The pandemic of the Indian mutual fund industry

Authored by Mr. Pankaj Pathak Fund Manager, Fixed Income

The business of mutual fund investments is completely based on Trust.

People trying to become investors trust mutual funds with their money.

Why do they trust mutual funds? Because loud advertisements and louder fund managers have told them, they can. They’ve said “Hey you want to grow your money, we have the right plans and smart brains to help you do so. Give us your money and we will grow it over time.” What happens is that, investors are blinded with high returns when times are good. Markets are doing well. Which is the easiest thing to do.

< You know that logic - it’s very easy to be with someone in their happier times, but true & few friends stick around during difficult times. It’s something like that. >

Similarly, when markets change their tide and testing time arrives, investors are left with shock and disappointed. This is the start to a dangerous pandemic!!!

Recently, debt fund investors suffered high losses. Their investments were at RISK. There was a threat to their capital. Do you think this is more grim then equity investors facing losses? We think so - for sure! Simply because debt investments are supposed to be the least risky of the lot. Probably, no risk at all to the capital… And BAM!.

In a quest to bring more AUM, investors are infused with a high sugar rush (sugar being a metaphor to high returns), high returns makes investor happy, that leads to more AUM in under wrong hands - so basically it becomes a vicious circle. This joy ride eventually stops. Which does happen, but it’s too late for investor now. The high returns are gone, investor’s investment objective is gone for a toss, and the money is down the drain. Hard earned money is down the drain.

The saddest part: this money was for a goal. Probably child’s school fees, kid’s marriage, funding for their dream start up. But it’s gone now.

What is the lesson learned for the investor here - if you want safety - look out for funds that prioritize safety. Funds that upfront enough to say that they won’t aim to chase returns but to ensure there is enough safety and liquidity in their portfolio. So when it’s time to pay that school fee - you have your money, when it’s time to get your kid married - you have that money.

Our solution to this pandemic is here, you don’t have to wait until June 2021 for that. Rather it was always here, since December, 2009. It’s the Quantum Liquid Fund!

Quantum Liquid Fund with an AUM of around Rs. 250 crores (which is definitely a smaller number compared to other liquid funds, but size doesn’t matter, especially in mutual funds!) has always chose to stand by its investment objective. No chasing returns or higher returns, just follow the investment objective. We, as part of the Quantum Fixed Income team knew our investors and the fact that they have invested their money for short term goals. They can ask for their money back anytime. If they needed higher returns for long term goals they could have invested in equity funds.

We have been trying to make our investors understand why they need to invest in Quantum Liquid Fund for their liquidity needs. How QLF invests pre-dominantly in Government Securities, Treasury Bills and money market instruments issued by Public Sector Undertakings. Over the years we have done our job well, by doing what a liquid fund must do. Crises have come and gone, we always assure our investors to not worry since we always aim for safety and liquidity.

Some of our past articles that prove we have always maintained our stance of prioritizing safety and liquidity over returns.

Year 2016
How Liquid Funds Work

Year 2018 - During the IL&FS crisis
Quantum Liquid Fund has NO Exposure to IL&FS Group
Safety First, Always!

Year 2019
Quantum Liquid Fund Follows Mark-To-Market valuation since 2012
Why Quantum Liquid Fund Investors Should Not Worry About Credit Risk

Year 2020
Don’t Worry, Quantum Liquid Fund always aims for Safety and Liquidity
Liquidity crisis Q&A with Fund Manager
Bond Market Update & its impact on Fixed Income Funds

Okay, so what should debt fund investors do now?

When choosing a fund rather than checking the size of their AUM, investors should look at the underlying capacity/assets. Why is this important? As an investor we need to understand that debt investing is very different from equity investment. There are mistakes we can afford and there are mistakes we cannot afford to make. In equity, there could be hopes to recover from the ups and downs of the markets over a period of time but there is no coming back from default or bankruptcy. Therefore a mutual fund buying lower rated paper promising higher returns might be a risk for your money. That is the real risk not the NAV movement, what is generally the notion of investors as a level of risk.

May be its time to re-evaluate the risk in your debt portfolio. May be its time to switch to a debt fund that considers your short term goals as important as they are for you, may be its time we end this Pandemic.

@Quantum_AMC Hello again! I hope the team at Quantum is safe and sound.

We last discussed on the following thread. I think the readers should go through our last discussion as well.

I follow a principle in life - trust but verify. And I don’t make any random comments. Let me tell you, I have invested in Quantum Liquid Fund, only some portion overall, when I exhausted my other options as I mentioned in the other thread. So thanks to Zerodha for this opportunity to let me interact with you more as an investor.

Two things, I would like to discuss with you today-

  1. The TER of the fund at 0.16% is a bit high. Ideally, it should range somewhere between 0.05 - 0.08% or max 0.10%. I don’t know how but you need to cut down the cost by half. More so when the yields of the Govt bonds are going south. I don’t have to tell you that money saved is money earned too.

  2. Yesterday, I was reading this article about India’s borrowing plan, the target now raised to 12L Cr-
    https://www.cnbctv18.com/finance/covid-19-impact-govt-to-borrow-nearly-rs-5-lakh-crore-more-than-budgeted-5877251.htm

If I am thinking right, it means Govt would have to issue new bonds and securities so people at large can invest which Govt can utilize in various development projects and repay those loans through the earnings. Is it an opportunity for Quantum Liquid Fund given the majority of portfolio invests in Govt bonds?

Let’s discuss this.

Best,

We thank you for your reply.

Please find below our comments on below mentioned queries.

  1. The TER of the fund at 0.16% is a bit high. Ideally, it should range somewhere between 0.05 - 0.08% or max 0.10%. I don’t know how but you need to cut down the cost by half. More so when the yields of the Govt bonds are going south. I don’t have to tell you that money saved is money earned too.

We welcome your suggestion. We would like to assure you that appropriate action will be taken on this front after due consideration.

  1. Yesterday, I was reading this article about India’s borrowing plan, the target now raised to 12L Cr-
    https://www.cnbctv18.com/finance/covid-19-impact-govt-to-borrow-nearly-rs-5-lakh-crore-more-than-budgeted-5877251.htm 1

If I am thinking right, it means Govt would have to issue new bonds and securities so people at large can invest which Govt can utilize in various development projects and repay those loans through the earnings. Is it an opportunity for Quantum Liquid Fund given the majority of portfolio invests in Govt bonds?

The Government has recently increased its gross market borrowing for FY21 from Rs. 7.8 lakh crore to Rs. 12 lakh crore. This would be raised through dated government securities maturing in 2 years to 40 years.

As per SEBI mandate liquid funds can invest only in debt securities with maturity upto 91 days. Thus the incremental borrowing program will not have any material impact on the liquid funds in the near term. Liquid funds are more impacted by the level of repo/reverse repo rate and liquidity condition in the banking system. On technical basis it can also get impacted by issuance of short maturity treasury bills by the government, most of which matures within the financial year and thus not reflected fully in the government’s borrowing numbers.

Since last two months the government has been borrowing more than usual amount through treasury bills. Currently, the government is borrowing Rs. 45,000 crore per week as against earlier plan of Rs. 25,000 crore through treasury bills. Despite this sharp jump in supply of treasury bills, their yields have not changed much and remained below the reverse repo rate for 91 days papers. This is primarily due to huge surplus liquidity in the banking system (banks are parking ~Rs. 8 lakh crore of surplus liquidity with the RBI on daily basis) and general flight for quality in the financial system.

@Quantum_AMC
Hi Pankaj, further to our discussion, I checked the weekly portfolio dated 18th May, 2020

Portfolio % Allocation on 18th May Expense Comments
T-Bills ~80% 0.06 Brokerage, if invested on Zerodha
Remaining 20% 0.26 Too expensive for the 20% portion
Total TER 0.16

So if almost 80% of the portfolio is invested in T-bills, might as well I would invest directly in T-bills on Zerodha with 0.06% brokerage. 0.26% expense ratio for the remaining 20% portion of the portfolio is too high.

The reason you need to reduce the TER of the fund (currently 0.16%) else it is wise to invest in T-Bills directly on Zerodha at a lower cost.

2 Likes

I had followed up with @Quantum_AMC on DM requesting to respond to my question on TER of the Quantum Liquid Fund being too high. Today morning I received a response from the AMC. Since the question was originally on the public domain, I am sharing the screenshot so the users who have been following the thread are also aware of the update.

I got a response in DM saying:-

https://www.quantumamc.com/investor-education/quantum-direct/Quantum-s-Roadmap-for-Expense-Ratios/qd-589

My response as under:-

Dear Mr. Pankaj,
Let’s not digress from the topic. My question still remain unanswered. Let me repeat my question once again -

  1. Why would I invest in Quantum Liquid Fund at TER 0.16% if 80% of portfolio invests in T-Bills, which I can directly buy on Zerodha Coin at 0.06% Brokerage?

  2. What steps you are taking as a fund manager to reduce the TER of Quantum Liquid Fund (0.16%) which is currently high compared to if one directly invests in T-Bills (0.06% brokerage)?

Over to you Mr. Pankaj
Awaiting reply.

Don’t bother , I don’t think they have answer.

BTW good catch on 80% allocation of T-Bills.

Here is an update:

I received a call from @Quantum_AMC who connected me directly with the Fund Manager, Pankaj. I really appreciate this gesture by the AMC where the Fund Manager listened to me as an investor for feedback.

Following are the pointers I discussed with Pankaj:-

  1. Keeping funds in a high-interest paying bank account up to Rs 5 lakh is insured under DICGC so one would think of investing in Quantum Liquid fund only when they exceed 5L. Also Bank savings a/c interest up to Rs 10,000 is exempted under section 80TTA of ITR which is an added benefit.

  2. When you think beyond banks, Indian Post Term Deposit and KTDFC FD are high interest-paying options. The former has Govt of India backing, and the latter one is backed by Kerala State Govt. So both are safe options. Yes your money is locked and there is paperwork but the interest rate is more.

  3. After this if you think of investing in Quantum Liquid Fund, you notice that Quantum Liquid Fund has allocated 80% into T-bills. Whereas we can buy T-bills directly on Zerodha Coin @ 0.06% brokerage + 18% GST bringing the cost down.

  4. The TER of Edelweiss, PGIM, etc is 0.05% and 0.09% while 1-year returns are little above 6%. Also, PGIM has instant redemption benefit where you can get up to 90% of your amount in 30 min directly in your bank account.

Further to the above, the following are the pointers I gave as suggestions:-

  1. Reduce TER. Ideally should not exceed beyond 0.08 - 0.10% If 80% of allocation is in T-Bills, then the fund manager is not actively involved in rebalancing the fund very frequently. So the cost shouldn’t be so high. Also, today we all are cutting costs; be at a personal level, thinking before buying whether we need it or not. So at a fund manager and AMC level, cost should be cut to reduce TER to pass on the benefit to the investors. Money saved is money earned.

  2. Enable Insta Redeem feature.

  3. Allow pledging of the fund for collateral, and loan against security purposes. @Bhuvanesh @Riyas_Ahamed something you had discussed in an earlier thread.

After listening to my pointers Pankaj agreed to certain points but he said that the above changes especially the TER only the board can take a decision, because there is a certain fixed cost to manage the fund, but he would certainly pass on this strong feedback during the board meeting.

Whether the AMC would act or not, only time will tell.
Fingers crossed!