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Ringing in the New

Greetings to youfrom FundsIndia!We’re happy towelcome you to the

first issue of Think FundsIndia,our new and improved monthlynewsletter. Our old newsletter‘Capital Letter’ served itspurpose over the past five years,but it’s time to ring in the new!

Think FundsIndia is an effortthat better reflects our widerange of services and is suited toserve the growing needs of ourdiverse audience.

We’re also happy to announcethat Think FundsIndia would bemanaged by S Vaidya Nathan.Vaidy has long-standingexperience in financial markets aswell as journalism.He has worked asHead of Research inThe Hindu BusinessLine. He has served as aPortfolio Manager and Head ofProducts & Risk at SundaramMutual Fund. He was also theContent Editor for The WiseInvestor, Sundaram’s criticallyacclaimed monthly newsletter.

This new format newsletter hasmuch of the content that you’vecome to expect, and much more.Please share your feedback atcontact@fundsindia.com.

Happy reading!

Srikanth Meenakshi

Peak to Peak

As Indian equities have at last gone past their highs of 2007, it is a good timeto pause and reflect on the learning from the close-to-six years it has taken toregain lost ground after the bust in 2008.

� It is not one market in equity out there. Large, mid and small-cap spacesbehave differently. Indices tracking large-cap stocks such as Nifty sufferedan erosion of 52% in 2008 while those tracking mid- and small-capspaces declined by about 75%. The differential performance has majorbearing for investor portfolio value.

� Large-cap stocks needed to just double to get back to level ground thatprevailed before the decline in 2008. Mid- and small-cap spaces had totreble on an average. This is an important reason why for almost allinvestors (except those who have lots of money and could afford biglosses), large-cap stocks and funds tracking them must be a major part ofthe equity portfolio.

� Investors must be careful not to indulge in herd behaviour of the kindwitnessed in 2007 when they made a beeline for almost every New FundOffer from mutual funds. Scant attention was paid to what the fundsplanned to do, how and where they planned to invest. Most fundslaunched at close to the 2007 peak are yet to recover. Open-end fundswith a track record are a superior option than new funds.

� Investors must assess funds, fund managers and fund houses based onhow they fare in bullish (2003-2007), bearish (2000, 2008, 2011) andsideways markets (of the kind between August 2009 and mid 2013). Fundhouses that scorch in bullish phases but suffer more in bearish phasesmust take a backseat to fund houses that handle different marketconditions in a superior manner.

� This phase also highlights the need for investors to have exposure acrossasset classes. It would be imprudent to be carried away at any time andtake excessive exposure in one asset class. Different types of debt fundsmust be given due consideration and allocation at all times. And alsoperiods such as 2006 / 2007 must be used to take at least partial profits.

� A 50% decline is almost always a good period for those going for aphased deployment of funds in equity. It is investment made in difficulttimes that deliver the biggest bang for the buck, as you get to buy moreat lower outlays. But it is in precisely such a phase that many-an-investorwalks away, the exact opposite of the herd behaviour seen in euphoricperiods such as 2007. Together, the two cause even more damage.

Bear markets and their aftermath teach us more than bullish markets ever do.We must learn right, and more importantly, never ever forget the learning.

S Vaidya Nathan

April 2014 � Volume 07 � 04

Why start early in the year?

Planning tax-saving investments

Last minute exercises in tax planning hurts you in severalways. You may not have enough time to calmly considerthe various options and what suits you best.

You end up earning sub-optimal interest on a few of thefixed-income options. For instance, interest on your PPFis calculated on the lowest balance between the fifth andthe last date of the month.

So if you do not deposit before the fifth, you do not getinterest for that for that month! Besides, you lose out oninterest by depositing it rather late in the financial year.

If you are investing in equity-linked options for tax saving,you may end up investing at the wrong time. You may beforced to make a one-time lump-sum investment.

As you can use Systematic Investment Plan (SIP) if youstart at the beginning of the year, it helps you averagecosts and avoid making a lump-sum investment at thewrong time. You could do an SIP even with limitedsurplus every month.

Insurance

Yes, this is, ostensibly, a tax-planning exercise for most ofyou. But more is at stake. This is why you need to planfor your insurance when you are not in a hurry.

Often times, you end up buying one policy after the other,every single year, not knowing what you need, whetheryou are already well covered, and more importantly,whether your medical expenses require coverage.

The must-haves are a cover on your life via a term policyand cover for your medical expenses. The thumb rule isto have a term cover that is equivalent to at least eighttimes your annual income.

The desired cover will also depend on your liabilities suchas home loans and educational loans and any otherspecific goals for your family for which you might want tokeep this cover higher.

Similarly, even if you get a medical cover through youremployer, it makes sense for you to supplement it with acover for yourself and your family. This will ensure thatyou are protected when you switch jobs, and are also ableto supplement what your employer provides, given themounting costs of hospitalisation.

If there is no medical cover as part of your terms ofemployment, make sure you have a sizeable medicalinsurance.

Get your cash flows right

Beginning of a year is also appraisal time for many of you.That may mean suddenly staring at a lump-sum incentive

� Invest in tax-saving at thebeginning to earn optimalreturns

� Start investing small sums intax-saving funds to avoid ill-timing the market

� Choose your insuranceneeds with care instead ofpicking one under the wire

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A new financial year has started on April 1. This is a good time to get your personal financedecisions straight. To plan and act this time of the year makes sense for two reasons:

� after the last minute tax-related investments in the just-ended financial year, your moneymatters will remain fresh in your mind.

� starting early in the year allows you to plan more methodically for not just your taxes, butalso for your short- and long-term goals.

Here are five aspects you should consider planning and executing right away.

Never mingle your speculative and investment operations in the same account, nor in any part of your thinking.

Benjamin Graham

Vidya Bala

or seeing a hike in your pay. While there are ways to stripyour bank balance of this sum in no time, act before itdisappears!

If you have any unsecured loans or credit card loans thatyield you no tax benefits, get rid of them; repay using thesurplus. You cannot have some surplus earning you 4 percent in your savings account while you shell out anywherebetween 13-36 per cent interest on such loans!

Else, create a contingency fund by investing in a liquidfund. That way you will keep your money away from yourATM card, earn much higher than your savings account,and, of course, take the money out in an emergency.

And if it is a pay hike you have received, then more reasonyou should hurry up and put the increase to good use.The best way would be for you to start an SIP in a mutualfund. If you have short-term or long-term goals, markthe investment towards a goal and choose the fundsaccordingly. This time of the year, when you see theschool admissions on or see students starting to apply forhigher education, you get a feel of what is the kind ofsum you need to save up for your children.

Investing at the beginning of the year, especially for short-or medium-term goals, makes sense as in products such asdebt funds, you maximize returns by availing capital gainsindexation benefit (available if you hold for at least a year).

Review your allocation and investments

The start of the financial year is a good time for you torejig your asset allocation, if needed, and bring them backto your intended allocation. For instance, in years whenyour equity holding has gone way above your original

allocation, you could well book profits and shift it to otherasset classes such as debt funds or gold.

Also weed out laggards, especially in your mutual fund orstock portfolio and shuffle the money to other funds (orstocks) or asset classes as the case may be.

Reinvest right away

It is also the time of the year when investments such asFixed Maturity Plans (FMP), mostly invested by you fordouble indexation benefit, mature and swell your bankbalance. Not investing them right away, especially at a timewhen interest rates have peaked, would mean that yousettle for lower returns later. Consider rolling the moneyinto a fresh FMP or go with debt funds with a 1-2 yeartime frame at least. If you are looking for some incomeand are in the lower tax bracket, then options such asquality corporate fixed deposits or post office seniorcitizens’ scheme are good to lock into now, given thedecent interest rates.

Drawing a budget or beginning to keep tab of yourexpenses or checking whether your loan rates are in linewith the market are a few other tasks that you could planand implement.

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�Do your investment reviewand rebalance your portfolio

� Prioritise where to deployyour surplus

� Reinvest to avoid earninglower returns

Following the saying, “You can fool all the people some of the time”, bursts of inflation can generategrowth for some time. Thus in the short run, the argument goes, higher inflation leads to highergrowth. But as the public gets used to the higher level of inflation, the only way to fool the public againis to generate yet higher inflation. The result is an inflationary spiral, which creates tremendous costsfor the public. Therefore, economists have argued that the best way for the central bank to generategrowth in the long run is for it to bring down inflation. Sooner or later, the public always understandswhat the central bank is doing, whether for the good or for the bad. And if the public starts expectingthat inflation will stay low, the central bank can cut interest rates significantly, thus encouraging demandand growth. Put differently, in order to generate sustainable growth, we have to fight inflation first.

Dr Raghuram Rajan, Governor, Reserve Bank of India on ‘Fighting Inflation’.

Viewpoint

Know ‘What is Risk?’

Unplanned and / or uninformed investing can be asdamaging to one’s wealth and well being, as gambling orrampant speculation. Yes, in investing, one cannot planwith any certainty about how price trends of variousassets will pan out.

The variables influencing them are way too many, andmostly beyond the control of most investors. Look at afew aspects involving you at the outset. This is a vital firststep, if you are going to have in place a good assetallocation plan either on your own or with help.

It is easy to start thinking about income levels, expenses,assets, loans, other obligations, children’s education,

marriage and savings to sustainself and family. Not so arewhere to, when to and howmuch to invest, risk andreturns.

Nothing in this list is asimportant as risk. Everyperson who invests in any assetclass does so for returns ofvarying magnitudes across amarket cycle, which mayinvolve many years. Risk levelsare also different.

In most cases, there is an ill-informed, misguidedunderstanding of risk. We need not get obsessed with risk.What we need for sure is a correct understanding of risk.

In its simplest and most accurate form, risk in thefinancial context is loss of capital, a concept brilliantlyexplained by James Montier, investment thinker and assetallocator. If it appears too simple to accept, be happy thatrisk is indeed so.

It does not involve complex math, esoteric formulae orfancy terms. Once you are clear that risk is loss of capital,irrespective of what several may say to misguide you, youare on the road to informed investing.

Munger’s 10Charlie Munger has been one of the two key persons behindthe success of Berkshire Hathaway in investment managementfor about 45 years now. Yet he is rarely in the limelight, as thefocus is almost always on Warren Buffet. Munger is a legend inis own right. In his book, Poor Charlie's Almanac, he outlines 10Rules of Investment Success.

# 1 Measure risk: All investment evaluations should begin bymeasuring risk, especially reputational.

# 2 Be independent: Only in fairy tales are emperors toldthey're naked.

# 3 Prepare ahead: The only way to win is to work, work,work, and hope to have a few insights.

# 4 Have intellectual humility: Acknowledging what you don'tknow is the dawning of wisdom.

# 5 Analyse rigorously: Use effective checklists to minimiseerrors and omissions.

# 6 Allocate assets wisely: Proper allocation of capital is aninvestor's No. 1 job.

# 7 Have patience: Resist the natural human bias to act.

# 8 Be decisive: When proper circumstances presentthemselves, act with decisiveness and conviction.

# 9 Be ready for change: Accept un-removable complexity.

# 10 Stay focused: Keep it simple and remember what you setout to do.

Source: Poor Charlie's Almanac The Wit and Wisdom of Charles TMunger & www.berkshirehathaway.com

Invest With A Plan 1

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wisdom

Fund Types by Risk & ReturnInvestors have many an option in the mutual fund spacein India. It is important to understand the risk-returnprofile of the choices on hand. This graphic visuallyplaces different types of funds in the ascending orderfrom low to high on risk and return attributes.

Sector Funds - Riskier Sectors

Micro-Cap Funds

Thematic Funds - Infrastructure, Energy

Small-Cap Funds

Mid-Cap Funds

Sector Funds - Defensive Sectors

International Funds

Thematic Funds - PSU, FMCG, IT

Equity Diversified Funds

Large-Cap Concentrated Funds

Large-Cap Diversified Funds

Dividend Yield Funds

Balanced Funds

Gold Funds

Hybrid Funds

Monthly Income Plans

Long-Term Bond Funds

Gilt Funds

Income Funds

Short-Term Debt Funds

Fixed Maturity Plans

Ultra Short-Term Funds

Capital Protection Funds

Liquid Funds

Primer Mutual Funds

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Cheap or Expensive

Perhaps this is a good time to revisit some favouritequestions: Are (U S) stocks cheap or expensive? Whereare we in the economic cycle? And has the markettopped? To know whether stocks are cheap or pricey, wetypically look at price-to-earnings ratio. Valuation is atougher question than many folks realise.

With that caveat, let’s look at the Standard & Poor’s 500-stock index, a broad benchmark for equity markets. It iscurrently trading at 16.7 times forward earnings estimates.

In 1982, we were at the end of a 16-year bear market.Price-to-earnings multiples were under 10, and stocks,which were widely reviled, were cheap. Fast forward to1999, the tail end of an 18-year bull market. Just beforethe dot-com bubble burst, the S&P 500 traded at anexpensive 27 times forward earnings. Today, using thesame measures, stocks are more or less fairly valued —not cheap but not terribly expensive.

Barry Ritholtz is chief investment officer of Ritholtz WealthManagement, author of Bailout Nation, and finance blog, The BigPicture. Please read the full version of the blog post atwww.ritholtz.com

Blog Pick

High

Low

Risk&

Return

Index 1 Year 5 Years 10 Years

CNX Nifty 17.8 17.3 14.2

BSE Sensex 18.7 18.2 14.9

CNX Mid Cap 16.2 20.4 14.8

CNX Small Cap 17.7 18.5 16.3

CNX 100 18.1 18.4 14.3

CNX 500 17.6 17.9 13.6

CNX Bank 12.0 25.2 16.3

CNX Energy 10.2 5.1 8.4

CNX FMCG 17.9 28.6 22.0

CNX Infrastructure 18.2 2.0 8.8

CNX IT 28.6 32.0 17.0

MSCI EM -3.1 12.0 8.5

MSCI World 16.5 14.2 4.8

Returns (in per cent as of March 31, 2014) for less than one year is on anabsolute basis and for more than one year on a compounded annual basis.

Equity Performance Snapshot

Must Read

1999 bubble, 2000 crash, bubble of the mid 2000sthat ended with a bust in 2008, the recovery in 2009– he saw them coming in advance with detailed noteson why, and wrote about them extensively in his nowcoveted Quarterly Letters. He was considered aperma-bear, as he appeared bearish almost all thetime though that was not the case. His approach ledto lost clients in bullish phases, but investors whostayed with him have obviously done well.

In his latest quarterly to investors, Jeremy Grantham,Founder & President of GMO looks at resources,investment lessons learnt by him in his early yearswith his mother there for cover, and lean years thatare ahead for U S equities. His writings may not havea direct Indian context, but they are very relevant.Please read his report available at www.gmo.com.

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Q I have a liquid fund, the dividends of which are re-invested. How do I calculate the capital gains for taxpurposes in this case? Do I have to calculate the capitalgains separately each time dividend is re-invested?

A The capital gains calculation in such a case is a bit easierthan you describe. Dividends declared in a liquid fund aretax free in your hands. You may still have a capital gain ifyour market value of units is higher than the cost.

Now the question is what is your total cost, as you haveonly been receiving re-invested units. The cost of yourfund is not simply your initial investment, but also thecost of the units allotted to you instead of the dividend.Hence, you need to add the amount of dividendsreceived by you at each point, to your original cost anddeduct this from the market value of your totalinvestment to see if you have a capital gain or loss.

For example, let us say you invested ` 10,000 in a liquidfund that had four dividend payments of ` 50, ` 75, `100, and ` 60 in four weeks of holding. The dividendsare re-invested. Let us say redemption value is ` 10,350.

Capital Gains = Value at redemption - Total Cost

Total Cost of investment = Original investment + alldividends re-invested ` 10285 (50 + 75 + 100 + 60).

Capital Gains would be ` 10,350 – ` 10,285 = ` 65. So,you'll pay tax on ` 65.

Q & A

Did you know?

20 years ago, there was a mad rush to invest in the closed-end equity fund launched by Morgan Stanley. The offerwas capped at ` 750 crore on first-come first-served basis.This led to a mad craze. Even before listing, applicationforms and units were unofficially traded in excess of ` 60each (face value ` 10). Morgan Stanley Growth Fund hada disastrous start and it took many years for the Net AssetValue to reach the face value of ` 10 per unit. The fundis now part of HDFC Mutual Fund stable.

LLeeaarr nniinngg :: Never go for hype. Never go for gimmicksthat pass as marketing strategy. Never go for names alone.

Technical View

GrasimThe short-term outlook for Grasim Industries is positive.We expect the stock to reach our target of ` 3,150 soon.Have a look at the weekly price chart of Grasim.The share price of Grasim has been on a recovery modesince February. Last week the stock cleared an importantresistance at ` 2,800-` 2,850, strengthening the case for ashort-term upward trend. Investors may buy Grasim ator below ` 2,875 with a stop loss at ` 2,750 and target of` 3,150. A move past the immediate target at ` 3,150 would lendmomentum, and the stock could then rise to the majorresistance at ` 3,300. The positive view in Grasim wouldbe negated if the stock slides below ` 2,750, as this wouldopen up possibility of further downside.

Cummins IndiaThis month, we cover the outlook for the stocks ofCummins India and Grasim Industries. We are positive onboth and expect 10-12 per cent returns from a short-termperspective. As always, we suggest investors accumulatethese stocks at current levels as well as on declines.From the weekly price chart of Cummins India featuredbelow, it is evident that the stock has been on a steadyuptrend over the past few months. The stock has alsomoved to new lifetime highs recently pointing to strongbuying interest.Investors may buy the stock at or below ` 580 with a stoploss at ` 540 and target of ` 690 to begin with. A movepast ` 690 would be sign of strength and the stock couldthen target the major resistance at ` 720.

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 The Nifty and Sensex scaled to new lifetime highs inMarch gaining close to 7 per cent. The Nifty has also hitour target of 6,650-6,700 mentioned in newsletters of therecent past. The announcement of the results of generalelections on May 16 would be the next major event.Corporate earnings season would get underway. Thoughexpectations are muted, any negative surprise would causedamage. Technically, we maintain the positive outlook onthe Nifty, and would expect the index to reach our nexttarget of 6,950-7,000. This positive view would be subjectto re-assessment only if the Nifty declines to below therecent swing low of 6,430.

1 He created wealth for investors for 20 years throughthe first two private sector equity funds (Bluechip &Prima) in India. He recently decided to move on inhis career. Who is he?

2 Who is the author of Fool’s Gold?

3 Which type of debt mutual fund invests in theshortest maturity securities in India?

4 Who is at the helm of equity investment in HDFCMutual Fund? He is now the longest serving personin the role in the Indian context.

5 What is the unit of measure in which internationalgold prices are usually quoted?

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.

@fundsindia.com in March

The FundsIndia.com platform is a happening place, constantlychanging, constantly improving.

� NACH: We have adopted National Automated ClearingHouse (NACH) mechanism for bank mandates. This newprocess enables us to get your mandates registeredquickly, and also facilitates faster money transfer for yourinvestments. So, if you do not already have a bankmandate registered, please get going now!

� Two new fund houses – SBI Mutual Fund and DSPBlackRock - have come on board for paperless instantinvesting!

� Folio selection at SIP setup:Now, investors can select betweencreating a new folio and using an existing folio whilesetting up a SIP for any fund.

� Women’s Portfolio: We celebrated the International Women’sday with a bang! We have created a specialized portfoliothat is now available as a Ready-to-Go portfolio for lumpsum investment as well as using the SystematicInvestment Plan (SIP) route.

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.

Funds showcased here are those that are consistently top,quartile performers in their categories. Different time andassessment criteria were used for debt and equity funds.They have all delivered superior risk-adjusted rollingreturns beating their benchmarks while keeping withintheir investment mandates.

Do note, however, note that past performance is not aguarantee of future results. Please consider your specificinvestment requirements before designing a portfolio thatsuits your needs. For a full list of funds, please go tohttp://www.fundsindia.com/select-funds. We feature acategory of equity funds this month.

Equity funds - Moderate Risk: These are funds thatseek to generate inflation-beating returns with limiteddownside risks. The recommended holding period is atleast five years. Please invest in the Growth Option.

Axis Equity CanRobeco Equity Driver Franklin India Bluechip HDFC Index-Sensex PlusHDFC Top 200 ICICI Pru Dynamic PlanTata Dividend Yield ICICI Pru Focused BluechipUTI Equity UTI Opportunities

FundsIndia Select Funds