fact that unlike other funds, this fund did not dive into the Mid Caps and large caps haven’t quite generated the returns that Mid and Small cap stocks generated. To compound the mistake if one were to say, they also went into Cash (30% of portfolio) way too soon.
But now with the markets down 10% from the peaks, the fund has been one of the better performing funds compared to many other funds which have lost substantially. The only fund to better this fund has been the PPFAS fund which also had been a under-performer when the markets were rallying. In fact, my own Top 10 funds to invest does not feature both of them (List)
I believe Quantum Dynamic Bond fund too will be run pretty conservatively and hence while it may not be the top performing fund by returns, if you were to measure them in terms of being safer and less volatile, I believe that they may suit a investor who is prepared for the long haul and is not chasing short term performances.
Our Recommendation is a Buy with capital allocation of 10% of Portfolio if you are prepared to stay put with it for at the very least 5 years (as usual, more the better 🙂 ).
QLTEF has not been among the best funds in the previous year in terms of returns. True . But as you mentioned , for a truly long term , risk-averse , cost-conscious MF investor, no fund is more cheap , consistent and has better downside protection ( all factors combined) than this one. If you ask me what the truly investor-friendly funds in India are , I would have to name this one and PPFAS.
Now , many people would ask (rightly) isn’t the whole point of investing to generate returns ? Yes , but there is no point in getting massive returns in bull markets followed by terrible losses in bear markets. (Personal example:JM funds run by Sandip Sabharwal. I rode it up all the way and down as well :). To come out over the top in the long run , you need a fund which gives at least a decent return in a bull market , excellent downside protection in bear markets and very low cost. QLTEF fits the bill on all 3 counts , as evidenced from its long term track record.This can be a core holding in one’s portfolio and some of the funds in your list can be considered to spice up returns. Best of both worlds:)
Agree with you on Quantum Long Term Equity Fund. the only reason it misses in my list of Top 10 is lack of a 10 year performance number. Adjusted for Risk, the fund comes as one of the best funds in the market.
With regard to PPFAS, while I understand their philosophy, I am not too sure if that is the way to go about. What also bothers me is their investment into companies such as Google and IBM. Neither I believe qualify as a value buy (even though Warren seems to be loading up on IBM on every low).
Add to it, with 25% of portfolio being outside India, there is the currency risk (one may also see it as a hedge) to consider as well.
And the death of the founder in my opinion puts the brakes on any fresh investment there. I would rather wait and see how they perform over the next couple of years before taking a fresh call.