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FundsIndia Academy

Greetings fromFundsIndia!

Benjamin Franklinonce famously said,

“An investment in knowledgepays the best interest”. The moreinformed and educated investorsare, the higher the chances thatthey would make profitableinvestments, and, as importantly,avoid bad investment choices.

So, we are happy and proud toannounce our newest initiative,FundsIndia Academy.

This is an online initiative(www.fundsindia.com/academy)that provides a comprehensivepersonal finance course.

This course – PF 101 - isorganised as a series of modules,each of which contains a set ofshort videos on different topicsfollowed by simple quizzes.Please sign-up for the course andtry it out. If you have friends orfamily members who you thinkwould be well served to gothrough it, please recommend itto them.

And, most importantly, please letus know what you think bywriting to us atcontact@fundsindia.com

Happy Learning!

Happy reading!

Srikanth Meenakshi

Perils of tracking frenetic news

In May, we can be sure that all forms of media – print, electronic and online– will go ultra hyper-active with results of the Lok Sabha elections, a newgovernment formation, allocation of ministries, key appointments, budget bythe new government, attendant implications for policy making and postmortems too. There will be the attempt to dissect what every micro movemeans for the economy, specific industries, stocks and investment actions.You will have hundreds of experts proffering their views for at least the nextsix months. If are a news addict, you could follow all of this, and add your twobits as well.

For the next few months, it is going to be tough to sift the sensible from thenoise, which, at normal times over the past decade and a bit, has been anincredibly high proportion of what one reads or hears. We can expect newhighs in the noise quotient on all forms of media from May 16, the dayelection results are due. If you are also an investor, it is quite likely the dosageand content will be harmful for your financial well being. You may end withbuy and sell actions that add only from the point of costs and risks.

There have been 11 Lok Sabha Elections since the mid 1970s (that’s a good40 years almost). As an investor, you could have been completely oblivious toeach one of them, especially from an economy and investment point of view.You would have still done well across asset classes.

Even in equity, perhaps the most vulnerable to policy decisions, you wouldhave earned a compounded annual return of about 14 per cent over this longstretch, and that too, without doing anything linked to any of these elections.Fortunately, till the mid 1990s, overkill was not an issue in media coverage.Now it is overkill, overkill, and kill again.

We have had instances of the most unlikely governments ushering in policyframeworks that were good from an economy perspective. No pre- or post-election analysis would have had this on the radar. We have had unlikelyFinance Ministers taking the more appropriate steps from the standpoint ofsensible policy making.

If you are interested in speculation and trading around the election outcomesand immediate actions that follow, then it is ok to sniff every bit put out there.If you are in this category, please make sure you have the ability to take highrisks and suffer deep losses that are integral to speculation and trading.

If you are investing to build on your financial health, you could safely steerclear of deluge of news and views that is about to hit us. As long as you areinvested according to your long-term goals and ability to take risk, you couldwell become Rip Van Winkle and emerge from hibernation six months out.

S Vaidya Nathan

May 2014 � Volume 07 � 05

Why you need mutual funds for retirement planning

Just take a look at the returns your EPF (interest declaredby the central government) was delivering about 2 decadesago, and how steadily the rates have been declining. It isno different with your PPF account.

At the same time, consumer price inflation has been onthe rise, particularly over the past five years, and has creptto an average of 10.2% in this period. This is based onthe old Consumer Price Index (CPI) rates for IndustrialWorkers, as the new CPI is available only from 2011. Thatmeans, your net returns from your EPF or PPF, postinflation would actually be negative!

Now, if you do not build yourself a healthy retirementkitty, then the corpus so built may not generate sufficientinterest income to meet your post-retirement needs. Youwill have to start spending from your capital as well andthus eroding it, perhaps well before you lifetime. Now thatis not a happy proposition.

You have a way out. Just take a look at the graph below.It is a simple example, assuming a contribution of ` 500a month in EPF with an annual increase in contributionby 5% over the past 10 years. Assume a similar investmentwas made in one of the more established equity funds,HDFC Top 200.

After 10 years, you can see that the equity fund managedclose to 50 per cent higher corpus than EPF. Thedifferential could be significantly higher over longerperiods. Despite such performance, what is preventingIndians from investing in mutual funds? Here are a fewmyths that need to be busted for you to ensure you arenot grappling for funds post retirement:

Mutual funds are risky, I will lose my money

No doubt, mutual funds, especially equity funds, movewith the market forces, and can, therefore, be risky. Long-term equity fund data shows that the risks are evened outover the long term. In fact over a 15-year period, ouranalysis of past data suggests that chances of negativereturns in the stock market are nil. And to top it, equityfunds have delivered inflation-beating returns over thelong term.

Mutual funds will give too much exposure to equity

Mutual funds, for most people, mean investing in equitymarkets. This is not true. Mutual funds offer exposure toa wide range of low- to medium-risk debt instruments.

They offer exposure to gold without having to hold themphysically. Mutual funds also offer a combination of

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The Medium, Small & Micro Enterprises (MSME) sector is of vital importance to our nationaleconomy. It accounts for 8 per cent of GDP, 45 per cent of manufactured output and 43 per centof exports. It provides employment to over 10 core people.

Dr Manmohan Singh, Prime Minister of India

Vidya Bala

For most of you, holding an Employee Provident Fund (EPF) account with your company orinvesting separately in Public Provident Fund (PPF) could be the only retirement plan in place.

This means of saving may have held water about a decade ago. But for the upcoming generationof retirees, dependence on EPF and lack of any mandatory pension schemes may mean theyare at a real risk of falling short of capital, post retirement.

0%

2%

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6%

8%

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12%

1993-94

1994-95

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2003-04

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EPF

0

20000

40000

60000

80000

100000

120000

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` 75467

Invested Capital EPF Value Equity Fund Value

` 116107

` 166865

equity and debt to provide you asset allocation strategies.

Mutual funds cannot give fixed returns

Well, it’s true that mutual funds cannot guarantee youreturns or provide fixed outflow of interest income asdeposits do. But let’s get this one straight. What is theobjective behind saving for retirement? It is to build asizeable corpus until you retire. A healthy corpus can thenbe invested in reasonably safe investment avenues togenerate some monthly or annual income, once you retire.

This being the objective, going for regular interest payoutoptions do not help the purpose of building wealthbecause chances are that you will not diligently reinvest.

Even if the option is cumulative, you run a reinvestmentrisk because you may end up with lower rates (when yourenew your investments after they mature) than what youreceived earlier. Your EPF, with varying interest rate everyyear, assumes this risk. Equity funds, by way of beinginvested in markets all the time (and taking cash positionsonly if warranted), do not carry such reinvestment risk.

Rules for retirement investing using mutual funds

# 1 Hold reasonable exposure to equities in the earlyyears, and gradually reduce by moving them to debtfunds and other traditional saving options such asfixed deposits, post office schemes and tax-freebonds. Most people burn their fingers simplybecause they take high exposure to equities just a fewyears ahead of retiring and expect equities to

generate high returns in a short time. A downmarket, in such instances, can even wipe your capital.

# 2 Rebalance your mutual fund portfolio, preferablyevery year. This involves bringing your portfolio tothe original asset allocation, if the equity, debt, andgold proportion in your portfolio moves out of kilterThis can be done at a click with FundsIndia’sRetirement Solutions.

# 3 Stay clear of any thematic or fancied sector funds inyour retirement portfolio. The last thing a retirementportfolio needs is volatility from cyclical funds.

# 4 Make sure your retirement kitty should be a basket –EPF, PPF, NPS, mutual funds (equity and debt withgold being optional) and other traditional debtoptions such as deposits.

# 5 If you continue to have some exposure to mutualfunds post retirement, don’t depend on them todeclare dividends. If you need monthly income, usethe systematic withdrawal plan (SWP) option tocreate your own annuity plan.

SWPs are also tax efficient; as they enjoy capital gainsindexation benefit in the case of debt funds held over ayear (equity funds are exempt from capital gains tax).

Following these guideposts will likely ensure that youbuild a comfortable retirement corpus without burningyour fingers.

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LIC’s behemoth portfolio is shrouded in opacity. Compared to most other domesticinstitutions, which make their portfolio public once every month, or at least every quarter,LIC’s disclosures are restricted to the once-a-year statements in its annual report. Even if yourefer to its latest annual report, you would be hard pressed to find how LIC’s overall portfoliobreaks up into sectors and stocks. And if you are keen to know how LIC allocates its stockand bond holdings across different schemes, forget it... It is precisely because of its sheer sizeand the unquestioning trust of its policyholders that LIC needs to become more transparentand accountable on its investment decisions. If there was one key learning from the Unit Trustof India’s collapse a decade ago, it was that allowing behemoth institutions to function on‘trust’ alone, without the accountability or disclosures that go with it, encourages laxity and putsthe entire system at risk.

– Aarati Krishnan, Editorial Consultant, The Hindu Business Line

Source: www.thehindubusinessline.com

Viewpoint

I don't think the Customs duty on gold is so high. In my view, once investors start getting betterreturns from financial assets and inflation starts moderating, there would be sustained reduction inimport of gold.

C Rangarajan, Chairman, Economic Advisory Council to the Prime Minister

In his Annual Letter to Shareholders 2013, Warren Buffett, Chairman, BerkshireHathaway, usually articulates interesting thoughts. We present edited extracts from hislatest report, worth a read in entirety. It is available at www.berkshirehathaway.com.

# 1 Owners of stocks, however, too often let the capricious and often irrationalbehavior of their fellow owners cause them to behave irrationally as well. Becausethere is so much chatter about markets, the economy, interest rates, price behaviorof stocks, etc., some investors believe it is important to listen to pundits – and,worse yet, important to consider acting upon their comments. Those people whocan sit quietly for decades when they own a farm or apartment house too oftenbecome frenetic when they are exposed to a stream of stock quotations andaccompanying commentators delivering an implied message of “Don’t just sitthere, do something.” For these investors, liquidity is transformed from the unqualified benefit it should be toa curse.

# 2 When Charlie and I buy stocks – which we think of as small portions of businesses – our analysis is very similarto that which we use in buying entire businesses. We first have to decide whether we can sensibly estimate anearnings range for five years out, or more. If the answer is yes, we will buy the stock (or business) if it sells at areasonable price in relation to the bottom boundary of our estimate. In the 54 years we have worked together,we have never foregone an attractive purchase because of the macro or political environment, or the views ofother people. In fact, these subjects never come up when we make decisions. It’s vital, however, that we recognizethe perimeter of our “circle of competence” and stay well inside of it. Even then, we will make some mistakes,both with stocks and businesses. But they will not be the disasters that occur, for example, when a long-risingmarket induces purchases that are based on anticipated price behavior and a desire to be where the action is.

# 3 The goal of the non-professional should not be to pick winners but should rather be to own a cross-section ofbusinesses that in aggregate are bound to do well. A low-cost S&P 500 index fund will achieve this goal. That’sthe “what” of investing for the non-professional. The “when” is also important. The main danger is that thetimid or beginning investor will enter the market at a time of extreme exuberance and then become disillusionedwhen paper losses occur. (Remember the late Barton Biggs’ observation: “A bull market is like sex. It feels bestjust before it ends.”) The antidote to that kind of mistiming is for an investor to accumulate shares over a longperiod and never to sell when the news is bad and stocks are well off their highs. Following those rules, the“know-nothing” investor who both diversifies and keeps his costs minimal is virtually certain to get satisfactoryresults. Indeed, the unsophisticated investor who is realistic about his shortcomings is likely to obtain betterlong-term results than the knowledgeable professional who is blind to even a single weakness.

# 4 Investment is most intelligent when it is most businesslike.

I learned most of the thoughts in this investment discussion from Ben’s book The Intelligent Investor, whichI bought in 1949. My financial life changed with that purchase. Before reading Ben’s book, I had wanderedaround the investing landscape, devouring everything written on the subject. Much of what I read fascinated me.Ben’s ideas were explained logically in elegant, easy-to-understand prose (without Greek letters or complicatedformulas). I can’t remember what I paid for that first copy of The Intelligent Investor. Whatever the cost, itwould underscore the truth of Ben’s adage: Price is what you pay, value is what you get. Of all theinvestments I ever made, buying Ben’s book was the best (except for my purchase of two marriage licenses).

Buffett Speak

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I feel the monsoon situation this year could be similar to 2012. In 2012, the overall southwestmonsoon was 7% below normal. The rains arrived late and its progress over many parts of thecountry was sluggish thereafter.

Dr Laxman Singh Rathore, Director General of India Meteorological Department

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Think Long Term

Yes. We can hear sighs of yawn, as you read this. So manypeople have told you this so many times, over so manyyears. This is true even in the global context. You had tounquestioningly believe when mutual funds told you toinvest for the long-term in equity and forget. It willautomatically grow and generate substantial wealth foryou. There is truth in this, but there is also not.

• If you had done this in the Indian context (or severalemerging markets, not all), it would have worked outwell over the past three decades.

• If you were an investor in most developed worldcountries and followed this blindly, you may be in redover two to three decades.

With the advent of a few global fund houses that havestarted to openly advice investors in a genuinely prudentmanner and of financial blogs, this buy-and-hold strategyover the long term for equity funds has come under fire.

Here we are saying think long-term in a slightly differentcontext:

• Think long term for your investments in all assetclasses.

• This does not mean buy-and-hold forever in any assetclass.

• Be long term in approach, but review your allocationand investments actively either on your own or withthe help of quality advisors who are genuinely investedin your financial well being.

• Thinking long term may also mean taking money offthe table from almost every class as and when thereare deep bullish phases.

• It also involves staying clear of asset classes you haveno clue.

If you think long-term at all times, you are likely to makeless mistakes, less trades / transactions, and stay true toyour asset allocation, risk and liquidity preferences.

Seven Immutable Laws of InvestingIn a 2011 White Paper, James Montier of GMO set out themost important dos and don’ts for investors.

# 1 Always Insist on a Margin of Safety: When investorsviolate Law 1 by investing with no margin of safety, they riskthe prospect of the permanent impairment of capital.# 2 This Time Is Never Different: Sir John Templetondefined “this time is different” as the four most dangerouswords in investment.# 3 Be Patient and Wait for the Fat Pitch: Patience isintegral to any value-based approach on many levels.# 4 Be Contrarian: Humans are prone to herd because it isalways warmer and safer in the middle of the herd.# 5 Risk Is the Permanent Loss of Capital, Never aNumber: To my mind, the permanent impairment of capitalcan arise from three sources:• valuation risk – you pay too much for an asset;• fundamental risk – there are underlying problems with the

asset that you are buying (aka value traps); and• financing risk – leverage.By concentrating on these aspects of risk, I suspect thatinvestors would be considerably better served in avoiding thepermanent impairment of their capital.# 6 Be Leery of Leverage: Leverage is a dangerous beast. Itcan’t ever turn a bad investment good, but it can turn a goodinvestment bad.# 7 Never Invest in Something You Don’t Understand:This seems to be just good old, plain common sense. Ifsomething seems too good to be true, it probablySource: www.gmo.com

Invest With A Plan 2

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wisdom

A first step to prescribing the right medicine is to recognize the cause of the sickness. Extrememonetary easing, in my view, is more cause than medicine. The sooner we recognize that, the moresustainable world growth we will have.

Dr Raghuram Rajan, Governor, Reserve Bank of India.

Index 1 Year 5 Years 10 Years

CNX Nifty 12.9 14.0 14.1

BSE Sensex 14.9 14.5 14.8

CNX Mid Cap 12.3 17.8 14.2

CNX Small Cap 22.0 16.4 16.0

CNX 100 12.9 15.0 14.1

CNX 500 13.2 14.5 13.3

CNX Bank 2.3 20.1 15.4

CNX Energy 4.7 2.7 8.3

CNX FMCG 4.5 27.1 21.9

CNX Infrastructure 7.4 -1.3 8.4

CNX IT 52.6 27.2 16.1

MSCI EM -4.5 20.1 12.5

MSCI World 9.1 23.0 9.8

Returns (in per cent as of April 30, 2014) for less than one year is on an absolutebasis and for more than one year on a compounded annual basis.

Equity Performance Snapshot

Must Read

TThhee IIrr oonn LLaaww ooff VVaalluuaatt iioonn

John Hussman, President of Hussman Funds, writesa weekly analytical report for his investors. This is arich resource that is available in the public domainonline. He writes ‘The Iron Law of Valuation is thatevery security is a claim on an expected stream offuture cash flows. Given that expected stream offuture cash flows, the current price of the securitymoves opposite to the expected future return on thatsecurity. Particularly at market peaks, investors seemto believe, future returns remain entirely unaffected.The repeated eagerness of investors to extrapolatereturns and ignore the Iron Law of Valuation hasbeen the source of the deepest losses in history’.Please read Margins, Multiples & The Iron Law ofValuation at www.hussmanfunds.com.

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Q I am investing in HDFC Top 200, IDFC PremierEquity fund and ICICI Pru Discovery usingSystematic Investment Plan (SIP). Looking to post-election scenerio, what changes (even exiting) in mycurrent portfolio to be made. Should I continue withall of my funds as it is? Or should sell particularfund?

A Your approach to your portfolio should be based onyour financial goal, time frame and risk appetite, andnot so much based on elections. You could, however,take a tactical approach to funds that invest insectors, which may revive on the back of a stablegovernment and policy implementation. We havediscussed such funds in our call some time ago. Inour blog, we had recommended that you chooseHDFC Top 200, Franklin India Prima and ICICI PruDiscovery funds as a combination of dark horseplays and value picks.

This three-fund portfolio, with predominant mid-capfocus would give an investor exposure to the sectorsthat we think would be favourably impacted in apost-election scenario. We would go with equalexposure to these funds. Please note that we preferthis as a portfolio holding (call it the ‘Revival StoryPortfolio’, if you please!), as this would give acombination of stocks across market-cap segments.

Of the three funds mentioned, you already hold two.Only Franklin India Prima is not there. Consideringthat you already have two mid-cap funds - IDFCPremier Equity and ICICI Pru Discovery, addingFranklin India Prima would increase your exposureto mid-cap stocks.

What you can do is consider stopping SIP in IDFCPremier Equity, hold it, but start fresh SIPs inFranklin India Prima.

Please note that IDFC Premier Equity is a good fundand only if you specifically want a fund with moreexposure to cyclical sectors such as engineering orinfrastructure should you move to Franklin Prima.Else, the rest of your portfolio looks good.

Q & A

We have increased allocation to companies which will benefit from the demand revival in thedomestic economy and eventual lower interest rate and inflation, though the battle is half-won. Weare confident that the RBI will win.

Apoorva Shah, Co-Head Equity, DSP BlackRock Mutual Fund

Technical View B Krishna Kumar

Mahindra & MahindraMahindra & Mahindra is not too different from HDFC.After a minor correction, the stock appears set to resumeits uptrend. We expect the stock to touch the target of `1,230. The positive view would be under threat if price declinesbelow ` 1,015. Buy the stock at the current levels as wellas on dips, with a stop loss at ` 1,010 and target of `1,230.

HDFCWe cover the outlook for Housing Development FinanceCorporation (HDFC) and Mahindra & Mahindra. We arepositive on both, and expect 10-15 per cent upside fromthe current levels in these two stocks. After a nice downward correction, HDFC appears to haveresumed its uptrend. The stock has bounced off the keysupport at ` 860-870 with a stop loss at ` 860 and targetof ` 1, 010.

This column is targeted at investors who are registered customers with FundsIndia for trading and investing in equity as well as prospectiveinvestors who wish to open an equity account with FundsIndia. B Krishna Kumar hosts a weekly webinar that discusses the market outlookfor the following week. You can follow him on Livestream. If you wish to receive reminders for his webinars, go tohttps://www4.gotomeeting.com/register/131985103

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Nifty Nifty scaled lifetime highs in April, but sentiment turneda bit sour towards the end of the month owing to profitbooking and relatively lackluster quarterly earnings fromICICI Bank, Maruti and Hindustan Unilever. The May 16results for the Lok Sabha elections would be the crucialfactor influencing near-term sentiment. Technically, weremain bullish. Nifty has already reached the first target of6,850-6,900 in April, and our next target is 7,150-7,200.Our positive view would warrant a reassessment if Niftydeclines below 6,600-6,640. While the break below thissupport zone would be a cause of concern, it would notinvalidate the case for a rally to 7,150-7,200.

A number of factors favour an app revolution in India – the existence of developers, a billionconnections, a deficit in service delivery through conventional means, and a competitive mobilemarket.

Rajat Kathuria, CEO, ICRIER

The stock market is a giant distraction to the business of investing.

John Bogle

1 Name the person in the image? He is the Chairman ofSecurities & Exchange Board of India?

2 What is the common description for funds that investonly in government securities?

3 Which fund house has the largest Assets UnderManagement as of March 31, 2014 in India?

4 Who is the author of Global Crisis, Recession &Uneven Recovery?

5 Which was the first electronic stock exchange in India?

Answers can be emailed to quiz@fundsindia.com. Thefirst three to send in all correct answers will be entitled toa must-have book on investment.

Answers for April 2014 Quiz: 1 K N Sivasubaramiam 2 GillianTett 3 Liquid Fund 4 Prashanth Jain 5 Troy Ounce or OzPrize Winners: The first three to send in correct answersfor April 2014 Quiz are Ajay Kumar, NishanthMuralidhar and Mathusoothanan.

@fundsindia.com in AprilGold: For customers who do not want to take themonthly payment route, we have enabled a one-timepayment option for subscribing to the Reliance MoneyGold Plan. The customer can subscribe by paying any amount greaterthan ` 12000 and take delivery of gold after 30 days. Forcustomers, who have already subscribed to RMGP, wehave enabled additional purchases. We have also simplifiedtracking of your purchases by providing your GoldPurchase details in a separate tab.SIP Returns Information: To help investors decidebetter, we are now providing information on SIP(Systematic Investment Plan) returns for one, three andfive years for all equity funds are available on our MutualFund Explorer section.Set Up SIP: We have now enhanced our platform toprovide the ability to set up an SIP as a part of theregistration flow.

Contact Us

Wealth India Financial ServicesH M Centre, Second Floor29 Nungambakkam High RoadNungambakkamChennai 600 034

Email us at contact@fundsindia.com

To invest, call 0 7667 166 166

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Disclaimer: Mutual Fund Investments are subject to market risks. Please read the offerdocuments available at the website of each mutual fund carefully before investing. Pastperformance does not indicate or guarantee future performance. There is risk of capitalloss and uncertainty of dividend distribution. Think FundsIndia, a monthly publicationof Wealth India Financial Services, is for information purposes only. Think FundsIndiais not and should not be construed as a prospectus, scheme information document oroffer document Information in this document has been obtained from sources that arecredible and reliable.Publisher: Wealth India Financial Services Editor: Srikanth Meenakshi

QuizFundsIndia's Select Funds is a list of mutual funds that wethink are most investment worthy for a regular investor.These funds have been selected in a completely unbiasedmanner taking into account quantitative measures andqualitative assessments. The funds shortlisted are those thatare consistently top quartile performers in their categories.Different time and assessment criteria were used for debtand equity funds. They have all delivered superior risk-adjusted rolling returns by staying within the investmentmandate and beating their benchmarks. Please do note thatpast performance is not a guarantee of future results. Pleaseconsider your specific investment requirements beforedesigning a portfolio that suits your needs.

Equity funds - High risk: These are funds withpotential to generate high returns but come with highrisks and volatility. Please invest in the Growth Option.The recommended holding period is five yearsaccompanied by an active review of performance

BNP Paribas Mid Cap DSP BlackRock Small- & Mid-CapFranklin India PrimaHDFC Mid-Cap OpportunitiesICICI Pru Value Discovery FundIDFC Premier EquityReliance Equity OpportunitiesSBI Emerging Business Fund

FundsIndia Select Funds

‘(In mid-caps) we do play long themes but that is not necessarily sector driven. As a corollary, we do not indulge insector rotation or play events as the elections…..the overweight is not on FMCG but on Consumer Discretionary,which is a diversified basket with different growth drivers’ – R Srinivasan, Head Equity, SBI Mutual Fund. Readhis interview and more by regularly checking out FundsIndia Blog at www.fundsindia.blog.com.