IPRU Insights June 2015

June 2015

IPRU

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AN INVESTOR EDUCATION INITIATIVE BY

The wisdom of buying low and selling high- Pg.3

Making volatility work for you in the long run- Pg.2

Emotion Trap - pg.8

Are You Ready to TestYourself? - pg.7

All you need to know about VOLATILITY- Pg.5

Mutual funds offer a wide variety of product types to choose from. They can be classified as

MUTUAL FUNDSTAKE PICKyour

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Sche

me

Clos

e En

ded

Sche

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Equi

tySc

hem

e

Deb

tSc

hem

e

Hyb

rid

Sche

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(All three can be Open Ended or Close Ended)

On the basisof schemestructure

Based on assetclass in which the

scheme invests

Things to Check While Creating a Mutual FundPortfolio for a Goal- Pg.6

Volatility not the same as risk- Pg.4

Mr. Nimesh Shah, MD & CEO, ICICI Prudential AMC

he solution to the Greek situation, which had been keeping Tthe world’s stock markets on its toes for some time, was well-accepted by the global markets as prices of equities rose across geographies. The austerity measures imposed in the bailout deal has been passed by the Greek parliament too and the good news for Greece is that banks will open soon.

The Greece crisis has been going on for some time now, but it was unlikely to cause major trouble to financial markets. The issues that plagued the Eurozone when the first crisis hit some years ago, is not the same as the current one.

Back in 2012, private institutions held Greek debt at the time the crisis unfolded, but this time it is public institutions such as International Monetary Fund (IMF) and European Central Bank that hold these debts. So there was not going to be any major chaos. Secondly, euro zone countries have improved their macro-economic positions and are in better shape.

The crisis did affect the Indian market, and for a limited time stocks prices turned volatile. However, we believe volatility is an opportunity to buy. These volatile periods seem a good time to grab a good slice of financial assets such as equity and debt mutual funds.

Such bouts of volatility are inevitable. Given that the global economy is more intertwined than ever before, where ever there is a crisis, the first reactions in the global markets are not always pleasant. After the number crunching, and worst case scenarios are analysed, the markets then begin to stabilise.

The good news for India is that we can now focus on the growth and recovery in India rather than worry about events that are unlikely to have an impact here in India. So, if we can keep the long-term focus in mind, especially when the Indian macros seem favourable, we can have a good investor experience over time.

Macroeconomic fundamentals have improved from 2012-13, with reduced external vulnerability (the current-account deficit is less than 1.5%), lower fiscal deficit and benign inflation. The recent Wholesale Price Index again came in at -2.4%, and has been negative for eight months now.

Oil prices have come down further after the Iran nuclear deal which reduces India’s import bill further and save precious foreign exchange. It also spurs economic activity as spending begins to increase in other areas.

Amid all this, the Indian equity market has proved resilient despite global market volatility, and has risen 6.23% in one month, and the S&P BSE Sensex has crossed the crucial 28,000 mark.

The earnings season is on us. This quarter may come in muted as commodity prices have been falling and the demand growth has not yet picked up. We have seen some good news coming on this front which said that the number of stalled projects has been falling.

The Indian economy is in a position that is likely to see mutual funds deliver a good investor experience in the next three-five years. Remember, negative market reactions, whenever there is an international or domestic crisis, are more likely to prove to be good time to buy equity mutual funds.

We have seen how the global markets have recovered, and how the Indian markets have particularly been resilient and rebounded sharply after the news of the crisis. Quite a few people were sitting on the sidelines during the equity sell-off and are now ruing the fact that they missed an opportunity to accumulate equity assets.

Hence, we would nudge you to follow the mantra of buy on volatility. Investors with a medium-to long-term view need not worry about the Greece crisis, or any other crisis.

02 IPRU Insights | June 2015

CEO Letter Making volatility work for you in the long run

If you see a crisis brewing again, remember it’s time to focus on the distant horizon and invest in equity mutual funds

03IPRU Insights | June 2015

Mr. S. Naren, CIO, ICICI Prudential AMC

S Naren

One of my favourite gurus, Howard Marks, whose writing is for everyone to read at oaktreecapital.com and is easy to understand as it is without financial jargon, had this to say about investor behaviour: “When things are going well and prices are high, investors rush to buy, forgetting all prudence. Then, when there’s chaos all around and assets are on the bargain counter, they lose all willingness to bear risk and rush to sell. And it will ever be so.”

I have also seen that type of investor behavior on many an occasion and during different market cycles in the Indian subcontinent. A general tendency of investors is to invest in equity when markets are surging, while pull out when markets are underperforming. But does it lead to a good investment experience?

Mastering market moods can be daunting

It’s a bit difficult to see this happening all the time in the Indian market, and when there’s so much of investor material that speaks otherwise. Cycles are rarely used well. And to be fair, mastering market moods can be daunting for many an investor.

Marks said that markets are like a pendulum, sometimes extremely optimistic and at other times deeply pessimistic. Both the times you have to act against it. But very often, markets are in the middle of these cycles, and there is no sense in extreme positive or negative stance in the market.

One factor that always comes in the middle of making these prudent decisions of acting against the pendulum or staying in the middle is – human emotions. Our first reaction when buying an asset is not to make a loss, which often leads us to make mistakes during buy and sell.

More often, volatility also tends to unnerve those investors who cannot stomach the ups and downs of the markets. As for what my own experience shows us, investors tend not to make investments in a market that is volatile because of the worries of seeing a loss in their portfolios in the short run, and so they don’t have the confidence of investing in equities as an asset class.

This lack of confidence usually arises out of their lack of understanding of equities. It is apt to mention here that equity is a suitable investment avenue for long term wealth creation. One should ride the short-term volatility with patience with an aim to benefit from capital appreciation in the long-term.

Using price-to-book value model to one’s advantage

If you want to reduce or even eliminate these psychological barriers to investing wisely, it may be a prudent strategy for investors to add funds that follow the principle of asset allocation. These funds practice "buying low and selling high" as a general rule all the while keeping human emotions aside. These funds invest in equities when markets are cheap and book profits when markets are high. This is totally opposite of what retail investors normally tend to do.

How do you know when markets are inexpensive or vice versa? One financial yardstick that has stood the test of time is the price-to-book value ratio, which is calculated by dividing the stock price to its book value per share. This model is less volatile as compared to the price-to-earnings ratio. Earnings can be very volatile in some seasons or during shifts in cycles, which tends to make the underlying yardstick of the price-earnings ratio rise up and down during difficult times.

The cyclical shift in 2008 showed us how volatile price to earnings ratio could be. For example, earnings raced up in 2007 when markets were surging, but in 2008 when markets dipped, the earnings dipped as well causing the yardstick to be less reliable. In general, we observed that as book value is a balance sheet item, it is more useful to gauge the intrinsic value of a company.

Essentially, the model eliminates human emotion in decision making. By following a model that is driven by prices and valuation of an asset class, and not by sentiment, investors can achieve the goal of buying equity at low valuations and selling at higher valuations.

A feature of balanced funds that use this objective is that it rebalances frequently and automatically to other asset classes when the book value rises. So, when price-to-book value of equities rise, the model helps to cut exposure to equities as they begin to get overvalued and to re-balance to other asset classes.

This model reduces the human emotion of timing the markets and trying to play out the luck factor as opposed to objectively buying based on principles that follow the value-buying principles.

The price-to-book value yardstick serves one well in the long run, navigating different market cycles, capturing the upside and aiming to limit the downside. If there’s a conservative tilt to this strategy, it’s with good reason because the emotions are kept aside and the price-to-book value shows its potential.

The wisdom of buying low and selling high

If you want to reduce or even eliminate these psychological barriers to investing wisely, it may be a prudent strategy for investors to add funds that follow the principle of asset allocation.

CIO Letter

Funda Clear

Over the last several months, a common refrain in this market is that volatility is quite high. If one day the stock market is up, the next day it’s down by an equal or larger number. By their very nature, financial markets are volatile reflecting the news and developments happening every day. A mishap here or there can cause the market to swing wildly, up or down. But is volatility the same as risk? Financial concepts have us believe that volatility is the same as risk, and end up costing us money. Sure, volatility makes assets such as equity swing more wildly than other assets. An understanding of the concept of risk will give us a true picture. Risk is usually seen as a probability of loss say in any asset class. If you lose your investments, then the asset is risky. But in stock market parlance, volatility is also looked at as risky. Warren Buffett explained the concept of volatility and risk in his 2014 annual letter to his shareholders, and how mixing these concepts is costing investors.

“Stock prices will always be far more volatile than cash-equivalent holdings. Over the long term, however, currency-denominated instruments are riskier investments – far riskier – than widely-diversified stock portfolios that are bought over time and that are owned in a manner invoking only token fees and commissions. That lesson has not customarily been taught in business schools, where volatility is almost universally used as a proxy for risk. Though this pedagogic assumption makes for easy teaching, it is dead wrong: Volatility is far from synonymous with risk. Popular formulas that equate the two terms lead students, investors and CEOs astray”

Volatility is an inherent characteristic of equities in the short-run. But that does not imply risk as most people mistakenly think and as explained by Buffett, who adds that not investing in shares and holding currency instead is far more riskier in the long run.

“It is true, of course, that owning equities for a day or a week or a year is far riskier (in both nominal and purchasing-power terms) than leaving funds in cash-equivalents. That is relevant to certain investors - say, investment banks - whose viability can be threatened by declines in asset prices and which might be forced to sell securities during depressed markets. Additionally, any party that might have meaningful near-term needs for funds should keep appropriate sums in shorter term investment tools.

For the great majority of investors, however, who can - and should - invest with a multi-decade horizon, quotational declines are unimportant. Their focus should remain fixed on attaining gains in purchasing power over their investing lifetime. For them, a diversified equity portfolio, bought over time, can prove far less risky than dollar-based securities.”

Over decades, such as 10 and fifteen years, equities can provide inflation-adjusted reasonable returns for investors. A recent Morgan Stanley report said that equity has delivered the best returns over 5-, 10-, 15- and 20-year periods in India, compared to gold, real estate, fixed deposits, et al. Over a 20-year period, equities returned 12.9 percent, gold 8.4 percent, bank fixed deposits 5.5 per cent and property 6.2 percent. (Source: Morgan Stanley)

Cash in hand would be less volatile in the short run than stocks. But understand that volatility in stocks is not the same as risk. Instead, real risk is the loss of purchasing power that your cash in your wallet would be left with. Buffett says holding cash is riskier than a stock portfolio built for the very long run.

Volatility is not the same as risk



Remember that volatility can be balanced out through long term investment. So it is advisable to spend time in the market and not time the market

Mutual funds can help you benefit during Market Volatility

When markets are high the scheme sell equity and book profit; and invest in cash, debt or similar instruments.

When markets are low they identify and invest in stocks that have the potential of becoming more valuable.

Hence, such schemes aim to buy at lower level and sell at higher levels.

HOW TO PROTECT INVESTMENTS FROM VOLATILITY IN THE MARKETS

Some mutual fund schemes are structuredto invest and aim to benefit from volatile markets.

BY changing the proportion of investment in equitymarkets according to the market movement.

when

INVESTMENT ARE SAID TO BE VOLATILE

There is frequent Price fluctuation which leads to uncertainty in the end value of the investment. Thereby increasing the risk in the respective investment

INDUSTRY SPECIFIC

Such as changes inpolicies specific to that industry

COUNTRY SPECIFIC

for instance, uncertaintyin political scenario

Like, uncertainty in globaleconomic conditions

Ups and Downs in the stock market are referred to as market volatility.

WHAT CAUSES VOLATILITY?

GLOBAL FACTORS

Volatility means

fluctuation or inconsistency.

ALL YOU NEED TO KNOW ABOUT

VOLATILITY

Checklist

Things to Check While Creating a Mutual FundPortfolio for a Goal5

Ask yourself about the time left for your financial goals like buying home or children’s higher education. This will help you decide on the right category of mutual fund (MF) scheme. For instance, invest in equity funds for long-term goals such as retirement and children’s education, since they have high long term returns potential despite higher risks. Debt funds, lower in risk, work well for shorter term needs like down payment for home that could be 3-4 years away.

Mutual funds offer multiple options to choose from. If you are not comfortable with the higher risk of equity funds, consider lower risk alternatives like balanced or hybrid fund. They invest in mix of debt and equity.

1. Get a Fix on the Time You Have

2. Check Your Risk Bearing Capacity

3. Determine an Investment Amount You Are Comfortable With

Arrive at the amount that you will be comfortable investing regularly over the long term. Start with a small amount in an SIP. Keep increasing the amount of SIPs in funds you gain in confidence, get investment ideas and try containing investment risks through diversified MF investments.

Make sure to invest in a scheme whose objective and investment philosophy you understand and are comfortable with. You also need to have confidence in its short and long-term track-record. Remember, one laggard in your portfolio may drag down your overall portfolio’s returns drastically.

4. Do Homework on the Scheme and its Performance Track Record

Do not invest in too many schemes. For instance, 4-5 equity schemes if chosen carefully are enough for diversification. This also makes managing the portfolio and tracking performance simpler. Avoid schemes with the same themes or which invest in the same securities.

5. Restrict the Number of Schemes



Quiz

Answers to appear in IPRU Insights July, 2015

Q.1. Bond prices have nothing to do with interest rates.(a)True(b)False

Q.2. In which year did BSE Sensex give the highest annual return?(a) 1991(b) 1992(c) 1979(d) 1997

Q.3. How often do regular mutual funds price change?(a) Minute to minute(b) Daily(c) Weekly(d) Monthly

Q.4. What is the maximum investment limit in equity schemes for an individualinvestor?(a) 1 crore(b) 5 crore(c) 10 crore(d) No limit

Q.5. An index funds is notmanaged by a fund manager(a) True(b) False

Q.6. When did the Government allow public sector banks and institutions to set up mutual funds?(a) 1990(b) 1960(c) 1992(d) 1956

Q.7. A mutual fund is not required to be registered with the capital market regulator Securities and Exchange Board of India (Sebi) before it can collect funds from the investors.(a) True(b) False

Q.8. In India, a mutual fund is set up in the form of a private limited company.(a) True(b) False

Q.9. Is higher net worth of a sponsor a guarantee for better performance of schemes?(a) True(b) False

Q.10. A mutual fund scheme can invest up to 100 per cent of its assets in unlisted companies.(a) True(b) False

Are YouReadyto TestYourself?

Are YouReadyto TestYourself?

Answers for Quiz in IPRU Insights May, 2015-

1) c 2) d 3) b 4) a 5) a

Storyboard

How did you know?

But where is Nilesh?Both of you are incorrigible!

EMOTIONTRAP

One day in the office whereMahesh and Rajesh work

I was just checking out theastrological forecasts forthis week.

Hey! Why are you poring over thenewspaper during lunch time?

So, what does the column say?Would you be inheriting a fortunefrom a long lost uncle?

Don’t befunny! I justmade someserious lossesin my stocksinvestments. Iam lookingforward tobetter luck inthe future.

That’s why I tell you to invest in equitymutual funds like me. You don’t lose sleepand can benefit from a fund manager’sexpertise. But how did the fiasco happen?

Aaww! So, you thought it would goup more and you will get lucky!

I suppose ittanked as well.

Well, I first lost money in a stock which Ibought when it was going up and myfriend Nilesh made some serious money.

Well! I suppose, so! Then, I boughtanother stock which my neighborhoodgrocery store owner gave me a tip andtold that it was a steal at that low price.

Rajesh, a better way ofgetting lucky is to dohomework on investments,instead of buying or sellingthem when you want tomake a quick buck or panic.Or reading astro forecasts!

Yes, yes! I have heard that from you before. Fromnow on, I will invest only after I have done research.

He has got to get a ring from his astrologer forbetter luck. He made evenmore losses than me!



The sector(s)/ stock(s) mentioned in this presentation do not constitute any

recommendation/ opinion of the same and ICICI Prudential Mutual Fund may

or may not have any future position in these sector(s)/stock(s). Past

performance may or may not be sustained in the future. Please refer to the

SID for investment pattern, strategy and risk factors. This material is

circulated only to the empanelled Advisors/ Distributors of ICICI Prudential

Asset Management Company Limited (the AMC). The information contained

herein is only for the reading/ understanding of the registered Advisors/

Distributors.

In the preparation of the material contained in this document, the AMC has used information that is publicly available, including information developed in-house. Some of the material used in the document may have been obtained from members/ persons other than the AMC and/or its affiliates and which may have been made available to the AMC and/ or to its affiliates. Information gathered and material used in this document is believed to be from reliable sources. The AMC however does not warrant the accuracy, reasonableness and/ or completeness of any information. We have included statements in this document, which contain words, or phrases such as “will”, “expect”, “should”, “believe” and similar expressions or variations of such expressions, that are “forward looking statements”. Actual results may differ materially from those suggested by the forward looking statements


Wish to give your child the best education?

Begin with the RIGHT SIP AMOUNT.

ICICI Prudential Mutual Fund presents

www.icicipruamc.com/investcorrectly

Soch samajh ke invest karein.

An investor Education initiative byThe answers to these questions will help you arrive at the RIGHT SIP AMOUNT.

To know which fund to invest in, contact your distributor.To know more, visitwww.icicipruamc.com/investcorrectly

Mutual Fund investments are subject to market risks, read all scheme related documents carefully.

What am I investing for? How long should I invest for?

How much should I invest?

As SIP makes sense only when the amount invested leads to realizing a dream. Therefore it is important to arrive at the RIGHT SIPAMOUNT. And to help you decide the right amount, here are three important questions to ask yourself:

due to risk or uncertainties associated with our expectations with respect to, but not limited to, exposure to market risks, general economic and political conditions in India and other countries globally, which have an impact on our services and/ or investments, the monetary and interest policies of India, inflation, deflation, unanticipated turbulence in interest rates, foreign exchange rates, equity prices or other rates or prices etc.

All data/ information used in the preparation of this material is specific to a time and may or may not be relevant in future post issuance of this material. The AMC takes no responsibility of updating any data/ information in this material from time to time. The AMC (including its affiliates), the Mutual Fund, The Trust and any of its officers, directors, personnel and employees, shall not liable for any loss, damage of any nature, including but not limited to direct, indirect, punitive, special, exemplary, consequential, as also any loss of profit in any way arising from the use of this material in any manner. The recipient alone shall be fully responsible/ are liable for any decision taken on this material.

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IPRU Insights June 2015