June 2014 Volume 07 06

Keeping faith

Recently, I had an
interesting
conversation with
an investor. This
person, a software engineer from
Hyderabad, had set up an SIP for
three years exactly 35 months
ago. Now that the tenure is
coming to an end, he set up an
appointment to discuss what to
do next.
During the conversation, he
revealed he had his moments of
doubt as to whether he was on
the right track. His portfolio had
a compounded annual return of
about 8 per cent, and he
considered redeeming it all to
avoid future downturns.

Thankfully, he did not and stuck

through. His particular portfolio
has a compounded annual return
of about 20 per cent and our
conversation, consequently, was
a very pleasant one.

Lesson here is about staying

invested and keeping the faith in
the economy and the markets.
We hear all the clichs - invest
right, sit tight, time in the
market better than timing the
market, but hearing these real
situations where people have
actually benefited by staying
invested in the market reinforces
the faith.
Happy reading!

Srikanth Meenakshi

60%
With the rally in equity prices over the past few months, the relative rankings
of equity funds are starting to change. In such phases, even those who
struggled earlier, and especially fund managers, who take more risk than they
ought to, get into the limelight. It is, however, not a good idea to immediately
embrace such funds. Investors in equity funds in India are today fortunate to
have choice, especially in terms of longevity. Funds such as Prima and
Bluechip are into their 21st year and at least about 100 funds sport a track
record that is in excess of 10 years.
This is a very important choice that is available for investors. You have hard
evidence of performance in different phases of the market bullish, bearish
and sideways, and in each case at least twice in each phase.

Rather than go for the chart toppers of the present, especially one year and
less, investors have the opportunity to go for consistent performers across
different phases of the market. These options will definitely be more worth
pursuing than the New Fund Offers and short-term chart busters.

60 per cent is an important number. Funds that are ahead of the benchmark
about 60 per cent of the time usually tend to do well in terms of returns,
consistency and ability to handle different phases of the market. 60 per cent
has not been plucked out of thin air. It is based on analysis of track record of
equity funds over long periods. Funds that have delivered superior returns as
compared to benchmarks and most peers would, inevitably, have attained or
be close to this threshold.

Funds that are ahead of the benchmark about 60 per cent of the time in
bearish and sideways markets tend to be more consistent. At the outset, this
indicates that their risk taking is not excessive. It also indicates that the fund
managers understand better the prevailing economic environment and its
implications for equity prices.

Most funds that make the cut on 60 per cent in these market conditions tend
to be middle or lower of the pack in bullish phases. The fact they do well in
bearish and sideways markets makes them emerge in the top quartile over long
periods even if they miss out a fair bit in bullish phases.

Many funds that make the 60 per cent cut in bullish phases tend to take
outsized risks. A large number of them also fare unimpressively in bearish
and sideways markets. The outsized risk taking approach that helps in bullish
phases hurts these funds big time in other phases. You can look at 2008 and
2010-2013 for evidence of how the aggressive risk takers got burnt.

Keep a close watch on funds that do well in bearish and sideways markets.
They are likely to be superior options for a long-term portfolio.
S Vaidya Nathan

www.fundsindia.com

Change spells opportunities

From uncertainty to confidence is what the markets went through from January till date in 2014.
And that change of mood is what triggered a 15 per cent rally in the Sensex year to date.

Vidya Bala

With the BJP-led alliance securing a clear mandate to rule the next government, one expects the
alliance to undertake its reform agenda and find viable solutions to macro-economic challenges
in as fast a mode as possible. It is for this that the markets have reacted positively and will
continue to respond to every single move from here on.
If you wonder whether expectations can turn economies, they probably do.

When expectations spur reality

Expectations are known to often spur action. Higher

inflation expectations for instance, are often known to
spur inflation! So is the case with market sentiments.
Expectation of implementation of reforms and policies
may well spur corporate investment, and, therefore,
corporate earnings.

History does, however, suggest that as long as valuations

are in the vicinity of the averages, (see graph below on
MSCI India 12-month forward P/E), there could be less
possibility of returns being capped as a result of
valuations running too ahead of earnings.

So how should you tune your expectations to the political

and economic events that will unfold in the following
weeks, months and years? Heres our take on it and also
on where to put your eggs now:
Near-term expectations

In the near term, chances are that markets will respond to

events such as cabinet formation and announcement of
policies, and perhaps partly ignore macro-economic
indicators, even if they look lack lustre.

But then overall, with earnings numbers coming

intermittently, it is possible that markets will react, even
negatively, as fundamentals are not going to improve
overnight. Such negative reactions could only be
opportunities to buy into the market in our opinion.

W h a t t o d o : Accumulate in your existing equity funds on

short-term negative reactions by market. Do not try to
pick and choose the chart busters. Chances are you may
pick the wrong one or worse still, miss the short
opportunity while you search for the right funds.
Medium-term expectations

Most analysts have a consensus that there could be no

meaningful contribution by companies to the earnings pie
until FY-16. That means, earnings would come in later,
and valuations would stop looking cheap.

Now, typically sectors such as banks, auto and industrials

are those that are known to benefit from the first sign of
a market/economic recovery. Why? First, a market
recovery typically gets companies to raise funds to
deleverage.
This could in turn provide some relief on the burgeoning
NPA size of banks. Markets may take notice of such
events given the far-from-high valuations of banks.

Also, often times, logistics activity in the economy, with

commercial automobile demand uptick, is a key indicator
of economic recovery; so also the purchase of industrial
or capital goods an indicator of capex spending. Hence,
these stocks are the ones to be re-rated first.

Next, mid-cap stocks which, look less expensive and also

form part of the cyclical upturn, could also be candidates
that would participate in the medium-term recovery. Why
is this so?
FII money mostly goes into liquid large-cap stocks leaving

What matters to consumers is inflation, precisely food inflation. The weather forecast suggests
there could be scanty rainfall this year, which will push up food prices. I see the slowdown easing,
not in the next six to eight months but possibly in the next two years.

Zubair Ahmed, Managing Director, GSK Consumer Healthcare

www.fundsindia.com

domestic investors such as mutual funds or other local

institutional investors looking for less expensive options
but with potential. As is the case, the not-so-high liquidity
in these stocks would often lead to quick upward move
in such stocks.

W h a t t o d o : While most equity funds will likely benefit

from a banking rally, we have identified funds that will
also benefit from sectors such as auto and auto
components and industrials and have recommended the
funds in March, For those who can spare additional sums,
this may be a good time to start taking small exposures to
such funds.
Long-term expectations

Over a longer time frame we expect the reforms effect

to start kicking in. And we picked a few key areas of
reforms that could potentially benefit specific cyclical
sectors.
W h a t t o d o : Read FundsIndia Equity Strategies: A
Portfolio for Election Euphoria and Beyond' at
www.fundsindia.com/blog.

The three funds we had recommended (see article above)

- HDFC Top 200, Franklin India Prima and ICICI Pru
Discovery - hold good to ride what may be a long-term
sustainable rally albeit with short-term corrections.

As suggested, use your existing funds to accumulate over

short bursts (or funds we recommend if you do not hold
equity funds) and the funds we recommended in March
for long-term SIPs. As fund portfolios change colour, we

Sector Reforms/macroeconomic trigger

Engineering /
Industrials/
Infrastructure
Banks

Oil & Gas

PSUs

Deleveraging, earnings upgrade on

back of improved capex/infrastructure
spending
by
companies
and
government
Improving asset quality, higher loan
growth on interest rate declines and
recapitalization of banks
Diesel/gas price hikes and lower oil
subsidy
Revival in order book and
disinvestment

will, through our weekly call, bring to you more funds that
are well placed to ride the long-term wave.

Just three points to note before we close this event-linked

review:
The holding period of your funds need to be for at
least three-to-five years. While you may use triggers or
time your accumulation based on our short-term
expectations, you should ideally be running SIPs if the
medium to long-term expectations make sense to you.
It is best to refrain from fund chart busters that were
never seen earlier, if you were to invest based on the
above expectations. You could get yourself hurt
especially in sector funds or mid-cap funds.

Do not lose grip over your asset allocation strategy.

This equity strategy does not mean you stop investing
in debt.

The new finance minister should be thinking about the deployment of macroprudential and
capital control measures to insulate the Indian economy from fickle, footloose and short-term
capital flows. In this regard, he needs to remain wary of and be alert to creeping and
inadvertent capital account liberalization. Specifically, it may be tempting to usurp powers to
regulate capital inflows from the RBI. But that would be counterproductive. Once regulatory
powers are vested in the hands of a political appointee, the scope for external bodies global
financial institutions (aka Wall Street) to influence outcomes to the detriment of the broader
Indian economy rises immeasurably. The central bank should remain in charge of managing
capital flows in and out. Nor should the finance minister consider hiving off banking
regulation from the remit of RBI. Thanks to RBI, India has avoided death by finance, so
far. The new finance minister should ensure that he does nothing to damage that history.

Viewpoint

V Anantha Nageswaran, co-founder, Aavishkaar Venture Fund and Takshashila Institution source: www.livemint.com

www.fundsindia.com

Market Place

FundsIndia Blog

Term Insurance: Online vs Offline

In the market, insurance companies are increasingly

introducing online term plans for lesser premiums to
customers. This, in one way, is exciting news, as it means
more savings.

Price should not, however, be the main criterion for

choosing something as important as term insurance. Here
are a few pointers that will help you make the right
decision between online and offline term insurance.

Is low premium the main criterion for choosing term

plans?

In our view, low premium must never be the only criterion

for choosing a term plan. Before you fall for the charms
of such plans, youll need to look closely at the fine print.
For starters, the cheap premium paid for online term
insurance often jumps by 25% after the prospective
customer undergoes a medical test.
Also, after the medical test, if the proposer would like to
decline the policy, the amount paid will be refunded to
him only after the cost of the medical test that was borne
by the insurance company has been deducted.
One important point to note here is that such a customer
has to disclose his entire medical history, and that can be
used as evidence in the case of a claim.

To read more and learn from informed checklists, check

out the Market Place FundsIndia, the official blog of
FundsIndia.com,
on
a
regular
basis
at
http://www.fundsindia.com/blog.

Did you know?

S Sridharan

Blog Pick
China Debt Endgames

In effect, the flexibility of Chinese authorities to deal with

any problems may be more constrained than assumed.
But the risk of a major collapse while always present is, at
this stage, low. A familiar endgame, entailing bank failures,
depositor runs, massive outflows of foreign investors or
a sovereign default, is unlikely. The Central Government
is seeking to steer a middle path, which is both difficult
and has significant risks.. In the short run, continued
mal-investment and deferring bad debt write-offs will
provide the illusion of robust economic activity. Over
time, households will discover that the purchasing power
of their savings has fallen.

Wealth levels will be reduced by the decline in the prices

of overvalued assets. Businesses and borrowers will find
that their earnings and the value of their overpriced
collateral are below the levels required to meet
outstanding liabilities. The alternative is equally
problematic. If the government moved to liquidate
uneconomic businesses and unrecoverable debt, then it
would need to finance the recapitalization of businesses
and banks. This cost would require a sharp increase in
taxation, which would also result in a slowdown in
economic activity.
In reality, Chinas Potemkin economy of zombie
businesses and banks will create progressively less real
economic activity.
Satyajit Das (Source: www.economonitor.com)

Unit Scheme 64 (U S 64), Indias first mutual fund scheme, stopped functioning as a mutual fund ought to. It became
a mini-Ponzi scheme of sorts with dividend payments that were unlinked to fundamentals, profits of the fund and
sustainability. Buying its units for dividend and selling became a no-brainer game that attracted large corporate
investors, who started dominating it. Eventually, it became unsustainable. In the late 1990s, the government organized
a bailout, closed the fund and moved its huge portfolio in PSU stocks to a separate fund of the government. It also
led to the shut down of Unit Trust of India, and led to its new avatar, UTI Mutual Fund.
L e a r n i n g : Be wary of any investment option that appears delinked to reality and sustainability.

You are going to see brutal, brutal consolidation in the IT industry, where out of the top five players,
only two or three of us will be meaningful in as quick as five years. You will see this disruption not
so much in combination, but almost like musical chairs.

John Chambers, CEO, CISCO

www.fundsindia.com

www.fundsindia.com

Invest With A Plan

Risk & Return

3
wisdom

This might be a case of jumping the gun. Having dealt with

Risk, and, not yet with Return, we are moving to the links
between Risk & Return. The rationale is that understanding
this relationship is a necessary pre-condition for developing the
right concept of return in our mind.

Nothing works with clockwise precision as the maxim `Higher

The Risk, Higher The Returns and vice versa.

We repeatedly hear experiences of investing in a small finance

company that promised 20 per cent or 30 per cent a year
deposits. Just ask yourself the simple question: how can the
deposit taker offer such returns. He is, in turn, investing in
assets or businesses that are so risky that they can offer him
more than 30 per cent.

There are not businesses that can do so in a sustainable manner

unless they are on niche product or service that cannot be
replaced. Tales abound of depositors losing every rupee in such
adventurous investing guided by greed for high interest rates.
A few percentage points (2-3) more than what PSU banks,
HDFC and Sundaram Finance, to name a few, offer is fine.
Even here the risks are high.
Cut to stocks. The same mid- and small-cap stocks that
handsomely outpaced large-cap stocks between 2003 and 2007
would have drained your capital in 2008.

In the 2008 crash, large-cap stocks lost about 52 per cent, midcaps about 75 % and many small caps in the vicinity of 90 per
cent. Even if you made three-fold returns in a small cap stock,
your Rs 100 would have been down to Rs 40. In the large-cap
space, if you had doubled your money, you would at about Rs
95 post the crash. This is risk for you small cap stocks are
way riskier than large-cap stocks.

Real estate, gold, bonds, fund that invest in them you name
the asset class. The maxim will work effectively. For a transient
period, you may be on the other side. This may embolden you
to try similar strategies again and it is likely you would get
singed.

It is not enough to know what is risk. You must know risk

works with return. Only then you would be able to understand
your risk-taking ability and make appropriate asset allocation
plans. Take quality and credible advisory help if you cannot
come to grips on your own.

Being so skeptical about the usefulness of advice, I have been

reluctant to lay down any rules or guidelines on how to invest
or speculate wisely. Still, there are a number of things I have
learned from my own experience which might be worth listing
for those who are able to muster the necessary self-discipline:
#1

#2
#3
#4
#5

#6
#7
#8
#9

Dont speculate unless you can make it a full-time job.

Beware of barbers, beauticians, waiters of anyone

bringing gifts of inside information or tips.

Before you buy a security, find out everything you can

about the company, its management and competitors,
its earnings and possibilities for growth.

Dont try to buy at the bottom and sell at the top. This
cant be done except by liars.

Learn how to take your losses quickly and cleanly. Dont

expect to be right all the time. If you have made a
mistake, cut your losses as quickly as possible.
Dont buy too many different securities. Better have only
a few investments, which can be watched.

Make a periodic reappraisal of all your investments to

see whether changing developments have altered their
prospects.

Study your tax position to know when you can sell to

greatest advantage.

Always keep a good part of your capital in a cash

reserve. Never invest all your funds.

# 10 Dont try to be a jack of all investments. Stick to the

field you know best.
Background: Bernard Mannes Baruch was an American
financier, stock investor and philanthropist.

www.fundsindia.com

Q&A
Q

I plan to go out on vacation with my family every

year, and for this purpose wish to start our monthly
SIP of Rs 4,000. This would be utilized within a span
of a year for short breaks from our work life. We
need your advice on where to start our SIP - debt,
MIP, ultra short-term or liquid fund.

Equity Performance Snapshot

Index

CCNX Nifty
BSE Sensex

CNX Midcap

CNX Small Cap

CNX 100

CNX 500

We appreciate your decision to save systematically

towards building a kitty for your vacation. This not
only helps you to plan ahead but give marginally
higher returns than parking your money in a savings
account.

For an eight-to-nine month time frame, ultra shortterm funds such as Templeton India Ultra Short
Term, Tata Floater and ICICI Prudential Flexible
Income Plan can serve your requirement. They have
SIP options. Debt funds and MIP require a longer
time frame of two to three years at least.

As your holding period will likely be less than a year,

you will have short-term capital gains tax impact.
Short-term capital gains for debt funds will be taxed
at your income tax slab rate. To mitigate the impact
you can adopt one of these options based on your
tax slab:

If you are in the 10-20 per cent tax bracket, go

for growth option as dividend distribution tax at
28.3 per cent will be higher than your tax slab.

If you are in the 30 per cent tax slab, consider

dividend reinvestment option where the
dividend tax impact will be slightly lower than
your slab rate and you will still be reinvesting
the dividends by way of units.

We hope this helps you a build a decent corpus for a

happy vacation.
Vidya Bala

CNX Bank

CNX Energy
CNX FMCG

CNX Infrastructure

CNX IT

MSCI EM

MSCI World

1 Year

5 Years

10 Years

19.8

10.6

17.5

18.1

28.3
49

19

10.2

13.6

12.1
11

16.9
17.6

19.6

17.1

21.6

10.1

16.5

20

13.2

15.5

14.8

-0.3

26.9

40.4

22.8

11.0

22.0

32.1
1.8

20.1

23.3

-3

13.1

18.4

11.1

16.1
10.0

Returns (in per cent as of May 30, 2014) for less than one year is on an absolute
basis and for more than one year on a compounded annual basis.

M a k e a h a b i t o f Va n & L a c y

Must Read

Perhaps the best commentary on economic

conditions and its implications for U S Bonds comes
from Van Hoisington and Lacy Hunt. Their views are
well researched, rooted in history, and yet take note
of the emerging trends. They have never shied of
taking a contrarian view, even it meant staying that
way for long periods. In general, views by fund
managers focused on bond markets reflect economic
reality in a far superior manner as compared to the
rest of pack. In their report for first quarter 2014,
they opine: `Since the FOMC began quantitative
easing in 2009, its balance sheet has increased more
than $3 trillion. This increase may have boosted
wealth, but the U.S. economy received no meaningful
benefit. Read at www.hoisingtonmgt.com.

We reach 4.6 million retail outlets nationally. Of this, 60 per cent is in urban and 40 per cent in rural
areas. So, it is not as if we dont have a competitive advantage in rural regions. When targeting
villages, we do keep affluence in mind.
Prabha Parameswaran, Managing Director, Colgate-Palmolive, India

www.fundsindia.com

Technical View

Hindustan Zinc

After prolonged period of consolidation, Hindustan Zinc

has staged a breakout. The recent correction offers a
buying opportunity in Hindustan Zinc for a target of `
195. The stop loss for long position in Hindustan Zinc
may be placed at ` 130. Buy the stock at the current levels
as well as on weakness for an initial target of ` 195. A
breakout past ` 195 would push the stock to the second
target of ` 225.

Nifty

The Nifty gained sharply in May. Technically, the outlook

for the stock market remains positive. The recent rally has,
however, pushed the indices to an overbought region.
Hence, a short-term consolidation or a downward
correction is likely. The bullish view would be intact until
the Nifty declines below the recent swing low of 6,600. As
long as this level is intact, a rally to 7,850-7,900 would be
favoured outcome. Investors may use price weakness to
buy quality large-cap and small-cap stocks from the
banking, realty, metals and automobile sectors. Stocks
such as Tata Motors, Tata Steel, CESC, DLF, HDFC Bank
and Glenmark Pharma are a few examples.

Tata Motors

The second stock in the buy list for this month is Tata
Motors. The stock has been on a correction mode in the
past few weeks. The recent fall was arrested on Friday at
the key support zone of ` 400-410. Investors may buy
this stock from a short-term perspective, with a stop loss
at ` 398 and target ` 450. A breakout past ` 465 would
lend momentum to the upward trend, and the stock could
then target ` 480.

B Krishna Kumar

This column is targeted at investors who are registered customers with FundsIndia for trading and investing in equity as well as prospective
investors who wish to open an equity account with FundsIndia. B Krishna Kumar hosts a weekly webinar that discusses the market outlook
for the following week. You can follow him on Livestream. If you wish to receive reminders for his webinars, go to
https://www4.gotomeeting.com/register/131985103

The time of maximum pessimism is the best time to buy and the time of maximum optimism is the best time to sell.
Sir John Templeton

The world seems to be struggling back to its feet after the great financial crisis, and financial markets
are buoyant. This is partly because central bankers are collectively engaged in extreme monetary
easing through unconventional policies.
Dr Raghuram Rajan, Governor, Reserve Bank of India.

www.fundsindia.com

@fundsindia.com in May
Revamped scheme selection page

The scheme selection page is the page where an investor selects

the scheme for investment (one-time or SIP). We have made
changes to this page to simplify the scheme selection.

We have moved to a tabbed structure with 3 tabs One for

FundsIndia Select Funds, one for all active schemes and one
for NFOs/FMPs. The select funds tab will be provided by
default and the user will be able to move to the other tabs.

In the tab for viewing all schemes, we have now provided

options to view only growth and dividend funds. This will
simplify finding only growth schemes or only dividend
schemes.

For investors keen on NFOs and FMPs, we are now

providing additional information specific to NFOs, which
we were not providing earlier at the time of scheme
selection

HDFC MF, instant investing enabled

Starting May, our instant investing investors will be able to

transact in schemes from HDFC Mutual Fund also. With this,
we now support investments in the 13 top fund houses without
any paperwork.
Extending portfolio notes

Our investors have the ability to enter notes for every portfolio
they have. Based on feedback from our investors, we have now
enhanced the field to capture up to 1000 characters.

Smart Solutions Recommendations

It has been a year since we launched Smart Solutions - a

promise to walk with you in your journey towards your
financial goals. We have been tracking the schemes you have
invested in and are ready to roll out recommendations for
change of schemes. In June, we will be reaching out to you with
our review of your Smart Solutions and recommendations for
change, if any. You will be required to accept the
recommendations for the changes to be effective. So, keep an
eye out for our recommendations to ensure that you stay on
course for your goals.

Disclaimer: Mutual Fund Investments are subject to market risks. Please read the offer
documents available at the website of each mutual fund carefully before investing. Past
performance does not indicate or guarantee future performance. There is risk of capital
loss and uncertainty of dividend distribution. Think FundsIndia, a monthly publication
of Wealth India Financial Services, is for information purposes only. Think FundsIndia
is not and should not be construed as a prospectus, scheme information document or
offer document Information in this document has been obtained from sources that are
credible and reliable.
Publisher: Wealth India Financial Services
Editor: Srikanth Meenakshi

Quiz

1 Who is the Finance Minister of India now?

2 Name the first segment in which trading started on the
National Stock Exchange?
3 Which was first liquid fund (by any name) to be
launched in India?
4 What is the name of the highly regarded weekly letter
that is published by Christopher Wood, Managing
Director & Global Strategist of CLSA?
5 Name the person in the image? He
spearheaded the spread of electronic
trading and settlement systems in
India.
Answers can be emailed to quiz@fundsindia.com. The
first three to send in all correct answers will be entitled to
a must-have book on investment. Answers for April 2014
Quiz: 1 U K Sinha 2 Gilt Funds 3 HDFC Mutual Fund 4 Dr
Y V Reddy 5 Over The Counter Exchange of India (OTCEI)
Prize Winner: Jatin Nagpal is the winner of the May 2014 quiz.

FundsIndia Select Funds

FundsIndia's Select Funds is a list of mutual funds that we

think are most investment worthy for a regular investor.
For a full list of funds, please go to
http://www.fundsindia.com/select-funds.
Tax-savings funds - Moderate risk

These are equity-oriented funds with a lock-in of three

years. Investment up to ` 1 lakh qualifies for deduction
under Section 80C of the Income Tax Act.
Axis Long-Term Equity Fund
CanRobeco Tax Saver
Franklin India TaxSheild

Tax-saving funds - High risk

ICICI Pru Tax Plan
IDFC Tax Advantage Fund
Religare Invesco Tax Plan

To invest, call 0 7667 166 166

The idea is to keep the large cap allocation at 65-70 per cent and increase mid cap allocation to 3035 per cent to participate in economic cycle improvement- Swati Kulkarni, Fund Manager, UTI
Mutual.
Read more at FundsIndia Blog at http://www.fundsindia.com/blog
www.fundsindia.com