ipru insights may 2015 close
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god bless uTRANSCRIPT
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May 2015
IPRU
InsightsInsightsEIGHTH EDITION
Market dip makes large-cap stocks reasonably valued- Pg.2
More rate cuts likelydebt funds still well-poised- Pg.3
5 Steps to Select Mutual Funds - Pg.6 Mutual funds
offer a wide variety of product types to choose from. They can be classified as
MUTUAL FUNDSTAKE PICKyour
Ope
n En
ded
Sche
me
Clos
e En
ded
Sche
me
Equi
tySc
hem
e
Deb
tSc
hem
e
Hyb
rid
Sche
me
(All three can be Open Ended or Close Ended)
On the basisof schemestructure
Based on assetclass in which the
scheme invests
7 Things To Check Before Buying An ELSS - Pg.5
Are You Ready to TestYourself? - pg.8
Cooking it Right - pg.9
7
Please visit us at
Website: www.icicipruamc.com
Follow us on:
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https://www.facebook.com/iciciprumf
AN INVESTOR EDUCATION INITIATIVE BY
http://www.icicipruamc.comhttp://www.icicipruamc.com -
Mr. Nimesh Shah, MD & CEO, ICICI Prudential AMC
f stock market returns of 2014 are an indication, should it Imean that similar returns are going to be possible every year? Is investing in equity always supposed to give double-digit returns year-on-year? No. This sky-high expectation is built on a wrong assumption, and its illogical to expect year-on-year returns in the high-double digits from the market.
Stock market returns in 2014 were a combination of deep undervaluation, which has since risen significantly to fair value levels. The year made investors mistakenly believe that stock market returns have to be positive every month, and high every year. This expectation has to be reset.
Realistic outlook
One cannot get positive returns from the stock market every year, let alone it meeting return expectations of 25-30% per annum. Stock markets are known to hit investors with negative returns every now and then. The derivatives market is another place where people believe that they will get more than 20% returns. Consequently, whenever there is an unwinding of speculative positions, markets correct. And whenever such corrections take place, investors see only gloom, which is not logical at all.
Having said that, equity assets are good investments to make for the longer haul, such as for three to five years, especially with economic reforms taking place. The economy is now recovering slowly and there are some signs of a pickup in investments along with the government increasing its spending.
However, investors are not taking advantage of these opportunities that an unwinding of speculative positions sometimes offers. By investing during market dips, investors can get more mutual fund units, for instance, for the same amount of money as opposed to when markets are at higher levels.
One such opportunity passed by recently. Due to a series of negative news, including the Greek debt repayment crisis, globally, stocks took a small breather and corrected, presenting a good opportunity to invest.
These investing opportunities may not come all the time. But whenever they do, stay alert for a quick investmentwhether small or bigin equity assets.
Dont bank on leveraging
While the outlook is good, equating the structural growth story to the 2002-07 cycle is irrational. We started the 2002 cycle with very low leverage, and we over-leveraged to the extent that
deleveraging is still continuing in infrastructure and real estate.
It is a known fact that during a deleveraging cycle in infrastructure and allied sectors, growth cannot accelerate. Currently, the rest of the economy may be leveraging, but that may not lead to a situation where you could see significant returns from the market. This is because you need infrastructure and real estate to begin the de-leveraging cycle. That appears to be at least two-three years away.
Valuation gap in large caps
There may be a few opportunities in the mid-cap space, but if you are looking for undervalued stocks, there are more opportunities in the large-cap space. Over the past few months, plenty of funds entered into the mid-cap category, as a result of which, these stocks appear to have crossed the rich valuation zone. Some of these funds are likely to move into large caps now and begin the switch from mid caps purely from valuations perspective .
I am from the camp that believes mid-cap stocks are relatively expensive; even today. In fact, about six months ago, we had a similar view that large-cap stocks were quoting on the higher side. But since then, some large-cap names have corrected. A few notable quality names have corrected in the consumer, pharmaceutical and information technology sectors. So, investors have an opportunity that is ripe for the picking in the large-cap diversified equity funds space.
One point worth a mention is that while the market is up significantly from the levels where the bull run in equities started back in October 2013, we are still distant from the overvalued or bubble territory. Sure, equity valuations are above average, but only marginally above the mean.
We have been seeing over the past few months that the market is quick at pricing quality companies at higher levels. This could make it difficult for investors to get better price bargains in quality large-cap stocks sometime down the line. So, perhaps a prudent strategy for now may be to invest in good quality companies whenever there is a valuation gap, as we are seeing at the moment. One may reap the benefit of this by investing in large cap funds for wealth creation in the long-term.
02 IPRU Insights | May 2015
CEO Letter Market dip makes large-cap stocks reasonably valued
Investors are not grabbing these opportunities and are not resetting return expectations either
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03IPRU Insights | May 2015
Mr. S. Naren, CIO, ICICI Prudential AMC
f there was a doubt that the Reserve Bank of India (RBI) would
Ihold rates firm, it was laid to rest in the second bi-monthly monetary policy. After all, consumer inflation has been benign for some time now and credit growth has also been a tad sluggish, so a 25 basis point cut was in the offing and given the wide consensus this time, the RBI didnt disappoint.
What is important to note is that despite the fact that RBI has been cautious on inflation, especially food inflation, the slower credit growth, patchy economic recovery, under investments and lower capacity utilization have been a driving factor for the cut in rates, as cited by the RBI. This perhaps shows that the RBIs focus is now shifting from containing inflation to reviving growth, and is a welcome sign for the broader economy.
The RBI has cautioned about the coming monsoons saying that a below average rainfall may result in lower food output and therefore raises the chances of a spike in food inflation. However, for now, CPI inflation looks fairly contained and range abound between 5.25-5.50 percent, and is likely to be within RBIs comfort zone of 6 percent by January 2016.
Continuing on the inflation front, oil prices are likely to remain low adding to the optimism. Whats more, the government is expected to initiate policy actions that could be successful in reigning food inflation if the monsoons are not near average levels.
So given the sluggish economy, we still think theres enough
scope for further rate cuts. First, we think given that investment and credit growth could remain low for the next 4-6 quarters, the countrys Central Bank could reduce rates further by 25-50 basis points in this financial year. So the broad signs of the interest rate trajectory continuing downward remains.
The RBI might pause before further rate cuts to see the progress of the monsoons and see how inflation behaves, but if the investment and credit growth remains a low, further rate cuts cannot be ruled out.
One trend worrying the markets has been the global currency movements. However, we think that the rupee is among the well-behaved currencies in the world and has held up even in the recent times when emerging market currencies were taking a beating. So concerns on that front might not necessarily pan out on expected lines.
For investors, there are opportunities in the debt space with the 10-year bond hovering at yields of around 7.75%. It shows that theres scope for the RBI to reduce rates further over the course of the year.
Hence, longer-duration bonds funds are still the place to remain invested given the downward trajectory of the rate cycle. For those investors looking at the conservative side, one could consider adding a dash of short- and medium-term bond funds as tapering of rates is likely to add enough buoyancy to these funds.
More rate cuts likely debt funds still well-poised
The bi-monthly credit policy signals stance is shifting from containing inflation to reviving growth and so further rate cuts cannot be ruled out.
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04IPRU Insights | May 2015
Lets take a look at
how investing in ELSS*
over the years!
as his income increased
helped Mr. Tax Saver,
AN INVESTOR EDUCATION INITIATIVE BY
Mutual Fund investments are subject to market risks, read all scheme related documents carefully.
LEARN MORE ON MUTUAL FUNDS, LOG ON TO WW.ICICIPRUAMC.COM/INVESTCORRECTLY
Now that you know of the varied benefits offered by ELSS, like Mr. Tax Saver, you too can make the most of your income by investing in tax saving investments.
As per Finance Act, 2015 the above rates are applicable for individual less than 60 years of age. Education cess of 3% has been considered.
Surcharge is not applicable as the income is less than Rs. 1 crore
SAVINGS
46,350
TAX PAYABLE2,36,290
TAXABLE INCOME P.A.
13,50,000APPILICABLE TAX
CHARGES30.60%
TAX PAYABLE
15,00,000
TAXABLE INCOME P.A.
2,83,25040
Years
SAVINGS
30,900
TAX PAYABLE
97,850
TAXABLE INCOME P.A.
8,50,000APPILICABLE TAX
CHARGES26.60%
TAX PAYABLE
10,00,000
TAXABLE INCOME P.A.
1,28,75036
Years
SAVINGS
30,900
TAX PAYABLE
46,350
TAXABLE INCOME P.A.
6,00,000APPILICABLE TAX
CHARGES26.60%
TAX PAYABLE
7,500,000
TAXABLE INCOME P.A.
77,25032
Years
Before Investing u/s 80C After investing Rs.1.5 Lakh u/s 80C
More Savings, Less Taxing.
Plan to save tax by investing in
Equity Linked Savings Schemes (ELSS).
Effective planning can help you save more!
How can you aim tobenefit from ELSS?
What is ELSS
*As per Finance Act, 2015, returns earned after one year are tax-free
TAX
An Equity Linked Saving Scheme
Investments are managed by expert fund managers
Aims to grow your money by investing in the equity market
CAN PROVIDE REGULAR RETURNS
WITH THE DIVIDEND OPTION EVEN DURING THE LOCK-IN PERIOD
5 OF 3 YEARSSHORT LOCK-IN PERIOD
4TAX-FREE*
RETURNS ON LONG TERM
INVESTMENTS
3
2 MORE ORGANIZED TAX SAVINGS WITH SIP#
#SYSTEMATIC INVESTMENT PLAN
DUAL BENEFITS: TAX SAVING & WEALTH CREATION
1
New &Improved
Under Section 80C of
the Income Tax Act, 1961,
the investment limit
is Rs. 1.5 lakh!
*The aforesaid calculations are for illustrative purposes only.
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You are ready to invest in an (ELSS) if your answer is yes to these seven questions
05IPRU Insights | May 2015
Is tax deduction from the section 80C limit of Rs 1.5 lakh still available after accounting for provident fund and home loan principal payments?
1
Are you open to a tax-saving equity investment where returns and capital invested would be subjected to volatility in the short term?
2
7 THINGS TO CHECK BEFORE BUYING AN Equity Linked Saving Scheme (ELSS)THINGS TO CHECK BEFORE BUYING AN Equity Linked Saving Scheme (ELSS)
Is there a long term goal such as childrens higher education or retirement that the ELSS investment will be earmarked for?
What is the performance track record of the scheme over one, three and five years? has it consistently beaten its benchmarks?
Yes No
Do you need the money any time soon since the money would be locked in for three years?
3
Does the fund house have an establish investment process to which it is committed?
7
Does the ELSS scheme belong to a reputed fund house well-known for consistently rewarding its investors?
Yes No
Yes No
Yes No
Yes No
Yes No
Yes No
5
4
6
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06IPRU Insights | May 2015
Funda Clear
Heard about mutual funds? Plan to start investing in them? The first step most of us would take is to do a search on the internet the result? Too many options! This would often lead to a sense of being overwhelmed. However, there is a way to simplify your selection and make your journey to investing in mutual funds easy and convenient.
To invest in mutual funds, take these 5 steps to shortlist your mutual funds:
5 Steps to Select Mutual Funds
Track record of scheme
The investment objective
The risk profile
Fund house pedigreeBefore you decide on which mutual fund scheme you want to invest, its important to first check out the reputation of the fund houses that offer schemes. To assess a fund houses reputation, you should consider one with a good parentage and trusted brand name.
Now that you have shortlisted a suitable fund house, the next step is to decide what schemes to invest in. Every fund house offers numerous schemes. Short-list your selection to schemes that have performed well in the past. To assess this, check the returns offered by the fund vis--vis its benchmark index and other funds in its category over the long term. But do keep in mind that good performance in the past will not necessarily guarantee good performance in future. Unfortunately, most investors rely solely on past performance while making their selection of funds; this is not advisable.
One should also consider the current market situation and assess its impact on the future performance of their funds of choice. For instance, since the markets could remain volatile this year, we are currently recommending defensive equity investing in asset allocation funds or funds that benefit out of volatility. These funds invest in equities when markets are cheap and book profits when markets are rising, thus limiting risk and aiming to provide long term returns. Investor should consider investing in such funds with an aim to benefit out of volatility.
Each scheme has an investment objective. While selecting funds, it is important to align the investment objectives of the fund to ones financial goals. For instance, Investors comfortable with market volatility and have a long-term investment horizon may invest a portion of their funds in small and midcap funds; remember, equity as such is a more volatile asset class and mid and small caps are even more volatile. Your long term investment horizon will help you ride this volatility to make gains. If you have a 3-year horizon, you are better off investing in large cap funds since these funds offer more stability.
While equity funds carry the risk of fall in market prices of stocks due to changes in the economy, business, etc., debt funds carry the risk of changes in interest rates, possibility of default by borrower, etc. To understand the risk carried by a particular fund, see the riskometer of the fund (it is provided in the Scheme Information Document and on the Key Information Memorandum and application forms). Its important to match your risk profile with that of the fund you want to invest in.
The payout options
Each fund offers three options to receive your investment income: 1. Dividend payout; 2. Dividend reinvestment; 3. Growth. If you are looking to build wealth over the long term, the growth option should be preferred. However, if you need regular income flows, you may select the dividend-payout option.
With these 5 steps, your journey to mutual fund investing will be a pleasant one.
The sector(s)/stock(s) mentioned in this communication do not constitute any recommendation of the same and ICICI Prudential Mutual Fund may or may not have any future position in these sector(s)/stock(s).
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07IPRU Insights | May 2015
FUNDS AS PER THE ASSET CLASS
EQUITY SCHEMES
Can focus on individual sectoror diversify across sectors
Certain schemes can also help save tax
Certain schemes invest in global markets
FUNDS BASIS SCHEME STRUCTURE
Are always open to investors
Can buy or sell units on a continuous basis
OPENENDEDSCHEMES
CLOSE
ENDED
SCHEME
S
Have a lock-in period. May vary from 3 - 5
years depending on the scheme objective
Suitable for long term investment
Mutual funds offer a wide variety of product types to choose from. They can be classified as
MUTUAL FUNDSTAKE PICKyour
Ope
n En
ded
Sche
me
Clos
e En
ded
Sche
me
Equi
tySc
hem
e
Deb
tSc
hem
e
Hyb
rid
Sche
me
(All three can be Open Ended or Close Ended)
On the basisof schemestructure
Based on assetclass in which the
scheme invests
DEBT SCHEMES
HYBRID SCHEMES
With such varied products and schemes,
Mutual Funds are ideal to meet the long, medium or short term
financial needs with different risk appetite.
ALWAYS PLAN AND INVEST CORRECTLY!AN INVESTOR EDUCATION INITIATIVE BY
Mutual Fund investments are subject to market risks, read all scheme related documents carefully.
WW.ICICIPRUAMC.COM/INVESTCORRECTLYLEARN MORE ON MUTUAL FUNDS, LOG ON TO
Provide blend of both equity and debt
There are also schemes that allow you to invest in gold units.
Invest in range of securities like stocks & bonds depending upon the scheme
Aim to add stability to your equity portfolio and can provide stable returns
Some schemes try to benefit from
changing interest rates
Some schemes provide investment
opportunities across different time periods
Some schemes provide easy liquidity
suitable to park surplus cash for short term
Invest in interest bearing securities like
Government & Corporate Bonds,
Money Market Instruments & Term Deposits
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08IPRU Insights | May 2015
Are YouReadyto TestYourself?
Quiz
Q.1 Which of the followinghas nothing to do with adebt mutual fund scheme?
A. Interest rate B. Price fluctuations of debt
securities C. Share price movements D. None of these
Q.2 An investor invests Rs1 lakh in an equity mutualfund scheme. He sells hisinvestments after two yearsfor Rs 1.5 lakh. What is thecapital gains tax payable,
without indexation?A. 5%B. 10%C. 20%D. No capital gain tax
Q.4 The NAV of each schemeneeds to be updated onSEBIs website every monthA. TrueB. False
Q.5 SEBI has made itmandatory for every AMCto have a complianceofficer responsible forimplementation of all laws,guidelines and voluntarycodes of conduct.A. TrueB. False
Q.3 A Systematic TransferPlan (STP), allows investorsto get back the principalamount invested along withreturn on investmentA. TrueB. False
Answers to appear in IPRU Insights, June 2015
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COOKINGIT RIGHT
09IPRU Insights | May 2015
Storyboard
Gotcha! Caught you again! Checkingout cricket match scores on the officecomputer! Wait till I tell boss!
Are you kidding me? You are making itsound like Facebook status updates!
No, man! I have been worriedabout the market going up anddown the last few days. Somehow,I am often checking the status ofmy mutual fund investments.
Very funny! Whatelse do youexpect me to do?!Not everybody is asrelaxed as you.
Really? Tell me something. When youcook rice for yourself, do you keep check-ing the utensil every now and then?
Investments are not verydifferent either, sir. Eachtype of investment needs aminimum amount of time todeliver results.
I knowthat! Butwhat if Istill loseout?
Of course, not. Itneeds time to cook. Iknow that!
That is the reason people tellyou to invest across differentinvestments or different fundswith different investmentfocus. It controls your risk.
Are you telling meto stick on to myinvestments even ifsome of them dontwork out?
No! But you can shiftto better performingfunds if your currentinvestment islagging behind thebenchmark and thepeers? But dont exitearly from equityfunds when themarket is dipping, oryou will again loseout like last year.
I guess youare right.Let me takea break andquickly askSarika outfor lunch.
Too bad! She madean early exit fromthe office for lunchwith Rohit.
You can saygotchaagain!
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The sector(s)/ stock(s) mentioned in this presentation do not constitute any recommendation/ opinion of the same and ICICI Prudential Mutual Fund may or
may not have any future position in these sector(s)/stock(s). Past performance may or may not be sustained in the future. Please refer to the SID for
investment pattern, strategy and risk factors. This material is circulated only to the empanelled Advisors/ Distributors of ICICI Prudential Asset
Management Company Limited (the AMC). The information contained herein is only for the reading/ understanding of the registered Advisors/
Distributors.
In the preparation of the material contained in this document, the AMC has used information that is publicly available, including information developed in-house. Some of the material used in the document may have been obtained from members/ persons other than the AMC and/or its affiliates and which may have been made available to the AMC and/ or to its affiliates. Information gathered and material used in this document is believed to be from reliable sources. The AMC however does not warrant the accuracy, reasonableness and/ or completeness of any information. We have included statements in this document, which contain words, or phrases such as will, expect, should, believe and similar expressions or variations of such expressions, that are forward looking statements. Actual results may differ materially from those suggested by the forward looking statements due to risk or uncertainties associated with our expectations with respect to, but not limited to, exposure to market risks, general economic and political conditions in India and other countries globally, which have an impact on our services and/ or investments, the monetary and interest policies of India, inflation, deflation, unanticipated turbulence in interest rates, foreign exchange rates, equity prices or other rates or prices etc.
All data/ information used in the preparation of this material is specific to a time and may or may not be relevant in future post issuance of this material. The AMC takes no responsibility of updating any data/ information in this material from time to time. The AMC (including its affiliates), the Mutual Fund, The Trust and any of its officers, directors, personnel and employees, shall not liable for any loss, damage of any nature, including but not limited to direct, indirect, punitive, special, exemplary, consequential, as also any loss of profit in any way arising from the use of this material in any manner. The recipient alone shall be fully responsible/ are liable for any decision taken on this material.
10 IPRU Insights | May 2015
Wish to give your child the best education?
Begin with the RIGHT SIP AMOUNT.
ICICI Prudential Mutual Fund presents
www.icicipruamc.com/investcorrectly
Soch samajh ke invest karein.
An investor Education initiative byThe answers to these questions will help you arrive at the RIGHT SIP AMOUNT.
To know which fund to invest in, contact your distributor.To know more, visitwww.icicipruamc.com/investcorrectly
Mutual Fund investments are subject to market risks, read all scheme related documents carefully.
What am I investing for? How long should I invest for?
How much should I invest?
As SIP makes sense only when the amount invested leads to realizing a dream. Therefore it is important to arrive at the RIGHT SIPAMOUNT. And to help you decide the right amount, here are three important questions to ask yourself: