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Regress, Progress

At FundsIndia, wehave been spendingthe past 2-3 weeksanswering questions

from investors regarding twospecific announcements made inthe budget.

The first is the change to debtfund taxation. The definition of‘long-term’ for debt mutualfunds has been increased fromone year to three years.

This affects investors who investin such funds for the mediumterm, especially Fixed MaturityPlans. We believe this is aregressive move that is also toobroad in scope affecting morethan just debt funds(international funds and goldfunds are also impacted).

The second move is the longpending increase in the Section80C limit from Rs 1 lakh to Rs1.5 lakh. This means thatinvestors can save up to at leastRs 15,000 more on their tax outgo.

Along with a slight increase inthe tax slab, this will spell somerelief to the middle-classtaxpayers who have been reelingunder the impact of highinflation in the past few years.

Happy investing!

Srikanth Meenakshi

Let us become informed investorsTo be an informed investor and to invest in stuff you understand is wisdomthat has been handed down over several generations of great investors.Irrespective of whether you are investing on your own or through avenuessuch as mutual funds, it is increasingly become important for investor to readand have a good idea so that they are not mislead in their investment decisions.

Unlike 20 or even 10 years ago, investors have several quality options to readabout economy, investments and markets across asset classes. We are nolonger dependent on newspapers and television channels. Perhaps the bestthing to have happened over the past decade is the emergence of blogs as aplace for quality and realistic analysis of economic trends and what it meansfor investment. A few global funds houses put out high quality analysis/

Yet overload of information and information sources is a major problem nowwith the proliferation and sensalisaton of even routine happenings. You couldbe easily overawed by all the stuff that is out there. Here goes our first-stopof references for reading:

• The Quarterly Letter of Jeremy Grantham of GMO (www.gmo.com)• Weekly commentary by John Hussman (www.hussmanfunds.com)• Absolute Return Letter (www.arpinvestments.com)• Annual Letter to Shareholders of Berkshire Hathaway by Warren Buffett(www.berkshirehathaway.com)

• The Big Picture (blog by Barry Ritholtz at www.ritholtz.com)• Global Economic Analysis (blog by Mike Shedlock athttp://globaleconomicanalysis.blogspot.in)

• Investment Postcards from Cape Town (a blog that aggregates the bestwriting on economy and markets (www.investmentpostcards.com)

• Speeches by the top brass of Reserve Bank of India, easily the best qualityand credible source on Indian economy (www.rbi.org.in)

• Commentary by V Ananthanageswaran in www.livemint.com• Analytical work on mutual funds by Aarati Krishnan of The HinduBusiness Line (www.thehindubusinessline.com)

You may find a higher level in several places and in several of the suggestionsthan what is your comfort zone. Do not let this aspect put you off. For starters,read what you understand. If you read regularly, you will find that yourknowledge levels slowly and steadily improving. This would be a better useof your time than listening and tracking noise and views of vested interests.

S Vaidya Nathan

August 2014 � Volume 07 � 08

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

Taxation Changes & Debt Fund Strategy

It’s 3 Years now

Thus far, all non-equity mutual funds held for more thanone year qualified for indexation benefit at the time ofredemption, as they were treated as long-term capital gain.This time frame is now increased to 36 months for you toenjoy indexation benefits.

Non-equity funds includes all categories of open-endedand closed-end debt funds, debt-oriented funds such asMIPs, FMPs, international funds, gold funds and otherhybrid funds and fund-of-funds.

Besides, currently the tax on debt mutual funds is 10 percent without indexation or 20 per cent with indexation.The 10 per cent option is proposed to be withdrawn. Youwill still have the 20 per cent with indexation option.

What are the implications?

• If you have been investing in liquid or ultra short-termfunds with a less than one-year view, nothing changesas the tax status of ‘short-term capital gain’ remains.

• For those investing in debt funds as part of your assetallocation for the long term (over three years), no harmis done, as you will continue to benefit fromindexation.

• Similarly, for those buying gold funds or internationalfunds, we have maintained that these asset classesrequire an at least three-year time frame, as they areeither part of your asset allocation or diversificationstrategy. Hence, in our view, your strategy to thesecategories of funds should remain neutral.

Then where would you have to tweak your strategy?

If you are an avid Fixed Maturity Plan (FMP) investorespecially in the 1-3 year bucket, then you have to onlykeep your fingers crossed about an FMP’s ability to deliverreturns superior to traditional debt options, stripped offthe tax advantage.

Of course, it is possible for FMPs to go for instruments(perhaps with slightly higher credit risk) to still delver youenhanced returns; but then if your purpose of investingin FMPs would be to assume lower risk and generate FD-beating returns, then it may be a tough call to invest inthis segment.

Added to this, as things stand, had you invested in FMPsbelieving that you will get ‘double indexation’ benefit, theproposal in its current form will deny you that. Hence,FMPs in the less than three-year time frame run the riskof going into oblivion.

How to aproach short-term debt funds?

Those of you who invested in short to medium termopen-ended debt funds with a 1-3 years view would needto be aware of the loss of indexation benefit.

If you have at least one more year to go for your goal,then there are good chances for these short-term debtfunds to participate in a price rally if and when rates fall.Hence, even if you have to pay tax at your income slab,chances are that their returns would be superior to FDs.

Hence, if you have a 1-2 year time frame, irrespective ofwhether your investment touches three years or not, youcan adopt a hold strategy. This holds true for investors

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No market is as diverse and dynamic as India. People here are smart, motivated and possess a zealfor success. ‘Localisation’ is the key to business here as every city is different from the other interms of consumer needs and demands.Kenichiro Hibi, Managing Director, Sony India

Vidya Bala

In a move that could disturb the tax efficient structure of a few of your debt mutual funds, theUnion Budget 2014 has proposed changes in the way your non-equity mutual fund gains will betaxed. Besides, there is also a less significant change – in terms of calculating dividend distributiontax for debt mutual funds. For the article on dividend distribution tax, please refer to our blog.Please note that these changes are applicable for redemption/sale made from July 11, 2014. Fortransactions until then, the old laws will continue to apply. We shall discuss how you could dealwith the change in tax to ensure that you continue to earn returns superior to traditional optionssuch as fixed deposits.

entering this category with a view of next 1-2 years.

Having said that, once rates fall, it may be hard for thiscategory of funds to consistently beat traditional optionson a post-tax basis. Hence, we provide a few alternatives,albeit strictly not like-to-like, if tax efficient structure andgenerating superior returns are your primary goal.

Alternative options for investors

The first option is arbitrage funds. These funds, in reality,are equity funds but fully hedged with derivative positionsin all stocks they hold. Their return opportunity comesfrom any arbitrage in cash and derivative market.

Such arbitrage is high in a volatile market and low in amarket that moves in a single direction. The key aspecthere is that these funds cannot generate equity returnsgiven the neutralising positions they hold in derivatives.

But it also means that they cannot decline like equities.Hence, as a segment, they can be expected to generatemoney market plus returns and come with a lower riskprofile – that is low risk of capital loss (technically thereshould be none).

These products have low exit load period, and have nodividend distribution tax (as they are considered as equity)and no capital gains tax if held more than one year. Thismakes them an attractive option for those who are keento keep their holding tax efficient.

Our picks in this segment would be ICICI Pru EquityArbitrage, IDFC Arbitrage and SBI ArbitrageOpportunities. These funds have delivered in the rangeof 9.4-9.8 per cent over the past one year.

Check our blog for a detailed coverage on arbitrage funds.But please make sure you understand this product beforeyou choose to invest in it.

Our next strategy for those mostly with a 2-3 year timeframe would be to invest in MIPs/debt-oriented funds.Now you might ask why as these funds too would have tobe held for three years to enjoy indexation benefits.

Our suggestion here is based on the fact that these fundscan generate debt-plus returns over 2-3 years. Therefore,even if you end up paying full taxes, their returns could bemarginally higher than FD returns. But these are strictlyfor those with higher risk appetite given the 20-25 per centequity component. Also, investors in the 10-20 per centtax bracket may prefer this option.

Please check our Select Funds (categorised as hybridfunds –low risk) for MIPs/debt-oriented funds.

But in all this remember the following:

• Always check post- tax returns when comparing withtraditional debt products. A back of the envelopecalculation would be that a 9 per cent FD would delivera return of 6.3 per cent post tax (with compounding ina cumulative option it would be about 6.6 per cent)over three years.

• All your debt funds earn returns every single day whilethe interest compounding is quarterly with deposits.That makes debt funds still superior to fixed depositsin terms of how hard they work for you.

Do talk to our advisors if you need help reviewing yourdebt funds portfolio.

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We can turn on the profitability today, we're not doing small numbers. It's about what's theright time. It is important to time your revenue flow; if you look at any Internet company inthe world everyone went for a long time frame for profitability whether it is Google, Facebookor Alibaba. We have limited bandwidth, and we want to use it to grow carefully at a fast pace.The ecosystem is evolving fast. 12 months ago, 5 per cent of our orders were mobile, todayit is 50 per cent. So we have to keep up, and our investors are confident we are going to beprofitable someday…We are not worried about competition. But I'd say domestic players arebetter positioned, as they are more local in their approach. International competition appearsto think that they have already won. If you talk to people like eBay, for example, they'll tell youthat they are leading and so on. I'd say none of them are making us uncomfortable now.

Sachin Bansal, co-founder, Flipkart.com

Viewpoint

source: www.rbi.org.in

Junk Bond Indigestion

The first half of 2014 sported record junk bondpurchases by investors thirsty for yield, no matter howabsurd the bond covenants or how risky the investment.Things may have changed in July. So while this could bethe start of a decline, it might also be nothing.

While it's certainly possible for an individual investor tohave a "finger on the sell button" or to "take chips offthe table" it is impossible for investors in aggregate to takeany chips off the table. Someone must own every bondever sold, 100% of the time, until the bonds mature orthey are called. Mathematically, 100% of the chips mustbe on the table 100% of the time.

Sentiment can and does change overnight (and pricingalong with it) whether shares of stocks, bonds, homes, orother assets trade or not.

Just like Chuck Prince, former Citigroup CEO in 2007,everyone believes they can dance while the music plays,and safely head for the door when the music stops.Investors are fooling themselves, for the third time. It'simpossible now, just as it was in 2007 and 2000, forinvestors to exit at the right time. All that remains is theanswer to the question: "How much more insane does itget before the junk bond bubble bursts?" When it doesburst, it's near-certain equities will go along for the ride.

Source: Mike Shedlock, a registered investment advisor in the U.S representingSitka Pacific and writer of the outstanding blog Global Economic Analysis.(http://globaleconomicanalysis.blogspot.in)

7 Suggestions…

…to choose the best health insurance plan. Medical costsand the complexity of diseases keep increasing by the day.A minor surgery can cost you anywhere between Rs30,000 and Rs 60,000, while a cardiac treatment can costyou Rs 5 lakh, depending on the city and hospital youchoose.

One way to handle this rising cost is by taking a medicalinsurance policy in your name. In India, there are morethan 25 companies offering various medical insurancepolicies. Most of these policies are, however, complex innature and one plan never fits all.

Hence, it is very important to note that you have tounderstand your individual needs in order to choose theright insurance plan.

1. Company….It is best to choose a general insurancecompany for your health insurance, rather than acompany that offers life and general insurance. This isbecause the cost for health insurance policies is higherwhen life insurance companies offer them.

Tip 1: For your health insurance policy, choose acompany that is purely into the general insurance arena.

2. Inclusions and Exclusions

Tip 2: Take a close look at the list of excluded diseasesbefore finalizing your health insurance plan.

You can read the full version of this article by S Sridharan ofFundsIndia at Market Place – FundsIndia, the official blog ofFundsIndia.com. Check it out on a regular basis athttp://www.fundsindia.com/blog.

Market Place FundsIndia Blog

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Blog Pick

Did you know?New fund offers during bullish phases of the equity markets have always drawn investors like a magnet. Go back22 years and you will find a new fund raking in money in a magnitude that subsequently became reality again at thepeak of the 2007 bull market. A bull market of maddening valuations developed on the back of massive rigging,led by the now infamous Harshad Mehta. Those were heady days of the first disinvestment in pubic sectorcompanies. Unit Trust of India launched a fund – Mastergain 1992 – to focus in this space. The fund garnered inexcess of Rs 4500 crore, more than three times the previous high for a new mutual fund mobilization and with 6.5million invetors. Soon after, markets crashed and Mastergain 1992 left in its wake a swathe of impoverished investors.

Be clear of liquidity needsYou may understand risk well, know how it correlateswith returns, think long term and form realisticexpectations of returns. All of it will easily come tonaught if you do not think and develop a goodunderstanding of your liquidity needs.

Liquidity needs could range from having enough cash tomeet current expenses at home to planning on meetingcosts of a marriage in the family. You need to get to astage of trying to pin down your liquidity needs to the lastrupee. As long as you have a reasonably clear idea of howmuch funds you, when and for what, that should be goodenough for starters.

If you are enticed by an investment offering or markettrends in any asset class, you are most likely to go aheadand invest whatever you can rustle up without paying heedto liquidity needs for a variety of purposes. Having soinvested, you would be forced to pull out yourinvestments when the need arises and if the market trendshave not moved in your favour, you could land in deeptrouble.

You could be short of your needs. You may be forced toborrow. Your overall investment plan will be in tatters. Atthe other end of the spectrum, many are ultraconservative and leave way more money (than what isneeded) languishing in savings bank accounts. So strikinga proper balance in estimating liquidity needs is a veryimportant but often neglected aspect of investing.

It is not on a one-time exercise. Neither should it becomea daily, monthly or quarterly exercise. You must regularlyreview your liquidity needs but if you do it too often, itcould consume you and lead you to sub-optimal decisions.Review your liquidity needs once in six months or a year,when there is major spending / investing event imminentand when there is a dramatic change in your income levelsfor any reason.

What you invest, for how long you invest and where youinvest – each will depend critically on your liquidity needs.Take guidance from a credible and informed advisor butonly if it is needed.

In his Q1 2012 quarterly report titled The LongestQuarterly Letter Ever, Jeremy Grantham of GMOoutlined advice for individual investors setting out ondangerous investment voyages. We present edited extracts:

# 1 Believe in history.

In investing Santayana is right: history repeats andrepeats, and forget it at your peril.

# 2 Neither a lender nor a borrower be

Leverage reduces the investor’s critical asset:patience. It encourages financial aggressiveness,recklessness, and greed… suddenly, it ruins you.

# 3 Don’t put all of your treasure in one boat

# 4 Be patient and focus on the long term

# 5 Recognize your advantages over the professionals

# 6 Try to contain natural optimism

# 7 On rare occasions, try hard to be brave

# 8 Resist the crowd; cherish numbers only

# 9 In the end it’s quite simple. Really

(GMO) estimates are not about nuances or PhDs.They are about ignoring the crowd, working outsimple ratios, and being patient.

# 10 This above all: To thine own self be true

To be at all effective investing as an individual, it isutterly imperative that you know your limitations aswell as your strengths and weaknesses.

Source: www.gmo.com

Invest With A Plan 5

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wisdom

The investor’s chief problem and even his worst enemy is likely to be himself.

Benjamin Graham

Index 1 Year 5 Years 10 Years

CNX Nifty 34.5 10.7 16.8

S&P BSE Sensex 33.9 10.6 17.5

CNX Mid Cap 57.7 12.7 17.9

CNX Small Cap 90.8 12.3 19.2

CNX 100 36.0 11.2 17.0

CNX 500 41.4 10.5 16.4

CNX Bank 52.4 15.1 20.7

CNX Energy 23.2 1.7 11.8

CNX FMCG 7.4 22.0 23.8

CNX Infrastructure 45.2 -3.2 11.9

CNX IT 32.3 18.9 16.3

MSCI Emerging Markets 10.6 17.8 13.4

MSCI World 13.3 21.7 10.4

Returns (in per cent as of end July 2014) for less than one year is on an absolutebasis and for more than one year on a compounded annual basis.

Equity Performance Snapshot

Must ReadKey lesson from Argentina

A century ago Argentina ranked as one of thewealthiest countries in world. Today it is a shadow ofits former self. A long string of policy errors explainthe long slide from riches to rags. Europe, likeArgentina 100 years ago, is facing enormouschallenges - as well as potential pitfalls - and themanagement of those challenges will define thewelfare path for many years to come. Unfortunately,the early signs are not good. Our political leaders,afraid to face public condemnation, have so far chosento ignore them. Unless serious action is taken, Europein particular (but the U.S. is not far behind) is at risk offalling into a very deep hole from which it may beextraordinarily difficult to dig itself out of writes NielsJensen in Absolute Return Letter. Make reading him atwww.arpinvstments.com a habit.

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Q. I have a few liquid and ultra short-term funds undertwo categories – one, dividend re-investment to takecare of my monthly STP to various equity funds andtwo, growth option for more than a year-to three-year investments. I may withdraw early based on myrequirements. Given the current tax changes shouldI switch from current growth liquid/ultra short-termfunds to arbitrage funds?

A. Your strategy would depend on your idea behindholding this money. If you are holding liquid ultrashort-term funds to transfer to equity, then you couldcontinue to have the STPs done with them. If youare simply holding them for one-year plus term, thenyou can look at arbitrage funds but remember theyare first hedging tools, only then tax efficient tools. Ifyou are reasonably sure you will hold the currentshort-term debt funds for three years, then youmight as well hold to debt funds. In future, if you donot have a very large sum and are looking at equitywith a very long-term view of say over 10 years (andshort-term falls won’t perturb you) then you couldsimply invest as lump sum in about 3 tranches inequity funds. You need not opt for an STP, given thetax disadvantage.

Recognition

Q & A

Infrastructure, iron and steel, textiles, mining and aviation services had significantly higher level ofstress and were identified as ‘stressed’ sectors in the banks’ lending portfolios. The share of thesefive to total advances of is 24 per cent.

Harun Rashid Khan, Deputy Governor, Reserve Bank of India

C R Chandrasekar, co-founder and CEO, and SrikanthMeenakshi, co-founder and COO, FundsIndia.com, withthe Award for National Online Advisory Services 2013-14

Technical View

InfosysThere is a steady contraction in the volatility. A look atthe weekly chart suggest that the stock is consolidating atRs 3,200-3,220 range, which is just a touch above the 20-period moving average of Rs 3,214. After thisconsolidation is over, the Infosys stock could see a sharpbreakout and could rally to the immediate resistance at Rs3,550. Investors may buy this stock with a stop loss at Rs3,140 and target Rs 3,550. A move above Rs 3,550 wouldtrigger a rally to the next target of Rs 3,760.

Karur Vysya BankAfter a sharp rally, the stock has been consolidating. TheBollinger Band width in the daily chart has beennarrowing, which is a sign of a contraction in volatilityand is happening near the key resistance level of Rs.490-500. Once this sideways correction / contraction is over,the stock is likely to resume its uptrend. Buy Karur Vysyawith a stop loss at Rs 440 and target of Rs 550. Buy atthe current levels as well as on a weakness for an initialtarget at Rs 550 and secondary target of Rs.575.

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/131985103Disclaimer:Mutual Fund Investments are subject to market risks. Please read the offer documents available at the website of each mutual fund carefully before investing. Pastperformance does not indicate or guarantee future performance. There is risk of capital loss and uncertainty of dividend distribution. Think FundsIndia, a monthly publicationof Wealth India Financial Services, is for information purposes only. Think FundsIndia is not and should not be construed as a prospectus, scheme information document oroffer document Information in this document has been obtained from sources that are credible and reliable.

Publisher: Wealth India Financial Services Editor: Srikanth Meenakshi

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NiftyNifty was confined to a relatively narrow trading range inJuly thought it scaled new highs. There was a perceptibledrop in momentum behind the upward move. Theoutlook remains positive from a long-term perspective.From a short-term perspective, there is a case for therecent range-bound action to continue. A strong movepast 7,900 is required to impart momentum. Until Niftymoves past the resistance at 7,850-7,900, there would bea case for a slide to the major support at 7,450-7,500. Asobserved last month, investors may use any weakness tobuy fundamentally sound large cap stocks from thebanking, infrastructure, metal and realty sectors.

B Krishna Kumar

1 Who is the CEO of the Bombay Stock Exchange?

2 Name the first mutual fund offer to raise in excess ofRs 1000 crore during the new fund offer period?

3 What is the usual benchmark for long-term bondfunds in India?

4 Who is the author of Financial Armageddon?

5 Name the person in the image? He isthe new Finance Secretary in theGovernment of India, occupying apost that is considered ‘first amongequals’ in the economic space.

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. Answers for July 2014Quiz: 1 Benchmark ETF 2 Kothari Pioneer IT Fund andKothari Pioneer FMCG Fund (both now go with Franklin prefixesinstead of Kothari Pioneer) 3 Benjamin Graham 4 John Bogle 5Janet Yellen, Head of U S Federal Reserve

Prize Winners: Jatin Nagpal, Nishanth Muralidhar and KS Santhosh are the winners of the July 2014 quiz.

FundsIndia Select FundsSelect Funds – Tax Saving Funds

ELSS (Equity Linked Savings Schemes) are equity-oriented funds with a lock-in of three years that qualifyfor deduction up to Rs 1.5 lakh under Section 80C of theIncome Tax Act in the year of investment.

At this juncture, we think it is worthwhile consideringfunds with a ‘growth’ approach, or those with higherweights to cyclical sectors than those loaded withdefensives. It is for this reason that you may see someexits by otherwise sound funds. This is a relative call wehave to take and is done to keep our list compact; not somuch because the funds that exited are underperformers.

Tax-savings funds - Moderate Risk

• Axis Long-Term Equity Fund

• CanRobeco Tax Saver

• Franklin India Taxshield

Tax-saving funds - High Risk

• ICICI Pru Tax Plan

• IDFC Tax Advantage

• Reliance Tax Saver

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

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. These funds have been selected in a completelyunbiased manner taking into account various factors-bothquantitative measures and qualitative assessments. Fundsshowcased are consistently top quartile performers intheir categories. Do note, however, note that pastperformance is not a guarantee of future results. Pleaseconsider your specific investment requirements beforedesigning a portfolio that suits your needs.

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Quiz

FundsIndia on Mobile

We will be launching the beta version of our AndroidMobile App shortly. Investors will be able to view detailsof their holdings, check out our tools and set up SIPsthrough this app. We intend to continually build on thisto offer a wide range of functionalities in the near future.

@fundsindia.com in July

To invest, call 0 7667 166 166

About us: FundsIndia.com is India's leading online investment platform. Here, investors get access to a wide range ofmutual funds, equities, corporate deposits, bonds, the National Pension System, loans, insurance, 24 Karat gold andvarious other investment products in one convenient online location. FundsIndia also offers a host of beneficial value-added services such as Alert SIP, Flexi SIP, trigger-based investing, and more, which further enrich an investor'sinvestment experience!

If your answer to any one of these questions is ‘Yes,’ then your credit card is taking control over you…. Answerthem and find out for yourself ! Read more at Market Place, the FundsIndia Blog athttp://www.fundsindia.com/blog