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Is Quantum right here?


This one is a problem for you guys. Quantum AMC has an article in their July 07 newsletter saying thus:

Let’s take a normal school classroom.
During the mid-term exams, two students
Ram and Shyam scored 40% and 90%
respectively. It doesn’t take a genius to
figure out that Shyam (with 90%) is the
better performer. Now comes the fun part.
For the final exams, Ram scored 80% and
Shyam scored 95%. Who would you rank
as the better performer?

Shyam, of course! He scored 95 out of
a possible 100 while Ram scored only 80.
Yet, if Ram and Shyam were mutual
funds, and were ranked in the way mutual
funds are being evaluated, Ram (with 80%)
would have shown up as a great performer
while Shyam (with 95%) would have been
an underperformer and the laggard!

The logic behind the ranking of Mutual
Funds is that Ram, even though he has less
marks, has improved by 100% (from 40
to 80) while Shyam has improved only by
around 5.25% (from 90 to 95). By this
argument, the “best” mutual funds could
be those who have lost the most money
for their investors initially and not done
well, so that when they do recover lost
ground – as Ram did when his scores
jumped from 40% to 80% – they end up
as the “best performers”. That, dear
investor, is the potential flawed logic of
ranking mutual funds.

I think there is a serious flaw in this argument. I’ve mentioned in an earlier post about Quantum that I think this is completely ridiculous.

Firstly, mutual funds aren’t limited to 100%, are they?

Secondly, if the market moved up 35% in general, are we wrong to expect you to give us at least 35%? You are a no load, no commission fund, so the least I can expect is that you perform to the market’s expectations, no?

What they really intend is that investors should look at a “risk/return ratio”. There is something called the “sharpe ratio” which quantifies risk and return. Let me explain that in another post, but tell me if you also think the argument above is flawed, or if I’m just being silly.

P.S. I don’t want to sound too harsh on Quantum, but it gets my goat when they charge you 2.5%, give sub market returns, and have the gall to say other funds are expensive and that they shouldn’t be ranked.


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