Disciplined Investing, Disciplined Withdrawal

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1 M F P O I N T E R Issue - 70 September, 2011 For Private Circulation only Disciplined Investing, Disciplined Withdrawal After witnessing continuous decline for two straight months, Indian equity markets ended on a flat note for the month ended 15 September 2011, amidst huge volatility. The rise in volatility could be attributed to the investors being more and more skeptical and confused about the outcome of various macro-economic indicators both domestic as well as at the global level. Indian indices, Sensex and Nifty gained marginally by 0.22% Û and 0.05% Û respectively during the period. The global economic outlook continued to remain weak during the month, with increasing concerns of the global economy slipping into a recessionary mode. Some optimism was however, witnessed following the US Federal Banks statement that US economy will slowly recover, which acted as a stimulus. However, the weak employment outlook and lower GDP expectations continued to weigh down on the investor sentiments. Euro region continued to struggle to contain its sovereign debt woes. Concerns raised high over the European banks' exposure to euro zone debt crisis. The future direction would depend on the outcome of the Euro-region Finance Ministers meeting to discuss on the steps to be taken to control the debt crisis and also on the measures to protect the banks in the region. On the domestic front, Indian GDP for the first quarter grew at its slowest pace in six quarters (7.7% y-o-y) reinforcing concerns over the economy. However, given the muted recovery in the US and Europe, the GDP data was stronger-than-expected. Further, lower than expected Index of Industrial Production (IIP) growth rate for July 2011, expanding by 3.3% as against 9.9% growth a year earlier, dampened the investor sentiments, which could be attributed primarily to the adverse base effect. FII's were net sellers in equity market for the month to the extent of `3341cr. (continued on page 2) If you have trouble imagining a 20% loss in stock markets, you shouldn't be in stocks." - John Bogle Page 1 of 8

2 The yield on the 10-year benchmark paper closed marginally higher by 4bps to close at 8.34% for the month ended 15th, after touching a low of the 8.22% in the first half of the month. RBI in its recent Mid-Quarter Monetary Policy Review has hiked the policy rates again by 25bps to 8.25%. which seemed to be already factored into the yields as there was no major impact on the prevailing level. At Ventura, we believe that equity markets has the potential to act as portfolio builders in the long-run and an investor should stay invested for longer time. But the need to satisfy regular income needs would always bog the investments of every investor. To address this, in this issue of MF pointer we have emphasized on SYSTEMATIC WITHDRAWAL PLAN, which provides an option for an investor to stay invested into equity for longer periods and also provide for fixed payout options. Happy Investing!! Juzer Gabajiwala Global Market Watch A b solute (%) C A G R (%) Benchmark Country Index Level* Month Months Months Year Years Years Bovespa Brazil 56, Nasdaq USA 2, S&P 500 USA 1, BSE SENSEX India 16, S&P CNX Nifty India 5, FTSE 100 UK 5, Dow Jones USA 11, NYSE USA 7, RTS Index Russia 1, TA 100 Israel Straits Times Singapore 2, KLSE Composite Malaysia 1, Nikkei 225 Japan 8, Madrid General Spain Jakarta Composite Indonesia 3, Hang Seng Hong Kong 19, Taiwan Weighted Taiwan 7, Shanghai Composite China 2, MerVal Argentina 2, DAX Germany 5, *Data as on 15th Sep 2011 Page 2 of 8

3 Disciplined Investing, Disciplined Withdrawal Since a long time experts, financial planners and even Ventura had been advocating the benefits of investing in equity via Systematic Investment Plan (SIP). How powerful this tool is to capture opportunities in stock market and its desirability for a longer investment horizon. But when it comes to redeeming/switching we always do so in one single move, thinking this is the best price that would be available, thereby again getting us entangled in timing the market, ignoring the simple law i.e. Staying invested for a longer horizon. Ever thought of using a mutual fund portfolio to give you fixed monthly revenue for certain duration. Ever thought of Systematic Withdrawal Plan (SWP) Avoid timing the market while selling and get regular payouts. SWP What & How? Just like Systematic Investment Plans (SIPs), most mutual fund houses also offer Systematic Withdrawal Plans (SWPs). Through SWPs, one can withdraw their money gradually from an MF scheme instead of redeeming all units at once, redemption of units is done over a period of time. Thus, avoiding timing of the market and benefit from cost averaging. This works on the same principle as that of SIP's, the investor just has to intimate the fund house the fixed amount that needs to be withdraw every month/quarter. At the specified date, this fixed amount is converted into equivalent number of units as per the prevailing Net Asset Value (NAV) for the MF scheme. These units are then redeemed from the investor's mutual fund portfolio, and the money is given to the investor, leaving remaining amount to be invested. Example Let's say an investor has 10,000 units in September in an MF scheme and has given a mandate to the fund house for withdrawing `10,000p.m. through SWP on 1st day of every month. On 1 October, the NAV of the scheme is ` 150. Equivalent number of units = ` 10,000 / ` 150 = Thus, units would be redeemed from the holdings, and credited to him. ` 10,000 would be Balance units in the fund = 10, = Value of the fund ` 14,89,999.5 Now, on 1 November, the NAV is ` 16. Thus, Equivalent number of units = ` 10,000 / `160 = 62.5 (continued on page 4) Page 3 of 8

4 62.50 units would be redeemed from the holdings, and ` 10,000 would be credited to you. Balance units in the fund = = Value of the fund `15,79, Advantages of a Systematic Withdrawal Plan (SWP) Apart from helping in avoiding timing the market or benefiting from cost averaging, there some other advantages as well. Regular Income: By opting for SWP, an investor gets a fixed amount periodically (Monthly/Quarterly). Thereby it enables in ensuring a fixed amount as per the needs of the investor. Booking profits periodically: Many MF houses also offer SWP with a feature that allows investor to withdraw only the gains or appreciation made in the units. Thus, by choosing this option, an investor can book his profits while still retaining his capital in the mutual fund scheme. This is more advantageous when he has chosen the growth option in the MF scheme, as profits are automatically booked in the dividend option in the form of dividend distributions. Lower tax Implications: For periodic returns from mutual fund schemes, investors choose dividend option, which attracts Dividend distribution tax (DDT) at the rate of 13.52% incase of debt schemes and 27% in case of liquid and money market schemes. The only way to avoid DDT is to go for a cumulative option and start a SWP of the amount that is needed by the investor every month. A major benefit of SWPs is the tax rate, which is lower than the DDT. The profit from the sale of units being redeemed at every withdrawal is taxable. In the first year of investment, the profits are included in the investor's income for the year and taxed at normal rates. But after a year, the profit is treated as long-term capital gain and taxed at a flat rate of 10% or at 20% after indexation benefit (in respect of debt schemes). Is SWP right for you? Ideally, any investment in MFs should be withdrawn over a time using SWPs instead of making lump sum redemptions. A Systematic Withdrawal Plan is also good for anyone who needs regular periodic income. However, one needs to note that the amount being withdrawn is generated by diluting your units and is not a guarantee of returns. SWP is also good for retirees as it can satisfy the need of regular income. Page 4 of 8

5 FMPs (Fixed Maturity Plan) Fixed Returns, Lesser Risk and; Tax Effective An Excellent Investment a venue over Bank FDs Have you considered it? About FMP? Fixed Maturity Plan (FMPs) falls under the debt category of mutual fund with exposure to fixed income securities with the Primary objective is to generate income while protecting the capital by investing in a portfolio of debt and money market securities. They are also known as Fixed Tenure Funds (FTF) and Fixed Horizon Funds (FHF). Portfolio Compositions: The portfolio of FMPs basically consists of fixed income securities viz. Certificate of Deposits (CDs), Commercial Papers (CPs), corporate debt papers, PTCs (Pass through certificate) and other liquid & money market instruments. These securities come with lesser risk and delivers fixed returns. Maturity of instruments corresponds with the maturity of FMPs. Risk: The level of risk is less, due to exposure to Debt & Liquid instruments. It is advisable to invest in fund house with a proven track record, as risk depends on quality of debt papers in portfolio. The risk of interest rate volatility is minimal as the maturity of portfolio instruments corresponds with fund maturity. Maturity: FMPs come with different maturities ranging from 30 Days, 90 Days, 6 months, 1 year, 3 years, 5 years and are locked in till the maturities period. Investment in FMPs & Bank FDs for a period of 1 year. FMPs (Fixed Maturity Plan) Bank Fixed Deposits (FDs) Rate of Return (%) 9.50% 9.50% Taxation (%) 10.30%# 30%* Return (%) Post Tax 8.52% 6.65% #In FMPs, long-term Capital Gains are taxed@10.30% without indexation, while short-term (period less than 1 year) are taxed as per income slab. * Capital gains (Interest) from bank FDs are taxed as per income slab for both short & long term Duration. When to Invest in FMPs? It is ideal to invest in FMPs when interest rates are rising, especially FMPs with maturity ranging from 3 months to 1 year are lucrative during rising interest rate regime, as investor benefits from higher yield during maturity. It is desirable to choose dividend option for a horizon less than 1 year as it is tax effective to pay Dividend Distribution 13.52%, rather than growth option, where short-term capital gains are taxed as per the rate applicable to income slab of individual. Page 5 of 8

6 Franklin India Bluechip Fund Highlights: AUM Trend BUY NAV - Growth (G) ` (15-Sep-2011) Month ` Cr NAV Dividend (D) ` (15-Sep-2011) Jun, Week High (G) ` (09-Nov-2010) Mar, Week Low (G) ` (26-Aug-2011) Dec, Inception Date 01/Dec/1993 Sep, Fund type Large-cap Statistics# Minimum Investment ` 5000 (For Lumpsum) Std. Deviation 27.89% ` 1000 (For SIP) Beta 0.91 Fund Manager Mr. Anand Radhakrishnan, Sharpe Ratio 0.25 Anand Vasudevan Benchmark BSE SENSEX R Squared 0.99 Entry Load Nil Portfolio T/O N.A Exit Load 1% on or before 1Y Expense Ratio 1.83% # Ratios are calculated on annualised basis using 3 yrs history of half yearly data; Risk free return: 8% Scheme Analysis: Focus: Franklin India Bluechip Fund is one of the oldest diversified equity schemes in India and among the largest. In accordance with its name 'Bluechip', the scheme is focused on bluechip companies with a little exposure to midcaps and absolutely no exposure to high risk small-cap stocks. The fund's portfolio consists of prominent large-caps such as Bharti Airtel, Infosys, ICICI Bank, Reliance Industries, Grasim, HDFC Bank among prominent names. At present the fund has exposure into 15 major sectors, with 19.79% of its assets in Banking & Finance Sector followed by Oil & Gas sector forming 11.90% of its portfolio. The top 5 stocks form about 31.67% of the total portfolio. Performance: Franklin India Bluechip Fund has been a consistent performer and has been able to outperform its benchmark (Sensex) by sizable margins. During the last 12 quarters the fund has been able to outperform its benchmark for 9 quarters. In last one year the fund has delivered a return of -8.77% in comparison to % by benchmark (BSE SENSEX). The outperformance maybe attributed to the significant gains from stocks like Bharti Airtel ltd ( Û10%, adding `27.19cr), followed by Hindustan Zinc Ltd. ( Û20%, adding `5.84cr) and Idea cellular Ltd. systems Ltd ( Û36%, adding ` 5.80cr). Among the laggards were stocks like Infosys Ltd, Crompton Greaves Ltd, ICICI Bank Ltd. which declined by Ü53.76%, Ü45.40%, Ü36.75% respectively during the period. The fund has delivered a 23.09% CAGR since its inception i.e. an investment of `1Lakh has become `40.38Lakhs in approx 17.8 Years. Portfolio Churning: During the period between September 2010 and August 2011,the fund has entered into 18 new stocks like Power Grid Corp., Bajaj Auto, Hindustan Unilever, Mahindra & Mahindra etc constituting to % of the current portfolio and exited from BHEL, Bharat Electricals Ltd, PNB, Siemens etc which constituted to % of the total portfolio. AUM Change: AUM of the has increased by `867.26cr ( Û27.51%) in last 12 months, i.e from ` cr in July 2010 to ` cr in June 2011, owing to appreciation in the market value which added `348.35cr ( Û11.05%) and an inflow of `518.91cr ( Û16.46%). Recommendation: The fund through its mandate targets to invest in companies that are well managed; generate high return on capital and demonstrate the ability to deliver sustainable growth. This along with the strategy of investing in stocks that have large market capitalization and liquidity makes it suitable for an equity investor with lower risk appetite and also for those who seeks to increase the large cap portion in their overall portfolio. Page 6 of 8

7 Return Performance as on 15th Holding Period Fund (%) Category (%) Benchmark (%) 1 Month Months Year Years Years * Return upto 1 year are absolute & more than 1 Year are compounded annualized Systematic Investment Plan(SIP) Performance SIP of ` p.m Investment Tenure(in years) 3 5 Since Inception Total Investment(` Lakhs) Present Value of Fund (` Lakhs) Present Value of Benchmark (` Lakhs) If you had invested Rs 10,000 p.m since inception in Franklin India Bluechip, your investment of `21.20 Lakhs would be `1.46cr against benchmark (BSE SENSEX) which would be worth `69.76 Lakhs. Quarterly Return Performance in (%) Financial Year Q1 Q2 Q3 Q Top 5 Companies Holding (%) Top 5 Sectors Holding (%) Bharti Airtel Ltd 8.53 Banking & Finance Infosys Ltd 7.94 Oil & Gas ICICI Bank Ltd 6.58 Computers Reliance Industries Ltd Telecom Grasim Industries Ltd 3.32 Power 8.26 Total Total Total No. of Companies 45 Total No. of Sectors 15 (Note: Large cap Stocks with market cap of `10,000 crore or more, Mid cap Stocks with Market cap less than `10,000 crore but more than `2,500 crore, Small Cap Stock with market Cap less than `2,500 crore) Page 7 of 8

8 Recommended Mutual Fund Plans BUY Scheme Name Corpus NAV (`) Annualised % (` Crs)# Gr Div 1 mth 3 mths 6 mths 1 yr Income Funds Birla SL Dynamic Bond Fund 1, HDFC High Interest-STP Liquid Funds Birla SL FRF-LT Tata Floater Fund 4, Scheme Name* Corpus NAV (`) 6 mths 1 yr 3 yrs 5 yrs (` Crs)# Gr Div (%) (%) (%) (%) Hybrid - Monthly Income Plans (MIPs) HDFC MIP-LTP Fund 9, Reliance MIP Fund 7, BalancedHDFC Prudence 6, Equity Large Cap Birla SL Frontline Equity Fund 2, HDFC Top 200 Fund 11, Franklin India Bluechip Fund 4, ICICI Pru Focused Bluechip Equity 2, Equity Multi Cap Birla SL Dividend Yield Plus Fund HDFC Equity 9, ICICI Pru Discovery Fund 1, IDFC Premier Equity-A Fund 2, Reliance Equity Opportunities Fund 3, UTI Dividend Yield 3, Equity Mid Cap DSPBR Small & Mid Cap Fund 1, HDFC Mid -Cap Oppor 1, Sundaram Select Midcap Fund 2, SBI Magnum Emerging Businesses Equity - Thematic Reliance Banking Fund 1, Reliance Pharma Fund HDFC Infrastructure 1, Tax Saving Scheme (ELSS) Fidelity Tax Advt 1, HDFC TaxSaver Fund 3, ICICI Pru Tax Plan Fund 1, Fund Of Funds DSPBR World Gold Fund 1, Sensex 16, Nifty 5, *Returns for less than 1 year are absolute (in case of MIP, it is annualized) and more than 1 year are compounded annualized as on 15th. #Corpus as on June 2011 as AMFI has mandated for quarterly AUM declaration. This document is solely for private circulation only. Mutual funds like securities investments are subject to market risks and other risks. Investors are advised to read the offer document before investing. Corporate Office Address : A1, Kailash Industrial Complex, Park Site, Off LBS Marg, Vikhroli West, Mumbai Tel: mutualfunds@ventura1.com Website : Page 8 of 8