August 2014 Volume 07 08

Regress, Progress

At FundsIndia, we
have been spending
the past 2-3 weeks
answering questions
from investors regarding two
specific announcements made in
the budget.

The first is the change to debt

fund taxation. The definition of
long-term for debt mutual
funds has been increased from
one year to three years.
This affects investors who invest
in such funds for the medium
term, especially Fixed Maturity
Plans. We believe this is a
regressive move that is also too
broad in scope affecting more
than
just
debt
funds
(international funds and gold
funds are also impacted).
The second move is the long
pending increase in the Section
80C limit from Rs 1 lakh to Rs
1.5 lakh. This means that
investors can save up to at least
Rs 15,000 more on their tax out
go.

Along with a slight increase in

the tax slab, this will spell some
relief to the middle-class
taxpayers who have been reeling
under the impact of high
inflation in the past few years.
Happy investing!

Srikanth Meenakshi

Let us become informed investors

To be an informed investor and to invest in stuff you understand is wisdom

that has been handed down over several generations of great investors.
Irrespective of whether you are investing on your own or through avenues
such as mutual funds, it is increasingly become important for investor to read
and 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 read
about economy, investments and markets across asset classes. We are no
longer dependent on newspapers and television channels. Perhaps the best
thing to have happened over the past decade is the emergence of blogs as a
place for quality and realistic analysis of economic trends and what it means
for investment. A few global funds houses put out high quality analysis/

Yet overload of information and information sources is a major problem now

with the proliferation and sensalisaton of even routine happenings. You could
be easily overawed by all the stuff that is out there. Here goes our first-stop
of 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 at
http://globaleconomicanalysis.blogspot.in)
Investment Postcards from Cape Town (a blog that aggregates the best
writing on economy and markets (www.investmentpostcards.com)
Speeches by the top brass of Reserve Bank of India, easily the best quality
and 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 Hindu
Business Line (www.thehindubusinessline.com)
You may find a higher level in several places and in several of the suggestions
than 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 your
knowledge levels slowly and steadily improving. This would be a better use
of your time than listening and tracking noise and views of vested interests.
S Vaidya Nathan

FundsIndia
Winner CNBC TV18 UTI Award 2013-14
National Online Advisory Services
www.fundsindia.com

Taxation Changes & Debt Fund Strategy

Vidya Bala

Its 3 Years now

In a move that could disturb the tax efficient structure of a few of your debt mutual funds, the
Union Budget 2014 has proposed changes in the way your non-equity mutual fund gains will be
taxed. Besides, there is also a less significant change in terms of calculating dividend distribution
tax 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. For
transactions until then, the old laws will continue to apply. We shall discuss how you could deal
with the change in tax to ensure that you continue to earn returns superior to traditional options
such as fixed deposits.

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

Non-equity funds includes all categories of open-ended

and closed-end debt funds, debt-oriented funds such as
MIPs, FMPs, international funds, gold funds and other
hybrid funds and fund-of-funds.

Besides, currently the tax on debt mutual funds is 10 per

cent without indexation or 20 per cent with indexation.
The 10 per cent option is proposed to be withdrawn. You
will still have the 20 per cent with indexation option.
What are the implications?

If you have been investing in liquid or ultra short-term

funds with a less than one-year view, nothing changes
as the tax status of short-term capital gain remains.

For those investing in debt funds as part of your asset

allocation for the long term (over three years), no harm
is done, as you will continue to benefit from
indexation.

Similarly, for those buying gold funds or international

funds, we have maintained that these asset classes
require an at least three-year time frame, as they are
either part of your asset allocation or diversification
strategy. Hence, in our view, your strategy to these
categories of funds should remain neutral.

Then where would you have to tweak your strategy?

If you are an avid Fixed Maturity Plan (FMP) investor

especially in the 1-3 year bucket, then you have to only
keep your fingers crossed about an FMPs ability to deliver
returns superior to traditional debt options, stripped off
the tax advantage.

Of course, it is possible for FMPs to go for instruments

(perhaps with slightly higher credit risk) to still delver you
enhanced returns; but then if your purpose of investing
in FMPs would be to assume lower risk and generate FDbeating returns, then it may be a tough call to invest in
this segment.
Added to this, as things stand, had you invested in FMPs
believing that you will get double indexation benefit, the
proposal in its current form will deny you that. Hence,
FMPs in the less than three-year time frame run the risk
of going into oblivion.
How to aproach short-term debt funds?

Those of you who invested in short to medium term

open-ended debt funds with a 1-3 years view would need
to 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 debt
funds 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 of
whether your investment touches three years or not, you
can adopt a hold strategy. This holds true for investors

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

www.fundsindia.com

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

Having said that, once rates fall, it may be hard for this
category of funds to consistently beat traditional options
on a post-tax basis. Hence, we provide a few alternatives,
albeit strictly not like-to-like, if tax efficient structure and
generating 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 positions
in all stocks they hold. Their return opportunity comes
from any arbitrage in cash and derivative market.

Such arbitrage is high in a volatile market and low in a

market that moves in a single direction. The key aspect
here is that these funds cannot generate equity returns
given 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 generate
money market plus returns and come with a lower risk
profile that is low risk of capital loss (technically there
should be none).
These products have low exit load period, and have no
dividend distribution tax (as they are considered as equity)
and no capital gains tax if held more than one year. This
makes them an attractive option for those who are keen
to keep their holding tax efficient.

Our picks in this segment would be ICICI Pru Equity

Arbitrage, IDFC Arbitrage and SBI Arbitrage
Opportunities. These funds have delivered in the range
of 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 before
you choose to invest in it.

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

Our suggestion here is based on the fact that these funds

can generate debt-plus returns over 2-3 years. Therefore,
even if you end up paying full taxes, their returns could be
marginally higher than FD returns. But these are strictly
for those with higher risk appetite given the 20-25 per cent
equity component. Also, investors in the 10-20 per cent
tax bracket may prefer this option.
Please check our Select Funds (categorised as hybrid
funds low risk) for MIPs/debt-oriented funds.
But in all this remember the following:

Always check post- tax returns when comparing with

traditional debt products. A back of the envelope
calculation would be that a 9 per cent FD would deliver
a return of 6.3 per cent post tax (with compounding in
a cumulative option it would be about 6.6 per cent)
over three years.
All your debt funds earn returns every single day while
the interest compounding is quarterly with deposits.
That makes debt funds still superior to fixed deposits
in terms of how hard they work for you.
Do talk to our advisors if you need help reviewing your
debt funds portfolio.

We can turn on the profitability today, we're not doing small numbers. It's about what's the
right time. It is important to time your revenue flow; if you look at any Internet company in
the world everyone went for a long time frame for profitability whether it is Google, Facebook
or 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, today
it is 50 per cent. So we have to keep up, and our investors are confident we are going to be
profitable somedayWe are not worried about competition. But I'd say domestic players are
better positioned, as they are more local in their approach. International competition appears
to think that they have already won. If you talk to people like eBay, for example, they'll tell you
that 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
www.fundsindia.com

Market Place

7 Suggestions

FundsIndia Blog

to choose the best health insurance plan. Medical costs

and the complexity of diseases keep increasing by the day.
A minor surgery can cost you anywhere between Rs
30,000 and Rs 60,000, while a cardiac treatment can cost
you Rs 5 lakh, depending on the city and hospital you
choose.

One way to handle this rising cost is by taking a medical

insurance policy in your name. In India, there are more
than 25 companies offering various medical insurance
policies. Most of these policies are, however, complex in
nature and one plan never fits all.
Hence, it is very important to note that you have to
understand your individual needs in order to choose the
right insurance plan.

1. Company.It is best to choose a general insurance

company for your health insurance, rather than a
company that offers life and general insurance. This is
because the cost for health insurance policies is higher
when life insurance companies offer them.
Tip 1: For your health insurance policy, choose a
company that is purely into the general insurance arena.
2. Inclusions and Exclusions

Tip 2: Take a close look at the list of excluded diseases

before finalizing your health insurance plan.

You can read the full version of this article by S Sridharan of

FundsIndia at Market Place FundsIndia, the official blog of
FundsIndia.com. Check it out on a regular basis at
http://www.fundsindia.com/blog.

Did you know?

Blog Pick
Junk Bond Indigestion

The first half of 2014 sported record junk bond

purchases by investors thirsty for yield, no matter how
absurd the bond covenants or how risky the investment.
Things may have changed in July. So while this could be
the start of a decline, it might also be nothing.

While it's certainly possible for an individual investor to

have a "finger on the sell button" or to "take chips off
the table" it is impossible for investors in aggregate to take
any chips off the table. Someone must own every bond
ever sold, 100% of the time, until the bonds mature or
they are called. Mathematically, 100% of the chips must
be on the table 100% of the time.
Sentiment can and does change overnight (and pricing
along with it) whether shares of stocks, bonds, homes, or
other 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's
impossible now, just as it was in 2007 and 2000, for
investors to exit at the right time. All that remains is the
answer to the question: "How much more insane does it
get before the junk bond bubble bursts?" When it does
burst, it's near-certain equities will go along for the ride.

Source: Mike Shedlock, a registered investment advisor in the U.S representing

Sitka Pacific and writer of the outstanding blog Global Economic Analysis.
(http://globaleconomicanalysis.blogspot.in)

New fund offers during bullish phases of the equity markets have always drawn investors like a magnet. Go back
22 years and you will find a new fund raking in money in a magnitude that subsequently became reality again at the
peak 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 sector
companies. Unit Trust of India launched a fund Mastergain 1992 to focus in this space. The fund garnered in
excess of Rs 4500 crore, more than three times the previous high for a new mutual fund mobilization and with 6.5
million invetors. Soon after, markets crashed and Mastergain 1992 left in its wake a swathe of impoverished investors.

www.fundsindia.com

Invest With A Plan

Be clear of liquidity needs

5
wisdom

You may understand risk well, know how it correlates

with returns, think long term and form realistic
expectations of returns. All of it will easily come to
naught if you do not think and develop a good
understanding of your liquidity needs.

Liquidity needs could range from having enough cash to

meet current expenses at home to planning on meeting
costs of a marriage in the family. You need to get to a
stage of trying to pin down your liquidity needs to the last
rupee. As long as you have a reasonably clear idea of how
much funds you, when and for what, that should be good
enough for starters.
If you are enticed by an investment offering or market
trends in any asset class, you are most likely to go ahead
and invest whatever you can rustle up without paying heed
to liquidity needs for a variety of purposes. Having so
invested, you would be forced to pull out your
investments when the need arises and if the market trends
have not moved in your favour, you could land in deep
trouble.

You could be short of your needs. You may be forced to

borrow. Your overall investment plan will be in tatters. At
the other end of the spectrum, many are ultra
conservative and leave way more money (than what is
needed) languishing in savings bank accounts. So striking
a proper balance in estimating liquidity needs is a very
important but often neglected aspect of investing.

It is not on a one-time exercise. Neither should it become

a daily, monthly or quarterly exercise. You must regularly
review your liquidity needs but if you do it too often, it
could 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 imminent
and when there is a dramatic change in your income levels
for any reason.
What you invest, for how long you invest and where you
invest each will depend critically on your liquidity needs.
Take guidance from a credible and informed advisor but
only if it is needed.

In his Q1 2012 quarterly report titled The Longest

Quarterly Letter Ever, Jeremy Grantham of GMO
outlined advice for individual investors setting out on
dangerous investment voyages. We present edited extracts:
#

1 Believe in history.

In investing Santayana is right: history repeats and

repeats, and forget it at your peril.

# 2 Neither a lender nor a borrower be

Leverage reduces the investors critical asset:

patience. It encourages financial aggressiveness,
recklessness, and greed suddenly, it ruins you.

# 3 Dont 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 its quite simple. Really

(GMO) estimates are not about nuances or PhDs.

They are about ignoring the crowd, working out
simple ratios, and being patient.

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

To be at all effective investing as an individual, it is

utterly imperative that you know your limitations as
well as your strengths and weaknesses.

Source: www.gmo.com

The investors chief problem and even his worst enemy is likely to be himself.

Benjamin Graham

www.fundsindia.com

Recognition

Equity Performance Snapshot

Index

CNX Nifty

S&P BSE Sensex

CNX Mid Cap

CNX Small Cap

CNX 100

C R Chandrasekar, co-founder and CEO, and Srikanth

Meenakshi, co-founder and COO, FundsIndia.com, with
the Award for National Online Advisory Services 2013-14

Q&A

Q. I have a few liquid and ultra short-term funds under

two categories one, dividend re-investment to take
care of my monthly STP to various equity funds and
two, growth option for more than a year-to threeyear investments. I may withdraw early based on my
requirements. Given the current tax changes should
I switch from current growth liquid/ultra short-term
funds to arbitrage funds?

A. Your strategy would depend on your idea behind

holding this money. If you are holding liquid ultra
short-term funds to transfer to equity, then you could
continue to have the STPs done with them. If you
are simply holding them for one-year plus term, then
you can look at arbitrage funds but remember they
are first hedging tools, only then tax efficient tools. If
you are reasonably sure you will hold the current
short-term debt funds for three years, then you
might as well hold to debt funds. In future, if you do
not have a very large sum and are looking at equity
with a very long-term view of say over 10 years (and
short-term falls wont perturb you) then you could
simply invest as lump sum in about 3 tranches in
equity funds. You need not opt for an STP, given the
tax disadvantage.

1 Year

5 Years

10 Years

33.9

10.6

17.5

34.5

57.7

90.8

36.0

10.7

12.7

12.3

11.2

16.8
17.9

19.2

17.0

CNX 500

41.4

10.5

16.4

CNX Energy

23.2

1.7

11.8

CNX Bank

CNX FMCG

CNX Infrastructure

CNX IT

52.4
7.4

22.0

32.3

18.9

13.3

21.7

45.2

MSCI Emerging Markets 10.6

MSCI World

15.1

20.7

23.8

-3.2

11.9

17.8

13.4

16.3
10.4

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

Key lesson from Argentina

Must Read

A century ago Argentina ranked as one of the

wealthiest countries in world. Today it is a shadow of
its former self. A long string of policy errors explain
the long slide from riches to rags. Europe, like
Argentina 100 years ago, is facing enormous
challenges - as well as potential pitfalls - and the
management of those challenges will define the
welfare path for many years to come. Unfortunately,
the early signs are not good. Our political leaders,
afraid to face public condemnation, have so far chosen
to ignore them. Unless serious action is taken, Europe
in particular (but the U.S. is not far behind) is at risk of
falling into a very deep hole from which it may be
extraordinarily difficult to dig itself out of writes Niels
Jensen in Absolute Return Letter. Make reading him at
www.arpinvstments.com a habit.

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

Harun Rashid Khan, Deputy Governor, Reserve Bank of India

www.fundsindia.com

Technical View

Karur Vysya Bank

After a sharp rally, the stock has been consolidating. The

Bollinger Band width in the daily chart has been
narrowing, which is a sign of a contraction in volatility
and is happening near the key resistance level of Rs.490500. Once this sideways correction / contraction is over,
the stock is likely to resume its uptrend. Buy Karur Vysya
with a stop loss at Rs 440 and target of Rs 550. Buy at
the current levels as well as on a weakness for an initial
target at Rs 550 and secondary target of Rs.575.

Nifty

Nifty was confined to a relatively narrow trading range in

July thought it scaled new highs. There was a perceptible
drop in momentum behind the upward move. The
outlook remains positive from a long-term perspective.
From a short-term perspective, there is a case for the
recent range-bound action to continue. A strong move
past 7,900 is required to impart momentum. Until Nifty
moves past the resistance at 7,850-7,900, there would be
a case for a slide to the major support at 7,450-7,500. As
observed last month, investors may use any weakness to
buy fundamentally sound large cap stocks from the
banking, infrastructure, metal and realty sectors.

Infosys

There is a steady contraction in the volatility. A look at

the weekly chart suggest that the stock is consolidating at
Rs 3,200-3,220 range, which is just a touch above the 20period moving average of Rs 3,214.
After this
consolidation is over, the Infosys stock could see a sharp
breakout and could rally to the immediate resistance at Rs
3,550. Investors may buy this stock with a stop loss at Rs
3,140 and target Rs 3,550. A move above Rs 3,550 would
trigger a rally to the next target of Rs 3,760.

B Krishna Kumar

This column is targeted at investors who are registered customers with FundsIndia for trading and investing in equity as well as prospective
investors who wish to open an equity account with FundsIndia. B Krishna Kumar hosts a weekly webinar that discusses the market outlook
for the following week. You can follow him on Livestream. If you wish to receive reminders for his webinars, go to
https://www4.gotomeeting.com/register/131985103

Disclaimer: Mutual Fund Investments are subject to market risks. Please read the offer documents available at the website of each mutual fund carefully before 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, scheme information 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

FundsIndia Select Funds

Select Funds Tax Saving Funds

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

At this juncture, we think it is worthwhile considering

funds with a growth approach, or those with higher
weights to cyclical sectors than those loaded with
defensives. It is for this reason that you may see some
exits by otherwise sound funds. This is a relative call we
have to take and is done to keep our list compact; not so
much 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 of

mutual funds that we think are most investment worthy
for a regular investor. We review this list on a quarterly
basis. These funds have been selected in a completely
unbiased manner taking into account various factors-both
quantitative measures and qualitative assessments. Funds
showcased are consistently top quartile performers in
their categories. Do note, however, note that past
performance is not a guarantee of future results. Please
consider your specific investment requirements before
designing a portfolio that suits your needs.

To invest, call 0 7667 166 166

Quiz
1 Who is the CEO of the Bombay Stock Exchange?

2 Name the first mutual fund offer to raise in excess of

Rs 1000 crore during the new fund offer period?

3 What is the usual benchmark for long-term bond

funds in India?
4 Who is the author of Financial Armageddon?
5 Name the person in the image? He is
the new Finance Secretary in the
Government of India, occupying a
post that is considered first among
equals in the economic space.

Answers can be emailed to quiz@fundsindia.com. The

first three to send in all correct answers will be entitled to
a must-have book on investment. Answers for July 2014
Quiz: 1 Benchmark ETF 2 Kothari Pioneer IT Fund and
Kothari Pioneer FMCG Fund (both now go with Franklin prefixes
instead of Kothari Pioneer) 3 Benjamin Graham 4 John Bogle 5
Janet Yellen, Head of U S Federal Reserve
Prize Winners: Jatin Nagpal, Nishanth Muralidhar and K
S Santhosh are the winners of the July 2014 quiz.

@fundsindia.com in July

FundsIndia on Mobile

We will be launching the beta version of our Android

Mobile App shortly. Investors will be able to view details
of their holdings, check out our tools and set up SIPs
through this app. We intend to continually build on this
to offer a wide range of functionalities in the near future.

About us: FundsIndia.com is India's leading online investment platform. Here, investors get access to a wide range of
mutual funds, equities, corporate deposits, bonds, the National Pension System, loans, insurance, 24 Karat gold and
various other investment products in one convenient online location. FundsIndia also offers a host of beneficial valueadded services such as Alert SIP, Flexi SIP, trigger-based investing, and more, which further enrich an investor's
investment experience!
If your answer to any one of these questions is Yes, then your credit card is taking control over you. Answer
them and find out for yourself! Read more at Market Place, the FundsIndia Blog at
http://www.fundsindia.com/blog
www.fundsindia.com