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Mutual Fund

When founders Quit, does Philosophy change?

I have been a follower as well as investor in Quantum Mutual Fund and also a big admirer of their philosophy. While their fund, Quantum Long Term Equity was launched in 2006, unlike many, I came across them fairly recently (2012).

The key reason for me to like their fund was their philosophy of lower fees and willingness to go to cash when markets felt over-heated. While they remained one of the cheapest equity funds to invest for a long time, the same isn’t true now with mutual fund fees falling dramatically in recent times.

Yesterday, the man who started it all “Ajit Dayal” sent a letter bidding adieu to investors in the fund. This was very surprising given that founders do not generally exit the company without a period of transition and even then, generally tend to stay around for long to ensure continuity.

While returns are key, one of the reasons funds like Quantum have been able to garner assets is because of investors belief in the philosophy they claim to uphold. While Quantum sits on top of the ranking list (on ValueResarch) categorized as it is under Large Cap, that doesn’t really provide the true picture since just a few years back, it was categorized (based on their portfolio) as a Multi Cap Fund.

When a Star fund manager / founder exits the fund / firm, the key question that needs to be asked is, should one continue to stay with the fund. Most fund houses ensure that the logic / philosophy that is the core of the fund is ingrained that ensures continuity regardless of presence or not of the guys who build those philosophies in the first place.

As investors, when we invest in a fund, we are outsourcing the whole fund selection and investment process to some one we trust. The bigger the investment, greater the trust factor. But when key people quit without sufficient reason or warning, it puts us in a quandary about whether we should stay with those who remain at the firm or move.

Moves such as these reinforce my view that rather than be dependent on fund managers, one should develop the expertise necessary to invest directly in the markets. If that is not possible, the best alternative is to invest in Index Funds / Exchange Traded Funds.

The risk of investing in Index is that while we are basing our investment in a mutual fund on the capability of the fund manager in question, here we are trusting that the Index Selection process has a sound logic that can survive and thrive over time.

The key to returns is concentration and this is more so important in mutual funds where investing in too many funds will only mean fodder for everyone else while you get returns lower than what even the Index could have easily delivered. But when changes such as this happens, its time to step back and think deep and hard as to why you were invested in the fund in the first place and whether the logic continues to remain true – change of management not withstanding.

Personally, the family investments we have in Quantum will stay for now though I am not too enthused to invest afresh at this point of time.

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