MF POINTERFor Private Circulation only

Budget and Your money

Issue - 103 July, 2014

July, 2014 Smart investing starts here 1

Ventura Research Desk:

The article for this month “Budget and your money” focuses mainly on how the first budget of the Modi-led-NDA Government will affect retail investors. It also examines the major changes announced by the Finance Minister, Arun Jaitley. Turn to page 3 for advice on investing in a model portfolio designed especially for investors who want to make a MODERATE S.I.P. Portfolio. Top performing equity and debt mutual fund schemes are highlighted on Page 6 & 7.

Happy Investing!!

Juzer Gabajiwala

Markets:

• Indian equity markets extended their rally in the passing month, with major indices surging to record highs following a series of encouraging macro-economic indicators. However, investors preferred to book profits after the new Indian government's maiden Budget fell short of expectations. Later, the markets retreated after a fall in wholesale and retail price inflation in June raised hopes of a rate cut by the RBI at its policy review next month. Moreover, continued buying by FIIs (foreign institutional investors) further led to an upside rally. Strong Index of Industrial Production data for May also provided additional support. Key benchmark indices – the Sensex and Nifty - rose 1.89% and 1.45%, respectively.

• On the macro economic front, India's Index of Industrial Production (IIP) grew at a 19-month high of 4.7% in May due to the rise in output of manufacturing, mining and power sectors. Meanwhile, the June consumer price index (CPI)-based inflation came in at a 29-month low to 7.31% against 8.28% in May, helped mainly by a moderation in food prices.

• Bond yields fell during the month after a decline in retail and wholesale price inflation for June boosted investor sentiments. Moreover, a fall in global crude oil prices also improved sentiments. However, after an escalation in the Ukraine crisis, markets remained largely cautious and stayed on the sidelines.

• According to data released by the Securities and Exchange Board of India (SEBI), Foreign Institutional Investors (FIIs) continued to remain net buyers in the equity segment for the month of July, 2014. They bought equities to the tune of Rs. 13,123.84 crore compared to Rs. 13,990.76 crore recorded in the previous month. Domestic mutual funds also remained net buyers in Indian equity markets to the tune of Rs. 3,609.7 crore (upto 30th July, 2014).

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Category returns: For the month of July, 2014, barring Equity - Infrastructure, Equity - Banking, FOF - Gold and Equity – Sector, all other categories ended on a positive note. The top five category gainers were Equity - Pharma, FOF - Overseas, Equity - Specialty, Balanced - Debt and Gilt funds. These categories generated absolute returns in the range of 1 to 6%. However, the bottom categories mentioned above gave negative returns in the range of 1 to 2%, during the month.

Top 5/Bottom 5

Equity Schemes

Top Performers Under Performers

Absolute Absolute Scheme Name Ret. % (1M) Scheme Name Ret. % (1M)

SBI Pharma Fund 7.87 Kotak PSU Bank ETF -9.33

DSPBR World Mining Fund 7.37 GS PSU Bank BeES -9.31

UTI Pharma & Healthcare Fund 7.17

SBI FMCG Fund 7.06 Baroda Pioneer PSU Equity Fund -6.85

ICICI Pru FMCG Fund 6.71 Sahara Star Value Fund -6.67

Debt Schemes

Top Performers Under Performers

Annualised AnnualisedScheme Name Ret. % (1M) Scheme Name Ret. % (1M)

Axis Fixed Income Opp Fund 17.09 ICICI Pru Cautious Plan -11.53

Birla SL Gilt Plus-PF 13.18 ICICI Pru Moderate Plan -10.65

Escorts Income Plan 13.10 Sundaram Flexible-FIP -1.02

IDFC G Sec-STP 12.63 Tata FIPF A1 -0.07

SBI Magnum Gilt-LTP 12.47 JPMorgan India Active Bond Fund 1.08

Sahara Power & Natural Resources -7.51

*Returns as on 31-Jul-2014

*Returns as on 31-Jul-2014

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Model Portfolio - II: MODERATE

Objective: The moderate model portfolio consists of a mix of 5 funds across different

categories, wherein the total equity allocation is 63%, while the rest is in debt and others. The

top 5 sectors constitute 27% of the investment portfolio, of which 13% of the allocation is

inclined towards Banks (public and private), while 7% is in IT followed by 4% in Pharma and 3%

is in Engineering-Construction. In the case of debt and balanced funds, exposure to G-secs is

48% and 11% is in AAA/P1+ papers. This makes the fund more stable and safe to invest in.

Source: Accord Fintech

SIP of Rs. 5000 per month.

XIRR returns as on 31st July 2014.

Performance (%)

Years 1 yr 3 yrs 5 yrs

Total Amount Invested (Rs.) 60,000 1,80,000 3,00,000

Present XIRR Present XIRR Present XIRR

Scheme Name Value (%) Value (%) Value (%)

(`) (`) (`)

Reliance Equity 77,832 72.43 267,882 29.19 499,254 21.14

Opportunities Fund

IDFC Premier Equity Fund 78,555 75.64 270,695 30.01 509,743 22.03

ICICI Pru Focused BlueChip 73,966 55.58 254,148 25.10 466,807 18.30

Equity Fund

HDFC Prudence Fund 78,982 77.56 262,548 27.62 472,629 18.82

Birla Sun Life Dynamic 62,996 11.18 204,567 8.98 372,218 8.85

Bond Fund

Index

S&P BSE 100 72,759 50.45 246,491 22.77 418,829 13.74

Crisil Balanced Fund Index 69,107 35.18 229,658 17.42 400,793 11.91

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Finance Minister Arun Jaitley's maiden budget was devoid of any block buster announcements,

and rightly so. However, there were a few surprises for retail investors.

Positive Surprises

1) Personal income-tax exemption limits raised from Rs. 2 lacs to Rs. 2.50 lacs for

individuals and from Rs. 2.50 lacs to Rs. 3 lacs for senior citizens (60 years and above).

This delivers a saving of Rs. 5,150 (including education cess of 3%) to all individuals

across the board. The Rs. 5 lakh income slab exempt for those above 80 years remains

the same.

2) Income-tax deduction for interest on housing loans for self-occupied property

increased from Rs. 1.50 lacs to Rs. 2 lacs.

3) Investment limit for the deduction under Section 80C of the Income-Tax Act, 1961

raised from Rs. 1 lac to Rs. 1.5 lacs. This will result in a maximum saving of Rs. 15,450

to investors in the 30% tax bracket.

Accordingly, the new tax slabs will be:

Budget and Your moneyBudget and Your money

Tax rate Tax slab

Individuals Current Slab Post Budget

Exemption* Up to Rs.2,00,000 Up to Rs. 2,50,000

10% Rs.2,00,001 – Rs. 5,00,000 Rs.2,50,001 – Rs. 5,00,000

20% Rs.5,00,001 – Rs. 10,00,000 Rs.5,00,001 – Rs. 10,00,000

30% Above Rs. 10,00,000 Above Rs. 10,00,000

Note: Education cess @ 3% plus surcharge chargeable to all slabs.

In addition to the Income tax changes, the retail investor could also gain from the divestment of

PSU banks, as the FM has proposed to come out with IPOs for the benefit of retail investors.

Negative Surprises

The Union Budget has increased the period of holding for debt funds from the existing 12

months to 36 months, in order to classify the fund as long-term. Moreover, the rate of tax on

debt funds will be at 20% (with indexation) and the previous concessional rate of 10% has been

scrapped. This, according to the FM, has been done predominantly to remove the tax arbitrage

between debt funds and fixed deposits.

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Since the Budget proposal includes all non-equity funds, schemes that invest in overseas stocks

to the tune of more than 65% of their portfolio, too, would attract higher taxes as they are

treated as debt products for all practical purposes.

Secondly, Dividend Distribution Tax (DDT) was earlier calculated on the net dividend

distributed; now it will be calculated on the gross dividend. The earlier effective DDT, which was

22.07% will now be 28.325% (including surcharge and cess). This 6.3% increase in the tax will

have a direct impact on the returns of debt funds.

Debt funds to lose their charm

Retail investors who looked towards debt funds for tax-efficient returns will now have to pay

more taxes. Under the new rules for FMPs with a 1-3 year tenure, the gains would be added to

your income and taxed at your slab rate. Now, Fixed Maturity Plans (FMPs) with tenures of less

than 3 years will become scarce as no investor would look at those instruments, going forward.

Given below is the table depicting the change in taxation of debt funds:

Holding period Existing Tax rate Proposed Tax rate

Less than 1 year Marginal rate applicable to No change

More than 1 year but less 10% without indexation or Marginal rate applicable to

More than 3 years 10% without indexation or 20% with indexation

investor

than 3 years 20% with indexation, investor

whichever is lower

20% with indexation,

whichever is lower

Way Forward:

Depending upon the tax rate, the table below shows what option an investor could choose:

REQUIRE Regular Income DO NOT REQUIRE

(Dividend Option)

Marginal Regular

Tax Rate Income (Growth Option)

Long Term Short Term Long Term Short Term

More than 3 yrs Less than 3 yrs More than 3 yrs Less than 3 yrs

Indifferent between Fixed Income

(Bonds/NCDs/FDs) & Debt Funds Indifferent

Debt Funds would between Fixed

Fixed Income is a better option be still attractive Income &

Debt Funds

30%

20%

10%

Debt and Hybrid Funds Corpus NAV (`) Annualised(%)

( Crs)# Gr Div 3 mths 6 mths 1 yr

Income Funds

Franklin India Corporate Bond Opportunities 6,471.45 13.08 10.88

UTI Dynamic Bond Fund 375.11 14.46 10.78

Birla Sun Life Medium Term Fund 3,193.87 15.82 11.73

Ultra Short Term Plan

Franklin India Ultra Short Bond Fund 5,307.00 17.41 10.09

DWS Ultra Short Term Fund 1,816.47 15.79 10.51

Birla Savings Fund 7,162.18 253.37 100.27

Gilt Funds

SBI Magnum Gilt-STP 124.52 26.17 11.67

ICICI Pru Short Term Gilt Fund 116.82 32.26 12.30

Liquid Funds

Birla Cash Plus 16,448.49 211.90 100.36

Tata Money Market Fund- A 3,275.36 2,078.49 1,001.52

Reliance Liquid-Treasury Plan 14,944.55 3,217.86 1,588.99

Hybrid - Monthly Income Plans(MIPs)

HDFC MIP-LTP 3,665.49 31.48 13.98

Birla MIP II-Wealth 25 213.25 25.01 12.55

Crisil Liquid Fund Index

Crisil Composite Bond Fund Index

`

Fund

11.18 11.87 12.21

14.58 13.95 11.89

11.53 12.02 11.87

9.40 10.04 10.78

9.46 9.50 10.74

9.35 9.70 10.62

11.39 10.23 10.27

11.59 10.57 9.48

8.73 9.23 9.90

8.73 9.10 9.82

8.74 9.09 9.80

35.52 32.73 23.17

30.13 26.49 20.88

8.97 9.43 10.06

13.67 12.90 9.92

Sun Life

Sun Life

Sun Life

Performing Mutual Fund Plans

*Returns are annualized as on 31st Jul 2014# Monthly Corpus as on June 2014.

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Performing Mutual Fund Plans

Equity and Hybrid Funds Corpus NAV (`) CAGR (%)

( Crs)# Gr Div 1 yr 3 yrs 5 yrs

Equity - Large Cap

Birla Equity Fund 1,003.26 413.01 88.78

Reliance Vision Fund 3,020.82 365.58 43.04

HDFC Top 200 Fund 12,695.19 308.22 49.89

Equity - Multi cap

Birla Pure Value Fund 207.99 32.37 26.19

Tata Equity P/E Fund 468.31 72.96 39.27

Equity - Mid & Small cap

Reliance Small Cap Fund 782.58 18.88 17.26

ICICI Pru Midcap Fund 525.20 56.17 22.69

DSPBR Micro-Cap Fund 849.80 28.36 17.22

Equity - Sectoral

HDFC Infrastructure Fund 1,490.80 14.42 14.42

Reliance Diver Power Sector Fund 2,432.97 73.43 34.22

Tax Saving Scheme(ELSS)

Reliance Tax Saver (ELSS) Fund 2,871.53 37.62 19.45

ICICI Pru Tax Plan 2,095.14 232.72 23.81

HDFC TaxSaver Plan 4,606.58 349.87 62.54

Balanced Fund

HDFC Prudence Fund 6,527.81 332.87 31.40

HDFC Balanced Fund 1,772.93 91.00 24.94

Sensex 25,894.74

Nifty 7,721.30

`

Sun Life

Sun Life

68.82 17.76 14.45

60.35 11.00 11.37

53.64 13.86 14.49

104.07 23.78 22.14

72.83 15.87 15.92

113.36 23.71

104.18 19.98 19.12

101.80 21.65 26.18

89.61 8.46 9.19

79.01 3.99 1.70

86.61 20.89 19.69

65.30 18.11 19.68

63.07 14.39 16.65

59.83 15.15 17.99

54.08 16.14 18.99

33.85 12.44 10.56

34.47 12.06 10.73

-

*Returns are compounded annualized as on 31st Jul 2014# Monthly Corpus as on June 2014.

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