A N I NVE STOR E D UCATION I NITIATIVE BY

IPRU

Insights
June 2015

Making volatility work for

you in the long run- Pg.2

The wisdom of buying low

and selling high- Pg.3

Volatility not the same as

risk- Pg.4

d
Clo
se
Sch
En
em de
e

H
Schybrid
em
e

Based on asset
class in which the
scheme invests

ScEquit
he y
me

On the basis
of scheme
structure

Ope
Schn En
em ded
e

TAKE your PICK

Mutual funds
offer a wide
variety of
product types
to choose
from. They
can be
classified as

SchDebt
em
e

All you need to know

about VOLATILITY- Pg.5

MUTUAL FUNDS

(All three can be Open Ended or Close Ended)

Things to Check While

Creating a Mutual Fund
Portfolio for a Goal- Pg.6

Are You Ready to Test

Yourself? - pg.7

Emotion Trap - pg.8

Please visit us at
Website: www.icicipruamc.com
Follow us on:

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CEO Letter

Making volatility work for

you in the long run
If you see a crisis brewing again, remember its
time to focus on the distant horizon and invest in
equity mutual funds

Mr. Nimesh Shah, MD & CEO, ICICI Prudential AMC

he solution to the Greek situation, which had been keeping

the worlds stock markets on its toes for some time, was
well-accepted by the global markets as prices of equities rose
across geographies. The austerity measures imposed in the
bailout deal has been passed by the Greek parliament too and
the good news for Greece is that banks will open soon.
The Greece crisis has been going on for some time now, but it
was unlikely to cause major trouble to financial markets. The
issues that plagued the Eurozone when the first crisis hit some
years ago, is not the same as the current one.
Back in 2012, private institutions held Greek debt at the time the
crisis unfolded, but this time it is public institutions such as
International Monetary Fund (IMF) and European Central Bank
that hold these debts. So there was not going to be any major
chaos. Secondly, euro zone countries have improved their
macro-economic positions and are in better shape.
The crisis did affect the Indian market, and for a limited time
stocks prices turned volatile. However, we believe volatility is an
opportunity to buy. These volatile periods seem a good time to
grab a good slice of financial assets such as equity and debt
mutual funds.
Such bouts of volatility are inevitable. Given that the global
economy is more intertwined than ever before, where ever
there is a crisis, the first reactions in the global markets are not
always pleasant. After the number crunching, and worst case
scenarios are analysed, the markets then begin to stabilise.
The good news for India is that we can now focus on the growth
and recovery in India rather than worry about events that are
unlikely to have an impact here in India. So, if we can keep the
long-term focus in mind, especially when the Indian macros
seem favourable, we can have a good investor experience over
time.

02

Macroeconomic fundamentals have improved from 2012-13,

with reduced external vulnerability (the current-account deficit
is less than 1.5%), lower fiscal deficit and benign inflation. The
recent Wholesale Price Index again came in at -2.4%, and has
been negative for eight months now.
Oil prices have come down further after the Iran nuclear deal
which reduces Indias import bill further and save precious
foreign exchange. It also spurs economic activity as spending
begins to increase in other areas.
Amid all this, the Indian equity market has proved resilient
despite global market volatility, and has risen 6.23% in one
month, and the S&P BSE Sensex has crossed the crucial 28,000
mark.
The earnings season is on us. This quarter may come in muted
as commodity prices have been falling and the demand growth
has not yet picked up. We have seen some good news coming
on this front which said that the number of stalled projects has
been falling.
The Indian economy is in a position that is likely to see mutual
funds deliver a good investor experience in the next three-five
years. Remember, negative market reactions, whenever there is
an international or domestic crisis, are more likely to prove to be
good time to buy equity mutual funds.
We have seen how the global markets have recovered, and how
the Indian markets have particularly been resilient and
rebounded sharply after the news of the crisis. Quite a few
people were sitting on the sidelines during the equity sell-off
and are now ruing the fact that they missed an opportunity to
accumulate equity assets.
Hence, we would nudge you to follow the mantra of buy on
volatility. Investors with a medium-to long-term view need not
worry about the Greece crisis, or any other crisis.

IPRU Insights | June 2015

CIO Letter

The wisdom of buying

low and selling high
If you want to reduce or even eliminate
these psychological barriers to investing
wisely, it may be a prudent strategy for
investors to add funds that follow the
principle of asset allocation.

Mr. S. Naren, CIO, ICICI Prudential AMC

S Naren

Using price-to-book value model to ones advantage

One of my favourite gurus, Howard Marks, whose writing is for

everyone to read at oaktreecapital.com and is easy to
understand as it is without financial jargon, had this to say about
investor behaviour: When things are going well and prices are
high, investors rush to buy, forgetting all prudence. Then, when
theres chaos all around and assets are on the bargain counter,
they lose all willingness to bear risk and rush to sell. And it will
ever be so.

If you want to reduce or even eliminate these psychological

barriers to investing wisely, it may be a prudent strategy for
investors to add funds that follow the principle of asset
allocation. These funds practice "buying low and selling high" as
a general rule all the while keeping human emotions aside.
These funds invest in equities when markets are cheap and
book profits when markets are high. This is totally opposite of
what retail investors normally tend to do.

I have also seen that type of investor behavior on many an

occasion and during different market cycles in the Indian
subcontinent. A general tendency of investors is to invest in
equity when markets are surging, while pull out when markets
are underperforming. But does it lead to a good investment
experience?

How do you know when markets are inexpensive or vice versa?

One financial yardstick that has stood the test of time is the
price-to-book value ratio, which is calculated by dividing the
stock price to its book value per share. This model is less volatile
as compared to the price-to-earnings ratio. Earnings can be very
volatile in some seasons or during shifts in cycles, which tends
to make the underlying yardstick of the price-earnings ratio rise
up and down during difficult times.

Mastering market moods can be daunting

Its a bit difficult to see this happening all the time in the Indian
market, and when theres so much of investor material that
speaks otherwise. Cycles are rarely used well. And to be fair,
mastering market moods can be daunting for many an investor.
Marks said that markets are like a pendulum, sometimes
extremely optimistic and at other times deeply pessimistic.
Both the times you have to act against it. But very often, markets
are in the middle of these cycles, and there is no sense in
extreme positive or negative stance in the market.
One factor that always comes in the middle of making these
prudent decisions of acting against the pendulum or staying in
the middle is human emotions. Our first reaction when buying
an asset is not to make a loss, which often leads us to make
mistakes during buy and sell.
More often, volatility also tends to unnerve those investors who
cannot stomach the ups and downs of the markets. As for what
my own experience shows us, investors tend not to make
investments in a market that is volatile because of the worries of
seeing a loss in their portfolios in the short run, and so they dont
have the confidence of investing in equities as an asset class.
This lack of confidence usually arises out of their lack of
understanding of equities. It is apt to mention here that equity is
a suitable investment avenue for long term wealth creation. One
should ride the short-term volatility with patience with an aim to
benefit from capital appreciation in the long-term.

IPRU Insights | June 2015

The cyclical shift in 2008 showed us how volatile price to

earnings ratio could be. For example, earnings raced up in 2007
when markets were surging, but in 2008 when markets dipped,
the earnings dipped as well causing the yardstick to be less
reliable. In general, we observed that as book value is a balance
sheet item, it is more useful to gauge the intrinsic value of a
company.
Essentially, the model eliminates human emotion in decision
making. By following a model that is driven by prices and
valuation of an asset class, and not by sentiment, investors can
achieve the goal of buying equity at low valuations and selling at
higher valuations.
A feature of balanced funds that use this objective is that it
rebalances frequently and automatically to other asset classes
when the book value rises. So, when price-to-book value of
equities rise, the model helps to cut exposure to equities as they
begin to get overvalued and to re-balance to other asset
classes.
This model reduces the human emotion of timing the markets
and trying to play out the luck factor as opposed to objectively
buying based on principles that follow the value-buying
principles.
The price-to-book value yardstick serves one well in the long
run, navigating different market cycles, capturing the upside
and aiming to limit the downside. If theres a conservative tilt to
this strategy, its with good reason because the emotions are
kept aside and the price-to-book value shows its potential.

03

Funda Clear

Volatility is not the same as risk

Over the last several months, a common refrain in this market is that volatility is quite high. If one day the stock market is up,
the next day its down by an equal or larger number. By their very nature, financial markets are volatile reflecting the news and
developments happening every day. A mishap here or there can cause the market to swing wildly, up or down. But is volatility
the same as risk? Financial concepts have us believe that volatility is the same as risk, and end up costing us money. Sure,
volatility makes assets such as equity swing more wildly than other assets. An understanding of the concept of risk will give
us a true picture. Risk is usually seen as a probability of loss say in any asset class. If you lose your investments, then the
asset is risky. But in stock market parlance, volatility is also looked at as risky. Warren Buffett explained the concept of
volatility and risk in his 2014 annual letter to his shareholders, and how mixing these concepts is costing investors.
Stock prices will always be far more volatile than cash-equivalent holdings. Over the long term, however, currencydenominated instruments are riskier investments far riskier than widely-diversified stock portfolios that are bought over
time and that are owned in a manner invoking only token fees and commissions. That lesson has not customarily been
taught in business schools, where volatility is almost universally used as a proxy for risk. Though this pedagogic assumption
makes for easy teaching, it is dead wrong: Volatility is far from synonymous with risk. Popular formulas that equate the
two terms lead students, investors and CEOs astray
Volatility is an inherent characteristic of equities in the short-run. But that does not imply risk as most people mistakenly think
and as explained by Buffett, who adds that not investing in shares and holding currency instead is far more riskier in the long
run.
It is true, of course, that owning equities for a day or a week or a year is far riskier (in both nominal and purchasingpower terms) than leaving funds in cash-equivalents. That is relevant to certain investors - say, investment banks - whose
viability can be threatened by declines in asset prices and which might be forced to sell securities during depressed
markets. Additionally, any party that might have meaningful near-term needs for funds should keep appropriate sums in
shorter term investment tools.
For the great majority of investors, however, who can - and should - invest with a multi-decade horizon, quotational
declines are unimportant. Their focus should remain fixed on attaining gains in purchasing power over their investing
lifetime. For them, a diversified equity portfolio, bought over time, can prove far less risky than dollar-based
securities.
Over decades, such as 10 and fifteen years, equities can provide inflation-adjusted reasonable returns for investors. A recent
Morgan Stanley report said that equity has delivered the best returns over 5-, 10-, 15- and 20-year periods in India, compared
to gold, real estate, fixed deposits, et al. Over a 20-year period, equities returned 12.9 percent, gold 8.4 percent, bank fixed
deposits 5.5 per cent and property 6.2 percent. (Source: Morgan Stanley)
Cash in hand would be less volatile in the short run than stocks. But understand that volatility in stocks is not the same as risk.
Instead, real risk is the loss of purchasing power that your cash in your wallet would be left with. Buffett says holding cash is
riskier than a stock portfolio built for the very long run.

04

IPRU Insights | June 2015

ALL YOU NEED TO KNOW ABOUT

VOLATILITY

Ups and Downs in the stock market are referred to as market volatility.

Volatility means

fluctuation or inconsistency.

WHAT CAUSES VOLATILITY?

GLOBAL FACTORS

Like, uncertainty in global

economic conditions
COUNTRY SPECIFIC

for instance, uncertainty

in political scenario
INDUSTRY SPECIFIC

Such as changes in
policies specific to that industry

INVESTMENT ARE SAID

TO BE VOLATILE

when

There is frequent Price fluctuation which leads to uncertainty in the end value of
the investment. Thereby increasing the risk in the respective investment

HOW TO PROTECT INVESTMENTS

FROM VOLATILITY IN THE MARKETS
Mutual funds can help you benefit during Market Volatility

Some mutual fund schemes are structured

to invest and aim to benefit from volatile markets.

BY

changing the proportion of investment in equity

markets according to the market movement.

When markets are high the scheme sell equity and book profit; and invest in cash, debt or similar instruments.
When markets are low they identify and invest in stocks that have the potential of becoming more valuable.
Hence, such schemes aim to buy at lower level and sell at higher levels.

Remember that volatility can be balanced out through long term investment.
So it is advisable to spend time in the market and not time the market

IPRU Insights | June 2015

05

Checklist

Things to Check While

Creating a Mutual Fund
Portfolio for a Goal
1. Get a Fix on the Time You Have
Ask yourself about the time left for your financial goals like buying home or childrens
higher education. This will help you decide on the right category of mutual fund (MF)
scheme. For instance, invest in equity funds for long-term goals such as retirement
and childrens education, since they have high long term returns potential despite
higher risks. Debt funds, lower in risk, work well for shorter term needs like down
payment for home that could be 3-4 years away.

2. Check Your Risk Bearing Capacity

Mutual funds offer multiple options to choose from. If you are not comfortable with
the higher risk of equity funds, consider lower risk alternatives like balanced or hybrid
fund. They invest in mix of debt and equity.

3. Determine an Investment Amount You Are Comfortable With

Arrive at the amount that you will be comfortable investing regularly over the long
term. Start with a small amount in an SIP. Keep increasing the amount of SIPs in
funds you gain in confidence, get investment ideas and try containing investment
risks through diversified MF investments.

4. Do Homework on the Scheme and its Performance Track

Record
Make sure to invest in a scheme whose objective and investment philosophy you
understand and are comfortable with. You also need to have confidence in its short
and long-term track-record. Remember, one laggard in your portfolio may drag
down your overall portfolios returns drastically.

5. Restrict the Number of Schemes

Do not invest in too many schemes. For instance, 4-5 equity schemes if chosen
carefully are enough for diversification. This also makes managing the portfolio and
tracking performance simpler. Avoid schemes with the same themes or which invest
in the same securities.

06

IPRU Insights | June 2015

Quiz

Are You
Ready
to Test
Yourself?
Q.1. Bond prices have nothing
to do with interest rates.
(a)True
(b)False

Q.4. What is the maximum

Q.7. A mutual fund is not required to
investment limit in equity
be registered with the capital market
schemes for an individual
regulator Securities and Exchange
investor?
Board of India (Sebi) before it can
(a) 1 crore
collect funds from the investors.
Q.2. In which year did BSE Sensex (b) 5 crore
(a) True
give the highest annual return?
(c) 10 crore
(b) False
(a) 1991
(d) No limit
Q.8. In India, a mutual fund is set up in
(b) 1992
the form of a private limited company.
(c) 1979
Q.5. An index funds is not
(a) True
(d) 1997
managed by a fund manager
(b) False
(a) True
Q.3. How often do regular
(b) False
Q.9. Is higher net worth of a sponsor a
mutual funds price change?
guarantee for better performance of
Q.6. When did the Government
(a) Minute to minute
schemes?
allow public sector banks and
(b) Daily
institutions to set up mutual funds? (a) True
(c) Weekly
(b) False
(a) 1990
(d) Monthly
(b) 1960
Q.10. A mutual fund scheme can invest
(c) 1992
up to 100 per cent of its assets in
Answers for Quiz in IPRU
(d) 1956
unlisted companies.
Insights May, 2015(a) True
1) c 2) d 3) b 4) a 5) a
(b) False
Answers to appear in IPRU Insights July, 2015
IPRU Insights | June 2015

07

Storyboard

EMOTION
TRAP
One day in the office where
Mahesh and Rajesh work

I was just checking out the

astrological forecasts for
this week.

So, what does the column say?

Would you be inheriting a fortune
from a long lost uncle?

Hey! Why are you poring over the

newspaper during lunch time?

Dont be
funny! I just
made some
serious losses
in my stocks
investments. I
am looking
forward to
better luck in
the future.

Aaww! So, you thought it would go

up more and you will get lucky!
Thats why I tell you to invest in equity
mutual funds like me. You dont lose sleep
and can benefit from a fund managers
expertise. But how did the fiasco happen?

I suppose it
tanked as well.

Well, I first lost money in a stock which I

bought when it was going up and my
friend Nilesh made some serious money.

Well! I suppose, so! Then, I bought

another stock which my neighborhood
grocery store owner gave me a tip and
told that it was a steal at that low price.

Rajesh, a better way of

getting lucky is to do
homework on investments,
instead of buying or selling
them when you want to
make a quick buck or panic.
Or reading astro forecasts!
How did you know?

But where is Nilesh?

08

He has got to get a ring

from his astrologer for
better luck. He made even
more losses than me!

Yes, yes! I have heard that from you before. From

now on, I will invest only after I have done research.
Both of you are incorrigible!

IPRU Insights | June 2015

IPRU Insights | June 2015

09

ICICI Prudential Mutual Fund presents

www.icicipruamc.com/investcorrectly

Wish to give your child the best education?

Begin with the RIGHT SIP AMOUNT.

As SIP makes sense only when the amount invested leads to realizing a dream. Therefore it is important to arrive at the RIGHT SIP
AMOUNT. And to help you decide the right amount, here are three important questions to ask yourself:

How long should I invest for?

What am I investing for?

How much should I invest?

The answers to these questions will help you arrive at the
RIGHT SIP AMOUNT.
To know which fund to invest in, contact your distributor.
To know more, visit
www.icicipruamc.com/investcorrectly

An investor Education initiative by

Soch samajh ke invest karein.

Mutual Fund investments are subject to market risks, read all scheme related documents carefully.
The sector(s)/ stock(s) mentioned in this presentation do not constitute any
recommendation/ opinion of the same and ICICI Prudential Mutual Fund may
or may not have any future position in these sector(s)/stock(s). Past
performance may or may not be sustained in the future. Please refer to the
SID for investment pattern, strategy and risk factors. This material is
circulated only to the empanelled Advisors/ Distributors of ICICI Prudential
Asset Management Company Limited (the AMC). The information contained
herein is only for the reading/ understanding of the registered Advisors/
Distributors.
In the preparation of the material contained in this document, the AMC has
used information that is publicly available, including information developed
in-house. Some of the material used in the document may have been
obtained from members/ persons other than the AMC and/or its affiliates
and which may have been made available to the AMC and/ or to its affiliates.
Information gathered and material used in this document is believed to be
from reliable sources. The AMC however does not warrant the accuracy,
reasonableness and/ or completeness of any information. We have included
statements in this document, which contain words, or phrases such as
will, expect, should, believe and similar expressions or variations of
such expressions, that are forward looking statements. Actual results may
differ materially from those suggested by the forward looking statements

10

due to risk or uncertainties associated with our expectations with respect to, but
not limited to, exposure to market risks, general economic and political conditions
in India and other countries globally, which have an impact on our services and/ or
investments, the monetary and interest policies of India, inflation, deflation,
unanticipated turbulence in interest rates, foreign exchange rates, equity prices or
other rates or prices etc.
All data/ information used in the preparation of this material is specific to a time and
may or may not be relevant in future post issuance of this material. The AMC takes
no responsibility of updating any data/ information in this material from time to
time. The AMC (including its affiliates), the Mutual Fund, The Trust and any of its
officers, directors, personnel and employees, shall not liable for any loss, damage
of any nature, including but not limited to direct, indirect, punitive, special,
exemplary, consequential, as also any loss of profit in any way arising from the use
of this material in any manner. The recipient alone shall be fully responsible/ are
liable for any decision taken on this material.

For further information contact:

IPRU Insights | June 2015