Indian Mutual Fund Industry’s outsider

I came across this story in ET of Ajit Dayal, Director of Quantum Mutual Fund, India. I knew that Quantum does not give the distributors any money and markets its MFs by word of mouth and distributes mostly by internet. What I didn’t know was the reason.

Most MFs pay huge monies to distributors for increasing former’s assets under management. So much so, that last year distributors made more money than AMCs (Asset Management Companies) themseleves.

Here is Ajit Dayal’s story:

The story behind Quantum Mutual goes back to late 2005, when after getting permission from Sebi to start his own AMC, Ajit Dayal met several distributors to create awareness about his funds. But he was shocked to see them put forth ‘a pricing sheet’. For 6% commission, you’ll get Rs 6,000 crore, for 5%, Rs 500 crore and so on, distributors told him. “Without bothering to check whether a product is suitable for investors, they came up with a sliding fee structure,” reminisces Mr Dayal, who is one of the first stock analysts and investment managers of the post 1991 era. “But who is going to pay for all this?” he asked them.

The last straw came when Mr Dayal went to a senior broker and asked him to recommend his funds to investors, but refused to pay him the hefty commission that he demanded. “We make elephants in the industry dance to our tune, you are just an ant,” thundered the broker. The decision was made. 

He has taken this agenda of selling Mutual Funds to people with as low cost as possible and has some useful articles on its website on how distribution costs can lower returns . 

How about the performance?

The AMC just has 2 funds one equity and one liquid.

Equity fund is called Quantum Long Term Equity which was launched in Feb-06. As per Valueresearch, the AUM is just about Rs 37 crores (Rs 370 million) compared to giants like HDFC Equity which is at about Rs 4600 cr. It ranks 139th in AUM size out of a list of 167 equity schemes.

In terms of returns, it has given around 30% in last one year compared to JM basic which has given 70%+. It ranks 131 in 161 schemes. The numbers for other tests like Sharpe Ratio, Alpha are not calculated as it is just about an year old. 
 
So performance of the quantum equity fund has to be spruced up as it lacks behind its peers by a huge %. It may have lower costs but can only be recommended if it produces returns higher net of costs. Other funds may have higher costs but produce higher returns as well.

But still, a great initiative and as it is only one year old, only time will tell how well Quantum fares in its objective.

I have a suggestion which could lower further costs. The equity fund still has high expense ratio = 2.5% which is just like its peers. It has its office in Nariman Point, the area which has the highest commercial rent and is one of the costliest in the world. It could do with an office at a less costly place in Mumbai.

7 Responses to “Indian Mutual Fund Industry’s outsider”

  1. suresh Says:

    Hi Amol

    A pretty good post.. Yeah you are right, one of the objectives of the fund itself is to reduce the cost. So why even an office..

    Regards
    suresh Kaimal
    http://kaimalsway.blogspot.com

  2. SEBI proposes to cut Mutual Fund costs « Mostly Economics Says:

    […] Ajit Dayal of Quantum MF tried to sell MFs and cutting down on brokerage but could not win against brokers. No broker was interested in pushing his product. Now he could have given in and agreed to broker’s conditions. But he took them on and is selling the Mutual Funds via internet and word of mouth. But as distributors are very powerful (have you ever been recommended Quantum AMC) the equity fund run by AMC continues to struggle. […]

  3. JV Says:

    Agreed. I will watch his mf to grow up.

  4. Alok Lal Says:

    Thanks for this post. I had been trying to find some information about low cost funds for a while and your post showed up on Google.

    BTW aside from the return itself it is also important to take note of its risk profile as measured by how much it fluctuates compared to its benchmark indices. Said other way it is possible for a fund to have higher returns but at the cost of much higher fluctuations and much higher risk (such that if the market were to go down then the loss would be much higher.) I mention this only because to judge a fund solely by its return is too common a method which is fraught with problems.

    thanks though for his post.

  5. Mutual Fund or Distributor’s fund? « Mostly Economics Says:

    […] had pointed to a story of a Mutual Fund that tried to create space without using distributors but failed miserably. The […]

  6. The Wall Street Culture that led to crash « Mostly Economics Says:

    […] is quite high which also is not understood. It is much better to be distributor of the funds (see this as well) or be an institutional […]

  7. Mutual Investment Says:

    I really liked the information. It will really help Investors………

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