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8/10/2019 Think FundsIndia November 2014 - Fundsindia.com
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Prashant Jain speaks…Prashant Jain,arguably India’smost famous fundmanager, managesHDFC Equity and
HDFC Top 200, that togetherhave assets of over ` 30,000crore. In May 2012, Mr. Jainpenned an essay titled, “It’s
tomorrow that matters,” amidmuch uncertainty and concerns,global and local.
In Mr. Jain’s words, “Pessimismis all that one sees all around.”Even so, as a veteran of multiplemarket cycles, he was able tolook at history and tell hisreaders that the time to invest inequities was at hand.
He wrote, “The lower themarkets are, the bigger is theopportunity.” The Sensex is upby 30 per cent since.
Today, Mr. Jain has spoken upagain in an interview. What doeshe say? Simply put, he tellsreaders to trust in equity investing and stay invested.
History indicates that investors will do well to heed the prescient words of Mr. Prashant Jain. I would urge all to read theinterview by clicking here.
Happy investing!
Srikanth MeenakshiCo-Founder & COOFundsIndia.com
Prefer Old to New
2014 has been a year in which mutual fund houses, barring a few, have movedyet again to a familiar theme – New Fund Offers (NFOs). This has happenedin 1992, 1994, 1999, 2005, 2007, and there we are again in familiar territory.
What is in it for investors?
• Almost nothing. The universe of funds that existed at the end of 2013 wasmore than adequate to take care of 99 per cent of the allocation andinvestment needs of investors.
• The residual 1 per cent will be essentially funds that chase riskier assetclasses, adopt riskier approaches, are complex, and / or are from new or old
fund houses that have an indifferent track record.• When it comes to international funds, they may look enticing given their
performance over the past five years in developed markets. All theseeconomies are in bad shape and equities from US and Europe, which makeup most of the MSCI World Index along with stocks from Japan, havelogged in compounded annual returns of 20 per cent over the past fiveyears. They are at the latter end of a long bullish phase that is unconnectedto reality. New funds are coming in from this space mostly.
• This streak of international funds comes at a time when the value of theIndian rupee (INR) is depreciating, or has been stable (as in the past few
months). INR appreciation can hurt you badly and it is never one-way traffic.
• The only area where genuinely decent funds have come up is corporatebonds. Here too, please go only for those fund houses who hold a goodtrack record in debt funds, along with sizeable assets under management.
• Prefer open-end funds any day to closed-end funds, except in the case of Fixed Term Plans.
• If you wish to own debt and a bit of equity, go for funds that focusspecifically on each class, rather than funds that seek to combine them.
• In equity, there are at least about 125 funds with a track record of over 10years, and a fairly sizeable number of funds have been around for 20 years;ditto for the type of debt funds you need to own.
• Please ask yourself and / or the sellers of these funds the question: why new funds? You can be sure that rarely will there be a satisfactory answer.
S Vaidya NathanEditorial Consultant, FundsIndia.com
November 2014 Volume 07 11
FundsIndia Winner CNBC TV18 UTI Award 2013-14
National Online Advisory Services
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Why equities are a must have in your portfolio
Your Savings
EPF and PPF: For most salaried individuals, your Employee’s Provident Fund (EPF) would be your compulsory
saving. A few of you may also add the Public Provident Fund (PPF) as a part of your tax-saving investment and
believe these two should take care of your non-income earning future.
While these can be great saving habits, sadly, they will simply not suffice to build you a decent investment kitty in yourretirement years. For one, the interest rates on EPF have been on a steady decline over the past 20 years, hardly keeping
pace with inflation, especially in recent years.
For instance, the annual Consumer Price Inflation (industrial workers) was at an average of 9.5 per cent over the last
five years. That means, except in FY-11 when EPF rates were 9.5 per cent, for the rest of the years, you would actually
have earned real negative returns (that is, adjusted for inflation, your returns are negative)!
Your PPF rates too have been on a similar downtrend. The accompanying graphic shows how much ` 10,000 investedevery year in PPF would have delivered as compared to a similar investment in a tax-saving fund – ICICI Pru Tax Plan.
The difference is stark, enough for you to realise how little you build with traditional options.
Actual rates of PPF are taken for calculation. ICICI Pru Tax Plan is the tax-saving equity fund considered. It was launched in August
1999. Past returns are not indicative of future performance. PPF is a 15-year investment product but earns interest up to its 16th year.Hence, investment comparison has been done on a similar basis.
Deposits: When it comes to other voluntary savings that you make, bank deposits are likely to be on the top of your
list. Not only are deposits tax inefficient, they are also likely to give you real negative returns – that is not give you
anything over inflation.
Given below is a graph that shows the three scenarios of Fixed Deposit (FD) returns – with an interest rate of 8, 9
and 10 per cent per annum. We have assumed a tax slab of 30 per cent and inflation of 8 per cent. You will see that
the FD does not beat inflation even with a rate as high as 10 per cent.
www.fundsindia.com
Vidya Bala
For all those who think equities are too risky to handle, or who think it cannot deliver enough,
here’s why your portfolio cannot do without equities, if you have to beat inflation, build a decent
corpus for the long term and be tax efficient. I am going to take the approach of debunking
your notions about other asset classes when it comes to their risks and return.
EPF interest rate on a downtrend
7%
8%
9%8.75%
10%
11%
12%
13%
F Y - 9 5
F Y - 9 6
F Y - 9 7
F Y - 9 8
F Y - 9 9
F Y - 0 0
F Y - 0 1
F Y - 0 2
F Y - 0 3
F Y - 0 4
F Y - 0 5
F Y - 0 6
F Y - 0 7
F Y - 0 8
F Y - 0 9
F Y - 1 0
F Y - 1 1
F Y - 1 2
F Y - 1 3
F Y - 1 4
PPF vs Tax-saving funds ` 10,37,367
` 3, 12,325
0
200000
400000
600000
800000
1000000
1200000 Tax-saving fund market value PPF Balance
A p r - 9 9
A p r - 0 0
A p r - 0 1
A p r - 0 2
A p r - 0 3
A p r - 0 4
A p r - 0 5
A p r - 0 6
A p r - 0 7
A p r - 0 8
A p r - 0 9
A p r - 1 0
A p r - 1 1
A p r - 1 2
A p r - 1 3
A p r - 1 4
A popular observation about the markets is that the markets have run up nearly 40 per cent in the
last one year. A more pertinent observation is that the markets are up only around 30 per cent fromthe pre Lehman levels over the last 6 years...
Prashant Jain, Chief Investment Officer, HDFC Mutual Fund
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We have a few of our investors asking ‘I read that indexfunds are low cost. Should I prefer them over actively managed funds?’
It is first important for you to get two things straight: thedistinction between active and passive funds, especially inthe Indian context, and what has been the historicalperformance between these two categories of funds.
Active Management: A dedicated fund managermanages an active fund. Such a fund manager selectssectors and stocks within the boundaries of the fund’smandate, based on quantitative and qualitative research,as well as his/her own judgment.
The fund manager, in such cases, generally seeks tooutperform a particular market index. He constantly receives inputs and ideas from a dedicated research team,and from external research support as well.
These entail a cost. Hence, the fund manager seeks togenerate excess returns over the benchmark to make upfor the costs involved.
Active fund managers take dynamic calls – whether toincrease or decrease cash, or curtail falls and participateoptimally in markets by specific strategies, or exit or entercertain stocks or sectors based on their potential and
valuations. Of course, the down side is that all calls donot work.
Passive Management: Passive funds, such as indexfunds invest their assets in the same stocks and in thesame proportion as the index they seek to track. Indeveloped markets where long-term annual returns are atmuch lower levels, passively managed funds are morepopular compared with actively managed funds.
Passive funds, as they do not need day-to-day active calls,have lower costs, a relatively low portfolio turnover, and
less or zero cash holding. In Indian markets, the universeof under-researched stocks outside the indices provideample scope to outperform.
Active Funds Outperform: Our analysis of diversifiedlarge-cap as well as mid-and small-cap funds with a 10 and15-year track record reveals that a majority of activefunds, in the Indian context, outperformed theirrespective indices over the past 10 years and 15 years. Mid-cap funds, especially, outperformed their indices by a
good margin of 4-5 percentage points.
Yes, while the expenses incurred is higher in an actively
managed fund, the margin of outperformance more thanmakes up for the costs involved, that is, if you had chosenfrom the 78 per cent of outperforming funds!
Active Funds Performance Large-Cap Mid - &/ Market Cap Funds Small-Cap Funds
Performance No. of funds that 36 10over past outperformed their10 Years benchmarks
No. of funds that 10 0underperformedtheir benchmarksOutperformance 78 per cent 100 per centPercentage
Performance No. of funds 17 3over past outperformed their15 Years benchmarks
No. of funds that 8 0underperformedtheir benchmarksOutperformance 65 per cent 100 per centPercentage
Analysis is as of October 22, 2014. Outperformance percentage relates the number of outperforming funds to total number of funds in each category in the analysis.
Strategy: So what approach should you choose? Thereare two ways to looking at this. One, if you simply wantto move with the markets and do not want to leave thedecision of your portfolio calls to a fund manager, thenindex funds are your best bet. At least, it is better than nothaving any equity in your portfolio.
But if you are a long-term investor, then a combination of
both would help you build a superior portfolio. You couldthen consider investing 15-25 per cent of your portfolioin index funds to ensure that at least a part of yourportfolio is not worse than the market index. Allow activefunds to generate additional returns with a chunk of yourinvestments there. The caveat: do your research inchoosing the right funds or seek help from your advisor.
N. Sathyamoorthy Analyst, Mutual Fund Research, FundsIndia.com
Active or passive?
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Handling loan application rejection
Have you ever applied for an auto loan, a home loan or a
personal loan? What if the loan application got rejected? What to do next? Rejection of any kind is one of thegreatest fears that lie within us. But there is also a way toaddress this. Put on your thinking cap to understand thefew ways on what to do next when your loan applicationgets rejected.
Know and understand: Check with the credit institutionto know the reason for the rejection – read it andunderstand the reason. As per the Reserve Bank of India,“A bank cannot reject your loan application without
furnishing valid reason(s) for the same.” Does the reasonfor rejection talk about a low credit score? Does it pointto poor payment history? Are the reasons reflecting inyour credit history? It’s time to check your credit report toknow the reasons behind the rejection.
Re-check your credit score: A low credit score is one of the reasons for which the credit institution may haverejected the loan application. It is advisable to check yourcredit score with one of the credit bureaus in the country to know how credit healthy you are.
Do an error check: A credit report contains yourdemographic details, credit account details and paymenthistory. Do a check to see if there are errors on your creditreport related to your personal details or account detailsand get them rectified.
Seek help: Do you need help to understand your creditreport? Do you find it difficult to read your credit report?Credit counselors guide you in understanding andreviewing your credit report.
Rejections are always a learning experience. Stop worrying and instead, be a little more alert, a little more prudent, alittle more assertive, and a little more proactive because
who knows? A window of opportunity may open soonfor you!
Satish Mehta is the Founder and Director of www.credexpert.in – a credit and debt counselling company. Read more such thoughtful articles at Market Place – FundsIndia, the official blog of FundsIndia.com at http://www.fundsindia.com/blog.
Market Place FundsIndia Blog
Five, not ‘one’ market in equity
Just as `market’ is not equal to just equity, there is no one
single market in equity. When you hear of equity, pleasedo not understand it as a homogeneous market where you
could draw conclusions that would be relevant across the
board all the time. Even if a few factors are common
across the market, the nature of their impact on the prices
of stocks differs. To make the right investment allocation
in equity, it is important to understand the different
markets in Indian equity as an asset class.
Large-cap stocks: These are major names that we are
familiar with, as they are a part of the Nifty Index. Ingeneral, if you list all the stocks on the National Stock
Exchange in the descending order of market
capitalization, stocks that account for about 70 per cent of
the overall market capitalization would constitute this
category. You could approximately reckon the top 100
hundred stocks by market cap as large-cap stocks. Even
here, the second 50 would have a different risk-return
profile as compared to the top 50.
Mid-cap stocks: The second hundred stocks could be
considered as mid-cap stocks. These stocks carry a higherlevel of risk and return. Liquidity levels are also not as
good as in the large-cap category. Risks are higher as are
returns, but you need to know when to back off, if you are
to make money in this category. Returns tend to be
compressed in very short periods. It gets progressively
even more risky from here.
Small-cap stocks: The third hundred stocks could be
considered as small-cap stocks. You need to dig really hard
to find quality and returns.
Micro-cap stocks: The fourth hundred stocks could be
considered as micro-cap stocks. This is the space for
lottery.
Penny Stocks: A very large proportion of the rest of the
listed stocks would be in this category. Forget about them.
We will examine what this graded equity market means
for performance next month.
Invest With A Plan 8
If you look carefully, almost all old money secrets can be traced to a single source: a longer-termoutlook.
Bill Bonner
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Technical View
Transport Corporation of India The Transport Corporation of India stock is on a strong upward trend and the recent pull back offers anopportunity to buy the stock. As long as the stock trades
above the stop loss level of ` 185, there is a possibility of
a rally to the target zone of ` 265-270. A move beyond `
270 could trigger a rally to the second target of ` 285.
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 outlook for 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
Disclaimer for Think FundsIndia: Mutual Fund Investments are subject to market risks. Please read the offer documents available at the website of each mutual fund carefully before investing. Past performance does not indicate or guarantee future performance. There is risk of capital loss and uncertainty of dividend distribution. Think FundsIndia,a monthly publication of Wealth India Financial Services, is for information purposes only. Think FundsIndia is not and should not be construed as a prospectus, schemeinformation document or offer document Information in this document has been obtained from sources that are credible and reliable.
Publisher: Wealth India Financial Services Editor: Srikanth Meenakshi
www.fundsindia.com
Nifty After a minor downward correction, the Nifty has been ina recovery mode in the past few weeks. Its long-termoutlook is bullish. There is a strong case for the index tocross the 10,000 mark in 12-15 months. From a short-term perspective, there is a strong resistance at the 8,100-8,150 mark.
Once it breaches 8,150, the Nifty could rally to the targetzone of 8,350-8,400. Any downward correction to the7,750-7,800 support would be a buying opportunity forlong-term investors. Investors may use any weakness tobuy fundamentally sound stocks from the banking,
automobile, auto ancillary and infrastructure sectors.
B Krishna Kumar, Head – Equity Research, FundsIndia.com
Tata Motors DVR After a sharp rally, Tata Motors DVR corrected sinceSeptember 12. The decline was arrested at the crucialsupport zone on October 17, and the subsequent priceaction suggests that the next leg of the upward trend is
underway. Buy at current levels and on weakness for an
initial target at ` 392, and a secondary target of ` 425.
Have a stop loss at ` 289.
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What does not kill you…
Investing, when it looks the easiest, is at its hardest.
• Only a small number of investors maintain thefortitude and confidence to pursue long-term
investment success, even at the price of short-term
underperformance. Short-term underperformance
doesn't trouble them.
• Most investors feel the hefty weight of short-term
performance expectations, forcing them to take up
marginal or highly speculative investments.
• The payoff from a risk-averse, long-term orientation is
just that - long term. It is measurable only over the
span of many years, over one or more market cycles.
• An investor’s willingness to invest amidst failing
markets is the best way to build positions at great
prices; but this strategy can cause short-term
underperformance.
• Buying as prices are falling can look stupid until sellers
are exhausted; and buyers who held back cannot
effectively deploy capital, except at much higher prices.
• The resolve in holding cash balances - sometimes very
large ones - in the absence of a compelling opportunity is another potential performance drag. But
in a world in which being anti-fragile is good, what
doesn't kill you can make you stronger.
• Patience and discipline can make investors look
foolishly out of touch until time makes them look
prudent and even prescient.
Seth Klarman is the founder of the Baupost Group.
www.fundsindia.com
Q & A
Q - Do funds maintain separate portfolios for the
dividend option and the growth option, or is it justaccounting jugglery? I always thought the dividendoption requires a different approach for stock selection,
as against the growth option.
A - Separate Net Asset Values (NAVs) are maintainedfor growth and dividend options as they have to bedeclared separately. There may not necessarily beseparate portfolios. There is usually a single fund, andthe stocks or bonds that it invests in do not vary between the two options. A dividend option does not
mean that a fund will only look to invest in stocks thatpay regular dividend. The dividend and growth optionsare merely ways to distribute/plough back your profits.
The idea of dividend is to periodically strip the profits
and give it back to you in the form of cash (dividendpayout), or additional units (dividend reinvestment). Inthe case of growth option, the gain is retained andreinvested into your portfolio.
Index 1 Year 5 Years 10 Years
CNX Nifty 30.7 11.6 16.4
S&P BSE Sensex 30.0 11.5 17.0CNX Mid Cap 57.0 12.1 17.4
CNX Small Cap 66.9 10.5 17.0
CNX 100 32.5 11.9 16.5
CNX 500 37.9 11.3 15.9
CNX Bank 49.0 14.7 21.1
CNX Energy 19.6 1.9 10.9
CNX FMCG 9.9 21.9 23.4
CNX Infrastructure 35.7 -0.7 11.0
CNX IT 25.9 17.1 15.3
MSCI Emerging Markets -2.8 16.1 12.1
MSCI World 5.1 20.4 9.9
Returns (in per cent as of October 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 Wisdom
Must Read: ‘Keep in mind that even terribly hostile market environments do not resolve into uninterrupteddeclines,’ writes John Hussman in ‘On the Tendency of Large Market Losses to Occur in Succession.’ Read hisinsightful comments at www.hussmanfunds.com
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1 Who is the Chief Economic Advisor to the Prime
Minister of India?
2 Who is the author of ‘Fooled by Randomness?’3 Which was the first-gold related fund to be launched in
India?
4 What is the usual benchmark for Balanced Funds (in
India)?
5 Name the person in the image. She is
the Head of one of the largest banks
in India.
Answers for October 2014 Quiz: 1 National Securities Clearing
Corporation 2 Shriram Mutual Fund and CRB Mutual Fund 3
85% 4 Barry Ritholtz 5 Prashant Jain, HDFC Mutual Fund
There were no winners for the October 2014 Quiz.
FundsIndia Select Funds
Equity Moderate Risk: Preferred picks in this category are:
Axis Equity Birla SunLife Top 100
BNP Paribas Equity Franklin Bluechip
HDFC Top 200 ICICI Pru Dynamic
ICICI Pru Focused ICICI Pru Top 100
Kotak Select Focus Mirae Asset Allocation
UTI Equity UTI Opportunities
What is FundsIndia Select Funds: This is a listing of mutual funds that we think are most investment worthy for a regular investor. We review this list on a quarterly basis. Do note, however, that past performance is not aguarantee of future results. Please consider your specific
investment requirements before designing a portfolio thatsuits your needs.
Please click here for a complete listing of our preferredfunds.
www.fundsindia.com
App Upgrade – FundsIndia’s mobile app for Android users
has been upgraded to enable new investments andadditional investments. Investors will be able to make
payments towards these investments from their internet-
banking accounts.
Quick Tax Saver – We have introduced a Quick Tax Saver
feature. This will help investors invest in the best tax saving
funds that have been hand-picked by our experts in a jiffy.
New Gold Plan – Satyug Mera Gold Plan is now available on
the FundsIndia platform. Investors will now be able to
systematically accumulate 24 Karat gold through this plan.
To start buying gold with SMGP, please click here.
@fundsindia.com in October Recommended Book
To invest, call 0 7667 166 166
About us: FundsIndia.com is India's leading online investment platform. It offers a wide range of investment options such
as mutual funds, equities, corporate deposits, bonds, the National Pension System, loans, insurance and 24 Karat gold, to name
a few, in one convenient online location. FundsIndia also offers a host of value-added services such as Systematic Investment
Plans (SIPs), Alert SIPs, Flexi SIPs, trigger-based investing, and more, that further enrich your investment experience.
Recovery in economic growth is expected to be led by a revival in the capex/investment cycle by FY 16-17. Hence,
recovery in earnings of cyclical sectors could be back-ended. Valuations of cyclical stocks might look expensivefrom the next 12-month perspective. Sanjay Dongre, Senior Fund Manager, UTI Mutual in Marketplace,
FundsIndia Blog.
Investment Quiz