Capital letter May'11 - Fundsindia

CAPITAL LETTER
Volume 3 May 7, 2011 Issue 5
Greetings from FundsIndia!
In the Pursuit of Happiness
At FundsIndia, we are always making small improvements to our system to make the user
experience of investing more fun. If you had logged in to your FundsIndia account recently,
you would have noticed that we have introduced a small but important feature to the ‘My Ac-count’
screen.
Now, every mutual fund portfolio carries in its header a small link that says
‘Analysis’. If you click on that link, you can see the overall equity/debt/liquid asset allocation pat-tern
for that portfolio. As we move forward we will also add a lot more things to this space such as
portfolio information and returns information at an aggre-gate
level.
Also, in this panel, you will see a way to set a goal for this
portfolio and track it (see image). For example, investors
can say something like I would like this portfolio to have 5
lakh rupees in three years. After setting this goal, whenever
they login, they can see where the portfolio is with respect to
this goal. This will work for both SIP portfolio and lump-sum
investments (to track if the expected returns are keep-ing
with your goal amount and timeline). We will also soon
be adding a facility to keep a note for each portfolio where
you can jot down the purpose of the portfolio and what you
aim to achieve with it.
The concept of portfolio (unique to FundsIndia system) has
always been to facilitate investors to group their invest-ments
in a manner that will help them develop a plan for
their financial goals and track them effectively. Now, with this feature, it makes it easier to do that.
More importantly, it would help remind us why we do what we do – saving and investing is not an
abstract “corpus-building” exercise. It is done to aim for and achieve real life goals. It is an effort that
embodies a “pursuit of happiness”.
Get your existing policies
analyzed for FREE!
Have insurance policies but not sure if you are
covered properly? Let us know about your policies
and our experts will scrutinize them and advice
you on your coverage! For FREE!
Please logon to
www.pelicaninsuranceonline.com
to get started!
Disclaimer: Mutual Fund Investments are subject to market risks. Please read all scheme related documents carefully before investing.

Deposits from ‘Top rated Companies’
Company Name Rating 1 Year 2 Year 3 year
HDFC LIMITED FAAAA 9.0% 9.15% 9.25%
ICICI HOME FINANCE COMPANY LIMITED MAAA 8.25% 8.75% 8.75%
LIC HOUSING FINANACE LTD FAAA 7.0% 7.40% 7.65%
MAHINDRA AND MAHINDRA FAA 8.5% 9.5% 10.0%
SHRIRAM TRANSPORT FINANCE CO.LTD FAA+ 9.25% 9.75% 10.75%
DHFL AA+ 10.25% 10.25% 10.25%
UNITECH LIMITED - 11.0% 11.5% 12.0%
For more information log on to www.daiwafunds.in

STOCK RECOMMENDATION PERFORMANCE – April 2011
Symbol
endations
Recommen-dation
Price
(Rs.)
Date
Price High
Date
%
Peak
Current Mar-ket
Price(Rs.)
Change
ELECON Buy 68 02/04/2011 89.00 78.9 21/04/2011 16.03 75 10.29
GODREJ Accumulate 360 02/04/2011 420.00 410 18/04/2011 13.89 377.00 4.72
ICICI BANK Buy 1125 02/04/2011 1287.00 1128.50 27/04/2011 0.31 1119 -0.53
GUJARAT GAS Buy 381 02/04/2011 481.00 398 05/04/2011 4.46 375 -1.57
DIVI'S LAB Buy 680 02/04/2011 833.00 730 05/04/2011 7.35 717.4 5.50
BUY TODAY SELL TOMORROW under the BTST® segment — Coming soon to FundsIndia.com
With ‘Buy Today Sell Tomorrow® (BTST® )’ you can get the incredible advantage of selling the stocks that you
have bought on the previous day. That’s right, you no longer need to wait for the receipt of your shares into your
demat account.
Why you should take advantage of BTST®:
♥ With BTSC you wont have to miss booking profits just because the shares have not yet been credited into our
account.
♥ Cash based transactions for intra-day trading can be more profitable as it lets you realize maximum profit.
♥ Gives you access to an intermediate option between cash and margin trades where you can make profits
within one or two days from the date you buy your stock without a compulsory square off.
At Fundsindia, we believe that the best advertisement comes from word of mouth of our valued customers
like you. Now that you have discovered happy investing with FundsIndia why don’t you introduce your
family, friends, and colleagues to our site?
So, what are you waiting for? Login to www.FundsIndia.com and click on ‘My Info’
and ‘Refer friends’ to get started! Your time starts now!

Road to Wealth
WWW.VALUERESEARCHONLINE.COM
The argument in favour of investing in mid- and small-cap stocks is
simple. The growth potential of a smaller company is much more than that of
a larger, already-established player. Hence, investors in these stocks can
benefit from the growth in terms of higher returns. Once a company grows
into a large entity, the growth rate tends to be sluggish in comparison to its
days when it was a small, racy firm. A classic example is Infosys. The soft-ware
biggie doubled its turnover and profits every year for the first eight
years after listing in 1993. In 2009-10, it achieved Rs21,140 crore in turnover
with a revenue increase of Rs876 crore, a growth rate of 4.3 per cent — not as
impressive as in the past.
Or, take the case of Shriram Transport. Way back in 2001, it was going at Rs6 and crept up to Rs40 by
2005. Today, this mid-cap company is quoting at over Rs500. There are numerous instances of mid- and
small-cap stocks that have grown phenomenally over time. But every small firm does not make it into the
big league. The trick is to find such stocks and bet on them for the long term. What the fund managers of
funds that fall into the ‘Mid- & Small- Cap’ category attempt to do is spot winners and then bet and hold
on to their convictions through rough patches. Hopefully, in the long run their bets will prove to be lucra-tive
investments.
Profile of Funds
From the universe of 265 diversified equity funds, 68 funds fall in the ‘Mid- & Small-Cap’ category. These
are funds with at least 60 per cent exposure to mid- and small-cap stocks over the past three years. So
while there are instances of these funds having a large-cap tilt, these funds would typically have a mid-cap
growth tilt. Having said that, all sorts of funds fall into this category. The average weighted market capi-talisation
of the funds in this category is Rs7,641 crore, which is similar to the market cap of Tata Chemi-cal
and Reliance Power. However, there are funds in this category with a weighted average market capi-talisation
of Rs900 crore right up to Rs36,161 crore. Some like DSP BlackRock Micro Cap barely have any
large-cap exposure, if any at all. Then there is ICICI Prudential Discovery which is a value fund. There are
dividend-yield funds like Birla Sun Life Dividend Yield Plus and ING Dividend Yield. Opportunity funds
like HSBC Unique Opportunities and ICICI Prudential Equity Opportunities also make an appearance
here.
Portfolio Composition
The definition of mid cap varies greatly depending upon who you ask. At Value Research, we define mid
cap as stocks falling within 70-90 per cent of the free-float market capitalisation, with the top 70 per cent
constituting large-cap stocks.
There are over 6,000 companies listed on Indian exchanges. The vast majority are of insignificant size.
The weighted average market capitalisation of the 293-stock BSE Midcap index is Rs1,419 crore and that
of the 553-stock BSE Small Cap index is Rs240.3 crore. Compare this to the 30-stock Sensex which has a
weighted market cap of Rs48,653 crore; one can imagine the character of a fund that focuses on mid and
small caps.
When picking stocks that fall in this category, fund managers have to tread carefully because not every
small cap will turn into a mid cap and eventually turn into a large cap stock. Some turn into multi-baggers,
others collapse. Hence though the universe of stocks that fund managers can select from run into a few
hundreds, fund managers have seldom gone beyond holding 70 stocks in their portfolios from an invest-ment
universe of a little over 100. The reason for this filtered set of stocks is that the fund manager needs
to validate stocks that can be invested into.

Returns & Volatility
Interestingly, we looked at the performance of three indices from March 2009 onwards. All these indices
are maintained by the Bombay Stock Exchange (BSE): Sensex, BSE Midcap and BSE Small Cap. We dis-covered
that at certain levels smaller stocks may actually be safer than large caps. First, the number of
days on which the small- and mid-cap indices have shown positive returns is more than that for the Sen-sex.
This makes the probability of loss on these two indices lower than in case of the Sensex on any given
day. There is also a technical reason why small and mid caps are safer than large caps: these stocks are
mostly subject to circuit filters. Trading in small stocks is stopped after they hit an upper or lower limit
during a trading session. This limits the loss to 5, 10 or 20 per cent, depending on the stock filter. How-ever,
a large-cap stock is not subject to such freezes. As a result, the Sensex has higher daily volatility.
But if we go back further in time and look at market downturns, we see that during the bear phase be-tween
January 8, 2008 and March 9, 2009, the Sensex lost 55 per cent while BSE Mid Cap lost 68 per cent
and BSE Small Cap lost 74 per cent. This does indicate that smaller stocks give a bumpier ride than bigger
stocks. They do not have the muscle to cushion a fall and drop really hard (which could have a detrimental
effect on a portfolio if the allocation to such stocks is large). But when the bulls come out, these stocks
have a higher potential to rally. In the bull run from March 9, 2009 to December 31, 2010, BSE Small Cap
witnessed a growth of 70 per cent followed by BSE Midcap (67%) while the BSE Sensex grew only 60 per
cent.
India is a growing economy, and the growth opportunities for smaller companies are more than in a devel-oped
economy. There’s no doubt that the Infosyses and Reliances of the future will come from the small-and
mid-cap segments. No Sensex stock is likely to grow 1,000 per cent within the next two years. A few
mid caps and small caps are almost certain to. If you want to latch on to such growth, these funds are tai-lor-
made for you.
Making the Right Pick
Should these funds find a place in your portfolio? If you already have a significant tilt towards such stocks,
either by directly investing in the market or by having an exposure to many ‘Large & Mid Cap’ funds, then
refrain from such offerings. If you don’t, you could consider them but not as a core holding. Such funds
should complement the core portfolio, not replace it. Investors should pick funds in this category for the
spike that they can offer.
By no means are we saying that all the funds in the category are excellent performers. In fact, the variation
in the performance of funds in this category is huge. On a 5-year time frame, the worst performing fund
lost 7 per cent and the best fund earned 23 per cent. For the same period, the large-cap category had the
best performer earning 18 per cent and the worst earning 7.5 per cent. Clearly, these funds have the poten-tial
for a better upside while the downside is pretty similar, when compared to their large-cap counter-parts.
But how do you make the right pick within the category since such funds also face issues of scalabil-ity
and ability to stick to their investment mandates? For instance, the much in demand Sundaram Select
Midcap had a great run in 2005 and 2006. But the select stock picks went against its performance in the
bear phase and the fund is yet to recover from the lows. To check such wild swings, some new funds have
taken measures to limit the complexity that fund size poses to this category: too big a size and they lose
out on the dexterity to manage efficiently; too small and they lose out on opportunity.
The best way investors should approach such funds is by starting off with a closed-end scheme that even-tually
turns open ended, such as DSP BlackRock Micro Cap. Or only stick to a systematic investment plan
(SIP).
This category has evolved over the years and will continue to do so. In fact, the classification may eventu-ally
evolve once there is data to support the creation of a pure small-cap fund classification. As of now,
some funds which have a higher small-cap allocation also find a place in this category as is the case with
some highly mid-cap oriented-funds that too get slotted as mid- and small-cap.
— Syndicated from Value Research Online

The Cloudy Silver Bubble
BY DHIRENDRA KUMAR
Readers of the investment press may have noticed in recent weeks a sharp increase in
the number of articles that use the phrase ‘silver lining’. However, most of these articles
are not saying the obvious thing--that every cloud has a silver lining. Instead, they are
saying that every silver lining has a cloud; or that silver has a cloudy lining. Or some-thing
along those lines.
It’s quite amazing the way interest in silver investing has increased. Or maybe, it’s not
so amazing after all. The last few years have seen one commodity after another going
through a similar cycle, and perhaps it’s just silver’s turn now. However, what is differ-ent
is the ordinary investor’s reaction to silver prices shooting up. When copper prices
shot up, hardly any mutual fund investor clamoured for a copper ETF. No one tried to
buy physical copper and stash copper at home.
Basically, copper was of concern only to copper users and those who were already investing in commodity futures.
But silver is different. Silver is one half of the gold and silver duo so many of feel that we should have bought or could
have bought it and made these awesome gains of many times our investments. However, silver is not gold either. De-spite
the phrase ‘gold and silver’, investing in silver is a very different matter than gold.
Unlike the deeply-ingrained centuries old culture of buying gold, Indians don’t actually buy silver traditionally in any
quantity. For one, silver is not a dense enough store of wealth. You can’t store, hide or transport a lot of wealth in any
reasonable physical volume. Also, silver has traditional been a status symbol (as jewellery etc) only among the rela-tively
less well-off. In a manner of speaking, silver is the poor man’s gold. From the middle class upwards, silver jew-ellery
is not part of any trousseau and no one’s family has a horde of silver that is handed down from generation to
generation. The fact that silver is not gold is true on a wider scale too. Silver is not the ultimate reserve currency like
gold, nor has it ever had the same role in the world economy. There never was a silver standard.
All of this makes silver a purely financial investment. Unless you are into commodity futures, there is no way to in-vest
in silver in India. Sure, you can buy chunks of physical silver but you’ll be paying sales tax and VAT. You can’t
really invest in something in which the transaction is costing 15 per cent or so. And of course, there are no silver-based
mutual funds so that route is closed too.
Don’t think that I’m pointing these out as problems—I’m not. This is all good news. Silver’s price rise is a bubble, and
as usual, by the time that the news has become disseminated widely enough for the non-investor to consider becom-ing
an investor, the fun is over and the dangerous part is looming large. You can come across any number of ideas as
to why silver’s shock rise is justifiable. The favourite is that silver has industrial uses and so its demand will shoot up.
While silver has many uses, nothing in its usage justifies the way its price has shot up and the short timeframe in
which it has shot up.
Basically this amounts to the fact that in today’s world, you can point to anything and scream ‘Chinese Demand!
Emerging Economies! Buy!’ and its price will shoot up. We’ve seen this trick many times in the last five years and we
will doubtless see it many more times in the coming years. Would you like to make money off this phenomenon?
Then you will have to be a bit smarter about recognising the next silver—this particular boat has already sailed.
— Syndicated from Value Research Online
17, RMG Complex,
TVK Industrial Estate,
Guindy, Chennai 600032
Tamil Nadu, India
Phone: 044-4344 3100
E-mail: contact@fundsindia.com

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