Why equities are a must have in your portfolio

1. www.fundsindia.com
Prashant Jain speaks…
Prashant Jain,
arguably India’s
most famous fund
manager, manages
HDFC Equity and
HDFC Top 200, that together
have assets of over `30,000
crore. In May 2012, Mr. Jain
penned an essay titled, “It’s
tomorrow that matters,” amid
much uncertainty and concerns,
global and local.
In Mr. Jain’s words, “Pessimism
is all that one sees all around.”
Even so, as a veteran of multiple
market cycles, he was able to
look at history and tell his
readers that the time to invest in
equities was at hand.
He wrote, “The lower the
markets are, the bigger is the
opportunity.” The Sensex is up
by 30 per cent since.
Today, Mr. Jain has spoken up
again in an interview. What does
he say? Simply put, he tells
readers to trust in equity
investing and stay invested.
History indicates that investors
will do well to heed the prescient
words of Mr. Prashant Jain. I
would urge all to read the
interview by clicking here.
Happy investing!
Srikanth Meenakshi
Co-Founder & COO
FundsIndia.com
Prefer Old to New
2014 has been a year in which mutual fund houses, barring a few, have moved
yet again to a familiar theme – New Fund Offers (NFOs). This has happened
in 1992, 1994, 1999, 2005, 2007, and there we are again in familiar territory.
What is in it for investors?
• Almost nothing. The universe of funds that existed at the end of 2013 was
more than adequate to take care of 99 per cent of the allocation and
investment needs of investors.
• The residual 1 per cent will be essentially funds that chase riskier asset
classes, adopt riskier approaches, are complex, and / or are from new or old
fund houses that have an indifferent track record.
• When it comes to international funds, they may look enticing given their
performance over the past five years in developed markets. All these
economies are in bad shape and equities from US and Europe, which make
up most of the MSCI World Index along with stocks from Japan, have
logged in compounded annual returns of 20 per cent over the past five
years. They are at the latter end of a long bullish phase that is unconnected
to reality. New funds are coming in from this space mostly.
• This streak of international funds comes at a time when the value of the
Indian rupee (INR) is depreciating, or has been stable (as in the past few
months). INR appreciation can hurt you badly and it is never one-way
traffic.
• The only area where genuinely decent funds have come up is corporate
bonds. Here too, please go only for those fund houses who hold a good
track record in debt funds, along with sizeable assets under management.
• Prefer open-end funds any day to closed-end funds, except in the case of
Fixed Term Plans.
• If you wish to own debt and a bit of equity, go for funds that focus
specifically on each class, rather than funds that seek to combine them.
• In equity, there are at least about 125 funds with a track record of over 10
years, and a fairly sizeable number of funds have been around for 20 years;
ditto for the type of debt funds you need to own.
• Please ask yourself and / or the sellers of these funds the question: why
new funds? You can be sure that rarely will there be a satisfactory answer.
S Vaidya Nathan
Editorial Consultant, FundsIndia.com
November 2014 I Volume 07 I 11
FundsIndia
Winner CNBC TV18 UTI Award 2013-14
National Online Advisory Services

2. Why equities are a must have in your portfolio
Your Savings
EPF and PPF: For most salaried individuals, your Employee’s Provident Fund (EPF) would be your compulsory
saving. A few of you may also add the Public Provident Fund (PPF) as a part of your tax-saving investment and
believe these two should take care of your non-income earning future.
While these can be great saving habits, sadly, they will simply not suffice to build you a decent investment kitty in your
retirement years. For one, the interest rates on EPF have been on a steady decline over the past 20 years, hardly keeping
pace with inflation, especially in recent years.
For instance, the annual Consumer Price Inflation (industrial workers) was at an average of 9.5 per cent over the last
five years. That means, except in FY-11 when EPF rates were 9.5 per cent, for the rest of the years, you would actually
have earned real negative returns (that is, adjusted for inflation, your returns are negative)!
Your PPF rates too have been on a similar downtrend. The accompanying graphic shows how much ` 10,000 invested
every year in PPF would have delivered as compared to a similar investment in a tax-saving fund – ICICI Pru Tax Plan.
The difference is stark, enough for you to realise how little you build with traditional options.
Actual rates of PPF are taken for calculation. ICICI Pru Tax Plan is the tax-saving equity fund considered. It was launched in August
1999. Past returns are not indicative of future performance. PPF is a 15-year investment product but earns interest up to its 16th year.
Hence, investment comparison has been done on a similar basis.
Deposits: When it comes to other voluntary savings that you make, bank deposits are likely to be on the top of your
list. Not only are deposits tax inefficient, they are also likely to give you real negative returns – that is not give you
anything over inflation.
Given below is a graph that shows the three scenarios of Fixed Deposit (FD) returns – with an interest rate of 8, 9
and 10 per cent per annum. We have assumed a tax slab of 30 per cent and inflation of 8 per cent. You will see that
the FD does not beat inflation even with a rate as high as 10 per cent.
www.fundsindia.com
Vidya Bala
For all those who think equities are too risky to handle, or who think it cannot deliver enough,
here’s why your portfolio cannot do without equities, if you have to beat inflation, build a decent
corpus for the long term and be tax efficient. I am going to take the approach of debunking
your notions about other asset classes when it comes to their risks and return.
EPF interest rate on a downtrend
7%
8%
9% 8.75%
10%
11%
12%
13%
FY-95
FY-96
FY-97
FY-98
FY-99
FY-00
FY-01
FY-02
FY-03
FY-04
FY-05
FY-06
FY-07
FY-08
FY-09
FY-10
FY-11
FY-12
FY-13
FY-14
PPF vs Tax-saving funds
` 10,37,367
` 3, 12,325
0
200000
400000
600000
800000
1000000
1200000
Tax-saving fund market value PPF Balance
Apr-99
Apr-00
Apr-01
Apr-02
Apr-03
Apr-04
Apr-05
Apr-06
Apr-07
Apr-08
Apr-09
Apr-10
Apr-11
Apr-12
Apr-13
Apr-14
A popular observation about the markets is that the markets have run up nearly 40 per cent in the
last one year. A more pertinent observation is that the markets are up only around 30 per cent from
the pre Lehman levels over the last 6 years...
Prashant Jain, Chief Investment Officer, HDFC Mutual Fund

3. Inflation of 8 per cent and an income tax rate of 30 per cent plus
cess has been considered.
Your Investments
Property: Multi-baggers in real estate are not uncommon
to hear. You may have probably heard of people saying
that their property value has doubled or tripled.
But very likely the person who sold it would not have told
you over what period the money doubled. So what,
equities hardly make that, you might think. They probably
delivered just 15 percent compounded annual returns in
five years.
Did you convert that into money terms? It means your
money actually more than doubled in five years! So often
times, the notion of returns in real estate is partly
overdone.
Also, remember, your confidence in real estate stems from
not knowing information as compared to an overload of
information with equities.
Just in case you wish to know the short-term returns of
real estate, go to the National Housing Bank (NHB)
website and see the property price index called Residex.
If you take the average returns from property in the top
15 cities over the past three years (ending March 2014), it’s
a mere 5.3 per cent annually! Surprised? An investment in
any top quartile equity fund over the same period (which
was among the worst period for equities) would have
delivered 12 per cent annually!
You’re better off not knowing too much information on
your property price isn’t it? Try it with equities too!
Gold: Agreed almost the whole of last decade was a
period of extraordinary returns for gold, with the yellow
metal delivering as much as 15.8 per cent annually (MCX
prices). But then, do remember, almost seven out of those
10 years were periods of global turmoil and slow recovery,
which is when gold is perceived as a safe haven and more
takers flock to it, thus pushing up price.
Still, take a look at how gold prices stacked up against the
return of equity funds.
Remember, gold too goes through cycles and if the last
one year’s indications are anything, it may be going
through low patches.
Your Wealth Creator
Equities: Ok, I am not going to again draw a chart
showing you the returns made by equities in the long run.
You would have seen it everywhere, but they may have
seldom convinced you.
EPF/ Deposits Real Gold Equities
PPF Estate
Liquidity No Partly No Partly Yes
Invest in tranches Yes Yes No Partly Yes
Transparency Yes Yes No No Yes
Tax efficiency Yes No No No Yes
Superior returns No No Yes Partly Yes
Unless you have hit a jackpot, which asset class can
provide you with liquidity, convenience of investing small
sums, transparency, tax efficiency and of course, superior
returns as equities? And if risks become marginal by
holding over the long term (we have discussed this in our
earlier publications), then are short-term pains that hard
to bear? No pain, no gain!
Vidya Bala
Head - Mutual Fund Research, FundsIndia.com
www.fundsindia.com
8.0%
5.5%
-2.5%
9.0%
6.2%
-1.8%
10.0%
6.9%
-1.1%
Real negative return
FD Rate Post-tax return Post inflation real return
15.9%
18.8%
15.5%
13.2%
16.5%
12.4%
0.0%
5.0%
10.0%
15.0%
20.0%
10-year annualised returns 15-year annualised returns
Price of gold (rupee terms) Avg. returns of equity funds* CNX 500

4. www.fundsindia.com
We have a few of our investors asking ‘I read that index
funds are low cost. Should I prefer them over actively
managed funds?’
It is first important for you to get two things straight: the
distinction between active and passive funds, especially in
the Indian context, and what has been the historical
performance between these two categories of funds.
Active Management: A dedicated fund manager
manages an active fund. Such a fund manager selects
sectors and stocks within the boundaries of the fund’s
mandate, based on quantitative and qualitative research,
as well as his/her own judgment.
The fund manager, in such cases, generally seeks to
outperform a particular market index. He constantly
receives inputs and ideas from a dedicated research team,
and from external research support as well.
These entail a cost. Hence, the fund manager seeks to
generate excess returns over the benchmark to make up
for the costs involved.
Active fund managers take dynamic calls – whether to
increase or decrease cash, or curtail falls and participate
optimally in markets by specific strategies, or exit or enter
certain stocks or sectors based on their potential and
valuations. Of course, the down side is that all calls do
not work.
Passive Management: Passive funds, such as index
funds invest their assets in the same stocks and in the
same proportion as the index they seek to track. In
developed markets where long-term annual returns are at
much lower levels, passively managed funds are more
popular compared with actively managed funds.
Passive funds, as they do not need day-to-day active calls,
have lower costs, a relatively low portfolio turnover, and
less or zero cash holding. In Indian markets, the universe
of under-researched stocks outside the indices provide
ample scope to outperform.
Active Funds Outperform: Our analysis of diversified
large-cap as well as mid-and small-cap funds with a 10 and
15-year track record reveals that a majority of active
funds, in the Indian context, outperformed their
respective indices over the past 10 years and 15 years. Mid-
cap funds, especially, outperformed their indices by a
good margin of 4-5 percentage points.
Yes, while the expenses incurred is higher in an actively
managed fund, the margin of outperformance more than
makes up for the costs involved, that is, if you had chosen
from the 78 per cent of outperforming funds!
Active Funds Performance Large-Cap Mid - &
/ Market Cap Funds Small-Cap Funds
Performance No. of funds that 36 10
over past outperformed their
10 Years benchmarks
No. of funds that 10 0
underperformed
their benchmarks
Outperformance 78 per cent 100 per cent
Percentage
Performance No. of funds 17 3
over past outperformed their
15 Years benchmarks
No. of funds that 8 0
underperformed
their benchmarks
Outperformance 65 per cent 100 per cent
Percentage
Analysis is as of October 22, 2014. Outperformance percentage
relates the number of outperforming funds to total number of funds
in each category in the analysis.
Strategy: So what approach should you choose? There
are two ways to looking at this. One, if you simply want
to move with the markets and do not want to leave the
decision of your portfolio calls to a fund manager, then
index funds are your best bet. At least, it is better than not
having any equity in your portfolio.
But if you are a long-term investor, then a combination of
both would help you build a superior portfolio. You could
then consider investing 15-25 per cent of your portfolio
in index funds to ensure that at least a part of your
portfolio is not worse than the market index. Allow active
funds to generate additional returns with a chunk of your
investments there. The caveat: do your research in
choosing the right funds or seek help from your advisor.
N. Sathyamoorthy
Analyst, Mutual Fund Research, FundsIndia.com
Active or passive?

5. www.fundsindia.com
Handling loan application rejection
Have you ever applied for an auto loan, a home loan or a
personal loan? What if the loan application got rejected?
What to do next? Rejection of any kind is one of the
greatest fears that lie within us. But there is also a way to
address this. Put on your thinking cap to understand the
few ways on what to do next when your loan application
gets rejected.
Know and understand: Check with the credit institution
to know the reason for the rejection – read it and
understand the reason. As per the Reserve Bank of India,
“A bank cannot reject your loan application without
furnishing valid reason(s) for the same.” Does the reason
for rejection talk about a low credit score? Does it point
to poor payment history? Are the reasons reflecting in
your credit history? It’s time to check your credit report to
know the reasons behind the rejection.
Re-check your credit score: A low credit score is one of
the reasons for which the credit institution may have
rejected the loan application. It is advisable to check your
credit score with one of the credit bureaus in the country
to know how credit healthy you are.
Do an error check: A credit report contains your
demographic details, credit account details and payment
history. Do a check to see if there are errors on your credit
report related to your personal details or account details
and get them rectified.
Seek help: Do you need help to understand your credit
report? Do you find it difficult to read your credit report?
Credit counselors guide you in understanding and
reviewing your credit report.
Rejections are always a learning experience. Stop worrying
and instead, be a little more alert, a little more prudent, a
little more assertive, and a little more proactive because
who knows? A window of opportunity may open soon
for you!
Satish Mehta is the Founder and Director of www.credexpert.in –
a credit and debt counselling company. Read more such thoughtful
articles at Market Place – FundsIndia, the official blog of
FundsIndia.com at http://www.fundsindia.com/blog.
Market Place FundsIndia Blog
Five, not ‘one’ market in equity
Just as `market’ is not equal to just equity, there is no one
single market in equity. When you hear of equity, please
do not understand it as a homogeneous market where you
could draw conclusions that would be relevant across the
board all the time. Even if a few factors are common
across the market, the nature of their impact on the prices
of stocks differs. To make the right investment allocation
in equity, it is important to understand the different
markets in Indian equity as an asset class.
Large-cap stocks: These are major names that we are
familiar with, as they are a part of the Nifty Index. In
general, if you list all the stocks on the National Stock
Exchange in the descending order of market
capitalization, stocks that account for about 70 per cent of
the overall market capitalization would constitute this
category. You could approximately reckon the top 100
hundred stocks by market cap as large-cap stocks. Even
here, the second 50 would have a different risk-return
profile as compared to the top 50.
Mid-cap stocks: The second hundred stocks could be
considered as mid-cap stocks. These stocks carry a higher
level of risk and return. Liquidity levels are also not as
good as in the large-cap category. Risks are higher as are
returns, but you need to know when to back off, if you are
to make money in this category. Returns tend to be
compressed in very short periods. It gets progressively
even more risky from here.
Small-cap stocks: The third hundred stocks could be
considered as small-cap stocks. You need to dig really hard
to find quality and returns.
Micro-cap stocks: The fourth hundred stocks could be
considered as micro-cap stocks. This is the space for
lottery.
Penny Stocks: A very large proportion of the rest of the
listed stocks would be in this category. Forget about them.
We will examine what this graded equity market means
for performance next month.
Invest With A Plan 8
If you look carefully, almost all old money secrets can be traced to a single source: a longer-term
outlook.
Bill Bonner

6. Technical View
Transport Corporation of India
The Transport Corporation of India stock is on a strong
upward trend and the recent pull back offers an
opportunity to buy the stock. As long as the stock trades
above the stop loss level of ` 185, there is a possibility of
a rally to the target zone of ` 265-270. A move beyond `
270 could trigger a rally to the second target of ` 285.
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 for Think FundsIndia: 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
Nifty
After a minor downward correction, the Nifty has been in
a recovery mode in the past few weeks. Its long-term
outlook is bullish. There is a strong case for the index to
cross the 10,000 mark in 12-15 months. From a short-
term perspective, there is a strong resistance at the 8,100-
8,150 mark.
Once it breaches 8,150, the Nifty could rally to the target
zone of 8,350-8,400. Any downward correction to the
7,750-7,800 support would be a buying opportunity for
long-term investors. Investors may use any weakness to
buy fundamentally sound stocks from the banking,
automobile, auto ancillary and infrastructure sectors.
B Krishna Kumar, Head – Equity Research, FundsIndia.com
Tata Motors DVR
After a sharp rally, Tata Motors DVR corrected since
September 12. The decline was arrested at the crucial
support zone on October 17, and the subsequent price
action suggests that the next leg of the upward trend is
underway. Buy at current levels and on weakness for an
initial target at ` 392, and a secondary target of ` 425.
Have a stop loss at ` 289.

7. What does not kill you…
Investing, when it looks the easiest, is at its hardest.
• Only a small number of investors maintain the
fortitude and confidence to pursue long-term
investment success, even at the price of short-term
underperformance. Short-term underperformance
doesn't trouble them.
• Most investors feel the hefty weight of short-term
performance expectations, forcing them to take up
marginal or highly speculative investments.
• The payoff from a risk-averse, long-term orientation is
just that - long term. It is measurable only over the
span of many years, over one or more market cycles.
• An investor’s willingness to invest amidst failing
markets is the best way to build positions at great
prices; but this strategy can cause short-term
underperformance.
• Buying as prices are falling can look stupid until sellers
are exhausted; and buyers who held back cannot
effectively deploy capital, except at much higher prices.
• The resolve in holding cash balances - sometimes very
large ones - in the absence of a compelling
opportunity is another potential performance drag. But
in a world in which being anti-fragile is good, what
doesn't kill you can make you stronger.
• Patience and discipline can make investors look
foolishly out of touch until time makes them look
prudent and even prescient.
Seth Klarman is the founder of the Baupost Group.
www.fundsindia.com
Q & A
Q - Do funds maintain separate portfolios for the
dividend option and the growth option, or is it just
accounting jugglery? I always thought the dividend
option requires a different approach for stock selection,
as against the growth option.
A - Separate Net Asset Values (NAVs) are maintained
for growth and dividend options as they have to be
declared separately. There may not necessarily be
separate portfolios. There is usually a single fund, and
the stocks or bonds that it invests in do not vary
between the two options. A dividend option does not
mean that a fund will only look to invest in stocks that
pay regular dividend. The dividend and growth options
are merely ways to distribute/plough back your profits.
The idea of dividend is to periodically strip the profits
and give it back to you in the form of cash (dividend
payout), or additional units (dividend reinvestment). In
the case of growth option, the gain is retained and
reinvested into your portfolio.
Index 1 Year 5 Years 10 Years
CNX Nifty 30.7 11.6 16.4
S&P BSE Sensex 30.0 11.5 17.0
CNX Mid Cap 57.0 12.1 17.4
CNX Small Cap 66.9 10.5 17.0
CNX 100 32.5 11.9 16.5
CNX 500 37.9 11.3 15.9
CNX Bank 49.0 14.7 21.1
CNX Energy 19.6 1.9 10.9
CNX FMCG 9.9 21.9 23.4
CNX Infrastructure 35.7 -0.7 11.0
CNX IT 25.9 17.1 15.3
MSCI Emerging Markets -2.8 16.1 12.1
MSCI World 5.1 20.4 9.9
Returns (in per cent as of October 30, 2014) for less than one year is on an
absolute basis and for more than one year on a compounded annual basis.
Equity Performance Snapshot Wisdom
Must Read: ‘Keep in mind that even terribly hostile market environments do not resolve into uninterrupted
declines,’ writes John Hussman in ‘On the Tendency of Large Market Losses to Occur in Succession.’ Read his
insightful comments at www.hussmanfunds.com

8. 1 Who is the Chief Economic Advisor to the Prime
Minister of India?
2 Who is the author of ‘Fooled by Randomness?’
3 Which was the first-gold related fund to be launched in
India?
4 What is the usual benchmark for Balanced Funds (in
India)?
5 Name the person in the image. She is
the Head of one of the largest banks
in India.
Answers for October 2014 Quiz: 1 National Securities Clearing
Corporation 2 Shriram Mutual Fund and CRB Mutual Fund 3
85% 4 Barry Ritholtz 5 Prashant Jain, HDFC Mutual Fund
There were no winners for the October 2014 Quiz.
FundsIndia Select Funds
Equity Moderate Risk: Preferred picks in this category are:
Axis Equity Birla SunLife Top 100
BNP Paribas Equity Franklin Bluechip
HDFC Top 200 ICICI Pru Dynamic
ICICI Pru Focused ICICI Pru Top 100
Kotak Select Focus Mirae Asset Allocation
UTI Equity UTI Opportunities
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. Do note, however, that past performance is not a
guarantee of future results. Please consider your specific
investment requirements before designing a portfolio that
suits your needs.
Please click here for a complete listing of our preferred
funds.
www.fundsindia.com
App Upgrade – FundsIndia’s mobile app for Android users
has been upgraded to enable new investments and
additional investments. Investors will be able to make
payments towards these investments from their internet-
banking accounts.
Quick Tax Saver – We have introduced a Quick Tax Saver
feature. This will help investors invest in the best tax saving
funds that have been hand-picked by our experts in a jiffy.
New Gold Plan – Satyug Mera Gold Plan is now available on
the FundsIndia platform. Investors will now be able to
systematically accumulate 24 Karat gold through this plan.
To start buying gold with SMGP, please click here.
@fundsindia.com in October Recommended Book
To invest, call 0 7667 166 166
About us: FundsIndia.com is India's leading online investment platform. It offers a wide range of investment options such
as mutual funds, equities, corporate deposits, bonds, the National Pension System, loans, insurance and 24 Karat gold, to name
a few, in one convenient online location. FundsIndia also offers a host of value-added services such as Systematic Investment
Plans (SIPs), Alert SIPs, Flexi SIPs, trigger-based investing, and more, that further enrich your investment experience.
Recovery in economic growth is expected to be led by a revival in the capex/investment cycle by FY 16-17. Hence,
recovery in earnings of cyclical sectors could be back-ended. Valuations of cyclical stocks might look expensive
from the next 12-month perspective. Sanjay Dongre, Senior Fund Manager, UTI Mutual in Marketplace,
FundsIndia Blog.
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