An active 'ethical' MF scheme comes to market after 15 years. Chirag Mehta of Quantum MF explains trigger

There has not been an ‘ethical’ fund launch in nearly 15 years. What was the trigger for launching a fund now?

Many investors expressed interest in aligning their investments with their values. This inspired us to explore the creation of a fund tailored to these principles. After careful evaluation, we concluded that we could develop a fund that aligns with investors' values while providing long-term returns.

How are you approaching the concept of ethics?

We analysed various ethical frameworks and belief systems, identifying common exclusions like alcohol, tobacco, and gambling. By consulting experts and understanding different ideologies, we established clear ethical exclusion criteria. Alongside these, we incorporated liquidity, integrity, and financial metrics to ensure a balanced approach.

What are the sectors that would be excluded?

The exclusions apply to sectors such as alcohol, tobacco, and gambling. Business activities are evaluated against ethical criteria, drawing from principles rooted in diverse ideologies. Other excluded segments include vulgar entertainment, film exhibition, media broadcasting, content production, and film distribution. Companies involved in mainstream financial services, narcotics, socially harmful substances, leather industries, meat and poultry production, animal cruelty, or pharmaceutical animal testing are also excluded. Financial screening disallows investments in companies with interest-based debt exceeding 25% of total assets or interest income surpassing 4% of total income, in line with specific ethical principles.

Would all these inclusions not significantly narrow the pool of stocks that the scheme can invest in?

When applying filters such as liquidity and ethical exclusions, the investment pool narrows to some extent. Within this refined pool, it is crucial to focus on well-researched and robust companies, like any other fund. Even a great business may not always deliver returns for investors, making financial viability an essential factor. Combining ethical considerations with sound financial analysis helps investors in their wealth creation journey. It also addresses the misconception that aligning investments with values necessitates sacrificing returns.

Will there be exceptions to the exclusions for companies with strong fundamentals?

No, the exclusions are absolute. Even companies with strong fundamentals or liquidity will not be included if they fall under excluded categories.

Have you conducted back testing, and what were the results?

Yes, we conducted back testing, combining ethical exclusions with financial and integrity metrics. The results showed strong long-term performance. Even if you look at Nifty 500 Sharia Index against Nifty 500 over extended periods, including as far back as 2009, these purely passive exclusions can outperform when combined with the right tools available to investors. By focusing on integrity, well-grounded companies, and financial metrics, it is possible to achieve better outcomes.

What is the ideal investment horizon? And, How many stocks will the portfolio include?

A minimum horizon of 3–5 years is recommended, though 10 years is ideal. This allows investors to navigate market cycles and maximize returns. The portfolio will consist of 30–40 stocks, selected based on liquidity, ethical, integrity, and financial criteria.

Would it be right to call this a high-risk portfolio?

Being an equity investment, it carries inherent high risks. We are trying our best to reach out to all the investors and giving them an avenue to invest in, with their beliefs and values.

Disclaimer: The views and investment tips expressed by investment experts on Moneycontrol.com are their own and not those of the website or its management. Moneycontrol.com advises users to check with certified experts before taking any investment decisions.