www.fundsindia.com

Prashant Jain speaks…Prashant Jain,arguably India’smost famous fundmanager, managesHDFC Equity and

HDFC Top 200, that togetherhave assets of over `30,000crore. In May 2012, Mr. Jainpenned an essay titled, “It’stomorrow that matters,” amidmuch uncertainty and concerns,global and local.

In Mr. Jain’s words, “Pessimismis all that one sees all around.”Even so, as a veteran of multiplemarket cycles, he was able tolook at history and tell hisreaders that the time to invest inequities was at hand.

He wrote, “The lower themarkets are, the bigger is theopportunity.” The Sensex is upby 30 per cent since.

Today, Mr. Jain has spoken upagain in an interview. What doeshe say? Simply put, he tellsreaders to trust in equityinvesting and stay invested.

History indicates that investorswill do well to heed the prescientwords of Mr. Prashant Jain. Iwould urge all to read theinterview by clicking here.

Happy investing!

Srikanth MeenakshiCo-Founder & COOFundsIndia.com

Prefer Old to New2014 has been a year in which mutual fund houses, barring a few, have movedyet again to a familiar theme – New Fund Offers (NFOs). This has happenedin 1992, 1994, 1999, 2005, 2007, and there we are again in familiar territory.What is in it for investors?

• Almost nothing. The universe of funds that existed at the end of 2013 wasmore than adequate to take care of 99 per cent of the allocation andinvestment needs of investors.

• The residual 1 per cent will be essentially funds that chase riskier assetclasses, adopt riskier approaches, are complex, and / or are from new or oldfund houses that have an indifferent track record.

• When it comes to international funds, they may look enticing given theirperformance over the past five years in developed markets. All theseeconomies are in bad shape and equities from US and Europe, which makeup most of the MSCI World Index along with stocks from Japan, havelogged in compounded annual returns of 20 per cent over the past fiveyears. They are at the latter end of a long bullish phase that is unconnectedto reality. New funds are coming in from this space mostly.

• This streak of international funds comes at a time when the value of theIndian rupee (INR) is depreciating, or has been stable (as in the past fewmonths). INR appreciation can hurt you badly and it is never one-waytraffic.

• The only area where genuinely decent funds have come up is corporatebonds. Here too, please go only for those fund houses who hold a goodtrack record in debt funds, along with sizeable assets under management.

• Prefer open-end funds any day to closed-end funds, except in the case ofFixed Term Plans.

• If you wish to own debt and a bit of equity, go for funds that focusspecifically on each class, rather than funds that seek to combine them.

• In equity, there are at least about 125 funds with a track record of over 10years, and a fairly sizeable number of funds have been around for 20 years;ditto for the type of debt funds you need to own.

• Please ask yourself and / or the sellers of these funds the question: whynew funds? You can be sure that rarely will there be a satisfactory answer.

S Vaidya NathanEditorial Consultant, FundsIndia.com

November 2014 � Volume 07 � 11

FundsIndiaWinner CNBC TV18 UTI Award 2013-14National Online Advisory Services

Why equities are a must have in your portfolio

Your Savings

EPF and PPF: For most salaried individuals, your Employee’s Provident Fund (EPF) would be your compulsorysaving. A few of you may also add the Public Provident Fund (PPF) as a part of your tax-saving investment andbelieve these two should take care of your non-income earning future.

While these can be great saving habits, sadly, they will simply not suffice to build you a decent investment kitty in yourretirement years. For one, the interest rates on EPF have been on a steady decline over the past 20 years, hardly keepingpace with inflation, especially in recent years.

For instance, the annual Consumer Price Inflation (industrial workers) was at an average of 9.5 per cent over the lastfive years. That means, except in FY-11 when EPF rates were 9.5 per cent, for the rest of the years, you would actuallyhave earned real negative returns (that is, adjusted for inflation, your returns are negative)!

Your PPF rates too have been on a similar downtrend. The accompanying graphic shows how much ` 10,000 investedevery year in PPF would have delivered as compared to a similar investment in a tax-saving fund – ICICI Pru Tax Plan.The difference is stark, enough for you to realise how little you build with traditional options.

Actual rates of PPF are taken for calculation. ICICI Pru Tax Plan is the tax-saving equity fund considered. It was launched in August1999. Past returns are not indicative of future performance. PPF is a 15-year investment product but earns interest up to its 16th year.Hence, investment comparison has been done on a similar basis.

Deposits: When it comes to other voluntary savings that you make, bank deposits are likely to be on the top of yourlist. Not only are deposits tax inefficient, they are also likely to give you real negative returns – that is not give youanything over inflation.

Given below is a graph that shows the three scenarios of Fixed Deposit (FD) returns – with an interest rate of 8, 9and 10 per cent per annum. We have assumed a tax slab of 30 per cent and inflation of 8 per cent. You will see thatthe FD does not beat inflation even with a rate as high as 10 per cent.

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Vidya Bala

For all those who think equities are too risky to handle, or who think it cannot deliver enough,here’s why your portfolio cannot do without equities, if you have to beat inflation, build a decentcorpus for the long term and be tax efficient. I am going to take the approach of debunkingyour notions about other asset classes when it comes to their risks and return.

EPF interest rate on a downtrend

7%

8%

9% 8.75%

10%

11%

12%

13%

FY

-95

FY

-96

FY

-97

FY

-98

FY

-99

FY

-00

FY

-01

FY

-02

FY

-03

FY

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FY

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FY

-06

FY

-07

FY

-08

FY

-09

FY

-10

FY

-11

FY

-12

FY

-13

FY

-14

PPF vs Tax-saving funds` 10,37,367

` 3, 12,325

0

200000

400000

600000

800000

1000000

1200000Tax-saving fund market value PPF Balance

Apr

-99

Apr

-00

Apr

-01

Apr

-02

Apr

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Apr

-04

Apr

-05

Apr

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Apr

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Apr

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Apr

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Apr

-14

A popular observation about the markets is that the markets have run up nearly 40 per cent in thelast one year. A more pertinent observation is that the markets are up only around 30 per cent fromthe pre Lehman levels over the last 6 years...

Prashant Jain, Chief Investment Officer, HDFC Mutual Fund

Inflation of 8 per cent and an income tax rate of 30 per cent pluscess has been considered.

Your Investments

Property:Multi-baggers in real estate are not uncommonto hear. You may have probably heard of people sayingthat their property value has doubled or tripled.

But very likely the person who sold it would not have toldyou over what period the money doubled. So what,equities hardly make that, you might think. They probablydelivered just 15 percent compounded annual returns infive years.

Did you convert that into money terms? It means yourmoney actually more than doubled in five years! So oftentimes, the notion of returns in real estate is partlyoverdone.

Also, remember, your confidence in real estate stems fromnot knowing information as compared to an overload ofinformation with equities.

Just in case you wish to know the short-term returns ofreal estate, go to the National Housing Bank (NHB)website and see the property price index called Residex.

If you take the average returns from property in the top15 cities over the past three years (ending March 2014), it’sa mere 5.3 per cent annually! Surprised? An investment inany top quartile equity fund over the same period (whichwas among the worst period for equities) would havedelivered 12 per cent annually!

You’re better off not knowing too much information onyour property price isn’t it? Try it with equities too!

Gold: Agreed almost the whole of last decade was aperiod of extraordinary returns for gold, with the yellowmetal delivering as much as 15.8 per cent annually (MCX

prices). But then, do remember, almost seven out of those10 years were periods of global turmoil and slow recovery,which is when gold is perceived as a safe haven and moretakers flock to it, thus pushing up price.

Still, take a look at how gold prices stacked up against thereturn of equity funds.

Remember, gold too goes through cycles and if the lastone year’s indications are anything, it may be goingthrough low patches.

Your Wealth Creator

Equities: Ok, I am not going to again draw a chartshowing you the returns made by equities in the long run.You would have seen it everywhere, but they may haveseldom convinced you.

EPF/ Deposits Real Gold EquitiesPPF Estate

Liquidity No Partly No Partly YesInvest in tranches Yes Yes No Partly YesTransparency Yes Yes No No YesTax efficiency Yes No No No YesSuperior returns No No Yes Partly Yes

Unless you have hit a jackpot, which asset class canprovide you with liquidity, convenience of investing smallsums, transparency, tax efficiency and of course, superiorreturns as equities? And if risks become marginal byholding over the long term (we have discussed this in ourearlier publications), then are short-term pains that hardto bear? No pain, no gain!

Vidya BalaHead - Mutual Fund Research, FundsIndia.com

www.fundsindia.com

8.0%

5.5%

-2.5%

9.0%

6.2%

-1.8%

10.0%

6.9%

-1.1%

Real negative returnFD Rate Post-tax return Post inflation real return

15.9%18.8%

15.5%13.2%

16.5%

12.4%

0.0%

5.0%

10.0%

15.0%

20.0%

10-year annualised returns 15-year annualised returnsPrice of gold (rupee terms) Avg. returns of equity funds* CNX 500

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We have a few of our investors asking ‘I read that indexfunds are low cost. Should I prefer them over activelymanaged funds?’

It is first important for you to get two things straight: thedistinction between active and passive funds, especially inthe Indian context, and what has been the historicalperformance between these two categories of funds.

Active Management: A dedicated fund managermanages an active fund. Such a fund manager selectssectors and stocks within the boundaries of the fund’smandate, based on quantitative and qualitative research,as well as his/her own judgment.

The fund manager, in such cases, generally seeks tooutperform a particular market index. He constantlyreceives inputs and ideas from a dedicated research team,and from external research support as well.

These entail a cost. Hence, the fund manager seeks togenerate excess returns over the benchmark to make upfor the costs involved.

Active fund managers take dynamic calls – whether toincrease or decrease cash, or curtail falls and participateoptimally in markets by specific strategies, or exit or entercertain stocks or sectors based on their potential andvaluations. Of course, the down side is that all calls donot work.

Passive Management: Passive funds, such as indexfunds invest their assets in the same stocks and in thesame proportion as the index they seek to track. Indeveloped markets where long-term annual returns are atmuch lower levels, passively managed funds are morepopular compared with actively managed funds.

Passive funds, as they do not need day-to-day active calls,have lower costs, a relatively low portfolio turnover, andless or zero cash holding. In Indian markets, the universeof under-researched stocks outside the indices provideample scope to outperform.

Active Funds Outperform: Our analysis of diversifiedlarge-cap as well as mid-and small-cap funds with a 10 and15-year track record reveals that a majority of activefunds, in the Indian context, outperformed theirrespective indices over the past 10 years and 15 years. Mid-cap funds, especially, outperformed their indices by a

good margin of 4-5 percentage points.

Yes, while the expenses incurred is higher in an activelymanaged fund, the margin of outperformance more thanmakes up for the costs involved, that is, if you had chosenfrom the 78 per cent of outperforming funds!

Active Funds Performance Large-Cap Mid - &/ Market Cap Funds Small-Cap Funds

Performance No. of funds that 36 10over past outperformed their10 Years benchmarks

No. of funds that 10 0underperformedtheir benchmarksOutperformance 78 per cent 100 per centPercentage

Performance No. of funds 17 3over past outperformed their15 Years benchmarks

No. of funds that 8 0underperformedtheir benchmarksOutperformance 65 per cent 100 per centPercentage

Analysis is as of October 22, 2014. Outperformance percentagerelates the number of outperforming funds to total number of fundsin each category in the analysis.

Strategy: So what approach should you choose? Thereare two ways to looking at this. One, if you simply wantto move with the markets and do not want to leave thedecision of your portfolio calls to a fund manager, thenindex funds are your best bet. At least, it is better than nothaving any equity in your portfolio.

But if you are a long-term investor, then a combination ofboth would help you build a superior portfolio. You couldthen consider investing 15-25 per cent of your portfolioin index funds to ensure that at least a part of yourportfolio is not worse than the market index. Allow activefunds to generate additional returns with a chunk of yourinvestments there. The caveat: do your research inchoosing the right funds or seek help from your advisor.

N. SathyamoorthyAnalyst, Mutual Fund Research, FundsIndia.com

Active or passive?

www.fundsindia.com

Handling loan application rejectionHave you ever applied for an auto loan, a home loan or apersonal loan? What if the loan application got rejected?What to do next? Rejection of any kind is one of thegreatest fears that lie within us. But there is also a way toaddress this. Put on your thinking cap to understand thefew ways on what to do next when your loan applicationgets rejected.

Know and understand: Check with the credit institutionto know the reason for the rejection – read it andunderstand the reason. As per the Reserve Bank of India,“A bank cannot reject your loan application withoutfurnishing valid reason(s) for the same.” Does the reasonfor rejection talk about a low credit score? Does it pointto poor payment history? Are the reasons reflecting inyour credit history? It’s time to check your credit report toknow the reasons behind the rejection.

Re-check your credit score: A low credit score is one ofthe reasons for which the credit institution may haverejected the loan application. It is advisable to check yourcredit score with one of the credit bureaus in the countryto know how credit healthy you are.

Do an error check: A credit report contains yourdemographic details, credit account details and paymenthistory. Do a check to see if there are errors on your creditreport related to your personal details or account detailsand get them rectified.

Seek help: Do you need help to understand your creditreport? Do you find it difficult to read your credit report?Credit counselors guide you in understanding andreviewing your credit report.

Rejections are always a learning experience. Stop worryingand instead, be a little more alert, a little more prudent, alittle more assertive, and a little more proactive becausewho knows? A window of opportunity may open soonfor you!

Satish Mehta is the Founder and Director of www.credexpert.in –a credit and debt counselling company. Read more such thoughtfularticles at Market Place – FundsIndia, the official blog ofFundsIndia.com at http://www.fundsindia.com/blog.

Market Place FundsIndia Blog

Five, not ‘one’ market in equityJust as `market’ is not equal to just equity, there is no onesingle market in equity. When you hear of equity, pleasedo not understand it as a homogeneous market where youcould draw conclusions that would be relevant across theboard all the time. Even if a few factors are commonacross the market, the nature of their impact on the pricesof stocks differs. To make the right investment allocationin equity, it is important to understand the differentmarkets in Indian equity as an asset class.

Large-cap stocks: These are major names that we arefamiliar with, as they are a part of the Nifty Index. Ingeneral, if you list all the stocks on the National StockExchange in the descending order of marketcapitalization, stocks that account for about 70 per cent ofthe overall market capitalization would constitute thiscategory. You could approximately reckon the top 100hundred stocks by market cap as large-cap stocks. Evenhere, the second 50 would have a different risk-returnprofile as compared to the top 50.

Mid-cap stocks: The second hundred stocks could beconsidered as mid-cap stocks. These stocks carry a higherlevel of risk and return. Liquidity levels are also not asgood as in the large-cap category. Risks are higher as arereturns, but you need to know when to back off, if you areto make money in this category. Returns tend to becompressed in very short periods. It gets progressivelyeven more risky from here.

Small-cap stocks: The third hundred stocks could beconsidered as small-cap stocks. You need to dig really hardto find quality and returns.

Micro-cap stocks: The fourth hundred stocks could beconsidered as micro-cap stocks. This is the space forlottery.

Penny Stocks: A very large proportion of the rest of thelisted stocks would be in this category. Forget about them.

We will examine what this graded equity market meansfor performance next month.

Invest With A Plan 8

If you look carefully, almost all old money secrets can be traced to a single source: a longer-termoutlook.

Bill Bonner

Technical View

Transport Corporation of IndiaThe Transport Corporation of India stock is on a strongupward trend and the recent pull back offers anopportunity to buy the stock. As long as the stock tradesabove the stop loss level of ` 185, there is a possibility ofa rally to the target zone of ` 265-270. A move beyond `270 could trigger a rally to the second target of ` 285.

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

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, 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.

Publisher:Wealth India Financial Services Editor: Srikanth Meenakshi

www.fundsindia.com

NiftyAfter a minor downward correction, the Nifty has been ina recovery mode in the past few weeks. Its long-termoutlook is bullish. There is a strong case for the index tocross the 10,000 mark in 12-15 months. From a short-term perspective, there is a strong resistance at the 8,100-8,150 mark.Once it breaches 8,150, the Nifty could rally to the targetzone of 8,350-8,400. Any downward correction to the7,750-7,800 support would be a buying opportunity forlong-term investors. Investors may use any weakness tobuy fundamentally sound stocks from the banking,automobile, auto ancillary and infrastructure sectors.

B Krishna Kumar, Head – Equity Research, FundsIndia.com

Tata Motors DVRAfter a sharp rally, Tata Motors DVR corrected sinceSeptember 12. The decline was arrested at the crucialsupport zone on October 17, and the subsequent priceaction suggests that the next leg of the upward trend isunderway. Buy at current levels and on weakness for aninitial target at ` 392, and a secondary target of ` 425.Have a stop loss at ` 289.

What does not kill you…

Investing, when it looks the easiest, is at its hardest.

• Only a small number of investors maintain thefortitude and confidence to pursue long-terminvestment success, even at the price of short-termunderperformance. Short-term underperformancedoesn't trouble them.

• Most investors feel the hefty weight of short-termperformance expectations, forcing them to take upmarginal or highly speculative investments.

• The payoff from a risk-averse, long-term orientation isjust that - long term. It is measurable only over thespan of many years, over one or more market cycles.

• An investor’s willingness to invest amidst failingmarkets is the best way to build positions at greatprices; but this strategy can cause short-termunderperformance.

• Buying as prices are falling can look stupid until sellersare exhausted; and buyers who held back cannoteffectively deploy capital, except at much higher prices.

• The resolve in holding cash balances - sometimes verylarge ones - in the absence of a compellingopportunity is another potential performance drag. Butin a world in which being anti-fragile is good, whatdoesn't kill you can make you stronger.

• Patience and discipline can make investors lookfoolishly out of touch until time makes them lookprudent and even prescient.

Seth Klarman is the founder of the Baupost Group.

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Q & A

Q - Do funds maintain separate portfolios for thedividend option and the growth option, or is it justaccounting jugglery? I always thought the dividendoption requires a different approach for stock selection,as against the growth option.

A - Separate Net Asset Values (NAVs) are maintainedfor growth and dividend options as they have to bedeclared separately. There may not necessarily beseparate portfolios. There is usually a single fund, andthe stocks or bonds that it invests in do not varybetween the two options. A dividend option does notmean that a fund will only look to invest in stocks thatpay regular dividend. The dividend and growth optionsare merely ways to distribute/plough back your profits.

The idea of dividend is to periodically strip the profitsand give it back to you in the form of cash (dividendpayout), or additional units (dividend reinvestment). Inthe case of growth option, the gain is retained andreinvested into your portfolio.

Index 1 Year 5 Years 10 Years

CNX Nifty 30.7 11.6 16.4S&P BSE Sensex 30.0 11.5 17.0CNX Mid Cap 57.0 12.1 17.4CNX Small Cap 66.9 10.5 17.0CNX 100 32.5 11.9 16.5CNX 500 37.9 11.3 15.9CNX Bank 49.0 14.7 21.1CNX Energy 19.6 1.9 10.9CNX FMCG 9.9 21.9 23.4CNX Infrastructure 35.7 -0.7 11.0CNX IT 25.9 17.1 15.3MSCI Emerging Markets -2.8 16.1 12.1MSCI World 5.1 20.4 9.9Returns (in per cent as of October 30, 2014) for less than one year is on anabsolute basis and for more than one year on a compounded annual basis.

Equity Performance Snapshot Wisdom

Must Read: ‘Keep in mind that even terribly hostile market environments do not resolve into uninterrupteddeclines,’ writes John Hussman in ‘On the Tendency of Large Market Losses to Occur in Succession.’ Read hisinsightful comments at www.hussmanfunds.com

1 Who is the Chief Economic Advisor to the PrimeMinister of India?

2 Who is the author of ‘Fooled by Randomness?’

3 Which was the first-gold related fund to be launched inIndia?

4 What is the usual benchmark for Balanced Funds (inIndia)?

5 Name the person in the image. She isthe Head of one of the largest banksin India.

Answers for October 2014 Quiz: 1 National Securities ClearingCorporation 2 Shriram Mutual Fund and CRB Mutual Fund 385% 4 Barry Ritholtz 5 Prashant Jain, HDFC Mutual Fund

There were no winners for the October 2014 Quiz.

FundsIndia Select FundsEquity Moderate Risk: Preferred picks in this category are:

Axis Equity Birla SunLife Top 100BNP Paribas Equity Franklin BluechipHDFC Top 200 ICICI Pru DynamicICICI Pru Focused ICICI Pru Top 100Kotak Select Focus Mirae Asset AllocationUTI Equity UTI Opportunities

What is FundsIndia Select Funds: This is a listing ofmutual funds that we think are most investment worthyfor a regular investor. We review this list on a quarterlybasis. Do note, however, that past performance is not aguarantee of future results. Please consider your specificinvestment requirements before designing a portfolio thatsuits your needs.

Please click here for a complete listing of our preferredfunds.

www.fundsindia.com

App Upgrade – FundsIndia’s mobile app for Android usershas been upgraded to enable new investments andadditional investments. Investors will be able to makepayments towards these investments from their internet-banking accounts.

Quick Tax Saver – We have introduced a Quick Tax Saverfeature. This will help investors invest in the best tax savingfunds that have been hand-picked by our experts in a jiffy.

New Gold Plan – Satyug Mera Gold Plan is now available onthe FundsIndia platform. Investors will now be able tosystematically accumulate 24 Karat gold through this plan.To start buying gold with SMGP, please click here.

@fundsindia.com in October Recommended Book

To invest, call 0 7667 166 166

About us: FundsIndia.com is India's leading online investment platform. It offers a wide range of investment options suchas mutual funds, equities, corporate deposits, bonds, the National Pension System, loans, insurance and 24 Karat gold, to namea few, in one convenient online location. FundsIndia also offers a host of value-added services such as Systematic InvestmentPlans (SIPs), Alert SIPs, Flexi SIPs, trigger-based investing, and more, that further enrich your investment experience.

Recovery in economic growth is expected to be led by a revival in the capex/investment cycle by FY 16-17. Hence,recovery in earnings of cyclical sectors could be back-ended. Valuations of cyclical stocks might look expensivefrom the next 12-month perspective. Sanjay Dongre, Senior Fund Manager, UTI Mutual in Marketplace,FundsIndia Blog.

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