Human emotions and behaviors - ICICI Directcontent.icicidirect.com/MoneyManagerMagazine/February_2015.pdf · Human emotions and behaviors ... it measures progress toward goals rather

4

Human emotions and behaviors

often influence the decision-

making process of an investor.

Several studies in the field of

behavioral finance suggest that

most investors are emotional

and try to time the market,

which often lead to below

average returns on their

portfolio, as compared to

broader markets.

This is the case, not only with

Indian investors, but also with

investors across the globe. For

instance, the latest report on

'investor behavior analysis' by

Dalbar, a research agency,

shows that in the last 20 years,

Anup BagchiMD & CEO

ICICI Securities Ltd.

the average equity investor has earned significantly less

(5.02%) than the broad equity markets (9.22% by S&P 500).

During the same period, the average fixed-income investor

has earned less (0.71%) than the rate of inflation (2.37%).

This is mainly because of our behavioral biases, which lead to

the large gap between broader market returns and actual

investor returns. Our emotional reaction, or rather over-

reaction, to good news or to bad news, causes irrational

investment decisions. Such decisions can be avoided by

adopting a goal-based investing approach, as it helps us stay

focused on our goals - the true purpose behind making an

investment.

1ICICIdirect Money Manager February 2015

For instance, the 'herding' behavior - the tendency to imitate

other investors - can be avoided through a goal-based

investing approach - as the investor then is less influenced by

public opinion and is focused on his goals. Similarly, the

'Myopic loss aversion' behavior - paying excessive attention to

the market's short-term ups and downs - can be avoided as the

investor then looks beyond intermittent market volatility.

Likewise, our behavioral biases can be controlled with a goal-

based investing approach.

Goal-based investing is nothing, but a simple approach, where

the focus is on funding the financial goals rather than

achieving the higher return on investment or exceeding the

market return. In this approach, our assets and investments

are closely matched with liabilities (requirement of funds) and

goals, to create an optimum portfolio. Having this closer

alignment of assets and liabilities helps us avoiding some

common investment mistakes. The best part about this

approach is that it provides us a better understanding of what

needs to be done to achieve our goals.

You may speak to our financial planners about building a goal

based investment portfolio. They will help you determine your

financial profile, including your investment goals, time

horizon, and risk tolerance. Our planners will also work with

you to understand, anticipate, and overcome the any unique

investment challenges that you could face over time.

Our message remains the same - 'Keep investing and stay

invested for your life goals'. Through this magazine and our

website www.icicidirect.com we want to make an earnest

attempt to partner with you in setting and achieving your

financial goals. Do walk into any of your Neighbourhood

Financial Superstore and talk to us.

2

A core expectation for most investors is growth and return. Returns could be absolute or relative to a benchmark. The absolute return strategy chases a target return, having a target return in mind works well for an investor. However, being anchored to a target return expectation always is neither practical nor advisable.

A goal-based investment strategy works better. Unlike absolute return strategy, it measures progress toward goals rather than returns versus the benchmark. In a goal-based investment strategy, our investments are matched to our liabilities (or requirement of funds) and to our life goals by proper planning. It may look like a new concept, but it is not. Financial institutions such as banks and insurance firms have always followed this strategy of matching their assets with their expected liabilities.

When we have a clear idea of our goals, we can effectively invest in products that are best suited for achieving our goals. Our cover story of this edition takes you through the fine details of goal-based investing to help you better manage your finances.

The edition also features a piece on how should debt investors invest in the current scenario, as the Reserve Bank of India (RBI) has recently cut the repo rate, which indicates of easing interest rate cycle going ahead. We also feature an interview with R Sivakumar, Head - Fixed Income, Axis Mutual Fund, who expects the entire yield curve to benefit from the rate cut cycle.

I would also like to draw your attention to our new section 'Debt market outlook', where we present the key recent developments of debt market along with the outlook going ahead. So read on, stay updated and involved. Do write in with your feedback at moneymanager@ icicisecurities.com and share your thoughts.

Editor & Publisher : Abhishake Mathur, CFA

Coordinating Editor : Yogita Khatri

Editorial Board : Sameer Chavan, CWM®, Pankaj Pandey

CMEditorial Team : Azeem Ahmad, Nithyakumar VP CFP , Nitin Kunte, Sachin Jain, Sheetal Ashar

ICICIdirect Money Manager February 2015

Your magazine is now also available on www.magzter.com, a digital newsstand.

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MD Desk.............................................................................................1

Editorial.............................................................................................. 2

Contents..............................................................................................3

News..................................................................................................4

Equity Market Round-up & Outlook.........................................................5

Debt Market Round-up & Outlook...........................................................8

Getting Technical with Dharmesh Shah..................................................10

Derivatives Strategy by Amit Gupta.......................................................12

Stock Ideas: Century Plyboard and KSB Pumps.......................................21

Flavour of the Month: Goal-based Investing Read on to find out how by adopting a goal-based investing approach you can have a better chance of meeting your goals................................................................................................. 29

Tête-à-tête: 'Longer duration strategies to benefit the most' An interview with R Sivakumar, Head - Fixed Income, Axis Mutual Fund…...............................................................................................37

Ask Our PlannerYour personal finance queries answered…....................................41

Mutual Fund Analysis: Category – Debt Funds Read on to know how to invest in debt funds post RBI's recent rate cut…..................................................................................................44

Mutual Fund Top PicksHere we present our research team's top mutual fund recommendations, across equity and debt categories…...............47

Equity Model Portfolio...........................................................................49

Quiz Time............................................................................................54

Monthly Trends....................................................................................55

Premium Education Programmes Schedule.............................................59


4ICICIdirect Money Manager

Budget 2015: Government looking at SEBI proposal to introduce MF retirement plans with tax benefits

Investors may soon get tax benefits in retirement plans run by mutual funds. The government is considering a proposal by the capital market regulator to introduce retirement savings plan under section 80CCD of the Income Tax Act, which allows investors to claim tax deductions. The government may announce this in the Budget. Currently, individuals investing in National Pension Scheme (NPS) are eligible to claim income tax deductions under section 80CCD.

Courtesy: The Economic Times

Mutual fund houses plan to come up with special schemes focused on the manufacturing sector that is expecting a big boost from the Centre's 'Make in India' initiative. ICICI Prudential Mutual Fund (MF), which has filed offer documents with market regulator SEBI, plans to launch an open ended equity scheme 'ICICI Prudential Manufacture in India Fund'. Besides, Pramerica MF has filed draft papers to launch 'Pramerica Build in India Fund', while the 'Birla Sun Life manufacturing equity fund' is already being launched. These schemes are aimed at investment in equity and equity-related securities that are likely to benefit from the Government's 'Make in India' initiative.

Courtesy: The Hindu Business Line

Mutual funds plan schemes to cash in on 'Make in India' campaign

If you are an insurance policy holder confused about jargon such as pure-term, non-linked, co-pay cover, et al, here's some good news. The insurance sector is working on simple, plain-vanilla products to cater to people like you. In a recent meeting at Hyderabad between state-owned insurers, regulatory and finance ministry officials, the government has asked public sector insurers to launch products that are simple, cheap and something that a layman can understand. The insurers have already begun to work on them.

Courtesy: Business Standard

No more confusion: Plain vanilla insurance products coming up

The government is likely to increase the lock-in period for Public Provident Fund (PPF) by at least two years, reports ET Now. According to ET Now sources in the Finance Ministry, those who invest in PPF will be able to withdraw after 8 years, as against the current 6-year lock-in period. The government is also likely to increase the tenure of PPF from 15 years to 20 years. "While it will be up to the saver to opt for either a 15-year or a 20-year saving period, the government will look to lure people with a higher interest rate for the 20-year tenure, under Section 80C," reported ET Now. "This implies that if the saver is willing to invest in PPF for 20 years, the subsequent tax benefit will be higher," the channel said. According to ET Now, the government is considering this move in order to ensure a stable source of infrastructure funding.

Courtesy: The Economic Times

Government may increase lock-in period for PPF; to offer higher interest rate for 20-year tenure

February 2015


Markets likely to consolidate as Budget countdown begins

February 2015

EQUITY MARKET ROUND UP& OUTLOOK

-

Domestic equity benchmarks

posted strong gains in January,

ending the month ~6% higher

as the market took positive

cues from a sharp fall in global

commodity prices and a

dovish monetary policy stance

by the Reserve Bank of India

(RBI) besides encouraging

f isca l pr ints . December

Consumer Price Index (CPI)

inflation came in at 5% year-

on-year (YoY), below Street

expectation of 5.3%. The Index

of Industrial Production (IIP) for

November 2014 was recorded

at 3.8% after a sharp decline of

4.2% in the previous month.

The growth was driven by all

t h r e e s e c t o r s , m i n i n g ,

manufacturing and electricity,

which registered growth of

3 . 4 % , 3 % a n d 1 0 % ,

respectively. Easing inflation

was the main influential factor

behind the RBI's surprise move

of a 25 basis points (bps) repo

rate cut to 7.75%. The move

was cheered by the equity as

well as debt markets.

The Q3FY15 numbers have

been a mixed bag with a

negative bias. For IT, the

cons tant cur rency (CC)

revenue growth for tier-I IT

companies was notably

stronger in a seasonally weak

quarter. In the auto space, the

results were subdued barring

Bharat Forge and Maruti. On

the banking front, divergence

b e t w e e n t h e e a r n i n g

performance of private &

public sector undertaking

(PSU) banks continued. While

private banks sustained their

h e a l t h y o p e r a t i o n a l

performance with asset quality

staying under control, PSU

banks continued to reel under

asset quality pressure thereby

leading to declining/muted

profitability. In the consumer

discretionary space, the results

were below expectations on

account of a weak demand

scenario. Even fast moving

consumer goods (FMCG)

companies continued to

witness muted volume growth

due to a slowdown in urban

d i s c r e t i o n a r y d e m a n d .

However, with a sharp fall in

commodity prices, operating

margins witnessed an uptick.


Global markets continued to

be influenced by falling crude

prices and the pol i t ical

situation in Greece during the

month besides the stimulus

a n n o u n c e m e n t b y t h e

European Central Bank (ECB).

Crude plunged to as low as

$45.2 per barrel in the month

as Organ iza t ion o f the

Petroleum Exporting Countries

(OPEC) lowered its demand

forecast for 2015 to 28.8 million

barrels per day. The downward

revision of growth forecast for

the global economy by the

International Monetary Fund

(IMF) from 3.8% to 3.5% for

CY15 and from 4% to 3.7% for

CY16 a lso we ighed on

sent iments. Though the

markets received some boost

from the ECB announcement

of bond buying programme of

€ 6 0 b i l l i o n p e r m o n t h

(including investment grade

sovereign bonds), the gains

could not offset the losses in

the month. Concerns due to

negative implications from

falling crude prices kept the US

markets in the red territory. The

European markets remained

more or less flat.

With softening inflation, the

benchmark 10-year bond yield

fell to 7.69%, the lowest since

September 2013. During the

m o n t h , c r u d e ( B r e n t )

continued the decline and

ended at ~US$ 50.7/barrel vs.

US$ 55.7/barrel at the end of

December. Gold prices ended

the month with gains of 8% at

US$ 1,283.7/ounce.

Global markets

The US markets ended on a

negative note as sentiments

were dampened owing to

falling crude prices and the

political situation in Greece.

The Dow Jones, S&P 500 and

Nasdaq were down 4.5%,

4.1% and 3%, respectively,

during the month. The UK

FTSE, German Dax and French

CAC gained 3.1%, 9.1% and

8.4%, respectively. In Asian

markets, Nikkei and Shanghai

SSEC ended the month up

1 . 3 % a n d d o w n 0 . 8 % ,

respectively, while the Hang

Seng was up 3.8%.

Domestic markets

Foreign institutional investors

(FIIs) bought heavily to the tune

of ~ Rs. 17,689.09 crore on the


-


b a c k o f s t r e n g t h e n i n g

confidence on the Indian

economy vis-à-vis the rest of

the emerging markets. Though

the domestic institutional

investors (DII) investment

remained relatively subdued,

they continued to be net

buyers with a net inflow of

~Rs. 879.5 crore.

The Nifty and Sensex posted

decent gains and were up 6.4%

and 6.1%, respectively, during

the month. Except the BSE

Metal Index (-5.2%) and BSE

FMCG Index (-4.9%) all other

indices ended January in the

positive territory. Some of the

sectoral indices gainers were

BSE Realty (16.5%), BSE Auto

(7.3%), BSE Bankex (5.9%),

BSE Healthcare (6.6%), BSE IT

(5.6%), BSE Power (6.3%) and

BSE Technology (5.0%).

Outlook: Focus firmly on Budget in

backdrop of weak global cues,

subdued Q3 numbers

The Budget, which will be the

first full-fledged Budget of

NDA-2 (the July Budget was a

kind of formality), will be a

major catalyst. The new

government will be put to the

task to match the long list of

expectations and unfinished

agendas o f the ea r l i e r

government. The July Budget,

albeit a formality, has already

addressed the strategic need

to improve the investment

climate by emphasising on

m e a s u r e s t o c r e a t e a

framework for low & stable

inflation, setting fiscal deficit

on a sustainable path through

tax and expenditure reforms

and setting up a broad based

inclusive growth framework

for a sustainable market

e c o n o m y. H e n c e , t h e

expectations have already

been amplified. After taking

into account the RBI's positive

surprise of an unscheduled

rate cut, expectations may go

through the roof. On the

earnings front, the trend was

more or less subdued with

very positive beats till date.

Globally, the liquidity gush is

likely to continue with ECB

joining the bandwagon amid

Greece's false bravado and

subsequent submission. In this

backdrop, markets are likely to

focus solely on the Budget

outcome.


-


DEBT MARKET ROUND UP& OUTLOOK

-

Change in monetary policy stance... Interest rates to head lower

In January, benchmarks yields turned south as the Reserve Bank of India (RBI) announced a 25 basis points (bps) repo rate cut on January 15, 2015, well ahead of the February monetary policy. While inflation declined faster than expected due to a favourable base effect during June-November, the upturn in December turned out to be muted relative to projections. Augmenting this data with s u r v e y d a t a o n f a l l i n g inflationary expectations as well as data on weak commodity

prices and muted rural wage growth, the Reserve Bank projected that it would meet its objective of 6% consumer price index (CPI) inflation by January 2016. Having committed in public statements to initiate a change in the monetary policy stance as soon as incoming data permitted, the RBI cut the policy rate on January 15, 2015. The benchmark 10-year government securities yield, therefore, corrected sharply by 16 bps to 7.69%; Corporate bond yields followed G Sec yields.

Government Securities (G-Sec) Yield Jan-15 Dec-14 Change (bps)

10-year 7.69 7.85 16

5-year 7.67 7.94 27

3-year 7.98 8.16 18

1-year 7.96 8.26 30

Corporate Bond Yields Jan-15 Dec-14 Change (bps)

AAA 10-year 8.33 8.59 26

AAA 5-year 8.38 8.67 29

AAA 3-year 8.41 8.66 25

AAA 1-year 8.47 8.62 15

AA 10-year 8.93 9.02 9

AA 5-year 9.00 9.13 13

AA 3-year 9.06 9.15 9

AA 1-year 9.13 9.17 5

Credit Spread Jan-15 Dec-14

G sec - AAA 10-year 64 74





DEBT MARKET ROUND UP& OUTLOOK

-

Money market rates corrected 100 bps both in the daily Call market as wel l as the Col lateral ized B o r r o w i n g a n d L e n d i n g Obligation (CBLO) market despite traded volumes being higher. Average daily call volumes stood

at Rs. 1,69,139 crore while CBLO volumes were at Rs. 7,10,865 crore. Banks, on an average, borrowed Rs. 12,575 crore under the liquidity adjustment facility (LAF) window.

Money Market Rates Jan-15 Dec-14 Change (bps)

Call 7.75 8.75 100

CBLO 7.72 8.83 111

Certificate of Deposit (CD) Rates Jan-15 Dec-14 Change (bps)

12-Months 8.59 8.66 7

6-Months 8.53 8.52 -1

3-Months 8.36 8.42 6

1-Month 8.18 8.40 22

Commercial Paper (CP) Rates Jan-15 Dec-14 Change

Outlook

The year 2015 started with a change in monetary policy stance by the RBI. The rate cut in January by the RBI weighs more as it now marks a change in the monetary policy stance and beginning of the easing of the interest rate cycle. The RBI has repeatedly said that once the policy stance shifts it will be a definitive shift and further actions will be consistent with the new stance. We continue to maintain our view of a 100 bps repo rate cut by the RBI in

calendar year 2015. Therefore, we expect another 50-75 bps rate cut throughout the remainder of the year. We remain positive on the Indian debt markets as it is well placed to benefit from the structural improvement in macroeconomic data and expect the positive undertone of the debt market to sustain, going forward. Duration funds as well as credit opportunities funds both present an investment opportunity at current levels as well. However, the return in duration funds is likely to moderate, going forward.

12-Months 8.97 9.01 4 6-Months 8.86 8.91 5 3-Months 8.80 8.65 -15 1-Month 8.31 8.59 28

Volume Data (Average for the month – Rs. Crore) Jan-15 Dec-14 Change

Call Volume 1,69,139 1,43,127 26,012

CBLO Volume 7,10,865 6,82,574 28,291

LAF Volume 12,575 11,400 1,175

ICICIdirect Money Manager

TECHNICAL OUTLOOK

Pendulum to tilt towards 30400

February 2015

Domestic equity benchmarks began 2015 with renewed zeal and surged over 7% to achieve our short-term target of 29500/8900 (Sensex/Nifty) as elaborated in the January edition.

We believe the markets will continue to ride the positive momentum and extend the c u r r e n t r a l l y t o w a r d s 30400/9200 in the run-up towards the Union Budget. The short-term base for the benchmarks has shif ted upwards to 28800/8600. Any intermediate cool-off towards these levels should be used as a n i n c r e m e n t a l b u y i n g opportunity.

The current up-move from December 2014 low of 26469 to the life-time high of 29786 (3317 points) is the largest in magnitude since February 2014. In the entire up-move from February 2014 onwards,

the index had followed a peculiar tendency as price-wise each major up-leg measured 3000 points (900 points on Nifty). After every 3000-point rally, the index ventured into a short-term consolidation phase to form a h i g h e r b a s e b e f o r e continuance of the larger uptrend. The current rally exceeding the magnitude of all preceding up-moves over the past year signals an extending market, which holds further u p s i d e p o t e n t i a l . T h e minimum 138.2% Fibonacci extension of the October – D e c e m b e r 2 0 1 4 r a l l y measured from December 2014 low of 26469/7961 projects an upside target of 30400/9200 in the coming month.

The index continues to stride northwards in a rising peaks and troughs manner as the support base keeps shifting higher with every subsequent rally. The strong resolve past the December 2014 high of 28822/8626 has confirmed a significant higher bottom in place at the December low of

10


BSE Sensex – Monthly Candlestick Chart

February 201511

26469/7961. Going forward, we expect the December 2014 peak of 28822/8626 to reverse its role and as support for the benchmarks in the immediate short-term. The placement of 38.2% Fibonacci retracement o f the December 2014 –January 2015 up move

around the 28800/8600 region makes this a sound base for the index. Any temporary cool-off towards the 28800/8600 zone s h o u l d b e s e e n a s a n i n c r e m e n t a l b u y i n g opportunity to r ide the expected up move towards 30400/9200 in the coming month.

21 week EMA

2976 points

2911 points

3062 points

3098 points

3317 points

Positive crossover on MACD oscillator abov e its 9 period average highlights strength in the current up move

138.2% extension of Oct-Dec rally @ 30400

Weekly RSI formed a Double Bottom at its bull market support of 55 during recent correction highlighting the overall positive price structure

Source: Bloomberg, ICICIdirect.com Research

The views expressed in the article are personal views of the author and do not necessarily represent the views of ICICI Securities.

Ø The current rally from December 2014 lows is the largest in magnitude (3317 points) since February 2014 signaling an extending market, which has further upside potential

Ø The minimum 138.2% extension of the October-December 2014 rally measured from December 2014 low projects upsides towards 30400 for the current up move in the coming month

TECHNICAL OUTLOOK


DERIVATIVES STRATEGY

Nifty likely to move towards 9300/9500; Key support near 8500

Amit Gupta

Head - Derivatives Research,ICICI Securities

February 201512

Nifty clocking strongest expiry performance in well over a year, with broad based participation from various sectors

After seeing profit booking in the December series, the Nifty saw a strong pullback as the Reserve Bank of India (RBI) surprised the market with a repo rate cut on January 15, 2015. Since then, buying momentum was seen across sectors. For the month, the Nifty registered strong returns of close to 10% for the January series. This is the highest expiry return in well over a year.

We believe the up-move could continue as expectations are still running high from the Union Budget on February 28. However, bouts of profit booking are not ruled out as the Nifty has already moved up over 900 points on the trot.

Looking at the sectoral performance for the month, broad-based buying was seen during the month. At the start of the series, consumer durables started to move up. Then capital goods stocks witnessed buying. Towards the expiry, banking stocks were back in the reckoning. Driven by dol lar s t rength, the commodity space, including metals remained weak and closed negative despite the strong move in the broader markets.

This sectoral buoyancy is likely t o c o n t i n u e a s t h e consumption, cyclical and capex stories are likely to attract focus.

Nifty expiry returns in trailing12 months

9%

-4%

4%3%3%3%4%

6%

3%

6%

3%

-1%

-4.0%

-2.0%

0.0%

2.0%

4.0%

6.0%

8.0%

10.0%

Jan'

15Dec

NovOct

Sep

AugJu

l

Jun

MayApr

Mar

Feb


Sectoral performance

-3-113579111315

Consumer Durable

Capital Goods

Bank Nifty

Nifty

Mid Cap

Metal

% monthly return

Nifty target of 9300/9500; Key support placed near 8500

The January series saw a remarkable turnaround after tumbling to 8065. The Nifty pulled back 900 points. Key trigger for this 9.5% Nifty up move was the RBI rate cut on January 15. Post the rate cut, foreign institutional investors (FIIs) pumped in over US$2 billion.

Looking at the February series options build up, the Put options concentration is one of the highest at the 8500 strike. On the higher side, the Call options concentration of over 5.1 million shares is at the 9000 Call strike. Thus, in the immediate term, the Nifty could continue consolidating in the range of 8500-9000. As we approach the budget, the Nifty could surpass 9000 to move towards a target of 9300.

The Nifty has started the

February series with the highest open interest since October 2011 with 24.8 million shares. The higher roll spread suggests that the bias of these positions is on the long side. Thus, intermediate declines are likely to attract buying interest while the Nifty is likely to move towards the highest options base of the 9000 Call strike.

Our upside target on the Nifty in the coming months remains at 9300 and 9500. The upward momentum could gain traction around the Union Budget. A strong Budget will also make a case for India sovereign rating upgrade. The RBI will also feel obliged to follow up with rate cuts if the government delivers in the Union Budget on February 28.

N i f t y vo lume we igh ted average price (VWAP) for the January series is placed near the 8500 while Nifty expiry was at 8952, 2 sigma levels away from the VWAP considering the January series. Going ahead, the level of 8500 is likely to act as a strong support level for the Nifty.



As seen in the sigma level chart below, the Nifty had bounced from the 100 DMA line in the middle of the January series and is currently trading near mean + 2 sigma level of 8700. Thus, the Nifty is likely to consolidate before scaling higher.

Nifty options build-up in February series

0

1

2

3

4

5

6

7

8

8500

8600

8700

8800

8900

9000

9100

9200

9300

9400

9500

OI i

n M

illio

n S

hare

s

Call OI Put OI

Nifty 2 sigma Band: consolidation initially

5700

6200

6700

7200

7700

8200

8700

9200

Jan-

14

Feb

-14

Ma

r-14

Apr

-14

Ma

y-14

Jun-

14

Jul-1

4

Aug

-14

Sep

-14

Oct

-14

Nov

-14

Dec-

14

Jan

-15

Close UBB(2) BollMA (100) on Close LBB(2)

FII buying in Nifty futures commenced at 8250, which remains critical support for coming months

Since the election verdict,

Indian markets have displayed

new found strength as the new

government in place has taken

s t rong re formis t po l icy

initiatives. This was further

helped by a cool-off in crude oil

prices, improving India's fiscal

condition. This strength has

seen good participation from

FIIs inflow not only via cash

buying in equities but also

through long Index futures

blocks.

Since the election verdict, FIIs

have created long index future

p o s i t i o n s o n m u l t i p l e

occasions. In the first Instance,

the Nifty moved up 8.5%, in the

second instance it moved up

11% while recently in January

2015, the Nifty moved up 10%.

The key takeaway from this

analysis is from the point from

where buying in index future

commences the level is not

violated. The chart below

displays the same.

T h e r e c e n t b u y i n g

commenced from 8250 on

January 13, 2015. Hence, the

Nifty was unlikely to dip below

this level. This will remain a

positional support for the Nifty

i n t h e c u r r e n t u p w a r d

momentum, which started

post elections verdict in 2015.



Large index future buying starts at 8250 in 2015

1st instance Aug 14 2nd instance Oct 14 3rd Instance Jan 15

11-Aug-14 162.46 17-Oct-14 1030.18 13-Jan-15 440.83

12-Aug-14 1390.77 20-Oct-14 1455.01 14-Jan-15 178.2

13-Aug-14 717.77 21-Oct-14 398.53 15-Jan-15 3896.76

14-Aug-14 604.91 22-Oct-14 751.09 16-Jan-15 -848.13

19-Aug-14 451.36 27-Oct-14 680.01 19-Jan-15 56.02

20-Aug-14 276.72 28-Oct-14 592.15 20-Jan-15 1749.06

21-Aug-14 -157.58 29-Oct-14 2166.72 21-Jan-15 483.32

22-Aug-14 448.55 30-Oct-14 1286.49 22-Jan-15 901.84

25-Aug-14 191.55 31-Oct-14 1485.22 23-Jan-15 1371.99

26-Aug-14 269.04 3-Nov-14 163.56 27-Jan-15 1731.69

27-Aug-14 437.8 5-Nov-14 721.73 28-Jan-15 -1301

28-Aug-14 847.03 7-Nov-14 332.44 42033 1867

Inr in Cr 5640.38 Inr in Cr 11063.13 Inr in Cr 10527.58

Nifty returns 8.50% Nifty returns 11% Nifty returns 10%

Nifty Low 7568 Nifty Low 7720 Nifty Low 8248

Nifty levels where FII major buying in Nifty Futures commenced

EM equity buying by FIIs post US QE3 (in US$)

Indonesia Phillipines Thailand S.Korea India

Dec -33 325 702 3299 4446

Jan 635 724 551 -1723 4096

Feb 1160 146 -583 1760 4142

Mar 189 204 208 -1885 1912

Apr 75 283 -682 -2584 951

May -33 448 -169 902 3772

Total 1993 2130 27 -231 19319

Jun -2033 -250 -1800 -4491 -1765

FIIs outflows started post hints of QE reduction

Nifty up-move continues postUS QE announcement (in Rs. Cr.)

Buying seen post ECB QE on 22 Jan 2015 (in US$)

-500

0

500

1000

1500

2000

2500

India Indonesia Philippines Thailand Brazil South

Africa

Turkey


16250

22230 22123

10399

6407

21175

0

5000

10000

15000

20000

25000

Dec '2012 Jan Feb Mar Apr May

5640

5740

5840

5940

6040

6140

6240

FII Secondry Equity inflows ('000 Cr Inr) Nifty Spot


Last liquidity infusion cycle

was triggered by the US QE 3

of US$80 billion per month on

December 12, 2012.

As visible in the first chart

above, India stood to gain from

this liquidity infusion with

largest inflows of close to

US$20 billion in six months.

Also visible in the second chart

above is the price performance

of the Nifty (monthly high

values used in chart). There is a

c l e a r t r e n d o f p r i c e

performance from the Nifty as

FIIs flows increase.

On January 22, 2015 the

European Central Bank (ECB)

announced the US-styled QE

of buying €60 billion per month

until Sept ember 2016 totaling

€ 1.1 trillion. Along with this,

l iquidity is also gett ing

generated from Bank of Japan

(BoJ) and Peoples Bank of

China (PBOC).

FIIs are likely to allocate a lion's

share of equity allocation to

Ind ia as Ind ia ' s macro

conditions have improved

significantly.

Hence, the Nifty is likely to

FII flows in January: Win-win for Indian equities and debt at start of 2015

FIIs cash activity: strong buying post RBI rate cut

-5000

0

5000

10000

15000

20000

25000

30000

Jan-

14

Feb-

14

Mar

-14

Apr

-14

May

-14

Jun-

14

Jul-1

4

Aug

-14

Sep-

14

Oct

-14

Nov

-14

Dec

-14

Jan-

15

INR

is C

r

Debt markets flows stayed strong

-15000

-10000

-5000

0

5000

10000

15000

20000

Jan-

14

Feb-

14

Mar

-14

Apr-1

4

May

-14

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14

Jul-1

4

Aug-

14

Sep-

14

Oct-1

4

Nov

-14

Dec-

14

Jan-

15

INR

in C

r

As suggested in the previous

pages as well, FII inflows are

likely to see a pick-up in pace.

Historical evidence also

supports this view. Barring Q4

of 2008, 2009 & 2011, Q4 in last

10 fiscal years has attracted

strong FII equity inflows.

Hence, we believe FIIs inflows

will not only be eyeing existing

scale up higher as FII buying is

likely to be in blue chip stocks,

where sufficient float is

available.



blue chip stocks to keep the

positive bias intact in Nifty. It

will also keep an eye on

impending OFS, which are

likely to be announced in the

foreseeable future.

FII buying in the debt segment

remained intact & they bought

over US$1.7 billion in January

as yields dipped over 20 basis

points to 7.70 on 10-year

benchmark (in the last three

months). From here on, yields

on the shorter end are likely to

remain more volatile than long

dated yields, as the RBI action

is likely to mainly impact the

shorter end.

India centric data points that

FIIs will be focusing on

includes consumer price index

(CPI) numbers and index of

industrial production (IIP)

numbers that could provide

insights into the RBI rate action

and, more importantly, the

Union Budget on February 28.

Bank Nifty: Likely to move towards

22000 above highest Put base of

20000

The Bank Nifty continues to

hold leadership position and

registered gains of over 12%

for the series. However, within

the banking space, there was a

clear preference for private

banking stocks as they posted

the strong set of quarterly

numbers while public sector

undertakings (PSU) banking

tumbled.

After struggling to move

beyond 2.27 for over a month,

the Bank Nifty/ Nifty price ratio

moved to 2.31 in the later part

of series. The price ratio is

likely to move towards 2.38

and the recent declines should

be bought with stop loss of

2.14.

Looking at the options build up

for the February series, similar

to 9000 Call in Nifty, the 21000

Call in Bank Nifty has double

the contracts (over 18000

contracts) that of any other

option strike, which is the

immediate target for the index.

Above this, 22000 Call is seeing

additions, which remains a

positional target for the Bank

Nifty.



As the Bank Nifty weightage is

dominated by private banking

stocks, the banking index is

likely to head higher as most

private sector banks reported

strong quarterly results. PSU

stocks are likely to linger as

there were asset quality issues

in most banks.

Today's RBI policy review has

tossed the ball in the Central

government's court. i.e. in

order for further rate cuts to

happen the government must

push fiscal prudence to the

forefront and not get swayed

away by populist measures.

Bank Nifty options build-up forFebruary series

0

0.1

0.2

0.3

0.4

0.5

0.6

0.7

0.8

0.9

1

1950

0

1970

0

1990

0

2010

0

2030

0

2050

0

2070

0

2090

0

2110

0

2130

0

2150

0

Call OI Put OI

India VIX: Likely to move towards 25 ahead of Union Budget

On expected lines, India

Volatility Index (VIX) continued

to trade with a positive bias

and moved towards 20 levels.

The fear gauge reading is at its

highest level since May 2014.

The surge in volatility is likely

to continue as we approach the

Union Budget on February 28.

As the February expiry is on

February 26, volatility is likely

to see surge near. February 15,

the March series contracts will

also be included for the India

VIX calculation. Thus, near

February 15, one can create

long Vega strategies for the

Budget outcome.

Volatility is also expected to

surge towards month end

because Greece's line of long

term financing will be cut off at

February end if it does not

comply with the Troika

mandate. Also, portfolio

hedging is likely to push IV

skew at play as participants will

be looking to hedge their

portfolios aggressively.

India VIX is unlikely to dip

below 17 while on the higher

side VIX could move towards

25 levels in the run up to the

Budget.



India VIX likely to move towards 25 in run up to Union Budget

EM currencies show resilience

despite strength in Dollar Index.

INR likely to move towards 61,

good indicator of strength

continuing in equity markets

Since the start of the January

series, the Dollar Index has

showed a strong price up

move and is currently near 95.

The key reason is the euro,

which is the key component of

Dol lar Index. The euro

weakened from 1.15 to 1.1

before a pullback post QE in

late January. Swiss Franc

unpegging from euro also

increased volatility in the

global currency markets.

The cu r rency vo la t i l i t y

triggered a risk-off wave in the

global equity markets and

investors fled for safety in the

debt market. Bond yields of US

10-year also fell from 2.2 to 1.4

(down 50 bps) while German

10-year yield fell from 0.54 to

0.34 (down 20 bps). The similar

trend of bond market inflows

was also seen in EM debt

markets, where money moved


90

92

94

96

98

100

102

104

106

26

-Dec

28-

De

c

30

-Dec

1-J

an

3-J

an

5-Ja

n

7-J

an

9-Ja

n

11

-Jan

13

-Ja

n

15-

Jan

17

-Ja

n

19-

Jan

21

-Jan

23-J

an

25

-Jan

27-J

an

Dollar Index Euro Australian Dollar Japanese Yen


out from equities and moved

into the debt segment. These

strong debt market inflows

helped EM currencies to

prevent a depreciation trend.

The rupee, Thailand Baht &

Philippines Peso currency

s t r e n g t h e n e d a t 1 - 4 % .

However, weakness was seen

in the Malaysian ringgit and

Turkish Lira.

Overall, the EM currency

managed well till now to

counter the dollar strength till

now. However, going ahead,

the ECB QE driven liquidity is

likely to decide the fate of these

currencies. Continuance of

money flows in emerging

markets is likely to help EM

currency and equities.

Going ahead, strength of the

INR will remain key for

furtherupsides in Indian equity

markets.

Developed market currencies move in January series

Emerging market currency move in January

96

97

98

99

100

101

102

103

104

26-

De

c

28

-Dec

30-D

ec

1-J

an

3-J

an

5-Ja

n

7-J

an

9-J

an

11-J

an

13

-Jan

15

-Ja

n

17-

Jan

19

-Jan

21

-Ja

n

23-

Jan

25

-Jan

27-J

an

Thai Bhat Indonesian Rupiah Indian Rupee

Russian Ruble Zimbabwian Rand Turkish Lira

Malaysian Ringitt Brasilian Real Philippines Peso

The views expressed in the article are personal views of the author and do not necessarily represent the views of ICICI Securities.


21

STOCK IDEAS


Century Plyboard (India): Structural shift… New thrust to growth…

Company Background

Century Plyboard (India) Ltd.

(CPIL) is India 's largest

plywood manufacturer with

~23-30% share of India's

organised plywood sector and

a market share of ~6-7.5% in

the overall market. The

company was promoted by

first generation entrepreneurs

Sajjan Bhajanka (Chairman),

Hari Prasad Agarwal (Vice

Chairman) and Sanjay Agarwal

(Managing Director) and ably

supported by Prem Kumar

Bhajanka (Joint MD), Vishnu

Khemani (Joint MD) as well as

experienced professionals.

CPIL is engaged in the

manufacture of plywood,

laminates, veneer, MDF,

blockboards and doors,

among others. The company is

also engaged in the Container

Freight Station (CFS) business,

managing the first private CFS

at the Kolkata Port. CPIL

recently launched retai l

furniture chain (brand Nesta)

with the launch of two owned

stores. CPIL has retained its

leadership in India's plywood

sector for more than two

decades, accounting for nearly

a third of all branded plywood

sold in India. The company

countered the progressive

c o m m o d i t i s a t i o n w i t h

increased average realisations

for its premium brands. Hence,

whereas the plywood industry

g r e w a t 5 - 7 % C A G R

(compounded annual growth

rate) over the last five years,

CPIL has grown at 17% CAGR

led by market share gains from

the unorganised segment.

Leading player with strong brand

equity & robust distribution

network

The Indian plywood industry is

worth ~ 15,000-16,000 crore

where the organised segment

accounts for ~25-30% of the

overall market. CPIL, with a

capacity of 2,09,420 cubic

metres (CBM) in FY14, is the

leading player in the plywood

industry. The company enjoys

Investment Rationale

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~ 2 3 - 3 0 % s h a r e o f t h e

organised market with strong

b r a n d s a c r o s s p r o d u c t

categories and a robust pan-

India distribution network

comprising 33 marketing

offices, 1,424 dealers, 6,333

employees and more than

13,000 retail outlets.

Myanmar ban & GST roll out –

structurally positive for organised

pie

In April 2014, Myanmar

banned the export of raw

timber logs, putting Indian

plywood players at a huge

disadvantage as they were

h e a v i l y d e p e n d e n t o n

Myanmar for raw timber.

However, CPIL had proactively

set up a plant in Myanmar to

process raw timber providing

security on face veneer (key

component for plywood). This

has helped the company to

gain a first mover advantage

over others. Secondly, with the

rollout of GST (goods &

services tax), the pricing

difference between organised

and unorganised players due

to tax inequalities is likely to

narrow down providing a level

playing field to organised

players. Hence, we believe

CPIL will reap the benefits of a

s t ructura l shi f t towards

organised players.

Set to ride expanding organised pie;

initiate with BUY

Like other building materials

such as tiles, we envisage the

Indian organised plywood

player's pie (currently stands at

~ 3,500-4,500 crore) will

expand in coming years on the

back of structural changes like

rollout of GST, ban on raw

material from Myanmar and

higher brand aspirations. CPIL

is likely to see exponential

earnings growth of 52% in

FY14-17E with a significant

improvement in return ratios

and leverage making a strong

case for a further re-rating.

Hence, we initiate coverage on

C P I L w i t h a B U Y

recommendation and a target

price of 254 (24x FY17E EPS

implying a PEG (price/earnings

to growth) of 0.5x).

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STOCK IDEAS

STOCK IDEAS


Key Financials

Net sales ( crore) 1,284 1,545.3 1,865.7 2,299.9

EBITDA ( crore) 148.2 245.4 297.6 363.6

Net profit ( crore) 67 140 182.4 235.1

EPS ( ) 3 6.3 8.2 10.6

FY14 FY15E FY16E FY17E

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Valuations Summary

P/E (x) 61.5 29.4 22.6 17.5

Target P/E (x) 84.3 40.3 30.9 24

EV / EBITDA (x) 31 18.6 15.2 12.3

P/BV (x) 14.1 10.8 8.2 6.3

RoNW (%) 23 36.6 36.4 36

RoCE (%) 14.7 23.8 26.3 28.6

FY14 FY15E FY16E FY17E

Stock Data

Market capitalization ( crore) 4,116

Total debt (FY15E) ( crore) 491

Cash and investments (FY15E) ( crore) 18

Enterprise value ( crore) 4,589

52-week High/ Low ( ) 199/22

Equity capital ( crore) 22.3

Face value ( ) 1

DII Holding (%) 2.8

FII Holding (%) 6

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STOCK IDEAS

Key RisksLack of raw material availability

and high raw material costThe industry procures majority

of its raw material from

Myanmar as well as countries

l ike Vietnam, Indonesia,

Thailand, Germany, etc. We

believe the biggest risk for

CPIL/industry is its inability to

procure raw material due to

any unforeseen regulation in

the respective jurisdiction e.g.

Myanmar's ban on raw timber

export. However, we believe

CPIL is well placed in terms of

raw material security after

setting up a peeling unit in

Myanmar to facilitate the

sourcing of face veneers.

Forex volatilityT h e c o m p a n y i m p o r t s

substantially for its raw

material requirements. CPIL

reviews foreign currency risk

periodically and takes hedging

initiatives accordingly. If the

anticipated forex (foreign

exchange) loss is more than

the cost of hedging only then

does CPIL prefer to hedge.

Otherwise, CPIL defers its

forex liabilities by availing

overseas buyer 's credit ,

avoiding exchange losses and

s u b s t a n t i a l l y l o w e r i n g

borrowing costs. On account

of this strategy, CPIL lost Rs. 44

crore in FY14. This deeply

impacted its profitability.

Recently, CPIL reduced its

buyer's credit exposure. Also,

g o i n g f o r w a r d , t h e

management is expecting the

same trend to continue, hence,

mitigating the forex related

volatility.

(EBITDA: Earnings before

interest, taxes, depreciation,

a n d a m o r t i z a t i o n ;

EPS:Earnings per share; P/E:

P r i c e - t o - e a r n i n g s ; E V :

Enterprise value; P/BV: Price-

to-book value; RoNW: Return

on Net Worth; RoCE: Return on

C a p i t a l E m p l o y e d ; D I I :

D o m e s t i c I n s t i t u t i o n a l

I n v e s t o r s ; F I I : Fo r e i g n

Institutional Investors)



KSB Pumps: Quality play, master of fluid control

Company BackgroundKSB Pumps (KSB), a subsidiary of KSB AG, Germany (global l e a d e r i n p u m p manufacturing), is a pumps & v a l v e s m a n u f a c t u r e r domestically based out of Pune. The company has been at the forefront of importing technology from its parent for delivering cutting edge, high quality products in the domestic market. Globally, KSB AG is one of the largest pump manufacturers with sales in excess of €2.2 billion (~US$2.8 billion) out of the total pump market, which is pegged at US$47 billion as of 2014. In India, KSB supplies pumps and valves to all major industries viz. power, waste water treatment, irrigation (agriculture), chemicals, etc. KSB's products are used for pumping, transportation and flow control of fluids, which include clean or contaminated w a t e r, e x p l o s i v e f l u i d s , corrosive and viscous fluids, slurries and fluid/solid mixtures. In India, KSB has a wide distr ibut ion network that includes four zonal offices, 15 branch off ices, over 800 authorised dealers, four service stations, 110 authorised service centres and 22 warehouses. In

Cy13, pumps comprised 82% ( 603 c rore ) wh i le va lves comprised 17% ( 122 crore) of total sales ( 733 crore). The company clocked an EBITDA (earnings before interest, taxes, depreciation, and amortization) of Rs. 101 crore (EBITDA margins 14%) in CY13 with corresponding PAT (profit after tax) at 67 crore.

Indian pump market on strong footing; KSB well placed

As per industry sources, the global pump market size is pegged at US$47 billion as of 2014 and is expected to reach US$56 billion in 2017, growing at a CAGR (compounded annual growth rate) of 6% in CY14-17E. The Indian pump market size is pegged at ~Rs. 8,500 crore as of 2014; wherein a majority of it i.e. ~95% (~ 8,000 crore) consists of centrifugal pumps while the remaining i.e. 5% (~ 500 crore) c o m p r i s e s p o s i t i v e displacement pumps. The Indian pump market is expected to grow at a CAGR of 10% in FY14-17E to 11,300 crore in FY17E on the back of thrust of the new government on augmenting the domestic

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Investment Rationale

STOCK IDEAS


manufacturing and pumps being an integral part of process manufacturing. In India, KSB commands a market share of ~7% (pump sales of 603 crore in Cy13), wherein it supplies ~35% of its pumps in the standard pumps segment (used for irrigation & building services) while it supplies the remaining 65% of its pumps (~ 400 crore sales vis-à-vis market size of ~ 4,500 crore, market share ~9%) to the industrial segment, which is technology intensive. Going forward, we expect KSB's pump sales to grow at a CAGR of 13.1% in CY13-16E to Rs. 876 crore in CY16E.

Valves segment, focus on increasing profitability; not chasing growth

Valves constitute ~17% ( 122 crore in CY13) of consolidated sales. The performance of valves has been a laggard in the past few quarters on account of fierce competition and subdued demand (a majority of which is accounted by oil & gas sector). Going forward, KSB expects to consolidate its position in the valves market with focus on increasing profitability rather than chasing sales growth. Going forward, post a blip in CY14E, we expect valves sales to largely remain flat with CY16E sales at 122 crore. KSB also

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owns 49% in MIL Controls Ltd (51% ownership with KSB AG) with an initial investment of 6.3 crore, on which it is reaping rich benefits (share of profit at 9.6 crore in CY13; RoI (return on investment) ~150%).

Likely beneficiary of capex cycle revival; balance sheet strength to grow; initiate with BUY

By virtue of KSB focusing only on non-project businesses (unlike its peers) it generates robust free cash flows and maintains working capital discipline with CY13 Free Cash Flow (FCF) yield at 4.2%. KSB is likely to realise operating leverage benefits (margin expansion of 360 basis points (bps) and PAT CAGR of 22.5% in CY13-16E) in the form of higher demand for its products. This may lead to improvement in return on equity (RoE) & return on capital employed (RoCE) and strong FCF generation of 90 crore in CY15E and Rs. 114 crore in CY16E. Going forward, we expect KSB's sales and PAT to grow at a CAGR of 10.8% and 22.5%, respectively, in Cy13- 16E. We assign a 23x P/E (1x PEG (price/earnings to growth)) on KSB's CY16E EPS of 35.2 to arrive at a target price of 810 and assign a BUY rating on the stock.

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STOCK IDEAS


STOCK IDEAS

Key Financials

Net sales ( crore) 733 758.5 860.8 1,000.2

EBITDA ( crore) 100.8 111.9 144 173.7

Net profit ( crore 66.7 78.3 100.7 122.5

EPS ( ) 19.2 22.5 28.9 35.2

CY13 CY14E CY15E CY16E

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Valuations Summary

P/E (x) 36 30.7 23.9 19.6

Target P/E (x) 42.3 36 28 23

EV / EBITDA (x) 22.3 19.8 15.1 12.2

P/BV (x) 4.7 4.3 3.8 3.3

RoNW (%) 13 13.9 15.9 17.1

RoCE (%) 14.4 14.8 17.8 19.6

CY13 CY14E CY15E CY16E

Stock Data

Market capitalization ( crore) 2,401.9

Total debt (CY13) ( crore) 3.2

Cash and investments (CY13) ( crore) 160

Enterprise value ( crore) 2,245.1

52-week High/ Low ( ) 682 / 234

Equity capital ( crore) 34.8

Face value ( ) 10

MF Holding (%) 2.6

FII Holding (%) 14.2

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STOCK IDEAS

Key Risks

Volatility in raw materials prices, especially steel price

Iron derivative products like pig iron, iron castings, stampings, metal scrap, etc. form the major raw material costs for pumps & valves with the management guiding that ~35% of the sales value is composed of iron p r o d u c t s ( 3 5 % o f s a l e s equivalent to ~80% of raw material costs; raw material as a percentage of sales at ~45%). We have modeled steel price to be a complete pass through for the company. However, any inability of the company to pass through the increase in steel costs will dent EBITDA margins and will have a consequent negative impact on our target price calculation. It has been observed that for every 5% increase in steel price and KSB's pump realisation remaining same; our target price reduces by ~12.7% i.e. Rs. 103/share.

Increase in royalty to the parent i.e. KSB AG

By virtue of technology transfer and support from the parent group i.e. KSB AG; KSB pays a royalty fee amounting to ~2% of its sales. The company's management has guided for a royalty payment of 2-5% (of sales value) depending upon the product to its parent company. The total royalty outgo consists of direct royalty payments,

professional fee and technical fee. Therefore, any increase in the roya l ty outgo (as a percentage of sales), going forward, will have an adverse impact on the company's profitability with a direct impact on our target price calculations.

Increase in commission to sole selling agent i.e. KSB Singapore

KSB has appointed its sister concern i.e. KSB Singapore (Asia Pacific) Pte Ltd as its sole selling agent in all territories outside India (exports) for a period of three years from February 20, 2014. The company is authorised to pay up to 12.5% of sales (value) as commission to the aforesaid entity. However, currently, for the past few years i.e. CY10-13, this commission is being paid at ~10%. Therefore, going forward, any increase in this commission paid to this sole selling agent i.e. KSB Singapore will have adverse impact on the company profitability, thereby directly impacting our target price calculation.

(EBITDA : Earnings before interest, taxes, depreciation, and amortization; EPS:Earnings per share; P/E: Price-to-earnings; EV: Enterprise value; P/BV: Price-to-book value; RoNW: Return on net worth; RoCE: Return on Capital Employed; MF: Mutual Funds; F I I : Fore ign Ins t i tu t iona l Investors)


FLAVOUR OF THE MONTH

A goal-based approach to investing

February 2015

For most of investors, “return” is the basic criterion for choosing an investment. In this race, we generally miss out on the bigger picture. We miss to ask whether our investments will be able to help us reach our financial goals, which is the core purpose of making an investment. Instead of paying greater attention to products and their performance, it is important to focus on our goals and invest accordingly. Investing towards a specific goal is more precise and detailed way of investing. It goes beyond the performance of a portfolio and focuses more on matching your financial resources with your financial goals and liabilities. There is a 50% greater probability of reaching your goals with a goal-based investing compared to traditional product-centric approach, says an international study. Read on to find out how by adopting a goal-based investing approach you can have a better chance of meeting your goals.

We aren't always rational

Most of us understand the

importance of sticking to a

d i s c i p l i n e d i n v e s t m e n t

strategy. Yet, we can often

make investment decisions

that could hurt our financial

well-being and our goals. For

instance, we may fall prey to

buying the latest hot stock or

get panicked by market

volatility and dump a well-

designed investment plan.

This behavior, known as

'irrational investment behavior'

in behavioral finance parlance,

is common among investors.

The challenge is to overcome

such behavior and stay

invested for goals. That is

w h e r e t h e g o a l - b a s e d

investing comes into picture.

For most of us, the investing

process goes like this usually:

We identify two or three goals

and then invest into avenues

by creating a single portfolio.

We expect a standard rate of

return on our investmentbased

on the historic performance,

and strive to achieve that

return or even greater than

that.

However, it does not make

Goal-based investing: What is it and

how is it different?



February 2015

sense to identify different

goals and creating a single

portfolio for all the goals.

This is because, our goals

differ in terms of importance,

time horizon and the level of

risk we are comfortable taking

relative to each goal. For

example, we would want to

take less risk with the funds

designated for critical goals

that are short-term in nature,

while would be ok to accept

more risk for discretionary

goals, which are long-term in

nature.

Creating a separate portfolio or

a bucket for each goal provides

a much clearer picture of how

well we are succeeding. This

approach also greatly reduces

the influence of emotions that

often play a role in our financial

decisions and goals.

Traditional approach vs. Goal-based investing approach: A quick snapshot

Traditional approach

Investors are rational Investors have behavioral biasesand make emotional decisions

All investors have roughly the

same goals

Investors have unique and multiple goals

Investments should manage expected return vs. risk

Investments should help achieving goals

The greater emphasis is on ‘risk tolerance’ of an investor, slowing the progress toward reaching goals

The greater emphasis in on ‘risk capacity’ for each goal, makes the planning more efficient and flexible

Market volatility is the top risk to mitigate in a portfolio

Mitigating market volatility is an important consideration, but the chief risk is the failure to reach a specific goal

Typically relies on a single pool of assets to generate the necessary return

Asset are allocated based on each goal

Difficult to measure progre ss toward any single goal

Can clearly measure the progress toward each of the goals

Why to follow the goal-based

investing approach?

It has a number of distinct

advantages. First of all, it is

motivating. If you have a goal

in place and can see the

tangible result of investing, it is

less tempting to divert your



February 2015

money towards discretionary

items such as a vacation.

Investing based on goals also

imposes discipline. It helps

you focus on exactly what you

are trying to achieve. It then in

turn helps you invest in

avenues based on your goals

and time horizon.

Further, goal-based investing

helps you take the amount of

risk that is needed. It helps you

avoid taking excessive risk by

trading or churning your

portfolios, either to recoup the

losses or to reach an anchored

target rate of return.

Goal-based investing also

helps to track down the

progress towards our goals. It

then helps in making the

necessary changes to our

investment strategy and

contribution level if we move

ahead of our target or fall

behind.

Amit, Anil and Pankaj, each 35

years of age, are married and

The story of three friends

have a child of 3 years old. The

trio works with an IT company

and has a similar income level.

However, when it comes to

managing personal finances,

their approach is quite different

than each other.

For instance, Amit has little

idea of investments and

invests mainly into fixed

deposits. He has no idea how

inflation affects one's finances

and has no plans for the future.

Anil, on the other hand, is

aware of a few financial goals

that he wants to achieve in his

life. However, most of his

investments are for the

purpose of saving taxes. While

Pankaj is the most organized

among the lot; he is well aware

of his financial goals and has

also written and quantified it

down.

Let's take a look at their current

financial position and their

investment plans.



February 2015

Income, expenses, investments & insurance:

Particulars

Amit

Anil

PankajAnnual income

` 12 lakh

` 12 lakh

` 12 lakh

Annual expenses

(including EMIs)

` 11

lakh

` 10.50 lakh

` 9 lakh

Annual investments / insurance

FD: ` 50,000

Total : `50,000

ELSS: `20,000

MF SIP: ` 24,000

LI policies: ` 40,000

FD: ` 25,000

Total: `

1.09 lakh

PPF: 1,00,000`MF SIP: `

96,000Gold ETF: `

30,000Term/Medical:

` 40,000

Total : ` 2.66 lakh

Annual surplus in Savings bank account

/FD for contingencies

` 50,000

` 41,000

` 34,000

Existing life insurancecover

` 25 lakh: employer-provided


` 8 lakh: Self- taken

` 25 lakh: employer provided

` 1.75 crore: Self-taken

Existing medical cover ` 4 lakh :employer-provided

` 4 lakh:employer-provided


` 5 lakh : self-taken

(FD: Fixed deposits; ELSS: Equity-linked savings schemes; MF SIP: Mutual fund Systematic investment plan; LI: Life insurance; PPF: Public provident funds; gold ETF: gold exchanged traded funds)



February 2015

Assets:

Particulars Amit Anil PankajSelf-occupied house

` 60 lakh

` 60 lakh ` 60 lakh

Employees’ provident fund (EPF)

` 10 lakh

` 10 lakh

` 10 lakh

Savings balance

` 50,000

` 50,000

` 50,000

Fixed d eposits

(FDs)` 5 lakh

` 3 lakh

` 1.50 lakh

MF equity (including ELSS)

- ` 2 lakh

` 6 lakh

Public pro vident fund (PPF)

-

-

` 9 lakh

Life insurance fund value

/ Gold

ETF

-

` 3 lakh

` 2.50 lakh

Total ` 75.50 lakh ` 78.50 lakh ` 89.50 lakh

Their financial goals:

1. Child's education: Amit, Anil and Pankaj plan to set side 10 lakh in today's cost, for their child's graduation after 15 years.

2. Retirement: The trio plans to retire at the age of 55; Annual

`

expenses are 4.20 lakh in present value.

3. Protection: They also plan to have a sufficient protection plan in place to protect their loved ones in case of any unfortunate event.

`



February 2015

Let's see how well placed they are with respect to their financial goals.

1. Child's education goal:

Particulars Amit Anil PankajPresent value of goal

` 10 lakh ` 10 lakh ` 10 lakh

Future value of goal (15 years later)

` 41.77 lakh

` 41.77 lakh

` 41.77 lakh

Existing investments done

FD: 5 lakh & `further ` 50,000

p.a.

FD: 3 lakh & `further ` 25,000

p.a.;

Life insurance policy: 40,000 `

p.a.

and mutual

funds: `

2 lakh

PPF: 9 lakh & further 1 lakh `

p.a.

Future value of investments

` 34.43 lakh

` 42.87 lakh

` 61.22 lakh

Goal achievement

Shortfall of `7.34 lakh

Goal a chieved; Surplus of `

1.10 lakh, which can be used for

retirement

Goal achieved; Surplus of `

19.45 lakh, which can be used for

retirement

(For future value of goal, inflation is assumed at 10% p.a.; for future value of investments, the post-tax return assumed is: 6% for FDs; 12% for mutual funds; 5% for gold ETF; 8.5% for PPF)

2. Retirement goal:Particulars Amit Anil Pankaj

Retirement corpus required

` 3.56 crore ` 3.56 crore Rs. 3.56 crore

Existing investments done

EPF: 10 lakh;` EPF: 10 lakh` ELSS: 20,000 `

p.a.;

Equity

Mfs: `24,000 p.a. and PPF

-

surplus from child’s

education goal

EPF: 10 lakh`Mutual funds: `

6 lakhGold ETF: `

2.50 lakhFD: 1.50 lakh `and PPF - surplus

from child’s education goal

Future value of investments

` 1.76 crore

` 2.12 crore

` 3.58 crore

Goal achievement

Shortfall of `1.80 crore

Shortfall of `1.44 crore

Goal achieved; Surplus of `

2.26 lakh

Notes: 1) Retirement corpus is calculated after taking into account their yearly expenses of Rs. 4.20 lakh p.a. for 20 years post-retirement, whose future value would be Rs. 16.25 lakh p.a. at 55, again inflating every year. Inflation is assumed at 7% p.a. and annuity rate at 6% p.a. 2) Future contributions of all existing investments like EPF, MF, PPF & Gold ETF also considered for calculating future value



February 2015

Post-retirement needs fulfillment:

Amit

Anil

Pankaj

Retirement corpus built: Only 50% of requirement

Retirement corpus built: Only 60% of requirement

Retirement corpus built: 100% of requirement

3. Protection goal:

Amit Anil PankajAnnual expenses of `8 lakh (excluding

EMI)

Outstanding home loan of 18 lakh ̀

Child graduation 10 `lakh

Annual e xpenses of `7.50 lakh (excluding EMI)

Outstanding home loan of 18 lakh`

Child graduation 10 `

lakh

Annual expenses of `6 lakh (excluding EMI)

Outstanding home loan of 18 lakh`

Child graduation 10 `

lakh

Do they have sufficient protection plan?

Existing life cover

Amit Anil Pankaj

` 25 lakh: Employer-provided

` 25 lakh: Employer-provided

`

8 lakh: Self-taken

` 25 lakh:

Employer-provided

` 1.75 crore-Self-taken

Existing medical cover

` 4

lakh: Employer-provided

` 4

lakh: Employer-provided

` 4lakh:

Employer-provided

` 5 lakh: Self -taken

Ideal life cover and shortfall

Ideal cover:

2.28 crore;

Existing assets (excluding

house): ` 15.50 lakh

Existing cover: Nil

Shortfall – 2.13 crore

Ideal cover: ` 2.20 crore;

Existing assets (excluding house & LI fund value):

` 15.50 lakh;Existing cover:

` 8 lakh;

Shortfall: ` 1.97 crore

Ideal cover: ` 1.96 crore;

Existing assets (excluding

house): ` 29.50 lakh;

Existing cover: ` 1.75 crore;

Shortfall - Nil



February 2015

In case of any eventuality…Amit Anil

Pankaj

Inadequate life cover of ` 2.13 crore;

No separate medical cover available

Inadequate life cover of ` 1.97 crore;

No separate medical cover available

Sufficient life cover and separate medical cover available

Summary for Amit's, Anil's and Pankaj's goals vs. achievement status:Amit Anil Pankaj

Both goals - child’s education and retirement - have big shortfall;

Education loan has to be taken / house needs to be mortgaged to fund education;

Lifestyle has to be compromised both today and post -retirement

Protection aspect totally missing

Can ac hieve child’sgraduation goal, if mutual funds investments are diverted to that; but will face a big shortfall in retirement

Has to make compromises in lifestyle today / post-retirement

Protection: Only ` 8lakh of life cover through ULIPs / endowment

Achieves both the goals comfortably;

Protection: Has taken sufficient life andmedical covers

Whom do you relate to and who would you want to be?

Summing up

If you adopt a goal-based investing approach, like Pankaj, you can effectively invest in products that are best for achieving your goals. Goal based investing does not lay

too much stress on the absolute or relative return but aligns your investments to your goals and ensures that you have sufficient or even more funds for meeting a particular goal.


'Longer duration strategies to benefit the most'

The rate cut by RBI was widely expected by the market with only the timing in question. 2015 may see an extended rate cut cycle, which will allow yields to fall across the curve, says R Sivakumar, Head - Fixed Income, Axis Mutual Fund, in an interview with ICICIdirect Money Manager. In a scenario like this, the longer duration strategies have the highest potential for mar-to-market gains as compared to short-term funds that run a lower duration, he adds. Excerpts:

R Sivakumar,

Head - Fixed Income,

Axis Mutual Fund

Tête-à-tête

February 2015

Q:

A:

How do you sum up the calendar

year 2014 for debt market and what

is your assessment for the year

2015?

The bond markets had a

great run in the second half of

2014. Markets spent the first

half of the year worrying about

El Nino, monsoon and food

inflation and potential for

further rate hikes from the

Reserve Bank of India (RBI).

However, our reading right

through the year was that

inflation momentum was

waning and would be reflected

in the headline numbers

shortly. The confidence on the

dis-inflationary trend was on

account of muted Minimum

Support Price (MSP) hikes,

weak growth and low pricing

power, and large output gap in

the economy. As these forces

played out in the second half of

the year and were supported

by the sharp fall in global

commodity prices, the market

started pricing rate cuts from

the RBI and the bond rally

started in earnest.

What is your take on the

surprising rate cut by RBI ahead of

its monetary policy? How extensive

Q:


Tête-à-tête

would the future rate cuts be?

The rate cut was widely

expected by the market with

only the timing in question.

2015 may see an extended rate

cut cycle by the RBI which will

allow yields to fall across the

curve. The extent of rate cuts

will depend on the inflation

trajectory. RBI will look beyond

the current inflation prints to

the medium term outlook for

inflation. The factors that the

RBI will look apart from

inflation to determine policy

action are fiscal outlook and

global market developments -

especially potential rate hikes

by the US Fed.

How do you expect the entire

yield curve to move in 2015?

The yield curve will take its

cues from policy expectations

and incoming data. We expect

yields to fall across the curve

during the rate cut cycle but

the fall in yields may be front

loaded as the market is not

likely to wait for RBI action

o n c e t h e d a t a s e e m s

supportive.

A:

Q:

A:

Q:

A:

Q:

A:

Foreign institutional inflows into

Indian debt market have been

strong in 2014. Will this continue

and why?

India will continue to see

strong interest from foreign

investors due to the high yields

a n d a t t r a c t i v e m a c r o

prospects. However the extent

of flows will also depend on the

elbow room made available by

RBI on additional foreign debt

limits.

Why the crude oil prices have

been falling lately? How do you

think it will affect globally and

domestically? How is India

prepared for any sharp rebound in

prices?

Oil prices are reacting to the

changed demand-supply

dynamics - specifically the

sharply higher supply from US

as also the weaker prospects

f r o m g l o b a l d e m a n d

(especially China). Indian

macro is currently on a sound

footing and we expect that the

economy should be able to

handle any shorter term

volatility in crude prices going


Tête-à-tête

forward. Sustained higher

prices will however have an

i m p a c t o n i n f l a t i o n

expectations.

Rupee has been depreciating

against US dollar. What are the

factors driving down the rupee?

How do you see rupee-USD pair

moving ahead?

Rupee has weakened

against the US Dollar but

appreciated against most

other major currencies. This is

also a reflection of the global

strength of the US dollar on the

back of the strong US

economy. As far as the Rupee

is concerned, falling current

account deficit (CAD), higher

f o r e i g n e x c h a n g e ( F X )

reserves and stronger growth

prospects together mean that

the chances of any currency

dislocation is remote. We

therefore expect Rupee to be

broadly stable in the short

term.

What are your expectations from

the Union Budget 2015 w.r.t. to debt

market?

Q:

A:

Q:

A:

Q:

A:

Q:

A:

We expect the government

to maintain the path of fiscal

prudence that they laid out in

the previous budget. Some

action on subsidy reduction is

expected and some of the

savings from the same may be

used for h igher capi ta l

investments.

What is your strategy for both

short-term and long-term bond

funds?

Our core position across all

duration funds is to stay long

within the individual fund's

mandate. As highlighted

earlier, we expect an extended

p o l i c y c u t c y c l e a n d

accordingly we expect longer

duration strategies to benefit

from mark-to-market gains as

yields fall.

Which segment of the debt

market looks attractive with a

twelve-month horizon?

As explained earlier, the

entire curve is expected to

participate in the fall in yields.

In a scenario like this, the

longer duration strategies have


Tête-à-tête

the highest potential for mar

to-market gains as compared

to short term funds that run a

lower duration. However,

depending on the risk appetite

of the investor and their

horizon, they can allocate to

any segment of the market,

since both short-term funds

and duration funds should

benefit from the scenario.

Statutory Details: Axis Mutual Fund has been established as a Trust

under the Indian Trusts Act, 1882, sponsored by Axis Bank Ltd.

(liability restricted to Rs. 1 Lakh). Trustee: Axis Mutual Fund Trustee

Ltd. Investment Manager: Axis Asset Management Co. Ltd. (the

AMC) Risk Factors: Axis Bank Limited is not liable or responsible for

any loss or shortfall resulting from the operation of the scheme.

This document represents the views of Axis Asset Management Co.

Ltd. and must not be taken as the basis for an investment decision.

This document does not constitute advice to buy/sell any scheme of

Axis Mutual Fund. Neither Axis Mutual Fund, Axis Mutual Fund

Trustee Limited nor Axis Asset Management Company Limited, its

Directors or associates shall be liable for any damages including lost

revenue or lost profits that may arise from the use of the information

contained herein. No representation or warranty is made as to the

accuracy, completeness or fairness of the information and opinions

contained herein. The AMC reserves the right to make modifications

and alterations to this statement as may be required from time to

time. Mutual Fund Investments are subject to market risks, read all

scheme related documents carefully.

The views expressed in the interview are personal views of the authors and do

not necessarily represent the views of ICICI Securities.


ASK OUR PLANNER

Taxation of a pension policy

February 2015

Q:

A:

Your May 2014 edition says that in case if one surrenders any pension plan before maturity, then the entire sum received is taxable. Do you mean to say, sum received less the premiums we have paid, i.e. the profit will be taxable?

If yes, I would also like to know if there is indexation benefit on taxable income like debt/personal asset. Can you illustrate with example?

- Pracheta Prabhu

The taxation of a pension policy, in case of surrender, works differently. The entire surrender value, not only the gain, is added to one's income and is taxed as per the income slab.

Say for example, you have paid 50,000 p.a. premium towards a pension policy for the last 8 years, whose original tenure was 15 years, and you surrender it now. Assuming, you receive a surrender value of 6 lakh, the entire 6 lakh and not only the gain of 2 lakh (reducing the total premium outgo of 4 lakh (50,000 x 8 years)), will be added to your income in that year and will be taxed as per your income slab.

`

` ``

`

There is no indexation coming into picture here, since the entire surrender value, and not the gain, is taxed.

I read in one of your replies that surrendering a pension plan before maturity, the entire amount is taxable. If I surrender unit-linked pension plan (ULPP) after its maturity date, and instead of taking one-third amount and annuity for balance amount, opt for entire amount by surrendering after maturity then whether the entire amount is still taxable even if I have received it after maturity?

- Meenu Manchanda

Surrendering a policy always refers to closing it before its maturity and hence, you cannot 'surrender' after maturity.

On maturity of a pension policy, both unit-linked and non-unit-linked, a maximum of 1/3rd of the maturity amount can only be withdrawn as lumpsum and this lumpsum is exempt from tax. The balance h a s t o b e n e c e s s a r i l y converted into annuity. The annuity received will be added to your income and will be taxed as per your income slab.

Q:

A:


ASK OUR PLANNER

February 2015

While you have an option to convert 100% of the maturity amount into annuity and not withdrawn any amount in lumpsum, the other way is not possible.

I am looking for short term (3 to 5 years) investment, and utilize those funds for closure of my home loan. I can invest 3,000-4,000 per month. Help me with a proper investment plan.

- Vijay S

The term 3 to 5 years in medium term in nature, and t h e p u r p o s e f o r y o u r investment is well-defined. You may look to invest into Monthly Income Plans (MIPs), with growth option, which will have a lower component of equity investments.

The tenure of investment being more than 3 years, the taxation on returns generated will be post indexation, which means the tax outgo will be effectively lesser. This is because, in indexation, the purchase price is indexed to the inflation, which reduces the profit and in turn, the tax outgo.

Alternatively, instead of accumulating for next 3 to 5 years and then closing the

Q:

A:

`

loan, you could accumulate every year and keep pre-paying the accumulated amount every year end, so that the principal of your loan will also keep coming down, which will mean you will be paying l esser amount towards interest. However, in such a scenario, the gains earned on your investment will be short-term capital gains and the tax outgo will be on a higher side.

For recommendations on specific MIPs, you may visit 'Do your Research' section on our website www.icicidirect.com.

I have a joint demat account with my mother as a first applicant and myself as a second applicant. Should I or my mother pay tax on the short-term capital gains earned from sale of shares?

- Prabhakar Sharma

Generally, the income earned from any joint account is included in the name of the first account holder and is taxable in his/her hands.

In case, if you have gifted the money to your mother - the first account holder – and the investment has been made out of this amount, then also the income from such investment will be added to your mother's

Q:

A:


ASK OUR PLANNER

February 2015

income only. There is no limit on the amount you can gift to your parents.

Short-term capital gains will not attract 15% tax if your mother's income does not cross the basic exemption limit, which is 2.50 lakh, as per current tax laws.

I am 38 years old and planning to save for my retirement. I have two flats, one of which is loan-free and the other in on loan, for which, the EMI will start from December 2015 for 20 years (I may be able to close this loan prior to that).

I want to understand that, can I rely on the flats I own as a retirement fund, i.e. I will sell one of the flats when I attain/nearby age of 60, and use that amount as pension by putting the amount under annuity plan.

- Vikas Kumar Pal

There are quite a few individuals who invest into real estate to fund their post-retirement needs. In most of the cases, they look at generating rental income from the investments. Some of them also look at selling the investment at retirement and investing the proceeds in annuity / fixed deposits to generate regular income from

`

Q:

A:

the same. When you sell your real estate investment, you will have to take into account the huge outflow towards capital gain tax. If you don't prefer paying the tax, you will have to keep the gains invested with a lock-in period.

However, there are certain risks associated with real estate investments too, like financial investments. Also, the returns from this asset class are more cyclical in nature. Since you have more than 20 years to retire and the investment is for a longer horizon, there is a good chance of your investment generating a positive return over this period. But a word of caution – there is no guarantee on the returns as the real estate market is unorganized and the price is largely determined by demand-supply factors, rather than fundamental factors.

Hence, instead of relying only on the real estate investments, it is better to diversify and look a t o t h e r a v e n u e s o f investments, specif ical ly equity as an asset class, with the term being longer.

Do you also have similar queries to ask our experts? Write to us at: [email protected].

MUTUAL FUND ANALYSIS


Investing in debt funds in current scenario

The Reserve Bank of India (RBI) has recently cut the repo rate, which indicates of easing interest rate cycle going ahead. In this scenario, where should debt investors invest? Here we explain.

The rally so far

Triggered by the 25 basis points (bps) repo rate cut announced by the Reserve Bank of India (RBI) (ahead of the monetary policy review scheduled in February 2014), the benchmark yield corrected sharply by 15 bps from 7.85% on December 31, 2014 to 7.72% as at the end of January 2015. In FY15 itself, year to date, yields have dropped 100 bps led by easing inflation.

C o r p o r a t e b o n d y i e l d s followed government security (G-sec) bond yields. Yield on five-year AAA-corporate bond corrected from 9.6% at the start of FY15 to 8.3% as at the end of December 2014, a fall of 130 bps.

RBI's gauge of monetary policy, consumer price index (CPI) inflation, eased faster than anticipated to 5% year on year (YoY) by December 2014. A seasonal decline in food pr ices , lower min imum support price (MSP) increase, easing global food inflation,

falling global crude oil and other international commodity prices along with a stable rupee led to inflation easing at a faster pace.

Bond prices are inversely related to yields. Hence, the drop in yields led to an increase in bond prices, which led to capital gains in income/gilt funds. Gilt funds and dynamic bond funds gained the most as interest rates moved south.

Fixed income outlook

Going ahead, we expect G-Sec yields to trade in the range of 7.5-7.75% in the medium term. Banks that are major players in the bond market are holding statutory liquidity ratio (SLR) s e c u r i t i e s m o r e t h a n stipulated. Credit growth has been sluggish at 10% and even the third quarter results commentary failed to provide any cheer on the credit front. Therefore, we believe, the demand from banks for G-Secs will continue to hold in the near term. On the supply front, the



N D A g o v e r n m e n t i s committed towards restricting the fiscal deficit to 4.1% of gross domestic product (GDP). The Finance Minister has indicated at cutting the plan expenditure if need be and fast tracking the disinvestment process to achieve the fiscal target. Media reports indicated an average of 20% plan allocation cut across central ministries and departments to save about Rs. 47,000 crore. Further, lower crude oil prices have meaningfully contributed in reducing the subsidy burden, which has supported the ministry in achieving fiscal balance. In the near term, therefore, we do not anticipate supply pressure gett ing aggravated on account of an increase in government borrowings. However, the Budget to be announced on February 28, 2015 will be a key trigger to watch for the longer t e r m s u p p l y t r e n d f o r government securities and can cause near term volatility.

The revised macroeconomic data, both GDP as well as inflation statistics, will be closely studied by market participants to build a longer

term outlook.

We do not expect inflation to again accelerate at a faster pace given the benign global commodity outlook, effective utilisation of food stocks to control domestic food prices and reforms implementation to i m p r o v e s u p p l y c h a i n management. Also, with the thrust of the government on monitoring prices of main commodities to avoid price shocks in future, gives us comfort that inflation may not accelerate sharply even for per i shab le i tems (mi l k , vegetables and fruits). The RBI has already signified a change in its monetary policy stance. Easing inflation may provide increased room for further rate cuts.

The government has put in place a fiscal consolidation roadmap as per which the fiscal deficit has to be brought down to 3% of GDP by 2016-17. We believe, with growth picking up and implementation of tax reforms, government revenues may start picking up, providing some comfort that the fiscal road map may be adhered to. Hence, we do not anticipate higher government



borrowings. Therefore, supply side pressure on yields will s t a y m o d e s t f u r t h e r cushioning yields from hereon.

Where to invest in the current scenario?

We believe interest rates will further move south from the current 7.75% levels on the G-sec and 8-9% levels on corporate bonds in the next 1.5-3 years. This makes long bond income funds or dynamic

bond funds preferable as they have the potential to earn capital gains, though investors should be ready to withstand the interim volatility. Short term funds with credit strategy can also be an option for moderate investors, as going ahead, revival in growth may r e d u c e t h e c r e d i t r i s k cons iderably whi le s t i l l fetching pre-tax returns of ~9-9.5% annualised.

Liquid Funds

Ultra Short-term Funds

Short-term Funds

Gilt Funds

Category Remarks

Invest only for a short term 3-6 months. Returns to be in line with Commercial Paper (CP)/ Certificate of Deposit (CD) rates

Invest only for a short term 3-6 months. Return primarily tracks CD /CP rates

Suitable for conservative to moderate investor. Return close to three-year corporate bond yields

Credit Opportunities Funds (recommended category in current scenario)

Suitable for moderate to aggressive investor. Credit risk is higher while interest rate risk is lower. Returns to track 2-3 year AA-corporate bond yields

Income Funds (recommended category in current scenario)

Suitable for moderate to Aggressive investor. Credit risk is lower while interest rate risk is higher. Best funds in case of falling interest rate scenario

Very high interest rate risk and therefore suitable for aggressive investor. Retail investor can buy G-Secs only through investing in these funds.

For specific funds recommendations in the above categories, please refer our 'Mutual Funds Top Picks' section.


MUTUAL FUND TOP PICKS

Wth over thousand of mutual fund schemes available in the market, selecting the right ones may become too complex. To make it easy for you, we present our research team’s top recommendations, across equity and debt categories

Mutual Fund Top Picks

Equity

Category Top Picks

Largecaps Axis Equity FundBirla Sunlife Frontline equity FundICICI Pru Focussed Bluechip Equity FundUTI Opportunities Fund

Midcaps HDFC Midcap Opportunities FundICICI Prudential Value Discovery FundFranklin India Smaller Companies FundSBI Magnum Global Fund

Diversified Franklin India Prima PlusICICI Prudential Dynamic PlanReliance Equity Opportunities

ELSS Axis Long Term EquityICICI Prudential Tax PlanFranklin India Tax shield

Sector - Banking ICICI Prudential Banking Reliance BankingUTI Banking

February 2015


MUTUAL FUND TOP PICKS

February 2015

Short Term Birla Sunlife Short Term FundHDFC Short Term Opportunities FundICICI Pru Short Term Plan

Credit Opportunities Fund

Birla Sunlife Medium Term PlanFranklin India Short term PlanICICI Prudential Regular Savings

Income Funds ICICI Prudential Dynamic Bond FundBirla Sun Life Income Plus - Regular Plan IDFC Dynamic Bond Fund

Gilts Funds ICICI Pru Gilt Inv. PF PlanBirla Sunlife Gilt Plus

MIP(Aggressive)

Birla Sunlife Savings 5ICICI Prudential MIP 25DSP Blackrock MIP

Debt

Category Top Picks

Liquid Funds HDFC Cash Mgmnt Saving Plan ICIC Pru Liquid PlanReliance Liquid Treasury Plan

Ultra Short Term Birla Sunlife Savings FundFranklin India Ultra Short Term Bond FundICICI Pru Flexible Income Plan


EQUITY MODEL PORTFOLIO

Our indicative large-cap equity model portfolio (“Quality-21”) has continued to deliver an impressive return of 88.7% (inclusive of dividends) till date (as on February 9, 2015) since its inception (June 21, 2011) vis-à-vis the benchmark index (S&P BSE Sensex) return of 61.8% during the same period, out-performance of ~27%. This validates our thesis of selecting companies with sound business fundamentals that forms the core theme of our portfolio. Our “Consistent-15” mid-cap portfolio also continues to outperform, delivering 103.1% (inclusive of dividends) till date (as on February 9, 2015) vis-à-vis the benchmark index (CNX Midcap) return of 64.2%, out-performance of ~39%. Our consistent out-performance demonstrates our superior stock picking ability as markets in H2CY15 aligned to our view of favourable risk-reward, good franchisee vs. reward-at-any-risk businesses. Some key performers of our portfolio are Lupin, Sun Pharmaceuticals, Axis Bank, TCS and Info Edge delivering ~120-230% returns since inception.

We have always suggested the systematic investment plan (SIP) mode of investment and still find a lot of merit in it as the preferred mode of deployment given the market conditions and volatility associated since the inception of the portfolio. It has outperformed other portfolios, thus, reinforcing our belief in a plan of investment. However, now we are also advising clients to look at lump sum investments at any possible dips.

The last six months saw a paradigm shift in the global energy industry as crude prices declined to a historic five-year low to $58 (down ~46% year-to-date or YTD). Intense competition among oil-producing nations for market share (OPEC (Organization of the Petroleum Exporting Countries) vs. non-OPEC) and ramp-up in US shale resources led to this slump in global commodity aided further by languishing global growth prospects. While world economies adjust to this new normal, India, which fulfils ~80% of its oil demand through imports, could be a major beneficiary of this benign oil scenario. Thus, domestic equities attracted strong foreign institutional investor (FII) flows (YTD $16 billion, highest ever) helped by a stable, reformist central government. Consequently, sectors geared towards a pick-up in domestic economy like consumer discretionary, banks, auto and cement outperformed the benchmark index. On the other hand, defensives saw profit booking

February 2015



as YTD CNX IT and FMCG indices underperformed by ~13% each on moderating valuations and changing investor preference.

Thus, we rebalance our portfolio, to capture the essence of a broader economic revival, growing urbanisation and benefits of crude declines. Accordingly, thus add stocks like Castrol India (crude), CARE (economy), Voltas (consumerisation) and Heidelberg Cement (value buying) while we feel Tata Steel, ONGC are well placed to be added to large-cap portfolio.

Though we have a tilt towards higher beta that could generate substantial returns given their respective market dominance, we have not deviated from our core focus on holding good brands. We exit DCB (74% returns), JK Cement (71%) to book profits since potential upside appears limited, hereafter, and remove Tata Global Beverages and Oberoi Realty as company-specific headwinds could likely persist in the medium term.

Our conviction in domestic recovery is visible in terms of relative weightage of sector vis-à-vis the index. We remain overweight on the consumer discretionary (auto, consumer), financials (private sector banks in particular), and the infra space (cement, infra and power). This has been primarily triggered by hopes of a rate cut by the Reserve Bank of India (RBI) on the back of moderating inflation and possibility of decisive action in the infrastructure and real economy space by the new government. We are also overweight on telecom, media owing to reducing concerns & better earnings growth.

We have turned underweight on oil & gas as we have chosen to replace Reliance with ONGC, which has better risk-reward (muted return of investment (RoI) from unrelated investments could impact the former while the latter has lessening regulatory challenges). We continue to remain underweight on pure play defensives (IT, FMCG) as secular earnings coupled with sector rotation could de-rate valuations and offer limited upside. We remain equal weight on pharmaceuticals, metals (global generic opportunity, stock specific play).

On individual names, we are strongly overweight on companies like L&T and UltraTech in the infrastructure space while we prefer HDFC & SBI in financials.

February 2015



Name of the company

Largecap Stocks

Model Portfolio

Largecap(%)

Midcap(%)

Diversified(%)

February 2015

Consumer Discretionary 12 8.4

United Spirits 4 2.8

Tata Motors DVR 4 2.8

Bajaj Auto 2 1.4

Titan 2 1.4

BFSI 30 21

HDFC 8 5.6

HDFC Bank 7 4.9

SBI 8 5.6

Axis Bank 7 4.9

Power, Infrastructure & Cement 15 10.5

L & T 8 5.6

UltraTech Cement 7 4.9

FMCG 8 5.6

ITC 8 5.6

Metals & Mining 4 2.8

Tata Steel 4 2.8

Oil and Gas 8 5.6

ONGC 6 4.2

Gail 2 1.4

Pharma 5 3.5

Lupin 2 1.4

Sun Pharma 3 2.1

IT 13 9.1

Infosys 5 3.5

TCS 5 3.5

Wipro 3 2.1

Telecom 3 2.1

Bharti Airtel 3 2.1

Media 2 1.4

Zee Entertainment 2 1.4

Largecap share in diversified 70



Midcap Stocks

Content source: ICICIdirect.com Research

ICICI Securities Ltd. has been assigned an advisory mandate by Ranbaxy Laboratories Limited with regard to Sun Pharmaceutical Industries Limited's acquisition of Ranbaxy Laboratories Limited. This report is prepared on the basis of publicly available information.

ICICI Securities Limited has received an advisory mandate from Natco Pharma. This report is prepared based on publicly available information.

ICICI Securities has received an investment banking mandate from Government of India for disinvestment in ONGC. This report is prepared based on publicly available information.

This report is based on publicly available information.

Name of the company Model Portfolio

Largecap(%)

Midcap(%)

Diversified(%)

February 2015

Consumer Discretionary 34 10.2

Bosch 6 1.8

Cox & Kings Ltd 6 1.8

Arvind 6 1.8

Voltas 8 2.4

Castrol 8 2.4

IT 6 1.8

Info Edge 6 1.8

BFSI 14 4.2

CARE 6 1.8

IndusInd Bank 8 2.4

FMCG 8 2.4

Kansai Nerolac 8 2.4

Pharma 6 1.8

Natco Pharma 6 1.8

Media 8 2.4

PVR 8 2.4

Capital Goods 6 1.8

Cummins 6 1.8

Realty/Infrasturcture/Cement 18 5.4

Heidelberg Cement 6 1.8

Container Corporation of India 6 1.8

Shree Cement 6 1.8

Midcap share in diversified 30

Total of all three portfolios 100 100 100



Performance* so far Since inception

*Returns (in %) as on , 2015

Large-cap Portfolio Benchmark: BSE Sensex; Mid-cap Portfolio

Benchmark: CNX Midcap; Diversified Portfolio Benchmark: Combination

of BSE Sensex and CNX Midcap

February 09

Value of ` 1,00,000 invested via SIP at the end of every month

Portfolio Benchmark

Investment Value of Investment in Portfolio Value if invested in Benchmark

Start date of SIP: June 30, 2011; *Value as on February 09, 2015

February 2015

88.7

103.194.2

61.8 64.2 60.6

0

25

50

75

100

125

%

4,5

00,0

00

4,5

00,0

00

4,5

00,0

00

6,6

40,0

73

8,1

94,4

87

7,0

26,9

84

6,1

53,8

59

6,8

89,4

21

6,2

95,5

07

3,500,000

4,500,000

5,500,000

6,500,000

7,500,000

8,500,000

|

QUIZ TIME

1. The government is looking to increase the lock-in period for Public

Provident Fund (PPF) from current ______ years to ______ years in this

Budget.

2. When you surrender a pension policy, there is indexation benefit

available on the gains generated. True / False

3. Investment into National Pension Scheme (NPS) is available for tax

deduction under section ______ of Income Tax Act.

4. In case of a pension policy, you have an option to convert 100% of the

maturity amount into an annuity. True / False

5. Expand CBLO.

Note: All the answers are in the stories that have appeared in this edition

of ICICIdirect Money Manager. You may send in your answers at:

The answers will be published in our next edition. The names of the

earliest all correct entries will be published too. So jog your grey cells

and be quick to send in your entries.

Correct answers for the January 2015 quiz are:

1. The government is planning to revise the lock-in period for Rajiv

Gandhi Equity Savings Scheme (RGESS) from the existing 3 years to

______.

A: 1 year

2. It is mandatory to hold the tax-saving funds in a demat account to

claim tax benefits under Section 80C. True / False

A: False

3. The Reserve Bank of India (RBI) decided to cut the benchmark

interest rate by ______ per cent to ______ per cent.

A: by 0.25 per cent to 7.75 per cent

4. There is a 'minimum age' criteria to apply for a PAN card. True / False

A: False

5. Demat account cannot be opened in the name of a minor. True / False

A: False

Congratulations to the following winner for providing correct answers!

Srinivas Gangundi

[email protected]



MONTHLY TRENDS

5.20

8.00

0.0

1.0

2.0

3.0

4.0

5.0

6.0

7.0

8.0

9.0

Dec-14 Jan-15

(%)

53.27

48.24

0.0

10.0

20.0

30.0

40.0

50.0

60.0

31-Dec 5-Jan 10-Jan 15-Jan 20-Jan 25-Jan 30-Jan

$ pe

r ba

rrel

555.04

5325.16

186.00

609.00

-2000

-1000

0

1000

2000

3000

4000

5000

6000

31-Dec 5-Jan 10-Jan 15-Jan 20-Jan 25-Jan 30-JanFII DII

.

WPI INFLATION (FOOD)

(The figures are in %)

CRUDE OIL

NYMEX crude oil prices ($/barrel)

FII & DII INVESTMENTS

(Foreign institutional investors (FIIs) and domestic institutional

investors (DII) net equity investment ( ` in crore)

February 2015


27499.42

29182.95

25000

25500

26000

26500

27000

27500

28000

28500

29000

29500

30000


8282.70

8808.90

7600

7800

8000

8200

8400

8600

8800

9000

9200


DOMESTIC INDICES BSE Sensex

NSE Nifty

6.35%

6.12%

February 2015

15.12

20.17

10.0 11.0 12.0 13.0 14.0 15.0 16.0 17.0 18.0 19.0 20.0 21.0


VIX

VOLATILITY INDEX (VIX)

MONTHLY TRENDS


17823.07

17164.95

16500

16800

17100

17400

17700

18000


GLOBAL INDICESDow Jones

4,736.05

4635.24

4400

4500

4600

4700

4800


NASDAQ

63.03

62.01

60.0

60.5

61.0

61.5

62.0

62.5

63.0

63.5

64.0


US

D /

INR

EXCHANGE RATES USD-INR

3.69%

2.13%

1.62%

MONTHLY TRENDS


76.25

69.99

65.0

67.0

69.0

71.0

73.0

75.0

77.0

79.0


€/

INR

1183.55

1282.80

1100

1175

1250

1325


$ pe

r O

unce

15.66

17.22

15.0

17.0

19.0


$ pe

r Oun

ce

POUND-INR

EURO-INR

BULLION GOLD

(The prices are in $ per ounce).

SILVER

(The prices are in $ per ounce). (Source for all indicators: Bloomberg, Reuters)

MONTHLY TRENDS

98.16

93.42

88.0

90.0

92.0

94.0

96.0

98.0

100.0


£/

INR

4.82%

8.21%


ICICIdirect Centre for Financial Learning (ICFL) imparts quality education on financial markets to beginners and amateurs, student, housewives, working professionals and self employed. ICFL's broad objective is to make participant feel confident to start investing in stock market.

Here is the list of our programmes scheduled for the month of February, 2015.

Schedule for Beginners' programme on Futures and Options (F&O) TradingSr.No

City Dates For More Information & Registration call:

Premium Education Programmes Schedule

Sr.No City Dates For More Information & Registration call:

Schedule for Fast-Track Programme on Futures & Options (F&O)


Schedule for Fast-Track Programme on Stock Investing

Sr.No


Schedule for MarketMaster Programme

1 Nagpur 14 and 15 FEB, 2015 Kusmakar on 7875442311

2 Kolkata 21 and 22 FEB, 2015 Sumit Sarkar on 8017516187

3 Pune 21 and 22 FEB, 2015 Kusmakar on 7875442311

4 Hyderabad 21 and 22 FEB, 2015 Ruchi on 8297362323

5 New Delhi 21 and 22 FEB, 2015 Vishal on 07838290143, Harneet on 09582158693

6 Bangalore 28 FEB and 01 MAR, 2015 Subrata on 9620001478

7 Rajkot 15 FEB, 2015 Yogesh on 8238053563

8 Patna 22 FEB, 2015 Sumit Sarkar on 8017516187

9 Bhopal 15 FEB, 2015 Kusmakar on 7875442311

10 Jodhpur 08 FEB, 2015 Vishal on 07838290143

11 Ranchi 08 FEB, 2015 Sumit Sarkar on 8017516187

12 Amritsar 15 FEB, 2015 Vishal on 07838290143

13 Aurangabad 22 FEB, 2015 Kusmakar on 7875442311

Sr.No


Schedule for Technical Analysis


15 Thane 14 and 15 FEB, 2015 Vidhu on 9619716146



18 Bangalore 21 and 22 FEB, 2015 Subrata on 9620001478




Sr.No


Schedule for Foundation Programme on Stock Investing

Sr.No


Schedule for Advanced Derivatives Trading Strategies


22 Mumbai 07 and 08 FEB, 2015 Vidhu on 9619716146

23 Kolkata 07 and 08 FEB, 2015 Sumit Sarkar on 8017516187



26 Mysore 14 and 15 FEB, 2015 Subrata on 9620001478

27 Chennai 14 and 15 FEB, 2015 Subrata on 9620001478





32 Mumbai 21 and 22 FEB, 2015 Vidhu on 9619716146


34 Hubli 21 and 22 FEB, 2015 Subrata on 9620001478

35 Pune 28 FEB and 01 MAR, 2015 Kusmakar on 7875442311

36 New Delhi 28 FEB and 01 MAR, 2015 Vishal on 07838290143, Harneet on 09582158693





Schedule for Foundation Technical Analysis Programme

40 Dhanbad 08 FEB, 2015 Sumit Sarkar on 8017516187

41 Dehradun 15 FEB, 2015 Harneet on 09582158693

42 Ajmer 22 FEB, 2015 Vishal on 07838290143

Contact us

Email:

Send us an email at [email protected] mention the name, date and venue of the programme you have

attended or wish to attend, for faster resolution of your queries.

SMS:

SMS EDU to 5676766 for more details

Documents

Human emotions and behaviors - ICICI Directcontent.icicidirect.com/MoneyManagerMagazine/February_2015.pdf · Human emotions and behaviors ... it measures progress toward goals rather