Lessons from the budget

1. www.fundsindia.com
Lessons from the budget
If you were sitting on the sidelines for the budget announcement, then you
will now have one less excuse now to postpone investment. If you base your
own actions on the Budget, then here is what you should know:
• The Budget prefers stability over fast-tracking growth. The Government’s
focus on sticking to its fiscal deficit target is a clear indication that it has no
intention of giving up on fiscal prudence to showcase economic growth.
• It prefers steady incremental changes and spending over sweeping changes
or largesse in spending. You will not find one ‘star’ proposal or a big
‘highlight’ in the entire proposal. Whether it is the changes to corporate rate
of tax or taxing foreign companies in the digital space, or nudging you to
make more market-linked investments, the changes are incremental.
• It prefers to invest in segments that will not provide any immediate
gratification but rather usher in changes and benefits over the long term.
Given its fiscal prudence, the Budget obviously has the challenge of
spending its resources in the most productive way and it chose rural and
infrastructure spending rather than subsidies or other less productive
channels.
The lessons from the above are simple. One, if economic growth and
corporate earnings growth are doing to be steady and incremental in nature,
so will your investment growth be. Do not expect swift wealth accretion.
Two, you cannot wait for big bang changes in the market or the economy to
start investing. Investing needs to be an ongoing, routine act (done through
SIP). Your investments will automatically adjust to the changing market
dynamics; at least mutual funds can be expected to do that as experts handle
them. Three, you have to spend less to save more – postpone gratification -
and also stay invested for the long term. If you can do it with sub-optimal
returning products such as EPF or PPF, there is no reason why you cannot
do it with a product that offers far superior returns, like mutual funds.
The last point, the budget has itself hinted to you, by asking you to be open
to market-linked instruments and returns.
But there is one more lessons that markets just taught you – if you’d
postponed your investments, waiting for the budget, you paid for it by not
participating in the recent rally!
Vidya Bala
Head – Mutual Fund Research
FundsIndia.com
March 2016 Volume 06 03
Really knowing our
customers
Greetings from
FundsIndia!
The capital market
regulator has a
favouriteplaything that they pickup
whenever they are bored and that’s
the Know Your Customer (KYC)
regulations. Every few months, a
new addition or change crops up,
putting burden on customers and
service providers like FundsIndia.
However, it is anybody’s guess if
the formal process that one goes
through helps the regulator, the
fund house, or a service provider
to really understand customers.
At FundsIndia, we have taken a
most meaningful step in this
direction.
We have created an area in your
FundsIndia account where you can
record pertinent, useful
information about yourself in the
form of profile data.
There is no compulsion to do this,
and you can fill it out as much or
as little as they want to. However,
the more comprehensive this data
is, the better we can tailor our
services and advice to your need.
I urge you to fill in your profile
data as soon as possible to help us
serve you better.
Happy Investing,
Srikanth Meenakshi
Co-Founder & COO
FundsIndia.com

2. www.fundsindia.com
This is a sponsored ad by ICICI Prudential Mutual Fund

3. FundsIndia Views: What the Budget has for your investments
The table below indicates how far we have come in
containing our deficit.
Why is fiscal prudence that important? We are already at
a stage of low oil prices and a consequent fall in current
account deficit, along with low inflation. That sets the
path for lower interest rate, which is the need of the hour
to boost corporate spending activity. Any extravagance, at
this stage, could affect the sweet spot in inflation and
deficit, thereby upsetting the case for lower rates.
By sticking to fiscal targets, the government has provided
the right signals for the Central Bank to act. It has
achieved this by not entirely taking its foot off the pedal
when it comes to key spending (infrastructure, rural
development). It thus sets the tone for private spending by
showing the way, but not indulging too much.
Also, it is noteworthy that the spending by the
government, under these circumstances, is not piddly as it
appears to be, if one merely looks at the 3.9 per cent
increase in capital expenditure by the government.
Experts from research firms such as CRISIL look at what
is termed as Productive Expenditure – that is the sum of
capital expenditure and a part of revenue expenditure that
is used to create capital assets in the economy. Such
productive spending as a share of the GDP is mildly up
at 2.75 per cent of FY-17, as against 2.73 per cent in
FY-16, according to reports.
Also, it is noteworthy that the subsidy bill of the
government is down, although it had to provide for pay
commission and pension payouts. That means money is
going into productive spending in the economy.
What’s in it for the markets?
Equity: Simply put, the stock markets pretty much get
nothing. You can only lead a horse to the water, and the
Government has shown the way. Companies have to
pretty much take cues from government spending, take
advantage of low oil and commodity prices, as well as
make the best of heavy rural spending by the government
and pick themselves up. While there are no major positives
for Corporate India as a whole, there are pockets of
benefits that companies can make the best of. We
highlight some of them here:
- In the auto space, while taxes at the consumption end in
the form of infrastructure cess, and tax collection at
source for cars over Rs. 10 lakh can impact 4-wheeler
sales, the large rural outlay, as well as key measures such as
opening up the road transport sector in the passenger
vehicle space (amendment to Motor Vehicles Act) can
provide a fillip to 2-wheeler, tractor as well as commercial
vehicle sales. Hence, we would view this as a positive for
this sector.
- Even as rural consumption has been slackening over the
past year, increased rural spending by way of Mahatma
Gandhi National Rural Employment Guarantee Act
(MNREGA) can provide some support to sales of
consumer goods (FMCG).
www.fundsindia.com
Vidya Bala
If you expected Budget 2016 to put the Indian economy on a fast track growth path, you might
be disappointed. The Union Budget has clearly prioritised fiscal prudence over aggressive growth
targets. Moderate expenditure growth, with key investments in pressing areas such as agriculture,
infrastructure, and employment generation, as well as providing for banking recapitalisation and
the Seventh Pay Commission (partly) were finely balanced without compromising on the fiscal
target of 3.5 per cent in FY-17.
“It is a pragmatic budget, particularly if you look at the fiscal consolidation road map.”
- S.S. Mundra, Deputy Governor, Reserve Bank of India
4.3 3.9 4
3.3
2.5
6 6.5
4.8
5.7
4.8 4.6
4.1 3.9 3.5
3
0
1
2
3
4
5
6
7
FY04
FY05
FY06
FY07
FY08
FY09
FY10
FY11
FY12
FY13
FY14
FY15RE
FY16BE
FY17BE
FY18BE
Central Government Fiscal Deficit (as % of GDP)

4. Your debt portfolio: Depending on how the RBI
interprets the fiscal situation, as well as inflation, and a
rate cut may trigger a rally. Hence, while a duration-driven
rally may happen, we believe a steady corporate growth
story and improving credit situation would be a more
dependable story, and therefore, income accrual funds
could be good bets for the long term.
A combination of duration and income accrual funds
is, therefore, the way forward for a 2-3 year debt
portfolio.
What’s with the way you invest?
This Budget discussion would not be complete without a
mention on why your investments in products such as
mutual funds gain more importance now than ever.
If you are already heavily into investing in market-linked
instruments such as mutual funds, you may not be too
worried by this. But for those largely depending on EPFs
for their life savings, the proposal of partial taxation of
your EPF may have sounded like a death knell. (Click here
to read our blog post for our latest position on this)
While we await clarity on the exact taxation (other than
the fact that 40 per cent of the lump sum withdrawn
would not be taxed) on EPF, we would urge you to take
the spate of signals from the Government and the tax
authorities on this. (Click here to read our blog post for
our latest position on how the Budget impacts your taxes)
One, provident fund rates have declined from double
digit rates in the 1990s, and are now, mostly in the range
of 8-9 percent.
Two, more recently, the rates on these small savings
schemes (as well as many other such schemes) have been
made more dynamic, with change in interest rates every
quarter pegged closely to the gilt rates. That means they
will hardly remain fixed in a given year, and can fall in line
with rate falls.
Three, in the latest budget, to provide parity between
NPS and EPF, EPF is also proposed to be taxed partly.
All these hint at just one message: move to
market-linked products. Of course, while the EPF-NPS
transition may happen once companies provide the
option, for you as an investor, it is important to also look
- While the general thought has been that the banking
recapitalisation amount of Rs. 25,000 crore is inadequate,
we believe this space has to be seen from the point of
structural changes being ushered in. A Bank Board Bureau
to improve the governance of public sectors banks and
providing a road map for their consolidation is a key
development. Also, empowering Asset Reconstruction
Companies by way of amendment to respective laws and
strengthening debt recovery tribunals are also positives,
when viewed from a long-term perspective.
- The biggest positive comes from the massive outlay of
Rs. 2.21 lakh crore for infrastructure, out of which Rs.
55,000 crore is budgeted for roads (with additional Rs.
15,000 crore to be raised through NHAI bonds). This
clearly is a boost for companies in construction, as well as
allied engineering and capital goods companies. Besides, a
Resolution Disputes Bill for PPP (Public Private
Partnership) projects and new guidelines to renegotiate
agreements will be issued. This can provide a fresh lease
of life to stalled/stressed projects.
Your equity portfolio: A good number of mutual funds
have been taking measured exposure to cyclical sectors
such as construction and automobile, and can benefit
from the above positives.
We still believe that funds that took contrarian views to go
overweight on the banking sector could benefit the most
as a combination of low valuations of many stocks in this
space, together with a rate cut event, could trigger the
prices of these stocks. Near term pain of fast tracking
NPAs in their books has only ensured cleaning up of
books sooner to make way for growth.
If you wish to average your equity portfolios, you
have no more uncertainties. Start now.
Debt: Fiscal prudence by sticking to the deficit target
received a big thumbs-up in the debt market as yields fell,
causing bond prices to rally. This could signal that markets
are readying themselves for a rate cut. A number of
measures to deepen the corporate bond market, including
allowing FPIs to invest in unlisted securities, and allowing
large borrowers to tap the market rather than go to banks
could also mean that the debt market’s demand-supply
scenario improves, thus reducing price volatility.
www.fundsindia.com
“Proposals for agricultural reforms, rural electrification, social sector reforms and allowing ships to
remain open seven days a week will add to economic growth.”
- Adi Godrej, Chairman, Godrej Group

5. www.fundsindia.com
beyond these options into more efficient market-linked
options such as mutual funds to deliver tax efficient,
superior returns.
For instance, in the same tax domain, an ELSS fund can
be effectively used to save tax, with no capital gains tax,
thereby helping you build a far superior retirement kitty
that can be later moved to safer avenues, closer to
retirement.
The government is favouring savings in market-linked
instruments. While you do that, make sure you pick
efficient and superior wealth-building market-linked
products.
Talk to your advisor if you wish to know how best you
can save outside of the traditional provident fund options
to ensure you are left with more money on the table.
Vidya Bala
Head – Mutual Fund Research
FundsIndia.com
Index 1 Year 5 Years 10 Years
Nifty 50 -21.5 5.5 8.5
S&P BSE Sensex -21.6 5.2 8.3
Nifty Midcap 100 -11.9 9.4 10.1
Nifty Smallcap 100 -23.3 5.4 6.4
Nifty 100 -20.2 6.2 8.9
Nifty 500 -19.4 6.5 8.2
Nifty Bank -29.1 6.0 11.8
Nifty Energy -11.8 -2.5 4.5
Nifty FMCG -13.1 16.0 13.3
Nifty Infrastructure -31.6 -4.3 -0.3
Nifty IT -18.8 9.0 10.0
Returns (in per cent as of February 29, 2016) for less than one year
is on an absolute basis, and for more than one year on a compounded
annual basis
Equity Performance Snapshot

6. Market linked returns from small savings schemes too
This interest rate is determined by a defined margin (or
spread) over the government security (G-Sec) with a
similar maturity period.
Short term instruments
The purpose of the change in short-term instruments is
to align rates with those of banks, bring about uniformity
in interest rates across debt instruments, and finally,
reduce the interest burden of the government.
The change: Up until now, post office term deposits of
1, 2, and 3 year maturities, the 5-year recurring deposit,
and the Kisan Vikas Patra pegged their interest rate at 25
basis points above the relevant G-Sec rate. This 25 basis
point spread will now be removed. Second, this interest
rate will be adjusted every quarter, instead of the annual
peg seen until now. The rates will be decided on the 15th
of March, June, September, and December based on the
preceding three months’ rates.
The implication: The direct result of the change right
now is lower interest rates, rendering them far less
attractive. Rates paid on the post office term deposits, for
instance, have held above 8 per cent from April 2012
onwards and are currently 8.4 per cent. This may come
down as rates fall. Next, the quarterly revision in interest
rates will make returns fluctuate more than they are now.
Small savings schemes will now see fluctuations similar to
bank deposits even in the short term.
Long term instruments
The goal of these instruments is to encourage investors to
stay put for years together, and most also have the added
benefit of qualifying for deductions under Section 80 C of
the Income Tax Act.
The change: The spreads in these instruments will
continue to remain the same. To this end, the Senior
Citizen Savings scheme, a tailor-made product for retirees,
will retain its 100 basis point spread over the G-Sec rate.
Also holding steady is the Sukanya Samriddhi Yojna’s 75
basis point spread. The Monthly Income Scheme, the
5-year term deposit, 5-year National Savings Certificate,
and the Public Provident Fund all have a 25 basis point
spread and will continue to do so. However, these rates
will be adjusted quarterly as well. A further change will
take place in the NSC, where the interest will compound
only annually instead of the half-yearly it is currently.
The implication: For the NSC, the annual compounding
frequency will reduce its yield. For every Rs. 1,000 invested
at the present rate of 8.5 per cent, the interest accrued will
reduce by Rs.12.56. For all other instruments, interest
rates will gyrate much more than they have hitherto.
In fact the biggest impact for investors would come from
the PPF, where rates will become more dynamic. In this
falling interest rate scenario, rates will move southward
almost every quarter.
The new interest rates on the small savings schemes will
be announced in March, and will thereafter come in every
quarter. As the link between market rate and the rate paid
by various instruments deepens, debt will lose much of
its rock-solid predictability. That makes a case for
investors to diversify into other regulated, market-linked
but superior returning products such as mutual funds if
they do not wish to settle for lower returns.
Bhavana Acharya
Analyst - Mutual Fund Research
FundsIndia.com
www.fundsindia.com
Bhavana Acharya
In February, the Government dropped something of a bombshell, at least for investors in small
savings schemes. The manner in which the interest rate is fixed will change from April 1st
onwards, and this has a few implications. Small savings schemes are many – time deposits and
savings account of the post office, monthly income schemes of the post office, national savings
certificates, provident fund, senior citizens scheme, the Sukanya Samriddhi scheme, Kisan Vikas
Patra. Each instrument has a different interest rate.
“The Budget has exploited its potential only in parts. Sectors like power, renewable energy, water
and effluent treatment did not receive much-needed attention.”
- R. Shankar Raman, CFO, Larsen & Toubro

7. www.fundsindia.com
Q: I have never understood how RBI rate cuts or hikes impact the market. Could you please elaborate?
A: A repo rate cut or a hike by the RBI signals that banks will follow a similar path. This is because a repo rate cut,
for example, means that the RBI makes funding available to banks at a lower rate. That also signals that banks can lend
to their customers at a lower rate. The inverse is true in case of a rate hike scenario.
In the equity market, a rate cut suggests that more credit will be made available to corporates and individuals. More
money at lower interest rates can spur private investment by companies and also consumption spending by individuals.
This done when economic growth is slackening, and capital investment activity in the economy is also low.
Higher investment and spending activity boosts corporate earnings growth, which gets reflected in the stock price of
companies. Thus,markets usually welcome a rate cut and are positive on stocks and sectors that gain from lower
interest rates. Similarly, in a high inflation, high growth scenario, the RBI may hike rates to curb excess money
circulation. Such a scenario need not always be bad for the economy if the rate hikes do not significantly hurt corporate
credit.
In the debt market, a rate cut would mean that debt instruments would have to readjust their yield to the new lower
rates. As yields settle at lower levels, the prices increase since the instruments (issued earlier) with higher coupon rates
will command a premium (as they pay out higher interest). Hence, in a falling rate scenario debt instruments, especially
those with longer maturity, see an appreciation in their price as yields fall.
Vidya Bala
Head – Mutual Fund Research
FundsIndia.com
Q & A
is

8. www.fundsindia.com
HDFC Bank
HDFC Bank has been trading in a tight band of Rs. 950
and Rs. 1,120. Currently,the stock is trading near the lower
band support of Rs. 950. There is a strong possibility of
it resuming its upward rally from the current price. We
recommend a buy for a target of Rs. 1,120. The stock can
be accumulated on declines. The latest 100-week SMA is
at Rs. 967. The stop loss is placed at Rs. 850.
This column is targeted at investors who are registered customers of
FundsIndia for trading and investing in equity as well as prospective
investors who wish to open an equity account with FundsIndia.
The Nifty has been making lower tops and bottoms
formations on the monthly chart for the past 5 months.
It has failed to hold the important level of 7,240. The
latest 21-day Simple Moving Average (SMA) is at 7,288.
Immediate resistance is at 7,550 and 7,700, while support
is at 7,040 and 6,870. The short term trend is negative.
The index needs to clear the resistance level of 7,250 to
confirm that this trend has turned bullish. Failure to break
above the resistance levels will result in short term
volatility. A close below 7,040 will lead to further
weakness to test 6,870 and 6,650.
Perumal Raja
Technical Analyst (Equity Research Desk)
FundsIndia.com
Reliance Industries
The stock has seen a massive fall from Rs. 1,080 to Rs.
890 in the past month. It has taken strong support around
the 200-week SMA at Rs. 890. The current correction
provides a good opportunity to accumulate the stock at
lower prices. Medium term target is Rs. 1,090. Major
support is at Rs. 830, and resistance is placed at Rs. 1,040.
The stock can be accumulated on declines. We
recommend buying Reliance Industries, keeping a stop
loss of Rs. 825.
Technical View Nifty
Disclaimer: Mutual fund investments are subject to market risks. Please read the scheme information and other related documents before
investing. Past performance is not indicative of future returns. Please consider your specific investment requirements before choosing a fund,
or designing a portfolio that suits your needs. Wealth India Financial Services Pvt. Ltd. (ARN code 69583) makes no warranties or
representations, express or implied, on products offered through the platform. It accepts no liability for any damages or losses, however
caused, in connection with the use of, or reliance on its products or related services. The terms and conditions of the website are applicable.
Think FundsIndia, a monthly publication of Wealth India Financial Services Pvt. Ltd., is for information purposes only. Think FundsIndia
is not, and should not, be construed as a prospectus, scheme information document, offer document or recommendation. Information in
this document has been obtained from sources that are credible and reliable in the opinion of the Editor.
Publisher: Wealth India Financial Services Private Ltd. Editor: Srikanth Meenakshi
"With Digital India, a new government, India has a chance to not only leapfrog its competitors,
but to move from being a slow follower to become a fast innovative leader."
- John Chambers, Executive Chariman, Cisco Systems

9. 1 Which Indian state has become the first ever state to
e- auction limestone blocks?
2 India’s largest coal washery will be set up in which
state?
3 Who has been named vice-chairman of International
Chamber of Commerce (ICC) Commission on
Corporate Responsibility and Anti-corruption?
4 Which agreement did the Reserve Bank of India
(RBI) and UAE Central Bank recently enter into?
5 India’s first-ever Aviation Park will come up in which
India state?
Answers may be sent to quiz@fundsindia.com.
Answers for February 2016 Investment Quiz:
1. United Nations (UN) 2. Mumbai Central station 3.
Bahrain 4. Geneva 5. 3 years
The winner of the February 2016 Investment Quiz is
Kushal Ramu Gowda
www.fundsindia.com
FundsIndia Select Funds Investment Quiz
Tax Savings Funds
These are equity-oriented funds with a lock-in period of
three years, investment in which qualifies for deduction of
up to Rs 1.5 lakh under Section 80C of the Income Tax
Act in the year of investment.
Moderate Risk High Risk
BNP Paribas Long Term Axis Long-Term Equity
Equity
ICICI Pru Long Term
Franklin India Tax Shield
Equity
IDFC Tax Advantage Fund Reliance Tax Saver
Religare Invesco Tax
Plan(G)
What is FundsIndia Select Funds
This is a listing of mutual funds that we think are most
investment worthy for a regular investor. We review this
list on a quarterly basis. Do note, however, that past
performance is not a guarantee of future results. Please
consider your specific investment requirements before
designing a portfolio that suits your needs.
Please click here for a complete listing of our preferred
funds.