Capital Letter

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 docume nts 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

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

STOCK RECOMMENDATION PERFORMANCE – April 2011

Recommen- Current Mar- % Symbol dation Price Date Date ket endations Price High Peak Change (Rs.) Price(Rs.) 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!

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

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.

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

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

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

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, Phone: 044-4344 3100 TVK Industrial Estate, E-mail: contact@fundsindia.com Guindy, Chennai 600032 Tamil Nadu, India

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