Mutual Fund Review. ICICI Securities Ltd. Retail MF Research

Transcription

1 Mutual Fund Review June 20, 2014 Equity Markets... 2 Debt Markets... 3 MF industry synopsis... 3 MF Category Analysis... 3 Equity funds... 3 Equity diversified funds... 3 Equity infrastructure fund... 3 Equity Banking Funds... 3 Equity FMCG... 3 Equity Pharma Funds... 3 Equity Technology Funds... 3 Exchange Traded Funds (ETF)... 3 Balanced Funds... 3 Monthly Income Plans (MIP)... 3 Arbitrage Funds... 3 Debt funds... 3 Liquid Funds... 3 Income funds... 3 Gilt Funds... 3 Gold ETFs: International prices continue to trade with negative bias... 3 Model Portfolios... 3 Equity funds model portfolio... 3 Debt funds model portfolio... 3 I direct Top Picks... 3 ICICI Securities Ltd. Retail MF Research Note: Whenever, returns for the scheme are shown in the report, they are for the growth option of the scheme.

2 CNX Nifty: Rally continues post elections Jun-14 Small caps rally on better growth prospects Return (%) BSE Small Cap 15.5 BSE Midcap BSE 500 BSE 100 BSE Sensex Returns : Post election outcome (May16 -June16) Sectors where policy log jam was the hurdle rallied Return (%) Reality 18.1 Metal 16.3 Cap.Goods 11.5 PSU 9.6 Con.Dura 5.6 Auto 5.0 Healthcare 4.5 IT 4.4 Sensex Returns : Post election outcome (May16 -June16) Analyst s name Sachin Jain sachin.ja@icicisecurities.com Sheetal Ashar sheetal.ashar@icicisecurites.com 3.3 Oil &Gas 1.3 Banking -1.1 FMCG Equity Markets Update Domestic equity markets continue to scale new highs and crossed on the S&P BSE Sensex and 7500 on the CNX Nifty on the back of sustained optimism over the formation of a new government at the Centre and expectations from it in taking key economic policy decisions Investors are expecting speedy and effective implementation of reforms, which would provide much needed relief from the menace of an economic slowdown and high inflation In the last few years, anxiety stemming from weak economic health and an unstable policy environment has resulted in defensive sectors commanding high scarcity premium while debt ridden cyclicals witnessed a de-rating However, the current rally has totally reversed this trend, with the frontrunners of last year (IT, pharma and FMCG) underperforming so far in On the other hand, old economy sectors, including capital goods, realty, metals, power and oil & gas have been topping the charts this year, signifying changing investor preference FII investments into Indian equities continue to surge with inflows of $9.2 billion so far in Cumulative FII investments in the last 10 years in Indian equities stand at $129.9 billion, about 1.8 times the second highest FII investment in any other emerging market, highlighting the increasing FII confidence in India We have witnessed rotation of capital not only within equities but also across asset classes. Physical savings, including gold and real estate, which were hot favourites in the last few years, have been losing sheen as the outlook on equities is improving. While equities have appreciated ~21% in 2014, gold, in terms of INR, is down ~8% Outlook Even though we have witnessed a breathtaking performance in equities, the economic performance continues to be below par. There have been no signs of a revival in the recently released Q4FY14 GDP growth of 4.6%, with FY14 growth at 4.7% closer to a decade low. On the brighter side, the new government has already given several indications of streamlining processes and facilitating faster policy actions. We believe the markets would continue to trade with a positive bias while an economic recovery will follow with a lag Though things have already started to look up for market participants, there is a risk of expectations not being met by the new government. The imminent Budget would provide the first glimpse into the policy formulation of the new government. Markets would continue to have high expectations but once the initial euphoria settles down, critical evaluation of the government's performance may lead to volatility in markets. In addition, the risk of a below normal monsoon may not only dash the hopes of rate cuts but also delay an economic revival and recovery in cyclicals Sensex earnings grew 17.1% in FY14, partly aided by suppressed growth of 6-9% in the last two years cumulatively. As the high base effect catches up, earnings would grow 16.7% and 15.2% in FY15E and FY16E, respectively. We expect the Sensex to get further re-rated and trade at 16.5x FY16E EPS of 1835 at by December 2015 with the Nifty reaching 9050 Even though stocks across the board rallied smartly in the past few months, we believe there still exist investment opportunities across a spectrum of sectors ICICI Securities Ltd. Retail MF Research Page 2

3 Yields may have peaked Yield (%) Feb-13 Mar-13 Apr-13 Jun-14 Borrowing schedule may be revised Post budget Month Gross Borrowing Redemption Net Borrowing April 68,000 40,751 27,249 May 84,000 34,361 49,639 June 46,000 11,984 34,016 July 58, ,000 August 70, ,000 September 42, ,000 Total 368,000 87, ,904 Source: RBI, ICICIdirect.com Research Longer end yields correct flattening the curve Yield (%) yr 3yr 5yr 10yr 13-Jun Corporate yields at longer end offer value Yield (%) yr 3yr 5yr 10 yr 13-Jun Debt Markets Update The election of the BJP led NDA government with an absolute majority in the General Elections bodes well for the capital markets including the fixed income market, particularly at the longer end of the yield curve A strong government can make structural changes in the economy to manage inflation and fiscal deficit, which may be positive for the fixed income market. The new government is expected to take steps for improving supply side bottlenecks to manage food and primary article inflation, which is the major source of concern for the RBI. It is also expected to adhere to fiscal consolidation and improving the investment climate in the country Some of the macroeconomic variables like current account deficit and currency volatility have already started showing improvement Yields at the longer end of the yield curve may drift lower eventually on the back of improving macroeconomic data and some signs of action by the government on some major structural reforms There have already been some signs of strong investor s appetite at lower levels as we have seen yields correcting sharply from above 9% to close to 8.5% on the benchmark 10 year G-Sec The Reserve Bank of India in its policy meeting on June 3 left the key policy repo rate unchanged at 8% as inflation concerns were showing signs of abating. The RBI said a pro-growth stance could be adopted if prices rose at a slower rate than expected. The tone of the commentary was one of caution but more dovish than previous policy meetings Outlook The reasons for inflation can be monetary, fiscal or administrative. Right now the reason for inflation is administrative logjam. If a strong government at the Centre can resolve these issues, then inflation concerns may come down. If supply side concerns are tackled efficiently, we can expect a more accommodative monetary policy, going forward Many of the fund managers are incrementally increasing their exposure to government securities at lower price levels in their income and dynamic bond funds indicating their positive stance Any sell-off in G-Secs should be utilised to increase allocation to G-Sec or income funds from an investment horizon of one or two years as any positive macroeconomic development will further lead to investors sitting on the fence to correct their current underweight stance However, since there is no immediate bullish trigger for G-Secs, it is better to deploy some portion of the portfolio in G-Sec or income funds whenever 10 year G-Sec yields is around 9% Higher accrual short-term funds with attractive yields remain an evergreen investment option with low interest rate volatility and higher accrual income ICICI Securities Ltd. Retail MF Research Page 3

4 Exhibit 1: AUM grows to 10 trillion MF industry synopsis Assets under management (AUM) of all schemes put together rose to the highest ever to reach 10 trillion, growth of 5% MoM contributed mainly by a sharp run up in equity assets Crore % 15% 10% 5% 0% -5% -10% -15% AUM MoM Growth % Exhibit 2: Equity funds AUM see good rise as markets make fresh highs % Equity Balanced FOF(Overseas) Other ETFs Income Gilt Money Market Gold ETFs Total YTD gain Source: Company, ICICIdirect.com Research HDFC continues to manage over 1 lakh crore worth of assets maintaining its topmost position even for the current quarter Exhibit 3: HDFC AMC has highest AAUM Reliance & ICICI Prudential competing for second Cr HDFC MF Reliance MF Ipru MF Birla Sunlife MF UTI MF SBI MF Mar Franklin Tempelton Kotak Mahindra DSP BlackRock IDFC MF Exhibit 4: Top 10 AMCs manage ~80% of industry AAUM % HDFC MF Reliance MF Ipru MF 9.84 Birla Sunlife MF 8.20 UTI MF 7.24 SBI MF Market share Franklin Tempelton Kotak Mahindra DSP BlackRock 4.57 IDFC MF Rest all ICICI Securities Ltd. Retail MF Research Page 4

5 MF Category Analysis Equity funds The outcome of Lok Sabha Elections 2014 was better than market expectations leading to an equity market rally With the formation of a new stable government at the Centre, the outlook on banking and infrastructure stocks improved leading to stocks zooming to 52-week highs. Banking funds having gained in the preelection rally took a breather while infra funds gained on hopes of faster project clearance and break of the policy log jam Midcap realty and infrastructure stocks gained. Recovery in the US markets and positive commentary by technology companies benefited export sector funds i.e. IT and pharma funds while profit booking was seen in FMCG on growing concerns that lower monsoons may throw a spanner in rural demand, pushing up food prices Exhibit 5: Midcap, infrastructure funds gain post election outcome The widespread anticipation among market experts about an economic turnaround after the Bharatiya Janata Party s decisive poll victory has led money to be shifted from defensives to cyclicals and industrials Banking 1.7 Infra Return % Mid cap Large Cap -7.5 Multicap FMCG Pharma IT Post Election Pre Election Source: Crisil Fund Analyser, ICICIdirect.com Research; 1M absolute return Pre& Post Lok Sabha 2014 election results Exhibit 6: Highest monthly inflow in last two years Exhibit 7: AUM at year high as equity markets trading at all-time high Net Inflow ( Cr ) Crore Net inflow (Equity + ELSS) Equity +ELSS Exhibit 8: \Deployment of equity funds ( crore) (May 2014) Allocation Banks Software Pharma Finance Consumer Non Durables Auto Petrole Indusrial Construction Auto capitla um Projects Ancillaries goods Rupees % of total Source: SEBI, ICICIdirect.com Research, Sector Classification (as per AMFI) ICICI Securities Ltd. Retail MF Research Page 5

6 View Short term: Neutral Long-term: Positive Equity diversified funds Post the election outcome, diversified equity funds have delivered returns that investors wanted to see for a long time. Many investors who were accumulating through the volatility that was there in the equities since 2008, have finally been rewarded Formation of the Modi-led single majority government has fuelled hopes that the policy logjam will be cracked and growth will be back on track. It has acted as a catalyst for a bull market rally We expect the BSE Sensex EPS to grow 16.7% and 15.2% in FY15E and FY16E, respectively, to be at 1835 in FY16E. Even after the recent rally, the BSE Sensex is currently trading at a price to earning multiple of 13 times FY16 EPS of We expect the Sensex to get further re-rated and trade at 16.5x FY16E at by December 2015 with the Nifty reaching 9050 Post the decisive mandate, equity market sentiments have improved. India continues to be a favoured destination among emerging economies. With the hopes of a strong macroeconomic recovery, FII investments may continue to be strong We, therefore, recommend midcap funds to deliver better returns. The pro-growth government at the Centre augurs well for midcap companies to enter a high growth phase and see multiple re ratings. For long term SIPs, diversified funds can be preferred as they invest in both growth as well as value stocks Though things have already started to look up for market participants, there is a risk of expectations not being met by the new government. A critical evaluation of the government's performance may lead to volatility in markets Large cap Franklin India Bluechip Birla Sunlife Frontline Equity ICICI Prudential Focused Bluechip Equity UTI Opportunities Fund Diversified Franklin India Prima Plus ICICI Prudential Dynamic Plan Reliance Equity Opportunities Midcap HDFC Mid-Cap Opportunities Fund ICICI Prudential Discovery Fund IDFC Premier Equity Fund plan A SBI Magnum Global (Refer to for details of the fund) ICICI Securities Ltd. Retail MF Research Page 6

7 View Short-term: Positive Long-term: Positive Equity infrastructure fund The landslide victory of the NDA led government, which has a prodevelopment agenda, has raised hopes for the economy and investment cycle recovery. This has turned sentiments positive towards infrastructure sectors leading to % run up in the sector in the last three months Post this run up, we believe the focus will now be on stocks either focusing on de-leveraging the balance sheet or that have comfortable balance sheets along with relatively better management and can benefit from opportunities in the investment cycle recovery. Examples of such stocks are L&T, Jaiprakash Associates and Sadbhav Engineering Though there has been a sharp run in prices, we believe any correction in stocks should be used as an opportunity to accumulate stocks Franklin Build India Fund HDFC Infrastructure Fund ICICI Prudential Infrastructure Fund Refer to for details of the fund View Short-term: Neutral Long-term: Positive Equity Banking Funds A turnaround in sentiment for the banking sector on hopes of an expected improvement in the economy has resulted in a sharp appreciation in stock prices. Though the NPA cycle will take a while to recover, PSU banks are expected to continue their upturn in the near term as they still offer value Private sector banks are trading at a premium and are expected to hold on to valuations Credit and deposit growth are expected to improve from the current 13-15% range with an increase in capex We remain positive on the sector with a long term bias ICICI Prudential Banking & Financial Services Reliance Banking Fund UTI Thematic - Banking Sector Fund Refer to for details of the fund View Short-term: Neutral Long-term: Neutral Equity FMCG With the visible demand slowdown in the FMCG industry, volume growth has been muted in the last year The possibility of weaker monsoons could result in further demand deterioration, mainly from the rural side Considering the visible slowdown and expensive valuation multiples, we believe FMCG stocks may not be in flavour in the next quarter. Our stance remains neutral for the FMCG sector ICICI Prudential FMCG Fund SBI FMCG Fund Refer to for details of the fund ICICI Securities Ltd. Retail MF Research Page 7

8 Equity Pharma Funds View Short-term: Neutral Long-term: Neutral We continue to expect short-term temperance in buying in the pharma space on account of expectations of a pro-growth, pro-reforms government in the Centre. Hence, we envisage some rejuvenated buying interest in cyclicals such as power, capital goods, metals and materials The impact of strengthening of the rupee is also expected to lead to a pause in buying in the pharma space However, we remain neutral on the pharma industry. Structural strongholds such as manufacturing fungibility, geographical diversification, product approvals/pipeline and, hence, clear visibility will, however, keep the sector in focus for corrective buying Reliance Pharma Fund SBI Pharma Fund UTI-Pharma & Healthcare Refer to for details of the fund Equity Technology Funds View Short-term: Neutral Long-term: Neutral Technology funds, after putting up a stupendous performance, may see some profit booking in the near term Dollar revenue growth for tier-is was reasonable in a seasonally slow March 2014 quarter. Revenues grew an average 1.8% QoQ in Q4FY14 (vs. 2.1% in Q4FY13 but note H1FY14 was strong and grew average 3.2% vs. 2% in H1FY13) led in part by client specific issues and a weak India business. From an FY15E perspective, though Nasscom s growth guidance, at 13-15%, is optimistic, commentary from tier-i earnings suggest modest pressure on IT budget spend patterns despite timely conclusion of the budget cycle However, valuations are demanding at ~16.2x blended one-year forward for tier-is (~10% premium to Sensex) and capture a majority of tailwinds related to a depreciated rupee Though the demand environment outlook continues to be optimistic with both themes recovery in the US and penetration in Europe playing out, near team challenges from an appreciating rupee could not be overlooked as the rupee has appreciated 2.3% relative to the FY14 average of 60.3 and 1.8% since April 1, This has raised anxiety on its assumption going into FY16E. Rupee appreciation, if any, could impact margins and earnings going into FY15E. However, long term growth prospects of the sector are intact ICICI Prudential Technology Fund DSPBR Technology fund Refer to for details of the fund ICICI Securities Ltd. Retail MF Research Page 8

9 Exchange Traded Funds (ETF) In India, there are three kinds of ETFs available: Equity Index ETFs, liquid ETFs and gold ETFs An equity index ETF tracks a particular equity index such as the BSE Sensex, NSE Nifty, Nifty Junior, etc Traded volumes should be the major criterion that is used while deciding on investment in ETFs. Higher volumes ensure lower spread and better pricing to investors... Tracking error, though it should be considered, is not the deciding factor as variation among funds is not huge... An equity index ETF scores higher than index funds on several grounds. The expense of investing in ETFs is relatively less by % in comparison to an index fund. The expense ratio for ETFs is in the range of % excluding brokerage while for index funds the expense ratio varies in the range of %. However, brokerage (which varies) is applicable on ETFs while there are no entry loads now on index funds The tracking error, which explains the extent of deviation of returns from the underlying index, is usually low in ETFs as it tracks the equity index on a real time basis whereas it is done only once in a day for index funds ETFs also provide liquidity as they are traded on stock exchanges and investors may subscribe or redeem them even on an intra-day basis. This is unavailable in index funds, which are subscribed/redeemed only on a closing NAV basis There are over 400 ETFs traded globally. ETFs are transparent and cost efficient. The decision on which ETF to buy should be largely governed by the decision on getting exposure in that asset class Volumes are higher only in the Goldman Sachs Benchmark ETFs and tracking error is also lowest at 0.01%. Therefore, it is our top pick for investors wanting Nifty-linked returns CPSE ETF is a new entry in the Goldman Sachs ETF offering. Invest in selective 10 PSU stocks and will be listed on the exchange in April Exhibit 9: CPSE ETF leads to higher inflows and outflows Exhibit 10: AUM also sees jump Net Inflow ( Cr ) Crore Other ETFs Source: AMFI, ICICIdirect.com, Research Source: AMFI, ICICIdirect.com, Research ICICI Securities Ltd. Retail MF Research Page 9

10 View Short-term: Neutral Long-term: Neutral Investors with a limited investible surplus and a lower risk appetite but with a willingness to invest in equities can look to invest in these funds Exhibit 11: Outflows as market at all-time high Balanced Funds Balanced funds are hybrid funds. More than 65% of the overall portfolio is invested in equities. Hence, as per provisions of the Income Tax Act, 1961, any capital gains over one year become tax free. Also, dividends declared by funds are tax free In case you separately invest 35% of your investible corpus in a debt fund, the same will be subject to higher taxation. However, if the whole of the corpus is invested in balanced funds, 100% shall have lower taxation applicable as mentioned above After a sharp rally in equity markets, the funds can be a preferred investment avenue as the debt proportion serves to protect on intermediate relief rallies or the downturn while providing 65% participation on further upsides Exhibit 12: AUM shrinks Net Inflow ( Cr ) Crore Balanced ICICI Prudential Balanced - Advantage Fund HDFC Balanced Fund Tata Balanced Fund (Refer to for details of the fund) View Short-term: Positive Long-term: Positive In the recommended MIPs, HDFC MIP LTP and Reliance MIP are aggressive MIPs (higher equity allocation) while Birla Sunlife MIP II Savings 5 Plan is a conservative MIP MIP should be a preferred debt investment for funds that need to be parked for over two years Monthly Income Plans (MIP) An MIP offers investors an option to invest in debt with some participation in equity, approximately 10-25% of the portfolio. They are suitable for investors who seek higher return from a debt portfolio and are comfortable taking nominal risk. The debt corpus of the portfolio provides regular income while the equity portion of the fund provides alpha. However, returns can also get eroded by a fall in equities MIPs can be classified into aggressive MIP and conservative MIP based on its equity allocation. Risk averse investors should invest in MIPs with lower equity allocation to avoid capital erosion Birla Sun Life MIP II - Savings 5 Plan ICICI Prudential MIP 25 Reliance Monthly Income Plan (Refer to for details of the fund) ICICI Securities Ltd. Retail MF Research Page 10

11 View Short-term: Neutral Long-term: Neutral Arbitrage Funds Arbitrage funds seek to exploit market inefficiencies that get manifested as mispricing in the cash (stock) and derivative markets Availability of arbitrage positions depends very much on the market scenario. Directional movement in the broader index attracts speculators in the market and cost of funding makes futures positions biased Arbitrage funds are classified as equity funds as they invest into equity share and equity derivative instruments. Since these are classified as equity funds for taxation, dividends declared by the funds are tax free. No capital gains will be applicable if they are sold after a year These funds can be looked upon as an alternative to liquid funds. However, for these funds, returns totally depend on arbitrage opportunities available at a particular point of time and investors should consider reviewing the same before investing. Returns of arbitrage funds are not linear and, therefore, unsuitable for investors who want consistent return across time period Arbitrage funds should be used as a liquid investment and should not be a major part of the investor s portfolio Availability of arbitrage positions depends very much on the market scenario. Directional movement in the broader index attracts speculators in the market and cost of funding makes the futures positions biased In case of positive movement, long build-up in futures puts pricing in an upward bias and creates a window for direct arbitrage positions On the other hand, negative bias attracts fresh sellers in the market and speculators try to sell the stock much cheaper than theoretical prices. In such situations, reverse arbitrage opportunities arise On the other hand, a range bound market does not give ample room to create arbitrage positions ICICI Prudential Equity - Arbitrage Fund Regular IDFC Arbitrage Fund - (Regular) Kotak Equity Arbitrage Fund SBI Arbitrage Opportunities Fund (Refer to for details of the fund) ICICI Securities Ltd. Retail MF Research Page 11

12 Debt funds Exhibit 13: Yields easing 38 bps in last month lead to rally in debt market Returns(%) Income UST Liquid Crisil LiquiFex Income ST Crisil STBx Income LT Crisil ComBex Gilt Funds I-SEC Com.Gilt Source: Crisil Fund Analyser ICICIdirect.com Research Note : One month return as on Jun 16,2014 Exhibit 14: Deployment of funds : May year and above Corporate Debt Government Securities CP 182 days to 1 year 90 days to 182 days Less than 90 days Bank CD Bank CD CP Bank CD Bank CD Treasury Bills CBLO Other Money Market Investments Corporate Debt PSU Bonds Securitised Debt Bank FD Source: SEBI, ICICIdirect.com Research Note : Holding as percentage of total AUM Exhibit 15: G-Sec yield curve Yield (%) yr 3yr 5yr 10yr 13-Jun Exhibit 16: Corporate bond curve Yield (%) yr 3yr 5yr 10 yr 13-Jun ICICI Securities Ltd. Retail MF Research Page 12

13 View Neutral Liquid Funds The central bank aims to provide ample liquidity to make funds available for credit via conducting term repos while restricting the daily borrowing under the liquidity adjustment facility. Also RBI s currency intervention leads to infusion of funds in to the systems The certificate of deposit (CD) and the commercial paper (CP) yields, therefore, on the back off comfortable liquidity scenario have corrected by bps from above 9% to 8.7% levels. Liquid funds primarily invest in these papers Going forward, liquid funds, therefore, may earn marginally lower accrual income but may still return more than 8%, making them the best available and safest investment option Exhibit 17: Call rates near MSF rate Exhibit 18: CP/CD yields shoot up % Apr-13 Jun-14 % Apr-13 Jun-14 Call rate 3M CD 3M CP Exhibit 19: Borrowings under LAF window capped bln Apr-13 Jun-14 LAF ICICI Securities Ltd. Retail MF Research Page 13

14 Exhibit 20: Redemption may take place at financial year end Exhibit 21: AUM above 2 trillion but may see drop next month Net Inflow ( Cr ) Crore Money Market Exhibit 22: Returns may stay above 8% per annum Liquid funds deliver better risk adjusted return Returns % M 3 M 6 M 1 Yr 3Yr 5Yr Category Average Crisil liquid Fund Index Source: Crisil Fund Analyser,, ICICIdirect.com Research Note : Absolute returns as on June 16, 2014 HDFC Cash Management Fund - Savings Plan SBI Magnum InstaCash Reliance Liquid Fund - Treasury Plan (Refer to for details of the fund) ICICI Securities Ltd. Retail MF Research Page 14

15 Exhibit 23: Higher yield attracts strong inflows Net Inflows (.Cr) View Ultra-short term: Positive Short-term: Positive Long-term: Positive The BJP has emphasised in its manifesto that it will strictly implement fiscal discipline. It also mentioned that it will take measures to control inflation and even mentioned a possible price stabilisation fund along with dovetailing MGNREGS with agricultural operations. Narendra Modi has also mentioned restructuring the Food Corporation of India and improving the APMC Act. All these structural measures were long overdue and could be instrumental in bringing inflation to lower levels Many fund managers are incrementally increasing the exposure to government securities at lower price levels in their income and dynamic bond funds indicating their positive stance Income funds Income funds gained last month as the benchmark 10 year government securities further corrected by 20 bps for the second consecutive month of such a sharp decline. The RBI was seen giving a dovish tinge to the monetary policy outlook by stating that "if disinflation, adjusting for base effects, is faster than currently anticipated, it will provide headroom for an easing of the policy stance This was the first time after the new governor took charge that the official document had indicated at monetary easing. Debt market participants cheered the policy and FIIs poured in money exhausting the limit available to them Going forward, the Budget would be the key trigger indicating the NDA government s stance towards fiscal consolidation. The market will keenly watch the Budget as it will determine the bond supply and have a long term impact on the inflation trajectory We believe, in the longer term, as inflation cools off (which is more likely given that both RBI and central government are keen to bring it down) interest rates are bound to head south. Price and yield has an inverse relationship. Therefore, long term income funds are bound to deliver decent returns over next one or two years Higher accrual short-term funds with attractive yields remain an evergreen investment option with low interest rate volatility and higher accrual income. The G-Sec yields offers value at around 9% for the benchmark 10 year G-Sec yield as indicated by the absolute level from a historical perspective, the spread against repo rate and spread against AAA/AA corporate bonds Exhibit 24: AUM steady Crore Income Exhibit 25: Periodic returns (category average) % M 3 M 6 M 1 Yr 3Yr 5Yr Long Term Short Term Ultra Short Term Source: CRISIL Fund Analyser, ICICIdirect.com Research, Returns as on May 19, 2014; Returns above one year are CAGR returns ICICI Securities Ltd. Retail MF Research Page 15

16 Ultra Short Term Funds Ultra-short-term fund returns are attractive on risk adjusted basis IDFC Money Manager - Investment Reliance Medium Term Templeton India Low Duration Short Term Funds Short-term funds will benefit as short-term yields are likely to decline first compared to long-term yields Birla Short term Opportunities Plan ICICI Prudential Regular Savings Templeton India Short Term Income Plan UTI Short Term Income Fund Long term / Dynamic Bond Funds Dynamic bond funds are suitable for all types of investors and for longer duration They can take exposure to all durations as per the interest rate outlook and switch between G secs and corporate bonds IDFC Dynamic Bond Fund ICICI Prudential Income Plan - Regular Plan Birla Sun Life Income Plus - Regular Plan (Refer to for details of the fund) View Short-term: Neutral Long-term: Neutral Gilt Funds With a strong government in place, decisions around credible fiscal compression, which were difficult in a coalition, can now potentially be made. Supply side measures that can ease input cost inflation and improve the potential growth rate can also help the disinflation process Monsoon and fiscal policy of the new government are two key triggers for G-sec yields The G-sec yields offer value at around 9% for the benchmark 10 year G- Sec yield as indicated by the absolute level from a historical perspective Going forward, the Budget would be the key trigger indicating the stance of the NDA government towards fiscal consolidation. The market will keenly watch the Budget as it will determine the bond supply and have a long term impact on the inflation trajectory We believe G sec yields should be played thorough income funds as they have a diverse portfolio and, hence, provide some protection against sharp volatile yield movements Birla Sun Life Gilt Plus - PF Plan - Regular ICICI Prudential LT Gilt Fund - PF Option - Regular (Refer to for details of the fund) ICICI Securities Ltd. Retail MF Research Page 16

17 Gold($/Ounce) $ Price ($/Ounce) Gold (INR spot) Apr-13 Price ( /10 grams) 5 Profit booking in gold ETFs Net Inflow ( Cr ) AUM decline Crore Jun-14 Jun Gold ETFs: International prices continue to trade with negative bias Gold has corrected in the international market after a 12-year bull-run. Once considered to be a safe haven, it has corrected from an all-time high of 34,500 in last August to 27,000 per 10 gram on the back of an improving global economy The following are the reasons for the subdued attraction for Indian gold: a Improving US economy: The strong performance of global equities and easing geo-political tensions has reduced the safe haven appeal. Fed s QE tapering programme would likely remain on track on the back of a gradual improvement in US macroeconomic data, which would also strengthen the dollar. A stronger dollar would remain an overhang on international gold prices b Import restrictions: Indian gold prices remain resilient even as global prices corrected from all-time highs as the UPA government had imposed import restrictions to bring down India's current account deficit and stem the rupee decline. We have already witnessed a sharp correction of 800 in a day recently when there was an announcement of easing of restriction on gold imports by the Reserve Bank of India. Further correction is not ruled out if the new government decides to further remove the import restrictions c Currency volatility: One of the reasons for gold prices remaining high in India despite weak international prices was a sharp depreciation of the Indian rupee, which fell to a low of per dollar last August. Oil imports, FIIs outflows and an appreciating US dollar had kept Indian currency under pressure. However, the rupee strengthened following measures by the previous Finance Minister and RBI Governor Raghuram Rajan. It bounced back to 60/dollar. Recent inflows in the Indian market on hopes of a stable government have strengthened the rupee further. The Indian currency is likely to be more stable with an appreciating bias. The same may keep Indian gold prices under pressure d Better returns in equities: While gold has failed to give positive returns in the last year, investors are slowly moving back to equities after a five-year lull for better returns. While Indian equity markets witnessed a sharp up move and hit fresh all-time highs, gold has delivered negative returns However, gold acts as a portfolio diversifier as fundamental factors that affect other financial assets do not affect gold in a similar fashion. Adding gold to the portfolio, helps improve risk adjusted return of the portfolio. For Indian investors, gold acts as an even better portfolio diversifier. The fundamental factors that drive international gold prices also affect the rupee. Hence, the fall in international gold prices is compensated by a fall in the rupee Also, since Indians do not have too many international investments options, gold can be a proxy for global diversification. Hence, at this juncture, we believe investment in gold should not be from an absolute return point of view but should be as a tool for diversification. Investment in gold should be restricted to around 5-10% of the portfolio Gold ETFs ICICI Securities Ltd. Retail MF Research Page 17

18 Model Portfolios Equity funds model portfolio Investors who are wary of investing directly into equities can still get returns almost as good as equity markets through the mutual fund route. We have designed three mutual fund model portfolios, namely, conservative, moderate and aggressive mutual fund portfolios. These portfolios have been designed keeping in mind various key parameters like investment horizon, investment objective, scheme ratings, and fund management. No changes have been made in the current month Exhibit 26: Equity model portfolio Particulars Aggressive Moderate Conservative Review Interval Monthly Monthly Quarterly Risk Return High Risk- High Return Medium Risk - Medium Low Risk - Low Return Return Funds Allocation % Allocation Franklin India Prima Plus Birla Sunlife Frontline Equity ICICI Prudential Dynamic Plan ICICI Prudential Focussed Bluechip Eq UTI Opportunites Grand Total(a+b) Source:, ICICIdirect.com Research Since inception, all three portfolios have outperformed the benchmark BSE 100. Exhibit 27: Model portfolio Performance (since inception) Aggressive Moderate Conservative BSE 100 Source: : Crisil Fund Analyser, ICICIdirect.com Research Portfolio inception date : September 30, 2009; Returns as on May 30, 2014 ICICI Securities Ltd. Retail MF Research Page 18

19 Debt funds model portfolio We have designed three different mutual fund model portfolios for different investment duration namely less than six months, six months to one year and above one year. These portfolios have been designed keeping in mind various key parameters like investment horizon, interest rate scenarios, credit quality of the portfolio and fund management, etc. Keeping in mind the current market scenario and portfolio of the funds we have changed the allocation. Based on the portfolios of individual funds, we have introduced new funds in the portfolio. Exhibit 28: Debt funds model portfolio Particulars Time Horizon Objective 0 6 months 6months - 1 Year Above 1 Year Liquidity Liquidity with moderate return Above FD Review Interval Monthly Monthly Quarterly Risk Return Very Low Risk - Nominal Return Medium Risk - Medium Return Low Risk - High Return Funds Allocation % Allocation Ultra Short term Funds IDFC Money Manager Fund - Investment Plan Templeton India Low Duration Fund Reliance Medium term fund Short Term Debt Funds Taurus Short Term Income Fund Birla Sunlife Short Term Fund Birla Sunlife Short Term Opportunites Fund ICICI Prudential Short Term ICICI Prudential Regular Savings IDFC SSI Short Term Sundaram Select Debt UTI Short Term Fund Tempelton Short term income Long Term/Dynamic Debt Funds IDFC Dynamic Bond fund Total Source: ICICIdirect.com Research Exhibit 29: Model portfolio performance : FY15 till May 30, 2014 % Months 6Months - 1Year Above 1yr Portfolio Index Source: Crisil Fund Analyser,, ICICIdirect.com Research *Index: 0-6 month s portfolio Crisil Liquid Fund Index; 6 months-1 year Crisil Short term Index Above 1 year: Crisil Composite Bond Index ICICI Securities Ltd. Retail MF Research Page 19

20 I direct Top Picks Exhibit 30: I-direct Top picks Category View Equity Top Picks Short Term Long Term Largecaps Positive Positive Birla Sunlife Frontline Equity ICICI Prudential Focussed Equity Fund SBI Bluechip UTI opportunites Fund BNP Paribas Equity Midcaps Positive Positive HDFC Midcap Opportunities ICICI Prudential Discovery Fund IDFC Premier Equity SBI Emerging Bluechip Diversified Positive Positive Franklin India Prima Plus ICICI Prudential Dynamic Plan Reliance Equity Opportunites ELSS Positive Positve BNP Paribas Tax advantage ICICI Prudential Tax Plan Franklin India Tax shield Debt Category View Top Picks Liquid Funds Positive HDFC Cash Mgmnt Saving Plan Reliance Liquid Treasury Plan Ultra Short Term Positve IDFC Money Manager Fund - Investment Plan - Plan A Reliance Meduim Term Templeton India Low Duration Fund Short Term Positive Birla Sunlife Short Term Opportunites ICICI Prudential Regular Savings Templeton India Short term UTI Short Term Income Funds Neutral Reliance Dynamic Bond Fund IDFC Dynamic Bond Fund SBI Dynamic Bond Fund Gilts Funds Neutral ICICI Pru Gilt Inv. PF Plan Birla Sunlife Gilt Plus MIP Positive Birla Sunlife Savings 5 Aggressive ICICI Prudential MIP 25 Reliance Monthly Income Plan Source: ICICIdirect.com Research (Refer to for details of the fund) ICICI Securities Ltd. Retail MF Research Page 20

21 Pankaj Pandey Head Research ICICIdirect.com Research Desk, ICICI Securities Limited, 1 st Floor, Akruti Trade Centre, Road No. 7, MIDC, Andheri (East) Mumbai research@icicidirect.com Disclaimer ICICI Securities Ltd. - AMFI Regn. No.: ARN Registered office of I-Sec is at ICICI Securities Ltd. - ICICI Centre, H. T. Parekh Marg, Churchgate, Mumbai , India. The selection of the Mutual Funds for the purpose of including in the indicative portfolio does not in any way constitute any recommendation by ICICI Securities Limited (hereinafter referred to as ICICI Securities) with respect to the prospects or performance of these Mutual Funds. The same should also not be considered as solicitation of offer to buy or sell these securities/units. The investor has the discretion to buy all or any of the Mutual Fund units forming part of any of the indicative portfolios on icicidirect.com. Before placing an order to buy the securities/units forming part of the indicative portfolio, the investor has the discretion to deselect any of the securities/units, which he does not wish to buy. Nothing in the indicative portfolio constitutes investment, legal, accounting and tax advice or a representation that any investment or strategy is suitable or appropriate to the investor's specific circumstances. The details included in the indicative portfolio are based on information obtained from public sources and sources believed to be reliable, but no independent verification has been made nor is its accuracy or completeness guaranteed. The securities included in the indicative portfolio may not be suitable for all investors, who must make their own investment decisions, based on their own investment objectives, financial positions and needs. This may not be taken in substitution for the exercise of independent judgement by any investor. The investor should independently evaluate the investment risks. ICICI Securities and affiliates accept no liabilities for any loss or damage of any kind arising out of the use of this indicative portfolio. Past performance is not necessarily a guide to future performance. Actual results may differ materially from those set forth in projections. ICICI Securities may be holding all or any of the securities/units included in the indicative portfolio from time to time. ICICI Securities Limited is not providing the service of Portfolio Management Services (Discretionary or Non Discretionary) to its clients. Mutual fund investments are subject to market risks, read all scheme related documents carefully. Investors should consult their financial advisers if in doubt about whether the product is suitable for them. The information contained herein is strictly confidential and meant solely for the selected recipient and may not be altered in any way, transmitted to, copied or distributed, in part or in whole, to any other person or to the media or reproduced in any form, without prior written consent of ICICI Securities Limited. The contents of this mail are solely for informational purpose and may not be used or considered as an offer document or solicitation of offer to buy or sell or subscribe for securities or other financial instruments or any other product. While due care has been taken in preparing this mail, I-Sec and affiliates accept no liabilities for any loss or damage of any kind arising out of any inaccurate, delayed or incomplete information nor for any actions taken in reliance thereon. This mail/report is not directed or intended for distribution to, or use by, any person or entity who is a citizen or resident of or located in any locality, state, country or other jurisdiction, where such distribution, publication, availability or use would be contrary to law, regulation or which would subject I-Sec and affiliates to any registration or licensing requirement within such jurisdiction. ICICI Securities Ltd. Retail MF Research Page 21