mutual funds in india have been - icici...

Mutual funds in India have been there in existence since last over 50 years. The industry has evolved through the years, with current assets under management (AUM) being over Rs. 10 trillion ( 10 lakh crore). However, AUM as a percentage of GDP (gross domestic product) still remains low. It is just about 7-8 per cent, significantly lower than the global average of 37 per cent.

Only a small portion of Indian h o u s e h o l d s ' s a v i n g s g e t channelised into financial assets such as equity, mutual funds, etc. For instance, during FY13, only 32.4% of the total savings was in financial instruments, the rest 67.6% being into physical assets

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Anup BagchiMD & CEO

ICICI Securities Ltd.

such as gold and real estate. Out the total financial assets, mutual funds form even a smaller portion.

The capital market regulator, Securities and Exchange Board of India (SEBI), along with other financial intermediaries, has been regularly taking the initiatives to increase awareness and participation of retail investors in mutual funds, across the country.

I believe the retail participation will increase going forward, as mutual funds are one of the best investment vehicles. The collective benefit that they offer - professional management, diversification, liquidity, variety, etc., - is their unique feature. Whether you are a new investor or have spent time in the market, they are an ideal investment option for you, to meet your financial goals.

Just name a goal, and there is an appropriate mutual fund for you. For instance, for your long-term goals like retirement and children's education and marriage, equity diversified funds make a great

1ICICIdirect Money Manager October 2014

proposition. This is because, in the long run, equities tend to outperform all other asset classes. For your medium and near-term goals, such as arranging an amount for down payment of your car or a home, say within next six months to one year, there are short to medium-term debt funds available. If your goal is to save on taxes, there are mutual funds available for that as well - Tax-saving Equity Linked Savings Schemes (ELSS). And if you desire to take exposure into overseas companies, there are international funds available too.

Once you have identified the broad fund categories that are appropriate for your goals, you will want to zero down on the individual funds in each of the categories. Performance of a fund over a period of time compared to its benchmark and peers is usually an important factor, but not the only consideration. Other factors that you may are: fund manager's track record, his total experience, fund's expense ratio, etc.

If you already have not started investing in mutual funds, now is the time to do so. You can start with as low as Rs. 500 a month, by investing through systematic investment plan (SIP). Investing in mutual funds through SIP is an ideal investment strategy to achieve your goals.

Apart from investing, to achieve various life goals, it is also important that you protect your investments from any unforeseen events such as medical exigency or a job loss. With our unique proposition 'Secure Mind', you can do so. Secure Mind is a general insurance cover, aimed at insuring your mutual fund investments against some uncertain events. With this cover, you need not redeem your mutual fund investments halfway to pay for unforeseen expenses. Instead, you get the entire amount of sum insured upon diagnosis or occurrence of any events as covered under the policy.

Our message remains the same - 'Keep investing and stay invested for your life goals.' Through this magazine and our website www.icicidirect.com we want to make an earnest attempt to partner with you in setting and achieving your financial goals. I also take this opportunity to wish you and your loved ones a joyous Diwali and a Happy New Year.

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It is important to plan our investments according to our financial goals. It not only helps us set priorities and remain disciplined, but also gives us a clearer picture of how well we are progressing toward meeting our goals.

One of the best options, which help us plan our investments based on our goals, is: Mutual funds. Coupled with benefits of professional management and diversification, mutual funds provide range of options, designed to meet almost every financial goal. Be it planning for retirement, child's education, saving tax, etc., there are mutual funds available for it.

One argument given in favor of direct investing as against mutual funds is the fee and charges. While fee is a key consideration in choosing a mutual fund, it is important to also understand the cost involved in direct investing. Some costs like brokerage are known but direct investing also has other hidden costs like time spent, spreads and slippages which are not always considered.

In this edition of ICICIdirect Money Manager, we take you through the details of how mutual funds can help you reach your financial goals.

Further, with over thousand of mutual fund schemes available in the market, selecting the right ones may become too complex. To make it easy for you, we present our research team's top recommendations, across categories. All in all, this issue is a wholesome mutual funds package, which we hope will help you plan your investments efficiently.

I would also like to draw your attention to our interview with Anup Maheshwari – Executive Vice President, Head Equities & Corporate Strategy, DSP BlackRock Mutual Fund, who advises investors to remain overweight on equities and invest with a 3-5 year investment horizon.

So read on, stay updated and involved. Do write in with your feedback at [email protected] and share your thoughts.

Editor & Publisher : Abhishake Mathur, CFA

Coordinating Editor : Yogita Khatri

Editorial Board : Sameer Chavan, CWM®, Pankaj Pandey

CMEditorial Team : Azeem Ahmad, Nithyakumar VP CFP , Nitin Kunte, Sachin Jain, Sheetal Ashar

ICICIdirect Money Manager October 2014

3

MD Desk..............................................................................................1

Editorial............................................................................................... 2

Contents.............................................................................................. 3

News...................................................................................................4

Markets Round-up & Outlook..................................................................5

Getting Technical with Dharmesh Shah...................................................8

Derivatives Strategy by Amit Gupta.......................................................10

Stock Ideas: Rallis India and Tata Communications................................14

Flavour of the Month: Reach your financial goals through mutual funds

Be it planning for retirement, child's education, saving tax, etc., mutual funds are there to fit your financial needs and goals........20

Mutual Fund Top PicksHere we present our research team's top mutual fund recommendations, across equity and debt categories…..............27

Tête-à-tête: 'Remain overweight on equities’An interview with Anup Maheshwari – Executive Vice President, Head Equities & Corporate Strategy, DSP BlackRock Mutual Fund…..............................................................................................37

Ask Our Planner: Don't over-diversify your MF portfolio

Your personal finance queries answered…................................... 39

Equity Model Portfolio......................................................................... 42

Quiz Time........................................................................................... 47

Monthly Trends...................................................................................48

Premium Education Programmes Schedule............................................51



Now, 1 number to link all PF accounts

A Universal Account Number (UAN) for Provident Fund (PF) accounts, unveiled by Prime Minister Narendra Modi will help over four crore PF account holders to better manage their PF savings. Irrespective of the number of jobs a person switches, the number will remain unchanged. Those who have multiple PF accounts because of job switches can now link them to the unique number by logging into the new UAN-based portal. From now on, when switching jobs, a person will not need to apply to transfer the money to a new PF account, but will only need to provide the UAN to the new employer. That not all. In the coming days, the new portal will enable people to withdraw money from their PF accounts after online submission of the required documents.

Courtesy: Hindustan Times

The government is likely to launch the revamped Kisan Vikas Patra (KVP) early next month and may garner about 20,000 crore worth investments in the remaining months of the current fiscal. "All the paper work is complete. We hope to launch the revamped KVP early next month," a senior finance ministry official said. KVP was a very popular saving scheme that doubled the money invested in eight years and seven months. The government sold these saving bonds through Post Offices in the country.

Courtesy: The Economic Times

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Revamped Kisan Vikas Patra to be launched early next month

The pension regulator may allow a greater portion of the retirement savings of government employees parked in National Pension System (NPS) to be invested in equities if the government proposes to do so. This could over the year allow movement of thousands of crores of long-term retirement savings into equities, something that the government has been unable to persuade the Employees Provident Fund Organisation to do."The NPS structure offers an inbuilt flexibility to subscribers to choose the equity or debt option. We want that benefit to accrue to all subscribers," said a senior PFRDA official.

Courtesy: The Economic Times

Bigger equity play likely for National Pension System subscribers

The Pension Fund Regulatory and Development Authority (PFRDA) is seeking to bring various superannuation funds under its ambit, while it wants more deliberation on regulation of pension products offered by insurance companies and mutual fund (MF) houses.Asked if the regulatory body would also seek to bring pension products of insurance companies and MF under its umbrella, PFRDA executive director R V Verma said the issue would need more discussion and had to be addressed by all regulators together. PFRDA, which has now got statutory powers, is compiling details of various superannuation funds run by companies to bring these under its regulatory ambit.

Courtesy: Business Standard

PFRDA looks to expand its ambit


MARKETS ROUND-UP

Global growth concerns, Q2 numbers to keep markets jittery

The markets began September on a positive note boosted by first quarter gross domestic p r o d u c t ( G D P ) g r o w t h numbers and shrinking current account and fiscal deficits. The consumer price inflation (CPI) for August 2014 cooled marginally to 7.8% vis-à-vis 7.96% in July 2014 led by easing inflation in the services and transport segments. In its bi-monthly monetary policy meeting, the Reserve Bank of India (RBI) maintained status quo. Overall, for the month, markets ended flattish, with the momentum tapering off in the second half of the month.

The positive start to the markets was aided by upbeat GDP data for Q2CY14, which posted the biggest gain since early 2012 at 5.7% vs. 4.6% for Q1CY14 and 4.7% in Q2CY13. Current account deficit (CAD) for Q2CY14 also narrowed to US$7.8 billion vs. US$21.8 billion year-on-year (YoY). The lower trade deficit was largely led by a rise in exports and decline in imports. However, Index of Industrial Production

(IIP) data for July 2014 slipped to 0.5% vs. 3.4% for June 2014 led largely by contraction ( 1%) in manufacturing sector (75% weightage). The Indian auto industry posted growth of ~17% for August to ~2 million units led by 19% growth in two wheelers and ~7% growth in passenger vehicles. The RBI kept the repo rate unchanged at 8% as also the cash reserve ratio (CRR) and statutory liquidity ratio (SLR), which were kept unchanged at 4% and 22%, respectively. The RBI also reduced the liquidity provided under the export credit refinance (ECR) facility from 32% of eligible export credit outstanding to 15% with effect from October 10, 2014. The RBI has also maintained its forecast of GDP growth for FY15 at 5.5%.

Global markets began the month on a weak note as apprehensions on account of the European Central Bank (ECB) meet scheduled in the second half of the week w e i g h e d o n m a r k e t sentiments. US manufacturing


MARKETS ROUND-UP

data released during the week accelerated unexpectedly to 59.0 in August against 57.1 in July. Factory orders for July increased to 10.5% posting the biggest monthly increase on record. However, with the ECB a n n o u n c i n g a s l e w o f measures to boost the economy by reducing its benchmark interest rates from 0.15% to 0.05%, the markets saw momentum returning. Further, the ECB also said it would buy asset-backed securities and covered bonds and take further steps to boost the economy. Apart from this, the agreement for permanent ceasefire between Ukraine and Russia was also cheered by investors. The mid-month monetary policy of the Fed meanwhile made markets jittery with upbeat economic data dampening sentiments on expectations the Fed could consider raising interest rates sooner-than-expected.The Fed, however, reiterated its monetary policy stance in line with that of the last meet in July and announced that interest rates will remain at the current level for a sizable period.

Nearing the end of the month, comments from Chinese Finance Minister Lou Jiwei indicating that China will not dramatically alter its economic pol icy despi te s igns of downward pressure on growth, also aided negative sentiments on the long-term global growth outlook.

During the month, crude (Brent) continued to decline from ~$100, accelerating towards the $90-mark, closing at $93.2. The trend has continued in the first half of October as well, with crude breaching its previous 28-month low of $88.Global markets

The US markets continued to trade with a negative bias through the month with only intermediate signs of recovery. The major indices, Dow Jones, S&P 500 and the Nasdaq lost about 0.3%, 1.6% and 1.9%, r e s p e c t i v e l y. E u r o p e a n markets also remained weak with the FTSE losing 2.9% while the German Dax and French CAC remaining flat at 0% and 0.8%, respectively. Asian markets, on the other


MARKETS ROUND-UP

hand, witnessed a mixed trend with Nikkei and Shanghai SSEC gaining 4.9% and 6.6%, respectively, while the Hang Seng posted huge losses at 7.3%.

Domestic markets

The foreign institutional investors (FIIs) continued to remain net buyers in the Indian markets albeit at a lower pace than last month and bought ~ 900 crore while domestic institutional investors (DIIs) bought to the tune of ~ 1,130 crore.

T h e N i f t y a n d S e n s e x remained almost flat during the month. Other indices showed a mixed trend with BSE Healthcare, BSE IT, BSE FMCG, BSE IT, BSE Auto, BSE Midcap and BSE Small Cap Indices showing gains of 7.5%, 6%, 3.1%, 6%, 2.6%, 2.5% and 4.1%, respectively, while BSE Realty, BSE Metal, BSE Oil, BSE PSU, BSE Power and BSE Bankex witnessed a decline of 8.5%, 6.9%, 4.1%, 3.9%, 3.1%, and 2.2%, respectively.

Outlook – cracks emerging in global growth prospects; Q2 numbers hold key

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Global growth concerns have resurfaced again with the International Monetary Fund ( IMF ) t r imming g rowth prospects of most regions and the ECB openly accepting the fact that Europe is heading for def lat ion. The eurozone economy, meanwhile, is flirting with recession for the third time in recent years. Dismal German data has substantiated these fears. Chinese economic growth is also weakening while Japan continues to tell the same old story. On the other hand, oil prices are falling whereas the dollar is riding high on expectations that the US Federal Reserve will raise interest rates from next year. To sum up, barring US, all m a j o r e c o n o m i e s a r e struggling one way or the other. In this backdrop, we expec t Q2 numbers o f domestic companies to act as major catalysts for the Indian markets. The ruling party's performances in the two state elections will also be keenly watched.


TECHNICAL OUTLOOK

Index to consolidate in 7650-8050 range

Domestic equity benchmarks scaled to new all-time highs of 27354 / 8180 (Sensex / Nifty) in the first half of September 2014 and thereafter entered into consolidation mode amid profit bookings across the recently run-up heavyweights from cyclical space. The c o n t i n u e d g e o p o l i t i c a l tensions in Middle East and further roll back of US Fed's bond buying program led to cautious sentiments across global equities during second half of the month. In the broader market space, the BSE Mid-cap and Small-cap indices came under selling pressure after apprehending their respective 2008 and 2010 highs in September 2014, w h i c h i s a n o r m a l phenomenon as indices approaching their previous multi-year peaks tends to trigger profit bookings.

The current consolidation

phase is seen as a healthy

breather taken by the bulls to

g a t h e r s t e a m b e f o r e

northward journey. We expect

the Sensex / Nifty to witness

basing-formation near 25400/

7650 levels respectively and

thereafter resolve higher to

challenge the recent all-time

highs of 27354 / 8180 levels in

the coming month. Therefore,

cool-off towards 25400 / 7650

region should be used as

buying opportunity to ride the

next up-move.

Even as the benchmarks have

e n t e r e d a s e c o n d a r y

corrective phase in the short-

term, the market internals do

not suggest any signs of strain

from structural point of view.

Therefore, we believe the

current corrective decline will

find its feet around the 80%

Fibonacci retracement of

August-September rise placed

around 25400 / 7650 levels.


TECHNICAL OUTLOOK

BSE Sensex – Weekly Candlestick Chart

Source: Bloomberg, ICICIdirect.com Research

The views expressed in the article are personal views of the author and do not necessarily represent the views of ICICI Securities.

The index is expected to find

support near 25400/7650 mark

and head higher towards life

highs

Double Bottom @ 24879

22939

22277

19963

25375

2976 pts

3098 pts

13 week EMA

24163

80% retracement

27354

Weekly RSI holding its support reading of 60-65 during corrective phase highlights the underlying strength in the trend


DERIVATIVES STRATEGY

Nifty likely to consolidate in the range of 7800-8200 amidst quarterly results

Amit Gupta

Head - Derivatives Research,ICICI Securities

Nifty future premium surged to

63 po in ts pos t Augus t

expirywhich is the highest

premium seen in Nifty since

Feb 2012. Such a high

premium may push the

indexinto a consolidation

phase before resuming

uptrend.

The highest Put base in Nifty is

placed at 7800 strike which is

likely to provide support. The

highest Call base is continued

to be last series base of 8200.

Thus the range for Nifty

remains at 7800-8200 in the

coming sessions.

In last four consecutive

sessions, FIIs have sold over

half billion US $ in cash

segment, which is the longest

stretch since May 2014.

Further in the September

series there was long closure

from FIIs and unti l the

September expiry week they

had liquidated close to US $

700 million in index futures

(this quantum of liquidation is

not seen in last couple of

months).

We believe 8070 would remain

immediate hurdle on the

higher side. A move above this

level would lead to pullback

even in the oversold stocks.

Below this level, index may

consolidate for sometime.

As seen in the Nifty 2-sigma

Bollinger band below, Nifty had

bounced from the mean-2

sigma band on Sep 26. But we

believe that 8070 remains the

key intermediate hurdle, as this

is the VWAP of the last series.

Since the time Nifty bottomed

out in Feb 2014 near 6000, the

Nifty has not dipped below

VWAP of last series for more

than couple of sessions. This

time it has already spent 4

trading sessions. Inability in

surpass 8070 level could infuse

fresh weakness



Nifty Options build up inOctober series …

0

0.5

1

1.5

2

2.5

3

3.5

4

4.5

5

7400

7500

7600

7700

7800

7900

8000

8100

8200

8300

8400

OI i

n M

illio

n S

hare

s

Call OI Put OI

lNifty 2*Sigma Bollinger band : Nifty price near lower

5400

5900

6400

6900

7400

7900

8400

Jan-

14

Feb-

14

Mar

-14

Apr

-14

May

-14

Jun-

14

Jul-1

4

Aug

-14

Sep-

14

Close UBB(2) BollMA (20) on Close LBB(2)

Expiry gains in 2014 : First month since January where the expiry on expiry returns are negative

During the month, Nifty made few attempts to surpass 8200 levels, but it failed to conquer this level. Near the expiry the stuck leverage in the mid cap segment along with weakness in high beta names pushed Nifty to close 0.5% negative for the September series.

This is the first time in last 8 months, the Nifty has closed negative on expiry on expiry basis. The Nifty closed at 7911, which is 0.5% lower than the last expiry of 7954. The average ga ins pr ior to

September month had been 3% on expiry on expiry basis.

This trend is likely to trigger closure in some excess leverage which was created in the mid cap segment, which is likely to push Nifty into a consolidation. Further the Q2 earnings are kicking off during this month, which usually again causes broader markets to consolidate. Thus during the current month stock specific themes are likely to come back at the forefront.

Nifty MoM Expiry gains in 2014

3%3%4%

6%

3%

6%

3%

-3%

-4.0%

-2.0%

0.0%

2.0%

4.0%

6.0%

8.0%

SepAugJulJunMayAprMarFebJan

Nifty closing at series low, which triggered flight to safety, thus leading inflows in IT, Pharma & FMCG

As Nifty witnessed continuous selling from T-2 days in the run up to September expiry, the sectors which were majorly news driven saw the sharpest liquidation. Largest losses were seen in Real Estate -10%, Metal – 9.5%, Capital goods –



7.5% and Oil & gas -6.5%. As the market tumbled, the defensive plays was back in the reckoning. In fact largest gains were seen in FMCG of 5% and Technology of 4.5%.

For the month CNX mid cap was up only 0.5%, while CNX Small cap was down -1.0%.

The Nse Advance Decline ratio has been favouring declines since the mid of September as the cash buying in mid and small cap segment receded.

The way some of the large caps like Reliance Industries and L&T and mid caps names from PSU banking have corrected, it is suggesting the stock specific pressure could continue. And the shelter might be available in defensive like IT & Pharma along with FMCG.

High beta space should be looked only if Nifty is able to sustain above the September series average price of 8070.

Bank Nifty consolidation to continue near 15500 levels

Bank Nifty fell over 6% in the September expiry week, however post the positive rating news by S&P in Friday’s trade, the index bounced sharply by 300 points to close above 15600.

On the September settlement, the Banking sector witnessed one of the lowest rollovers as the PSU stocks witnessed leverage closure.

Looking at the options build up, the highest call base is at 16000, while on the lower side the highest Put base remains at 15000 and 15500 strikes. This build up is suggesting the Banking index could spend more time consolidating near 15500.

The Bank Nifty/ Nifty ratio is c u r r e n t l y a t 1 . 9 5 . Ke y resistance for the price ratio is 2 . 0 2 . I f t h e w e a k n e s s exaggerates, the price ratio could dip towards 1.85 levels.

During the week, an all important RBI policy review on Tuesday is likely to play an important role for banking index. A Dovish undertone could act as trigger for the upsides in the banking segment stocks.

Sectoral return in September Series…

-10 -5 0 5

FMCG

IT

Pharma

Realty

Metal

Capital Goods

Oil & Gas

% monthly return



Bank Nifty options build up suggest 15000-16000 range

0

0.1

0.2

0.3

0.4

0.5

0.6

1480

0

1500

0

1520

0

1540

0

1560

0

1580

0

1600

0

1620

0

1640

0

1660

0

1680

0

Call OI Put OI

India VIX : Likely to recover after hitting life lows of 10.31

Since the election verdict in May 2014, the volatility index has been in a declining trend and has hit the record lows of 10.31 in September month.

However with the onset of Q2 FY14-15 earnings season, increased geo political risk and US Dollar strength, equity markets are likely to remain

jittery within the broad range which is likely to push India VIX higher.

On a positional basis, the 100 week moving average is at 18.2. This level is likely to be tested only in the event Nifty breaches 7800.

Despite lot of holidays in October, higher levels of India VIX should be traded with caution for time value plays.

India VIX likely to move up fromrecord lows…

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STOCK IDEAS

Rallis India: Good play on agri theme


Company Background

Rallis India is a market leader in the crop protection (agro-chemical i .e. pesticides) segment domestically with a rich historical background. Under the crop protection segment, it manufactures and m a r k e t s i n s e c t i c i d e s , herbicides and fungicides. With manufacturing facilities spread across four geographic locations domestically, the company has a capacity of 10,000 tonne of technical grade pesticides and ~30,000 tonne/litres of formulations per annum. Rallis has a strong distribution network with ~2,000 dealers and 30,000 retailers, thereby covering ~80% of Indian districts. The company has got transformed from only an insecticide player to a total agro service solution provider. The transformation began in FY11 when it acquired a majority stake in a seed manufacturing company i.e. Metahelix Life Sciences Pvt Ltd. In FY13, it had also acquired a majority stake in organic manure and soil conditioners manufacturing c o m p a n y ( b a s e d i n Maharashtra) Zero Waste Agro Organics Pvt Ltd. Rallis also

has an institutional and contract manufacturing arm that manufactures chemicals for its institutional clients.

Challenges faced by Indian agri industry: Opportunity for agro-chemicals

Currently, a lot of challenges are being faced by the domestic agriculture sector, which comes as an opportunity for the agro chemical industry. Some of the challenges include (I) constant sowable land. In India, the net sown area has remained almost constant at ~140 million hectare (ii) Fragmented land holdings; the acreage of land holdings per Indian farmer has reduced over a period of time (from 1.33 hectare per holding in FY01 to 1.15 hectare per holding in FY11), thereby leading to challenges over economies of sca le and greater farm mechanisation (iii) mounting crop losses (amounting to ~ 90,000 crore annually) due to non usage of crop protection chemicals. Thus, with under-penetrat ion of the crop p r o t e c t i o n s e g m e n t d o m e s t i c a l l y a n d t h e government ' s th rus t to

Investment Rationale

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STOCK IDEAS


augment the crop yields, there exists an impelling case for augmenting the usage of crop protection chemicals. Rallis India, being one of the leaders in this segment is well poised for an exciting growth journey ahead.

Presence across the value chain

Rallis is present across the agr icul tural value chain ranging from hybrid seeds ( th rough i t s subs id ia ry Metahelix) to plant growth nutrients to organic manure & soil conditioners (through its subsidiary Zero Waste Agro Organics) to crop protection (agro chemicals). Metahelix manufactures and markets hybrid seeds with ~60-65% exposure to the Kharif season. Metahelix' revenue has grown at a CAGR (compounded annual growth rate) of 59% in FY12-14. With a good product profile coupled with strong R & D ( r e s e a r c h a n d development) set up, we expect revenues of Metahelix to grow at a CAGR of 25% in FY14-17E to 439 crore in FY17E ( 225 crore in Fy14). Hence, with Metahelix traction and strong base business, we expect consolidated revenues to grow at a CAGR of 16.8% over FY14-17E to 2755.3

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crore in FY17E.

Contract manufacturing; new area of thrust; robust growth outlook

Rallis also has a notable presence in the contract manufac tur ing segment wherein it manufactures chemicals and formulations for other reputed industry players. It is developing its new Dahej SEZ unit for the purpose of contract manufacturing. In FY14, Rallis clocked a topline of ~ 250 crore from this s e g m e n t . W i t h t h e commissioning of the Dahej facility (partially) we expect this segment to grow at a CAGR of 20% in FY14-17E.

Sound financials, lean balance sheet; well poised for growth

Rallis has a lean balance sheet with minimal leverage and strong return ratios with Fy14 RoCE and RoE at 21% and 28%, respec t ive ly. The company also possesses a relatively better working capital cycle with net working capital days at 23 days in Fy14 vis-à-vis industry average of ~44 days. We have valued Rallis at 24x P/E on an average FY16E and FY17E EPS of 12.6 and arrived at a target price of 302. We have assigned a BUY rating to the stock.

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STOCK IDEAS


Key risks include: Evolution of genetically modified crops (GM crops), which limit the usage of crop protection chemicals in the farm field; Adverse weather conditions/inadequate monsoons, which can limit the acreage under sowing; Failure to innovate and develop new products; fall in MSPs and global food prices, which limit the purchasing power of farmers.

(EBITDA: Earnings before interest, taxes, depreciation, and amortization; EPS: Earnings per share; P/E: Price-to-earnings; P/BV: Price/book value; RoNW: Return on net worth; RoCE: Return on Capital Employed; MF: Mutual Funds; FII: Foreign Institutional Investors)

Key Financials

Valuations Summary

Stock Data

Net sales ( crore) 1,727 2,026.6 2,360.8 2,755.3

EBITDA ( crore) 261.3 316.9 388.7 476.9

Net profit ( crore) 151.9 183.7 217.4 273.2

EPS ( ) 7.8 9.4 11.2 14

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P/E 30.9 25.5 21.6 17.2

Target P/E 38.8 32.1 27.1 21.5

EV / EBITDA 18.2 14.9 12 9.6

P/BV 6.5 5.6 4.8 4.1

RoNW 21.2 22 22.2 23.7

RoCE 27.5 29.9 33.9 35.4

Particulars Figure

Market capitalization ( crore) 4687.5

Total debt (FY14) ( crore) 74.5

Cash and investments (FY14) ( crore) 15.5

Enterprise value (EV) ( crore) 4746.5

52-week High/Low ( ) 251 / 148

Equity capital ( crore) 19.5

Face value ( ) 1

MF Holding (%) 5.7

FII Holding (%) 15.8

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STOCK IDEAS


Tata Communications: Treading on the path to balance sheet improvement

Company BackgroundTata Communications Limited

(TCL) is a leading B2B

( b u s i n e s s - t o - b u s i n e s s )

provider of communication

services such as wholesale

voice, wholesale data and

mobile signalling services, to

the service providers. It offers

a range of communication

s o l u t i o n s i n c l u d i n g

international and national

private leased circuits, virtual

p r i v a t e n e t w o r k s a n d

associated managed services,

ethernet services, internet

access, managed hosting,

cloud-based services, etc. to

the enterprise customers. It

also provides collaboration

services to large and medium

scale enterprises managing

telepresence rooms across the

world. Also the company is

establishing strong presence

in the ATM services to both

public and private sector

banks in India and manages

19,030 ATMs. TCL also boasts

of a wholly-owned cable

network ring around the world

ranging over 2,10,000km and

is a global Tier-I IP (internet

p ro toco l ) ne twork w i th

connectivity to more than 240

countries and territories across

400 PoPs (points of presence)

and nearly one million square

feet of data centre and

collocation space worldwide.

Margin-accretive GDS segment to

post 15.3% FY14-16E revenue

CAGR

The global IP traffic is expected

to grow more than threefold by

2018, with the annual traffic

expected to reach 1,31,553

PetaBytes (PB) per month by

2018, growing at 21% 2013-18

CAGR. TCL with a 10% market

share in the global IP traffic and

its continued innovations is

well poised to capitalize on this

data boom. We expect global

data solutions (GDS) segment

to register a 15.3% & 19.6%

revenue & EBITDA CAGR over

FY14-16E to 10,521 and

2,235.7 crore, respectively.

Global voice solutions: Global

leader in wholesale voice with 19%

share

Investment Rationale

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18

STOCK IDEAS


The company remains the

largest player worldwide in the

wholesale voice segment and

has transformed itself from the

provider of international long

distance (ILD) telephony to

global wholesale carrier. It

commands 19% share in the

global wholesale voice traffic.

Within India, the company

commands 21% share in the

total ILD (inbound 85 billion

minutes, outbound 4.5 billion

minutes) segment. In the total

national long distance (NLD)

segment of 372 b i l l ion

minutes, 15 billion minutes

(outside captive networks of

telecom operators) is the

addressable market for TCL,

within which, the company has

a market share of 39%.

Weexpect the company to post

a 3.1% FY14-16 CAGR in its

g l o b a l v o i c e s o l u t i o n s

business and reach 10,141.0

crore by FY16E from 9,539.5

crore in Fy14.

Free cash flows to grow 1.8x, net

debt /EBITDA to reduce to 2.7x

TCL has already past its peak

capital expenditure (capex)

requirement and we can

e x p e c t l o w e r c a p i t a l

`

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commitment going ahead. The

net debt/EBITDA has already

come down from high of 6.5x

in FY10 to 3.6x in FY14. As the

company further sweats its

existing assets, the ratio will

further come down to 2.7x by

FY16. Moreover, post the

Neotel stake sale, the net

debt/EBITDA could fall to far

more comfortable level of 2.5x.

Re-rating on cards; initiate Buy

with target price of Rs. 453

We initiate coverage on Tata

Communications with Buy

rating and a target price of

453, which implies Fy16

E V / E B I T DA m u l t i p l e o f

6.2x.Over the past five years,

the company has traded at an

average multiple of 8.0x.

Owing to improving business

performance led by the data

s e g m e n t a n d r e d u c i n g

leverage the stock will witness

further re-rating. Land de-

merger would provide an

additional value of 219 per

share; however we will include

it in our target price once the

de-merger is complete.

`

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19

STOCK IDEAS


Key risks include: Any further delay in land monetization could hurt investor sentiment. Moreover, if there is more than expected decline in the voice traffic, there could be a downside risk to our assumptions.

(EBITDA: Earnings before interest, taxes, depreciation, and amortization; CAGR: Compounded annual growth rate; EV: Enterprise value; EPS: Earnings per share; P/E: Price-to-earnings; RoNW: Return on net worth; RoCE: Return on Capital Employed; DII: Domestic Institutional Investors; FII: Foreign Institutional Investors)

Key Financials

Valuations Summary

Stock Data

Net Sales ( crore) 17,213 19,619.6 21,690.1 23,629

EBITDA ( crore) 2,059.7 3,041.6 3,293.7 3,684

Net profit ( crore) (623.3) 101.4 161.2 379.1

EPS ( ) (21.9) 3.6 5.7 13.3

`

`

`

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P/E (x) - 98.4 61.9 26.3

Target P/E (x) - 127.3 80.1 34.1

Dividend yield (%) 0.7 1 0.7 0.7

Price/Sales (x) 0.6 0.5 0.5 0.4

RoNW (%) (43.7) 12.7 18.8 33.4

RoCE (%) 0.2 6.6 8.2 10.1

Particulars Figure

Market capitalization ( crore) 9,975

Total debt (FY14) ( crore) 13,694.4

Cash and investments (FY14) ( crore) 2,673.9

Enterprise value (EV) ( crore) 20,995.5

52-week High/Low ( ) 409 / 202

Equity capital ( crore) 285

Face value ( ) 10

DII Holding (%) 11.7

FII Holding (%) 7.9

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FLAVOUR OF THE MONTH

Mutual funds for all your financial goals

Equity markets offer the best returns in the long run. You want a part of

those returns, but don't have the necessary expertise and the time to

research individual stocks. What do you do? Debt markets offer relatively

stable returns. You want a part of those returns, but don't have the

necessary skills to estimate interest rate cycles. What do you do? You

have got some idle funds lying into your savings bank account and want

more than 4 per cent returns. What do you do? The situation could vary

from person to person. But, the solution remains same: Mutual funds.

Mutual funds offer the solution for almost every financial need, for all

types of investors, across age groups. So, whether you are seeking an

equity market's growth, debt market's stability, or the best of both, mutual

funds are there to fit your needs and goals. Let's take a look.

For the uninitiated, a mutual fund is a company that pools the money from individuals like you and me, and invests it

in a variety of securities ─ shares, bonds, and others. T h o s e s e c u r i t i e s a r e professionally managed on behalf of the individual investors and each individual holds a proportional share of the portfolio.

The most important benefit of investing through a mutual fund is that you get access to professional management. The fund managers have real time access to crucial market information; they are able to

A lot to like about mutual funds

manage your investments better than you can - unless you have time to spend on researching the individual investment options you decide to invest in.

T h e s e c o n d i m p o r t a n t advantage of mutual funds is the in-built diversification they offer, by investing in a broad range of securities. This limits the investment r isk by reducing the effect of a possible decline in the value of any one security. You can participate in a diversified portfolio for as little as Rs 5,000, or less. Further, they offer liquidity, for instance, you can easily redeem an open-ended scheme. Being well



r e g u l a t e d , transparency. You also have a large variety of schemes c a t e g o r i e s a n d s u b -categories—to choose from.

Last, but not the least, mutual funds also offer you to invest in options where you individually can't. For instance, they can easily trade in the government securities and bond markets w h e r e t h e m i n i m u m investment criterion is into crores.

So, to put it in a nutshell, wherever you want to invest - Stocks or bonds, government securities or commercial paper, gold or real estate, mutual funds can do it with greater professionalism and w i th l ess r i sk to your investment. As mutual funds come into variety, they are there for almost every financial goal.

An emergency situation can arise at any point of time. For times like these, it is important to build a contingency fund. It is nothing but savings parked in liquid options, to be used during emergencies. The size of the fund depends on your expenses, stability of income, etc. It can be at least 6 months

t h e y o f f e r

Your goals and suitable mutual funds for that

Saving for emergencies:

of your basic living expenses.

Most people would consider parking money in savings accounts due to their liquid nature; however, this is not a prudent option. One should invest in liquid funds - short term mutual fund schemes - from where money can be withdrawn anytime without any exit load.

Liquid funds give better returns than savings accounts. While most banks offer 4 per cent interest on savings accounts, liquid funds have given around 9 per cent returns in the last one year.

From playschools to post graduation, education costs are rising exponentially. Hence, it is important that one plans in advance, to safeguard children's future.

Assuming that your child's education and marriage goals are 15-20 years away, you can invest aggressively in equity funds. You can choose a mix of equity diversified funds and index funds. Another option is a well-performing balanced fund. Mid-cap funds can be considered too.

In the past 5 years, equity d i v e r s i f i e d f u n d s h a v e r e t u r n e d a r o u n d 1 3 %

Children's education and marriage goals:



compounded annualized, while mid-cap and small-cap funds have returned around 18% in the past 5 years.

It is important to shift funds from equity to debt funds as you near your goal (at least three-five years before).

For your children's marriage goals, you can start buying gold for in the form of gold Exchange Traded Fund (ETF) units. Each unit represents approximately 1 gram of physical gold. Gold ETFs are listed on the National Stock Exchange (NSE) and can be traded just like stocks using the trading platform.

Factors such as increasing life spans, rising inflation, preference for nuclear families, absence of p e n s i o n s y s t e m s , e t c . necessitate early investing for retirement.

If you are in your 20s and 30s and retirement is 25-30 years a w a y, y o u c a n i n v e s t aggressively in equity mutual funds. In the long run, equity tends to outperform all other asset classes. Middle-age investors can use balanced or debt mutual funds. Those nearing retirement, can invest in short-term debt funds to generate regular income.

One may a l so op t fo r

Saving for retirement:

systematic features offered by mutual funds –systematic i n v e s t m e n t p l a n ( S I P ) , systematic transfer plan (STP) and systematic withdrawal plan (SWP) to plan their retirement. SIPs can be used to build retirement corpus. STPs, which help transferring the amount from one fund to another, can be useful in the consolidation phase where one would like to shift from equity to debt funds. SWPs can be used during retirement phase, for regular income, from the wealth already created.

If you want to lower your taxable income and also build long-term wealth, you can invest in equity-linked saving schemes (ELSSs). ELSS funds are diversified equity funds except for the lock-in period of three years from the time of investment and the tax deduction under Section 80C up to 1.50 lakh.

Being the equi ty- l inked instruments, they have given highest returns, with 5-year category average returns being around 12%. The best way to invest in ELSS is to take the SIP route and invest throughout the year.

Near term goals could be buying a

Tax planning:

Saving for near term goals:

`



car or make the down payment for a house in a year or two. For near term goals stay away from equity. Such goals can be met through debt funds, which invest purely in fixed-income instruments. Income funds may be used to ensure that your money grows at a steady pace.

Keep in mind: debt funds do carry interest rate risk. If interest rates go down, these funds do well (as interest rate and bond prices are inversely related).

With over 1,000 of mutual fund schemes in the market, managed by 42 fund houses, how does one sift through such a vast selection and pick the winners? Here are some key points to keep in mind:

As mutual funds have objectives, you too have your financial goals. Make sure these match. For example, if your goal is planning for retirement, liquid funds will not serve the purpose, as their objective is easy liquidity and not long-term growth.

Look at the fund's past performance, preferably over different time

Points to ponder before you select the funds

Make sure the fund's objectives match yours:

Fund's performance:

periods – like 3 years, 5 years, and so on. Also check out the fund's performance against its benchmark index and its peers. A fund that has consistently underperformed its benchmark index and also i ts peers is not wor th considering. If it is a new scheme, check out the past performance of the fund house's existing schemes. But you must remember that past p e r f o r m a n c e i s n o t a g u a r a n t e e o f f u t u r e performance.

Expense ratio is the annual fee that all funds charge for managing your money. It is d e d u c t e d f r o m y o u r investments every year. A higher expense ratio can lower your returns. Expense ratio is important especially in case of debt funds, as in the long run, returns from debt funds are generally lower compared to equity funds, and a higher expense ratio can drag down their returns by ~50-100 basis points (bps).

H o w h a v e t h e v a r i o u s categories of mutual funds performed over the years as compared to key benchmark indices? Let's take a look:

Weigh the impact of expense ratio:

Several mutual fund categories and their performance snapshot



Equity Funds

Categories Average Returns (%)

1-year 3-year 5-year

Equity Diversified 47.35 19.06 12.78

Midcap and Small-cap 76.72 26.32 17.99

Large-cap 37.06 17.41 10.70

Equity Linked Savings Scheme (ELSS) -Tax-saving funds 46.25 19.21 12.05

Sector and Thematic 44.06 16.90 13.54

Infrastructure 62.26 12.34 4.18

Arbitrage 8.67 8.87 7.74

International Equities 6.56 10.05 6.37

Index funds 24.29 12.54 9.36

Key Benchmark Indices

CNX Nifty Index 28.65 15.27 8.96

CNX Midcap Index 60.38 15.22 7.81

S&P BSE Midcap 52.94 16.44 9.99

S&P BSE Sensex 27.86 15.53 8.86

CNX 500 Index 35.88 15.71 8.79

CNX Infrastructure 33.28 4.51 -4.15

S&P 500 International 9.80 15.30 11.44

Data as on October 16, 2014; all returns are annualized; Source: CRISIL and ICICIdirect

Debt Funds

Categories

Average Returns (%)

6-month 1-year 3-year

MIP – Aggressive 18.22

14.91 10.08

MIP – Conservative 18.68

15.45 10.02

Liquid Funds 8.48

8.89 9.03

Gilt Funds 12.86

8.90 8.59

Income Funds – Short term

10.11

9.35 9.01

Income Funds- Long term

11.95

8.75 8.75

Key Benchmark Indices

Crisil MIPEX 17.13 13.12 9.64

Crisil LiquiFex 8.97 9.35 8.91

CRISIL Gilt Index 16.23 9.72 8.87

CRISIL Short Term Bond Index 9.98 9.68 9.09

CRISIL Composite Bond Index 14.44 10.34 8.40

Data as on October 16, 2014; all returns are annualized; Source: CRISIL and ICICIdirect



Mutual Funds: Taxation StructureTax on dividend received by unit holders

Equity mutual funds

Nil

Non-equity mutual funds

Nil

Tax on dividend payable by the mutual fund houses Equity mutual funds

Nil

Non-equity mutual funds 25% + 10% Surcharge + 3% Cess = 28.325%

Capital Gains Taxation

Equity mutual funds (For the period April 1,2014 onwards)

Long-term capital gains (units held for more than 12 months)

Nil

Short-term capital gains (units held for 12 months or less)

15%

Non-equity mutual funds - For the period April 1, 2014 to July 10, 2014


20% or 10%, whichever is lower (after providing for indexation)


30% (Assuming the investor falls into highest tax bracket).

Non-equity mutual funds-For the period July 11, 2014 onwards


20% with indexation


30% (Assuming the investor falls into highest tax bracket).

Mutual funds: Expected return, risk level and indicative investmenthorizon

Mutual Fund type

Brief/ Set of assets they invest in Expected return

Risk Indicativeinvestment

ho rizon

Equity: Large-cap

Invest predominantly in large-cap stocks High High More than 5 years

Equity: Diversified

Invest in stocks across market capitalization and sectors

High High More than 5 years

Equity: Small and mid-caps

Invest p redominantly in small and mid cap stocks

High

High

More than 5 years

Equity: ELSS (tax planning)

Diversified eq uity funds that have a 3 year lock -in period

and provide income tax exemption

under section 80 C upto

Rs.1.50

lakh

High

High

More than 5 years



Equity: Index funds

Invest into companies in the same proportion as that index (Sensex of Nifty)

High High More than 5 years

Balanced funds

Invest at least 65% of the corpus into equity and the remainder into debt

securities

Moderate

Moderate 5 years

Liquid funds Invest into short -term corporate debt papers, certificate of deposit (Cds) and money market instrum ents, with a maturity

of up to 91 days

Low

Very low Less than 90 days

Income funds – short term

Invest into short-term debt papers whose maturities are up to

3 years

Moderate

Low

1 to 3 years

Income funds – long term

Funds that invest in long -term debt

papers whose maturities range between few months and can go even beyond 25 years

Moderate

Moderate

3 to 5 years

Gilt funds Invest in government securities whose maturities range between few months and can go even beyond 20 years

Moderate

Moderate

5 to 10 to 20 years

Fixed maturity plans (FMPs)

Invest in debt papers w hose maturity or tenure coincides with that of the scheme

Moderate

Moderate

30 days to 5 years

Monthly income plans (MIPs)

Hybrid funds that invest a small portion (up to 30%) in equity and rest into debt

Moderate Moderate 3 years

Gold ETFs Invest in physical gold and are traded on an exchange.

Moderate Moderate 5 years

Summing up

Mutual funds are a great investment option for all types of investors for their all financial needs and goals. They o f f e r d i v e r s i f i c a t i o n , professional management, convenience, liquidity, and a large variety of options, at a relatively low cost. All these features make them a powerful tool for wealth creation in the

long run. If you haven't already started investing in mutual funds, start now. You can start investing as low as 500 a month through a systematic i n v e s t m e n t p l a n ( S I P ) . Investing in mutual funds through SIP is the best investment strategy to achieve your long term goals.

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Mutual Fund type

Brief/ Set of assets they invest in Expected return

Risk Indicativeinvestment

ho rizon


MUTUAL FUND TOP PICKS

With over thousand of mutual fund schemes available in the market, selecting the right ones may become too complex. To make it easy for you, here we present our research team's top recommendations across categories.

Equity

Large-caps Axis EquityFund

The fund is a recent entrant in our top picks. The fund was launched in 2010 when the BSE Sensex was at 16,000 levels, which aided the fund manager to buy large-cap stocks at decent valuations. Its large-cap orientation makes the fund a better pick for a core portfolio holding. Current fund manager Pankaj Murarka, who has managed the fund since June 2013, has vast experience with reputed investment companies and good stock-picking skills. The current portfolio is well-diversified across sectors and stocks without any bigger bets. Most stocks are main index ones.

ICICI Prudential Focussed Bluechip Equity Fund

The fund has adopted a "buy-and-h o l d " a p p r o a c h w h i l e uncompromisingly adhering to its stated mandate of being a pure large-cap fund. The fund's investment strategy is such that it will bear a concentrated exposure to its holdings. Given the large-cap f o c u s o f t h e f u n d , t h i s concentration in holdings does not pose a liquidity risk. Furthermore,

Mutual Fund Top Picks



the 25-30 stock limitation has not led to a lopsided portfolio. The management has achieved the c h a l l e n g e o f b a l a n c i n g a concentrated portfolio and at the same time maintaining optimum diversification. The large-cap focus of the scheme makes it suitable for investors with low risk appetite, particularly during volatile market conditions. The fund manager sticks to quality blue-chip stocks for consistency and stability, which helps the fund to generate superior returns in the long term.

Mid-caps HDFC Midcap Opportunities Fund

The 'buy-and-hold' strategy in mid-cap stocks has over the years benefited the fund. Diversification in midcap stocks is optimum as the fund has huge assets under management (AUM) of over 3,000 crore. A quality mid-cap stocks portfolio, 'buy-and-hold' strategy, no cash calls and an outstanding performance history make the fund suitable for long-term investment.

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Franklin India Smaller Companies Fund

Franklin India Smaller Companies Fund has been among the outperformers in its category. It intends to have at least 75% allocation to smaller companies with market capitalisation below the top 100 stocks in the CNX 500



Index. The focus on quality stock selection even though optimally priced and sticking to it for a longer investment horizon is a key to its outperformance. The fund is ideally suited for investors who want to take mid-cap exposure in their portfolio.

Diversified Franklin IndiaPrima Plus

Franklin India Prima Plus is among

the few mutual fund schemes,

which has survived through

various market cycles and is now

nearly completing 20 years of

existence. The fund seeks to invest

in companies that generate a

return on capital in excess of their

cost of capital. Usually, these are

large-cap growth companies. Mid-

cap stocks are introduced to boost

the growth potential of the

portfolio. The fund manager

usually maintains a large-cap bias

with allocation to large-cap stocks

to the tune of 60-80% of the

portfolio. The fund is from the

stable of Franklin Templeton. The

A M C h a s a w e l l - d e f i n e d

investment philosophy, which is to

be followed by each of their fund

managers. This reduces the

d e p e n d e n c e o f t h e f u n d

performance singularly on the fund

manager.



ICICI Prudential Dynamic Plan

Asset allocation of the fund is determined based on market valuations. The fund manager has the discretion to take aggressive or defensive asset calls, based on market conditions. Therefore, the equity al location f luctuates between 70% and 90% depending on the broader market scenario. This fund adopts a 'bottom-up' fundamental analysis strategy across market capitalisations for picking its investments. The fund manager, especially for his midcap holdings in the fund, follows a 'buy-and-hold' strategy without much churn. For stocks available in the future & options (F&O) category, the fund manger does not shy away from hedging the exposure, thereby limiting the interim downside. Overall, this fund is best suited in a volatile environment where profits in equities are booked at rich valuations while the downside is limited via hedging and cash calls.

Equity-Linked Savings Scheme (ELSS)

Axis Long Term Equity

Axis Long Term Equity Fund has a diversified portfolio of companies with sustainable business models. The fund tries to capitalise on growth opportunities in Indian markets. While the fund is partial to large-cap stocks, exposure to mid-cap stocks can go up to 25-30% of



p o r t f o l i o . I n v e s t m e n t s i n individual stocks are restricted to less than 5% and the fund does not choose heavy exposure to either sectors or stocks. The fund has weathered market volatility very well since inception in 2009. Maintaining a large-cap allocation also helps the fund check market f a l l s a n d b e n e f i t f r o m a turnaround. The fund has outperformed its category since its inception. It is a good choice to save tax and create wealth in the long term.

ICICI Prudential Tax Plan

Launched on August 19, 1999, ICICI Prudential Tax Plan is an open-ended ELSS. The fund constitutes a portfolio, which is a blend of large, mid and small-cap stocks. The fund manager may change the proportion of large-cap and mid/small cap stocks in the portfolio depending on market conditions. The fund aims to invest in value stocks with focus on the fundamentals of the business, the industry structure, the quality of management, sensitivity to economic factors, the financial strength of the company and the key earnings drivers. Investors who wish to have a blend of large, mid and small-cap stocks can consider investing in this scheme.



Franklin India Tax shield

Franklin India Taxshield Fund is one of the most consistent and stable performing funds in its category. The fund may not be the best of the performers all the time but manages the downside risk well. F r a n k l i n T a x s h i e l d i s predominantly a large-cap fund and restricts exposure to mid-cap stocks in its portfolio. With a track record of over 10 years, it offers a reliable opportunity for investors willing to stay invested for longer investment horizon.

Debt

Liquid Funds

ICIC Prudential Liquid Plan

Best among the liquid funds to park larger sum for lower investment horizon. The fund portfolio has small bit of exposure to bank fixed deposit. The current yield to maturity (YTM) stands at 8.79%. Portfolio quality is best among liquid funds. An individual with a minimum amount of 10,000 can invest in this fund.

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The fund also takes exposure to commercial papers and other short-term instruments l ike treasury bills (t-bills) and diversifies its portfolio as compared to other liquid funds. The current YTM stands at 8.75%.

HDFC Cash Management Savings Plan



Ultra Short-term Funds

Birla Sunlife Savings Fund

Fund has current YTM of 9.19% and an expense ratio of 0.65% comparative to its peers. Current portfolio comprises mainly of P1+ (Highest rating for short-term instrument) commercial papers. Being an ultra short-term fund there is no exit load and minimum that one can invest in the fund is 5,000. Overall a decent portfolio that can yield return without comprising on safety and liquidity.

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Franklin India Ultra Short Term Bond Fund

The fund takes exposure to sub AAA-rated papers as well to enhance the yield of the portfolio. Exposure to AA+ rate debentures is the core portfolio holding. With lower average maturity of 0.48 years we do not foresee any material risk. It is one of the better performing funds in its category. Minimum amount that can be invested is 10,000 and there is no exit load.

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ICICI Pru Flexible Income Plan

Fund portfolio is a mix of

commercial papers and bank

certificate of deposits (CDs).

Consequently, current YTM stands

at 8.9% marginally lower over the

other two funds. Also, there are

AAA-rated bonds and debentures

of infrastructure/housing finance

companies. Exposure to AA+



paper is restricted to 2% of the total

corpus and is invested in Tata

Capital finance debenture which

we believe carry hardly any risk.

Overall a good diversified ultra

short-term fund.

Short-term /credit opportunities Funds

Birla Sunlife Medium Term Plan

The uniqueness of the fund is that it

takes higher credit calls to earn

better accruals. Current YTM

stands at 10.47%. Exposure to A

and below rated paper is over 35%

and another 30-35% is in to AA and

equivalent, which makes it very

low on credit quality. However,

10% annualised return covers up

for the risk it takes. The fund has a

higher exit load : 2% for

redemption within 365 days 1% for

redemption between 366 - 730

days.

ICICI Prudential Regular Savings

The fund follows an accrual

strategy with maturity of ~2 to 3

years. Most of the corpus around

~60% is invested in better quality

AA equivalent corporate debt.

Higher allocation to AA+ papers

r e d u c e s t h e d e f a u l t r i s k

considerably. Allocation to sub-AA

debentures is lower at less than

10% but has contributed in

increasing the YTM, while the

earlier allocation to AAA-papers



was as high as 40%, of late it has

come down to ~17% of the

portfolio. Occasionally, the fund

seeks exposure to government

secur i t ies , espec ia l ly s ta te

development loans as they offer

higher coupon with complete

safety. However, the fund never

goes overboard with government

securities (G-Secs) allocation.

Income Funds

Birla Sun Life Income Plus - Regular Plan

The fund manager takes both

interest rate calls and credit calls

depending on the market scenario.

At present, higher allocation is to

government securities and state

development loans while the rest is

in to AAA-rated papers. Current

YTM stands at 8.76%.

IDFC Dynamic Bond Fund

The fund manager takes active

interest rate calls and exposure to

g o v e r n m e n t s e c u r i t i e s

accordingly increases to over 80-

90% of the portfol io. The

opportunities arising out of

seasonal variation in system

liquidity has also been well

captured by the fund manager. The

AMC frequently communicates its

view with the investors and hence

investors are well informed about

the position of the dynamic fund.



Gilt Funds ICICI Prudential Gilt Inv. PF Plan

The fund's objective is to closely

manage the downside risks of the

portfolio arising out of changes in

the market rates, by actively

managing its duration. The fund

invests only in central and state

government securities that cater to

long-term horizon by investing in

securities of longer tenure. It

benefits by earning the higher yield

associated with longer term

investments but this comes with a

higher level of interest rate risk, in

the short to medium term.

Birla Sunlife Gilt Plus

An open-ended government

securities scheme with the

objective to generate income and

capital appreciation through

investments exclus ively in

government securities. The fund

manages the duration of the

portfolio actively to capitalise on

the market opportunities.

As on date, the fund has 96% into

the government secur i t ies,

indicating fund manager expects

rates to go down.


'Remain overweight on equities'

A pick up in corporate earnings growth, fall in interest rates and expanding return on equity (ROE) for corporate India will be the medium to long term drivers for equity markets and hence we remain positive going forward, says Anup Maheshwari, Executive Vice President (EVP) & Head – Equities

DSP BlackRock Mutual Fund, in an interview with ICICIdirect Money Manager. He advises investors to remain overweight on equities and invest with a 3-5 year investment horizon. Excerpts:

& Corporate Strategy,

Anup Maheshwari,Executive Vice President,

Head-Equities & Corporate Strategy,DSP BlackRock Mutual Fund

Tête-à-tête

Q :

A:

M a r k e t s s e e m t o b e consolidating after sharp gains in the recent past. How do you see them trending in the near term?

India is one of the better performing emerging markets this year. Much of these gains could be attributed to the improvement in the macro economic variables like current a c c o u n t d e f i c i t ( C A D ) ,

currency, and gross domestic product (GDP) growth. The majority government at the centre is also a big positive as the new administration will be able to take tough decisions and push important reforms. Steps taken by the new administration to revive the investment cycle will further boost GDP growth which has seen a sharp decline over the past two years. A pick up in corporate earnings growth, fall in interest rates and expanding return on equity (ROE) for corporate India will be the medium to long term drivers for equity markets and hence we remain positive going forward. Any correction in markets should be taken as an opportunity to invest from a 3 year investment horizon.

What are the key risks to Indian markets that one should be watchful about?

Q:


Tête-à-tête

A:

Q:

A :

Q:

A:

Geo-politics continues to be the biggest risk not only for India but markets globally. On the domestic front, high food inflation could delay the rate cu t t ing cyc le . De lay in implementation of key reforms could also act as a dampener.

The Reserve Bank of India (RBI) has maintained status quo in its recent monetary policy. By when do you do see the interest rates easing?

T h e R B I e x p e c t e d l y maintained a status quo in its bi monthly monetary policy by keeping the repo and cash reserve ratio (CRR) unchanged. We expect the central bank to start the rate cutting cycle in the second quarter of CY 2015.

The rupee has been depreciating against the US dollar and is currently trading at a seven-month low. What could be its implications on corporate earnings?

Most of the emerging market ( E M ) c u r r e n c i e s h a v e depreciated in the recent past m a i n l y d u e t o t h e strengthening US dollar. However, despite the recent fal l , Indian Rupee ( INR) continues to be near its fair value on a Real Effective Exchange Rate (REER) basis.

Currency depreciation has positively impacted corporate earnings over the last 4-5 quarters. However, we expect earnings growth to be more broad-based going forward as demand recovers domestically and inflation moderates further.

What are your expectations in terms of earnings growth for Fy15?

We expect earnings growth to average greater than 15% p.a. for the next couple of years.

What sectors are you favoring currently and why?

We remain constructive on financials (mainly private sector banks), autos and cement and oil marketing companies (OMCs) within the energy sector.

What is your advice for investors at this point in terms of their overall portfolio and asset allocation?

We would advice investors to remain overweight on equities and invest with a 3-5 year investment horizon.

The views expressed in the interview are personal views of the authors and do not necessarily represent the views of ICICI Securities.

Q:

A:

Q:

A:

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ASK OUR PLANNER

Don't over-diversify your MF portfolio

Q:

A:

I have invested almost Rs. 50 lakh as lumpsum in equity in the year 2006 and 2007. I am holding 40 mutual fund (MF) schemes from different fund houses but some of them have given returns equivalent to bank fixed deposits (FDs) and some of them are into loss. Please advise how to recover losses.

- Shakuntla Joshi

First of all, given the volatile nature of equity as an asset class, it is always advisable to invest regularly, in a systematic manner, rather than investing as a lump sum. Further, since mutual funds itself offer you diversification; it may not be p ruden t to i nves t i n to 40schemes. Diversification should be limited, to around 4 to 5 funds, within an asset class. At times, too much of a g o o d t h i n g c a n y i e l d undesirable results - Piling up a large number of stocks and mutual funds may do more harm to your portfolio than good.

There is a misplaced belief that with every additional security / fund in the portfolio, the overall

risk gets reduced to that extent. This isn't true. Studies have proved that diversification can help reduce the risk only to a certain extent. Beyond this, there is no incremental benefit.

For example, all diversified equity funds have a basket of stocks, with the holdings spread across companies and sectors. If you choose 5 to 6 diversified equity funds, each having at least 50-60 stocks in their kitty, you end up paying more money for funds which are picking the same set of stocks. So the holdings are getting duplicated without adding any value to the portfolio.

Also, if you have too many stocks / funds in a portfolio, y o u r m o r e p r o f i t a b l e investments will not create a meaningful value for you. As your capital is spread out thinly a m o n g t h e d i f f e r e n t investments, the impact of a h e a l t h y u p s i d e i n o n e investment will turn out to be marg ina l . So, by over-diversifying, you are robbing yourself off the gains from the


ASK OUR PLANNER

good investments.

Finally, the best way to recover the losses in your portfolio is by booking loss in the funds which are not performing consistently as against their benchmark, and re-investing them into funds which are performing well consistently. Staying invested in these re-invested funds for some time can help you in recovering the losses booked.

I will soon have a retirement corpus of Rs. 50 lakh to invest. From your August Monthly Magazine I understand that I would be better off investing in a debt mutual fund than in a FD, when the period is 3 years or more. Is there any FD scheme for any period, from which the interest accrued could be considered as a long term capital gain? If not, could you suggest, without any liability towards yourselves, some debt schemes that I could consider investing in? I invest through ICICI Direct.

- Muthana

Investment into Fixed Deposits (FDs) earns only interest and there is no appreciation in the capital to

Q:

A:

give you a capital gain – short term or long term.

Also, it was said in our earlier issue that it would be better off investing in a debt mutual fund than in a FD for a period of 3 years or more, only from a taxation perspective. However, the returns fetched by a debt mutual fund are not fixed and could be lower than that of FD.

For our Research Team's recommended debt funds, you may visit Mutual Funds Page in Do Your Research Section on our website www. icicidirect .com.

I see you do show equity and debt model portfolio but you say nothing about Gold as an asset class. I know there has been a lot of volatility in gold and it is not expected to deliver the returns that it has in the past. However, shouldn't gold be a part of one's portfolio? Considering the long term perspective, what should be the allocation to gold or do you suggest any other precious metal or some other asset class for the purpose of diversification? If you say gold, then, is ETF the best route? Can we rely on ETF from companies like Quantum? Please help me with this

Q:


ASK OUR PLANNER

so that I can have a complete and well diversified portfolio.

- Sailesh Damani

Unlike equity and debt, the movement in price of gold is attributed to different factors including movement of prices of other commodities, global money supply, inflation, demand and supply of physical gold. The returns generated by gold over a longer period are just about inflation and not often beats it, similar to debt investments.

Hence, it's advisable to keep the allocation towards gold to a minimum level, say around 5% to 10%, in your portfolio, just for diversification purpose.

From taxation perspective, Gold Exchange Traded Funds (ETFs) had an advantage over physical gold till last year. However, in the recent budget, Gold ETFs have lost that advantage and will now be taxed similar to physical gold. Having said that, Gold ETFs still do have certain advantages o v e r p h y s i c a l g o l d – convenience, safety, purity, t ransparent pr ic ing and affordability.

A:

All Gold ETFs come under the purview of Securities and Exchange Board of India (SEBI) and can be relied upon. Before finalizing the fund, looking at the tracking error (the deviation of the price of Gold ETF from physical gold) and the expenses of the fund will help.

Please clarify whether Reliance Monthly Income Plan (Dividend Pay out) is a debt fund or an equity-oriented fund.

- Swaminathan T N

All Monthly Income Plans (MIPs) are debt-oriented f u n d s . F r o m t a x a t i o n perspective, only mutual funds which invest at least 65% of their portfolio into equity, at any point of time, are classified as equity-oriented f u n d s . M I P s i n v e s t predominantly into debt instruments; around 10% – 25% of the fund only is invested into equity to generate higher return.

Do you also have similar queries to ask our experts? Write to us at: moneymanager @icicisecurities.com.

Q:

A:


EQUITY MODEL PORTFOLIO

Our indicative large-cap equity model portfolio has continued to deliver an impressive return of 68.5% (inclusive of dividends) till date (as on October 8, 2014) since its inception (June 21, 2011) vis-à-vis the benchmark index (S&P BSE Sensex) return of 49.5% during the same period, out-performance of 19%. Our portfolio approach towards high-quality stocks aided us in outperforming the Sensex with continued success. We continue to trust our philosophy of choosing stocks where the risk reward is favourable and not just the reward aspect. We feel “Quality-21” large-cap portfolio will continue to be aligned to the same philosophy.

Our “Consistent-15” mid-cap portfolio also continues to outperform, delivering 73.7% (inclusive of dividends) till date (as on October 8, 2014) vis-à-vis the benchmark index (CNX Midcap) return of 45.8%, as we continued to identify fundamentally strong stocks. Some key performers of our portfolio are Sun Pharmaceuticals, Lupin, Tata Consultancy Services (TCS), Tata Motors, Info Edge and Dabur India delivering 97%-190% returns since inception.

We have always suggested the systematic investment plan (SIP) mode of investment and still find a lot of merit in it as the preferred mode of deployment given the market conditions and volatility associated since the inception of the portfolio. It has outperformed other portfolios, thus, reinforcing our belief in a plan of investment. However, now we are also advising clients to look at lump-sum investments at any possible dips.

In the last few years, anxiety stemming from weak economic health and unstable policy environment has resulted in defensive sectors commanding high scarcity premium while debt-ridden cyclicals witnessed a de-rating. However, the recent decisive election verdict has given investors optimism over the overall growth prospects of the economy. Thus, the current rally has totally reversed the penchant for defensives (like information technology (IT), pharmaceuticals and fast-moving consumer goods (FMCG)), which have underperformed in 2014 year-to-date (YTD). On the other hand, old economy sectors, including



capital goods, realty, metals, power and oil & gas have been topping the charts this year, signifying changing investor preference.

Thus, from a portfolio perspective, we have now leaned forward towards inclusion of stocks with more real economy, domestic discretionary exposure viz. GAIL, JK Cement, Arvind, etc. We have, thus, taken a strategic call of including stocks that possibly have a larger opportunity size either via reforms push or via revival in the discretionary demand from domestic consumers. Thus, we exit Page Industries and Nestlé with minimal returns.

Hence, we have made a significant shift in our portfolio stance to play the recovery cycle. In terms of relative weightage of the sector vis-à-vis the Sensex, we have changed our stance and gone overweight on financials (raising weights of public sector banks), oil & gas, the infrastructure space (cement, infrastructure and power). This has been primarily triggered by the possibility of decisive action in the infrastructure and real economy space by the new government. We have maintained our overweight stance on telecom considering the reducing regulatory hurdles and relatively better earnings growth profile. We are also overweight on sunrise sectors like media via Zee Entertainment.

We have, thus, positioned away from pure play defensives like the pure play mature exporter- IT and the expensive FMCG space. We feel both these sectors may have normalised earnings growth but the sectoral churning would cause them to de-rate on valuation terms.

For other equal weight sectors we are playing consumer discretionary sectors like autos (pent up demand, strong franchises) and the metals and mining space (high infrastructure demand expected), pharmaceuticals (large global generic opportunity yet to be tapped).

On individual names, we are strongly overweight on companies like L&T and UltraTech Cement in the infrastructure space while in public sector banks we like State Bank of India (SBI).

We believe we now have a better balance to our portfolio going into a recovery cycle and possibly a longer-term Bull Run.



Name of the company

Largecap Stocks

Model Portfolio

Largecap(%)

Midcap(%)

Diversified(%)

Consumer Discretionary 10 7

United Spirits 2 1.4

Tata Motors DVR 4 2.8

Bajaj Auto 2 1.4

Titan 2 1.4

BFSI 27 18.9

HDFC 6 4.2

HDFC Bank 6 4.2

SBI 8 5.6

Axis Bank 7 4.9

Power, Infrastructure & Cement 13 9.1

L & T 8 5.6

Ultratech Cement 5 3.5

FMCG 10 7

ITC 10 7

Metals & Mining 4 2.8

NMDC 4 2.8

Oil and Gas 14 9.8

Reliance 11 7.7

Gail 3 2.1

Pharma 5 3.5

Lupin 2 1.4

Sun Pharma 3 2.1

IT 12 8.4

Infosys 3 2.1

TCS 6 4.2

Wipro 3 2.1

Telecom 3 2.1

Bharti Airtel 3 2.1

Media 2 1.4

Zee Entertainment 2 1.4

Largecap share in diversified 70



Midcap Stocks

Content source: ICICIdirect.com Research

ICICI Securities Ltd. has been assigned an advisory mandate by Ranbaxy Laboratories Limited with regard to Sun Pharmaceutical Industries Limited's acquisition of Ranbaxy Laboratories Limited. This report is prepared on the basis of publicly available information.

Name of the company Model Portfolio

Largecap(%)

Midcap(%)

Diversified(%)

Consumer Discretionary 20 6

Bosch 6 1.8

Cox & Kings 6 1.8

Arvind 8 2.4

IT 6 1.8

Info Edge 6 1.8

BFSI 16 4.8

DCB 8 2.4

IndusInd Bank 8 2.4

FMCG 14 4.2

Kansai Nerolac 8 2.4

Tata Global Beverages 6 1.8

Pharma 6 1.8

Natco Pharma 6 1.8

Media 8 2.4

PVR 8 2.4

Capital Goods 6 1.8

Cummins 6 1.8

Realty/Infrasturcture/Cement 24 7.2

JK Cement 6 1.8

Container Corporation of India 6 1.8

Oberoi Realty 6 1.8

Shree Cement 6 1.8

Midcap share in diversified 30

Total of all three portfolios 100 100 100



Performance* so far Since inception

*Returns (in %) as on 8, 2014

Large-cap Portfolio Benchmark: BSE Sensex; Mid-cap Portfolio

Benchmark: CNX Midcap; Diversified Portfolio Benchmark: Combination

of BSE Sensex and CNX Midcap

October

Value of ` 1,00,000 invested via SIP at the end of every month

Portfolio Benchmark

Investment Value of Investment in Portfolio Value if invested in Benchmark

Start date of SIP: June 30, 2011; *Value as on October 8, 2014

68.573.7 70.9

49.545.8 45.9

0

20

40

60

80

100

Large Cap Midcap Diversified

%

4,1

00,0

00

4,1

00,0

00

4,1

00,0

00

5,5

65,9

47

6,6

05,3

59

5,8

32,8

00

5,3

12,3

71 5,7

57,2

86

4,5

22,9

05

2,000,000

3,000,000

4,000,000

5,000,000

6,000,000

7,000,000

Largecap Midcap Divesified

QUIZ TIME

1. Expand UAN (Hint: It would be provided for provident fund (PF)

accounts).

2. Non-equity mutual funds do not invite tax on dividends for unit holders.

True/ False.

3. The period for long-term capital gains has been changed from 12

months to 24 months in case of non-equity mutual funds for taxation

purpose. True/ False.

4. All Monthly Income Plans (MIPs) are debt-oriented funds. True/ False.

5. Short-term capital gains are taxed at ______% for equity mutual funds.

Note: All the answers are in the stories that have appeared in this edition of

ICICIdirect Money Manager. You may send in your answers at:

[email protected]

The answers will be published in our next edition. The names of the earliest

all correct entries will be published too. So jog your grey cells and be quick

to send in your entries.

Correct answers for the September 2014 quiz are:

1. Switching equity-oriented mutual funds within 1 year attracts short-term

capital gain tax. True/ FalseA: True

2. The minimum annual contribution for Tier-I national pension system

(NPS) account is Rs. ______.A: 6,000 (Rs. 500 a month)

3. One can deposit a maximum of Rs. ______ every year in public provident

fund (PPF) account.A: 1.50 lakh

4. There is no upper-cap on the contributions for investing into NPS. True/

FalseA: True

5. A Tier-II account of NPS has withdrawal option. True/ FalseA: True

Congratulations to the following winners for providing correct answers!

Neelakandan Eswaran; Vaibhav Mittal

`

`



MONTHLY TRENDS

5.15

3.52

0.0

1.0

2.0

3.0

4.0

5.0

6.0

Aug-14 Sep-14

(%)

95.96

91.16

88.0

89.0

90.0

91.0

92.0

93.0

94.0

95.0

96.0

97.0

29-Aug 2-Sep 6-Sep 10-Sep 14-Sep 18-Sep 22-Sep 26-Sep 30-Sep

$ pe

r ba

rrel

-503.40

-157.13

730.43

201.24

-1500

-1000

-500

0

500

1000

1500

2000

28-Aug 1-Sep 5-Sep 9-Sep 13-Sep 17-Sep 21-Sep 25-Sep 29-SepFII DII

.

13.0713.15

10.0

11.0

12.0

13.0

14.0


VIX

VIX

WPI INFLATION (FOOD)

(The figures are in %)

CRUDE OIL

NYMEX crude oil prices ($/barrel)

FII & DII INVESTMENTS

(Foreign institutional investors (FIIs) and domestic institutional

investors (DII) net equity investment ( ` in crore)

VOLATILITY INDEX (VIX)


MONTHLY TRENDS

26638.11

26630.51

26000

26200

26400

26600

26800

27000

27200

27400

28-Aug 31-Aug 3-Sep 6-Sep 9-Sep 12-Sep 15-Sep 18-Sep 21-Sep 24-Sep 27-Sep 30-Sep

7954.35

7964.80

7750

7800

7850

7900

7950

8000

8050

8100

8150

8200

28-Aug 31-Aug 3-Sep 6-Sep 9-Sep 12-Sep 15-Sep 18-Sep 21-Sep 24-Sep 27-Sep 30-Sep

17098.4517042.90

16500

16800

17100

17400


4,580.27

4,493.39

4400

4500

4600

4700


DOMESTIC INDICES BSE Sensex

NSE Nifty

GLOBAL INDICES Dow Jones

NASDAQ

0.03%

0.32%

1.90%

0.13%


MONTHLY TRENDS

60.51

61.93

59.0

59.5

60.0

60.5

61.0

61.5

62.0

62.5


US

D /

INR

100.42

100.39

95.0

96.0

97.0

98.0

99.0

100.0

101.0


₤/

INR

79.46

78.22

76.0

78.0

80.0


€/

INR

19.43

16.94

15.0

17.0

19.0

21.0


$ pe

r O

unce

EXCHANGE RATES USD-INR

POUND-INR

EURO-INR

BULLION GOLD

(The prices are in $ per ounce).

SILVER

1287.07

1208.74

1150

1225

1300


$ pe

r O

unce

(The prices are in $ per ounce). (Source for all indicators: Bloomberg, Reuters)

2.35%

0.03%

1.56%


Premium Education Programmes Schedule

ICICIdirect Centre for Financial Learning (ICFL) imparts quality education on financial markets to beginners and amateurs, student, housewives, working professionals and self employed. ICFL's broad objective is to make participant feel confident to start investing in stock market.

Here is the list of our programmes scheduled for the month of October, 2014.

Schedule for Beginners Programme on Futures and Options Trading Sr.No

City Dates For More Information & Registration call:

Sr.No


Schedule for Chartered Financial Analyst (CFA) Level 1

Sr.No


Schedule for Certified Financial PlannerCM (CFP CM) certification

1 Pune Oct 18 and 19 2014 Kusmakar on 7875442311

2 Chennai Oct 18 and 19 2014 Manivannan on 9742273109

3 Bangalore Oct 19 and 26 2014 Subrata on 9620001478


5 Mumbai-Malad Oct 10 and 17 2014 Vidhu on 9619716146

Sr.No


Schedule for Chartered Wealth Manager® (CWM) certification


Sr.No


Schedule for Fast-Track Program on Futures & Options

7 Ahmedabad Oct 19 2014 Yogesh on 8238053563

8 Patna Oct 19 2014 Sumit Sarkar on 8017516187

Sr.No


Schedule for Foundation Programme on Stock Investing

9 Ludhiana Oct 19 2014 Vishal on 7838290143

10 Jalandhar Oct 19 2014 Vishal on 7838290143

11 Surat Oct 19 2014 Yogesh on 8238053563

12 Ghaziabad Oct 19 2014 Harneet on 09582158693

13 Dehradun Oct 19 2014 Harneet on 09582158693

14 Bhubhaneshwar Oct 26 2014 Sumit Sarkar on 8017516187

Sr.No


Schedule for Fast-Track Technical Analysis

15 Vadodara Oct 19 2014 Yogesh on 8238053563

16 Ranchi Oct 26 2014 Sumit Sarkar on 8017516187

Sr.No


Market Master


Sr.No


Schedule for Technical Analysis

18 Hyderabad Oct 18 and 19 2014 Ruchi on 8297362323

19 Banglore Oct 18 and 19 2014 Subrata on 9620001478

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