RBI beats expectations with 50 basis-point rate cut
The Reserve Bank of India (RBI) made a surprise repo rate cut of 50 basis
points (a basis point is 0.01 per cent) through its September 29 Monetary
Policy Statement, taking the repo rate to 6.75 per cent. The RBI Governor
did what he usually does – surprise the markets. Only this time, it was with
a rate cut that was higher than the analyst consensus estimate of 25 basis
The RBI’s policy actions mean the following: the RBI has explicitly stated
that it is frontloading its policy actions. It hopes that investment activity in
the economy will likely respond to certainty about the extent of monetary
stimulus in the pipeline, low transmission notwithstanding. This raises the
bar for any rate cut in the next 3-6 months, as the ball is in the court of
government and private companies to revive investment, or evince interest
at least. With the low base effect in inflation waning by late 2016, food
inflation risks not entirely abating, and with the constant changes in the
global environment, the RBI could well hold, or delay any further policy
That essentially means that the game in the bond market may be a long drawn
one, and more rate easing could be due later, provided the bulk of RBI’s
conditions (inflation, deficit, global environment, commodity price) for such
accommodation are met. The current rate cut is clearly a boost to the debt
market. A rally caused by easing yields could lead to capital appreciation in
gilts as well as corporate bonds. RBI’s willingness to accommodate, based
on further data, suggests that there could be room for more rally in debt.
That means gains may accumulate over a longer period than at one shot. For
the stock market, a 75 basis-point rate cut until June resulted in just around
a 35 basis-point transmission in terms of lowering borrowing costs. The 125
basis-point cut, in all, certainly leaves much more scope, in part at least, for
borrowing costs of companies to ease.
If this happens, improved margins, both from lower input cost and interest
cost could bring cheer to companies with debt in their books. We do not
expect such a rate cut to immediately translate into investment activity since
the capacity utilisation (in manufacturing) is said to be around 70-72 per cent,
leaving scope for improved utilisation before any fresh capacity addition can
Head – Mutual Fund Research
October 2015 I Volume 08 I 10
“Mutual funds are
subject to market
risks.” These seven words
mandated by the regulator as a
part of all mutual fund related
communications have been a
scarecrow for potential investors.
As mutual fund investors know,
risk can be a good thing;
something that is an inevitable part
of anything that is better than the
ordinary. A risk-free endeavour will
always yield a pedestrian
experience compared to treading
outside the beaten path.
At FundsIndia, we view risk as a
positive change agent that is vital
for the growth and progress of
individuals, and of the society at
large. We have started an initiative
to underscore this point.
www.riskisgood.com has been
started as a social platform to share
stories about risk-taking.
We aren’t just talking about
financial risks; we’re talking about
all kinds of risks. These would be
stories illustrating that risk,
rewards, and learning form the
golden triangle of life. Check out
the site and inspire us with your
own experiences with risk.
Co-Founder & COO
FundsIndia Strategy: Guard yourself from risks in debt funds
When we say ‘limit’ your risk, we clearly mean that the
debt space is not devoid of risk. The risk arising from the
interest rate cycle, called the duration risk, affects most
medium to long-term debt funds.
Credit risk (risk arising from exposure to debt instrument
companies that do not have top credit quality) is a
conscious decision that fund houses choose to take, and
therefore, does not affect all funds. While you have little
choice but to ride out duration risk, if you take it, here are
ways to limit credit risks in debt funds.
Time frame based category choice
With equity funds, your time frame is clear – it has to be
long-term. With debt funds, time frame has, however, a
larger role to play in the choice of your funds, and thereby,
the risks you assume. When you have a short time frame,
you cannot be taking duration risks or credit risks. You
need to be reasonably sure of getting back your capital,
and earn returns that are slightly better than other liquid
options such as your saving bank account.
If you have a short time frame of say less than 1 year, you
should be happy to stick to liquid and ultra short-term
funds, and not venture beyond that. These categories have
low-risk papers, and even if they do have commercial
papers of corporate houses, their duration is too short to
balloon into unforeseen risks.
Avoid unless you understand
In recent years, there have been a number of funds that
have a stated strategy of digging deeper into the credit
space for higher yields, or looking for temporary
mispriced opportunities in the corporate credit space.
Either which way, unless you understand the overall credit
cycle of the corporate world, and whether you are riding
on top or bottom of such a cycle, it may not be an easy
call to ride this high-risk category.
Investing in this category is akin to investing in sector
funds in equity. You should know when to enter and exit,
and for that purpose, understand the cycle of that sector.
Also, funds with such strategies would sport
low-to-medium portfolio maturity, but require a
reasonably long time frame, overall, for the accrual to
So, if there is a mismatch of time between your own
horizon, and what the fund ideally requires you to hold,
you may lose. Long story short, this game is not for
everybody, and definitely not for those merely using debt
for asset allocation purposes. So, how should you take
exposure to corporate opportunities, if at all? Move on to
the next point.
Play it safe with ‘diversified’ debt funds
If you have a medium-to-long time-frame (two years and
more), look for a fund that has a diversified approach; that
is, a mix of gilts, corporate bonds, and a bit of allocation
to short-duration papers such as certificates of deposits,
and commercial papers. This should give you adequate
exposure to corporate opportunities, as well as play the
duration game through gilt.
Funds in the dynamic bond and income accrual category
sport this kind of profile. But then, one of the funds that
had Amtek Auto was a short-term fund, and ended with
higher risks. What do you do about it? Here again, such
rare instances are inevitable. You cannot be sure that every
AAA or AA paper is of a high credit standard. What you
can do, though, is to ensure that single instrument
exposure to AA-rated or a lower instrument is not over
The recent news of Amtek Auto’s problems with its debt, and the holding of its debt instrument
in a few mutual fund schemes raised a debate on whether debt mutual funds are indeed safe.
While such a debate may be a never ending one – it came up during 2008 Fixed Maturity Plan
(FMP) troubles, the 2013 liquid fund mark down, and now - let us focus on what you as an
investor can do to limit your own risks with debt funds.
We have to have the discipline to stick to our strategy of building the necessary institutions and
creating a new path of sustainable growth. For this, we need the cooperation of business, not
impatience and pressure for quick impossible fixes.
Dr Raghuram Rajan, Governor, Reserve Bank of India
If we look around the world today, it does not present a
pretty picture. Industrial countries are still struggling, with
a few exceptions, to grow. Our fellow BRICS nations all
have deep problems. Indeed, India appears to be an island
of relative calm in an ocean of turmoil. What is different,
and how can we be assured that it will continue?
Growth must be obtained in the right way. Of course,
India is not in the same situation today. But with the world
being an inhospitable place, we have to work hard to
strengthen our current recovery, and put it on a more
Edited extracts from a speech by Dr Raghuram Rajan
Governor, Reserve Bank of India
5-10 per cent in the fund you choose. When an illiquid
bond instrument accounts for 10 per cent of your Net
Asset Value (NAV), then any default can hurt you.
If it is lower at say one-to-three percent, it means less
harm. Do a quarterly check, or ask your advisor for one
to understand the fund you hold does not have such
Go for funds with larger AUM
As retail investors, you may be impacted by a large
redemption placed by institutional investors (who are
major investors in debt funds), if the asset size of a fund
cannot take that impact comfortably with sufficient
liquidity. Hence, look for funds (within the category fitting
you) with large assets of Rs. 1,000 crore, or over, in case
of liquid or ultra short-term funds, and at least Rs.
400-500 crore for medium-to-long-term categories.
Don’t chase yields taking credit risk
When you see a fund with top returns in equity, you are
tempted to pick it. The same happens with debt. The
question is whether it fits you. No debt fund would be
able to have a higher yield to maturity (the yield of
instruments in the portfolio), unless it goes for risks, or
takes bets that the category, on an average, does not take.
So a simple thumb rule is – ‘higher returns must come at
higher risk’. It may not be worth taking such risks if you
chose debt to simply hedge your equity portfolio, and
provide a bit of diversification. Debt funds, as a category,
are often misunderstood by retail investors. Remember,
banks, whose primary job is to lend, have large Non
Performing Assets (NPAs) in their books, despite all their
Hence, to expect mutual funds to be free of such issues
would be unrealistic. Be surprised that mutual funds have
managed to keep their ‘bad loans’ reasonably low. As an
investor, you do know that debt fund is a better vehicle to
ride than traditional options in terms of returns and taxes.
Events such as the present one will also help you ride it,
with lower risks.
Head – Mutual Fund Research
“Rule number one: Don’t lose money. Rule number two: Don’t forget rule number one.”
Warren Buffett, Chairman, Berkshire Hathaway
A lesson from Brazil
Further, Brazil’s government funded development bank
hugely increased subsidized loans to corporations. Certain
industries were favored with tax breaks while price
controls were imposed on gasoline and electricity, causing
huge losses in public sector firms. Petrobras, the national
oil company, which was supposed to make enormous
investments in oil drilling, instead became embroiled in a
Even as government pensions burned an ever-larger hole,
budget deficits expanded, and the political consensus to
narrow them has become elusive. While the Brazilian
authorities are working hard to rectify the situation, let us
not ignore the lessons.
Perhaps Brazil offers a salutary lesson. Only a few years
ago, the world was applauding the country’s thriving
democracy, its robust economic growth, and the
enormous strides it was making in reducing inequality. It
grew at 7.6 per cent in 2010, and had discovered huge
oilreserves, which the then President Lula likened to
“winning a lottery ticket”. Yet the country is expected to
shrink by 3 per cent this year, and its debt just got
downgraded to junk. What went wrong? Paradoxical as it
may seem, Brazil tried to grow too fast. The 7.6 per
cent growth came on the back of substantial stimulus
after the global financial crisis. In an attempt to keep
growth high, the New York Times says the central bank
was pressed to reduce interest rates, fueling a credit
spree that overburdened customers are now struggling
FundsIndia Features: Reports that help you with investing
For the touchy-feely ones among us, these emotions come
into play even on seeing any / all industry or market news.
There’s drama (when the markets go sliding up or down),
action (buying / selling), romance (oh, the way high
returns kindle our heart), tragedy (need I say anything
here?), and more!
Whoever said that investing is a boring affair has clearly
not known investing well enough.
Your investment film typically involves the following star
cast: The main protagonist of your film, the hero, is, of
course, your investments.
He is truly, madly and deeply in love with ‘high returns’ –
his beloved. In spite of all the obstacles in his way, he
keeps working hard to make sure he wins her heart.
Now there is another main protagonist who is central to
the success of this film – the heroine’s father, whose
approval and blessings are important for your hero’s
‘happily ever after’ with his beloved. Introducing –
investment reports aka the heroine’s father.
Says Gopalakrishnan Upadhyaya, Head of Products,
FundsIndia.com, “Investing money is the easiest part
about investing. It’s the tracking and maintaining of
investments that’s challenging. That’s why we’ve made
investment reports available to every investor at
FundsIndia.com. These require minimal effort on an
investor’s part for they are updated automatically, and
stored online.There is no hassle at all as there is no
paperwork involved. Moreover, they can be downloaded
in just the click of a button whenever an investor would
like to review his investments.”
To make sure your investment film is a blockbuster hit,
you can use investment reports to your advantage at
www.fundsindia.com by simply logging in to your account,
and selecting ‘Reports’ from the top menu.
A few of the reports available to you are:
1. Holdings Reports – This report gives you instant
information on your current investment holdings.
2. Transaction Reports – This is a detailed report on all
your investment transactions with FundsIndia. You’ll
know exactly how much you’ve invested, how many
units you’ve purchased, when you’ve invested, and
more – all in one report.
You get two variants in this report – a fund-wise report,
and a chronological report.
3. Capital Gains Statement – This report features your
capital gains for the current financial year, or for a
period you specify. You can get the current update on
realized, un-realized, short-term and long-term gains
for all your investments in a single place using this
4. Systematic Investment Plan (SIP) Reports – You
can download an instant report of all the SIPs (SIP,
STP, SWP, VIP, and VTP) you have set up on the
5. Portfolio x-Ray, Instant Reviews, and Portfolio
Analysis – Yup, there’s more to ensure you get your
capital’s worth at FundsIndia.com!
Have you ever felt like investing is similar to witnessing a grand film on screen? For one,
investments evoke the same myriad emotions we’d feel much as we do when watching a
spectacular movie. To experience a trailer of what we’re telling you, just open your account
dashboard and take in what you see.
These tools will help you take stock of where your
portfolio currently stands, where you wish to go with
it, and what needs to be done in order to reach your
desired goal, and more. You can read more about these
reports by clicking here.
Our goal is to build a bank unlike any other. Our goal is to present ourselves to the market and
the customer in a ‘hatke’ (different) manner. The experience has to be ultra convenient. The
customer has to get the sense that he is treated with respect and responsiveness.
Rajiv Lall, Managing Director, IDFC Bank
Filing taxes – These reports are exactly what you need at
the time of filing taxes. Last minute computation worries?
Say goodbye to them once and for all!
Compare performance – Your FundsIndia dashboard
provides substantial information on the performance of
your investments at a glance.
If you would, however, like specific information on how
your investments have done over specific years, and if
you’d like to compare that performance, then all you need
is any one of these reports.
Track performance – Track how much you’ve invested,
and when, to analyse your investment behaviour with
You can also download the transaction history of
individual funds / folios, and check their performance
over a specific period of time.
Moreover, you get detailed insights on the age of
individual investments, your unrealised short-term and
long-term returns, number of active / inactive SIPs, etc.
Easy format – These reports can be downloaded as
Excel sheets / PDFs as per your convenience.
While Excel sheets make computation easier (if you’d like
to analyse the XIRR, conduct a regression analysis, etc.
of your investments), PDFs are easier to print and
maintain, or to just print and save in a folder on your
See?! Investment reports can be so helpful when it comes
to tracking and maintaining your investments.
Q & A
Q: Please provide a comparison between equity funds and
liquid funds in terms of their returns. I understand that
if we redeem units before one year, an exit load will be
charged, and no such exit load exists for liquid funds. An
equity fund’s gain is, however, higher than that of any
liquid fund if exited in the same duration. Then why
should we choose liquid funds?
A: Liquid funds and equity funds belong to different asset
classes. Liquid funds are a class of debt funds that are
highly liquid, and have low risks since they invest in very
short-term, overnight bank treasury papers. They are
meant to park money temporarily, can be exited at
anytime, and still earn better returns than a banks savings
Equity funds are a different ball game altogether. They
invest in stocks (shares of companies), are subject to
market risks, can be volatile in the short-term, and will
hopefully, if you invest in the right funds, return well in
the long term.
As equities involve risks, to reduce the risk and enhance
return potential, it requires a long holding period. Ideally,
such a holding period should not be less than five years.
To encourage investment in the capital market (equity
market), capital gains tax exemption is given for a holding
period of more than one year for equities and equity
funds. To answer your question, expect only savings bank
plus returns from liquid funds. Expect a few percentage
points over inflation from equity funds in the long term.
Check out our recommended list – FundsIndia Select
Funds, to know the best funds in each category.
Choose the right category of funds based on your risk
profile, time frame, and savings. Invest through a
Systematic Investment Plan (SIP) every month to reduce
the volatility and risk in equity. Remember: equity funds
are necessary to generate inflation beating returns for
long-term goals such as retirement, children’s education,
or marriage. Liquid funds are only for temporarily parking
Head – Mutual Fund Research
Download these reports and start using them to your
advantage right away to give your investment film the fairy
tale ending it deserves.
Senior Executive – Corporate Communications
How these reports benefit you
These reports benefit you in the following ways:
Whoever swims the fastest, whoever is the most efficient, and whoever has the least amount of
fat on the body will win the race. We are the lowest cost producers in India. As long as you are the
lowest cost producer, especially in the airline business you are a winner.
Aditya Ghosh, President, IndiGo
The stock market is a capricious
beast, up one month, and down the
next. So how would you know
whether you are following the rule
of buying low and selling high?
This is where a Systematic
Investment Plan (SIP) makes a
There are other ways an SIP is useful to build wealth over
the long term. Here’s how:
First, it turns market volatility into an advantage. In an SIP,
investments will be made at regular intervals - ideally,
every month. Therefore, when markets slide, there is more
unit accumulation at lower NAV (Net Asset Value).
This leaves you with a higher number of units when
markets pick up again, therefore improving overall return.
You benefit from the effect of compounding.
Second, it reduces the cost of investment. You are, in effect,
striking bargains by buying more when equity markets are
cheaper, thereby staying true to the maxim of buying low.
In the past two decades, barring the bull run of
2003-2008, market cycles have generally lasted around two
to three years.
Therefore, it’s important that you continue your SIP,
especially when markets are correcting, as that is the best
phase for averaging out costs.
If you had started an SIP in a large-cap fund for Rs. 5,000
in October 2010, when markets had already rallied after
the 2008 crash, the worth of your investment surges far
ahead once the proper 2013 rally takes root after years of
dithering. The compounded annual return on your
investment works out to 14.6 per cent. Not bad, is it?
Third, it lets you gradually save up. If you notice, in the
example, the amount saved at the end of five years is a
good Rs. 3,00,000.
It’s hardly possible for most of us to save such a high sum
at one go. But goals such as retirement, or educating your
children do require such high savings.
To retire 20 years from now, for example, you would need
a corpus of Rs. 2.2 crore to last for the next 20 years,
assuming that your monthly expenses are Rs. 30,000 now.
In an SIP, investments can start as low as Rs. 1,000, which
can be increased progressively, as salaries and surpluses
grow. It therefore helps build wealth over the years.
Fourth, it brings discipline into your investments. An SIP does
not need you to have the smartness to time markets. It
simply introduces regularity in investing. Because an SIP
is automated, you don’t have to remember to invest each
month yourself either.
Once the SIP is done, you can splurge for the rest of the
month with a clear conscience! Allowing an SIP to
continue will also eliminate the tendency to sell when
markets turn gloomy, which can scupper your wealth
Analyst – Mutual Fund Research
Equity Performance Snapshot
Index 1 Year 5 Years 10 Years
CNX Nifty -1.5 5.5 11.6
S&P BSE Sensex -3.1 5.3 11.5
CNX Mid Cap 11.8 6.7 12.8
CNX Small Cap 4.5 3.8 9.5
CNX 100 0.7 6.0 12.0
CNX 500 2.3 5.9 11.1
CNX Bank 11.7 7.1 14.1
CNX Energy -18.9 -5.5 5.4
CNX FMCG -1.2 15.6 16.7
CNX Infrastructure -9.4 -5.8 4.1
CNX IT 4.7 12.5 13.7
MSCI Emerging Markets -27.7 -6.1 1.8
MSCI World -9.5 5.6 2.4
Returns (in per cent as of September 29, 2015) for less than one year is on an
absolute basis, and for more than one year on a compounded annual basis.
How an SIP makes a Difference
HDFC Bank, for the past three months, has declined
sharply from a high of Rs. 1,120, and has formed a strong
base at Rs. 980. The stock needs to clear a stiff resistance
at Rs. 1,100 to trigger a strong upward momentum, with
a target of Rs. 1,220 in the medium term. Else, it could
lead to sideways action in the short term. Accumulate the
stock on declines. Crucial support level is at Rs. 980 and
Rs. 940, while resistance level is at Rs. 1,100 and Rs. 1,160.
Stop loss is Rs. 935.
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.
It was a volatile month for the Nifty with a mixed bias.
After hitting a low of 7,540 on September 8, 2015, it faced
strong resistance at 8,050, resulting in the formation of a
consolidation band of 7,540 to 8,050. A pullback rally is
expected in the short term. The latest 21-day simple
moving average is at 7,831.2. The crucial support for
Nifty is placed at 7,670, and its major resistance is at 8,220.
The trend will turn positive only if the index closes above
the 8,050 levels for a target of 8,300. A close below 7,830
will lead to further weakness to test at 7,540.
Technical Analyst (Equity Research Desk)
Tata Consultancy Services
Since the beginning of the year, TCS has remained
volatile, building strong support at Rs. 2,400 levels, while
its resistance is at Rs. 2,650 and Rs. 2,750. There is a
strong consolidation building up in the Rs. 2,470 to Rs.
2,650 price band. The latest 100-day simple moving
average is at Rs. 2,565. The stock can be accumulated on
declines. A breakout above Rs. 2,650 will lead to a
medium-term upward trend with the target at Rs. 2,900.
Stop loss is at Rs. 2,350.
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 Pvt Ltd. Editor: Srikanth Meenakshi
If you take e-commerce, the value created in five years will be substantially larger than the value
that it existed at. So, it is a large opportunity, and somebody will win and somebody will lose. But
it is hard for me to say who the winners are, and who the losers are.
Vinod Khosla, Founder, Khosla Ventures
1 Which two regulatory bodies merged recently?
2 In 2008, which real-estate company had to enter into
a staggered repayment schedule with the mutual fund
industry in India?
3 What is a basis point? (For example, you may have
read headlines saying ‘RBI cuts rates by 50 basis
4 The debt woes of which company has recently
impacted a few debt funds?
Answers may be sent to email@example.com.
Answers for September 2015 Investment Quiz: 1 A liquid fund
invests in debt market instruments with maturity of less
than 91 days. 2 State Bank of India 3 10% of the size of
the fund (not exceeding 10% of the equity capital of the
company) 4 James Kynge 5 Tim Cook
The winner of the September 2015 Investment Quiz is
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
CanRobeco Tax Saver Axis Long-Term Equity
Franklin India Tax Shield ICICI Pru Long Term
IDFC Tax Advantage Reliance Tax Saver
Please click here for a complete listing of our preferred
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improved user experience to our stock trading customers.
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share your feedback by writing to us at
5 Name the person. He is the author
of the books – 'The Intelligent
Investor' and 'Security Analysis'.