CAPITAL LETTER

CAPITAL
LETTER
Volume 4

March 06, 2012

Issue 03

Making the FundsIndia experience more unique and enriching

Greetings from FundsIndia!
As we promised in our last month's newsletter and as many of you may have noticed, we have rolled out a
new user interface for FundsIndia.com. The feedback that we have received has been overwhelmingly positive with many people appreciating the clean and more professional look of the new lay out. The few negative feedbacks have been regarding specific functionality or specific device/browser scenarios. We are
working out some of these issues and are positive that we will be able to set it right within a week or so.
The main reason for the UI change, apart from giving the site a professional look, is to make sure that there is a consistency
of appearance across the platform. This new interface gives us the opportunity to do more interesting things with the software in terms of functionality as well.
Over the next few weeks/months, our customers will see new features and functionalities that will make investing with
FundsIndia an easier and a more enjoyable experience. Some of these include more social features, a better interface to
search and select mutual funds, more in-depth, customized reporting options, and support for more devices and interfaces.
In combination, these additions will make investing through FundsIndia a more unique and enriching experience than ever
before.
We wanted to roll out the new interface before we started work on these new features since the new interface provides us a
solid foundation that can handle the complex needs of these new functionalities.
In other news, it is budget time in the country, and we, along with all of you, are looking forward (with some trepidation,
this time around) to what the money mandarins come out with on March 16. Will all the questions regarding DTC, exemptions, ELSS, deductions etc will find a fair and clear answer? One can only hope...
Happy Investing!
Srikanth Meenakshi

Disclaimer: Mutual Fund Investments are subject to market risks. Please read all scheme related documents carefully before investing.

Disclaimer: Mutual Fund Investments are subject to market risks. Please read all scheme related documents carefully before investing.

Get upto Rs.1,20,000 exempted from your Income-tax when

You invest in ELSS Mutual Fund schemes and Infrastructure Bonds!
Why tax saving mutual funds?
1. Get upto Rs.1,00,000 exempted from tax under section 80cc.
2. Lowest lock-in period - just 3 years - of all tax saving investments.
3. 100% equity market exposure - best return potential of all investment classes
4. Easy and free - no demat account required, no entry load, no transaction fees to invest
So, tax saving mutual funds are easy to invest in, offer the best return potential, and has the lowest lock-in
period of all tax saving investments!
For example, if you had invested Rs. 20,000 in HDFC Tax Saver fund (one of our current recommended
funds) in the year 2008, not only would you have saved upto Rs. 6000 in taxes in the same year, your investments would have grown to Rs. 30,592 now (*as of September 22, 2011) - an annual return of 15.22%! .
What's more, the profit of Rs. 10,592 would be tax free as well!
Why infrastructure bonds?

1.Get an additional Rs.20,000 exempted from your income-tax (under section 80ccf)
2.Attractive interest rates
3.Can be acquired in physical form or by using your existing demat account
Click here to start investing now! - https://www.fundsindia.com/tax-saving-investment

Deposits from Top rated Companies

Company Name

Rating

1 Year

2 Year

3 year

HDFC LIMITED

FAAAA

9.5%

9.65%

9.75%

ICICI HOME FINANCE COMPANY LIMITED

MAAA

8.25%

8.75%

8.75%

LIC HOUSING FINANACE LTD

FAAA

7.0%

7.4%

7.65%

MAHINDRA AND MAHINDRA

FAAA

9.5%

10%

10.25%

SHRIRAM TRANSPORT FINANCE CO.LTD

TAA

9.25%

9.75%

10.75%

DHFL

AA+

10.5%

10.5%

10.5%

Disclaimer: Mutual Fund Investments are subject to market risks. Please read all scheme related documents carefully before investing.

Silver Linings in 2012

BY SANJAY KUMAR SINGH

As 2011 draws to a close, the economic outlook appears gloomy. Growth is slowing down: with luck the economy may clock a
growth rate of 7 per cent in FY12, quite a comedown from the 8.5 per cent rate notched up in FY11. Manufacturing has been badly
hit, as the lIP (index of industrial production) figure of -5.1 per cent for October brought home starkly. Private investment has
been on the decline ever since the 2008 crisis. Now private consumption too is faltering, owing to high inflation (that reduces
purchasing power), high interest rates, and a weak job market in urban areas. Government spending, the mainstay of GDP growth
since the credit crisis, is also bound to decline in future, since the governments revenues have taken a knocking amid slowing
growth. Moreover, it will perforce have to curtail spending in order to rein in its fiscal deficit. Against such a backdrop, to get dispirited about the economys prospects would be natural. However, a closer look reveals a few silver linings.
High inflation has been the economys biggest bugbear for the last two years (last 21-month WPI average: 9.7 per cent). But December onwards inflation is expected to begin softening. The Reserve Bank of India (RBI) expects it to abate to 7 per cent by
March 2012, while economists at Goldman Sachs expect it to average 5 per cent in FY13. Several factors will contribute to this
softening: the high base of 2011; softening of commodity prices due to weak global growth; lower food inflation due to a good
monsoon in 2011, and lower inflation in protein-based foods due to a cyclical improvement in supply.
If inflation softens, can interest-rate cuts be far behind? With growth decelerating rapidly, the central bank will be forced to reverse its policy stance. Rate cuts could commence as early as January or latest by the middle of 2012. How early rate cuts begin,
and how aggressively they are undertaken will determine how quickly the Indian economy shakes off its growth blues. Falling
interest rates will provide a fillip both to private consumption and private investment (though in case of the latter, policy initiatives and improvement in economic outlook will also be called for). Even equity markets could rally in anticipation of a reversal in
the interest-rate cycle.
The Indian rupee has depreciated sharply in recent months owing to Indias current account deficit, capital outflows, and lack of
fresh inflows. While the rupees depreciation will make imports more expensive, it will also enhance Indias export competitiveness, which the country will be able to capitalise on once global demand revives.
Among the two major international trouble spots, US and Europe, economic data from the former indicates that its economy has
stabilised to some degree in recent months. In Q3 2011 its GDP grew 2 per cent (revised downward from the initial 2.5 per cent),
an improvement over the 1.3 per cent growth in Q2 and 0.4 per cent in Q1. The consumer confidence index is up, the unemployment rate has tapered downward to 8.6 per cent (from 9.2 per cent in July 2011), and jobless claims have also fallen.
On the policy front, the Indian government has indeed disappointed. Sectors like mining, infrastructure and capital goods have
borne the brunt of delays in project approvals. After the governments decision to hold in abeyance its decision to open up the
retail sector further to FDI, doubts have arisen about its willingness and ability to push through long-pending reforms. Will the
Goods and Services Tax (GST) and the Direct Tax Code (DTC) be implemented in 2012? Will the Land Acquisition Bill, the Mineral and Mining Bill, and the Company Amendment Bill receive Parliaments approval? None can vouch for these reforms. In view
of the xenophobic outpourings of the political class in the debate on FDI in retail, it is doubtful if proposals to raise the FDI limit
in insurance or to allow foreign players into the education sector will receive the Parliaments approval anytime soon. However,
even on the reforms front there is room for optimism. Though the centres record will at best remain patchy, states like Gujarat,
Tamil Nadu and Bihar have initiated their own reforms. This is cause for celebration.
Overall, in 2012 (or FY13), the economy may not fare much worse than in 2011 (unless new risks appear), so undue pessimism
about its prospects is unwarranted. But it is unlikely to fare much better either. Which raises the question: will the around 7 per
cent growth rate (the current estimate by private-sector economists for both FY12 and FY13) suffice to meet the aspirations of an
increasingly ambitious middle class that has tasted 8 per cent trend growth and knows it is achievable, if only the quality of governance were to improve?
Misplaced ardour
Indians excessive lust for gold is neither in their nor the countrys interest
John Maynard Keynes, the economist who revolutionised his subject with the idea that governments should undertake countercyclical spending to pull economies out of recession, once referred to Indians fondness for gold as the the ruinous love of a barbaric relic. His words ring true even today.
Disclaimer: Mutual Fund Investments are subject to market risks. Please read all scheme related documents carefully before investing.

India remains the worlds largest consumer of gold. Indian households hold a cumulative 18,000
tonnes, which amount to 11 per cent of the total global stock. In 2010 Indias volume of gold consumed rose 72 per cent year-onyear. And despite prices reining high, consumption is up 5 per cent in the first three quarters of 2011.
In normal circumstances, Indians lust for the yellow metal would evoke neither comment nor worry. But these are not ordinary
times. India, which consistently runs a current account deficit, depends on capital flows from abroad to fund the deficit. The ongoing crisis in the developed world has heightened risk aversion and led to capital outflows. How to fund a current account deficit
of the order of 2.6 per cent of GDP (the figure for FY11, which could escalate to 3 per cent plus in FY12) has now become a source
of worry.
Gold is Indias third-largest import item after crude oil and engineering goods. Remove gold from its list of imports and its current account remains negative, but shrinks to a much less intimidating -1.2 per cent of GDP (for FY11). By raising the countrys
dollar needs, Indias gold lust is one of the factors responsible for the recent sharp depreciation of the rupee.
Even from a personal finance point of view, excessive allocation to gold in a portfolio is not wise. Most financial planners suggest
limiting exposure to 5-8 per cent. It may be argued that over the last 10 years the cumulative returns from gold have topped 500
per cent. Over the past five years returns from gold have beaten equity returns handsomely. But thats because global growth has
been wobbly since 2008, and central banks have been printing money to jumpstart growth. Gold does well in such circumstances
when the economic climate is adverse, inflation reins high, and faith in paper currencies is low.
Like all asset classes gold too witnesses booms and busts. The only difference is that commodity cycles are much longer lasting
than those of equities. Granted that gold may continue to outperform equities in the near future, given the likelihood of sluggish
global growth for a couple of years or more. But golds already long bull run suggests that it may now be closer to the peak of its
cycle than the bottom. Being overweight on the yellow metal at this stage is fraught with risk.
Furthermore, investments made in physical gold rather than in a financial instrument cant be channelled into productive uses,
say, for investment by either the government or a corporate. And all that an investor earns from this inert metal is capital gains; it
pays no dividends.
So while gold may be a good investment for diversifying a portfolio and for providing a hedge against inflation, carrying this lust
too far is neither in investors nor this countrys long-term interest.

Article is available online at: http://www.valueresearchonline.com/story/h2_storyview.asp?str=18945

Disclaimer: Mutual Fund Investments are subject to market risks. Please read all scheme related documents carefully before investing.

Simplicity goes a step Backwards

BY DHIRENDRA KUMAR

As is customary at this time of the year, the last few weeks have seen a lot of speculation about what
changes the budget will bring to personal income tax and consequently to peoples savings behaviour.
This year, the speculation has been a little more intense, as well as a little more complex because of a
set of special circumstances. The first among these is the postponement, by yet another year, of the
new Direct Tax Code. Another is, obviously, the governments need to grow its tax revenues strongly.
And the third seems to be the need for a variety of entities to somehow increase the quantum of investments that they get out of the pool of tax-saving investments. The last ranges from banks to, and in an
apparent (but not real) paradox, the government itself. And then there is the political process, in the
shape of the parliamentary standing committee, that has a set of recommendations on the tax exemptions and the DTC.
The suggestions on view cover a large range. The banks want that the lock-in for tax-saving fixed deposits should be reduced from
five to three years. A lot of people seem to think that the limit on tax-exempt (actually, tax-deferred) infrastructure bonds should
be raised, perhaps drastically. There is of course, the annual clamour for changing the various limits, slabs and rates so that less
tax should be paid. Moreover, the government seems acutely aware of the fact that increasing the inflows into the savings schemes
that it runs is imperative. Its amply clear that in an immediate sense, giving tax-exemptions which flow into its savings schemes is
a positive for the government.
By themselves, every one of these has its own logic. The need to bridge the fiscal deficit is definitely serious. The need to channelising savings to infrastructure can hardly be ignored. That of moving the limits and slabs at least in line with inflation is also
undeniable. And Ive no doubt that someor perhaps even many of these measures may well see the light of day on budget day.
However, something very important is getting lost in all this activity. One is the simplicity and conceptual clarity that we seemed
to be heading towards. Between the Kelkar Committee recommendations on in 2004 and the first draft of the Direct Tax Code in
2009, it really did seem that we would eventually be rid of the year-to-year ad-hocism in the personal tax and savings landscape.
However, that appears to be a distant dream now. We seem to be stuck in a situation where every years taxation measures is a
band-aid designed to cover the part thats hurting the most right now.
However, theres another, deeper problem thats there. The entire structure is geared towards guiding savers long-term savings
into fixed-income investments. Part of this problem is cultural but a big part of this is definitely driven by the nature of the instruments that are available. For example, the fixed-income PPF is a 15-year investment and the equity-based ELSS has a three-year
horizon. How one wishes it had been the other way around for the last two decades! The kind of returns that people would have
got from equity would have led to an amazing behavioural transformation. As things stand, the only hope for this is that the New
Pension System undergoes a revival.
Anyhow, in the current crisis situation, theres little reason to hope for a sudden turn away from short-term problems and towards
a simple and clear system. Any such move would probably carry too much revenue risks for the government to take now. However,
the DTC is now slated to finally become the law next year. When (if?) that happens, it will be a big step towards that simplicity.
Hopefully, there wont be any more dilution in its basic principles between now and when it finally sees the light of day.

-Syndicated from Value Research Online

Article is available online at: http://www.valueresearchonline.com/story/h2_storyview.asp?str=19184

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Disclaimer: Mutual Fund Investments are subject to market risks. Please read all scheme related documents carefully before investing.