monthly markets update (india) - july 2011

July 2011

Prepared by: iFAST Research Team

Monthly Markets Update - India July 2011

Key Points

The Federal Reserve also lowered its growth forecast for the US economy between 2.7% and 2.9% in 2011, down from 3.1% to 3.3%.

The Bank of Japan has maintained its optimistic stance on economic recovery.

Rising Inflation is fast becoming a problem especially for the emerging markets and for the central banks in the emerging world have resorted to tight monetary policy.

Indian markets bounced in the last few days of the month on the back of positive global and local factors.

On the Fixed Income side, we remain positive on the shorter end of the curve and suggest investments in FMPs, Ultra Short term fund and Short Term funds.

Indian Mutual Fund Industry’s average assets under management increased by Rs 43,799 crore to Rs.7,47,479 crores in the second quarter of 2011 as compared to the first quarter of 2011.

Index funds were the best performing funds as a category in India for June. Large-cap Funds outperformed multi cap and midcap funds; however they underperformed Sensex and Nifty Returns.


Equity Markets Update

International Markets (As at June 2011 end)

2011 2011 2010 P/E P/E P/E Earnings Growth

Earnings Growth

MTD YTD Return (%) Yr 2011 Yr 2012 Yr 2013 2011 (%) 2012 (%)

Asia ex Japan (MSCI Asia ex Japan) -2.69% 0.32% 17.00% 12.3 10.6 9.6 16.10% 15.50%

Emerging Markets (MSCI EM) -1.86% 0.04% 16.40% 10.5 9.2 8.2 23.50% 15.10%

Europe (Stoxx 600) -2.92% -1.50% 8.60% 10.8 9.5 8.7 10.30% 13.10%

Japan (Nikkei 225) 1.26% -4.04% -3.00% 16.0 13.7 11.2 6.20% 16.60%

USA (S&P 500) -1.83% 4.99% 12.80% 13.1 11.5 10.4 16.10% 13.50%

Australia (S&P/ASX 200) -2.13% -3.81% -2.60% 13.1 11.2 10.4 16.60% 7.90%

Brazil (IBOV) -3.43% -9.96% 1.00% 10.0 8.7 7.8 17.40% 14.90%

China (HS Mainland 100) -4.72% 0.29% 2.20% 11.1 9.7 8.5 20.60% 14.90%

Hong Kong (HSI) -5.43% -2.61% 5.30% 12.0 10.5 9.3 14.60% 14.50%

India (SENSEX) 1.85% -7.57% 17.40% 15.0 12.7 11.5 17.00% 17.70%

Indonesia (JCI) 1.34% 5.00% 46.10% 15.1 12.7 11.1 25.30% 18.60%

Malaysia (KLCI) 1.33% 3.96% 19.30% 15.5 13.7 12.4 7.10% 13.00%

Russia (RTSI$) 0.96% 7.71% 22.50% 5.7 5.4 5.5 57.80% 5.80%

Singapore (STI) -1.25% -2.86% 10.10% 14.0 12.7 11.2 6.30% 10.90%

South Korea (KOSPI) -1.95% 2.42% 21.90% 10.3 9.2 8.1 17.10% 12.30%

Taiwan (Taiwan Weighted) -3.74% -2.87% 9.60% 13.4 11.5 10.6 6.10% 16.20%

Technology Heavy (NASDAQ 100) -2.00% 4.46% 19.20% 14.3 12.6 11.3 21.90% 13.50%

Thailand (SET Index) -3.01% 0.84% 40.60% 11.3 9.8 9.2 27.60% 14.90%

Source: Bloomberg, iFAST Compilations All returns are in respective local currency terms and MSCI Index returns are in USD


Global Market Performance

Group 7 Countries

Events

US Unemployment rate rose to 9.1% in May 11, up from 9.0% in Apr 11

US 1Q 11 GDP at 1.9% q-o-q annualised, compared to 3.1% growth in 4Q 10

US Leading indicators rose 0.8% m-o-m in May 11, after a revised 0.4% decrease in Apr 11

US Business inventories rose 0.8% m-o-m in Apr 11, after an upward-revised 1.3% increase in Mar 11

German Industrial production fell 0.6% m-o-m in Apr 11, after an upward-revised 1.2% gain in Mar 11

French Industrial production fell 0.3% m-o-m in Apr 11, after a downward-revised 1.1% decline in Mar 11

UK Industrial production fell 1.7% m-o-m in Apr 11, down from a downward-revised 0.2% gain in Mar 11

Bank of Japan (BOJ) held its target rate unchanged at a range of 0% to 0.1% in Jun 11

Japan’s Industrial production dropped by 13.6% y-o-y in Apr 11 following a decrease of 14% in Mar 11

Market Outlook

In the June 2011 Federal Open Market Committee (FOMC) meeting, the Fed Funds Target Rate was held

at between 0 and 0.25%. The Federal Reserve also lowered its growth forecast for the US economy

between 2.7% and 2.9% in 2011, down from 3.1% to 3.3%. While we do not expect further quantitative

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Global Indices- G7 (MTD Returns)


easing, we expect short term interest rates to remain low given the fragile nature of the US economy,

and the Fed’s “extended period” of low interest rates will probably span well into 2012.

The European Central Bank will next decide the monetary policy on 7 July, which we expect benchmark

rate to remain unchanged unless there is an influx of higher than expected growth surprises during the

interim.

The Bank of Japan has maintained its optimistic stance that “the economy will return to a moderate

recovery path from the second half of fiscal 2011”. It also raised its monthly economic assessment for

the first time since February 2011. In our view, the BOJ will not push another round of QE programme in

any time soon.


Asia Pacific (Ex Japan)

Events

Taiwanese Industrial production expanded 7.8% y-o-y in May 11, compared to an upwardly revised 7.2% y-o-y gain in Apr 11

The Bank of Korea (BOK) raised its benchmark 7-day repo rate by 25bps to 3.25% in Jun 11

Thailand Manufacturing production fell 3.9% y-o-y in May 11, up from a downward-revised 8.1% decline in Apr 11

Indonesian Inflation rate decelerated to 5.98% y-o-y in May 11

Malaysian Industrial Production Index contracted 2.2% y-o-y in Apr 11, due to the 0.4% contraction in manufacturing outputs and 6.9% contraction in mining outputs

Singapore Industrial production for May 11 contracted 3.8% m-o-m, after a downward-revised 18.7% contraction in Apr 11

Hong Kong CPI rose 5.2% y-o-y in May 11, compared to 4.6% in Apr 11

Australian Trade balance fell to AUD 1597 mil surplus in Apr 11 from AUD 1691 mil surplus in Mar 11

Market Outlook

The Bank of Korea (BoK) has raised its benchmark 7-day repo rate from 3% to 3.25% in June 2011. The

move surprised markets as the bank was widely believed to freeze the interest rate until signs of

economic acceleration increased. The bank’s governor warned that low borrowing costs are fuelling

household debt which should be checked. We remain with our view that the Bank of Korea (BoK) would

raise its benchmark 7-day repo rate to 3.50% by end of this year.

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Global Indices- Asia Pacific (Ex Japan)

(MTD Returns)


Supply chain disruptions following Japan’s earthquake and tsunami appear to have had some impact on

Singapore’s economy in May. The contraction of industrial production in May marks a second

consecutive monthly decline, and on a year-on-year basis, May’s reading was 9.5% lower, a strong

indication that Singapore’s economy will likely contract in 2Q 11. Industrial production was weighed

down by the biomedical manufacturing cluster

Hong Kong inflationary pressures are building up on the back of higher imported prices and the imposition of minimum wages, with headline inflation hitting 5.2% in May, higher than median estimates of 5%. The Chief Financial Secretary earlier had expressed that Hong Kong’s exchange rate peg has made the policymakers unable to use interest rate as a tool to combat inflation.


BRIC (Ex India) Countries

Events

Chinese CPI rose 5.5% y-o-y in May 11 as compared with a 5.3% rise in Apr 11

Chinese Industrial production grew y-o-y by 13.3% in May 11 as compared with 13.4% increase y-o-y in Apr 11

Chinese Exports increased 19.4% y-o-y in May 11 as compared with a 29.9% increase y-o-y in Apr 11

Brazil’s Sovereign debt rating upgraded by Moody’s to Baa2 with a positive outlook

Brazil’s Selic rate raised to 12.25%, a 25 bps increase from a previous rate of 12.00%

Brazil’s IPCA Inflation rose to 6.6% y-o-y in May 11, up from 6.5% in Apr 11

Russia’s Industrial production expanded 4.1% y-o-y in May 11, after a 4.5% y-o-y increase in Apr 11

Russia’s Consumer Prices gained 9.6% y-o-y in May 11, same as Apr 11

Russia’s Unemployment rate was 6.4% in May 11, down from 7.2% in Apr 11

Market Outlook

China’s Headline inflation has stayed above 5% for three straight months. May’s figure hit 5.5% year-on-

year which is the highest in 34 months. In response, the Chinese central bank raised reserve

requirement ratios by 50 basis points to 21.5% so as to drain liquidity from the monetary system. In

anticipation of heightened inflation, the Chinese equity market has seen a PE contraction amid strong

earnings. We think such discount is unlikely to reverse unless inflation peaks or is expected to peak.

On the Chinese economic front, more signs reveal that the growth of the world’s second largest

economy has slowed. Manufacturing PMI posted a two-straight month decrease to 52.0 points in May.

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Global Indices- BRIC (Ex-India)- (MTD

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Brazil’s rate hike cycle combined with other macro-prudent measures aimed at combating inflation saw economic activity slow. We expect economic activity to further slow in the near future as the effects of the rate hike cycle and the various macro-prudent measures become more pronounced.

Inflation continued to remain above the government’s target of 4.5% (plus/minus 2%), registering a growth of 6.55% year-on-year in May, not much different from April’s 6.51% rise. We maintain our belief that inflation is close to peaking in the Latin American

Russia’s Headline CPI growth remained stable at 9.6% year-on-year due to easing food prices while consumer prices have risen 4.8% since year-to-date. Meanwhile, it’s too early to conclude that the inflation has peaked as Russia has often been hit by drought and bad weather in summer.


INDIA Equity Market Outlook


India-Equity

Events

India’s Manufacturing Purchasing Managers’ Index is at 57.5 in May as compared to 58.0 in April

Reserve Bank of India raised the repo and reverse repo rates by 25 basis points in the Annual Policy Meet held on June 16,2011

Production at factories, utilities and mines increased to 4.4% in April as compared to 7.3% in the previous month

WPI Inflation for the month of May stands at 9.06% as compared to 8.66% in April 2011

Market Outlook

The Indian equity market represented by SENSEX has gained 1.85% (in INR terms) in the month of June.

However, the Indian equity market was on a downward trend until 20 June 2011. A combination of local

and global factors have led to the sharp turnaround in the equity market performance from sharp drop

of 5.1% (as at 20 June 2011) in comparison to the SENSEX’s close value of 31 May 2011 to a positive

performance of 1.85% at the June month end .

A drop in the global crude oil price and the hope of Greece debt settlement were the global factors,

while the Indian government’s decision to withdraw 5% customs duty on crude oil, an excise duty cut of

INR 2.6 per liter and a cut in the import tax from 7.5% to 2.5% on Petrol and Diesel imports were the

local factors that led to the stock market rally. The government also chose to increase the fuel prices of

diesel, cooking gas and kerosene. The primary beneficiary of the duty cuts and the increase in the fuel

prices are the state run oil marketing companies.

The first quarter results and the first quarter monetary review to be held on 26 July 2011 are the

domestic factors that will decide the direction of the markets. However, we expect the markets to

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remain range bound on account of high inflation and more interest rate hikes which are expected in the

coming months. We are also expecting more earnings downgrades for 2012, which means that

correction is expected.


INDIA

Debt Market Outlook


India-Debt

The 10 year benchmark yields were on a downward trend for the greater part of the month, barring for the

spike up during the middle of the month, which coincided with the RBI’s mid quarter monetary policy

review. The 10 year benchmark rates were at 8.41% on 31 May 2011 and fell to the month’s low at 8.21% on

20 June 2011 before ending the month at 8.33%.

The RBI in its mid quarter policy meet increased the repo rate by 25 basis point from 7.25% to 7.50%. Since,

the reverse repo rate is linked to the repo rate, the reverse repo rate has also been increased by 25 basis

points from 6.25% to 6.50%. With the inflation for the month of May above 9%, the RBI will increase the

repo rate again on 26 July 2011. The fuel price hike announced in June will fuel inflation to still higher levels.

However, the RBI expects the inflation to rise before moderating in H2 of 2011-12.

The liquidity in the system continues to be in deficit mode.

In this scenario, we advise:

Investors with a time horizon anywhere from 3 months to 24 months can lock-in their money in FMPs (available with varying maturities) at the prevailing high rates

Investors with idle cash in the savings account should look at Ultra-Short Term Funds. The Recommended Funds in this category include DWS Ultra Short Term Fund and Birla Sun-life Ultra short term Fund .The investment horizon that we suggest for such instruments is

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1 month -3 months

Investors with a time horizon between 6 - 12 months should consider Short-Term Funds. The Recommended Funds in this category include Reliance Short Term Fund and Templeton India Short Term Fund


Mutual Funds


Mutual Fund Industry Asset Trends

The Indian mutual fund industry’s assets (average assets under management) increased by

6.22% or by INR 43,799 crores to INR 7, 47,479 crores in the second quarter (April – June) of

2011 in comparison to the first quarter (January – March) of 2011.

In absolute terms, IDFC Mutual Fund has managed to garner maximum average assets in this

quarter; the fund house assets increased by around INR 6,728 crores. ICICI Prudential Mutual

Fund registered second largest addition in average assets of around INR 6,305 crores. In the last

quarter also both these fund houses appeared among the top 5 AMCs list for registering highest

average assets in the industry in absolute terms.

Franklin Templeton Mutual Fund registered the largest fall in average assets of around INR 3,042

crores followed by LIC NOMURA Mutual Fund which lost close to INR 1,857 crores in second

quarter of 2011. Axis Mutual Fund which saw an increase in average assets in the previous

quarter lost around INR 849 crores in this quarter.

In percentage terms, Daiwa Mutual Fund and Tauras Mutual Fund have witnessed largest

increase in the average assets in this quarter. Daiwa Mutual Fund saw an increase in the average

assets by around 172% whereas Tauras Mutual Fund has increased its assets by 96%. Bharti Axa

Mutual Fund followed by ING Mutual Fund has seen the largest decrease in assets in percentage

terms.

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India Fund Industry Assets (Amount in INR Crores)

Source: AMFI, iFAST Compilations (Average Assets Under Management)

Q-o-Q Absolute Change

in Assets (INR in Crores)

% Change

in Assets

IDFC Mutual Fund 6727.89 30.79%

ICICI Prudential Mutual Fund 6304.87 8.57%

SBI Mutual Fund 6202.66 14.88%

HDFC Mutual Fund 5750.67 6.66%

Birla Sun Life Mutual Fund 3776.29 5.93%

ING Mutual Fund -255.58 -17.37%

DSP BlackRock Mutual Fund -578.78 -1.89%

Axis Mutual Fund -848.81 -10.22%

LIC NOMURA Mutual Fund -1857.17 -16.59%

Franklin Templeton Mutual Fund -3042.17 -7.69%

Top and Bottom Five AMCs - By Absolute Change in Assets (Q-o-Q), as

of April- June 2011

Source: AMFI, iFAST Compilations


Fund Category Returns

Fund Category Returns (as of June 2011)

1 Month 1 Year

Equity: Large Cap 1.30% 4.92%

Equity: Multi Cap 0.94% 3.90%

Equity: Mid Cap 0.42% 1.54%

Equity: ELSS 1.14% 4.34%

Equity: Index 1.71% 5.22%

Equity: Global -3.18% 17.84%

Hybrid: Balanced 1.26% 5.87%

Hybrid: MIP 0.94% 4.81%

Debt: Income 0.99% 5.14%

Debt: Gilt Short Term 0.63% 4.93%

Debt: Gilt Long Term 0.83% 4.22%

Debt: Floating Rate 0.73% 7.17%

Debt: Ultra Short Term 0.72% 6.84%

Debt: Short Term 0.92% 6.01%

Liquid 0.65% 6.52% Source: ACE MF, iFAST Compilations

(Excludes Institutional Plans)

In the month of June, all the categories except global funds category have delivered positive

returns. Index funds category has delivered highest returns across the three segments i.e.

equity, debt and hybrid. After delivering negative returns in the last month, the actively

managed large-cap, multi-cap and midcap funds have given positive returns in the month of

June.

The large-cap funds as a category have outperformed multi cap and mid cap segment; however,

they have underperformed BSE SENSEX and CNX NIFTY Index returns in the month of June. Both

the broader indices CNX Nifty Index and BSE SENSEX gave month-on-month (m-o-m) returns of

1.57% and 1.85% respectively.

Global funds category continues to deliver negative returns for second consecutive month. The

category delivered negative returns of around 3.18% on a month-on-month basis. This was

mainly on the back of negative returns delivered by most global markets in the month of June.

In the debt segment, all categories have delivered positive returns for the second consecutive

month. All these categories have managed to deliver returns in excess of 0.5%. Income funds

followed by Short Term funds have given the highest returns in the debt category in June.


Top and Bottom Performing Equity Funds in June

Top Performing Equity funds on our Platform in June 2011

Sector 1 Month 1 Year

DSP Black Rock Focus 25 Fund Large Cap 2.20% 3.72%

UTI Master Plus Unit Scheme Large Cap 2.19% 7.88%

CNX Nifty Index (Benchmark) 1.57% 6.30%

HDFC Premier Multi-Cap Fund Multi-Cap 3.01% 9.97%

Reliance Equity Opportunities Fund Multi-Cap 2.87% 11.40%

CNX 500 Index (Benchmark) 0.67% 2.31%

Magnum Sector Funds Umbrella- Emerging

Businesses Fund Midcap & Small Cap 5.14% 19.03

Mirae Asset Emerging Blue Chip Fund Midcap & Small Cap 2.10% NA

CNX Midcap Index (Benchmark) -1.16% -1.96%

Axis Tax Saver Fund ELSS 3.15% 13.06%

Religare Tax Plan ELSS 2.90% 8.33%


Tata Growing Economies Infrastructure Fund Plan A Overseas 1.65% 6.98%

Fidelity International Opportunities Fund Overseas -0.76% 7.78%

MSCI World Index (in INR) (Benchmark) -2.71% 22.77%

Source: ACF MF, iFAST Compilations

Large Cap Funds

Large cap funds as a category have performed only second best to index funds. Out of the 40 large cap

funds on our platform, 98% of the funds have delivered positive returns in June. DSP Blackrock Focus 25

Fund was the top performer during the month delivering a return close to 2.20%. The fund has

outperformed both CNX Nifty Index and BSE Sensex which delivered month-on-month return of 1.57%

and 1.85% respectively.

Multi Cap Funds

Both the top performing multi cap funds i.e. HDFC Premier Multi-Cap Fund and Reliance Equity

Opportunities Fund have delivered positive month-on-month returns of around 3.01% and 2.87%

respectively. Both the funds have outperformed the benchmark i.e. CNX 500 Index which delivered a

mere 0.67% in June.


Mid Cap Funds

In the mid cap segment, Magnum Sector Funds Umbrella- Emerging Businesses Fund turned out to be

the star performer; the fund delivered a return of around 5.14% in June. The performance of the fund

deserves attention when the benchmark CNX Midcap Index delivered a negative return of 1.16% during

the same time period. Mirae Asset Emerging Blue Chip Fund was the second best performing fund in the

list despite being in existence for less than a year.

ELSS Funds

In the ELSS funds category, except for bottom three all the funds have managed to deliver positive

returns. Axis Tax Saver Fund was the top performer in the category delivering a return of 3.15% on a

month-on-month basis; on a one year basis also the fund has delivered highest returns in the category.

Global Funds

In this segment, Tata Growing Economies Infrastructure Fund Plan A was the top performing fund

delivering a return of close to 1.65%; it is the only fund among the global funds list to deliver positive

month-on-month returns in June.


Bottom Performing Equity funds on our Platform in June 2011


Principal Large Cap Fund Large Cap 0.32% 2.94%

Sundaram Select Focus Large Cap -0.17% 1.35%

CNX Nifty Index (Benchmark) 1.57% 6.30%

Birla Sun Life India Opportunities Fund Multi-Cap -1.01% -0.31%

L&T Global Advantage Fund Multi-Cap -1.26% 0.29%


L&T Midcap Fund Midcap & Small Cap -1.68% 1.98%

Reliance Small Cap Fund Midcap & Small Cap -1.80% NA

CNX Midcap Index (Benchmark) -1.16% -1.96%

Principal Tax Savings Fund ELSS -0.14% -3.17%

Sundaram Tax Saver ELSS -0.57% -0.05%


DSP Black Rock World Gold Fund Overseas -6.60% 7.54%

Birla Sun Life Commodity Equities Fund -

Global Precious Metals Plan Overseas -6.90% 0.57%

MSCI World Index (in INR) (Benchmark) -2.71% 22.77%


Large Cap Funds

In this category, Sundaram Select Focus was the bottom performing fund on our platform delivering a

negative return of 0.17% on a month-on-month basis. It is the only fund to deliver negative return

among the entire list of large cap funds. Both the bottom performing funds i.e. Sundaram Select Focus

and Principal Large Cap Fund have underperformed the benchmark CNX Nifty Index which delivered a

positive return of 1.57% in June.

Multi Cap Funds

In the multi cap funds segment, both the bottom performing funds Birla Sun Life India Opportunities

Fund and L&T Global Advantage Fund have underperformed its category average as well as the

benchmark i.e. CNX 500 Index. Both the funds have given negative returns of 1.01% and 1.26%

respectively.


Mid Cap Funds

In the mid cap space, both the bottom performing funds L&T Midcap Fund and Reliance Small Cap Fund

have delivered negative return of around 1.68% and 1.80%. Both the funds have underperformed their

benchmark CNX Midcap Index which delivered a negative return of close to 1.16%

ELSS Funds

Principal Tax Savings Fund appeared among the bottom two performing ELSS funds for the second

consecutive month. The fund delivered a negative return of around 0.14%.

Global Funds

In case of global funds both commodity oriented funds i.e. DSP Blackrock World Gold Fund and Birla Sun

Life Commodity Equities Fund -Global Precious Metals Plan have appeared among the bottom

performing funds for the month of June. Both the funds have delivered negative returns in excess of

6.5%.


Top and Bottom Performing Debt / Hybrid Funds in June

Top Performing Debt funds / Hybrid on our Platform in June 2011


ICICI Prudential Balanced Fund Balanced 2.37% 11.90%

JM Balanced Fund Balanced 2.14% -2.02%

Crisil Balanced Fund Index 1.35% 6.04%

Birla Sun Life MIP II-Wealth 25 MIP 1.56% 6.19%

FT India Monthly Income Plan MIP 1.49% 5.22%

Crisil MIP Blended Index 0.98% 5.03%

UTI Bond Fund Income 1.58% 6.62%

IDFC Dynamic Bond Fund Plan A Income 1.52% 5.28%

Crisil Composite Bond Fund Index 0.86% 4.58%

DWS Gilt Fund Gilt - Long Term 1.76% 2.95%

UTI Gilt Advantage Fund Long Term Plan Gilt - Long Term 1.24% 6.58%

I-BEX (I-Sec Sovereign Bond Index) 1.09% 4.93%

IDFC Super Saver Income Fund- Short Term Short Term 1.24% 5.59%

UTI Short Term Income Fund Short Term 1.23% 7.46%

Crisil Short-Term Bond Fund Index 0.94% 5.59%


Balanced Funds

In this category, all the funds on our platform delivered positive returns in June. Both the top

performing funds ICICI Prudential Balanced Fund and JM Balanced Fund outperformed their benchmark

Crisil Balanced Fund Index. Both the funds delivered a positive return of 2.37% and 2.14%; whereas their

benchmark delivered a return of 1.35% on month-on-month basis.

Monthly Income Plans

The best performing funds in this category, Birla Sun Life MIP II-Wealth 25and FT India Monthly Income

Plan have delivered positive returns in excess of 1.45% as compared to the category benchmark, Crisil

MIP Blended Index that has given slightly positive returns of 0.98% in June.

Income Funds


Income funds as a category outperformed all other categories in the debt segment; all the 45 income

funds on our platform delivered positive returns on month-on-month basis. UTI Bond Fund was the top

performer in the month of June delivering a return of 1.58%.

Gilt- Long term Funds

In this category, UTI Gilt Advantage Fund Long Term Plan featured among the top two funds for the

second consecutive month. DWS Gilt Fund was the top performing fund on our platform after featuring

among the bottom performing funds for two consecutive months. The fund delivered a return of 1.76%

on month-on-month basis.

Short Term Funds

In this segment, UTI Short Term Income Fund which was among the bottom performing short term fund

last month turned out to be among the top performing funds in the month of June. IDFC Super Saver

Income Fund- Short Term was the top performer during the month delivering a return close to 1.24% on

a month-on-month basis.


Bottom Performing Debt / Hybrid funds on our Platform in June 2011


Baroda Pioneer Balance Fund Balanced 0.42% 7.72%

LIC Nomura MF Balanced Fund Balanced 0.12% 6.20%

Crisil Balanced Fund Index 1.35% 6.04%

DWS Twin Advantage Fund MIP 0.07% 3.71%

JM MIP Fund MIP 0.02% 3.78%

Crisil MIP Blended Index 0.98% 5.03%

JPMorgan India Active Bond Fund Income 0.40% 5.50%

Morgan Stanley Active Bond Fund Income 0.39% 4.12%

Crisil Composite Bond Fund Index 0.86% 4.58%

ING Gilt Fund Provident Fund Dynamic Plan Gilt - Long Term 0.19% 4.70%

Canara Robeco Gilt PGS Gilt - Long Term -0.08% 3.44%

I-BEX (I-Sec Sovereign Bond Index) 1.09% 4.93%

Benchmark Short Term Fund Short Term 0.53% 0.00%

Mirae Asset Short Term Bond Fund Short Term 0.46% 5.01%

Crisil Short-Term Bond Fund Index 0.94% 5.59%


Balanced Funds

Both Baroda Pioneer Balance Fund and LIC Nomura MF Balanced Fund is the bottom performing

balanced funds for June. Both the funds have underperformed the Crisil Balanced Fund Index which

delivered a return of 1.35%.

Monthly Income Plans

In the MIP category, JM MIP Fund and DWS Twin Advantage Fund is the bottom performing funds for

June. Both the funds have underperformed their category average as well as the benchmark i.e. Crisil

MIP Blended Index which delivered a return of 0.94% and 0.98% respectively. This is the second month

where the DWS Twin Advantage Fund appears to be among the bottom performers after May.

Income Funds


In the income funds segment, both the bottom performing funds i.e. JPMorgan India Active Bond Fund

and Morgan Stanley Active Bond Fund have underperformed the benchmark i.e. Crisil Composite Bond

Fund Index. The benchmark delivered a return of around 0.86% on a month-on-month basis.

Gilt Long term Funds

Both the bottom performing Gilt long term funds underperformed benchmark i.e. ICICI Securities

Sovereign Bond Index on a month-on-month basis. Canara Robeco Gilt PGS which was among the top

two best performing funds last month turned out to be the bottom performer in the month of June.

Short term Funds

Mirae Asset Short Term Bond Fund is the bottom performing fund in the month of June. The fund

delivered the least positive return of close to 0.46% on a month-on-month basis.


Recommended Portfolios Update


Recommended Portfolios Update

1. Conservative Portfolio:

Portfolio Objective:

The portfolio aims to achieve long term capital appreciation by investing 90% into bond funds and 10%

into equity funds. The target allocation may change depending on our views on financial markets.

Currently, we hold a neutral position in equities and we target to have an exposure of 90% to bond

funds and 10% to equity funds.

Total Investment: INR 1,00,000 Portfolio Absolute Return since inception:

(Inception Date: 26 Feb 2010) 11.31%

Portfolio Value:

INR 1,11,307

June 2011 Portfolio Return:

0.93%

Portfolio Commentary:

The Conservative portfolio gave a return of 0.93% in June. The debt funds accounted for around 85% of

the total portfolio returns and the equity part of the portfolio accounted for 15% of the portfolio

returns.

In the debt segment, Short term funds accounted for close to 39% of the total portfolio returns while

the Floating rate funds have accounted for over 25% of the total portfolio returns. Among the debt

funds, Reliance Short Term Fund accounted for the highest returns of the total portfolio.

In case of equity funds, the trend reversed this month with equity funds delivering positive returns.

Among the equity funds, HDFC Top 200 Fund accounted for 8% of the entire portfolio returns followed

by UTI Dividend Yield Fund which accounted for 7% of the total portfolio returns.

2. Moderately Conservative Portfolio:



into equity funds. The target allocation may change depending upon our views on financial markets.




(Inception Date: 26 Feb 2010)

12.70%

Portfolio Value:

INR 1,12,701

June 2011 Portfolio Returns:

1.12%



The Moderately Conservative portfolio gave a return of 1.12% in June. The portfolio returns turned back

to positive territory after delivering negative returns in the previous month.

The debt funds have attributed close to 56% of the total portfolio returns while the equity funds have

attributed close to 44% of the total portfolio returns.

In the debt portfolio, Floating rate funds accounted for 14% of the total portfolio returns and short term

funds accounted for around 25% of the total portfolio returns. In the debt segment, Reliance Short Term

Fund accounted for 11.65% of the total portfolio returns followed by Birla Sun Life Dynamic Bond Fund

which accounted for around 11% of the total portfolio returns.

In the equity segment, large cap funds which have weightage of 20% in the portfolio accounted for close

to 33% of the total portfolio returns. Among the three funds in the equity portfolio, ICICI Prudential

Focused Blue Chip Equity Fund accounted for highest returns of around 20% of the total portfolio

returns.

3. Balanced Portfolio:







(Inception Date: 26 Feb 2010) 14.63%

Portfolio Value:

INR 1,14,628


1.19%


The Balanced portfolio gave a return of 1.19% in June. The monthly returns of the portfolio have turned

positive after delivering negative returns in May.

The debt funds accounted for around 36% of the total portfolio returns while the equity funds

accounted for close to 64% of the total portfolio returns. In the Debt funds, the short term funds

accounted for close to 18% of the total portfolio returns, while the floating rate funds accounted for


over 10%. In the debt segment, Reliance Short term fund alone accounted for close to 11% of the total

portfolio returns.

In the equity segment, large cap funds which have weightage of 30% in the portfolio accounted for close

to 42% of the total portfolio returns. Among all the equity funds, both the large cap funds; i.e. HDFC Top

200 Fund and ICICI Prudential Focused Blue Chip Equity Fund accounted for highest returns of around

18% and 19% respectively, of the total portfolio returns.

4. Moderately Aggressive Portfolio:








17.37%

Portfolio Value:

INR 1,17,375


1.12%


The Moderately Aggressive portfolio gave a return of 1.12% in June. The portfolio returns turned back to

positive territory after delivering negative returns in the previous month. The debt portfolio accounted

for close to 24% of the total portfolio returns while the equity part accounted for around 76% of the

total portfolio returns.

In the Debt funds, Birla Sun life Floating Rate Fund- Long term Plan accounted for around 7% of the

portfolio returns, while the Birla Sun life Dynamic Bond Fund accounted for close to 5.3% of the total

portfolio returns.

In the equity part of the portfolio, mid cap funds accounted for highest returns close to 32% of the

portfolio returns followed by sector funds which accounted for around 17%. HDFC Midcap Opportunities

Fund which has weightage of around 15% in the portfolio accounted for close to 25% of the total

portfolio returns. Reliance Banking Fund and HDFC Top 200 Fund were the other two funds which

accounted for most of the total portfolio returns.

5. Aggressive Portfolio:





Currently, we hold a neutral position in equities we target to have an exposure of 10% to bond funds

and 90% to equity funds.



21.01%

Portfolio Value:

INR 1,21,007


1.19%


The Aggressive portfolio gave a return of 1.19% in June. After delivering high negative returns in the

previous month, the portfolio returned to positive territory this month with 1.19% returns.

The debt funds attributed close to 8% of the total portfolio returns while the equity funds attributed

about 92% to the total portfolio returns. In the debt segment, both Reliance Short Term Fund and ICICI

Prudential Gilt Fund- Investment Plan accounted for close to 4% of the total portfolio returns.

In the equity space, mid cap funds accounted for highest returns of close to 41% of the portfolio returns

followed by sector funds which accounted for around 26%. Among the equity funds, HDFC Midcap

Opportunities Fund, Reliance Banking Fund and HDFC Top 200 Fund were the ones which accounted for

most of the total portfolio returns.

6. Moderately Aggressive (Global) Portfolio:


The portfolio aims to achieve long term capital appreciation by investing 30% into bond funds, 46% in

domestic equity funds and 25% in global equity funds. The target allocation may change depending

upon our views on financial markets. Currently, we hold a neutral position in equities and we target to

have an exposure of 30% to bond funds, 46% to domestic equity funds and 25% to global equity funds.



16.95%

Portfolio Value:

INR 1,16,953


0.09%


The Moderately Aggressive (Global) portfolio gave a return of 0.09% in June. The negative performance

of global equity funds weighted down the overall portfolio returns.


All the funds in the debt and domestic equity segment have delivered positive returns. In the debt

segment, Floating rate funds accounted for close to 46% of the total returns from the debt portfolio.

Among the debt funds, Birla Sun life Floating Rate Fund- Long term Plan accounted for around 30% of

the debt portfolio returns.

In the domestic equity space, actively managed mid cap funds accounted for 43% of the domestic equity

portfolio returns followed by multi cap funds which accounted for close to 21% of the domestic equity

portfolio returns. HDFC Midcap Opportunities Fund alone accounted for 36% of the domestic equity

portfolio returns. This was followed by HDFC Top 200 Fund which accounted for close to 24% of the

domestic equity portfolio returns.

In the global funds category, both Mirae Asset China Advantage Fund and Principal Global Opportunities

Fund delivered negative returns in June.

7. Aggressive (Global) Portfolio:


The portfolio aims to achieve long term capital appreciation by investing 10% into bond funds, 59% into

domestic equity funds and 31% into global equity funds. The target allocation may change depending

upon our views on financial markets. Currently, we hold a neutral position in equities and we target to

have an exposure of 10% to bond funds, 60% to domestic equity funds and 30% to global equity funds.



19.32%

Portfolio Value:

INR 1,19,318


-0.11%


The Aggressive (Global) portfolio gave a negative return of 0.11% in June. The drag down witnessed in

the portfolio returns is mainly owing to the negative returns delivered by global equity funds in the

portfolio.

In the debt segment, both Reliance Short Term Fund and ICICI Prudential Gilt Fund- Investment Plan

accounted for close to 50% each of the debt portfolio returns.

In the equity space, mid cap funds i.e. HDFC Midcap Opportunities Fund and DSP Blackrock Small and

Midcap Fund together accounted for highest returns of close to 38% of the domestic equity portfolio

returns followed by sector funds which accounted for around 25% of the domestic equity portfolio

returns.


Among the global funds, both Mirae Asset China Advantage Fund and Principal Global Opportunities

Fund delivered negative returns in June. However, Mirae Asset China Advantage Fund accounted for

higher negative returns of the global funds portfolio compared to Principal Global Opportunities Fund.


Fund Focus


Idea of the Fortnight: Templeton India Short Term Income Fund

Inverted yield curve

The RBI has hiked the policy rates for the 10th time since 2010 to tame inflation with the liquidity

situation in the system continuing to be negative. These rate hikes and the liquidity deficit situation has

led to an inverted yield curve i.e., the yields on shorter end of the curve is higher than the yields on the

longer end of the curve. A yield curve is a line that shows the yields of similar securities but of different

maturity periods as on a specific date. For example, AAA rated corporate securities yield curve will show

the yields of AAA rated corporate securities with a maturity from 1 year to 15 years as on a specific date.

The chart 1 shows the yield curve for AAA rated corporate debt securities on 15 June 2011 and 15 June

2010 from 1 year to 15 years. Normally, the yield for the shorter end (left side) of the curve is lower than

the yield for the debt securities on the longer end (right side). A normal yield curve is similar to the yield

curve on 15 June 2010. An inverted yield curve is contrary to the normal curve where in the yields on the

shorter side increase a lot more than the yields on the longer side, even to the extent that the yield on

the shorter side can match or exceed the yields on the longer side and this scenario cannot exist

indefinitely and has to revert back to a normal yield curve.

As seen in Chart 1, the yield curve for 15 June, 2010 is normal but the yield curve for 15 June, 2011 is

inverted.


Chart 1: AAA rated corporate securities yield curve

Investment opportunity in short term funds

In the annual monetary policy for FY2011-12, the RBI expects the WPI inflation to be at 6% by March

2012. Furthermore, the central bank is anticipating that the inflation would cool down in the second half

of FY2011-12. As a result, we expect the yields to come down during that period.

So, when the yields drop back, the investors in the shorter end debt securities will make profit as a drop

from high yield to low yield increases the market price of a debt security. Consequently, the debt fund

benefits with increase in the NAV and thereby, provides higher profit to the debt fund investors focusing

on the shorter end.

Templeton India Short Term Income Plan –Recommended Fund

Templeton India Short Term Income Plan (TISTIP) is one of the best performing short term funds in the

industry. The fund was incepted on 31 January 2002 and the fund is currently managed by Mr Umesh

Sharma and Mr Sachin Padwal -Desai.

6

6.5

7

7.5

8

8.5

9

9.5

10

10.5

1Y 2Y 3Y 4Y 5Y 6Y 7Y 8Y 9Y 10Y 15Y

Yield Curve for Corporate AAA securities

CORP AAA 15 June 11 CORP AAA 15 June 10

Source: iFAST Compilations


Performance

Chart 2 shows the performance of the TISTIP and other top performing short term funds since 31

December 2007. TISTIP started 2008 as the bottom performer but over the period has moved up in

performance. If an investor had put INR 10,000 on 31 December 2007 then on 15 June 2011, the

investment would be worth INR 13,397.

Table 1 shows the performance of the top performing short term funds over a 5 year period. Returns of

1 year and less than 1 year are absolute; Returns for periods more than one year is annualized.

Table 1: Performance of Top performing Short term funds as at 15 June 2011

3 Months 6 Months 1 Year 3 Years 5 Years

HDFC High Interest-STP(G) 2.03 3.42 5.28 8.56 8.71

HDFC STP(G) 2.15 3.68 5.80 8.89 8.59

JM Short Term-Regular(G) 2.42 4.31 7.20 9.45 9.11

Reliance STF(G) 1.80 3.40 5.40 8.35 8.56

Templeton India ST Income(G) 2.47 4.07 6.28 9.13 8.88 Source: iFAST Compilations

Chart 2 – Performance of best performing short term funds.

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Performance of Best performing short term funds

HDFC High Interest-STP HDFC STPJM Short Term-Reg Reliance STFTempleton India ST Income Source: iFAST Compilations


Investment Strategy of the fund

The fund has INR 3722.14 crores of AUM as at 31 May 2011. We analysed the fund’s investment pattern

from December 2007 to May 2011. The fund on an average holds about 5% of its corpus in cash but

since the beginning of this year i.e. since January 2011, the fund has held 2.6% in cash.

Corporate debt and Pass Through Certificates (PTC) are the two main types of instruments that this fund

invests in. Since December 2007, both the instruments on an average account for about 77% of the total

corpus. The corporate debt on an average accounts for a bigger share of 48.5% of the total corpus, while

the PTC accounts for 28.5% of the corpus. However, the fund has pared down the investments into PTCs

from 41% in March 2011 to 30.7% in May 2011.

Since January 2011 (YTD), the fund has increased its exposure to PTC an average exposure close to 37%

of the fund’s corpus into PTCs while the average allocation to PTCs in 2010 was 28.6% of the portfolio.

Similarly, the fund has increased the exposure to corporate debt from 39.4% in December 2010 to 50.8%

in May 2011,

The corporate debt is the tradable debt instruments issued by the companies. PTCs are collateralized

securities and are issued by banks. PTCs are basically formed from loans issued by banks to the general

public. By issuing a PTC, the bank is able to get the money it had loaned and the investor in the PTC gets

a higher interest rate than say, corporate debt. Since the investor benefits from the higher interest rate,

he also takes on the risk of default on the underlying loans. The default risk from loan borrowers’

increase with an increase in bank lending rates.

The fund also invests into Certificate of Deposits (CDs) issued by banks and Commercial Papers (CPs)

issued by companies. However, both put together on an average since December 2007 make up only

15% of the portfolio. Although, the fund has increased its exposure to CPs from 3.4% in March 2011 to

14% in May 2011. This is on the back of the high yields offered by CPs on account of liquidity deficit

condition in the system. On the contrary, the fund has reduced exposure to CDs from 16% in December

2010 to 1.7% in May 2011.

The fund has an exit load of 0.5% if the units are redeemed / switched out within 9 months of their

allotment.

Average Maturity and Modified Duration

The fund has had an average maturity between 288 days (0.8 Years) and 514 days (1.4 years) between

April 2008 and May 2011. The only exception was the average maturity of 566 days (1.6 years) in

September 2008. The average maturity for May 2011 is at 445 days (1.22 years). The average modified

duration between April 2008 and May 2011 is 364 days (1 year) and has been between 233 days (0.6

years) and 474 days (1.3 years) during the same period.


The modified duration is one of the risk measures for a debt security. It is usually measured in terms of

time i.e. days, months or years. A debt security with a modified duration of 1.5 years indicates that the

security’s yield will rise / fall by 1.5% for every 1% fall / increase in the key policy rates. A debt security

with higher modified duration value is considered riskier in comparison to a lower modified duration

security.

Maturity of a debt security refers to the period in which the debt security will mature and the investor in

that debt security will get his/her money back. Average maturity refers to the weighted average

maturity of all the securities in the fund. The value of the debt securities is the weighting factor.

The average maturity and the modified duration data point to that the fund has been able to get better

returns by the active management of the short-term debt securities by the fund manager.

Our view on the fund

With yields on the higher side on the shorter side of the yield curve and the ongoing liquidity deficit

situation has led to an inverted yield curve. This situation is an aberration and cannot be sustained for

long periods and the yields on the shorter side will come down. When the yields drop, the short term

debt instruments will increase in value and will provide profits to the investors. The Templeton India

Short Term Income Plan fund is best suited as the fund will benefit not only from higher rates on

account of higher exposure to PTCs but will also benefit from subsequent drop in the yields.

We recommend this fund to our investors with 9 months to 1 year time horizon.

monthly markets update (india) - july 2011

Documents

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emerging markets msci

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