IPRU Insight Nov-Dec 2016.cdr - ICICI Prudential Mutual Fund

0 downloads 154 Views 2MB Size Report
sum or a fixed percentage of money at regular intervals. It is based on the ... Here what price you pay for a single uni
AN INVESTOR EDUCATION INITIATIVE BY

IPRU

Insights Nov-Dec 2016

Volatility: Can be a boon more than a bane Pg 02

Style based Investing Pg 03

Rupee Cost Averaging: Buy low, sell high!

Volatility Can be a boon more than a bane

Pg 04

4 Things You Need To Consider Redeeming Your Mutual Fund Investments Pg 05

Optimize Your Investment Pg 06-07

The only 3 calculations you need to know Pg 08

Are You Ready To Test Yourself? Pg 09

The Christmas Present Pg 10

Please visit us at Website: www.icicipruamc.com Follow us on: https:/ / www.facebook.com/ iciciprumf https:/ / twitter.com/ iciciprumf

Mutual Fund investments are subject to market risks, read all scheme related documents carefully.

CEO Letter

Volatility: Can be a boon more than a bane An opportunity for investors to tap into equity markets.

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

V

olatility is a given when it comes to financial markets. Whenever there is a policy shift or periods of change in any economy, financial markets tend to go through periods of heightened volatility. This is generally because financial markets comprises of different stakeholders like long and short-term investors, financial institutions, pension funds, and many others, who participate with varying financial goals and objectives which ultimately leads to volatility. However, all is not grim as it sounds. Volatility in simple words is a movement of stock prices on a daily, monthly or a yearly basis put against its historical averages and valuations. The prices can move on the higher or the lower side of its historical averages based on various factors. Such volatility gives investors an opportunity to buy and sell into the markets at a relatively cheaper price and this is one opportunity an investor should tap into. Taking into account the current economic scenario, it is recommended for investors to invest in high quality assets that are on the decline, which can benefit from market during the period likely between 2017 and 2019. This volatility in the Indian market is a logical one, considering the recent developments in the Indian economy and financial market. Reserve Bank of India's neutral credit policy, strengthening of US Dollar, demonetisation of currency notes were all some of the reasons which lead to volatility in the Indian stock market. Due to these reasons, the Indian equity markets came under pressure thus making a suitable time for investors to enter the market and gain from the volatile times. With the Indian economy poised to grow at a faster rate in the coming few years, and other big economies like China and the Euro zone struggling, India continues to remain poised as an investment destination. Regardless of the nature of volatility in the market, to generate returns it's recommended to invest in equity for a long term. Investment-wise, equity valuations are also relatively attractive that what they were a few months before. It can be challenging for an investor to actually invest with fear and risk of markets falling further also at play. However, if continuous and regular investments are made following a strict discipline of allocating assets, investors need not worry about further volatility in the market.

investors to opt in for a balanced fund, a classical asset allocation strategy that invests in equity and debt in a more or less static proportion. The re-balancing takes place depending on market conditions but the allocation of equities ranges between 65-100%. Within balanced funds, we also have funds with a dynamic asset allocation strategy that follows the principle of rebalancing periodically and regularly. If equity prices decline, the scheme adds more equity, and vice versa. These funds aim to increase or reduce equity investments in the range of 30-80%, depending on market situation using a valuation yardstick like P/BV model. Such products help long-term investors ride the volatility wave as they aim to invest in equities when markets are cheap and begin recording profits when the markets rise, leading to limited risk and good returns. These products are also tax-efficient as they are taxed as equity funds. As per prevailing tax law, for equity oriented funds, longterm capital gains(investment beyond a year) are tax-free and short-term capital gains (investments within a year) are taxed at 15%. With investment funds prepared to leverage market volatility, it is an opportune time for investors to cash in on this opportunity and plan for reasonable returns from their investments for the long run.

Volatility gives investors an opportunity to buy and sell into the markets at a relatively cheaper price and this is one opportunity an investor should tap into.

In terms of investment strategy, it is recommended for

02

IPRU Insights | Nov-Dec 2016

CIO Letter Style based Investing

Identifying market cycles, key to your investment strategy.

Mr. S. Naren, CIO, ICICI Prudential AMC

A

year ago I attended a panel discussion where I was asked, if Warren Buffet's investing philosophy like moat-based strategy would work in a country like ours and secondly, what is the essence of smart investing? Before I answer any of this, it's important to understand the meaning of moat. A moat is nothing but a first line of defence. It is a deep, broad ditch which is either dry or filled with water, generally seen surrounding a castle in Europe. This arrangement is generally meant as a first line of defence to stop the enemies from entering the castles. Similarly, economic moat is the first line of defence for a company. It fortifies the company from their peers and helps them sustain and grow their market share and profits over the long term. Simply put, it is the competitive advantage of a firm over its competitors. Now, let's see what how this concept can be used in the investing universe. Noted investor, Warren Buffett who runs the world's biggest close ended fund is an ardent follower of the moat concept. Over the years, through his exemplary investing style he has proved how this strategy works beautifully when managing a close ended fund. Even though the concept has been time tested over the last 5060 years, the one thing an investor needs to remember is that while following moats, one needs to have patience for the strategy to play out. For instance, Buffet waited for 2008 crisis to peak out, before he injected ` 60,000 crores. The same tactic was followed even during the year 2011-2012 crisis. However, when it comes to investing in India, I believe that no one strategy holds precedence. In India, there have been distinct phases where moats have worked and then there were other times when growth or value has played out well. Therefore, one of the strategies than an investor could start with is to look at market cycles. In order to make the most of cycles, it is necessary to identify which cycle a stock/company is in, and check which cycles has got over-extended and invest against this over-extended cycle. This strategy works if you closely follow the market/stock cycles. However, this is not all. Given the equity market dynamics it is imperative to create such strategies which may work at different points of time. Like there was a period between 2004-2007 when only growth stocks worked; if at that point I was invested in just moats, wealth creation opportunity was likely to be completely eroded.

IPRU Insights | Nov-Dec 2016

In and out of fashion In investing, from time-to-time,ideas and strategies keep coming in and out of fashion. Way back in 60s and 70s, Nifty 50 constituted of moat stocks. These were supposed to be quality names but now more than 75% of those names have gone bankrupt or are not in existence. These changes can primarily be attributed to disruptions and the changes that take place in the market. A company which may have met most of the tests of moat investing three years back, may turn irrelevant today thanks to the onslaught of the newer technology, automation, ideas etc. Technological advancements as of today have disrupted the moats of several sectors. However the one advantage that Indian investors can leverage on is that we tend to follow global trends and developments. As a result, if one were to keep a keen eye on the changing trends and invest accordingly, there is a reasonable chance of making an accurate prediction. The key factor here is identifying such a change gives us the time to anticipate change and adapt to it faster when the change actually comes about. Change: The only constant Whenever there is a sector rotation, it is often seen that certain investors have fear to change. What investors don't realise is that every change brings in an inherent potential to make gains. As I mentioned, technology today has changed the way we look at future. So, the true essence of smart investing is to be able to gauge this change in trends; some of which could work, and invest accordingly. If someone were to ask me in 2007, if technology could affect retail industry in India I would have answered in the negative, with a view that there is no connection between retail and technology. But today the retail story is all about technology, thanks to the advent of ecommerce.

A moat is nothing but a first line of defence. It is a deep, broad ditch which is either dry or filled with water. 03

FUNDACLEAR Rupee Cost Averaging: Buy low, sell high! The market is prone to unpredictable highs and lows. This is no hidden fact, and it might scare you away from investing. After all, one always feels it's better to suffice in less than to lose it all. However, you must note that a ship is safe in its harbor, but that's not what it is built for. To make sure you are making most of your hard earned money it becomes crucial to invest. Yet most of us fail to make right investment choices either due to lack of knowledge or time. Investing in Mutual funds is relatively better, as the product offers benefits of low cost, diversification and professional management. Even better, they offer a facility of Systematic Investment Plans (SIP) that works on Rupee Cost Averaging. Heard of it? No? Well, read on to find out

Here what price you pay for a single unit does not matter but the average price at the end of purchase is the base for determining the profit and the returns. You wouldn't have to constantly brainstorm about when and how much to invest. A fixed sum of money can be invested regularly and over time it averages out the costs. However, the profits that you make over the longer run also depend on future value of scheme. This method is one of the good option in a volatile market full of risks. You can also use the concept of averaging while selling your stocks/schemes at continuously higher rates. Rupee cost averaging is essentially “buy low and sell high”, and hence a suitable way to follow the discipline of asset allocation.

What is Rupee-Cost Averaging? None of us has the time to check on our investments daily or even frequently for that matter. It is far more convenient to put the lumpsum amount into an asset class, and not having to worry about it as long as the investment earns reasonable returns. Think about it! A plan that could achieve this would reduce your tension over constant check of the investments. But how do we turn this idea into a plan? Systematic Investment Plan (SIP) can be a suitable solution for retail investors. Through this feature investor can invest a fixed sum or a fixed percentage of money at regular intervals. It is based on the concept of rupee cost averaging. Most of the investors invest when the markets are going up and as the market goes down, their investments do too! But the correct math would be to invest when the markets are low therein providing you more units for the same investment amount that you can later sell off as the market goes up. Timing the entry and exit into the market is what Rupee cost averaging makes easier for the investor. In case of SIP, you buy more number of units when the markets are low and lesser number of units when markets are high. For example: Let's assume an investment of ` 500 per month.

Most of the investors invest when the markets are going up and as the market goes down, their investments do too! But the correct math would be to invest when the markets are low therein providing you more units for the same investment amount that you can later sell off as the market goes up.

Illustration Timeline

04

Amount Invested (`)

Net Asset Value

No. of units issued

January 01

500

31

16.13

February 01

500

32

15.63

March 01

500

29

17.24

April 01

500

26

19.23

May 01

500

31

16.13

2500

29.8 (Average Cost)

84.36

IPRU Insights | Nov-Dec 2016

CHECKLIST

1. Underperformance: Is your mutual fund investment lagging behind signicantly or is it just a little below your expectation? Has it been consistently low on returns or is it just a phase that will pass? Do you see a practical future with improved returns? Long-term underperformance could be a cause of concern.

2. Tax Consequences: For equity mutual funds, if your holding period is less than one year, then the gains are subject to short term capital gains tax which is at 15% (excluding surcharge and cess). On the other hand if the investment duration is more than one year, then long term capital gains tax is NIL. For debt mutual funds, short term capital gains tax is as per the investor’s income tax slab rate while long term capital gains tax is 20% (with Indexation benet). Holding period for long term capital gains benet is three years. So before you come to a decision, be aware of these facts.

3. Exit Loads: If you are an investor who holds a fund that charges a back-end load, the total you receive when redeeming your units will be affected.

4. Rebalancing Your Portfolio: Since mutual funds are typically long term investment, a sudden quit might call for signicant changes in your own portfolio. Would you be able to adapt to the sudden shift? Disclaimer: Tax provisions mentioned above are as per the prevailing tax laws.

IPRU Insights | Nov-Dec 2016

05

06

IPRU Insights | Nov-Dec 2016

IPRU Insights | Nov-Dec 2016

07

The only 3 calculations you need to know I often hear the comment 'I don't have a head for numbers'. I can understand the angst that numbers create - I remember how most of my classmates used to hate math class. Even though I was decent at it (until a point), I used to wonder how much of it was going to be of practical use in real life, and eventually lost interest. I ended up studying English Literature. So it's ironic when people say 'you must be good at math'. In the previous post, I listed out the only numbers that really matter when managing your personal finances. Most of the numbers involved simple addition and subtraction that everyone can grasp. But there were some more calculations that not everyone understands fully - that I promised to elaborate on. These are Percentage

Hansi Mehrotra

But if you don't pay it back, the interest going forward will be on INR 110 rather than the original INR100, which is INR 11 rather than INR10. So at the end of second year, you owe INR121. This is how credit card debt goes out of control - the high interest rates of more than 20% get compounded very quickly. If you do the compounding monthly, or daily, rather than annually, the interest would come out different. To do meaningful comparisons, you need to know both the interest rate and the compounding frequency. So regulators usually require banks to show 'effective interest rate' or the 'annual equivalent rate', which basically takes into account the compounding effect. On the other hand, compounding concept is good if you are investing. You can save a small amount early in life, and leave the returns to get compounded. (I will cover this topic in more detail another time).

Percentage refers to how much something represents out of 100. It's shown by the '%' symbol. This is the most common calculation you will come across in all the concepts.

Probability

Say you earn INR 500 a month and spend 400 on living expenses, and save 100 for the future. The calculation would be (400/500)*100 = 80% on expenses and (100/500)*100 = 20% on savings. Or say, you get an annual return of INR 10 on the INR 100 you put in a traditional investment avenue. That's a (10/100)*100 = 10% return.

usually expressed as a number between 0 and 1 where 0 indicates impossibility and 1 indicates certainty, or as a percentage. It's relevant when measuring risk.

Compounding A powerful tool - compounding refers to how much something is magnified because of 'interest on interest'. This applies to both when you are borrowing and when you are saving, so it's a double-edged sword. Say you borrowed INR 100 on an annual interest rate of 10%; this means you have to pay back INR 110 at the end of the year.

Probability refers to the likelihood that an event will occur. It's

Say you invest in a government bond which guarantees return of your original money after 3 years. Basically you are lending the money to the government, which can print money, so the probability of you getting your money back is 1 (or 100%). What if you were to lend to a friend to start a restaurant? You will have to work out the probability of getting your original and interest back on time (delays count as defaults). In conclusion, most of the calculation that one needs to do in everyday life revolves around these three. So, aim to master these and have a peaceful investing time.

This article originally appeared on www.TheMoneyHans.com

08

IPRU Insights | Nov-Dec 2016

QUIZ

Q.1 Interval funds are a combination of both open-ended and close ended funds. A. True B. False Q.2 Hybrid funds are allowed to invest in both equity and debt. A. True B. False Q.3 Arbitrage funds take contrary positions in different market/securities to neutralise risk? A. True B. False Q.4 Investment objective defines the broad investment charter?

A. True B. False

A. 1 Year B. 3 Years

Q.5 Mutual Fund units are offered to investors for the first time through?

Q.8 Liquid funds invest in papers with a residual maturity of 91 days.

A. KIM B. NFO

A. True B. False

Q.6 What is the current CPI inflation numbers for October 2016? A. 4.5% B. 4.2%

Q.9 Systematic Withdrawal Plan allows an investor to redeem a fixed sum of money at regular intervals. A. True B. False

Q.7 Investors have to be invested in a debt scheme for how many years to avail indexation benefit for calculation of capital gains under the Income Tax Act, 1961?

Q.10 Standard deviation is a measure of calculating the fluctuations in scheme returns as compared to the schemes average return. A. True B. False

For answers to the Quiz questions, check out “Storyboard” page in this edition IPRU Insights | Nov-Dec 2016

09

STORYBOARD

Oh yes, papa. Those were the days…I really miss Santa Claus.

Christmas is coming, Tina. Do you remember how Santa Claus would get you the gifts you always wanted?

How?

But...

This is so beautiful!

Oh why so? You know you can be your own Santa too!

Yes, but it’s too less for me to buy the gifts I want.

You have started working now. You are earning, right?

Hahah, my darling no matter how much money you get, it will always be less if you don’t gure out how to make your money work hard for you.

What you can do is simple. Learn to strike a balance between spending and saving. Even if you manage to save a small amount regularly, it can compound to a sizeable sum in the years’ ahead. That's the way we got all your gifts and became your Santa.

But there was no need of this, beta …

Years Later (On 25th December, Tina gets gifts for her mom and dad)

Relax maa, now let me be your Santa Claus! Merry Christmas, Maa & Papa.

Quiz Answers: Q.1 - A, Q.2 - A, Q.3 - A, Q.4 - A, Q.5 - B, Q.6 - B, Q.7 - B, Q.8 - A, Q.9 - A, Q.10 - A In the preparation of the material contained in this document, ICICI Prudential Asset Management Company Limited (AMC) has used information that is publicly available, including information developed in-house. 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 / opinions / recommendations 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 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. The AMC (including its affiliates), the Mutual Fund, the trust and any of its officers, directors, personnel and employees, shall not be 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. All figures and other data given in this document are dated and the same may or may not be relevant in future. Investors are advised to consult their own legal, tax and financial advisors to determine possible tax, legal and other financial implication or consequence of subscribing to the units of ICICI Prudential Mutual Fund.

10

IPRU Insights | Nov-Dec 2016