5 Things Quantum Liquid Fund does to ensure safety first

Personal finance
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This article is written by Mr. Pankaj Pathak, Fund Manager - Fixed Income Quantum AMC

Corporate debt markets have been under stress since the IL&FS default. With onset of Covid-19 and its economic uncertainty - the situation has further worsened. The conflict between the investment objective and the portfolio positioning of various debt mutual fund schemes especially those of Liquid Funds is in news for all the wrong reasons. However, investors of Quantum Liquid Fund (QLF) have no reason to worry about, here’s why .

Unfortunately, investors and many fund managers ignored the liquidity and credit risk associated with the high yielding lower quality private debt which now came to haunt the entire market. While it’s time for some AMCs to regain the trust of their investors, for us at Quantum it is an opportunity to re-iterate what we have always been telling you, choose your fund wisely! It also builds our confidence in doing what we are doing…following our processes, our values and our zest to stand by our investment styles, no matter what.


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. The investment objective of a liquid fund is to keep your investment safe and liquid and try and achieve slightly higher returns than bank savings deposits.


In order to enhance transparency we disclose our portfolios of Quantum Liquid Fund and Quantum Dynamic Bond Fund on not just monthly but also on a weekly basis on our website. Since liquid funds are meant for short term investing, we believe sharing our portfolio not just monthly but also on a weekly basis allows us to update our investors on the bond market sentiments and portfolio construction. In the recent past, we have been consistently highlighting the continued stress in the bond markets and that despite all the actions by the Reserve Bank of India, some segments of the bond market remains risky for investors and presents a systemic risk to the industry as well.


Over the years we have tightened our processes and stopped investing in any private corporate credit corporations completely. We do not take any private credit exposure and invest only in government securities, treasury bills and bonds issued by a select few AAA rated Public Sector Undertakings (PSU) which are shortlisted under our proprietary credit research and review process. The fund thus hopes to mitigate the issue of credit risks (risk of default) and liquidity risks (unable to liquidate/sell the assets to meet redemptions) by investing in safer and more liquid instruments.


To re-iterate (we feel that we need to keep re-iterating this, given the market scenario) the investment objective of a liquid fund is to keep your investment safe and liquid and try and achieve slightly higher returns than bank savings deposits. QLF aims to have very high liquidity, minimum volatility and near zero chances of capital loss (credit risk – risk of default of interest and principal).


The investment team grades investors based on its assessment of their holding period and matches short term investors with Cash and short term treasury bills investment.

There is no way Quantum would sacrifice any of the above factors to chase returns. Thus we request investors to stay calm, choose funds wisely. If you are looking for returns with risk, we have equity funds, if you are looking for risk adjusted returns with considerably less risk, we have a multi-asset fund, but if you are in search of an investment avenue with minimal risk then Quantum Liquid Fund is your answer.

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Hi @Quantum_AMC

I have noticed that all your previous posts are monologues. So breaking the ice, let me have a discussion with you.

I went through the latest portfolio of Quantum Liquid Fund (Week 5 - April 2020) and it says 57.48% are in T-Bills.

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Now, from the RBI website, I found the latest T-Bills yields have gone south a lot in the last few weeks-

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My question to you is - with such low yields and then TER being 0.16%, the actual returns of the fund would go down even further, so much so that it would be lesser than even some Saving account interest rates of few banks.

For e.g.
Kotak Bank at present is giving 4.5% interest on Savings account. Now, let’s consider I keep Rs 5 lakh in Kotak Bank Savings A/c.

Safety:
We know that funds in any bank account are insured up to 5 lakh under DICGC Act. This includes the principal and interest amount in Savings account, current account, FD all put together. So my 5 lakhs in Kotak Bank account in Savings account, it is highly safe and gives returns of 4.5% without any expense.

Liquidity:
Keeping cash in the Savings account is highly liquid.

Returns:

  • 4.5% of Savings account fixed returns.
  • On top of it, Savings Bank interest up to Rs 10,000 is exempted under section 80TTA of the income tax act which is an additional benefit.

So, maybe Quantum liquid fund is good for only people who have exhausted keeping cash in bank accounts and those who have much more surplus funds available with them which they can’t keep in a bank account anymore.

P.S.
I am no way endorsing Kotak bank or advising anyone to do this or do that. I merely stated this as an example to have a healthy discussion looking from a different point of view.

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We thank you for your reply.

Debt Mutual funds are just an alternative to conventional fixed income products like bank deposits. There could be a situation when debt mutual funds become less rewarding compared to bank deposits.

We advise investors to not to invest in liquid funds to maximize returns rather look for safety and liquidity first. The Quantum Liquid fund always prioritizes safety and liquidity over returns. The fund invests only into government securities/treasury bills and few selected PSUs. Thus it keeps the credit risk to minimal levels and maintain a highly liquid portfolio.

In the last few months the RBI has reduced the policy rates substantially and infused a lot of liquidity into the banking system. This led to sharp drop in short term treasury bill rates. So I agree to your point that in the near term return on Quantum Liquid Fund could be lower than some of Saving account interest rates offered by few banks.

Nevertheless, for better comparison I would like to highlight that the SBI has already lowered its Saving Bank Account rate to 2.75%. If some private bank is paying higher interest rate to raise deposit that suggests a higher risk on that bank compared to the SBI. Although there is no risk of losing money upto Rs. 5 lakh as you have mentioned but in recent past we have seen depositors in few banks facing problem in terms of liquidity when RBI restricted withdrawals of deposits in case of PMC bank and Yes Bank.

Despite this, Saving Bank Account remains a good choice for keeping short term money and liquid funds are just an alternative which investors can choose if it suits their requirement or if they wish to diversify from bank deposits.

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@Quantum_AMC Thanks for responding. Allow me to have my thoughts in order:-

  1. I didn’t compare with SBI in the first place because of lower interest rates.
    If you insist on comparing, Post Office Savings Account gives you a 4% interest rate which is higher than SBI. Also, Post Office Savings Account does not come under the purview of RBI and it directly backed by the Ministry of Finance, Govt. of India, so has a Sovereign guarantee. Moreover, Time Deposit (similar to a Bank FD) gives an interest of 5.5% for 1 year.
    In short, full safety and better returns than Quantum Liquid Fund.
  1. Yes Bank withdrawal >50k is allowed since March 18th.

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  1. Over the weekend, RBI revoked the license of CKP Co-operative Bank but 99.2% of depositors would get their money as up to Rs 5 Lakh is insured under DICGC.

  1. Yes, PMC depositors are stuck for a while but that happened much before this pandemic. With the current situation and knowing that people at large keep their money in banks, and in my limited knowledge the Indian economy is majorly run by bank lending. Govt. or RBI has to has to bail out the depositors in case of bankruptcy. Else people would lose trust in the banking system and it would collapse. More so in such times where Govt. and banks, need funds.

  2. Of course, the Govt under certain extreme cases can override ownership and your money, your FD, your gold in banks is owned by govt. It happened last and once only in 1945 in pre-independent India during world war 2. It’s called the Mobilization of resources to protect sovereignty. Your accounts are seized and Govt utilizes that fund to protect the nation. You get a certificate for your contribution to the country. In such an extreme case, no investment is secured.

  3. On a different note, 57.48% of Quantum Liquid Funds are in T-Bills which are under lock-in and though can be sold in secondary markets, just in case of a hypothetical case of high redemption pressure from investors, for any known or unknown reason, with AUM of about 250+ Cr and 57.48% of the portfolio in locked-in Govt securities, wouldn’t it be hard for the AMC to payback because of lock-in period and low volume in the secondary market?

  4. Also, Quantum Liquid Fund can’t be pledged on Zerodha for margin. @Bhuvan is #6 the reason behind it - the illiquidity of the portfolio with a maximum portion being allocated to Govt Securities which are under lock-in?

Let’s discuss this.

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Contrary to the popular opinion G-secs and T-bills are some of the most liquid fixed income securities in India. The reason is this fund isn’t yet part of the the exchange approved collateral list. If possible, we’ll get this added.

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We thank you for sharing your thoughts.

As we mentioned earlier Liquid funds are just an alternative for saving bank account and there could be a situation when debt mutual funds become less rewarding compared to even saving bank account.

With lower interest rate on treasury bills we are in that situation for now. However we continue to believe that liquid funds should priorities safety and liquidity over returns and should not try to outperform deposit rates in all market situations.

Quantum Liquid Fund is not risk free but we try to keep risks at minimal levels. The fund always keeps an adequate amount of cash in overnight TREPS and runs a laddered maturity profile in its investment in securities. This gives us better flexibility in meeting any sudden redemption pressure.

We agree to your point that in extreme case even treasury bill market can freeze and Quantum Liquid Fund can face difficulty in raising cash for redemption’s of large part of amount. However, if we see such freeze in the treasury bills market…it can potentially break the entire financial system and thus prompt the RBI and the government to respond to it.

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What are the funds from your amc for Core And Satellite portfolio for 10 yrs time horizon.

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Quantum Liquid Fund is a joke.

The numbers speak for themselves. 1-year return of the fund is a mere 3.43%.

Instead, if I keep that money in a savings bank account, it would give the same return and up to Rs 5 lakh is safe too under DICGC insurance. Not to forget up to Rs 10,000 tax exemption under section 80TTA.

or

If I keep that money in Post Office Savings Account (POSA), I would get a 4% return which is higher than this fund and comes with a 100% sovereign guarantee. Also, the interest amount of a Post Office Savings Account gets tax exemption of Rs 3500 (for single a/c holders) and Rs 7000 (for joint a/c holders) under section 10(15)(i) of ITR. @Quicko correct me if I am wrong.

More than 4% is the minimum returns any liquid fund must deliver to beat the available safe options.

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Hey @rupeshmandal

If there is interest income from a bank or post office savings account, the taxpayer can claim a deduction of up to INR 10,000 under Section 80TTA or a deduction of up to INR 50,000 under Section 80TTB in the case of a senior citizen.

Further, as per notification dated 3rd June 2011, the Interest on Post Office Savings Account is exempt up to INR 3,500 in case of the individual account and up to INR 7,000 in case of joint account under Section 10(15) of the Income Tax Act. You must report such income in Schedule EI (Exempt Income) in the ITR.

Investment decision must be made after considering the rate of return, lock-in period and tax benefits.

Hope this helps! :slight_smile:

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Since we are comparing returns, lock-in period, and tax benefits here…

I assume the discussion here takes into account a time-frame of one-year for comparisons.

How does it vary/perform if we are looking at an investment and holding period of more than 3 years? Would the indexing benefit of debt funds change the returns/tax benefits drastically?

Would the liquid fund seem more attractive than FD/Savings and Post Office Saving scheme? Or would the latter still have an edge?

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You don’t park the entire emergency corpus into liquid fund for that long. Liquid funds are not meant for holding for that long. If your emergency fund is say 3 years (36 months) X your current monthly expenses, you would definitely diversify it. e.g. 1 year equivalent you can keep in liquid and the remaining you can park in other safe but little high yielding debt instruments. You don’t keep everything in a liquid fund for 3 years.