Think FundsIndia June 2014 - Fundsindia.com

8/10/2019 Think FundsIndia June 2014 - Fundsindia.com

1/9

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Keeping faithRecently, I had ani n t e r e s t i n g conversation withan investor. This

person, a software engineer fromHyderabad, had set up an SIP for

three years exactly 35 monthsago. Now that the tenure iscoming to an end, he set up anappointment to discuss what todo next.

During the conversation, herevealed he had his moments ofdoubt as to whether he was onthe right track. His portfolio hada compounded annual return ofabout 8 per cent, and he

considered redeeming it all toavoid future downturns.

Thankfully, he did not and stuckthrough. His particular portfoliohas a compounded annual returnof about 20 per cent and ourconversation, consequently, wasa very pleasant one.

Lesson here is about staying invested and keeping the faith inthe economy and the markets.

We hear all the clichs - investright, sit tight, time in themarket better than timing themarket, but hearing these realsituations where people haveactually benefited by stayinginvested in the market reinforcesthe faith.

Happy reading!

Srikanth Meenakshi

60%

With the rally in equity prices over the past few months, the relative rankings

of equity funds are starting to change. In such phases, even those who

struggled earlier, and especially fund managers, who take more risk than they

ought to, get into the limelight. It is, however, not a good idea to immediately

embrace such funds. Investors in equity funds in India are today fortunate to

have choice, especially in terms of longevity. Funds such as Prima and

Bluechip are into their 21st year and at least about 100 funds sport a track

record that is in excess of 10 years.

This is a very important choice that is available for investors. You have hardevidence of performance in different phases of the market bullish, bearish

and sideways, and in each case at least twice in each phase.

Rather than go for the chart toppers of the present, especially one year and

less, investors have the opportunity to go for consistent performers across

different phases of the market. These options will definitely be more worth

pursuing than the New Fund Offers and short-term chart busters.

60 per cent is an important number. Funds that are ahead of the benchmark

about 60 per cent of the time usually tend to do well in terms of returns,

consistency and ability to handle different phases of the market. 60 per cent

has not been plucked out of thin air. It is based on analysis of track record of

equity funds over long periods. Funds that have delivered superior returns as

compared to benchmarks and most peers would, inevitably, have attained or

be close to this threshold.

Funds that are ahead of the benchmark about 60 per cent of the time in

bearish and sideways markets tend to be more consistent. At the outset, this

indicates that their risk taking is not excessive. It also indicates that the fund

managers understand better the prevailing economic environment and its

implications for equity prices.

Most funds that make the cut on 60 per cent in these market conditions tendto be middle or lower of the pack in bullish phases. The fact they do well in

bearish and sideways markets makes them emerge in the top quartile over long

periods even if they miss out a fair bit in bullish phases.

Many funds that make the 60 per cent cut in bullish phases tend to take

outsized risks. A large number of them also fare unimpressively in bearish

and sideways markets. The outsized risk taking approach that helps in bullish

phases hurts these funds big time in other phases. You can look at 2008 and

2010-2013 for evidence of how the aggressive risk takers got burnt.

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

S Vaidya Nathan

June 2014 Volume 07 06


2/9

Change spells opportunities

When expectations spur reality

Expectations are known to often spur action. Higher

inflation expectations for instance, are often known to

spur inflation! So is the case with market sentiments.

Expectation of implementation of reforms and policies

may well spur corporate investment, and, therefore,corporate earnings.

So how should you tune your expectations to the political

and economic events that will unfold in the following

weeks, months and years? Heres our take on it and also

on where to put your eggs now:

Near-term expectations

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

events such as cabinet formation and announcement of

policies, and perhaps partly ignore macro-economicindicators, even if they look lack lustre.

But then overall, with earnings numbers coming

intermittently, it is possible that markets will react, even

negatively, as fundamentals are not going to improve

overnight. Such negative reactions could only be

opportunities to buy into the market in our opinion.

What to do: Accumulate in your existing equity funds on

short-term negative reactions by market. Do not try to

pick and choose the chart busters. Chances are you maypick the wrong one or worse still, miss the short

opportunity while you search for the right funds.

Medium-term expectations

Most analysts have a consensus that there could be no

meaningful contribution by companies to the earnings pie

until FY-16. That means, earnings would come in later,

and valuations would stop looking cheap.

History does, however, suggest that as long as valuations

are in the vicinity of the averages, (see graph below on

MSCI India 12-month forward P/E), there could be less

possibility of returns being capped as a result of

valuations running too ahead of earnings.

Now, typically sectors such as banks, auto and industrials

are those that are known to benefit from the first sign of

a market/economic recovery. Why? First, a market

recovery typically gets companies to raise funds to

deleverage.

This could in turn provide some relief on the burgeoning

NPA size of banks. Markets may take notice of such

events given the far-from-high valuations of banks.

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

commercial automobile demand uptick, is a key indicator

of economic recovery; so also the purchase of industrial

or capital goods an indicator of capex spending. Hence,these stocks are the ones to be re-rated first.

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

form part of the cyclical upturn, could also be candidates

that would participate in the medium-term recovery. Why

is this so?

FII money mostly goes into liquid large-cap stocks leaving

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What matters to consumers is inflation, precisely food inflation. The weather forecast suggests

there could be scanty rainfall this year, which will push up food prices. I see the slowdown easing,not in the next six to eight months but possibly in the next two years.

Zubair Ahmed, Managing Director, GSK Consumer Healthcare

Vidya Bala

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

With the BJP-led alliance securing a clear mandate to rule the next government, one expects the

alliance to undertake its reform agenda and find viable solutions to macro-economic challengesin as fast a mode as possible. It is for this that the markets have reacted positively and willcontinue to respond to every single move from here on.

If you wonder whether expectations can turn economies, they probably do.


3/9

domestic investors such as mutual funds or other local

institutional investors looking for less expensive options

but with potential. As is the case, the not-so-high liquidity

in these stocks would often lead to quick upward move

in such stocks.

What to do: While most equity funds will likely benefit

from a banking rally, we have identified funds that will

also benefit from sectors such as auto and auto

components and industrials and have recommended the

funds in March, For those who can spare additional sums,

this may be a good time to start taking small exposures to

such funds.

Long-term expectations

Over a longer time frame we expect the reforms effect

to start kicking in. And we picked a few key areas ofreforms that could potentially benefit specific cyclical

sectors.

What t o do : Read FundsIndia Equity Strategies: A

Portfolio for Election Euphoria and Beyond' at

www.fundsindia.com/blog.

The three funds we had recommended (see article above)

- HDFC Top 200, Franklin India Prima and ICICI Pru

Discovery - hold good to ride what may be a long-term

sustainable rally albeit with short-term corrections.As suggested, use your existing funds to accumulate over

short bursts (or funds we recommend if you do not hold

equity funds) and the funds we recommended in March

for long-term SIPs. As fund portfolios change colour, we

will, through our weekly call, bring to you more funds that

are well placed to ride the long-term wave.

Just three points to note before we close this event-linkedreview:

The holding period of your funds need to be for at

least three-to-five years. While you may use triggers or

time your accumulation based on our short-term

expectations, you should ideally be running SIPs if the

medium to long-term expectations make sense to you.

It is best to refrain from fund chart busters that were

never seen earlier, if you were to invest based on the

above expectations. You could get yourself hurtespecially in sector funds or mid-cap funds.

Do not lose grip over your asset allocation strategy.

This equity strategy does not mean you stop investing

in debt.

Sector Reforms/macroeconomic trigger

Engineering / Deleveraging, earnings upgrade on

Industrials/ back of improved capex/infrastructureInfrastructure spending by companies and

government

Banks Improving asset quality, higher loangrowth on interest rate declines andrecapitalization of banks

Oil & Gas Diesel/gas price hikes and lower oilsubsidy

PSUs Revival in order book anddisinvestment

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The new finance minister should be thinking about the deployment of macroprudential andcapital control measures to insulate the Indian economy from fickle, footloose and short-termcapital flows. In this regard, he needs to remain wary of and be alert to creeping and

inadvertent capital account liberalization. Specifically, it may be tempting to usurp powers toregulate capital inflows from the RBI. But that would be counterproductive. Once regulatorypowers are vested in the hands of a political appointee, the scope for external bodies globalfinancial institutions (aka Wall Street) to influence outcomes to the detriment of the broaderIndian economy rises immeasurably. The central bank should remain in charge of managingcapital flows in and out. Nor should the finance minister consider hiving off bankingregulation from the remit of RBI. Thanks to RBI, India has avoided death by finance, sofar. The new finance minister should ensure that he does nothing to damage that history.

V Anantha Nageswaran, co-founder, Aavishkaar Venture Fund and Takshashila Institution

Viewpoint

source:www.livemint.com
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4/9

China Debt Endgames

In effect, the flexibility of Chinese authorities to deal with

any problems may be more constrained than assumed.But the risk of a major collapse while always present is, atthis stage, low. A familiar endgame, entailing bank failures,depositor runs, massive outflows of foreign investors ora sovereign default, is unlikely. The Central Governmentis seeking to steer a middle path, which is both difficultand has significant risks.. In the short run, continuedmal-investment and deferring bad debt write-offs will

provide the illusion of robust economic activity. Overtime, households will discover that the purchasing power

of their savings has fallen.

Wealth levels will be reduced by the decline in the pricesof overvalued assets. Businesses and borrowers will findthat their earnings and the value of their overpricedcollateral are below the levels required to meetoutstanding liabilities. The alternative is equallyproblematic. If the government moved to liquidateuneconomic businesses and unrecoverable debt, then it

would need to finance the recapitalization of businessesand banks. This cost would require a sharp increase intaxation, which would also result in a slowdown in

economic activity.

In reality, Chinas Potemkin economy of zombiebusinesses and banks will create progressively less realeconomic activity.

Satyajit Das (Source: www.economonitor.com)

Term Insurance: Online vs Offline

In the market, insurance companies are increasingly

introducing online term plans for lesser premiums tocustomers. This, in one way, is exciting news, as it means

more savings.

Price should not, however, be the main criterion for

choosing something as important as term insurance. Here

are a few pointers that will help you make the right

decision between online and offline term insurance.

Is low premium the main criterion for choosing term

plans?

In our view, low premium must never be the only criterionfor choosing a term plan. Before you fall for the charms

of such plans, youll need to look closely at the fine print.

For starters, the cheap premium paid for online term

insurance often jumps by 25% after the prospective

customer undergoes a medical test.

Also, after the medical test, if the proposer would like to

decline the policy, the amount paid will be refunded to

him only after the cost of the medical test that was borne

by the insurance company has been deducted.

One important point to note here is that such a customer

has to disclose his entire medical history, and that can be

used as evidence in the case of a claim.

To read more and learn from informed checklists, check

out the Market Place FundsIndia, the official blog of

FundsIndia.com, on a regular basis at

http://www.fundsindia.com/blog.

S Sridharan

Market Place FundsIndia Blog

www.fundsindia.com

You are going to see brutal, brutal consolidation in the IT industry, where out of the top five players,

only two or three of us will be meaningful in as quick as five years. You will see this disruption notso much in combination, but almost like musical chairs.

John Chambers, CEO, CISCO

Blog Pick

Did you know?Unit Scheme 64 (U S 64), Indias first mutual fund scheme, stopped functioning as a mutual fund ought to. It becamea mini-Ponzi scheme of sorts with dividend payments that were unlinked to fundamentals, profits of the fund andsustainability. Buying its units for dividend and selling became a no-brainer game that attracted large corporateinvestors, who started dominating it. Eventually, it became unsustainable. In the late 1990s, the government organizeda bailout, closed the fund and moved its huge portfolio in PSU stocks to a separate fund of the government. It alsoled to the shut down of Unit Trust of India, and led to its new avatar, UTI Mutual Fund.

Learning : Be wary of any investment option that appears delinked to reality and sustainability.


5/9

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6/9

Risk & Return

This might be a case of jumping the gun. Having dealt withRisk, and, not yet with Return, we are moving to the links

between Risk & Return. The rationale is that understanding

this relationship is a necessary pre-condition for developing the

right concept of return in our mind.

Nothing works with clockwise precision as the maxim Higher

The Risk, Higher The Returns and vice versa.

We repeatedly hear experiences of investing in a small finance

company that promised 20 per cent or 30 per cent a year

deposits. Just ask yourself the simple question: how can the

deposit taker offer such returns. He is, in turn, investing in

assets or businesses that are so risky that they can offer him

more than 30 per cent.

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

unless they are on niche product or service that cannot be

replaced. Tales abound of depositors losing every rupee in such

adventurous investing guided by greed for high interest rates.

A few percentage points (2-3) more than what PSU banks,

HDFC and Sundaram Finance, to name a few, offer is fine.

Even here the risks are high.

Cut to stocks. The same mid- and small-cap stocks that

handsomely outpaced large-cap stocks between 2003 and 2007would have drained your capital in 2008.

In the 2008 crash, large-cap stocks lost about 52 per cent, mid-

caps about 75 % and many small caps in the vicinity of 90 per

cent. Even if you made three-fold returns in a small cap stock,

your Rs 100 would have been down to Rs 40. In the large-cap

space, if you had doubled your money, you would at about Rs

95 post the crash. This is risk for you small cap stocks are

way riskier than large-cap stocks.

Real estate, gold, bonds, fund that invest in them you name

the asset class. The maxim will work effectively. For a transientperiod, you may be on the other side. This may embolden you

to try similar strategies again and it is likely you would get

singed.

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

works with return. Only then you would be able to understand

your risk-taking ability and make appropriate asset allocation

plans. Take quality and credible advisory help if you cannot

come to grips on your own.

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

reluctant to lay down any rules or guidelines on how to investor speculate wisely. Still, there are a number of things I have

learned from my own experience which might be worth listing

for those who are able to muster the necessary self-discipline:

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

# 2 Beware of barbers, beauticians, waiters of anyone

bringing gifts of inside information or tips.

# 3 Before you buy a security, find out everything you can

about the company, its management and competitors,

its earnings and possibilities for growth.

# 4 Dont try to buy at the bottom and sell at the top. Thiscant be done except by liars.

# 5 Learn how to take your losses quickly and cleanly. Dont

expect to be right all the time. If you have made a

mistake, cut your losses as quickly as possible.

# 6 Dont buy too many different securities. Better have only

a few investments, which can be watched.

# 7 Make a periodic reappraisal of all your investments to

see whether changing developments have altered their

prospects.

# 8 Study your tax position to know when you can sell togreatest advantage.

# 9 Always keep a good part of your capital in a cash

reserve. Never invest all your funds.

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

field you know best.

Background: Bernard Mannes Baruch was an American

financier, stock investor and philanthropist.

InvestWithA Plan 3

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wisdom
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7/9

Index 1 Year 5 Years 10 Years

CCNX Nifty 18.1 10.2 16.9

BSE Sensex 19.8 10.6 17.5

CNX Midcap 28.3 13.6 17.6

CNX Small Cap 49 12.1 19.6

CNX 100 19 11 17.1

CNX 500 21.6 10.1 16.5

CNX Bank 15.5 14.8 20.1

CNX Energy 20 1 13.2

CNX FMCG -0.3 26.9 23.3

CNX Infrastructure 32.1 -3 13.1

CNX IT 40.4 22.8 16.1

MSCI EM 1.8 18.4 11.1

MSCI World 11.0 22.0 10.0

Returns (in per cent as of May 30, 2014) for less than one year is on an absolute

basis and for more than one year on a compounded annual basis.

Equity Performance Snapshot

Must ReadMa ke a habi t o f Van & Lacy

Perhaps the best commentary on economicconditions and its implications for U S Bonds comesfrom Van Hoisington and Lacy Hunt. Their views are

well researched, rooted in history, and yet take noteof the emerging trends. They have never shied oftaking a contrarian view, even it meant staying that

way for long periods. In general, views by fundmanagers focused on bond markets reflect economic

reality in a far superior manner as compared to therest of pack. In their report for first quarter 2014,they opine: `Since the FOMC began quantitativeeasing in 2009, its balance sheet has increased morethan $3 trillion. This increase may have boosted

wealth, but the U.S. economy received no meaningfulbenefit. Read atwww.hoisingtonmgt.com.

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Q I plan to go out on vacation with my family everyyear, and for this purpose wish to start our monthlySIP of Rs 4,000. This would be utilized within a spanof a year for short breaks from our work life. Weneed your advice on where to start our SIP - debt,MIP, ultra short-term or liquid fund.

A We appreciate your decision to save systematicallytowards building a kitty for your vacation. This notonly helps you to plan ahead but give marginallyhigher returns than parking your money in a savingsaccount.

For an eight-to-nine month time frame, ultra short-term funds such as Templeton India Ultra Short

Term, Tata Floater and ICICI Prudential Flexible

Income Plan can serve your requirement. They haveSIP options. Debt funds and MIP require a longertime frame of two to three years at least.

As your holding period will likely be less than a year,you will have short-term capital gains tax impact.Short-term capital gains for debt funds will be taxedat your income tax slab rate. To mitigate the impactyou can adopt one of these options based on yourtax slab:

If you are in the 10-20 per cent tax bracket, gofor growth option as dividend distribution tax at

28.3 per cent will be higher than your tax slab.

If you are in the 30 per cent tax slab, considerdividend reinvestment option where thedividend tax impact will be slightly lower thanyour slab rate and you will still be reinvestingthe dividends by way of units.

We hope this helps you a build a decent corpus for ahappy vacation.

Vidya Bala

Q & A

We reach 4.6 million retail outlets nationally. Of this, 60 per cent is in urban and 40 per cent in rural

areas. So, it is not as if we dont have a competitive advantage in rural regions. When targetingvillages, we do keep affluence in mind.

Prabha Parameswaran, Managing Director, Colgate-Palmolive, India
http://www.hoisingtonmgt.com./http://www.hoisingtonmgt.com./http://www.hoisingtonmgt.com./


8/9

Technical View

Tata MotorsThe second stock in the buy list for this month is TataMotors. The stock has been on a correction mode in thepast few weeks. The recent fall was arrested on Friday at

the key support zone of` 400-410. Investors may buythis stock from a short-term perspective, with a stop loss

at` 398 and target` 450. A breakout past` 465 wouldlend momentum to the upward trend, and the stock could

then target` 480.

Hindustan ZincAfter prolonged period of consolidation, Hindustan Zinchas staged a breakout. The recent correction offers a

buying opportunity in Hindustan Zinc for a target of `195. The stop loss for long position in Hindustan Zinc

may be placed at` 130. Buy the stock at the current levels

as well as on weakness for an initial target of ` 195. A

breakout past` 195 would push the stock to the second

target of` 225.

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

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NiftyThe Nifty gained sharply in May. Technically, the outlookfor the stock market remains positive. The recent rally has,however, pushed the indices to an overbought region.Hence, a short-term consolidation or a downwardcorrection is likely. The bullish view would be intact untilthe Nifty declines below the recent swing low of 6,600. As

long as this level is intact, a rally to 7,850-7,900 would befavoured outcome. Investors may use price weakness tobuy quality large-cap and small-cap stocks from thebanking, realty, metals and automobile sectors. Stockssuch as Tata Motors, Tata Steel, CESC, DLF, HDFC Bankand Glenmark Pharma are a few examples.

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

Sir John Templeton

The world seems to be struggling back to its feet after the great financial crisis, and financial markets

are buoyant. This is partly because central bankers are collectively engaged in extreme monetaryeasing through unconventional policies.

Dr Raghuram Rajan, Governor, Reserve Bank of India.

B Krishna Kumar
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9/9

1 Who is the Finance Minister of India now?

2 Name the first segment in which trading started on theNational Stock Exchange?

3 Which was first liquid fund (by any name) to belaunched in India?

4 What is the name of the highly regarded weekly letter

that is published by Christopher Wood, ManagingDirector & Global Strategist of CLSA?

5 Name the person in the image? Hespearheaded the spread of electronic

trading and settlement systems inIndia.

Answers can be emailed to [email protected]. Thefirst three to send in all correct answers will be entitled toa must-have book on investment. Answers for April 2014

Quiz: 1 U K Sinha 2 Gilt Funds 3 HDFC Mutual Fund 4 Dr

Y V Reddy 5 Over The Counter Exchange of India (OTCEI)

Prize Winner:Jatin Nagpal is the winner of the May 2014 quiz.

@fundsindia.com in May

Revamped scheme selection page

The scheme selection page is the page where an investor selects

the scheme for investment (one-time or SIP). We have made

changes to this page to simplify the scheme selection.

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

FundsIndia Select Funds, one for all active schemes and one

for NFOs/FMPs. The select funds tab will be provided by

default and the user will be able to move to the other tabs.

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

options to view only growth and dividend funds. This will

simplify finding only growth schemes or only dividend

schemes.

For investors keen on NFOs and FMPs, we are now

providing additional information specific to NFOs, whichwe were not providing earlier at the time of scheme

selection

HDFC MF, instant investing enabled

Starting May, our instant investing investors will be able to

transact in schemes from HDFC Mutual Fund also. With this,

we now support investments in the 13 top fund houses without

any paperwork.

Extending portfolio notes

Our investors have the ability to enter notes for every portfoliothey have. Based on feedback from our investors, we have now

enhanced the field to capture up to 1000 characters.

Smart Solutions Recommendations

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

promise to walk with you in your journey towards your

financial goals. We have been tracking the schemes you have

invested in and are ready to roll out recommendations for

change of schemes. In June, we will be reaching out to you with

our review of your Smart Solutions and recommendations for

change, if any. You will be required to accept the

recommendations for the changes to be effective. So, keep an

eye out for our recommendations to ensure that you stay on

course for your goals.

www.fundsindia.com

Disclaimer: Mutual Fund Investments are subject to market risks. Please read the offerdocuments available at the website of each mutual fund carefully before investing. Pastperformance does not indicate or guarantee future performance. There is risk of capitalloss and uncertainty of dividend distribution. Think FundsIndia, a monthly publicationof Wealth India Financial Services, is for information purposes only. Think FundsIndiais not and should not be construed as a prospectus, scheme information document oroffer document Information in this document has been obtained from sources that arecredible and reliable.

Publisher : Wealth India Financial Services Editor : Sr ikanth Meenakshi

Quiz

FundsIndia's Select Funds is a list of mutual funds that wethink are most investment worthy for a regular investor.For a full list of funds, please go tohttp://www.fundsindia.com/select-funds.

Tax-savings funds - Moderate risk

These are equity-oriented funds with a lock-in of threeyears. Investment up to`1 lakh qualifies for deductionunder Section 80C of the Income Tax Act.

Axis Long-Term Equity Fund

CanRobeco Tax SaverFranklin India TaxSheild

Tax-saving funds - High risk

ICICI Pru Tax PlanIDFC Tax Advantage FundReligare Invesco Tax Plan

FundsIndia Select Funds

The idea is to keep the large cap allocation at 65-70 per cent and increase mid cap allocation to 30-35 per cent to participate in economic cycle improvement- Swati Kulkarni, Fund Manager, UTIMutual.

Read more at FundsIndia Blog at http://www.fundsindia.com/blog

To invest, call 0 7667 166 166
http://www.fundsindia.com/select-fundshttp://www.fundsindia.com/select-funds

Documents

Think FundsIndia June 2014 - Fundsindia.com