Equity Linked Savings Scheme, better known as ELSS or Tax
Saving Mutual Funds have seen their prominence and popularity rise in the last
couple of years. Reasons attributed for the same is the successful ‘’Mutual Funds Sahi Hai’’ campaign carried
out by AMFI and decent performance by the said scheme in specific and markets
in general.
Investors often look at past returns and the name of the fund house primarily before deciding to take the plunge despite this proving to be a futile experience.
Investors often look at past returns and the name of the fund house primarily before deciding to take the plunge despite this proving to be a futile experience.
Now let us which are the top 5 ELSS Schemes based purely on
the returns on last five years
Not many would have expected Quant to be in the top two or for
that matter have even heard of it.
So let us try and understand Quant, their history,
functioning and reasons for such top drawer performance.
Quant had taken over Escorts Mutual Fund in the early months
of 2018 which was based out of Delhi.
Escorts Mutual Funds was one of the early entries into the
Indian Mutual Fund scene but had struggled to accumulate a corpus to sustain
itself.
It was a subsidiary of the Escorts Group currently headed by
Mr. Nikhil Nanda. Even though their stock prices took a beating
in 2018, it continues to be a strong contender due to its expansion and strong
fundamentals among stock pickers.
Coming back to Quant ELSS, let us try and understand their
working and reasons for their stellar performance so far.
Quant Tax Plan
The above image showcases three different stocks that held the top position when it comes to stock allocation.
Mind you all this was only over a period of 6 months, churning of such proportion in such a short period of time is not a usual phenomenon.
Quant Tax Plan had a portfolio turnover of 4.39 (past 1 year) as on 31st April 2021.
What is a portfolio turnover ratio?
- A turnover ratio basically tells you the extent to which your portfolio has been churned. A ratio exceeding 1 would mean the fund manager has changed his portfolio at least once.
- You must have often read and been told to stick long term with your equity investments so you must be probably wondering why does the fund manager does not do the same.
- It is because he/she is much better at that than us and also a high turnover ratio is not exactly a bad thing.
- It is higher for aggressive schemes like mid, small, value and contra and lower for the rest.
Before trying to understand the reasons for its high
turnover and frequent switches of stocks and sectors, first let us try to
understand the strategy of Quant schemes.
What does the term Quant mean?
The Merriam-Webster dictionary defines Quant as
‘’An expert at
analyzing and managing quantitative data’’
- A Quant based Mutual Fund Scheme is one that is far more driven by number, statistics and data than a macro- economic approach.
- Now what constitutes these numbers varies from Fund House and at times, even schemes. For some it might be the quarterly results to the PE ratio.
- This approach for example would be more reactive to the effect of a change in RBI Governor has on the market prices rather than predicting what effect it would have in the future.
- Meaning the mere change in RBI Governor has absolutely no bearing on its functioning but if the change has an effect on the stocks it holds and wishes to sell or buy then it would react accordingly.
- The stock selection process is quantitative driven and human intervention is limited, it picks up stocks based on their number irrespective of other factors.
So therefore HDFC Bank
did not even feature in the top ten of its stock holdings when in fact it had
allotted a sizeable exposure to it in the preceding few months. Most equity
schemes which previously bought the stock had held on to it and some even
added.
It is worth noting that this approach by the Fund House is
applied to all of its scheme and not just its tax saving scheme.
This is why even some of its other schemes also have a high
turnover ratio.
Quant Mid Cap Fund
|
5.64
|
Quant
Active Fund |
3.49
|
Quant Large & Mid Cap Fund
|
6.41
|
Quant Focused Fund
|
7.46
|
All data as on 31st April 2021
What does the Quant Mutual Fund Fund say about its
philosophy?
‘’ We believe consistent outperformance requires complete
freedom from relatively looking at the world. It is why we design investment
strategies for superior returns no matter how volatile or benign the market
environment. With this absolute objective, comes clarity of thought. Being
relevant requires an absolute focus on returns.’’
Source: Website
![]() |
Official site screenshot grab |
Quant strategy and the International Market
- Quant strategy as an investing style is not a recent phenomenon when it comes to the international markets.
- Robert Merton is considered one of the founding fathers of quantitative study and this was way before the advent of modern computers. With modern changes, it was imbibed with technology and is today used by financial institutions around the world including Fund Managers.
- The fundamental approach of this practice is to break down complex mathematical data to look for alpha or excess return. There has to be something more than what a Fund Manager can provide and that is where its value comes into the picture.
- At the International stage it has done more than decent along with the Index Funds.
Reliance Quant Fund is run completely on this model.
This is what its Fund Manager had to say in an interview
with Economic Times
“The approach eliminated any human bias
from the management. Every 45 days, the data is churned by the system and based
on the earnings growth, valuations and price momentum; it selects a set of 30
stocks from BSE 200 Index. This is a totally evidence-based model,”
Although returns should never be the sole criteria for your
choice of scheme, the fact that it does not have a great track record when one
compares it to other actively managed schemes over a ten year period,
diminishes its value point.
It has failed to beat the benchmark anytime over a ten year period.
India is still an emerging economy,it is way more sensitive
in its reactions as compared to other developed economies. This is far more the
case when it comes to mid, small, large&mid and even value schemes.
Expecting an algorithm to handle aggressive schemes that take the most beating in a market slump may not exactly be the most prudent thing to do.
Expecting an algorithm to handle aggressive schemes that take the most beating in a market slump may not exactly be the most prudent thing to do.
Why
Quant strategy Funds may do well when it comes to the Large Cap
schemes?
Recently ICICI Prudential Mutual and DSP Mutual Fund have
also filed papers with SEBI to launch schemes that would adopt the Quant
investing strategy.
Additional reading: Click Here to read our complete report on ELSS funds and how they work
What
goes against the Quant ELSS Tax plan though?
ELSS has no sector bias, meaning it can invest in mid and
small cap stocks as well which can be extremely sensitive and volatile. This
would require a far more hands on approach than say the large cap stocks.This system cannot predict the market mood after say a
regulation or regime change and this is all the more important in sensitive
sectors like say Oil and Petroleum.
Although this scheme has been around for quite some time now, the Quant style of investing was only applied since 2018 though when the Fund House had taken over from Escorts Mutual Fund. Therefore judging the performance of the scheme on the basis on just 1 year would be extremely naïve.
With ELSS schemes, the fund manager basically takes a Multi Cap approach. Therefore the minimum time horizon a fund manager keeps when picking a stock is 5 years. ELSS has a lock in period of 3 years and even though one should stay invested longer, numbers prove that investors often redeem their investments as soon as the lock in period expires.
This style does not have a buy and hold approach but rather is heavily dependent on quantitative data. A very high turnover ratio is testament to that. Every sector and stock has a lean phase, that’s the very nature of equity markets.
It may miss out on massive growth potential of certain stocks and sectors because it may most likely get rid of them once the numbers at the present time do not make for a good reading even though it may have potential for growth.
This article was originally published in April 2019 and has been periodically updated with latest data
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