capital letter may'13 - fundsindia

Disclaimer: Mutual Fund Investments are subject to market risks. Please read all scheme related documents carefully before investing.

Greetings from FundsIndia!

As was expected, the Reserve Bank of India has cut the interest rate (repo rate) by 0.25% in its quarterly monetary policy review. More cuts of similar quantum can be expected in the following quarters as well. Both the actual cut as well as the ex-pectation of further cuts will have a negative impact on the deposit rates that banks offer to investors.

The month of April was also an interesting month for gold – the price of the metal fell dramatically over a few days before recovering moderately. However, even after the recovery, the price of gold is off by more than 8% from the year’s high.

Seen together, these two facts will seem to imply that investor attention should naturally turn towards equity market investing. Will it happen? After all, the market valuation, as indicated by the Price-to-Earnings ratio of the Sensex index, is at a historically moderate level (trailing 17.46 times as we write this). The other side of the argument is that there is a lot of pessimism in the market presently, mainly around the issues of stasis in governance and erosion of investor confidence due to financial scams. Whether or not a bull market will be able to power through these negatives would be interesting to see.

At FundsIndia, we don’t subscribe to making asset allocation calls based on market conditions for long-term investing. However, indications are that the next 9-12 months looks to be a promising period for the equity markets in the country.

Happy Investing!

P.S: At FundsIndia, over the course of the last week of April, we completed a significant technology upgrade to our infrastructure. We are hopeful that this will mitigate some of the performance issues you may have been encountering. Please let us know if you face any issues by writing to [email protected] Thanks!

T h e m o n t h l y n e w s l e t t e r f r o m F u n d s I n d i a

08—May—2013

Volume 5, Issue 05

Inside this issue:

Is i t the turn of equit ies? —Sr ikanth Meenak-

1

The month ahead - Equ ity recommen-dations - B.Krishna Kumar

2

Should you invest in g i l t funds? —Vidya Bala

3

F inancial Planning Educat ion Ser ies

6

Opt imists, Pess i-mists and Mood Swings —Dhirendra Kumar

7

Is it the turn of equities? Srikanth Meenakshi

*Please note: Comprehensive financial planning is a fee based service

http://lp.fundsindia.com/FP/index.html?utm_source=homepage?utm_source=FIEMLcapitalletter


The month of April turned to be an eventful one for the stock and commodity markets. The price of crude oil and gold took a knock in the international markets last month. This has had a positive rub-off on the domestic stock market sentiment. Expectations are that this devel-opment could ease the economic strain, especially on the current account deficit front.

The headline inflation too has displayed signs of easing, which is likely to prop stock market sentiment. It however remains to be seen if the interest cycle takes a downward turn.

The cut in petrol price announced a couple of days ago would also play a part in pulling down the headline inflation. The cause of concern, however, is the consumer price inflation which is still at lofty levels.

In this context, the focus would shift to the progress of the monsoon in the western part of the country. A healthy bout of rainfall would do a world of good to check the spiraling price of food articles.

A look at the automobile sales number for the month of April 2013 has not been encouraging either. The corporate earnings season is under-way and the flow of results till date has been mixed, but broadly, not disappointing.

Technically, the short-term outlook for the Nifty is positive after the recent breakout past the resistance level at 5,970. We however expect a counter-trend fall before the index resumes its uptrend.

The immediate support for the index is at 5,800-5,850 range. Any signs of stability at these levels would present an opportunity to enhance equity exposures..

This month, we cover the outlook for Hindustan Unilever and United Spirits. While both the stock have appreciated sharply in the past few weeks, we are positive on United Spirits and sense lim-ited upside potential for Hindustan Unilever.

Hindustan Unilever has been in the news this week after the company announced a better-than-expected quarterly performance. This was followed by an announcement that the company’s parent – Unilever PLC is coming out with a voluntary open offer to enhance the stake in the Indian arm.

The open offer has been priced at Rs.600 per share, which basically would act as a ceiling for Hindustan Unilever. From the monthly chart of the stock featured below, it is apparent that the stock has bounced off the middle blue line and has managed to hit the upper line, which is a trend barrier.

Unless the stock manages to breakout above the upper blue line, the chances of a significant upside potential is slim. As mentioned earlier, the open offer price of Rs.600 would also act as a impedi-ment to any significant rally.

Investors may therefore pare exposures in Hindu-stan Unilever. Any significant weakness from the current levels may be used to buy the stock. At the prevailing market price, there is little scope for any significant appreciation.

Volume 5, Issue 05

The month ahead - Equity recommendations B. Krishna Kumar


United Spirits on the other hand appears to have significant upside potential from the prevailing levels.

Investors may adopt an SIP kind of approach and gradually accumulate shares in United Spirits. We expect the stock to rally to the immedi-ate target of Rs.2,900. The stop loss for United Spirits may be placed at Rs.1,900.

Mr. B. Krishna Kumar also hosts a weekly webinar that discusses the mar-ket outlook for the following week.

You can register for the webinar by clicking here:

https://www4.gotomeeting.com/register/927617871

Volume 5, Issue 05

Another repo rate cut of 25 basis points by the RBI on Friday and you begin to wonder if the rate cuts can give you a cool ride in gilt funds.

Many of you have evinced interest in investing in long-term gilt funds in recent months and have written to us. Returns as high as 16% show-cased by top funds in this category in the last one year, together with a downward interest rate movement (which typically triggers a bond price rally), does coax you to conclude that this class of funds can return well.

Tactical play

But we have maintained that gilt funds are high risk and are meant only as a tactical play for investors who can track them and book prof-its at the right time. We have, instead, more actively advocated short-term debt funds/income funds for medium to long-term portfolios.

Read on to know why we say that. I am not going to deal with complicated yield curve theories. Let us simply look at past performances to make out how these funds behave.

Before we move to returns, a quick recap on what gilt funds are. Gilt funds seek to invest in government securities (gilts). While these can be short-term securities, a good number are long-term gilts. Income funds, on the other hand, is a broad category that represents funds that invest in a combination of bonds, certificates of deposits, commercial papers, as well as gilts.

These can be short-term or long-term and can be low on credit risk or hold high risks. These funds look for interest income from holding debt instruments till maturity and also look for capital appreciation coming from price rallies in the instruments.

Should you invest in gilt funds? Vidya Bala — Head Mutual Fund Research


Volume 5, Issue 05

Given below is a table of average returns of the above-discussed category. Here, by gilt funds, we mean medium and long-term gilt funds.

The above table amply illustrates that the spurts seen in gilt funds over the short term (of 1 year) are clearly absent in the long term and they tend to behave like a regular bond fund.

For an investor with a long-term time frame, this means that you are not better off holding a gilt fund. While what we have in the table is the median returns, established income funds have, in fact, beaten gilt funds by a decent margin. Moreover, the volatility faced by income funds is much lower than gilt funds.

Just to provide an illustration, take one of the top performing gilt funds – IDFC GSF PF. In early 2009, when there was an unexpected yield move causing gilt prices to fall, the fund actually returned negatively. It fell 8.1% that year after an astounding 33% return the previ-ous year. It may well be that many investors joined the bandwagon after seeing the 2008 returns only to lose money in 2009.

On the contrary, another income fund from the same fund house IDFC SSI Medium Term managed a decent 6% in 2009, after a 16% rally in 2008. The recovery was even better in 2010 with the income fund while this was not the case with the gilt fund.

Negative returns

This trait of negative returns in gilt funds becomes more evident if we look at the rolling one year return of Crisil 10-year gilt index (representing long-term gilt). If we take the period between April 2008-2013, there was a 10% chance that your one-year return would have been negative for investments made on any day. If we roll this over a longer period between 2003-13, the chances of negative returns goes up to 15%. This is not the case if you take the Crisil Composite Bond index, which is the benchmark for most income funds.

If you are an equity investor, here’s a simplistic (although not equivalent) comparison of gilt funds: gilt funds require the kind of skills equity theme funds would need - know when to play them and know when to walk away.

Short-term and income funds are like diversified equity – they have varying risks too but are diversified. Just as a diversified equity fund may go marginally overweight on certain sectors, an income fund may up its stake on gilt at times and corporate bonds in other times based on opportunities. That means you get the best of various options.

If you are a long-term investor, you are better off with tested income funds or short-term debt funds based on your requirement. What you see as returns in gilt today may well not be what you will eventually get.

Median compounded annual returns (%)

Gilt funds Income funds

3 years 8.29 8.57

5 years 8.34 8.43

7 years 7.85 7.86

10 years 6.75 7.04


Volume 5, Issue 05

Outlook

All that said, if you are asking for what the debt market holds from here for those looking for opportunistic returns, this is my take: unlike late 2008 when yields crashed leading to a rally, the gilt yields have gradually moved down with repo rate cuts. A combination of rates cuts (that started in April 2012) and lowering of cash reserve ratio (from January 2012) have led to a falling yield, thus triggering a price rally. The result is what you are seeing in term of high 1-year returns of gilt funds. 10-year gilts have moved from 8.6% to 7.7% currently.

Experts feel that while there would be some scope for yields to soften, the room is limited. That means you cannot expect any extraordi-nary rally in gilt funds. But there still appears enough scope for returns from corporate bonds (currently 8.6) as spreads narrow between corporate bonds and gilt over the course of the next 12 months at least.

That means funds that hold slightly long-dated corporate bonds and even state development loans, besides some gilt may actually benefit more than pure gilt funds. Simply put, you may have to sift through the income fund category to look for specific opportunities.

We shall also do the sifting and present such funds in our future weekly fund reviews.

Vidya Bala is the Head of Mutual Fund Research at FundsIndia. A chartered accountant by training, she was earlier with the Hindu Business Line’s research bureau, tracking mutual funds, stock markets and sectors for eight years. She writes for our monthly newsletter

on topics including mutual fund, personal finance and equity markets. Vidya Bala can be reached at [email protected]

http://www.fundsindia.com/pages/offers/


Benefit Illustration of Asset Allocation

Let us assume that there are two investors – A & B, who have both invested Rs.100 in the year 2000. Investor A invested Rs.100 in an equity based mutual fund in the year 2000 and left it for 12 years without doing anything.

It is to be noted that this investment has seen the ups and downs of market cycles. After a period of 12 years, the investment of Rs. 100 becomes Rs.314.

Before that, the investment of Rs.100 had become Rs.314 in 2007, coming down to Rs.154 in the year 2008 when the market was down. The same investment had become Rs.314 in the year 2012. Hence, we can see that there is no sig-nificant movement in the market return on this investment since 2007 to 2012.

On the other hand, investor B had invested Rs.100 in the asset allocation plan. The asset allocation chosen for the illustra-tion is 60% in Equities, 30% in Debt and 10% in Gold.

If the asset allocation plan was created in the year 2000 and left as it was, then the investment would have become Rs. 365 in a period of 12 years.

The investment of Rs.100 would have become Rs.284 in 2007 when the market was bullish, and the same would have gone down to Rs.215 in 2008 when the market was bearish. Also, the same investment would have gone up to Rs.365 in the year 2012. This shows that the asset allocation plan provides a down side protection to your investments when the market is bearish. There is no significant movement in the market during this period. However, asset allocation works better during this period.

The investment of Rs.60 invested in the Sensex would have increased to Rs.188 and the Rs.30 invested in debt would be-come Rs.106. The Rs.10 invested in gold would go up to Rs.70. The rally on gold in the last few years was very well cap-tured in the asset allocation plan. Hence, we recommend that you invest using the asset allocation plan to see your investments grow faster.

Mr. S. Sridharan is the Head of Financial Planning with FundsIndia. You can reach Mr. Sridharan at [email protected]

Year Sensex G-Sec fund

Gold Value of Rs.100 in-vested in sensex

Equity 60%

Debt 30%

Gold 10%

Value of Rs.100 invested in the AA Plan

2000 -11.52% 13.06% 3.92% 88.48 53.09 33.92 10.39 97.4

2007 41.48% 4.85% 28.57% 314.53 188.72 67.40 25.51 281.63

2008 -49.56% 33.09% 15.74% 158.65 95.19 89.70 29.52 214.41

2012 24.23% 8.02% 12.80% 314.24 188.54 102.1

70.34 361.04

Volume 5, Issue 05

The Benefits of Asset Allocation S.Shridharan —Head - Financial Planning

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Even though the business environment looks as depressed as ever, investors and investment managers seem quite optimistic...

Among investment and business professionals that I meet, the last three weeks have been the beginning of yet another cycle of severe mood swings that started as far back as November 2010. Of course, these mood swings follow the fortunes of the stock markets but lately they have come and gone less on actual externalities and actual justification. Of course, severe mood swings without any justification are sometimes a precursor to some sort of

mental illness. Not to be facetious, but equities are looking decidedly unhinged in some ways.

For one, this so called recovery or green shoots or what have you is about the most narrow even by the standards of the last few years. From the time this year started, the large cap indices--Sensex and Nifty--are about even, having gained back whatever they had lost in the early part of the year. And that's the good news. Mid-sized and small companies are the ones where the bad news is coming from. Since the be-ginning of the year, the BSE Midcap index is down 11 per cent while the BSE Smallcap index is down 19 per cent. And these are the indices themselves--there is a large diversity of stocks within the indices and the worst performing ones are doing very poorly indeed.

Like it has happened more than once since the 2008 crisis, the mood swings do not happen in sequence, the opposing moods are actually held simultaneously. There are two distinct sides to the story today, the (cautiously) optimistic one and the (blatantly) pessimistic one. The pessimists, in whose ranks most businessmen seem to be there, see no great improvement ahead. The root cause of the business crisis in India--issues related to governance, infrastructure, land, cost of funding, energy availability and cost, labour quality and the many more similar things on the list are all there to stay. Here and there, some individual businesses or sectors might be immune to some of them but as a trend, businessmen don't see any great room for optimism. As more and more people seem to be realising, the long term has caught up with us.

However, there are still plenty of optimists out there. But the funny thing is that almost everyone on the happy side of the divide is an in-vestment professional. From mediocre to the best, all the investment managers are optimists today. They see the problems that the busi-nessmen see but almost to a man, they claim that in a year or so, things will start working out and business prospects will be better. Why is this so? Why are investment types so much more optimistic compared to actual businessmen. Your guess is as good as mine but I suppose most of them are professional optimists anyway. That sounds like I'm saying that they are faking it. Some of them surely are but even in the worst of times investment managers are a congenitally optimistic lot. Perhaps only people naturally predisposed to optimism become in-vestment managers.

Moreover, investment types' living will go on quite comfortably if a reasonable trickle of foreign money keeps flowing into a set of stocks, no matter how narrow and overvalued that set gets. Till the music stops, they're all fine. How a broad, secular selection of businesses might do fundamentally seems less of a concern to those who make their living from the markets. If the next cycle is OK, then they're all OK.

The whole thing is like being in the middle of a conversation where many people are speaking simultaneously. I'm thinking of one of those so-called debates on the TV channels, I guess. A lot of people are talking, loudly and incessantly about what they believe in. None of the listeners can make head or tail of what is being said, but then they don't need to. Each one has chosen one side as the right one, and is go-ing to stick to it, come what may.

Syndicated from Value Research Online—Article can be viewed online here—http://www.valueresearchonline.com/story/22846

Volume 5, Issue 05

Wealth India Financial Services Pvt. Ltd., H.M. Centre, Second Floor,

29, Nungambakkam High Road, Nungambakkam,

Chennai - 600 034

Phone: 044-4344 3100 Email: [email protected]

Optimists, Pessimists and Mood Swings By Dhirendra Kumar | May 06, 2013