Think Fundsindia April'15 - Fundsindia.com

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Should you switch from EPF to NPS? Yes!The recent budget assumes significance as far as your long-term savings goin the form of the National Pension System (NPS). To my mind, theadditional Rs. 50,000 of tax deduction allowed is just an add-on. What is ofreal importance is the proposal to allow an employee to replace his / herEmployee Provident Fund (EPF) with the NPS. This is a landmark proposal,as it is a step towards directing your hard-earned savings in more efficientinvestment channels that hold potential to provide you with a meaningfulcorpus when you retire.

The steady decline in EPF rates from 12 per cent in 2000-01 to 8.75 per centin 2013-14 is evidence to the declining rate regime we are in. Laden with highdebt, the Government can ill-afford to pay you high rates. This is why theGovernment has, over the past few years, been encouraging market-linkedinstruments as a part of retirement savings; but to no avail. It coaxed thePension Fund Regulatory and Development Authority (PFRDA) to increaseits exposure to equity-linked instruments, and reduce exposure togilts/bonds; however, it faced stiff resistance from various union segments.It encouraged companies to offer the NPS to their employees, and alsoprovided additional tax benefits for the same. Save for a few, most corporatefirms shied away from this, given the administrative work involved. Now, inwhat could be termed as empowering the stake holders, the Government hasprovided the flexibility to choose between EPF and NPS to the employee.

We think NPS scores over EPF in terms of providing you with a superior,contemporary, transparent retirement-saving cum accumulating tool,notwithstanding its currently lack-lustre structure and administrativeweakness. We believe these can be gotten over once there are more takers,and more private players come into the picture as service providers. The veryfact that NPS will allow you to invest in a superior-earning asset class, suchas equity, makes it a better product in relation to EPF. The fact that youcannot take out your money, as you would with EPF, is a positive, as it willensure you have a decent kitty when you retire, and that you won’t spend itall on other ‘incidental expenditure’ that life demands you to spend. Go forit once the laws are in place; but do not confuse it with your mutual fundinvestments. That is a different story and we will tell you why you cannotmix your NPS with mutual funds another time soon.

Vidya BalaHead – Mutual Fund Research

FundsIndia.com

April 2015 � Volume 05 � 04

Yet another innovationGreetings fromFundsIndia!

Good advicecombined with a

great execution platform – thiscombination is the foundation ofFundsIndia.

Traditionally, investors makeone-time investments usingpayment gateway (net-banking),and Systematic Investment Plans(SIP) using bank mandates.

At FundsIndia, we go one stepbeyond and say that you can makeyour SIP payments also, if you like,using the payment gatewaythrough our Alert SIP service.

The missing piece was the ability tomake one-time investments usingbank mandates. Now, investors cando that too!

If you have a National AutomatedClearing House (NACH) mandate,you can make lump-suminvestments using your existingbank mandate.

This cuts the time to completetransactions as you don’t needbank logins / One-Time Passwordverifications. Also, NACH helpseliminate the possibility of apayment gateway failure.FundsIndia is the first transactionplatform to offer this facility acrossmutual funds.

Happy investing!

Srikanth MeenakshiCo-Founder & COOFundsIndia.com

The real risk to your investments…

Yet, when we measure the swings in your fundperformance using metrics such as standard deviation, wedo attribute such volatility to risk. So, are we making amistake?

Not really, because in the short term, volatility hurtsportfolio returns. When the Buffetts and Mungers talk ofvolatility not being synonymous with risk, the underlyingassumption is that you have a multi-decade view of theequity asset class, and that you do not enhance the risk byyour own erroneous investment behaviour.

That essentially means that the problem is not withvolatility, or the seeming risk associated with it; it is withthe investor’s outlook and expectation of the equitymarket.

Here are a few issues with the way we perceive equitymarkets, and also in the way we invest:

Short-term outlook

The first and foremost problem is with our short-termoutlook. If you’re in the equity market for the short term,yes, volatility counts simply because equities are far riskierwhen you hold them for a few weeks, months, or even ayear. Just to illustrate, take the case of an outperformingfund such as ICICI Pru Value Discovery.

Its volatility, when measured by standard deviation, is 11.3per cent for any 3-year returns (based on daily rolling datafor the last 5 years). That means it can deviate from itsmean returns by 11.3 per cent - on the upside, as well asthe downside.

For the same fund, if you take the standard deviation ofits 1-year returns (again, seen on a daily rolling basis overthe last 5 years), it is as high as 36 per cent! That means

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Vidya Bala

…Is your investment behaviour. That’s how I choose to interpret what Charlie Munger,Vice-Chairman of Berkshire Hathaway, says of risk and volatility, in the company’s much-anticipated annual newsletter to shareholders.

In his words, “If the investor fears price volatility, erroneously viewing it as a measure of risk, he may,ironically, end up doing some very risky things.”

its returns can swing 36 per cent, higher or lower, fromthe average returns. So, you can lose a third of yourreturns as a result of such volatility!

Clearly, the longer the period, lower the standard deviationto a point where volatility is no longer a factor that candamage your portfolio, and is something that normaliseswith time. This is what Charlie Munger suggests when hesays volatility is not synonymous with risk.

“For the great majority of investors, who can – and should – investwith a multi-decade horizon, quotational declines are unimportant.Their focus should remain fixed on attaining significant gains inpurchasing power over their investing lifetime.”

Timing the market

For many Indian investors, investing is a one-off, sporadicactivity, and is not seen as an ongoing one that is doneover time. This, combined with the short-term outlookmeans the risk of timing the market. Hence, as CharlieMunger puts it, by their own behaviour, investors makeequity investing far riskier than it is.

An investment done in the peak of 2008, for instance,would have hardly delivered even 3-5 years hence, thanks

Azim Premji has a simple motto — work hard and work harder. Jokes apart, if there is one thing Iused to lose sleep over it had to do with him calling up in the morning and giving me a earful withregard to anything that concerned integrity and ethics in company matters.

Suresh Senapaty, Wipro’s outgoing CFO

Charlie Munger and Warren Buffett, the brains behind BerkshireHathaway.

to ill-timing the market. The same investment spread overtime – say through Systematic Investment Plans (SIPs) -would have delivered decent returns, in fact, takingadvantage of the same volatility that seemingly dragsreturns lower.

A long-term view, combined with investments made overtime, would be the best recipe to largely neutralisevolatility in your portfolio.

Lack of diversification

The stress of seeing your portfolio swing wildly can belargely mitigated when you diversify your portfolio acrossasset classes, across categories, and across styles ofinvesting. Ever wondered why most of us fail to diversify?It stems from the wish to chase returns.

Running behind an asset class that delivered superlativereturns, or filling a portfolio with a theme that recentlyoutperformed (and perhaps lost steam), are a few of thereasons why volatility hits your portfolio. Many investorswho went overweight on gold at its peak in 2012 wouldhave taken a hit in the next few years. This holds for giltstoo in the same period.

Diversifying helps reduce volatility and removes the needto time asset classes, or fund classes, at different points intime.

In Charlie Munger’s words:

“Investors, of course, can, by their own behaviour, make stockownership highly risky. And many do. Active trading, attempts to‘time’ market movements, inadequate diversification.... can destroythe decent returns that a life-long owner of equities would otherwiseenjoy.”

The lesson is simple: change your outlook – change theway you view equities as an asset class, diversify, buy overtime, and forget what market forecasters say. CharlieMunger ends his note this year with this quote fromShakespeare: “The fault, dear Brutus, is not in our stars, but inourselves.”

Vidya BalaHead – Mutual Fund Research

FundsIndia.com

A Financial Check List for WomenWomen today earn an income that is equal, if not more,than their male counterparts. But that isn’t the realachievement. The real achievement is when women don’tjust make money; they also manage it efficiently. Here isa simple financial checklist for you that will help youkick-start and manage your finances effectively.# 1 Your spending plan: Chart out a spending planevery month. When you do that, don’t write down yourexpenses first. Instead, start your plan by listing out howmuch you would save and invest during that particularmonth. The wisest way to use your money is in thefollowing order – earn, save, and then, spend. Once youdecide how much you will save, then list out all yourexpenses for the month. This will help you identify anyunwanted expenses, and then, you can divert it to yoursavings budget. Remember, at least 20 per cent of yourincome must be invested every month.# 2 A contingency plan: Set aside a minimum of 6months’ expenses money as a contingency fund. You canuse this at the time of any emergency, such as say a suddenloss of job, or hospitalisation. You can maintain thismoney in a liquid fund.# 3 A plan for your liabilities: Taking a loan is inevitablethese days. But you must remember this: your liability canmake life difficult for you IF you do not know to controlit. Make sure your Easy Monthly Installments (EMI)outgo does not exceed 50 per cent of your income. Theinterest on your credit card may range from 36 per cent to42 per cent.# 4. A plan for your children: The cost of educationkeeps increasing every year. That’s why you need to havea sound investment plan in place to meet your children’seducation needs. It might be difficult to arrange themoney at the last minute.

S Sridharan,Head Financial Planning,

FundsIndia.com

Read more of this article, and get more insights on allmatters financial at the FundsIndia Marketplace – theofficial blog of FundsIndia by clicking here.

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Market Place

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A portfolio crafted to ride the India growth story

Why invest now

Post the new political regime, there has been a spate ofreforms announced from mid-2014 that have caused themarkets to gain. These reforms received a structure andshape by way of fund allocation and legal framework onlyafter the recent budget.

India’s macro-economic indicators are improving over thepast one year. Lower inflation and improving deficitsituation, aided by lower crude and stable currency, are afew of the improving macro-economic factors. Similarly,petrol and diesel prices’ deregulation helped theGovernment reign in fiscal deficit.

The environment for growth became conducive since theReserve Bank of India (RBI) started cutting rates (tworate cuts of 25 basis points have so far been done; morerate cuts to come).

This prompted us to build a portfolio that will gain froman economic revival and easing rate cut scenario. Thosewho are keen to benefit from India’s growth revivalshould consider the New India Portfolio for long-termwealth creation.

Our picks for New India Portfolio

We analysed hundreds of funds to identify a small set thatare best positioned to take advantage of the revival story.In the process, we did not lose sight of the core of ourfund selection philosophy – consistency and stability.

This is reflected in our choice of funds for the New IndiaPortfolio as well. This is not a portfolio meant to deliverflashy returns. You may, therefore, not find all top notchfunds alone in the portfolio. Stability, together withportfolios tuned towards reviving sectors and themes, will

We all know that the new Indian Government has launched a whole set of reform initiatives.Thanks to these, the country's economy is poised to grow on a fast track mode over the nextfew years.

But how can you, as an investor, take advantage of this situation and invest smartly? We haveanalysed hundreds of funds to identify a small set that are best positioned to take advantage ofthe revival story, so that they deliver great returns to you. We are calling it the 'New IndiaPortfolio' and it is available for you to invest and benefit from the India story.

Parameter Nov Nov Mar

2012 2013 2015

Wholesale Price Index (WPI - %) 7.2 7.5 -2.06

Consumer Price Index (CPI - %) 9.9 11.6 5.37

Current Account Deficit (%- GDP0 4.7 1.7 -1.3*

Fiscal Deficit (as % of GDP) 4.9 4.6 4.1*

Oil Prices ($/bbl) 110 112 55

G-Sec Yield (%) 8.22 8.74 7.75

Credit Growth (%) 14 14 10.8

GDP growth - (% Old) 4.6 5.2 5.3

GDP growth - (% Rebased) -- 7.5 7.8

Index of Industrial Production (%) 1.01 1.3 2.6

Source: Bloomberg; *As per Union Budget; GDP - Gross Domestic Product

distinguish this 4-fund portfolio from regular fundportfolios.

A diversified fund

A diversified fund with premium blue-chip companies,and a general bias for large caps can provide stability tothe portfolio. Such a fund is necessary in any coreportfolio, and we have chosen one that scales high on arisk-adjusted basis and has low volatility. This fund has aconsistent track record of more than 5 years.

A mid-cap fund

A contrarian mid-cap fund will help you capture potentialin quality mid-sized companies that usually out-performbroad markets. Mid-sized companies that benefit fromhigher capacity utilisation, or de-leverage in an easing

N Sathyamoorthy

ImprovingMacro-Economic Indicators

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interest rate also benefit from operating and financialleverage.

These companies, albeit risky, are well placed to gain in aprolonged rally. We have tried to mitigate the risks from atypical mid-cap fund by choosing a fund that is lessvolatile, even as its portfolio is well placed to capture theupside from economic reforms. This fund has a consistenttrack record of more than 5 years.

A diversified theme fund

We chose a fund that will invest in multi-themes(infrastructure, resources, finance, social development,and agriculture) that are meant to act as building blocksfor the economy.

This fund can be expected to benefit well from a revivalin cyclical sectors. Cyclical sectors such as manufacturing,infrastructure, banking, auto, and so on, are the ones thatprop the Gross Domestic Product (GDP) growth in anyeconomic revival. This was seen in the 1992-97 rally, aswell as the 2003-2007 rally.

A long-term debt fund

To ride the interest rate rally (when rates decline), and toprovide meaningful asset allocation, we added an incomefund that is well placed now to gain from falling rates(price rally when rates fall).

The fund seeks to play the credit spread, which is thedifference between the government bond (called gilt) andcorporate bond rates. It also takes higher exposure ingovernment securities, if the interest environment isconducive. This fund takes exposure to medium- tolong-maturity government securities, and AAA-ratedbonds, and is well placed to gain from a rally.

How the portfolio fared

Back testing analysis seeks to estimate the performanceof a strategy if it had been employed during a past period.You may be aware about the individual performance ofthe underlying funds; but the weighted averageperformance of the underlying funds can bring to lightits ability to contain volatility and generate superior returnsoverall. The portfolio generated 18 per cent compoundedannual returns in the past five years as compared to 11 percent returns from the blended index.

Is it for you?

If you are looking for a high-risk-high-returnpredominantly equity portfolio with some debt, and arewilling to hold it for at least five years, then you couldconsider the New India Portfolio for long term wealthcreation. On a risk-reward basis, this portfolio is positionedabove large and mid-cap funds, but below thematic andsector funds.

The New India Portfolio could be more volatile than apure large-cap portfolio, but well positioned to deliverbetter returns in the long run. This portfolio is moresuitable for existing investors who look for a slightlyaggressive portfolio to supplement their existing portfolio.

Suitability: This is a high-risk portfolio and investors areadvised to get it reviewed with their advisors every 6months. As always, our advisors would be able to give youthe in-house view on these funds, and whether anychanges are needed in the strategy.

N SathyamoorthyAnalyst, Mutual Fund Research

FundsIndia.com

54% 45% 36% 29%18% 11%

1 Year 3 Years 5 Years

New India Portfolio Blended index

Back Testing: Performance Chart

Returns over one year are annualized (as of 24/03/2015)

Leadership talent is always in shortage. I don’t think you would ever hear a leader say, ‘I have surplusleadership talent’. In fact, we will see the reverse. You will see companies that have been able toattract leaders are the companies that grow.Noshir Kaka, Managing Director, India, of McKinsey & Company

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Axis BankSince the beginning of the year, Axis Bank has remainedvolatile, building strong support at Rs 525 levels, while theresistance is at Rs 580 and Rs 620. There is a strongconsolidation building up in the Rs 525 to Rs 580 priceband. The latest 100-day Simple Moving Average is at Rs530. A breakout above Rs 580 will lead to a medium-termupward trend, with the target at Rs 650 and stop loss at Rs480.

This column is targeted at investors who are registered customers ofFundsIndia for trading and investing in equity as well as prospectiveinvestors who wish to open an equity account with FundsIndia.

The Sensex continues to remain weak after it broke thecrucial level of 28,600. It witnessed volatile trading andnegative bias in March. The index was trading in a broadrange of 27,250 to 30,024 for the month. The strongsupport is placed at 27,250 and 26,800 levels, whileimmediate resistance is at 28,200 and 29,000 levels. Theshort-term trend is bearish, and the downward trend willcontinue as long as the index trades below the 28,200levels. The Sensex can scale lower to 26,800 levels if thedowntrend continues. The trend will turn positive only ifthe index closes above the 28,200 levels.

Perumal RajaTechnical Analyst (Equity Research Desk)

FundsIndia.com

Sun PharmaSun Pharma, which was trading in a tight band of Rs 800to Rs 950 for the past 5 months, has broken out andmoved to a high of Rs 1,070. Support is at Rs 950 and Rs880, while strong resistance is at Rs 1,080 and Rs 1,150.The stock can be accumulated on declines. The latest20-day Exponential Moving Average is at Rs. 1,005. Theimmediate target is Rs. 1,180, with its stop loss at Rs 850.

Technical View Sensex

Disclaimer for Think FundsIndia:Mutual Fund Investments are subject to market risks. Please read the offer documents available at the website of each mutual fund carefullybefore investing. Past performance does not indicate or guarantee future performance. There is risk of capital loss and uncertainty of dividend distribution. Think FundsIndia,a monthly publication of Wealth India Financial Services Pvt. Ltd., is for information purposes only. Think FundsIndia is not and should not be construed as a prospectus, schemeinformation document, or offer document. Information in this document has been obtained from sources that are credible and reliable in the opinion of the Editor.

Publisher:Wealth India Financial Services Pvt Ltd. Editor: Srikanth Meenakshi

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Q

I read your article about investing in real estate versusequities. The article is good, but it misses a very criticalpoint. It only talks about upside. What about downside?The advantage of real estate is that the downside isprotected. Yes, it might be illiquid for some time, but theprincipal is protected. On the other hand, in equities, yes,you gain; but I’ve also experienced equities in which youlose a substantial principle component, which you neverrecover.

A

First, it is not true that property prices do not decline.Check out the Residex Index of the National HousingBank and you will see that in many a large city, prices arestill negative since the inception of the index in 2007.

Let me narrate my own experience in real estate andstocks.

I invested in a duplex house (suburban location inChennai) in 2011 for Rs. 30 lakh (Rs. 25 lakh of homeloan). Had I invested the down payment and made 10 percent returns in options such as mutual funds, I would havemade close to Rs. 2 lakh of return. That is hardly what Ihave got as return on my property.

This is because just a couple of months ago, a similar newduplex house in the same locality was sold for Rs. 32 lakh.Had I invested the down payment, the registrationexpenses, and the brokerage cost in the investment optionI have indicated, I would have made higher returns.

Now after including the cost of my loan and interest, Iam actually sitting on losses. If I sell my property now, Iwould end up with more losses.

Where is the principal protection? I should hold thisproperty for the next 10-15 years to get 8-10 per centcompounded annual returns. That is the reality. Most ofus do not look at the cost of borrowing when we checkour returns.

Now for equity. I had invested in the stock of ReliancePower in 2008. Even though I understand equity

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Q & A

Index 1 Year 5 Years 10 YearsCNX Nifty 26.7 10 15.6S&P BSE Sensex 25.1 9.7 15.9CNX Mid-Cap 51.7 11 16.2CNX Small-Cap 53.5 9.1 14.9CNX 100 29.3 10.4 15.7CNX 500 33.8 10.1 14.9CNX Bank 43.7 14.2 18CNX Energy -1.8 -1.9 8.9CNX FMCG 9.2 22 22CNX Infrastructure 23.2 -1 9.5CNX IT 30.3 15.4 15.7MSCI Emerging -2.1 -0.7 6.1Markets IndexMSCI World Index 4.5 7.9 4.3

Returns (in per cent as of March 30, 2015) for less than one year is on anabsolute basis and for more than one year on a compounded annual basis

Equity Performance Snapshot

valuations, and that the Initial Public Offering (IPO) wasexpensive, I invested my money and lost my capital. Thefault was mine; not that of the equity market.

I should have taken sufficient time to analyse the stockbefore investing in it. Before investing in a property, wecompare and evaluate expected rent and the growthprospects of the property. Despite all that, it remainsclose to a gamble! We do not, however, do some basichomework while investing in stock markets and get easilyswayed by market sentiments, or by what others say.

If you invest in a quality stock and have the patience tohold on to it, you seldom lose. For instance, if you hadinvested in Infosys in 2000, you would have lost 75 percent of your capital in the very next year. But had youheld on to it, you would have built your wealth! This istrue of so many blue-chip stocks.

N SathyamoorthyAnalyst, Mutual Fund Research

FundsIndia.com

Dearth of formal vocational education, high school dropout rates, inadequate skill training capacity,negative perception towards skilling, and lack of industry ready skills even in professional courses,are major causes of poor skill levels in India.S. S. Mundra, Deputy Governor, Reserve Bank of India

1 Name the investment management company ownedand managed by Warrant Buffett and Charlie Munger.

2 Who is at the helm of equity investments at UTIMutual Fund? He is one of the most highly regardedfund managers in India.

3 Apple replaced which stock in the Dow JonesIndustrial Average recently?

4 Who is the author of `Seven Habits of EffectivePeople’?

5 Name the person in the image. Hehas been responsible for thedevelopment and growth of one ofIndia’s highly rated financialservices group.

Answers may be sent to [email protected].

Answers for March 2015 Investment Quiz: 1 Finance Bill 2 RK Shanmukhan Chetty 3 Prudential 4 Gillian Tett 5 RaviMohanWinner March 2015 Quiz: Mr. Prabakaran Kuppusamy

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Investment QuizFundsIndia Select Funds

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These are funds that seek to generate inflation-beatingreturns, and limit downside risks. The required holdingperiod is at least five years.

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Please click here for a listing of our preferred funds.

@fundsindia.com• As indicated last month, we have simplified the processof paying for your investments by introducing a newpayment option – your NACHmandate. This eliminatesthe need to log in to your internet banking account tocomplete your transaction.

• We have also rolled out a new version of our mobileapp that allows users to invest in new fixed deposits,and purchase 24 Karat Gold through the Reliance MyGold Plan (RMGP).