Should you invest in gilt funds?. Monthly recommendations & Negatives

1. T h e m o n t h l y n e w s l e t t e r f r o m F u n d s I n d i a
Is it the turn of equities?
Srikanth Meenakshi
Greetings from FundsIndia!
As was expected, the Reserve Bank of India has cut the interest rate (repo rate) by
0.25% in its quarterly monetary policy review. More cuts of similar quantum can
be expected in the following quarters as well. Both the actual cut as well as the ex-pectation
of further cuts will have a negative impact on the deposit rates that banks
offer to investors.
The month of April was also an interesting month for gold – the price of the metal fell dramatically over
a few days before recovering moderately. However, even after the recovery, the price of gold is off by
more than 8% from the year’s high.
Seen together, these two facts will seem to imply that investor attention should naturally turn towards
equity market investing. Will it happen? After all, the market valuation, as indicated by the Price-to-
Earnings ratio of the Sensex index, is at a historically moderate level (trailing 17.46 times as we write
this). The other side of the argument is that there is a lot of pessimism in the market presently, mainly
around the issues of stasis in governance and erosion of investor confidence due to financial scams.
Whether or not a bull market will be able to power through these negatives would be interesting to see.
At FundsIndia, we don’t subscribe to making asset allocation calls based on market conditions for long-term
investing. However, indications are that the next 9-12 months looks to be a promising period for
the equity markets in the country.
Happy Investing!
Volume 5, Issue 05
08—May—2013
Inside this issue:
I s i t the turn of
equi t ies?
—Sr ikanth Meenak-
1
The month ahead -
Equi ty recommen-dat
ions - B.Kr i shna
Kumar
2
Should you invest
in gi l t funds?
—Vidya Bala
3
Financial Planning
Educat ion Ser ies
6
Opt imi st s, Pessi -
mist s and Mood
Swings
—Dhi rendra Kumar
7
P.S: At FundsIndia, over the course of the last week of April, we completed a significant technology upgrade to our infrastructure. We are
hopeful that this will mitigate some of the performance issues you may have been encountering. Please let us know if you face any issues
by writing to contact@fundsindia.com
Thanks!
*Please note: Comprehensive financial planning is a fee based service
Disclaimer: Mutual Fund Investments are subject to market risks. Please read all scheme related documents carefully before investing.

2. Volume 5, Issue 05 Page 2
The month ahead - Equity recommendations
B. Krishna Kumar
The month of April turned to be an eventful one for the stock and commodity markets. The price of crude oil and gold took a knock in the
international markets last month. This has had a positive rub-off on the domestic stock market sentiment. Expectations are that this devel-opment
could ease the economic strain, especially on the current account deficit front.
The headline inflation too has displayed signs of easing, which is likely to prop stock market sentiment. It however remains to be seen if
the interest cycle takes a downward turn.
The cut in petrol price announced a couple of days ago would also play a part in pulling down the headline inflation. The cause of concern,
however, is the consumer price inflation which is still at lofty levels.
In this context, the focus would shift to the progress of the monsoon in the western part of the country. A healthy bout of rainfall would do
a world of good to check the spiraling price of food articles.
A look at the automobile sales number for the month of April 2013 has not been encouraging either. The corporate earnings season is under-way
and the flow of results till date has been mixed, but broadly, not disappointing.
Technically, the short-term outlook for the Nifty is positive after the recent breakout past the resistance level at 5,970. We however expect
a counter-trend fall before the index resumes its uptrend.
The immediate support for the index is at 5,800-
5,850 range. Any signs of stability at these levels
would present an opportunity to enhance equity
exposures..
This month, we cover the outlook for Hindustan
Unilever and United Spirits. While both the stock
have appreciated sharply in the past few weeks,
we are positive on United Spirits and sense lim-ited
upside potential for Hindustan Unilever.
Hindustan Unilever has been in the news this week after the company announced a better-than-expected quarterly performance. This was
followed by an announcement that the company’s parent – Unilever PLC is coming out with a voluntary open offer to enhance the stake in
the Indian arm.
The open offer has been priced at Rs.600 per share, which basically would act as a ceiling for Hindustan Unilever. From the monthly chart
of the stock featured below, it is apparent that the stock has bounced off the middle blue line and has managed to hit the upper line, which
is a trend barrier.
Unless the stock manages to breakout above the
upper blue line, the chances of a significant upside
potential is slim. As mentioned earlier, the open
offer price of Rs.600 would also act as a impedi-ment
to any significant rally.
Investors may therefore pare exposures in Hindu-stan
Unilever. Any significant weakness from the
current levels may be used to buy the stock. At the
prevailing market price, there is little scope for any
significant appreciation.
Disclaimer: Mutual Fund Investments are subject to market risks. Please read all scheme related documents carefully before investing.

3. Volume 5, Issue 05 Page 3
United Spirits on the other hand appears to have significant upside potential from the prevailing levels.
Investors may adopt an SIP kind of approach and gradually accumulate shares in United Spirits. We expect the stock to rally to the immedi-ate
target of Rs.2,900. The stop loss for United Spirits may be placed at Rs.1,900.
Mr. B. Krishna Kumar also hosts a weekly webinar that discusses the mar-ket
outlook for the following week.
You can register for the webinar by clicking here:
https://www4.gotomeeting.com/register/927617871
Should you invest in gilt funds?
Vidya Bala — Head Mutual Fund Research
Another repo rate cut of 25 basis points by the RBI on Friday and you begin to wonder if the rate cuts can give you a cool ride in gilt funds.
Many of you have evinced interest in investing in long-term gilt funds in recent months and have written to us. Returns as high as 16% show-cased
by top funds in this category in the last one year, together with a downward interest rate movement (which typically triggers a bond
price rally), does coax you to conclude that this class of funds can return well.
Tactical play
But we have maintained that gilt funds are high risk and are meant only as a tactical play for investors who can track them and book prof-its
at the right time. We have, instead, more actively advocated short-term debt funds/income funds for medium to long-term
portfolios.
Read on to know why we say that. I am not going to deal with complicated yield curve theories. Let us simply look at past performances to
make out how these funds behave.
Before we move to returns, a quick recap on what gilt funds are. Gilt funds seek to invest in government securities (gilts). While these can
be short-term securities, a good number are long-term gilts. Income funds, on the other hand, is a broad category that represents funds that
invest in a combination of bonds, certificates of deposits, commercial papers, as well as gilts.
These can be short-term or long-term and can be low on credit risk or hold high risks. These funds look for interest income from holding
debt instruments till maturity and also look for capital appreciation coming from price rallies in the instruments.
Disclaimer: Mutual Fund Investments are subject to market risks. Please read all scheme related documents carefully before investing.

4. Volume 5, Issue 05 Page 4
Given below is a table of average returns of the above-discussed category. Here, by gilt funds, we mean medium and long-term gilt funds.
Median compounded annual returns (%)
Gilt funds Income funds
3 years 8.29 8.57
5 years 8.34 8.43
7 years 7.85 7.86
10 years 6.75 7.04
The above table amply illustrates that the spurts seen in gilt funds over the short term (of 1 year) are clearly absent in the long term and
they tend to behave like a regular bond fund.
For an investor with a long-term time frame, this means that you are not better off holding a gilt fund. While what we have in the table is
the median returns, established income funds have, in fact, beaten gilt funds by a decent margin. Moreover, the volatility faced by income
funds is much lower than gilt funds.
Just to provide an illustration, take one of the top performing gilt funds – IDFC GSF PF. In early 2009, when there was an unexpected
yield move causing gilt prices to fall, the fund actually returned negatively. It fell 8.1% that year after an astounding 33% return the previ-ous
year. It may well be that many investors joined the bandwagon after seeing the 2008 returns only to lose money in 2009.
On the contrary, another income fund from the same fund house IDFC SSI Medium Term managed a decent 6% in 2009, after a 16% rally
in 2008. The recovery was even better in 2010 with the income fund while this was not the case with the gilt fund.
Negative returns
This trait of negative returns in gilt funds becomes more evident if we look at the rolling one year return of Crisil 10-year gilt index
(representing long-term gilt). If we take the period between April 2008-2013, there was a 10% chance that your one-year return would
have been negative for investments made on any day. If we roll this over a longer period between 2003-13, the chances of negative returns
goes up to 15%. This is not the case if you take the Crisil Composite Bond index, which is the benchmark for most income funds.
If you are an equity investor, here’s a simplistic (although not equivalent) comparison of gilt funds: gilt funds require the kind of skills
equity theme funds would need - know when to play them and know when to walk away.
Short-term and income funds are like diversified equity – they have varying risks too but are diversified. Just as a diversified equity fund
may go marginally overweight on certain sectors, an income fund may up its stake on gilt at times and corporate bonds in other times
based on opportunities. That means you get the best of various options.
If you are a long-term investor, you are better off with tested income funds or short-term debt funds based on your requirement. What
you see as returns in gilt today may well not be what you will eventually get.
Disclaimer: Mutual Fund Investments are subject to market risks. Please read all scheme related documents carefully before investing.

5. Volume 5, Issue 05 Page 5
Outlook
All that said, if you are asking for what the debt market holds from here for those looking for opportunistic returns, this is my take: unlike
late 2008 when yields crashed leading to a rally, the gilt yields have gradually moved down with repo rate cuts. A combination of rates cuts
(that started in April 2012) and lowering of cash reserve ratio (from January 2012) have led to a falling yield, thus triggering a price rally.
The result is what you are seeing in term of high 1-year returns of gilt funds. 10-year gilts have moved from 8.6% to 7.7% currently.
Experts feel that while there would be some scope for yields to soften, the room is limited. That means you cannot expect any extraordi-nary
rally in gilt funds. But there still appears enough scope for returns from corporate bonds (currently 8.6) as spreads narrow between
corporate bonds and gilt over the course of the next 12 months at least.
That means funds that hold slightly long-dated corporate bonds and even state development loans, besides some gilt may actually benefit
more than pure gilt funds. Simply put, you may have to sift through the income fund category to look for specific opportunities.
We shall also do the sifting and present such funds in our future weekly fund reviews.
Vidya Bala is the Head of Mutual Fund Research at FundsIndia. A chartered accountant by training, she was earlier with the Hindu
Business Line’s research bureau, tracking mutual funds, stock markets and sectors for eight years. She writes for our monthly newsletter
on topics including mutual fund, personal finance and equity markets. Vidya Bala can be reached at vidyabala@fundsindia.com
Disclaimer: Mutual Fund Investments are subject to market risks. Please read all scheme related documents carefully before investing.

6. Volume 5, Issue 05 Page 6
The Benefits of Asset Allocation
S.Shridharan —Head - Financial Planning
Benefit Illustration of Asset Allocation
Year Sensex G-Sec
fund
Gold Value of Rs.100 in-vested
in sensex
Equity
60%
Debt
30%
Gold
10%
Value of Rs.100
invested in the
AA Plan
2000 -11.52% 13.06% 3.92% 88.48 53.09 33.92 10.39 97.4
2007 41.48% 4.85% 28.57% 314.53 188.72 67.40 25.51 281.63
2008 -49.56% 33.09% 15.74% 158.65 95.19 89.70 29.52 214.41
2012 24.23% 8.02% 12.80% 314.24 188.54 102.1 70.34 361.04
Let us assume that there are two investors – A & B, who have both invested Rs.100 in the year 2000. Investor A invested
Rs.100 in an equity based mutual fund in the year 2000 and left it for 12 years without doing anything.
It is to be noted that this investment has seen the ups and downs of market cycles. After a period of 12 years, the investment
of Rs. 100 becomes Rs.314.
Before that, the investment of Rs.100 had become Rs.314 in 2007, coming down to Rs.154 in the year 2008 when
the market was down. The same investment had become Rs.314 in the year 2012. Hence, we can see that there is no sig-nificant
movement in the market return on this investment since 2007 to 2012.
On the other hand, investor B had invested Rs.100 in the asset allocation plan. The asset allocation chosen for the illustra-tion
is 60% in Equities, 30% in Debt and 10% in Gold.
If the asset allocation plan was created in the year 2000 and left as it was, then the investment would have become Rs. 365
in a period of 12 years.
The investment of Rs.100 would have become Rs.284 in 2007 when the market was bullish, and the same would have
gone down to Rs.215 in 2008 when the market was bearish. Also, the same investment would have gone up to Rs.365 in the
year 2012. This shows that the asset allocation plan provides a down side protection to your investments when the market is
bearish. There is no significant movement in the market during this period. However, asset allocation works better during
this period.
The investment of Rs.60 invested in the Sensex would have increased to Rs.188 and the Rs.30 invested in debt would be-come
Rs.106. The Rs.10 invested in gold would go up to Rs.70. The rally on gold in the last few years was very well cap-tured
in the asset allocation plan. Hence, we recommend that you invest using the asset allocation plan to see your
investments grow faster.
Mr. S. Sridharan is the Head of Financial Planning with FundsIndia. You can reach Mr. Sridharan at sridharan@fundsindia.com
Disclaimer: Mutual Fund Investments are subject to market risks. Please read all scheme related documents carefully before investing.

7. Volume 5, Issue 05 Page 7
Optimists, Pessimists and Mood Swings
By Dhirendra Kumar | May 06, 2013
Even though the business environment looks as depressed as ever, investors and investment managers seem
quite optimistic...
Among investment and business professionals that I meet, the last three weeks have been the beginning of yet
another cycle of severe mood swings that started as far back as November 2010. Of course, these mood swings
follow the fortunes of the stock markets but lately they have come and gone less on actual externalities and actual
justification. Of course, severe mood swings without any justification are sometimes a precursor to some sort of
mental illness. Not to be facetious, but equities are looking decidedly unhinged in some ways.
For one, this so called recovery or green shoots or what have you is about the most narrow even by the standards of the last few years. From
the time this year started, the large cap indices--Sensex and Nifty--are about even, having gained back whatever they had lost in the early
part of the year. And that's the good news. Mid-sized and small companies are the ones where the bad news is coming from. Since the be-ginning
of the year, the BSE Midcap index is down 11 per cent while the BSE Smallcap index is down 19 per cent. And these are the indices
themselves--there is a large diversity of stocks within the indices and the worst performing ones are doing very poorly indeed.
Like it has happened more than once since the 2008 crisis, the mood swings do not happen in sequence, the opposing moods are actually
held simultaneously. There are two distinct sides to the story today, the (cautiously) optimistic one and the (blatantly) pessimistic one. The
pessimists, in whose ranks most businessmen seem to be there, see no great improvement ahead. The root cause of the business crisis in
India--issues related to governance, infrastructure, land, cost of funding, energy availability and cost, labour quality and the many more
similar things on the list are all there to stay. Here and there, some individual businesses or sectors might be immune to some of them but
as a trend, businessmen don't see any great room for optimism. As more and more people seem to be realising, the long term has caught up
with us.
However, there are still plenty of optimists out there. But the funny thing is that almost everyone on the happy side of the divide is an in-vestment
professional. From mediocre to the best, all the investment managers are optimists today. They see the problems that the busi-nessmen
see but almost to a man, they claim that in a year or so, things will start working out and business prospects will be better. Why is
this so? Why are investment types so much more optimistic compared to actual businessmen. Your guess is as good as mine but I suppose
most of them are professional optimists anyway. That sounds like I'm saying that they are faking it. Some of them surely are but even in the
worst of times investment managers are a congenitally optimistic lot. Perhaps only people naturally predisposed to optimism become in-vestment
managers.
Moreover, investment types' living will go on quite comfortably if a reasonable trickle of foreign money keeps flowing into a set of stocks,
no matter how narrow and overvalued that set gets. Till the music stops, they're all fine. How a broad, secular selection of businesses might
do fundamentally seems less of a concern to those who make their living from the markets. If the next cycle is OK, then they're all OK.
The whole thing is like being in the middle of a conversation where many people are speaking simultaneously. I'm thinking of one of those
so-called debates on the TV channels, I guess. A lot of people are talking, loudly and incessantly about what they believe in. None of the
listeners can make head or tail of what is being said, but then they don't need to. Each one has chosen one side as the right one, and is go-ing
to stick to it, come what may.
Syndicated from Value Research Online—Article can be viewed online here—http://www.valueresearchonline.com/story/22846
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