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Small savings, smaller returnsIf you thought only bank deposit rates are lower, the other fixed incomeproducts will fall in line now. The government announced across the boardslashing of interest rates in small savings schemes effective April 1, 2016.

This means the rates on all your post office deposits, including the SeniorCitizen Savings Scheme (SCSS) and the Public Provident Fund (PPF), will belower now. The new rates for PPF from April to June 2016 will be 8.1%,down 60 basis points from 8.7%. This is not an annual change. The rateswill henceforth be revised/reviewed quarterly based on gilt rates. Moreover,the interest will be compounded only annually as against half-yearlycompounding earlier.

All this means two things: less of ‘interest rate subsidy’ and more of ‘marketlinked returns’ in your fixed income products.

We think the recent move of small savings schemes to go for more dynamicmarket-linked rates will leave little choice for investors – whether in theirearning years or retired – other than to go for better returning products –mutual funds. If the only reason why you were not into mutual funds wasbecause the rates weren’t ‘fixed’, you are not too far away from a similarexperience with small savings schemes, be it PPF or SCSS.

Here’s what we think you should do:

If you are in your earning years, use options such as tax-saving funds (ELSS)for your tax deduction, and set yourself long-term goals against it. EPFshould suffice for the ‘fixed’ component of your investment. If you don’t,you run a very high chance of building a significantly diminished, insufficientcorpus – be it for your children’s education or your own retirement. Thedynamic rates will ensure that you do not enjoy ‘rate subsidy’ any more.

If you are retired and looking for regular income, you should certainly havesome proportion parked in Post Office SCSS as it still gives higher returnsthan bank FDs. Park some in tax-free bonds, if you are in the high tax bracketof 20-30% even after retirement. At least a third or a fifth of your moneyshould be parked in short-term debt funds. A systematic withdrawal plan insuch funds will ensure you have cash flows and are highly tax efficient.

This, we see as the only sustainable way of ensuring your investment returnsdo not dwindle much.

Vidya BalaHead – Mutual Fund Research

FundsIndia.com

April 2016 Volume 06 04

Yet another milestoneGreetings fromFundsIndia!

As we step into thenew financial year this

month, I am happy to share withyou another milestone that we havecrossed here at FundsIndia.

In the month of March 2016, wecrossed the mark of Rs. 1,500crore* in assets undermanagement. This would havehappened at least a couple ofmonths earlier but for the marketkeeping us down.

Even so, this was the fastestaccumulation of 500 crore ofassets in our history. To put thingsin perspective, our first 500 croretook us 3.5 years to get, the seconda little more than 1.5 years, and thelast took us 10 months. Needlessto say, we are pleased with theacceleration of our progress.

It is also humbling to know thattens of thousands of investorshave reposed their faith and moneyin our services and guidance. Wewill continue to strive to be worthyof that trust.

You can also expect severalinteresting new improvements toour platform. Please look forannouncements about thesechanges in the middle of thismonth.

Happy investing!

Srikanth MeenakshiCo-Founder & COOFundsIndia.com

*We’re now at Rs. 1,700 crore!

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Some of the portfolio holdings as on March 31, 2016.

Infosys ITC ICICI Bank Grasim Industries Bharti Airtel HDFC Bank Larsen & Toubro Titan Reliance Industries Oil & Natural Gas Corporation Hindustan Zinc CiplaMahindra & Mahindra...

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Roll back of PF tax – Winning the battle and losing the war

Let us look at the entire issue from the perspective ofwhat the government is seeking to achieve, and what itmeans to you.

The current and previous ruling governments have triedvarious means to get the EPFO, as well as investorsthemselves to adapt a bit to market-linked investing.

- One, the government had asked the EPFO to invest aportion (15-20%) of their corpus in equities(index-linked). However, only a measly 5% of theincremental corpus was agreed to be invested. Hardlya proportion to yield any impactful results for theinvestor, or for the government to reduce its burdenfrom ‘subsidised’ rates.

- Two, one of its other market-linked products, NPS,did not have many corporate takers. In Budget 2015,the government stated that it will look at making an“either-or” of EPF and NPS. That is, an employee canchoose to have one of these two.

- Three, in a significant move, it changed the wayinterest rates would be set for small-savings schemes,and said rates would be reset every quarter. That meansyour balance in EPF or PPF can earn different ratesevery quarter, and in the current falling rate scenario,that means your returns will simply move southward,forcing you to move to better yielding options.

- Four, the Economic Survey this year, too has notedhow a chunk of ‘wealthy’ investors are the ones whotake maximum advantage of benefits in small savingsschemes, including provident funds, and the need to atbest postpone taxability and not entirely exempt it(move to EET).

In all this, the following message is clear.

One, the government wants Small Savings to belong togenuinely small investors and not those seeking tax havensand safety besides good returns.

Two, the government does not intend to continue its‘subsidy’ raj in interest rates, and would at least like part ofit to be linked to market forces. Paying just 25 basis pointsmore than gilt for PPF/EPF is a clear indication.

Three, with the deepening gilt market, the governmenthas enough ways to raise resources other than dependingon public money. It does not need local players alone tobuy its bonds; there are FIIs in hordes, now.

The budget proposal (before rollback), althoughharsh, was trying to convey that investors need tobroad-base their investments. They need to changetheir attitude towards investing.

As those who have observed the government instrumentsrates will agree, interest rates, whether in EPF, PPF, orother government schemes have clearly been on adownward trend post the late 1990s. There is no way wewill go back to the period of 12% returns.

All this means is that the government needs you, and you need tomove to market-linked instruments that deliver superior returns,rather than getting stuck with the idea of saving taxes (at all costs)alone. Just as the government cannot bear the cost ofproviding for an ageing population, you will yourself findit hard to fend for your needs with a higher cost of livingand lower returns.

By trying to place EPF and NPS on an even footing,the government wanted to send across the message

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Vidya Bala

You might rejoice now at the withdrawal of the Budget’s proposal to tax provident fund onmaturity. But it may not please you when I say that you may have won the tax battle but run therisk of losing the returns war. Lower contribution (since you mostly invest only to save taxes)and lower returns from the traditional options of provident fund may leave you with a muchlower corpus than you ought to have.

“Given the importance of spill overs from monetary policies, it is important we start building aglobal consensus on how to get better outcomes for the world.”- Raghuram Rajan, Governor, Reserve Bank of India

that now, investors have to look for superior returningproducts and not just tax-saving products.

Unfortunately, the move was too sweeping and lessthought-out to be accepted. Here’s the trouble with theBudget proposals:

As a result of the rollback, NPS continues to remain aweak option, despite the 40% exemption on withdrawal(as up to 20% will still be taxed out of the 60% allowedto be withdrawn). On the other hand, EPF and PPF willcontinue to swell, with investors unaware that they maybe among the mediocre returning options, given that therates are set to be more dynamic.

If the intention of the government was to force peopleinto properly channelizing the lump sum they receive onretirement into products that give out regular income,then it could simply have demanded proof of suchincome-generating investment to avoid tax on withdrawal.Any withdrawal before retirement must be taxed to deterinvestors from pulling out their entire corpus.

Pension plans, which are low yielding, should not be theonly option when it comes to parking such proceeds. Whynot give an array of schemes – including options such asthe Post Office Senior Citizen Savings Scheme or, for thatmatter, low-risk mutual funds and government bonds toensure investors create their own ‘income’ stream?

Unfortunately, this did not happen in the recent Budget.However, the roadmap laid thus far is pointing to onlyone direction: a move towards market-linked products ifyou are saving for retirement. This may yet reappear in anew avatar for all you know. And it’s better for you if itdoes.

So, what should you do as an investor? Looking up to thegovernment to pay you inflation-beating returns, lookingup to the tax authorities to exempt all such income, andlooking up to your employer to contribute to yourretirement kitty (which is the latest proposal; thatemployer will contribute more to pension) are all variablesthat are not within your control – as far as building wealthis concerned.

A move here or there can send your financial goals for atoss. This is one of the biggest reasons why you shouldhave your own retirement savings plan in place by way ofsimple, steady investing in high yielding asset classeswhose returns will ensure taxes, regulations, and regulatorsmatter little over the long term. For what remains at theend, from investing regularly in such asset classes, iswealth alone.

Vidya BalaHead – Mutual Fund Research

FundsIndia.com

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Equity does outperform in the long run

High risk, high returns

One, the return on the bank deposit works out to thefigure of 8.8% only when considering the highest rate, asper RBI data. On a similar note, the highest return alarge-cap fund delivered in the past ten years is actually anannual 14.5%. That is perfectly satisfactory.

In fact, over 60% of the large-cap funds beat thecategory’s 9.8% average return, ranging between 10 and12%. Choosing a fund that has consistently beaten themarket and its category, therefore, is of immenseimportance when deciding to invest in a mutual fund.

Two, interest on fixed deposits is taxed at slab rates, andthis cuts into the return. At the 10, 20, and 30 per cent taxbrackets, the return on the fixed deposit drops to 8.1%,7.4%, and 6.7% respectively. Gains on equity funds, whenheld for more than one year, are not taxed. The onepercentage point differential between fixed deposits andlarge-cap funds therefore widens to two to threepercentage points.

10 year returnsPre-tax Post-tax

Large-cap equity funds 9.80% 9.80%

Mid-cap equity funds 13.20% 13.20%

Bank fixed deposits 8.80% 6.70%

Tax has been calculated at the highest slab rateReturns are as of March 23, 2016

Three, using the SIP method to invest over the past tenyears would have higher yields at an average of 10.5% forlarge-cap funds. Recurring deposits pay lower interest than

fixed deposits, widening the gap between equity and debt.The average SIP return for large-cap equity funds is alsohigher than the Nifty 50 or the Sensex which deliveredyields of 8.2% and 7.9%, respectively, in the past ten years.

Four, for long-term horizons such as 10 years, large-capequity must be mixed with mid-cap funds as well. Mid-capfunds in the last ten years delivered an annual averagereturn of 13.2%. The best fund returned a good 18.8%.A monthly SIP would have yielded 16.7% on an average.

So, including mid-caps to the extent of 20% of a portfoliowill yield, on an average, a return of 12%.

Keeping it realistic

Equity does deliver returns superior to debt, as we haveseen. But it’s also important to have realistic expectationswhile investing in equities.

For one thing, while in one year, the market can soar (asit happened in 2007 and 2009, when the Nifty 50 movedup by over 50 per cent), over the long term, the returnseven out. Market lows inevitably follow such booms.

For another, an equity mutual fund invests in a basket offundamentally sound stocks, to keep risk diffused andbring in a balance of risk and return.

Most individuals invest in mutual funds because they donot have the time or expertise to identify stocks that willmultiply several times. Nor do they have the risk appetitethat is required for direct stock investments.

Therefore, even if a stock happens to be a multi-bagger ina ten or fifteen year period, a fund is not going to have itsentire portfolio in that stock. The fund’s returns will thusbe lower than those star stocks.

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Bhavana Acharya

An article a couple of weeks ago, in a leading business newspaper, may have come as a rudeshock to some of you. Over the past ten years, it claimed, large-cap equity funds deliveredreturns on par with bank fixed deposits.Equity large-cap funds delivered an annual average return of 9.8% from March 2006 to now. Abank deposit taken at the same time would have delivered 8.8%. So, is there no use in equityinvestment? No. A look past the simple return numbers will help restore your faith in equities.

“Treat equity investments like a bamboo tree. One waters the bamboo tree for four years andnothing happens. In the fifth year, the bamboo tree goes to touch the sky.”- Nilesh Shah, CEO and Managing Director, Kotak Mahindra AMC

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In any case, stocks that are fundamentally sound withgood corporate governance that jump multi-fold are notcommon.

In the past 20 years, the Sensex has returned an average of13.8% in any ten-year period. It would be unrealistic, then,to expect annual returns of 30 or 40% from equity overthe long term.

While building portfolios and estimating returns equitywill bring in over the long term, an average of 12 to 15 percent is appropriate and an acceptable figure.

Therefore, take heart that equities have not, and will not,let you down as long as you hold for the long-term andkeep your expectations realistic.

Bhavana AcharyaAnalyst - Mutual Fund Research

FundsIndia.com

Index 1 Year 5 Years 10 Years

Nifty 50 -9.9 5.8 8.6

S&P BSE Sensex -10.3 5.5 8.4

Nifty Midcap 100 -3 9.4 10.3

Nifty Smallcap 100 -14.5 6 6.5

Nifty 100 -9.1 6.5 9

Nifty 500 -8.6 6.8 8.3

Nifty Bank -13.3 6.8 13.2

Nifty Energy 1.3 -2.2 4.5

Nifty FMCG -1.9 16.5 12.8

Nifty Infrastructure -22.4 -3.8 0.0

Nifty IT -5.4 9.7 10

Returns (in per cent as of March 31, 2016) for less than one yearis on an absolute basis, and for more than one year on a compoundedannual basis.

Equity Performance Snapshot

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Q: What is duration play in the context of debt funds?

Ans: A duration call means a play on interest rate movement. When rates fall, the fall in yield of traded debt

instruments causes a price rally. This is because the instruments that came in earlier with higher yields will be more

sought after, causing their prices to go up. Such a rally is sharper in longer duration instruments. Hence, in a scenario

where rates are expected to fall, duration funds hold a higher proportion of long maturity instruments, typically

long-term gilts, to gain from the price rally. However, if the rates do not fall and instead rise, such a call can hurt them.

For instance, if new instruments come with higher rates, then existing instruments will see a fall in their price as their

yields try to rise to keep in line with the newer instruments.

Q: Since savings bank interest is exempt up to Rs. 10,000 a year, would liquid funds make sense?

Ans: You need to look at the post-tax returns of liquid funds to see if they make more sense than savings bank

accounts, whether or not you are within the Rs. 10,000 per year savings interest exemption. For instance, a post-tax

return for a liquid fund that delivered 8% (illustrative only) would be 5.6%, even if you are in the highest tax bracket

of 30% and held it for less than 3 years. This would still be higher than the 4% returns on savings, even though the

latter is not taxed up to Rs. 10,000.

Vidya Bala

Head – Mutual Fund Research

FundsIndia.com

Q & A

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ZEE Entertainment Enterprises LtdThe long-term trend for ZEEL has been trading in a tightband between Rs. 350 to Rs. 440. The latest 200-day SMAis Rs. 391. Currently it is trading near the trend lineresistance level of Rs. 400. A breakout above Rs. 400 willtrigger an upward move for a medium-term target of Rs.470. Resistance is placed at Rs. 420 and Rs. 440. Strongsupport is at Rs. 350. The stock can be accumulated ondeclines. Stop loss is placed at Rs. 345.

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

The Nifty clocked a positive performance for March2016. The short- and medium-term trend remains positiveat this juncture, and there is every possibility of acontinued rally towards the immediate target level of8,020. The Nifty has been making higher tops andbottoms on the daily chart for this month. The latest50-day Simple Moving Average (SMA) is at 7,364. Thecrucial support for Nifty is placed at 7,550, and majorresistance is at 7,840 and 8,020. The trend will remainpositive as long as it trades above 7,405. A close below7,364 will lead to further weakness to test 7,200.

Perumal RajaTechnical Analyst (Equity Research Desk)

FundsIndia.com

SJVN LtdThis stock has seen a sharp decline from Rs 34.5 to Rs26.5 in the past 2 months. It has taken support around a200-day SMA of Rs. 27. Major support is at Rs. 25, whileresistance is placed at Rs. 32 and Rs. 34. Upwardmomentum will continue once the stock trades above thetrend-line breakout level of Rs. 30. It can be accumulatedon declines. We recommend buying SJVN for amedium-term target of Rs. 38 and stop loss of Rs 24.5.

Technical View Nifty

Disclaimer:Mutual fund investments are subject to market risks. Please read the scheme information and other related documents beforeinvesting. Past performance is not indicative of future returns. Please consider your specific investment requirements before choosing a fund,or designing a portfolio that suits your needs. Wealth India Financial Services Pvt. Ltd. (ARN code 69583) makes no warranties orrepresentations, express or implied, on products offered through the platform. It accepts no liability for any damages or losses, howevercaused, in connection with the use of, or reliance on its products or related services. The terms and conditions of the website are applicable.Think FundsIndia, a monthly publication of Wealth India Financial Services Pvt. Ltd., is for information purposes only. Think FundsIndiais not, and should not, be construed as a prospectus, scheme information document, offer document or recommendation. Information inthis document has been obtained from sources that are credible and reliable in the opinion of the Editor.Publisher:Wealth India Financial Services Private Ltd. Editor: Srikanth Meenakshi

“In the direction that the economy is following, there cannot be a situation where the bank lendingrates have to come down but the deposit rates are high. They both are linked.”- Arun Jaitley, Finance Minister, Government of India

1 Which bank launched India’s first contact-less mobilepayment solution, “iTap”?

2. The World Consumer Rights Day (WCRD) isobserved on which date?

3. What is the approximate contribution of real estatein India’s national GDP?

4. Name the person in the picture. He isthe 11th Governor of the CentralBank of Bangladesh.

5. Germany will partner with India to develop whichthree cities as smart cities?

Answers may be sent to quiz@fundsindia.com.

Answers for March 2016 Investment Quiz:

1. Jharkhand 2. Chhattisgarh 3. Davinder Singh

4. Currency Swap Agreement 5. Gujarat

The winner of the March 2016 Investment Quiz isAshutosh Rajendra Dixit.

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FundsIndia Select Funds Investment QuizEquity Funds Moderate Risk

These are funds that will seek to generate inflation-beatingreturns, and limit downside risks.

Axix Equity ICICI Pru Focused BlueChip

Birla SL Frontline Equity Kotak Select Focus

BNP Paribas Equity Mirae Asset IndiaOpportunities

Franklin India Bluechip Religare Invesco Growth

Franklin India Prima Plus SBI BlueChip

ICICI Pru Dynamic Plan UTI Equity

UTI Opportunities

What is FundsIndia Select Funds: This is a listing ofmutual funds that we think are most investment worthy fora regular investor. We review this list on a quarterly basis.Do note, however, that past performance is not a guaranteeof future results. Please consider your specific investmentrequirements before designing a portfolio that suits yourneeds.

Please click here for a complete listing of our preferredfunds.

About us: FundsIndia.com is India's leading online investment platform. It offers a wide range of investment optionssuch as mutual funds, equities, corporate deposits, and bonds, to name a few, in one convenient online location.FundsIndia.com also offers a host of value-added services such as free investment advisory services, different typesof Systematic Investment Plans (SIPs), trigger-based investing, Smart Solutions for important life goals, mobile apps,and more that further enrich your investment experience.

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“What we have done in the Budget is to create space for the Reserve Bank to cut rates.”- Jayant Sinha, Minister of State for Finance

Note: The table above reflects changes as of this quarter.