Capital letter Dec'12 - Fundsindia

Disclaimer: Mutual Fund Investments are subject to market risks. Please read all scheme related documents carefully before investing.

Greetings from FundsIndia!

As promised last month, we have published a list of mutual fund schemes that are most investment worthy in the market today. We are calling this the ‘FundsIndia Select Funds’, and it is available in this page:

http://www.fundsindia.com/select-funds

Here, you will find schemes across the board – equity funds for multiple purposes, ELSS funds, hybrid funds and debt fund based on your investment time frame. We hope that this list will serve as a ready reckoner for you when choosing funds, and will also serve as a handy reference for giving out to your friends who are wondering where to invest.

Along with this, we have also launched a page that presents similar information from a portfolio perspective. We are calling these the “FundsIndia Smart Portfolios”, and they are available at:

http://www.fundsindia.com/portfolios

Please take a look at both these pages and let us know your feedback.

Along with these, we have also launched our new look blog site which is much more easier to read through and navigate than previously. For example, you can get access to all our weekly fund recommendations with just one click. Check it out at:

http://www.fundsindia.com/blog

There are a few other new features that are under development as well, and I hope to be able to talk bout them next month in this space.

In the meanwhile, the markets have picked up smartly following steady FII inflows that in turn, followed the reform momentum that the central gov-ernment appears (as of now) to be capable of sustaining. As our own Vidya Bala noted, December has historically been a kind month for the markets. So, let’s hope for the best!

Happy Investing!

T h e m o n t h l y n e w s l e t t e r f r o m F u n d s I n d i a

05—Dec—2012

Volume 4, Issue 12

Inside this issue:

A kind month for markets

1

The month ahead - Equi ty recom-mendations - B .Kr ishna Kumar

2

There is a debt fund to sui t every t ime frame —Vidya Ba la

3

Financial P lan-n ing Education

5

Taming the Mid-Cap Beast —Dhirendra Kumar

6

A kind month for Markets Srikanth Meenakshi

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After a listless activity in October, the market sentiment improved in the second half of November. The Nifty managed to breakout past the 5,630-5,730 range, which is a sign of strength.

On the macro-economic front, a settlement in the Vodafone tax-case could provide some much needed revenue to the government. The soft trend in the price of international crude oil is also a welcome development. The US Dollar too has hit a crucial resistance and has turned lower, which is a healthy sign from an economic as well as stock market perspective.

We maintain the bullish view for the stock market and expect the Nifty to soon sail past the psychological barrier of 6,000. We advise investors to use any price weakness to buy frontline index heavyweight stocks.

From the large cap space, the likes of Infosys, TCS, State Bank of India, Larsen & Toubro and Maruti Suzuki are out top picks. We however feel that the mid-cap and small cap stocks would deliver better returns in relation to the large cap counterparts.

Outside of large cap universe, we sense investment opportunity in Unichem Labs, Granules India, Balkrishna Industries, Blue Star, Balrampur Chini and Shree Renuka. Those in a mood to take higher risk may consider exposures in Unitech, HDIL and Sintex.

From a technical perspective, the sequence of higher highs and higher lows is still intact which validates the bullish case scenario. The recent swing low at 5,540 now becomes the make-or-break level for the index.

Traders may use downward correction to buy the Nifty with a stop loss below 5,540, for a an eventual target of 6,400. Conservative investors may use the SIP-route to buy into Nifty BEES.

The banking, cement, realty, Pharma and infrastructure are our favoured sectors that could propel the Nifty to higher levels. Last month, we had recommended Cipla and Lupin from the Pharma sector. While Lupin has been rangebound, Cipla has performed well in the re-cent weeks. We maintain our positive stance on these two stocks.

This month, we cover the outlook for a couple of stocks from the sugar sector. Both Balrampur Chini and Shree Renuka Sugars have completed a brief downward cor-rection and appear poised to resume the next leg of the uptrend.

Balrampur Chini is one of the better known names from the sugar sector. The corporate governance is of highest standards and it’s one of the preferred picks from our side.

A look at the daily chart featured above indi-cates that the stock has recent correction was arrested the crucial trendline support, which is a positive sign. The sharp rally on Friday indi-cates that buyers are active.

Investors may buy Balrampur Chini with a stop loss at Rs.58, for a target of Rs.75. Price weakness may be used to enhance exposures in the counter.

Shree Rnuka Sugars is the other company we like from the sugar sector. From the daily chart featured below, it’s evident that the buyers are interested in picking up the stock at around the Rs.28-29 range.

Continued on page 4 . . .

Volume 4, Issue 12

The month ahead - Equity recommendations B.Krishna Kumar


This is a sign of strength and inves-tors may use weakness to buy Shree Renuka with a stop loss at Rs.27.50 and target of Rs.38.

Mr.B.Krishna Kumar also hosts a weekly webinar that discusses the market outlook for the following week.

You can register for the webinar by clicking here: https://www4.gotomeeting.com/register/927617871

Did you know that debt funds, as a category, offer a wide spectrum of products to suit your varying investment horizons? That’s perhaps the single biggest advantage that debt funds offer when compared with equity funds; the latter being mostly meant for the long term. Agreed, their returns may not be top notch like equity, but they can be optimal given the limited time frame.

In this issue, let’s take a quick look at what kinds of open-ended debt funds fit your different investment time frames.

Liquid and ultra short-term funds

These funds are meant to park your money temporarily before deploying them elsewhere. They are the least risky and least volatile among various mu-tual funds. We have covered about this category of funds in our weekly call: http://tinyurl.com/liquid-funds. Please read the link

Both these categories are highly suitable for short-term purpose, where the goal is to save money temporarily. If you need the money in less than three months, then liquid funds will meet the need. Ultra short-term funds are suitable for goals up to six months.

They are also good tools to invest money as lump sum and then transfer systematically to equity funds. Conversely, you can systematically withdraw from equities when you near your goal and park your money in these funds, until you need them.

Short-term and medium-term funds

Short-term funds are suitable if you need to invest your money with a time frame of six months to a year. These funds invest in a range of certificates of deposits, commercial papers and other short-term bonds. They can have a portfolio with an average maturity of up to two years. That means, in addi-tion to holding short-term instruments, they would also hold a small proportion of debt with slightly higher maturity to seek marginally higher returns than liquid and ultra short-term funds.

Then there are medium-term funds where you can park your money if you have an investment horizon of 1-1.5 years.

Cont inued from page 2 . . .

Volume 4, Issue 12

There is a debt fund to suit every time frame Vidya Bala—Head - Mutual Fund Research at FundsIndia

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It is noteworthy that a fund that calls itself short term or is classified as short-term by rating agencies may actually be a medium-term fund. Hence, you will do well to look at the fund investment strategy in its Scheme Information Document (SID) as well as look at the exit load structure.

A slightly longer exit load period may suggest that the fund is not really short term in nature. For instance, the names of HDFC Short Term Plan or Templeton India Short Term Income Plan may suggest they are short term in nature. But in reality, these are income funds that have an exit load for redemptions made within 9 months.

Income funds and dynamic bond funds

These funds invest in a wide range of instruments including corporate and government bonds, debentures, certificates of deposits as well as commer-cial paper and money market instruments. These are mostly go-anywhere funds as far as their portfolio maturity is concerned. Most of them tend to be dynamic in terms of their maturity profile, often pegging it to the interest rate cycle.

They tend to load themselves up with long-term instruments such as gilt when the interest rate is expected to slide and go short in a rising interest rate scenario. The appreciation in your NAV comes from both income accrual (interest arising from the instruments) as well as any price rally coming from a falling interest rate.

These funds may also take credit risks. While they seek to hold a good proportion in high credit-rated instruments, they may, at times, bet on slightly lower rated instruments, hoping to see a re-rating.

All these features enhance the risk of their portfolio. Such risk arises from interest rate as well as credit quality. That means you will have to hold a longer term view to take exposure to these funds. Funds typically recommend not less than an 18-month horizon to hold these funds. But when the interest rate cycle is unidirectional for a long while (as was the case for a good year and a half till the beginning of 2012), then the holding in these funds would have to be longer.

Income or dynamic bond funds are also good additions to a long-term portfolio. In such a case, SIPs will help reduce risk of timing in these funds.

Floating rate funds

These can be short or long-term funds that invest in floating rate instruments. That means the interest rates of the underlying instruments fluctuate. While some of these funds are suitable for a holding of 6-12 months, others require a longer holding. You will have to read the fund document carefully to know whether these funds will fit your time frame.

Gilt funds

As the name suggests, these funds invest a high proportion of their assets in government securities, often long term in nature. While these funds are sovereign-backed and therefore safe in term of credit quality, the longer maturity makes this class of funds most vulnerable to interest rate cycles. Quick capital appreciation from a falling rate scenario or short-term losses in case of sharp rise in rates means that timing plays a major role in these funds. While they can be good long-term instruments, their volatility makes them less suitable for retail investors, who look for debt funds to hedge their portfolio. HNIs and institutional players may take on these risks better.

Other categories of debt include capital protection schemes and fixed maturity plans. But since these funds either have a lock in or a fixed maturity, we are not discussing them in the context of debt funds fitting various time frames.

Another category of debt fund that is often misunderstood is the monthly income plan (MIP). These funds are hybrid in nature and have as much as 20-25 per cent of assets in equities. As a result, they can witness capital loss in prolonged bear markets. Hence, these funds have to be held for the long term like equities.

Time frame alone not enough

When you invest in debt funds, your choice of fund should be primarily based on your time frame. But that is not enough. As discussed, some fund categories, such as dy-namic bonds, or MIPs carry higher risks. If you have a long-term time frame but are totally risk averse, then you will have to settle for short-term funds. Of Course, that means a possibility of capping your returns as well.

Vidya Bala is the Head of Mutual Fund Research at FundsIndia. A chartered Accountant by training, she was earlier with the Hindu Business Line’s research bu-reau, tracking mutual funds, stock markets and sectors for eight years. She will write for our monthly newsletter on topics including mutual fund, personal finance

and equity markets. Vidya Bala can be reached at [email protected]

Volume 4, Issue 12


In the last article, we covered the importance of having a financial plan. In this article, we would like to talk about understanding where do you stand today in terms of debt to income, savings ratio and contingency fund.

Where do you stand today?

The first step towards the financial planning exercise is to find out where do stand today and where you want to reach. To find out where you stand just follow the following three steps:

Step 1 : Debt to Income ratio

Total Liabilities (EMI)

Debt to Income = ---------------------------

Total Monthly Income

In general, the total liabilities should be in the range of 40% - 50% of your monthly income. This should not exceed 50% of the total monthly income. For example, if your income is Rs.60000/- per month, the debt to income should be less than 50%. This means you should not have the liability more than Rs.30000/- paying in terms of EMI.

Step 2 : Savings to Income Ratio

Monthly savings

Savings to income = --------------------------

Monthly income

In general, the minimum savings to income ratio should be more than 20%. For example, if your income is Rs.60000/- per month, then the savings to income should be minimum of Rs.12000/-.

Step 3 : Contingency fund

We would suggest you to kept aside minimum of 6 months expenses to the maximum of 24 months expenses as a contingency fund which would take care of emergencies like job change or job losses. This would include your EMI’s, house hold expenses and insurance premium.

Mr.S.Sridharan is the Head of Financial Planning with FundsIndia. You can reach Mr.Sridharan at [email protected]

Volume 4, Issue 12

Financial Planning Education Series S.Shridharan —Head - Financial Planning

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Now that there’s a small wind of optimism blowing through the equity markets, its time for many mutual fund investors to take a fresh look at their portfolios and see if its distribution among different kinds of funds is the optimum one going for-ward. For seasoned investor at least, one vexing question always has been the exact role that funds that focus on mid-cap and smaller companies should play in their investment strategy.

Depending on their personal investing experience, that is, when they were invested in mid and small cap funds and when they were not, investors are divided between two sharply opposed opinions on such funds. There are those who think that mid and small cap funds are great for getting ahead of the markets’ more popular large-cap end; and there are those who think that investing at the smaller end is an invitation to disaster.

Both views are correct, after their own fashion. Since 2003, when last decades’ great bull run properly got going, mid-caps have repeatedly run ahead of large caps and then fell back sharply. An exact comparison of the progress of the BSE Sensex and the BSE Midcap tells the story rather nicely. At the beginning of April 2003, the Sensex was 3081 and the Midcap Index was 900. To make the comparison simpler, let’s equalise this point to 3081 on both. In May 2006, after three years, the Sensex hit a peak of 12,612. At that time, the Midcap index was already at an equivalent level of 20,671 having run ahead of the large-cap index by an amazing 64 per cent.

For investors who had discovered the joy and excitement of investing in smaller companies, the next month was a pretty hard landing. The Sensex fell almost 30 per cent but the Midcap index fell 40 per cent. However, the markets turned and the journey back started once more with the same pattern as earlier. In January 2008, when the Sensex peaked at close to 21,000, the Midcap index was at an equivalent level of 33,600. Predictably, the landing was even harder. By the end of March 2009, the Sensex was at 10,000 the Midcap index was just below that level having given up all the margin (79 per cent at its peak) by which it had overtaken the large-cap bellwether.

In the years since, even though the magnitude of the bull-runs’ wild ride has not been matched, the pattern remains the same. However, the moral of the story is not to avoid mid- and small-cap investing, but instead, to do it in a way that this pattern can be exploited to yield higher returns. And first step in doing so is to appreciate the fact that the variance in mid-cap stock performance is so high that it offers the better fund managers a wide scope for beating the markets. Moreover, the underlying volatility, when it appears in a well-run fund, actually serves to enhance returns from SIP invest-ments.

Here are some fascinating numbers that demonstrate this. In the period since March 2009 low mentioned above, an SIP in a Sensex or a Nifty tracking fund would have yielded a rather pedestrian return of a little over 5 per cent. Over this same period, the median mid and small cap fund in Value Re-search’s database has yielded a return of 14.8 per cent p.a. That’s just the median fund and I’m quoting its numbers first to show that that’s what a mid-dle-of-the-road mid-cap fund did. The 25th percentile fund did 17.4 per cent and the best 28.7 per cent. No great fund picking skills were needed to get these bonanzas—about 40 of the 50-odd funds beat the bellwether indices by huge margins.

But as we saw above, that’s just one side of it. The volatility in mid-caps is always there and it can turn negative with very little notice. When the mar-kets fall, these funds will fall more. Therefore, they are suitable only for those who can deal with this. For the less-involved investor, a better option is to stick to broad spectrum multi-cap funds, where the fund manager decides how much and when to allocate to mid-caps. Either way, any approach to investing in equity funds must take mid-caps into account.

Syndicated from Value Research Online—Article can be viewed online here—http://www.valueresearchonline.com/story/h2_storyview.asp?str=21494

Volume 4, Issue 12

Wealth India Financial Services Pvt. Ltd., H.M Center, Second Floor,

29, Nungambakkam High Road, Nungambakkam,

Chennai - 600 034.

Phone: 044-4344 3100 E-mail: [email protected]

Taming the Mid-Cap Beast By Dhirendra Kumar | Dec 3, 2012

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Capital letter Dec'12 - Fundsindia

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