market money manager
TRANSCRIPT
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The first s tep o f inves ting is to
decide allocation among different
asset classes. Asset allocation is
the most important factor that
determines the performance of a
portfolio. How much you invest in
equity or debt depends on your
stage of l i fe and goals. Once you
have decided the allocation, it is
tim e to s elect pro ducts tha t w o uld
fi t the asset classes you want to
inve st in. To d a y w ith a la rge
p r o d u c t s u i t e a v a i l a b l e t o
investors, this is a point of some
a m ount of confusio n. At an o verall
level , we should consider the
product features, liquidity, costs,
potential risks and tax efficiency
be fore se lec ting the pro duc t.
Anup BagchiM D & CEO
ICICI Securit ies Ltd.
Amongst all the parameters of evaluation, tax efficiency is an
extrem ely im portant a spec t.
Ta x-efficienc y de termines ho w m uch o f a return w e g et to keep a fter
accounting for taxes. Put simply, the net post-tax return. As
investors, our goal should be to maximize the post-tax return of a
po rtfo lio . This ca n be d one throug h se lecting prod ucts tha t are m o re
ta x-efficien t. In g enera l, eq uity-linked prod ucts a re be s t positioned
to provide better post-tax returns over the long run due to their
beneficia l ta x rules .
Keep in m ind, even a sm all a mo unt of tax sa ved to da y ca n m a ke a big
differenc e to our net w orth in the lo ng run. For insta nce , even if w em a na g e to sa ve 15,000 every yea r on taxes, for a perio d of next 25
ye a rs, a nd inves t this am ount, it w ould g row to 16.23 la kh a t 10 per
cent rate o f return. This is the ga in o f o ver 12 la kh o n a n inves tment
o f 3.75 la kh (15,000 X 25 yea rs).
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1ICICIdirect M oney Manager November 2014
Further, when it comes to saving taxes, we realize that certain
deductions and benefits are well known, while others are not. It is
im po rta nt to be co nversa nt w ith tax la w s a nd fully utilize the be nefits
available to us. Our experience is that health insurance tax limitsunder section 80D a re rarely fully us ed a nd thes e a re o ver and a bo ve
1.50 la kh that w e g et under sec tio n 80C. One ca n sa ve m a xim um
up to 40,000 unde r se ction 80D, if a ss es ee and pa rents , bo th a re
se nio r citizens (a bo ve a g e 60 ye a rs).
Even the ta x d ed uctio ns a va ila b le und er section 80C a re ra rely fully
used b y m os t of us. If w e d o so , w e ca n build a siza ble co rpus to m eet
our g oa ls. If w e con sid er tha t a taxpa ye r is sa ving 1.50 la kh per ye a rund er se ctio n 80C in ta x-sa ving ins trum ents from the a g e o f 30 till
the retirem ent a g e o f 60, a nd a ss uming 8 per cent rate o f return, this
a m o unt w ill g row to 1.77 crore. This is the ma g ic of co m po unding .
And if w e m a ke proper as se t alloca tio n a m ong d ifferent ta x-sa ving
prod ucts, the corpus c an g row even b ig g er.
Altho ug h tax-efficiency is im po rta nt, the inves tment dec is ion should
no t be so lely b a se d o n it . Our investm ents sho uld g o b eyo nd just ta xsa ving a nd s ho uld focus m ore o n fulfilling g oa ls.
Last, but not the least, we are in a growing nation with further
po tentia l for a long fores ee a b le future. Therefo re, w e m ust ta ke full
advantage of that and participate and ride the growth through
eq uities , either d irec tly o r throug h o ther ind irec t route o f inves tme nt
products.Investing in equity-related instruments (ELSS) is a good
o ptio n to crea te w ea lth in the lo ng run. With its lo ck-in pe riod o f three
ye a rs, it a llow s us to ride out the inherent vo la tility in the m a rkets a nd
rema in inves ted for the lo ng term. And the ta x bene fit it provide s is
the a dd itio na l cream o n the pie.
Our m es sa g e rema ins the s a m e - 'Keep investing a nd sta y invested
for yo ur life g oa ls'. Throug h this m a g a zine a nd o ur w eb site
w w w.icicidirect .com w e w a nt to ma ke a n ea rnest a t tem pt to partner
w ith yo u in se tting a nd a chieving yo ur fina ncia l g o a ls. Do w a lk into
a ny o f yo ur Neig hbourho o d Fina ncia l S uperstore a nd ta lk to us.
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When it com es to inves ting , mo st o f us kno w tha t it is im po rta nt to
look at the real rate of return. Real return is how much our
inves tments ha ve g ro w n o ver infla tio n. The returns a lso need to
be a d justed for ta x to und ersta nd the rea l return in ha nd . Whilethe a ss et cla ss es (eq uity, deb t, etc.) define the rea l returns m o st o f
the tim es , it is the prod uct cho ice , in the s pec ific a ss et cla ss , that
defines the ta x efficiency.
We m ust facto r in the ta x im plica tio ns o f ea ch prod uct, ba se d o n
our personal situations, in order to know what returns we are
likely to g et in. Ta x la w s a nd im plica tio ns kee p c ha ng ing . To help
you get the updated information, we, in our cover story of this
ed itio n, list va rio us investm ents a cros s a ss et cla ss es , in the lig ht
o f tax implica tio ns .
The ed itio n a lso o ffers co m prehens ive informa tio n a nd a na lys is
on ELSS, tax-saving mutual funds, which are best option for
sa ving taxe s a s w ell a s c rea ting w ea lth in the lo ng run. All in a ll,
this issue is a w holeso me tax planning packa g e, w hich w e ho pe,will help you plan your taxes more efficiently and in sync with
yo ur fina ncia l g o a ls.
I would also like to draw your attention to our interview, with
Pankaj Murarka, Head Equity, Axis Mutual Fund, who advises
inves tors to rem a in focus ed o n their lo ng -term a ss et a llo ca tio n.
Further, if yo u w ish to g et cla rity o n d ifferent a spec ts o f perso na l
fina nce o r any o ther m o ney m a tter thro ug h Ask o ur Pla nner, yo u
m a y w rite to us a t mo ney m a nag er @ icicisecurit ies.co m . So rea d
on, stay updated and involved. Do write in with your feedback
a nd sha re yo ur thoughts.
Editor &Pub lisher : Abh isha ke Math ur, CFA
Coordina ting Editor : Yog ita Kha tri
Editoria l Board : Sam eer Chavan , CWM , Panka j Pandey
CMEd ito ria l Te am : Aze em Ahm a d, Nithy a kum a r VP CFP , Nitin Kunte , S a chin J a in,
Sheetal Ashar
ICICIdirect M oney Manager November 2014
Your ma g a zine is no w also a vailab le o n w w w.ma gzter.com , a
dig ital new ssta nd.
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M D Desk ...............................................................................................1
Editorial................................................................................................2
Contents.............................................................................................. .3
News.................................................................................................. .4
M arkets Round-up & Outlook .................................................................. 5
Gett ing Technical w ith Dharmesh Shah................................................... 8
Derivatives Strategy by Amit Gupta.......................................................10
Stoc k Ideas: SKF India and L&T .............................................................. 15
Flavour of t he M onth: Tax implications of various investmentsHere w e take yo u throug h the vario us a venues o f investm ents
a cros s a ss et cla ss es , in the lig ht of ta x im plica tions .... . .. . .. . .. . .. . .21
Tte--tte: 'Remain focused on long-term asset allocation'
An inte rview w ith Pa nka j Murarka , Hea d Eq uity, Axis Mutua l
Fund ..............................................................................................34
Ask Our Planner: Sw itching your investment options
Your perso na l fina nce q ueries a ns w ered .... . .. . .. . .. . .. . .. . .. . .. . .. . .. . .. . .36
M utual Fund Analysis: Category - ELSS
Here w e a na lys e to p-performing ELS S funds , w hich a re b es t
o ption fo r sa ving taxes a s w ell a s c rea ting w ea lth in the long
run .................................................................................................40
Equity M odel Portfolio..........................................................................47
M utual Fund Top PicksHere w e present o ur rese a rch tea m 's to p m utual fund
reco mm enda tions, ac ros s eq uity a nd deb t ca tego ries . .. .. .. .. .. .. .52
Quiz Time............................................................................................54
Monthly Trends....................................................................................55
Premium Education Programmes Schedule.............................................58
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4ICICIdirect M oney Manager
No PAN requirement for investment in Kisan Vikas Patra
The Fina nce Minis ter Arun J a itley a nd Comm unica tion Minis ter Ra viS ha nka r Pra sa d relaunched Kisa n Vika s Pa tra (KVP) sc heme. The
Finance Ministry has said that there will not be requirement ofPermanent Account Number or PAN in putting money in relaunchedKVP. It w ill be a va ila ble to the inves tors in the denom ina tion o f Rs . 1000,Rs 5,000, Rs 10,000 and Rs 50,000, w ith no uppe r ceiling on inves tment.The inves tme nt m a de in the ce rtifica te w ill double in 100 mo nths.
Courtesy: The Hindu Business Line
Maintaining a bullish stance on Indian equities, foreign investorsincreas ed their exposure in BS E Se nsex co m pa nies to a n a ll-tim e hig hof 27 per cent in the September quarter, says a report. FII stake inS ens ex co m pa nies ha s b een rising co ntinuously since 2009, the g lob a lfina nc ia l se rvices m a jo r Bank o f Am erica Merrill Lynch s a id in a res ea rchno te, a dd ing the FII sta ke s too d a t an a ll-tim e pea k o f 27 per cent a s o fS eptem ber 30. As o f J une 2014, FIIs co llec tive ly held a round 22.5 percen t of the m a rket a nd a round 46 per cent o f the free flo a t.
Courtesy: The Indian Express
FII stake in Sensex companies hits all-time peak of 27 pct : BofA-M L
Abo ut 80 per cent o f respo nde nts, rea d pa rents, w ho pa rticipa ted in thea nnua l ING Zing survey, sa id they be lieved tha t their child ren follow edtheir m oney ha bits. Even more disc erning is the fa ct that child ren tendto pick parents' spending habits marginally more than their savingha bits, at lea st a m ong those w ho e a rn a bo ve Rs 8 la khs a nnually. Thestudy a lso ob serves tha t as y our inco m e levels g o up, children tend to
develop spending habits more while parents' tend to shore up theirsa vings hab its.
Courtesy: Business Standard
Children mimic parent's money habits, spending event more: ING survey
Negative growth rates in major sectors such as engineering, pharma,g em s a nd jew ellery, an d pe troleum prod ucts sa w the co untry's o verallmerchandise exports shrink 5.04% in October. India's exports haveplunged into the negative zone after a gap of six months. An exportcontraction was last witnessed in March when it fell 3.15%. Coupledwith the largely unexpected decline in exports, a surge in imports ofg o ld kept the trad e d eficit at $13.35 billion in Octo ber a g a ins t the $10.59billion a ye a r ea rlier. The deficit w a s tha nkfully a bit low er tha n tha t inS eptem be r w hen it sto od a t a n 18-m on th hig h o f $14.24 billion.
Courtesy: The Financial Express
October exports shrink 5% after a gap of six months
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M ARKETS ROUND-UP
M arkets to take cues from reforms and CPI data asQ2 season comes to end
October month was a ta le oftwo halves with the first half
showing weakness while the
s e c o n d h a l f s a w a s h a r p
recovery with global
commodity prices correcting
sharply and an improvement
in global cues. A drop in
m a n u f a c t u r i n g P M I
(Purchasing Managers' Index)
on a month-on-month (MoM)
basis coupled with muted
g lo ba l cues led to the slug g ish
start to the month. Lower
indus tria l pro ductio n d a ta a lso
de nted the m a rket co nfid ence .
The c o ns um er price inde x
(CPI) for September 2014
cooled off to 6.5% vis--vis
7.8% in August 2014 (the
lowest value in the last 22m o nths). The WPI (w ho les a le
price index) was also lower
a nd c a m e a t its five-ye a r lo w o f
2.4%. The decline in both CPI
and WPI was cheered by the
markets as expectations of a
policy rate cut by the ReserveBank of India (RBI) in its next
monetary policy in the first
w eek of Decem ber resurfa ced
a g a in. The sentim ents a lso
im pro ved in the se co nd ha lf ofthe month on the back of a
drastic decline in crude oil
price s to ~ $85/b a rrel a nd
po sitive cues fro m a ro und the
globe at the fag end of the
month as Bank of Japan's
M o n e t a r y P o l i c y B o a r dunexpected ly d ecide d to raise
t h e m o n e t a r y b a s e a t a n
a nnua l pa ce o f abo ut 80 trillio n
Yen.
The Q2 ea rning s se a so n in
October also influenced theperformance of the markets.
The ba nking se cto r co ntinued
to sho w a n im prove m ent in the
operational performance with
bo th priva te a nd public s ecto r
banks improving sequentially.
C o n s u m e r d i s c r e t i o n a r ystocks continued to show an
improvement in operational
performance, especially the
auto sector, which showed
p o s i t i v e e a r n i n g s l e d b y
volume growth on improved
s e n t im e n t s a n d f e s t i v ed em a nd . The FMCG (fas t
m o v i n g c o n s u m e r g o o d s )
s e g m e n t , h o w e v e r ,
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M ARKETS ROUND-UP
d i s a p p o i n t e d a s v o l u m e
growths continued to remain
low. The IT ( Informat ion
Te c h n o lo g y ) p a c k h a d adisa ppointing ea rning s sea so n
mainly driven by an
unfa vo ura ble currency im pa ct.
Pharmaceut ica l companies ,
on the other hand , ha d a m ixed
ba g w ith a po sit ive b ia s.
The g lo ba l m a rkets ha ve b een
driven by contrasting news
flows across the globe. Post
the disappointing industrial
output da ta from G erm a ny, the
German government had cut
the growth estimate for thisyea r a s w ell a s the next yea r to
1.2% and 1.3%, respectively.
The m a rket sentim ent further
deter iora ted as the
International Monetary Fund
(IMF) cut its g lo ba l g row th
forecast to 3.3% from 3.4%,the third such revision in the
yea r. The decline in c rude o il
continued unabated in the
month c lear ly highl ight ing
g ro w th co ncerns. The m a rket
sentiment, however, received
a boost as the Federal OpenMarket Committee (FOMC)
m e e t i n g e n d e d w i t h t h e
minutes revealing the dovish
sta nce o f the Fed o n the po licy
rate front, even as the
Q u a n t i t a t i v e E a s i n g ( Q E )
prog ra m me ende d. At the endof the month, the Bank of
J apa n unexpectedly surprised
the markets with a spurt of
mo netary ea sing.
D u r i n g t h e m o n t h , c r u d e
(Brent) continued the decline
a nd end ed a t ~ $85/ba rrel. The
t r e n d c o n t i n u e d i n e a r l y
November as well, with crude
reaching the lo w s o f $81.
The US m a rkets c o ntinued to
trade with a negative biasthrough the month but ended
w ith a strong po sitive b ia s po st
the announcement from the
Ba nk o f J a pa n. Ma jo r indices ,
Dow J o nes , S &P 500 a nd the
Nasdaq gained about 1.9%,
2% and 2.8%, respectively.
European markets, however,
rem a ined w ea k de spite the la te
surg e in the ind ices in the la st
tw o se ss io ns w hile the FTS E
lo st 2.8%. The G erm a n Da x
a nd French CAC lo st 3.3% a nd
5 % , r e s p e c t i v e l y . A s i a n
m a rkets, a lso g a ined in the la st
two sess ions to end on a
po s itive no te w ith the Nikkei
Global markets
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M ARKETS ROUND-UP
and Shanghai SSEC gaining
0.6% and 2.6%, respectively,
w hile the Hang S eng posted a
g a in o f 3.3%.
T h e f o r e i g n i n s t i t u t i o n a l
investors (FIIs) continued to
rema in net b uye rs in the Ind ia n
m a rkets a lthough the pa ce ha s
cons iderab ly s lowed downove r the past co uple o f mo nths
a n d the ne t b uy fig ure w a s ~
900 crore while domest ic
institutional investors (DIIs)
heavily bought to the tune of
~ 5,700 crore led by s trong
i n f l o w s i n t o m u t u a l f u n dschemes.
The Nifty a nd S ense x end ed
firmly in the positive territory
for the month wi th mos t
sectoral indices also ending
the m o nth in the g reen. Except
BSE Realty (-1.8%) and BSE
FMCG (-1.8%), a ll othe r ind ice s
ended October on a s trong
no te. BS E Ba nkex, BS E Pow er,
BSE PSU, BSE Auto and BSE
Oil sa w sha rp g a ins o f 10.7%,
9.5%, 7.2%, 4.7% and 4%,
respec tive ly, w hile BS E IT a nd
BSE Healthcare ended the
m o nth fla t.
Domestic markets
Outlook: Post Q2 numbers, focus
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shifts to government reforms and
RBI policy
As the earning season comes
t o a n e n d w i t h o u t m u c h
surprise (neg a tive o r positive),
the markets will eagerly look
towards government reforms
as well as the RBI's policy
stance (next policy meet on
e c e m b e r 2 ) . I n o r d e r t o
exped ite the reforms pro ces s,
the Mod i g o vernm ent initia ted
the much awaited portfolio
e x p a n s i o n b y i n d u c t i n g
t e c h n o c r a t s a n d c a d r e
workers in the Cabinet. After
the clear mandate for the BJPin Harya na a nd the eme rg ence
a s t h e l a r g e s t p a r t y i n
Maharashtra, this expansion
will be construed as a step in
the rig ht d irectio n a nd is likely
to b e chee red by the ma rkets.
F a l l i n g c r u d e p r i c e s a n dimproving CPI numbers are
likely to add to the buoyancy
w i t h h o p e s o f d o v i s h
comments by the RBI in its
next pol icy meet . In this
scenario, markets are likely to
pa y les s a ttentio n to the g lo ba lc u e s a n d f o c u s o n t h e
do m es tic situatio n.
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TECHNICAL OUTLOOK
Bulls reign supreme; index eyeing 28800
Benchmark indices overcame
huge bouts of volatility amid
weak global cues owing to
worries about global growth
and the end of years of US
s t imulus . Af te r d i sp lay ing
resilience in the face of a
volatile global environment,
m a r k e t s e n t i m e n t s w e r e
boosted by reform measures
announced b y the go vernmenta nd a stro ng verdict in the state
a s s e m b ly e le c t io n s . Th e
b e n c h m a r k s ( S e n s e x a n d
Nifty) staged a firm rebound
precise ly fro m the clo se to o ur
earmarked support zone of
26,000/7,800 leve ls a nd surg edto new a ll-tim e h ig hs in line
w ith our expecta tio n.
The d a sh tow a rds new a ll-tim e
highs after one month
corrective phase signals
r e s u m p t i o n o f u p w a r d
mo m entum a fter a brief pause.G o i n g f o r w a r d w e e x p e c t
benchmarks to remain in a
r is ing t ra jectory and head
to w a rds 28,800/8,650 leve ls
o ver the m ed ium -term. TheO c t o b e r 2 0 1 4 l o w o f
25,910/7,723 w ill a ct a s a key
shor t - t e rm base for the
markets.
The dec line unfo ld ing s ince
hitting the September 2014
high o f 27,354/8,180 disp la yedall the signs of a healthy
corrective decline within an
established uptrend and re-
affirmed the overall positive
p r i c e s t r u c t u r e a s i n d e x
retra ced its 25-se ss io n d ec line
in just 8 tra d ing se ss io ns .
The reso lutio n pa st S eptem ber
2014 highs opens target of
28,800/8,650 be ing the depth
of the September correction
(27,354-25,910) as projected
above September 2014 highs
ove r a m ed ium term .
Sectorally, the banking index
resumed its leadership role
a nd ven tured into n ew a ll-tim e
h i g h s a h e a d o f t h e
b e n c h m a r k s . W e e x p e c t
b a n k i n g t o l e a d t h e
benchmarks, going forward.
The a uto a nd ca pital g oo ds
sectors are also expected to
outperform in the coming
month.
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2976 pts
3098 pts
21
w eek EM A
Extended rally measuring
3244 pts so far
9ICICIdirect M oney Manager
TECHNICAL OUTLOOK
BSE Sensex Weekly Candlestic k Chart
S ource: Bloo m berg, ICICIdirect.com Rese a rch
The view s express ed in the article a re perso na l view s o f the author a nd d o no t neces sa rily
represe nt the v iew s o f ICICI S ecurities .
Weekly RSI tested its own
rising trend line support
along w ith price ap proa ching
its key support of 26000levels a nd produced a strong
pullback indicating strength
in the up mo ve
November 2014
Index concluded a month long
corrective phase and signalled
r e s u m p t i o n o f u p w a r d
momentum by recouping its last
falling se g m ent in fa ste r tim e. We
expect the index to remain in
r i s i n g t r a j e c t o r y a n d h e a d
towards 28800 over the mediumterm
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10ICICIdirect M oney Manager
DERIVATIVES STRATEGY
Nif ty to move tow ards highest call base of 8500
Amit Gupta
Head - Derivat ives Research,ICICI Securit ies
Nifty recovered sharply in the
second half of the October
series and is currently tradingclose to 8400 levels. At the
sa me tim e, strong g lob a l cues
co upled w ith susta ined foreig n
institutional investors' (FII)
interest in the equities also
helped Nifty to sca le ne w hig hs
a nd Nifty is likely to hit ta rge t o f
8500.
Open interest in Nifty futures
has risen to 1-year high and it
a lm o st tes ted 25 m illio n sha res
during the series. FIIs have
bo ug ht m o re tha n 11,000crore since October 17 when
Nifty made the low of 7730.
Lo o king a t the significa nt b uild-
up of positions, a round of
profit bo o king ca nno t be ruled
o ut. How ev er, Nifty is likely to
find b uying s upport o nce a g a innea r its prev io us h ig hs o f 8200
which also coincides with the
hig hes t Put o pen interest b a se .
On h ig he r side , 8500 ca ll s trike
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h a s s e e n c o n t i n u o u saccumulation, which remains
the ta rg et.
November 2014
Option open interest of November Series
0
50000
100000
150000
200000
250000
7800 7900 8000 8100 8200 8300 8400 8500 8600 8700 8800
OI(No.
ofContracts)
Put OI Cal l OI
Bank Ni f ty: l ikely to move
to w a rds ta rget o f 17500/17800
The Ba nk Nifty w a s the key
ca talyst in the current up -leg o fthe Nifty. Pos t the co o l-o ff see n
in consumer price index (CPI)
and wholesale price index
(WPI) read ings the index
roc ke ted 1400+ po in t s to
16600 leve ls .
The b a nking spa ce a lso g o t a
push from bond yields. Yields
cam e d ow n to a 13-mo nth low
of 8.32 (10-year government
security (G -S ec )).
With m o st priva te sec tor ba nks
reporting stronger net interestmargins (NIMs) and profit
marg ins , there i s a c lea r
preference for private sector
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DERIVATIVES STRATEGY
November 2014
b a n k s o v e r p u b l i c s e c t o r
ba nks. This bo des w ell for the
banking index , a s p r iva te
banks have more than three-f o u r t h w e i g h t a g e i n t h e
ba nking ind ex.
S ince the e lec tio n ve rd ict, this
space has been re l a t ive ly
under-owned. Until recently,
mo st stocks w ere s trugg ling totake out their election verdict
highs. Sticky inflation was one
of the key reasons for this.
However, as inflation cooled-
off sharply during the month
co upled w ith a w ea k se t of Q2
n u m b e r s f r o m t e c h n o l o g ymajors, banking stocks are
back in favour. Banking stocks
are likely to move up in the
com ing m onth w hile the s hort
open interest (OI) in many of
the stocks is still high and is
seeing a rollover of these
positions into the November
series.
Looking at the options build
up, the highest Cal l base
remains the target for the
index, which is a t 17500follo w ed by 18000 strike. On
the lower side, support is
pla ce d a t 16000 levels, w hich is
the hig hest Put ba se.
0
0.05
0.1
0.15
0.2
0.25
0.3
0.35
0.4
0.45
0.5
15500
15700
15900
16100
16300
16500
16700
16900
17100
17300
17500
Cal l OI Pu t OI
India VIX: Likely to consolidate
a bo ve 10.5 a s g eo -po litica l a nd
economic risks stay elevatedglobally
O n e x p e c t e d l i n e s , I n d i a
Vo la tility Ind ex (VIX) sa w a
jum p o f 30% to 17 levels a s the
Nifty fell on the back of weak
g lob al cues. How ever, tow ardsthe month end, as markets
reco vered, the fea r g a uge a lso
cooled-off.
Going ahead, as geo-political
risks and global market jitters
remain alive, the VIX could
r e m a i n h i g h e r a b o v e i t s
extrao rd ina ry lo w leve ls o f 10.5
se en in S eptem be r.
On a po sitio na l ba sis, the 50 &
100 w eek m o ving a verag e is a t
18.2. This level is likely to be
tested o nly in the eve nt of the
Nifty rea ch ing 7800.
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DERIVATIVES STRATEGY
November 2014
S&P 500: Current momentum likelyto continue above 1980 levels
After witnessing the worst
se lling press ure o f la st 3 yea rswhich eroded almost 10%
value, the recovery was even
m o re prom inent a s S &P 500
surpas sed its hig hes t Ca ll ba se
o f 2000 strike to m a ke a new life
high. We expect the current
momentum is unlikely to fadeo ut until S &P m o ve below 1980
levels o nce a g a in.
Even fo r co m ing up Decem be r
series, the highest Call option
base is placed at Call 2000
s t r i k e a l o n g w i t h t h e
n o t e w o r t h y P u t b a s e . W eexpec t S &P to co ntinue its
momentum on the back of
stuck up Call writers. Only a
move below 1980 levels is
likely to change the ongoing
trend.
Unlike the previo us pull ba cks,
S &P 500 Ind ex ha s fo und
suppo rt of sm a ll-ca p s tocks a s
w e l l s u g g e s t i n g b r o a d e r
pa rticipa tio n in the m o ve.
Russell 2000 Index has erased
all of its declines in the recent
bounce back, which was not
seen previous pull backs as
R u s s e l l I n d e x h a s u n d e r
pe rformed S &P500.
S &P has sho w n tendency of
moving towards its 50-DMA
(displa ced m o ving a verag e) inca se o f any interm ed ia te pro fit
bo o king . Currently 50 DMA for
S &P is pla ce d nea r 1980 levels
w hich m a kes it buying leve l o n
declines.
S&P500 options open interest for December Series
0
20000
40000
60000
80000
100000
120000
140000
160000
1940
1950
1960
1980
2000
2020
2040
2050
2075
2090
2100
Cal l OI Pu t OI
Dax: Immediate support is placed at 9200
The G erma n Inde x, Dax, ha s
underperformed most of itspee rs a s it is still tra d ing belo w
its b rea kdo w n levels o f 9600.
Despi te a thousand points
recovery, under-performance
can largely be attributed to
w e a ke n i n g c u r r e n c y o fEurozone.
Th e h i g h e s t P u t b a s e o f
G erma n Ind ex is p la ced a t 9000
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DERIVATIVES STRATEGY
November 2014
strike for December series
w hich is likely to rem a in c rucia l
support for the index in the
near term. At the same time,Call base is placed evenly
above 9500 strike. Hence a
m ove a bo ve 9500 m ay induce
fres h m o m entum in the DAX.
Importantly, both 100 and 200
DMA levels for German Indexare placed in the vicinity of
9 5 0 0 s t r i k e i n d i c a t i n g
immediate resistance for the
index. Hence, fresh upward
bias is expected if DAX is able
to sus tain ab o ve these levels.
Unl ike the res t o f equi ty
markets, volatility index for
G erma n Ind ex is s till a t hig her
at 16.5. US VIX is near 12.7
w hile Ind ia Vo la tility Ind ex is
ne a r 14 leve ls . Hig he r vo la tility
i n d e x i n D A X i n d i c a t e sprevailing skepticism in the
G erma n m arkets.
DAX option open interest for Decem ber Series
0
10000
20000
30000
40000
50000
60000
8900
9000
9100
9200
9300
9400
9500
9600
9700
9800
Dollar Index:Likely to surpass 2008
highs tow ards our immediate target
of 90
As expected, Dollar Index did
not m ove below 84 levels a nd
r e s u m e i t s u p w a r d t r e n d
t o w a r d s s u r p a s s i n g i t s
previous highs. Along with
s t r e n g t h i n d o l l a r ,
simultaneous selling pressurein the US Bonds suggests
money f low from safer assets
t o r is ky a s s e t s d u e t o
e x p e c t a t i o n s o f s u s t a i n e d
liq uid ity flo w.
The Do lla r Ind ex in the la s tcouple of months has moved
up sharply and posted the
highest quarterly gains since
2008. The prim a ry m o ve fro m
80 to 85 in Dollar Index was
trig g ered b y w ea kness in Euro .
S ta tements f rom European
Central Bank (ECB) hinted at
further expansion of balance
she et, w hich trig g ered a no ther
round of weakness in Euro
currency. We expect Euro to
remain weak and test 2010lo w s o f 120 in da ys to co m e. At
the sa m e tim e, co upling effect
was observed f rom Japanese
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DERIVATIVES STRATEGY
November 2014
Yen, which is at the highest
levels s ince 2008.
Both Euro a nd J apa nese Yen
cumulatively holds more than
70% w eigh t in the Do lla r ind ex,
given the weakness in the
major currencies, we expect
Do lla r ind ex to surpass its 2008
h i g h s o f 8 9 . 5 a n d m o v e
tow a rds 90 in the nea r term .
Brent Crude: Dow nsides likely toextend for t arget of 78/75 levels
As expected, Crude failed to
w i t n e s s a n y m e a n i n g f u l
reco very a nd hovered ne a r 80
levels for most part of the last
m o nth. The Put ba se pla ced a t
85 s t r ike remained major
hurdle fo r Crude a nd it failed to
susta in ab o ve these levels.
As per U.S . CFTC (Co m m o dity
Futures Trad ing Co m m iss io n)
data, net long positions in
Brent Crude have declined
sharply to 60,000 contracts
fro m 240,000 co ntrac ts s ee n in
the J une se ries . The currenttrend of long liquidation is
likely to continue in the Brent
and declines are likely to get
extended.
Alo ng w ith spec ula tors, Hed g e
position holders for Brent are
still bearish as almost 39%
posi t ions a re s t i l l hedged
a g a inst further de cline. De spite
Crude trad ing nea r 4 yea r lo w s,
s u c h a h i g h h e d g i n g
p e r c e n t a g e i n d i c a t e s
skepticism prevailing for thecrude prices.
Recent declines have forced
crude to breach its three-year
consolidation range. It may
eventually find support at its
J uly 2010 brea ko ut levels o f
$78. Hence, our downsidepositional target in Brent is at
$78.
Crude option open interest for December Series
0
4000
8000
12000
77
78
79
80
81
82
83
84
85
86
87
Cal l OI Pu t OI
The view s express ed in the article a re perso na l view s o f the author a nd d o no t neces sa rily
represe nt the v iew s o f ICICI S ecurities .
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STOCK IDEAS
SKF India: Leader in the Bearings space
ICICIdirect M oney Manager
Company Background
Incorporated in 1961, S KF Ind iais the Indian subsidiary of the
Sweden based SKF Group,
which is a global leader in
b e a r i n g s , s e a l s a n d
m e c h a t ro n ic s & lu b ric a t io n
sy stem s. The com pa ny is a
leader in the Indian bearingm a rke t w ith ~ 28% m a rke t
share. SKF is well-diversified
across the automotive (54% of
revenues including exports,
which are manufactured in
India) and industrial segment
(46% of revenues, which aremainly imported from SKF
Group companies) as well as
S K F Te c h n o l o g i e s ( t h e
sub s id ia ry o f the pa rent). In the
a utom otive se g ment, SKF India
ca ters to bo th tw o -w heelers a s
we l l as four-whee lers (PV
( p a s s e n g e r v e h i c l e s ) , C V(co mmercia l vehicles ), tra cto rs,
etc.) of which two-thirds come
f r o m o r i g i n a l e q u i p m e n t
m a n u f a c t u r e r ( O E M ) a n d
r e m a i n i n g f r o m t h e
repla ce ment m a rkets . S KF Ind ia
ca ters to a lm os t all a utom otiveOEMs in Ind ia such a s Ta ta
Moto rs, Hero MotoCo rp, HMS I,
Maruti, Bajaj Auto, Mahindra &
Mahind ra, TVS , Bo sch, etc . In
the industrial segment, SKF
India supplies to all majorindustries like heavy industries
such as s tee l , mining e tc ,
a g r i c u l t u r e , p o w e r , c a p i t a l
go ods , o il & ga s and food &
b e v e r a g e (F &B ) . W i t h i n
indus tria l, ~ 65% pertains to
aftermarket and 35% to OEMs.Its clientele includes: heavy
industries: SAIL, Coal India,
J S W, Essa r, Ta ta S teel; energ y:
NTP C, Ta ta Po w er, S uzlo n;
industrial machinery: Bhel, GE,
L&T; o il &g a s : Relia nc e, ONG C,
Ca irn India ; F&B: Nes tl, ITC,
Pepsi. SKF India has threemanufacturing facilities: Pune,
Ha ridw ar a nd Ba nga lore.
Leading bearing manufacturer w ithequal presence in industrial & auto
SKF is the leader in the Indianbearing market (pegged at
8,000-8,500 crore) w ith ~ 28%
share. Known for deep groove
ba ll be a ring s (forming ~ 35% of
revenues a nd ~ 45% ma rket
share), SKF is equally present
across the industrial (46% of
s a l e s ) a n d a u t o m o t i v e
s e g m e n t s ( 5 4 % o f s a l e s
i n c l u d i n g e x p o r t s ) . W i t h
expected industrial revival and
Investment Rationale
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STOCK IDEAS
ICICIdirect M oney Manager
up-tick in auto demand going
ahead, SKF is well poised to
capture the opportunity given
its strong balance sheet withc a s h f l o w g e n e r a t i o n a n d
s c a l a b i l i t y b a n d w i d t h . W e
expect revenues to grow at
13.3% compounded annual
g row th ra te (CAG R) over CY13-
16E to 3,266 cro re.
Early signs of recovery seen in auto,SKF to be key benef ic iary
For year-to-date (YTD) Cy14,
the auto sector has show n sig ns
o f re c o v e ry w it h ~ 12. 3%
growth (mainly driven by two
w h e e l e r s e g m e n t g r o w t h ,
which was up 16.3% year-on-year (YoY)). With the auto
indus try fina lly s how ing sig ns of
reco very a fter nea rly tw o y ea rs
o f a d e m a n d s l u m p , n e w
la unches a nd prod uct refreshes
a re the key, go ing a hea d . S KF,
be ing the l a rges t bear ings
player in the industry,
c o m m a n d s s c a la b i l i t y
bandwidth coupled with a lean
ba lance sheet a nd is po ised to
ca pture the o ppo rtunity a rising
from the revival in demand in
the automotive segment. We
expect SKF's manufacturedproduct (auto) sales to exhibit
~ 14.6% CAG R ove r CY13-16E,
in line with overall auto growth
assumptions.
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Localisation of industrial bearing toboost margins & market share
Industrial bearings (46% of
revenue s) a re so urced from thep a r e n t (~ 9 0 %) a n d S KFTe c h n o lo g ie s . We e x p e c timpo rt sub s titution o f indus tria lbearings, through ramp up inS KF Tec hno log ies , to be a keyr e v e n u e d r i v e r f o r S K F ' sr e v e n u e s a n d m a r g i ne x p a n s i o n a s S K F w o u l dimprove its turnaround timewhile the resultant cost savingwould lead to market shareg a ins. Conse q uently, w e expectindustrial (traded goods) salesto grow at 11.6% CAGR over
CY13-16E w ith ove ra ll EBITDAma rgins reco vering to 13.7% inCY16E vs . 11.5% in Cy13.
Premium valuat ions dr iven bygrow th prospects ahead
SKF is trading at 20.8x CY16EEPS. Given SKF's leadership
position in the bearing space,strong earnings growth (CAGRof 24% in CY13-16E), healthyba la nce sheet w ith rob ust cas hflow ge nera tion ( 680 croreover CY14E-16E) and corereturn o n eq uity (RoE) in exce sso f 30%, w e a s crib e a P /Emultiple o f 24x (implying a PEG(Price /Earnings to G row th) o f1x) on CY16E EPS . Hence , w eassign a target price of1,448/sha re w ith a BUY ra ting .
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STOCK IDEAS
ICICIdirect M oney Manager
Key risks inc lude:J apa nese co mpetit ion w hich ma y thw art ma rket share,S ustained slow do w n in key s eg m ent, Ra w m a teria l co st rise , Dela y in
S KF Techno log ies ra m p up ma y d ela y loca lisa tion process a nd Forex
Risk impa ct o n fina ncia l performa nce .
(EBITDA:Earnings before interest, taxes, depreciation, and amortization; EPS:Earnings per sha re; P/E:Price -to -ea rning s; EV:Enterprise va lue; RoNW:Returnon net worth; RoCE: Return on Capital Employed; FII: Foreign InstitutionalInvestors; DII:Do m es tic Ins titutio na l Inves tors)
Key Financials
Valuations Summary
Stock Data
November 2014
Net s ales ( cro re) 2,246.4 2,446.8 2,802.4 3,266.5
EBITDA ( crore) 261.4 318.9 376.2 453.1
Net pro fit ( cro re) 166.7 223.4 263.6 318
CY13 CY14E CY15E CY16E
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`EPS ( ) 31.6 42.4 50 60.3
P/E (x) 39.7 29.6 25.1 20.8
Ta rg et P/E (x) 45.8 34.2 28.9 24
EV /EBITDA (x) 23.9 19.2 16 12.9
P/BV (x) 5.2 4.7 4.2 3.7
Ro NW (%) 13 15.9 16.7 17.6
Ro CE (%) 16.6 18.9 20.2 21.7
CY13 CY14E CY15E CY16E
Ma rket ca pita liza tion ( cro re) 6,620
To ta l debt (CY13) ( crore) 0
Ca sh a nd inves tm ents (CY13) ( crore) 376
Enterprise va lue ( crore) 6,244
52-w eek Hig h/Lo w ( ) 1,248/511
Eq uity ca pita l ( crore) 52.7
Fa ce va lue ( ) 10
FII ho ld ing (%) 15.5
DII ho ld ing (%) 17.1
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STOCK IDEAS
ICICIdirect M oney Manager
L&T: Best w ay to capture capex recovery cycle
Company Background
Investment Rationale
After being incorporated in1938, La rsen & To ubro (L&T)h a s c o m e a l o n g w a y t ob e c o m e I n d i a 's l a r g e s tengineering and construction(E&C) co m pa ny. The co m pa nyh a s b u s i n e s s i n t e r e s t s i n
e n g i n e e r i n g , c o n s t r u c t i o n ,manufac tur ing , in format iont e c h n o l o g y a n d f i n a n c i a ls e r v i c e s . C o n s i d e r e d t h eb e l l w e t h e r o f t h e I n d i a ne n g i n e e r i n g s e c t o r , i t i sr e n o w n e d f o r i t s s t r o n gexecu t ion capab i l i t i e s andp r o f e s s i o n a l m a n a g e m e n t .The compa ny com ma nds adominant presence in India'si n f r a s t r u c t u r e , p o w e r ,hydrocarbon, machinery andrailw a y rela ted projec ts. With ac u s t o m e r b a s e s p a n n i n g
a c r o s s 3 0 c o u n t r i e s , t h ec o m p a n y h a s s i g n i f i c a n t l yincreased its global footprint,a long w ith a nota ble presencein t h e M i d d le E a s t . Th ec o m p a n y o p e r a t e s a c r o s sdif ferent business vert icalst h r o u g h t h e i n d e p e n d e n tcompanies .
Proxy play on India Infrastructurestory
L&T is the m o st d ive rsified
eng ineering & infra structurede velo per in the co untry w ith apresence across all segmentsof infrastructure i.e. power,r o a d s , h y d r o c a r b o n s &process industries. It is alsoplanning to scale up in niche
areas like defence, nuclearpo w er and shipbuilding , w hichhave the potent ia l to adds i g n i f ic a n t l y t o o v e r a l lrevenues in the next three tof i v e y e a r s ( f o r i n s t a n c e ,opening of defence foreigndirect investment (FDI) and
o rdering ca n help L&T a chievesca le o f 5x in term s o f defences e g m e n t r e v e n u e s f r o mcurren t 1,000 cro re run ra te).Over the last couple of years,L&T ha s a dded ca pa city tomeet increasing volumes. For
instance, the company hadadded 5,000 MW (MegaWatts)of power equipment facility,the heavy engineering facilityin Oman (FY10) and recentlyadded a complex shipbuildingfa cility. Hence, w e expect L&Tto register a revenue CAGR
(compounded annual growthrate) of 16.58% in FY14-16E asit commands a s trong orderba cklo g o f 2,14,000 crore,thereby providing visibility for
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STOCK IDEAS
ICICIdirect M oney Manager
three ye a rs.
I n Q 1 F Y 1 5 , h y d r o c a r b o nb us ine ss repo rted a n EBIT(earnings before interest andta xes) lo ss o f 942 cro re. Thisw a s m a inly due to co st/tim eo v e r r u n s i n M i d d l e E a s thydrocarbon orders to the
tune o f 10,000 cro re. Themanagement expects theseorders to get executed byFY15E. How ever, in Q2FY15,the seg m ent reported a m inorlo ss o f 54 crore ind ica tingt h a t m o s t p r o v i s i o n s a r e
pro vide d fo r a nd lo ss es w ill beco m pletely pro vided for in thenext s ix to n ine months .Hence, w e expect mo st of thepa in to be o ver by Q4FY15.
We expect revenue CAGR of16.8% o ve r FY14-16E w hileE B I T D A ( e a r n i n g s b e f o r einterest, taxes, depreciation,and amortization) CAGR overthe sa m e period is expected a t13.4%. Hence, with operating
leve rag e in p la y, our PAT (pro fita fter ta x) CAG R o ve r FY14-16Estands a t ~ 11% as w e havea ss ume d fla ttish o ther inco m e
Ghost of hydrocarbon segmentlosses receding gradually
Revenue and PAT to exhibit 16.8%and 11% CAGR in FY14-16E on pickup in execution, margin stabilit y
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component in FY16E overFY14 w hile d eprecia tio n a ndinterest costs are expected to
exhibit a CAG R o f ~ 9% a nd3%, respectively. Hence, weexpect L&T's PAT to be a t6,461 crore in FY16E vs . 5,247cro re in Fy14.
Concerns such as a depletingo rder bo o k in the po w er/hea vyengineering segment seem tobe abating as ordering trendsin H1FY15 for these segmentssee m s to be enco ura g ing . This,
we believe will lead to robustrevenue booking over Fy1617E coupled with continueds t r o n g e x e c u t i o n o f t h einfrastructure segment. Event h e g h o s t o f h y d r o c a r b o nseems to be factored into thevaluation. We assign a target
price o f 2,206 (24-m o nthsperspective) as we believe byDecember 2015, we will getclarity on the intensity of thecapex (capital expenditure)cycle recovery and marketswil l s tar t d iscount ing into
F Y 1 7 E - 1 8 E e a r n i n g s a n dvisib ility. Thus , w e b eliev eL&T's is the bes t o ption to playthe capex recovery cycle inInd ia . We reco m m end 'Buy '.
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Worst seems to be getting over asFY16E to see robust execution;
recommend 'Buy
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STOCK IDEAS
ICICIdirect M oney Manager
Key risks include:Dela y in m a cro ec ono m ic environm ent pickup, policyinaction and rising competitive intensity from domestic as well as
Chinese a nd Korea n pla yers.
(EBITDA:Earnings before interest, taxes, depreciation, and amortization; EPS:Ea rning s per sha re; P/E:Price -to -ea rning s; EV:Enterprise va lue; P/BV:Price -to -bo ok value; RoNW:Return on net w orth; RoCE:Return o n Capita l Em ploy ed ; DII:Do m es tic ins titution a l inve sto rs; FII:Fo reig n Ins titutio na l Inve sto rs)
Key Financials
Valuations Summary
Stock Data
November 2014
Net sa les ( cro re) 60,874 66,580.2 74,114.5 90,823.8
EBITDA ( cro re) 6,403.9 7,280.5 7,915.8 9,365.3
Net pro fit ( cro re) 4,729.5 5,247.2 5,374.8 6,461.8
EPS ( ) 51.1 56.7 58.1 69.9
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P/E (x) 32.3 29.1 28.4 23.6
Ta rg et P/E (x) 18.9 17.1 16.7 13.9
EV /EBITDA (x) 25.1 22.1 20.3 17.2
P/BV (x) 5.2 4.7 4.2 3.8
Ro NW (%) 16.2 16.2 14.9 16
Ro CE (%) 14.8 15.1 14.8 16.2
Ma rket ca pita liza tio n ( crore) 1,52,608.5
Tota l d eb t (FY15E) ( cro re) 10,836.2
Ca sh a nd inves tm ents (FY15E) ( crore) 2,799.3
Enterprise va lue (EV) ( cro re) 16,0645.4
52-w eek Hig h/Low ( ) 1.5
Eq uity ca pita l ( cro re) 185
Fa ce va lue ( ) 2DII ho ld ing (%) 36.6
FII ho ld ing (%) 15.6
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FLAVOUR OF THE M ONTH
Tax implications of various investments
One of the important aspects of investments, w hich, w e as investors oftenoverlook, is: Tax-eff iciency of returns. Tax ef fic iency is a measure of how
much of an investment's return is left over after taxes are paid. Taxeffi ciency is essential in order to maximize net returns on our investments.As regards the return of investment, one needs to consider the real netreturns and not gross returns. There are various tax implications, asregards to returns on investments, w hich one needs to consider beforeinvesting, says CA Dhananjay J. Gokhale. A basic understanding ofinvestment income and taxes can go a long w ay in helping you build a tax-
efficient portfolio. M r. Gokhale takes us through the various avenues ofinvestments across asset classes, in the light of tax implicat ions. Read on.
INVESTM ENTS IN EQUITY
Stocks (Equity and Preference
Shares):
There are tw o types o f inco m e
which are earned from stock,
viz., Dividend and /or Capital
G a in /(Lo ss ) w hen the s toc k is
sold.
As regards the tax aspect ond i v i d e n d o n s h a r e s o f
d o m e s t ic c o m p a n y , t h e
dividend is not taxable in the
hands of the investor as the
c o m p a n y p a y s d iv id e n d
d is trib utio n ta x o r DDT a t
17.65% on the same. (It Was
15% up to S eptem ber 30, 2014
and has been increased to17.65% w.e.f . October 01,
2014). For d eta ils o n DDT,
please refer Section 115O of
Inc o m e Ta x Act, 1961.
When a sto ck is s o ld, the s a m e
is considered as capital gain
except in case wherein the
investment is made in the
co urse o f busines s o f tra ding in
s e c u r i t i e s a n d n o t a s a n
inves tmen t. As reg a rds the tax
a spec t on G a in /(Lo ss ) o n sa le
o f sto ck the perio d o f hold ing isimportant to determine the
taxa b ility o f the inco m e, w hich
w ill be c lea r fro m the follo w ing
table:
November 2014
CA Dhananjay J. Gokhale
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Type of securit y Period ofholding
Type of capitalgain / (loss)
Taxability
Equity sha res /
preference
shares w hich are
listed
Up to 12
months
S h o rt -t e rm
ca pital ga in /
(lo ss ) a t
15%
Ta xa b le
More tha n 12
months Lo ng -t e rm
ca pital ga in /
(lo ss )
Not Ta xa b le if
securities
t ran sac t ion t ax
(STT) paidTa xa b le if S TT is
not pa id
Equity sha res /
preference
shares w hich are
no t listed
Up to 36
months
S ho rt -t erm
ca pital ga in /
(loss)
Ta xa b le
More tha n 36
months
Long -term
ca pital ga in /(loss)
Ta xa b le
There a re va rio us a venues to prudently s a ve the ta xa ble lo ng -
term c a pital g a ins, w hich a re a s follo w s:
Section Part iculars Amount / Limitat ions
54F If net co nsidera tio n is
inves ted in residential ho use
property purcha sed eitherbefore one yea r or w ithin
two years or constructed
w ithin three y ea rs
The b enefit ca nnot b e a vailed
if the assess ee ow ns more
than o ne house property(other than the ne w ly
acquired /constructed
property) as on the d ate o f
ca pital ga in
If the a mo unt is n ot utilise dfor purcha se /construction
of house property by the end
of the fina ncial yea r, the
same needs to be deposited
in Capital Gain Sc hem eAcco unt on or before the due
da te o f filing Incom e Ta x
return
54EC If a m ount o f ca pita l g ain is
inves ted in spe cifiedsecurities
Rs. 50 lakh
Employee Stock Option Plans(ESOPs):
To d a y , t h e r e a r e m a n y
co rporates w ho o ffer ES OPs to
its employees wherein the
employees are rewarded by
o f f e r i n g a s t a k e i n t h e
ow nership of the co m pany.
As reg a rds the ta xa b ility o f the
ESOPs, when an employee
exercises the option under
ES OP, i.e., w hen he s ubs cribes
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to the eq uity s ha res (se curities )
o f the c o m pa ny, his ta xa b ility is
dependent on the Fair Market
Va lue (FMV) a s o n the da te o fexercising the o ptio n:
(I) If the FMV is lo w er tha n the
exe rcise price , the d ifference is
taxable in the hands of the
em ploy ee a s a perq uisite and is
considered as Income from
S ala ry a nd taxed a cco rding ly;(ii) If the FMV is highe r tha n the
exercise price, generally the
employee does not exercise
the option to subscribe the
equity shares. In case if it is
exercised, there is no tax
incidence.
When equity acquired under
ESOPs are sold, the same are
governed by the regulations
applicable to equity shares,
except that the cost price is
required to be considered as
F M V o r e x e r c i s e p r i c ew h i c h e v e r i s h i g h e r
(presuming that the taxability
o f the sa m e is ta ken ca re o f a t
the time of exercising the
option as stated in the above
para).
Derivatives:
The transa ctio ns in deriva tives
a r e n o t c o n s i d e r e d a s
S pec u la t ive Trans a c t io ns
w.e.f. financial year 2005-06,
thanks to the provisions of
F i n a n c e A c t , 2 0 0 5 . T h e
classification of income fromderivatives as capital gain or
business income depends on
various factors in relation to
the asse ssee such as :
(I) I n t e n t i o n b e h i n d
undertaking tra nsa ctio ns
(ii) Freq uency o f tra nsa ctio ns(iii) Holding perio d
(iv) Vo lum e o f trans a ctio n
However, as all the above
fac tors a re sub jec tive in na ture,
there is always a grey area to
d e t e r m i n e t h e n a t u r e o f
i n c o m e f r o m d e r i v a t i v e stra nsa ctio ns. In ca se if the s a id
i n c o m e i s c o n s i d e r e d a s
b u s i n e s s i n c o m e , t h e
com pliance of tax a udit needs
to be kept in mind, if the
t u r n o v e r ( w h i c h i s g r o s s
summation of profit and lossfrom derivative transactions),
excee ds 1 crore during a
financial year and in other
ca ses , co m pliance w ith section
44AD need s to be ens ured .
Equity M utual Funds:
There are tw o types o f inco m e
w hich a re ea rned from eq uity-
oriented mutual funds, viz.,
Dividend (in case of dividend
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o ptio n) a nd /o r Ca pita l Ga in/
L o s s w h e n t h e u n i t s a r e
redeemed.
As regards the tax aspect ond ividend (inco m e) fro m eq uity-
oriented mutual funds, the
dividend is not taxable in the
hands of the investor as the
m utual fund pa ys DDT a t
14.28% on the same (Note:
1 4 . 2 8 % i s f o r i n d i v i d u a l
investors and for others it is42.86%). Fo r deta ils o n DDT,
please refer Section 115R of
Inc o m e Ta x Act, 1961.
When mutual fund units are sold or redeemed, the same is
considered as capital gain, which is subject to taxability asfollows:
Type ofsecurity
Period ofholding
Type of capitalgain / (loss)
Taxability
Equity
oriented
mutual funds
w he re in S TT
is paid
Up to
12 months
S h o rt -t e rm
ca pital ga in /
(loss)
Ta xa b le
More tha n 12
months
Lo ng -t e rm
ca pital ga in /
(loss)
No t t a x a b le
Equity
oriented
mutual fundsw he re in S TT
is no t paid
Up to
36 months
S h o rt -t e rm
ca pital ga in /
(loss)
Ta xa b le
More tha n 36months
Lo ng -t e rmca pital ga in /
(loss)
Ta xa b le
Further, in case if an assessee
i n v e s t s i n E q u i t y L i n k e dS a v i n g s S c h e m e ( E L S S )
m utual funds , the investm ent is
elig ib le for ded uctio n fro m his
taxa ble inco m e to the extent o f
1,50,000 (Refer se ctio n 80C ofInc o m e Ta x Act, 1961) w ith a
lock-in period of three years
fro m the d a te of inves tme nt.
`
Fo llo w ing tab le w ill g ive a co m pa ra tive s tatistics a s reg a rds the
various angles related to tax implications w.r.t . growth and
reg ula r (d ividend ) o ptio n o f eq uity m utual fund s.
Holding periodw herein STT is paid
Equity mutualfund Grow th Equity mut ual fund DividendDividend Principal amount
Up to 12 m onths Ta xa ble a s sho rt-
term ca pital ga in
a t 15%
DDT p aid by MF
a t 14.28% Ta xa ble a s s ho rt-term
ca pital ga in at 15%
More than 12 months Not taxable
DDT pa id by MF a t
14.28%
Not ta xab le
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Thus , a n inve s to r sho u ld
prudently choose the type of
scheme, depending on his
taxa ble inco m e and a pplica ble
tax b ra cket.
Raj iv Gandhi Equi ty Savings
Scheme (RGESS):
The scheme w as launched a s anew t ax advan t age s av ing
sche m e for eq uity inves tors in
India, who are first time retail
investors in securities market.
Under the s chem e a n investor
w a s a l l o w e d t o i n v e s t a
m a xim um a m o unt o f 50,000
per f inancial year and was
eligible for 50% deduction
fro m his ta xa b le inco m e. The
sa id schem e ca n be a vailed b y
t h e i n v e s t o r f o r t h r e e
consecut ive years and the
gains arising out the scheme
ca n b e rea lized a fter one y ea r.
The s a id sc hem e is a pplica b le
for inves tors w i th annua linco m e no t m o re than 12 la kh
per a nnum.
`
`
The ta xa b ility o f inco m e (in the
fo rm o f divide nd /g a in a rising
out of redemption of units) is
same as in case of equity
m utual funds .
Uni t L inked Insurance P lans
(ULIPs)/ Unit Linked Pension Plan
(ULPPs)/ National Pension System
(NPS):
The inves tment m a de unde r
ULIP a s w ell a s ULPP/NPS , is
eligible for deduction from
taxable income, under section
80C to the extent o f 1,50,000
per annum. (In case of NPS,
eligible for deduction under
se ctio n 80CCD to the extent o f
1,00,000 w ithin o ve r a ll lim it
o f 1,50,000 und er se ctio n
80CCE). However, as regards
the taxa bility fro m enca shm ent
of the same, one needs to
check various aspects which
a r e s u m m a r is e d in t h e
fo llo w ing tab le:
`
`
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FLAVOUR OF THE M ONTH
November 2014
Type ofinvestment
Event f orencashment
Taxability Condit ions
ULIP Dea th o f po licy
holder
Not ta xab le in
the hands o f the
recipient
S urrender of
p olicy b efore
maturity
Not ta xab le in
the hands o f the
recipient
If pa id for five
years
Ta xa ble in the
hands o f the
recipient
If no t pa id for
five years
S urrender ofp olicy a t the
time of m a turity
Not ta xab le inthe hands o f the
recipient
ULPP Dea th o f po licy
holder
Not ta xab le in
the hands o f the
recipient
S urrender of
policy before
maturity
Benefit availed
under sec tion
80C w ill be
reversed and
the surrender
va lue w ill berequired to be
offered to ta x
S urrender ofpolicy at the
time of m a turity
1/3 rd
of thesurrender value
is tax -free and
ba lance 2/3 rd
needs to be
used for
purc ha s e of
annuity plan
NPS Dea th o f po licy
holder
Not ta xab le in
the hands o f the
recipient
Clos ure or
opting out of the
scheme o r
pension
received from
annuity plan
purchased
Ta xa ble
As regards NPS, there is an
additional benefit available forem plo ye es w hich is in a dd itio n
to the overall ceiling of
1,50,000 und er s ec tio n 80CCE,
wherein the contribution is
`
m a d e b y a n e m p l o y e r t o
a cco unt of an em ploy ee underNPS , sub jec t to a ce iling o f 10%
employee ' s s a l a ry w i l l be
elig ib le fo r deductio n fro m his
taxable income. (Please refer
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sub-sect ion (2) of sect ion
80CCD o f Inc o m e Ta x Act, 1961
f o r m o r e d e t a i l s o n t h i s
a dd itio na l benefit).
Bank Fixed Deposits (Fds):Therea r e n o t a x - i n c e n t i v e s f o r
i n v e s t m e n t i n b a n k f i x e d
deposits (FDs) except for Fds
kept with a scheduled bankw ith a lo ck-in pe rio d o f not les s
t h a n f i v e y e a r s , w h e r e i n
ded uctio n und er sec tio n 80C is
available. However, such tax-
benefit FDs are subjected to
certain conditions like lock-in
perio d o f at lea st five y ea rs, noa d v a n c e s c a n b e g r a n t e d
against security of these Fds.
A s r e g a r d s t h e i n t e r e s t
received on bank FDs, the
INVESTMENTS IN FIXED-INCOM E
sa m e is taxa ble in the hands of
the assesse e.
Corporate Fixed Deposit s (Fds):
The inves tme nt in c o rpo rate
fixed deposits (FDs) does not
of fer any t ax benef i t . As
regards the interest received
on co rporate FDs, the s a m e is
taxable in the hands of the
assessee.Debentures / Non-Convert ib leDebentures (NCDs):
The inve s tment in Deb entures
/NCDs d oe s no t offer any ta x
bene fit. As reg a rds the interest
rece ived on Debentures /NCDs, the same is taxable in
the hands of the ass essee.
Debt M utual Funds (Including FixedM aturit y Plans or FM Ps):
The inves tme nt in d eb t mutual funds do es no t offer any tax
benefit . As regards the taxability of the income earned on thede bt m utua l funds , the ta xa bility is a s per fo llo w ing tab le:
Holding period Debt mutualfund Grow th
Debt mutual f und Dividend
Dividend Principalamount
U p t o 36 m o nths
Ta xa b le a s
short-term
ca pital ga in
DDT pa id by MF
at 33.33%
(42.86% if the
inves tor is o ther
tha n Ind ividua l)
Ta xa b le a s
short-term
ca pital ga in
More tha n 36
months
Ta xa b le a s
long-term
ca pital gain at
20% after
indexation
DDT pa id by MF
a t
33.33%
Ta xab le a s lon g-
term capital
gain at 20%after indexa tion
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PPF/ EPF/ KVP/ NSC/ SCSS/ Other Post Off ice Savings Schemes:
There a re va rio us o ther avenues fo r inves tmen ts w hich a re
fixed-income generating and the taxability w.r.t. the same is
g iven in the follo w ing tab le:
Type ofinvestment
Tax benefitavailable oninvestment
Taxabilit y onincome earned
Taxabilit y onw ithdraw al of
principal amount
Public P rovident
Fund (PPF)
Eligible for
ded uction unde r
se ction 80C
w ithin ov erall
limit of Rs.
1,50,000 p.a.
Ta x -free Ta x -free
Employees
Providen t Fund
(EPF)
Eligible for
d ed uc tio n un d er
se ction 80C
w ithin ov erall
limit of Rs.
1,50,000 p.a.
Ta x -free
Tax -free,
provide d the
em ploye e is in
em ploym ent for
a continuous
period of no t
less than five
yea rs, o therw ise
taxable
Kisa n Vika sPatra (KVP)
No b ene fit
Ta xa ble
Not ta xab le
National
S a v ings
Certificates
(NSC)
Eligible for
ded uction unde r
se ction 80C
w ithin ov erall
limit of Rs.
1,50,000 p.a.
Ta xa ble but
elig ib le for
deduction
under sec tion
80C
Not ta xab le
Senior Citizen
Sa vings Scheme
(SCSS)
Eligible for
ded uction unde r
se ction 80Cw ith in overall
limit of Rs.
1,50,000 p.a.
Ta xa ble
Not ta xab le
Five -yea r t ime
depo sit w ith
Post Office
Eligible for
ded uction unde r
se ction 80C
w ithin ov erall
limit of Rs.
1,50,000 p.a.
Ta xa ble
Not ta xab le
RecurringDeposit (RD) /
Monthly Incom e
S che me (MIS )w ith Pos t Office
No benefit Ta xa ble Not ta xa ble
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INVESTM ENTS IN CASH /LIQUIDASSETS
Savings Bank Account:
The interest ea rned o n sa ving s
bank account in excess of
10,000 p.a. is taxable in the
h a n d s o f t h e i n d i v i d u a l
(Deduction to the extent of
10 ,000 is ava i lab le under
section 80TTA o f Inco m e Ta x
Act, 1961). In case if the
amount of interest does not
excee d 10,000, the sa m e is
no t taxa ble in the hand s o f the
`
`
`
individual.
Liquid M utual Funds:
Th e in v e s t m e n t in liq u id
mutual funds does not offer
a ny ta x be nefit . Ho w ever, thes e
mutua l funds a re popula r
amongs t the inves tors for
parking of surplus funds and
e a r n b e t t e r r e t u r n s a s
compared to short-term fixed
depo sits of ba nks and also due
to very lower or nil exit load
charge d b y the m utual funds.
As regards the taxability of the income earned on the liquid
m utual funds , the taxa b ility is a s pe r follo w ing tab le:
Holding period Liquid mutualfundsGrow th
Liquid mut ual f undsDividendDividend
Principalamount
Up to 36 months
Ta xa b le a s
s ho rt -t erm
ca pital ga in
DDT pa id by MF
a t
33.33%
(42.86% if th e
inves tor is o ther
tha n Ind ividua l)
Ta xa b le a s
s ho rt -te rm
ca pital ga in
More tha n 36
months
Ta xa b le a s
long -term
ca pital ga in at
20% after
indexation
DDT
paid b y MF
a t
33.33%
Ta xab le a s lon g-
term capital
gain at 20%after indexation
INVESTM ENTS IN GOLD
In In d i a , a l m o s t e v e r y
household invests in gold in
v a r i o u s f o r m s ( t h o u g h
traditionally is purchased inphysical form) and at various
occasions.
Inves tment in g o ld in a ny o f the
following forms attracts same
tax treatment w.e.f. FY: 2014-
15:
I) Phys ica l Fo rm
ii) G o ld Exc ha ng e Tra d e dFunds (ETFs)
iii) Go ld Mutua l Funds
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Holding period Taxability Taxrate
U p to 36 m o nths
Ta xa ble a s s ho rt term
ca pital ga in
Will be clubbe d a lon gw ith the o vera ll
incom e, thus,
app licab le ta x bracketdepending on the
taxa ble inco me o f the
assessee
Mo re tha n 36 m onths Ta xa ble a s long -term
ca pital ga in20% after indexation
There a re va rio us a venues to prudently s a ve the ta xab le lo ng -
term ca pital g a in, w hich a re a s follo w s:
Section Part iculars Amount / Limitat ions54F If net considera tion is
inves ted in res ide ntia l ho use
property purcha sed eitherbefore o ne yea r or within
tw o yea rs or constructedw ithin three yea rs .
The be nefit can no t be a va iledif the as sesse e ow ns more
than one house property(other than the new ly
acquired /constructedproperty) a s o n the da te ofca pital ga in
If the a mo unt is n ot utilise dfor purcha se /construction
of house property by the endof the fina ncial yea r, the
sam e needs to b e depositedin Capita l Ga in S chem e
Acco unt on o r before the dueda te o f filing Inco me Ta x
return
54EC If a m ount o f ca pita l g a in is
inves ted in sp ecifiedsecurities
Rs. 50 lakh
INVESTM ENTS IN REAL ESTATE
Physical Property:
The ta xa b ility o f inco m e from
inves tment in rea l es t a t e
( p h y s i c a l i n v e s t m e n t ) i s
considered as Income from
House Property and taxed
according to the provisions
und er Inco m e Ta x.
As reg a rds the g a ins a rising o ut of sa le o f physica l pro perty, the
tax incidence a nd a venues o f sa ving of tax are as follow s:
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Type of security Period of holding* Type of capitalgain / (loss)
Taxability
i) Residential
house property
ii) La nd use d for
agricultural
purposes
Up
to 36
months
S h o rt -t e rm
ca pital ga in /
(loss)
Ta xa ble
More tha n 36
months
Lo ng -t e rm
ca pital ga in /
(lo s s )
Ta xa ble
*To b e ca lcula ted from the da te of pos se ss ion o f the ho use prope rty a nd no t
from the date of purchas e ag reem ent
There a re va rio us a venues to prudently sa ve the ta xab le lo ng-
term ca pital g a in, w hich a re a s follo w s:
Section Type of capital gain Particulars Amount / Limitations
54 Residentia l
house property
If am ount o f capital
g a in is invested in
residential house
property purcha sed
either before one
yea r or within tw oyea rs o r
con structed w ithin
three ye ars
No limit
If the a mo unt is no t
ut ilised for purcha se
/co ns truction of
house property by
the end o f the
fina ncial yea r, the
sam e needs to be
deposited in CapitalGain Scheme
Acco unt on or be fore
the d ue d ate of filing
Inc o m e Ta x return
54B La nd used fo r
agricultural
purposes
If am ount o f capital
g a in is invested in
land to be used for
agricultural
purpos e w ithin tw o
yea rs from the date
of trans fer
The land so ld s ho uld
have b een used for
a g ricultural purpos e
for tw o yea rs
immediately
preceding the da te
on w hich tran sfer
too k pla ce
If th e amo unt is notutilise d fo r purcha se
/co ns truction of
house property by
the end o f the
fina ncial yea r, the
sam e needs to be
deposited in Capital
Ga in SchemeAcco unt on or be fore
the d ue d ate of filing
Inc o m e Ta x return
54EC If a m ount o f ca pita l
ga in is invested in
spe cified se curities
Rs. 50 la kh
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Real Estate Investment Trusts(REITs):
The recent a nno uncem ent by
the Securities and ExchangeBoard o f Ind ia (SEBI) a s
reg a rds g uide lines fo r crea tio n
o f REITs, it is expected tha t it
would be a new investment
a venue for avid investors w ho
are on the look-out for non-
t r a d i t i o n a l i n v e s t m e n ta v e n u e s . H o w e v e r , t h e
suc ce ss o f REITs w o uld la rge ly
depend on the w ay the scheme
are drafted and launched. As
regards the taxability of the
REITs , pre s um ing tha t the
same are launched as mutualfund s , is likely to be in line w ith
non-equity mutual funds. But
one needs to wai t and watch
for the REITs to be la unched to
understand the nitty-gritty of
taxation.
ALTERNATE INVESTM ENTS
Art Effects /Private Equity (PE)/Venture Capi tal :
Th e s e a re u n c o n v e n t io n a l
i n v e s t m e n t a v e n u e s , n o t
s u i t a b l e f o r r i s k - a v e r s e
i n v e s t o r s , t h a n k s t o t h e
illiquidity of such investments
and uncerta inty of income
generation on the same. As
r e g a r d s t h e i n c o m e
generat ion, the same may be
genera ted in the form o f
d ividend o n P riva te Eq uity (PE)
in v e s t m e n t s , w h ic h h a s
taxa b ility s im ila r to d ividend o n
equity shares, which is not
taxable in the hands of theinvestor. As regards income
received on Venture Capital,
the taxability depends on the
nature of instruments as to
w hether the sa m e is in the fo rm
of units of mutual fund, or
eq uity o r deb entures.The ta xa b ility o n sa le o f inve s tments m a de in Art (effects ), Priva te
Eq uity a nd Venture Ca pita l (w hether in the form o f units, eq uity o r
de be ntures) is a s fo llo w s:
Holding Period Taxability Tax Rate
U p to 36 m o nths
Ta xa ble a s s ho rt-term
ca pital ga in
Will be clubbe d a lon gw ith the o vera ll
incom e, thus,applicable tax bracket
depending on the
taxa ble inco me o f the
assessee
Mo re tha n 36 m onths Ta xa ble as lo ng -term
ca pital ga in
20% after indexation
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33ICICIdirect M oney Manager
FLAVOUR OF THE M ONTH
November 2014
There a re va rio us a venues to prudently s a ve the ta xa ble lo ng -
term c a pital g a in, w hich a re a s follo w s:
Section Part iculars Amount / Limitations
54F If net cons idera tion isinvested in residential house
property purcha sed either
before on e yea r or w ithin
tw o yea rs or constructed
w ithin three y ea rs
The b enefit ca nnot b e a vailedif the assess ee ow ns more
than o ne ho use property
(other than the ne w ly
acquired /constructed
property) as on the d ate o f
ca pital ga in
If the
a mo unt is no t utilise d
for purcha se /construction
of house property by the end
of the fina ncial yea r, thesam e needs to b e deposited
in Capital Ga in S chem e
Acco unt on or before the due
da te o f filing Inco m e Ta x
return
54EC If a m o unt o f ca pita l g ain is
inves ted in spec ified
securities
Rs. 50 la kh
Portfolio Management Services(PMS):
The ta xa b ility o f inve stm ents
made under PMS depend on
the intention of the investor,
i.e. , w hether the sa m e is to b e
trea ted a s b usiness incom e o r
ca pital g a in. Depend ing o n the
intentio n o f the investo r (w hichis a sub jec tive c o nce pt), the tax
incidence on such transaction
needs to be determined as
stated earlier in relevant type
o f se curities (depe nd ent on the
type o f investm ent, viz., eq uity,
deb entures, etc.).Note:The implication of tax on various aspects of investment is a vastsubject and is dependent on case to case basis. This article is limited t o theextent of having an overview of the same. It m ay be noted that the reader ofthe article is expected to take a decision only after consulting an expert in thefield of taxation and not depending on the contents of t his article. This articleis not an expression of an opinion by t he author, and in no m anner is intended
to provide guidance to the investor in w hat so ever manner. The decision ofinvestm ent m ade by the reader of the article should be m ade at his ow n riskand w ithout any recourse to the author of this article.
Plea se send yo ur feedba ck to m oney ma nag er@ icicisecurities.com
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34ICICIdirect M oney Manager
'Remain focused on long-term asset allocation'
Indian macro has stabil ized and has become more support ive for economicgrow th, says Pankaj M urarka, Head Equity, Ax is M utual Fund in aninterview w ith ICICIdirect M oney M anager. He advises investors toremain focused on their long-term asset allocation and not make too manyfrequent adjustments based on recent market actions.
Pankaj M urarka,
Head Equity,
Ax is M utual Fund
Tte--tte
Q:
A:
M a r k e t s s e e m t o b e i nconsolidation mode, after sharp
gains in the recent past. How do yousee them t rending in the near term?W hat are the risks to the market?
We do not take a view onma rkets in the short-term a s w edo not think it is possible top r e d i c t s h o r t - t e r m m a r k e t
movements.The key risk to the ma rket overthe medium-term is linked toexecution by the government.Market expects the g overnme nt
t o i m p l e m e n t g r o w t h -enhancing policies over thenext 6-12 months .
Do valuations look ex pensive? Va lua tions a re a round the
fa ir-va lue ra ng e. How ever, itsho uld b e noted that co rporateea rning s a re a t the low -end o fth e cyc l e an d an y g row threbo und should lea d to a strongea rnings bo os t .
How is the economic situationlooking like?
Indian macro has stabilizeda n d h a s b e c o m e m o r es u p p o r t i v e f o r e c o n o m i cg row th . Wh i l e g row th h asrevived, it remains weak and
uneven. It will take a couple ofyea rs for the econo my to mo veto a decisively higher growthpath and government policieswill be crucial to decide thetrajectory.
How are September quarterearnings looking like? What is the
road ahead for corporate earnings?
In the absence of a broadba sed reco very s o fa r, Ea rningsactivi ty is extremely stock-s p e c i f ic . H i g h e r q u a l i t y
Q:A:
Q:
A:
Q:
A:
November 2014
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35ICICIdirect M oney Manager
Tte--tte
November 2014
companies have been able toma inta in/g row profits but ma nyo th e r compan i e s h av e g o ti m p a c t e d b y t h e w e a keconomy. On a consolidatedbasis, earnings-to-GDP (grossdomestic product) ratio is farlower than the level seen in2007. Susta ined revival ing row th sho uld provide a strongbo os t to e arnings .
Which sectors are you favoringcurrently and w hy?
Ra ther than look ing a ts e c t o r s , o u r a p p r o a c h h a salways been to look at qualitycompanies across sectors thato f f e r g o o d m e d i u m - t e r mearn ings g rowth prospects .
From a portfolio perspective,over the last few months, wehave run a higher exposure tocy clica l sto cks tha t a re expose dto the economic recovery. Webelieve that the economy hasbottomed and the revival overthe m ed ium term w ill provide a
big bo os t to q uality stoc ks tha tca n ta ke ad vantag e of the sa me.
The Reserve Bank of India (RBI)has maintained status quo in itsrecent monetary policy. By w hen doyou see the interest rates easing?
Inflation is on a weakening
trend a nd the RBI sho uld b e a bleto comfortably meet its glidepa th targ et in J a nua ry 2015. Weexpect policy rates to be cutover the ne xt 6-12 m onths .
Q:
A :
Q:
A:
Q:
A:
Q:
A :
How do you see the currencyreacting to the expected Fed act ionin 2015?
Given the stability in Indianmacro situation, the economyshould not face any disruptiverisk from any rate hikes by theFed. Some points to note arethe significant fall in currentaccount deficit (CAD), higherforex (FX) reserves, one of the
h i g h e s t i n t e r e s t r a t e s i nem erg ing m a rkets, a nd b eing a ta d i f f e r e n t s t a g e i n t h eeconomic cycle compared tothe US .
W hat is your advice for investorsat this point in terms of their overallportfolio and asset allocation?
Investors should remainfocused on their long-termasset allocation and not maketoo ma ny freq uent adjustmentsba sed on recent ma rket ac tions .G oing forw a rd, from a med ium-to-long term perspective, bothequity and fixed-income seemt o b e p o i s e d t o g e n e r a t er e a s o n a b l e r e t u r n s f o rinves tors. Inves tors s hould onlylook at quality portfolios andavoid making large allocationsto na rrow stra tegies.
The views expressed in the interview
are personal view s of the authors anddo not necessarily represent the view sof ICICI Securi ties.
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36ICICIdirect M oney Manager
ASK OUR PLANNER
Sw itching your investment options
Q:
A:
Our Group Superannuat ion Fund
is managed by ICICI Prudential LifeInsurance for the last 7 years. Wehave been given a choice to selectthe fund and I have chosen 'ShortT e r m D e b t F u n d ' f r o m t h ebeginning. We have the option ofsw itc hing to Tradit ion Plan /
Balanced Plan / Grow th Plan. Is itadvisable to sw itch it to Traditionalplan / Balanced Plan for a betterreturn w ith minimal risk? M y age is47.
- Sivaramakrishnan KG
S ho rt Term Deb t Fund s a re
ideal for investing for shorter
term i.e. less than 1 year.
Staying invested in them for a
per iod o f 7 years i s not
advisable. If your horizon is
lo ng i.e.15 yea rs o r mo re, yo u
s h o u l d c o n s i d e r i n v e s t i n g
some por t ion in to equi ty-oriented funds. Now that you
are 47 and might retire in the
next 10-12 years, you can still
consider investing into equity
for below reas ons:
One, your provident fund
a l r e a d y i n v e s t s i n t o d e b tinstruments and will be a
s i g n i f i c a n t p a r t o f y o u r
retirem ent co rpus. Tw o , the
provident fund accumulation
ca n b e utilized for fund ing yo urinitial post-retirement years,
say 10 to 15 years, depending
on the a ccumulation and yo ur
p o s t - r e t i r e m e n t e x p e n s e s .
This m ea ns tha t yo ur o ther
investments ca n sta y invested
into eq uity - o rientedins trum ents for this pe rio d too ,
adding to the 10-12 years left
no w fo r retirem ent.
S ince the numb er of years yo ur
other investments can stay
invested is over 15-20 years,
yo u ca n co nsider sw itching thefunds even to Growth Plan.
Growth Plan carries risk, but
the risk can get minimized if
yo u ho ld it ove r a lo ng er perio d
o f tim e (15-20 yea rs).
A l s o , w h i l e s w i t c h i n g t o
Growth Plan, it is suggestedno t to s w itch the entire a m o unt
in lum p sum , ra ther it is b etter
to switch systematically on a
regular basis, say, once in a
month or quarter, depending
o n ho w it is a llo w ed fo r yo u in
your Superannuation Fund.This w ill he lp in a verag ing the
en try po int into eq uity.
I am a ret ired employee aged 60Q:
November 2014
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37ICICIdirect M oney Manager
ASK OUR PLANNER
years. My requirement of housing,medical and monthly income istaken care of. I w ould like to invest
part of my retirement corpus ofaround 30 lakh in mutual fundsw ith follow ing object ives: To beatthe inflation and grow the corpus intax-eff icient manner in next five seven years.
Since investing big amount of
money through SIP route is notpossible in a short time, please letme know if it is a good idea to investin lump sum in mutual funds atcurrent levels. Please suggestfunds for investment keeping myprofile in mind.
- Manjunath
In o rder to b ea t infla tio n a nd
grow tax-efficient corpus, the
best option is to invest into
equity. However, i t is not
advisable to invest lump sum
amount in equity, given its
i n h e r e n t v o l a t i l e n a t u r e .
Hence, it is best to invest
systematically, either through
SIP (systematic investment
p la n ) o r S TP (s y s t e m a t ic
tra ns fer pla n).
If you invest through SIP, the
entire a m o unt w o uld be kept in
sa ving s ba nk ac co unt, ea rning
you a nominal rate of return.
Instead, you may shift the
`
A:
entire amount in liquid funds,
w hich w ill provide better return
than sa ving s b a nk a cco unt.
Yo u ca n then sta rt an S TP fro mliquid mutual fund, which will
systematically transfer a fixed
a m o u n t f r o m y o u r l i q u i d
m utual fund into e q uity m utual
fund regular ly , s ay , every
month. However, the gains
from your liquid mutual fundsha ll be a dd ed to y our incom e
a nd w ill be taxa ble a s per yo ur
incom e sla b.
Let's sa y yo u inve s t 30 la kh
into liquid mutual funds and
sta rt do ing a n S TP o f 1.50
lakh per month into equitym utua l funds fro m next mo nth
onw a rds . Yo u w ould ha ve
transferred the entire amount
into e q uity funds o ver the next
22 m o nths a ppro xim a tely. The
gain booked from the liquid
m