When the unexpected happens…Not many would have expected Donald J. Trump to become the Presidentelect of the U.S. Thanks to all the polling companies and the models andforecasts built around them, and the media that vociferously predicted whatwas about to happen. At the end of it all, it was the ‘little people’ who madethe decision. While that was unexpected, what really shook the nation wasthe withdrawal of Rs 500 and Rs 1,000 rupee notes overnight in India - ablow to black money economy. Quietly planned and executed over monthswith no media leaks and there it was, the news taking the country by storm.

A simple lesson for you as investors from all this is this - expect theunexpected. Do not take large bets based on forecasts and be prepared forsuch black swan events.

Expect the unexpected: An unexpected event – a black swan – is alwayspossible. Since you cannot avoid it, the best you can do is to build yourportfolio in such a way that these risks and hits can be handled. Diversifyingyour investments by doing proper asset allocation will reduce the impact ofsuch events and ensure that your portfolio moves back to normal after awhile. Doing an annual rebalancing will automatically ensure you reduce yourweight in the asset class you’re overweight on and deploy it in yourunderweight asset class.

Make the best of the unexpected: A large fall in the market, like the onethat happened on early Wednesday when Trump’s lead became clear, wasclearly not expected as the markets hardly expected a Trump win. If youhad panicked and sold, it would not have been a great decision as the marketsrecovered fast. Instead, you should look for opportunities to make the bestof such markets; like deploying additional sums in good funds that you hold.

Take forecasts with a pinch of salt: Forecasts are not cast in stone andsometimes they are simply gone with the wind! So instead of poring throughmedia reports and trying to time the market or exit the market, simply keepyour investments systematic and keep them diversified across asset classes.Your fund managers can worry about forecasts and getting them right.

Above all, do not try to go with the general market euphoria. The herdmentality often leaves you in deep waters.

Vidya BalaHead – Mutual Fund Research

FundsIndia.com

November 2016 � Volume 06 � 11

And they all fall downI recently read anarticle in the Mintnewspaper thatconfirmed what has

been widely accepted informally bybuyers around the country - thereal estate market is facing anunprecedented downturn. Pricesare no longer holding steady orflat, but are declining.

The higher-than-market circle ratesare causing a stagnation in themarket. Governments around thenational capital region (NCR) arenow trying to address this bylowering them. In fact, inUttarakhand, circle rates havealready been cut in the Dehradunarea.

This shows that we are in a newnormal when it comes to the realestate market, and dogmas such as‘home prices never go down’ don’thold good anymore. A house is nolonger a safe or lucrativeinvestment option, if it ever was.

This, along with flat gold pricesand declining interest rates, leaveslittle choice to investors in termsof where to invest today.

If you are investing for the longterm, there is no bad time to investin equity funds. But now, given theoptions out there, there might notbe a better choice now either.

Happy investing!

Srikanth MeenakshiCo-Founder & COOFundsIndia.com

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*Calculated at the highest tax slab rate applicable for FY17 on investments u/s 80C of the Income Tax Act, 1961.

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What has mid-cap fund managers worried?

This, when market mavens moan about the lack ofpenetration of mutual fund investments in the Indianmarket, with mutual funds holding a dismal 4.5% shareof the equity market; and when every expert championsmutual funds as the best product for retail investors. Whenevery fund house, as a business objective, aims for higherAUM, and when investors are willingly investing to buildwealth, shouldn’t it be a good thing for everyoneconcerned? Why should fund houses place restrictions onincoming money then?

The answer lies in the impact mutual funds have on thestocks they hold, and the manner in which inflows come.

Stocks rocket

First, some background. The funds that are worried aboutinflows are all concentrated in mid-cap and small-capfunds.

The BSE 100, the representative index for large-capstocks, besides bellwethers Sensex and Nifty had regainedtheir 2008 peak by the end of 2013. The relevant indicesfor mid-caps and small-caps, the BSE Midcap and BSESmallcap index were 32% and 51% below their 2008peaks. In the euphoria generated by the elections in 2014,the entire market took a turn upwards.

Three factors worked in favour of mid-caps andsmall-caps more than large-caps – one, they were cheap,having been beaten down so hard, two, the space sportedseveral niche companies that weren’t present in large-caps,and three, in the event of a recovery, smaller companieswould grow faster than the larger ones. Lower interestrates would also benefit smaller sized companies morethan larger ones.

From late 2013, mid-caps and small-caps marched ever

higher, shrugging off the concerns over global upheavalsand the slow pace of earnings and revenue recovery inour own markets. Ironically though, the same factorsstymied large-cap stocks from mid-2015 until March 2016and again over the past month. One reason for this is thatFPIs - large investors in the large-cap space - taking thesluggish earnings cues more seriously. The two BSEindices doubled since the close of 2013; the BSE Midcapindex is now 30% above its 2008 peak and the BSESmallcap index just crossed that high. The average gainof the top ten stocks of the two indices’ stocks is 917%.Four in ten stocks in this universe doubled. The BSE 100’sgain is much tamer, at 37%.

How does that relate to funds? When investors put inmoney, their natural tendency is to choose funds that areat the top of the charts at that point. 2014 and onwardswere good years where retail investors stepped up theirinvestments in equity mutual funds. This combinationresulted in money flowing towards mid-and-small capfunds, especially during mid 2015 to 2016 when large-capfunds corrected in the wake of global uncertainty.

Consider the change in fund AUM compared to its NAV,a measure used to determine if a fund has grown morebecause investors are pumping in money than generatingreturns. Almost all midcap funds owe a good chunk oftheir AUM growth to inflows rather than portfolio gains.Mirae Asset Emerging Bluechip, for example, grew fromRs 952 crore last September to 2,641 crore this September– a 177% growth - even as its NAV rose 24% in the sameperiod.

SBI MagnumMidcap, DSP BRMicrocap, Canara RobecoEmerging Equities, BNP Paribas Midcap all say similarstories. This doesn’t mean that these funds aren’t

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Bhavana Acharya

Last week, the popular Mirae Asset Emerging Bluechip, a mid-cap equity fund, stoppedaccepting lump-sum investments. It also closed its doors to SIP investments worth more thanRs 25,000. A few months before this, DSP BlackRock Micro Cap Fund – another investordarling – placed restrictions on lump-sum investments. SBI Magnum Small and Midcap Fundand IDFC Premier Equity have similar inflow restrictions.

“India is at a very seminal point in the use of fintech in financial services because many things arecoming together.”- Nandan Nilekani, former Chairman, UIDAI

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performing well – they are. It just means that they’requickly getting a lot of money. Money needs to beinvested. This is where the first reason about fundmanager wariness comes in.

Finding stocks is getting harder. Fund managers in theinitial part of the rally had a large, untapped, cheapuniverse of stocks. That is not so today. Many of thequality mid-cap and small-cap stocks have already beendiscovered. Mid-cap and small-cap stocks are gettingincreasingly expensive, pricing in strong earnings andrevenue growth. The BSE Mid-cap index’s price-earningsmultiple is 29 times while the BSE Smallcap index is at 75times trailing 12-month earnings. A third of the stocks inthese two indices have seen their PE multiples more thandouble.

Fund managers would thus have to compromise either onquality or valuations or both. Besides, the mid-cap andsmall-cap space is rife with all manners of companies andlittle available information to work with. Every newinvestment that a mid or small-cap fund receives has tobe deployed - holding it in cash will hit returns directly,compromising the existing investors of the fund. Withstock choices narrowing, some fund managers wouldrather see fund inflows more controlled so that they haveample time to slowly buy into and identify new stocks.

Funds impact stock prices. That’s the second reasoncausing jitters. In mid-cap and small-cap stocks, fundsbuying or selling influences stock prices. These stocks donot have much volumes being traded as they are smaller.They have higher promoter holding, leaving fewer sharesin public hands. The BSE 100 index has 53% of its marketcap held by the public (FPIs, MFs, insurance companies,retail investors, etc) or free-float market cap. In contrast,the BSEMidcap and Small cap indices have 43% and 45%as free-float market cap. A higher free-float market capallows higher trading. Average volume traded for BSE 100stocks is around double that of the BSE Midcap or BSESmallcap stocks.

A fund, as it buys and sells in crores, becomes a hugeplayer in small stocks; MF buying can quickly send a pricehigher as there’s more demand for stocks and a smallsupply. The reverse is more alarming – a fund trying tosell a stock can see difficulty in finding counterparties and

this pushes prices lower. Selling at lower and lower priceshits fund returns. Consider SRF, among the top holdingsin terms of value for mid-cap funds. The daily volumestraded numbers in a few thousands. Mutual funds togetherhold 39 lakh shares.

If these funds try to liquidate their holdings in the share,they won’t be able to do it easily or quickly. Further, insmall-sized stocks, institutional holding is low. Its theseinstitutions that can match fund volume requirements. Inthe BSE 100 index, 34% is held by institutions (see table).The BSE Midcap index is much lower at a 25%institutional holding and the BSE Smallcap index is evenlower at 19%.

Marketcap holding

Index Mutual funds FPI Insurance

BSE Midcap 4.6% 18.0% 2.8%

BSE Smallcap 6.2% 11.0% 1.4%

BSE 100 4.2% 23.0% 6.3%

As of September 2016

There are mid-cap funds that are still managing the show.This does not mean it is easier for them than othermid-cap funds. They manage, either because their assetsize or inflow is not grossly out of proportion yet, or theyhave moved to slightly larger stocks that provide liquidity.Funds such as HDFC Mid Cap Opportunities andFranklin India Prima are cases in point.

Amarket correction makes the liquidity issue worse.Remember that mid-cap and small-cap stocks can crashjust as much as they soar – it took them five years to

“One of the biggest barriers we found in behavioural science that keeps us from making goodfinancial decisions is that we discount the future.”- Sarah Newcomb, Behavioural Economist, Morningstar Inc,

1015202530354045

1-Jan-13 1-Jan-14 1-Jan-15 1-Jan-16

NiftyNifty Midcap 100

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“I think it’s a great time to be in the equity market. People are still looking at US results, corporateresults, by the end of the year, the UK should have a plan in place for Brexit.”- Kamlesh Rao, CEO, Kotak Securities

recover from their 2008 crash. Mid-cap and small-capstocks may well be ripe for a correction as the valuationgap between the Nifty Midcap 100 and the Nifty 100 iswidening.

If there is any sort of correction here, it can be steep andthis can cause investors to race for the exit. To meet theseredemption demands, funds may have to sell their stocks.Such liquidation can be hard during a correction to beginwith, more so when there is little liquidity. The impact onstock prices and returns can be exacerbated.

In a nutshell, funds are finding it increasingly hard toidentify and invest in stocks that are fundamentally sound,reasonably valued, and reasonably liquid. In such asituation, fund manager tries to protect the returns ofexisting investors and still deliver decent performance bylimiting the amount of money they take into the fund.

Bhavana AcharyaAnalyst – Mutual Fund Research

FundsIndia.com

Q. With regard to bond funds that follow a durationstrategy, if one has indeed ‘enjoyed the ride’ so to speak,does it make sense to take money off the table now? If wedo, what funds can one consider to deploy the proceedsof such exit?

A. It is not yet time to take the money off the table. Italso depends on the type of fund you hold. If you holdpure gilt funds, then in another 6 months you might haveto take a call on whether to book your profits – gilt fundsare time-based calls. But if you hold dynamic bond funds,you do not have to take this call as the fund will itself doso as part of its strategy. As to where you would deployproceeds from profit booking, it would depend on yourtime frame and requirement rather than the marketconditions.

Q. I have some money invested in equity and have reachedmy target for a specific goal which is six months away. DoI move the entire amount into debt via STP or do it slowlyover the period of six months so that any further upsidein equity can be realized?

A. Since your goal is just six months away, you can movethe entire sum to debt at one go. If your goal is a littlefurther away and thus you have a longer period, then anSTP will help you capture upside of equity whileminimising the downside possibility.

Vidya BalaHead - Mutual Fund Research

FundsIndia.com

Q & A

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Ashok Leyland LtdThis stock declined sharply from Rs 112 to Rs 75 in thepast six months. It recently bounced back from the low ofRs. 75 to test a high of Rs. 92. It needs to trade above Rs.84 to trigger a strong upside momentum with amedium-term target of Rs. 110. Resistance is at Rs. 94and Rs. 100. Support is placed at Rs. 84 and Rs. 78. Stoploss is placed at Rs. 76.

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.

After consolidating above 8,500 over the last threemonths the Nifty has finally closed below this level. Inour previous report, we had mentioned that a close below8,480 will lead it to test 8,300, and the index made a lowof 8,400 on November 4. We are taking a cautiousapproach at the current level. On the flip side, a closeabove 8,550 can lead it to continue its rally towards theimmediate short-term target of 8,850. It’s currentlytrading above the latest 200-day simple moving average(SMA) at 8,100. Major resistance is at 8,720 and 8,850.Support is placed at 8,300 and 8,150.

Perumal RajaTechnical Analyst - Equity Research Desk

FundsIndia.com

ZEE Entertainment LtdThis stock has strong support around Rs. 490. We expectit to bounce back from the current market price.Resistance is placed at Rs. 530 and Rs. 570. Currently it istrading above the 100-day SMA of Rs. 499. There isstrong support at Rs. 475. We recommend buying ZeeEntertainment for a medium-term target of Rs. 610. Stoploss is placed at Rs. 445.

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

“I think one of the reasons we’ve succeeded is because we’ve created a tremendous amount ofvalue for customers and democratised technology – made it more available, more affordable.”- Michael Dell, Chairman and CEO, Dell Technologies

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1. Who is the newly appointed chairman of the CentralBoard of Direct Taxes (CBDT)?

2. Who was appointed as a Whole-Time Member(WTM) of the Securities and Exchange Board ofIndia (SEBI) in August 2016?

3. The Commonwealth Finance Ministers Meeting 2016was held in which city?

4. What is India’s growth forecast for FY17, as perIMF’s recently released World Economic Outlook(WEO) report?

5. The 2016 World Economic Forum (WEF) IndiaEconomic Summit was held in which Indian city?

Please click here to submit your answers.

Answers for October 2016 Investment Quiz:

1. Anuradha Rao 2. ICICI Bank 3. Bombay StockExchange (BSE) 4. Bombay Stock Exchange (BSE) 5.Unified Payment Interface (UPI)

The winner of the October 2016 Investment Quiz isArijit Bhattacharyya.

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FundsIndia Select Funds Investment QuizEquity Funds - Moderate Risk

These funds tend to contain volatility better. They seek togenerate inflation-beating returns, and limit downside risks.The recommended holding period is five years.

Axis Equity ICICI Pru Focused BlueChipBirla SL Frontline Equity Invesco India GrowthBNP Paribas Equity Kotak Select FocusFranklin India Bluechip Mirae Asset India

Opportunities

Franklin India Prima Plus SBI BlueChipInvestco India Dynamic UTI EquityEquity 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.