Volume 5, Issue 03

06Mar2013

The monthly newsletter from FundsIndia

Budget an exercise in caution

Inside this issue:

Srikanth Meenakshi

1
Budgetan exercise in caution
Srikanth Meenakshi

Greetings from FundsIndia!

The month ahead Equity recommendations - B.Krishna

Kumar

The annual exercise of presenting the national budget has come and gone. Our assessment
is that this years document was an exercise in caution not measuring up to the built-up
hopes of the citizenry, but not falling short in terms of fiscal prudence. Coming as it did in
an election year, Mr. Chidambaram has shown commendable restraint in terms of not
yielding to political prerogatives at the expense of fiscal discipline.

Budgets and the

Markets
Vidya Bala

In hindsight, it is possible that there were unrealistic expectations from the budget this year. Given the state of
the governments finances as well as the state of global economy, the minister had little leeway in terms of making crowd-pleasing concessions in his presentation.

Financial Planning
Education Series

Great Expectations, But Few

Achievements
Dhirendra Kumar

However, what is disappointing is the lack of effort in addressing the genuine grievances of a tax-paying populace
who are reeling under the effects of high inflation over several consecutive years. One could say that the document is more protective of the nations coffers than those of the common man.
For FundsIndia investors, this budget brought in a couple of changes. Short-term investors in debt funds need to
be aware of the raise in the dividend distribution tax (DDT) from 12.5% to 25%. Equity investors will be relieved
by the reduction in securities transaction tax (STT) imposed at the time of redemption. Please refer to Vidya
Balas opinion piece in our blog for more details about the impact.
In this issue of the newsletter as well, you will find two articles another essay by Vidya and an essay by Dhirendra Kumar, both looking at the budget from different perspectives.

One of the few investor-friendly announcements in the budget was the expansion of the RGESS scheme now available for tax benefit for three years
as opposed to one year previously. If you are eligible and would like to save few more thousand rupees in taxes, please login to FundsIndia and let us
help you with your RGESS investments.
And, of course, this is the month of March, which means that its about time you completed your ELSS investments for getting the 80-C tax deduction
for this year. If you have not already done it, the time is now!
Happy Investing!

*Please note: Comprehensive financial planning is a fee based service

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

Volume 5, Issue 03

Page 2

The month ahead - Equity recommendations

B. Krishna Kumar
Last month, we had highlighted and voiced concern on the apparent slowdown in momentum behind the rally in benchmark indices. The
apprehension was not ill founded with the benchmark indices cracking sharply in the later half of February.
The Union Budget was behind us now and the stock market attention would now shift to the global developments and domestic macroeconomic indicators. The food inflation is still high and there are hardly any signs of easing. The price of petrol has been hiked recently,
which again would foster inflationary pressure.
Given this context, it remains to be seen if the Reserve Bank of India would be keen to cut interest rates any further in its forthcoming
meeting scheduled later this month. On the current front, the US Dollar has started strengthening after a period of minor downtrend.
We expect the US Dollar to appreciate to Rs. 56-56.50 levels in the short-term. Given this backdrop, we are unable to comprehend the case
for a strong rally in the stock market. On the global front, the compulsory spending cut would come into force in the US, unless the government takes some remedial measures. Any such forced cuts may result in a dry-up in liquidity and could have repercussions across various
asset classes.
Technically too, there are signs to indicate that the index could seek lower levels. As mentioned last month, the index fell to the support
zone of 5,650-5,700. In the process, the index has fallen below the crucial support level at 5,820, which is a significant sign of weakness.
We remain bearish on the Nifty and expect the slide to continue to 5,350-5,400 range. From an extremely short-term perspective, there
would be a relief rally but we would view any such recovery as an exit opportunity.
Unless-term index scales above the resistance at 5,970, the path of least resistance would be on the way down. The index heavyweights
such as Reliance Industries, ONGC, Hindustan Unilever and State Bank India look vulnerable and may act as a drag on the Nifty.

This month, we cover the outlook for a couple of

stocks from the metals pack. After being rangebound for several weeks, the BSE Metals index
cracked below the lower end of the range, which
is a sign of weakness. The short-term outlook for
the metals index as well as Tata Steel and Hindalco is bearish. We recommend investors to
scale down exposures in these stocks.

Tata Steel has been an underperformer and its European operation seems to be a drag on the overall performance. As highlighted in the
chart below, Tata Steel has fallen below crucial support level and appears headed to the next support at Rs.310-315 range.
While there could be a temporary respite to the selling pressure around the Rs. 310-315 range, we expect
the downward move to extend up to the lower blue
line highlighted in the above chart at Rs.290-295.
Shareholders may use any rally to pare exposures in
the company.
Traders comfortable in the derivatives segment may
consider short position on a rally, with a stop loss at
Rs.362 for an eventual target of Rs.290, based on
spot price.

Continued on page 4 . . .

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

Volume 5, Issue 03

Page 3

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

Volume 5, Issue 03

Page 4

Hindalco is another company from the metals pack that has taken a pounding in the past few weeks. The short-term outlook is negative
and we anticipate a fall to the major support at Rs.85-86 range.

Shareholders owning Hindalco may

reduce exposures while those who
are comfortable trading in the futures segment may consider short
positions on any pull back rally, with
a stop loss at Rs.105 and a target of
Rs. 86, basis spot price.

Mr. B. Krishna Kumar also hosts a weekly webinar that discusses the market outlook for the following week.
You can register for the webinar by clicking here:
https://www4.gotomeeting.com/register/927617871

Budget and the markets

Vidya BalaHead - Mutual Fund Research at FundsIndia
Yet another budget and not much has changed except for the negative reaction in the stock market. What would the budget mean for your
investments? Should you change your equity strategy or debt strategy? How does the Budget impact your other income, investments and
spending?
Well, we may not be able to answer them all as it would mean predicting markets. But let us try to put things in perspective to aid your investment decisions.
Equity market
The Sensex fell 290 points or 1.5 per cent on Budget day; clearly not too pleased with the proposals. An over-optimistic revenue receipt
forecast and no conscious effort to cut expenditure does leave much to be said on the fiscal consolidation front.
Lack of any big-bang reforms in terms of promoting capital expenditure (except for investment allowance for 2 years), or improving the
environment for project clearances and land acquisition, did not augur too well for capital goods and infrastructure stocks. That means the
budget belied hopes of any quick turnaround in these sectors, after having lagged behind this long.
While not much has been done to trigger capital formation, overall rural spending budget is up, thanks to a number of social development
allocation made in the budget. But allocation under the MNREGA scheme remains flat at Rs 33,000 crore.
While sectors such as IT and pharma remained neutral on budget day, banking stocks were beaten on fear of a liquidity crunch. This is
because the budget has proposed a 12.5% increase in government borrowing to Rs 6.3 trillion. That means the government would suck
plenty of credit available in the system, thus impacting the banks ability to get money at reasonable costs.
Overall, while you may have very little to cheer on the budgets impact on equities, this could be the year for accumulating equities. It is
years such as the current one, that will help you average costs if you have been running your SIPs. Here are a few dos and donts for your
Disclaimer: Mutual Fund Investments are subject to market risks. Please read all scheme related documents carefully before investing.

Volume 5, Issue 03

Page 5

equity investments:

While infrastructure and capital good stocks may be available at low valuations, avoid taking focused bets on them through
theme funds or direct equities simply based on budget proposals. Quite a few equity funds have started zeroing-in on stock
specific select opportunities in this space, especially backed by low valuations. Hence, you may actually see some of your diversified/value-based funds gradually increase exposure to select stocks in this space. That should suffice for you.

Higher rural spending may spell better prospects for the consumer sector. But it is noteworthy that the Governments pay
commission and MNREGA were key factors driving the consumption sector thus far. While consumer demand may continue,
pay commissions effect has waned and the proposed spending on MNREGA remains flat compared with last year.

With the sharp run-up in stocks from the FMCG space, these companies may have to keep up with high earnings growth to
deliver returns. A number of you have wished to take exposure to this theme. Our suggestion would be that you do it through
diversified funds rather than theme funds.

Banking stocks were battered on tight liquidity conditions. But then it is worth noting that of the gross borrowings of Rs 6.5
trillion, Rs 50,000 crore is due to bond buyback by the government. The Government is planning to buyback bonds that are
falling due in FY-15. If done in a prudent way, this could infuse liquidity to the said extent into the system. Hence, while there
could be near-term pain, rate cuts and such liquidity infusion could ease the situation after a few months. Hence, do not
panic if your funds are actually accumulating select stocks from this sector.

Interestingly, mid-cap stocks (using BSE Midcap as the index) have fallen 12 per cent year to date. The budget has not done
much to spruce them up.

If you have seen your mid-cap funds under perform , dont stop your SIPs. This could be the time to average their costs by
buying in to them steadily.

Overall, the pain of additional burden from surcharge, higher royalty (applicable for many MNCs) and lack of any meaningful
reforms could mean slower earnings growth in the near term. Hence, do not expect the kind of rally you saw in 2012. But if
you are one scouting for value, then this could be the year to average your portfolio cost. Apart from SIPs, consider buying
funds/index funds as lump sums on market falls of 5 per cent or more. You could also set up VIPs for this purpose to automate it.

Debt market
The five-year and ten-year gilt yields closed 7 basis points higher to 7.87% and 8.9% respectively at the close of Budget day, after
the government announced its borrowing programme. Clearly, the impending liquidity crunch drove the yields, dampening the
sentiments of those who were betting on a price rally in this segment. What does this spell for your debt funds? It spells opportunities! Contrary to our belief that debt fund performance would become more sedate in the coming fiscal, the budget provides
sufficient scope for some action on the debt side.
Strategy
Given the liquidity crunch that is likely to prevail over the next couple of months, short-term funds would be a good idea for investors looking for investment avenues for about a year.
It is noteworthy that 60-65% of government borrowings typically happen in the first half of the year. Hence, with rate cuts likely
to have happened by that time, yields may ease up a bit, providing some opportunity in instruments with medium time frame. If
you have not less than a time frame of 1.5-2 years, consider going for income funds/dynamic bond funds. Within this class, be
aware of funds that also play on the credit risk. The latter is for more risky investors. Even if you wish to play the gilt game (not
much steam left in it), consider using income funds that have some gilt exposure, than going for pure gilt funds. In all, expect
yields of corporate and government bonds to be range-bound for a good part of the year. That means returns may not be much
lower than last year.
Budget and you
The budget does have some impact on your personal finances, your spending and your investment options. To know more, read our blog:
http://www.fundsindia.com/blog/index.php/mutual-funds/budget-2013-10-measures-that-can-impact-you/1408/
Vidya Bala is the Head of Mutual Fund Research at FundsIndia. A chartered accountant by training, she was earlier with the Hindu
Business Lines research bureau, tracking mutual funds, stock markets and sectors for eight years. She writes for our monthly newsletter
on topics including mutual fund, personal finance and equity markets. Vidya Bala can be reached at vidyabala@fundsindia.com

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

Volume 5, Issue 03

Page 6

How inflation can affect your plan?

S.Shridharan Head - Financial Planning

What is inflation?
Almost every financial magazine in the country today discusses the issue of high inflation in our country. Inflation is the rise in prices of
goods and services over a period of time. In other words, inflation reflects the erosion in the purchasing power of money.
For example, if your cost of living today is Rs.20,000/-, the same would be Rs.39,350/- after 10 years, considering an inflation rate of 7%.
This means the cost of living keeps increasing on a year-on-year basis.
How does inflation impact your daily life?
ITEMS

1987

2017

Toothpaste

Rs.19

Rs.100

Hamam Soap

Rs. 8

Rs. 52

Masala Dosa

Rs.14

Rs.200

Petrol

Rs.25

Rs.250

The cost of petrol was Rs.25/- per litre during 1987. Today, a litre costs Rs.75/- and is projected to cost over Rs.100/- in the future. Similarly, few items which were considered to be a luxury have turned out to be bare necessities in todays life.
ITEMS

2000

2012

Mobile Phone

No

Yes

LCD/LED

No

Yes

Laptop/Computer

No

Yes

Internet

No

Yes

3G

No

Yes

For example, the mobile phone, internet or the computer were considered as items of luxury in the year 2000. Today they have become a
necessity for every individual and hence, expenses towards these items become inevitable.
Our lifestyle is changing constantly and this has considerably increased our cost of living.
We will see how to turn inflation into a favourable entity using the concept of Time Value of Money in the next series.

Mr. S. Sridharan is the Head of Financial Planning with FundsIndia. You can reach Mr. Sridharan at sridharan@fundsindia.com

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

Volume 5, Issue 03

Page 7

Great Expectations, But Few Achievements

By Dhirendra Kumar | Feb 28, 2013
As the dust settles on the Union Budget for 2013-14, the moral of the story is quite clear: if you don't want to be
disappointed, then don't get your hopes too high. For a whole set of reasons, all of usas savers, investors, businessmen and analysts, had psyched ourselves into expecting something special. As budget day came nearer, we
heard the phrase 'dream budget' more and more. There was supposed to be some magic wand that Mr.
Chidambaram would wave and all would be well again.
It was always wishful thinking and has proven to be. However, from the perspective of personal finance, saving
and investments, the budget has turned out to be a deep disappointment. There were a large number of quite
reasonable expectations of simple measures that could have been taken but none of them have been. Somehow,
the powers seem quite unaware of the fact that the ordinary individual saver is in a deep crisis and we need a structural overhaul in savings
to rescue the situation.
We are saving less, we are saving in the wrong things and we are getting less from our savings. The propensity to invest in equity and equity
-backed mutual funds is decreasing, while at the same time, deposits, bonds and other fixed-income investments are earning less and less
compared to the consumer inflation rate. The budget does nothing for any of this.
In the weeks leading up to the budget, there were definite indications from the finance ministry that either an enhancement to the
Rs. 1 lakh limit for section 80C tax exemptions or some kind of a new pension-targeted saving scheme was in the works. None of that has
materialised.
Instead, all we have is the extension of the Rajiv Gandhi Equity Savings Scheme (RGESS) from one to three years. Since it was first announced in the last budget, it has been clear that while the RGESS has the germ of a good idea, it was needlessly complicated. And learning
to deal with all the complexity was not much use because the scheme could be used only once in a lifetime and that too by those who had
never invested in stocks before. Now, that single-use limit has been extended to three but all the other complexity remains. A lot of people
in the finance ministry will admit that the scheme was announced in haste with the wrong targets in mind but somehow the government
seems anchored to those faults instead of thinking afresh.
The other changes too haven't materialised. The section 80C limit of Rs. 1 lakh is now unchanged for more than a decade and its real value
has declined sharply. Channeling long-term, retirement-oriented savings remains a pipe dream.
Instead of improvements, the budget creates a couple of new problems. One is the massive hike in dividend distribution tax. If you are an
investor who gets dividends from your stock investments or your fixed-income mutual funds, the deduction at source will be 25 per cent,
rather than the current 12.5 per cent. Those who depend on these sources for income will be hit hard. From being barely more than the
base income tax rate, the dividend distribution rate has gone up close to the highest tax bracket.
One more potential issue is that the KYC norms for insurance have been made easier, but not for mutual funds. This is an odd move, given
that most of what is sold as insurance are actually investment products. Hopefully, by the time the budget is passed, this will be fixed.

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