Mutual Fund Review

Transcription

Mutual Fund Review

Mutual Fund Review
Mutual Fund
Review
November 19, 2009 | Mutual Fund
December 26, 2014
Mutual Fund Review
December 26, 2014
Equity Markets ..................................................................................................... 2
Debt Markets ........................................................................................................ 3
MF industry synopsis.......................................................................................... 4
MF Category Analysis ......................................................................................... 5
Equity funds ...................................................................................................... 5
Equity diversified funds..................................................................................6
Equity Infrastructure fund.............................................................................7
Equity Banking Funds ......................................................................................7
Equity FMCG.......................................................................................................7
Equity Pharma Funds.......................................................................................8
Equity Technology Funds ...............................................................................8
Exchange Traded Funds (ETF) ...................................................................... 9
Balanced funds ............................................................................................... 10
Monthly Income Plans (MIP) ........................................................................ 10
Arbitrage Funds .............................................................................................. 11
Debt funds ....................................................................................................... 12
Liquid Funds ....................................................................................................13
Income funds ...................................................................................................14
Gilt Funds 15
Gold ETFs: Global gold price heading towards $1000 .........................16
Model Portfolios ................................................................................................ 17
Equity funds model portfolio ...................................................................... 17
Debt funds model portfolio ......................................................................... 18
Top Picks ............................................................................................................. 19
Note: Whenever, returns for the scheme are shown in the report, they are for the growth option of the scheme.
ICICI Securities Ltd. | Retail MF Research
Equity Markets
CNX Nifty: Retracts to 8000 mark
9000
Update
8500

Indian equity markets witnessed increased volatility at the start of
December on global concerns emanating from Russia and its contagion
impact on emerging market currencies, which depreciated significantly
against the US dollar

The broader market also witnessed increased volatility as many
investors booked profit as midcaps and small caps have outperformed
the headline benchmark indices significantly

The volatility in December, however, provided an excellent opportunity
for investors to increase their equity allocation

Overall, 2014 turned out to be a rewarding year for patient long term
investors. Markets gave a thunderous applause to the strong verdict in
the General Elections in May 2014. The markets have rediscovered their
animal spirits that is very well reflected in the performance of domestic
equities, which are up 31% YTD and 15% post election results, thereby
allowing India to top the global equity charts

The dash towards new all-time highs after a one month corrective
phase signals resumption of upward momentum after a brief pause.
Going forward, we expect benchmarks to remain in a rising trajectory
and head towards 28300/8450 over the medium-term. The October
2014 low of 25910/7723 will act as a key short-term base for the markets

The decline unfolding since hitting the September 2014 high of
27354/8180 displayed all the signs of a healthy corrective decline within
an established uptrend and reaffirmed the overall positive price
structure

The latest macroeconomic data was mixed with inflation decline
continuing while IIP data disappointed. CPI inflation decelerated for the
fourth consecutive month in November to 4.4% YoY, from 5.5% in
October while wholesale inflation (WPI) touched 0%. On the other hand,
IIP growth contracted 4.2% YoY in October, the first decline in the
current fiscal

Brent crude oil prices continue to decline and fell below US$60/barrel as
comments from Opec members indicate that a production cut is not in
the offing in the near term
8000
7500
7000
6500
6000
Dec-14
Nov-14
Oct-14
Sep-14
Aug-14
Jul-14
Jun-14
May-14
Apr-14
Feb-14
Mar-14
Jan-14
Dec-13
5500
Source: Bloomberg, ICICIdirect.com Research
Profit booking in small caps
0
-2.7
-4
-3.4
-3
-3.1
-2
-2.0
Return (%)
-1
-4.8
-5
-6
BSE
Midcap
BSE 500 BSE 100
BSE BSE Small
Sensex
Cap
Returns : 1M (Nov 18 – Dec 18 2014)
Oil &Gas -9.4
Metal -8.3
Reality -8.7
-6.8
Cap.Goods
-4.7
Sensex
IT
-3.4
PSU
-4.7
-3.1
Auto
Con.Dura
-2.8
-3.0
Healthcare
FMCG
0.0
4.8
6
4
2
0
-2
-4
-6
-8
-10
-12
Banking
Return (%)
…falling commodity prices hits oil&gas and metal
companies
Outlook

As we enter the second year of the changed regime, we believe the
markets will continue to give a thumbs-up to the pro-reforms
government and continue to rise in a similar fashion as witnessed over
the past six months. We do not foresee any major shift in the current
directional positive bias

Long term investors should note that secular bull markets also go
through phases of secondary corrections, which is a healthy
phenomenon to work off the excesses developed during rallies. Even
during the secular Bull Run from 2003 to 2008, the index was subject to
intermediate corrections ranging at 13-30%. However, these counter
trend corrections did not alter the overall bullish fabric of the market

Any sizable correction should be used as an attractive incremental
opportunity to buy for the long term

The overall outlook on the Indian equity market remain positive on the
back of improving fundamentals, going ahead, and improved corporate
earnings in coming years
Returns : 1M (Nov 18 – Dec 18 2014)
Analyst’s name
Sachin Jain
[email protected]
Sheetal Ashar
[email protected]
Page 2
Debt Markets
Update
G-Sec rally as with sharp correction
9.4

The RBI, in its monetary policy review on December 2, kept policy rates
unchanged, in line with market expectations. The tone of the monetary
policy statement was dovish relative to earlier statements. The clear
indication that the next move is towards monetary accommodation and
that it may come as soon as early next year led to the rally in the G-Sec
markets

Retail inflation has indeed eased more than what the base effect would
have suggested as the sequential momentum has also declined in
recent months. As expected, the RBI is being cautious and wants to
assess more of the incoming data, post dissipation of the base effect in
inflation, to ascertain that the disinflationary process is firmly
entrenched

The RBI has lowered its own inflation expectation at 6% in March vs.
the earlier expectation of ~7.7-7.8% while the Q4FY15 average is now
expected to be sub-6%. More significantly, the RBI now assesses that
the “risks to the January 2016 target of 6% appear evenly balanced
under the current policy stance”

Bond yields have come off over the past few months on expectations of
a lower interest rate regime, going forward. Credit spreads have also
come down to all-time low levels with the 10 year AAA spread down to
60 bps
Yield (%)
9.0
8.6
8.2
Oct-13
Oct-13
Nov-13
Dec-13
Jan-14
Feb-14
Mar-14
Apr-14
May-14
Jun-14
Jul-14
Aug-14
Sep-14
Oct-14
Nov-14
Dec-14
7.8
Second half calendar in line with expectation
Month
Gross
Borrowing
45,000
58,000
56,000
55,000
26,000
240,000
October
November
December
January
February
March
Total
Redemption Net Borrowing
19,755
52,500
6,430
78,685
25,245
5,500
56,000
55,000
19,570
161,315
Source: RBI, ICICIdirect.com Research, Figures are in | crore
Outlook

The corporate bond market segment continues to be attractive over the
medium term especially with expectations of an improvement in
corporate profitability and an improved economic outlook. The credit
opportunities funds are also better placed due to stable returns and a
change in taxation warranting a minimum holding period of three years
to avail indexation benefits

We continue to remain positive on corporate bonds with a maturity of
one to three years. Exposure to longer-dated gilt/bond strategies could
be suitable for investors with a relatively higher risk profile with a longer
investment horizon

The Reserve Bank of India is likely to cut interest rates anytime in the
first quarter of the next calendar year. As indicated by the RBI, once the
monetary policy stance shifts, it will be for good and subsequent
actions will be consistent with this change in stance. To that extent, the
signalling effect of the shift in stance will be larger than the first rate cut
itself and bodes well for debt investment over a medium term horizon

The RBI, so far, has adopted a single point agenda of targeting CPI
inflation, and understandably so, given the new CPI inflation has been
near double digits in February 2013 to December 2013. However, given
the moderation in CPI inflation since then and expectation of a further
reduction in same, the RBI may move towards a more balanced
approach. It may consider a rate cut in the first half of the next calendar
year

medium-term especially with expectations of an improvement in
corporate profitability and improved economic outlook. The credit
opportunities funds are also better placed due to stable returns and
change in taxation warranting minimum holding period of three years to
avail indexation benefits
G-sec yield curve moves down
8.6
Yield (%)
8.4
8.2
8.0
7.8
1yr
3yr
24-Dec-14
5yr
10yr
18-Nov-14
Yield (%)
Corporate bond yield curve follows G Sec
8.8
8.7
8.7
8.6
8.6
8.5
8.5
1yr
3yr
5yr
23-Dec-14
10 yr
18-Nov-14
Page 3
MF industry synopsis

Assets under management (AUM) of all schemes put together increased
23% YoY to | 1.09 trillion
Net fund flows into MF schemes was to the tune of | 129330 crore in
YTD FY15
Exhibit 1: AUM growth pushed by equity AUM pick-up
35%
32%
30%
1200000
32%
31%
29%
1000000
959415
1012824
1090309
Oct-14
Nov-14
974715
Jun-14
Sep-14
1011102
May-14
1012824
945321
Apr-14
Total AUM (RHS)
Aug-14
825330
Mar-14
13%
916393
9%
Feb-14
903255
825860
Dec-13
9%
Jan-14
889952
Sep-13
0%
4%
9%
Nov-13
745969
5%
833961
12%
10%
600000
16%
15%
1006452
18%
15%
23% 800000
20%
Jul-14
20%
Oct-13
| Crore
25%
400000
200000
0
Growth (YoY)
Source: AMFI, ICICIdirect.com Research
Exhibit 2: AUM break up – November 2014
Gold ETFs , 7060,
1%
Gilt, 7099, 1%
Money Market,
228149, 21%
Share of equity AUM has been increasing while that of
gold ETFs has been losing sheen
Equity, 314684, 29%
Balanced, 22769,
2%
Other ETFs, 7134,
1%
FOF(Overseas),
2819, 0%
Income, 500595,
45%
45738
39535
IDFC MF
37483
30486
37445
34806
55611
43688
Exhibit 4: …Top 10 AMCs manage ~80% of industry AAUM
Others
IDFC MF 25%
2%
DSP BlackRock
Sep-13
Franklin
Tempelton
Kotak
Mahindra
DSP
BlackRock
72850
58076
70057
UTI MF
77256
Birla
Sunlife MF
93249
85174
Ipru MF
HDFC MF
25000
Reliance
MF
50000
103046
75000
SBI MF
102616
127663
100000
Sep-14
83250
| Cr
125000
122068
150000
141481
Exhibit 3: HDFC AMC has highest AAUM…Reliance & ICICI Prudential
competing for second
MF
3%
Kotak Mahindra
MF
1%
Franklin
Tempelton MFSBI MF
UTI MF
5%
6%
5%
HDFC MF
15%
Reliance MF
11%
Ipru MF
17%
Birla Sunlife MF
10%
Page 4
MF Category Analysis
Equity funds
Midcap funds were clear winners as both earnings and multiple
revisions were strong and confidence on an economic turnaround
improved with the formation of a Narendra Modi led BJP majority
government at the Centre while cooling inflation strengthened hopes of
an interest rate cut by the RBI

Exhibit 5: Midcap clear winners
70.7
80
22.2
25.6
15.1
22.6
23.6
32.3
28.2
26.1
39.8
45.9
13.1
11.3
10
33.5
25.4
6.3
20
21.3
30
16.4
defensives to cyclicals and industrials
40
30.0
decisive election victory has led money to be shifted from
50
18.4
an economic turnaround after the Bharatiya Janata Party’s
35.8
Returns (%)
The widespread anticipation among market experts about
49.3
60
59.9
60.6
70
0
Mid cap
Banking Infrastructure Diversified
1year
Pharma
3 Year
Large Cap
FMCG
Technology
5year
Source: Crisil Fund Analyser, ICICIdirect.com Research ; Returns over one year are compounded annualised returns
314684
280397
Sep-14
297160
266742
Aug-14
192246
Apr-14
251630
191197
Mar-14
Jul-14
181127
Feb-14
241024
175421
Jan-14
217234
182682
Dec-13
200000
175128
250000
Nov-13
| Crore
300000
Net inflow (Equity + ELSS)
Nov-14
Oct-14
May-14
150000
Nov-14
Oct-14
Sep-14
Aug-14
Jul-14
Jun-14
Apr-14
May-14
Mar-14
Feb-14
Jan-14
Dec-13
350000
Jun-14
Exhibit 7: Equity AUM soars led by record inflows and marker rally
13500
10845
11500
7946
9500
7153
56004963
5364
7500
5500
2022
3500 699 857 427 582
1500
-500
-160
-2500
-1935
-4500
Nov-13
Net Inflow ( | Cr )
Exhibit 6: Retail investor sentiment strong post April 2014
Equity +ELSS
Exhibit 8: Deployment of equity funds
\
Exposure to banks and finance stocks together account for
the highest proportion with 21% of the equity corpus
followed by technology and pharma. Auto and auto
ancillary together have another 10%
Consumer
Indusrial
Petrole Construction
Non
capitla
um
Projects
Durables
goods
19132 20824
15574 14574
12901 13919
Allocation
Banks Software Pharma Finance
| crore
70574
34673
22654
21.2
10.4
6.9
% of total
5.7
Auto
6.4
4.7
4.4
3.9
Indusrial
Products
4.2
Source: Sebi, ICICIdirect.com Research , Sector Classification (as per Amfi)
Page 5
12473
3.8
Equity diversified funds
View
Short term: Positive
Long-term: Positive

Equity diversified funds be they large cap funds, midcap funds or multi
caps all posted healthy returns in the last year and rewarded investors
who stayed patient. Midcaps gained more than large cap counterparts

Formation of a Narendra Modi-led single party majority government has
fuelled hopes that the policy logjam will be undone and growth will get
back on track. It has acted as a catalyst for increased hopes of an
earnings revival and consequent multiple expansions for most stocks

As we enter the second year of a changed regime, we believe the
markets will continue to give a thumbs-up to the pro-reforms
government and continue to rise in a similar fashion as displayed over
the past six months. We do not foresee any major shift in the current
directional positive bias

We believe midcap and small cap funds will deliver better returns as the
pro-growth government at the Centre augurs well for midcap
companies to enter a high growth phase and see multiple re ratings

For long term SIPs, one should opt for diversified funds as they invest
in both growth as well as value stocks

Though things have already started to look up for market participants,
there is a risk of expectations not being met by the new government. A
critical evaluation of the government's performance may lead to
volatility in the markets
Recommended funds
Large cap
Axis Equity
Birla Sunlife Frontline Equity
ICICI Prudential Focused Bluechip Equity
UTI Opportunities Fund
Diversified
Franklin India Prima Plus Fund
ICICI Prudential Dynamic Plan
Reliance Equity Opportunities
Midcap
HDFC Mid-Cap Opportunities Fund
ICICI Prudential Discovery Fund
Franklin India Smaller Companies Fund
SBI Magnum Global Fund
Small cap
DSPBR Micro Cap
Reliance Small Cap
SBI Small & Midcap
(Refer to www.icicidirect.com for details of the fund)
Page 6
Equity Infrastructure fund
View
Short-term: Positive
Long-term: Positive
After a clear mandate, the government unveiled its 10-year agenda to
focus on infrastructure, especially in road & railways like the dedicated
freight corridor (US$80 billion), Diamond Quadrilateral (Mumbai
Ahmedabad bullet train preliminary cost pegged at | 65,000 crore) and
Sagar Mala project (| 1 lakh crore project). This lends comfort there will
be tangible opportunities in the long run for infrastructure players
Secondly, the government progress towards speeding up the decision
making process towards low hanging fruits/stuck project worth | 15-20
lakh crore would not only lead to better execution but also improve the
liquidity of various infrastructure projects
Thirdly, the dovish tone from the RBI towards interest rate would also
lead to better liquidity and savings on interest outgo for infrastructure
Fourthly, with the RBI's recent action allowing banks to issue long term
bonds for infrastructure with benefits such as relaxation of CRR & SLR
norms and longer duration of bonds, we believe the pressure to fund
infrastructure projects on developers would ease. Hence, cost of funds
and strain on cash flow is likely to reduce, going ahead. While the
valuation for the infrastructure sector has moved from distressed to
reasonable, we still see a significant scope for a re-rating of the sector
Though there has been a sharp run in prices, we believe any correction
in stocks should be used as an opportunity to accumulate stocks

Recommended funds

View
Long-term: Positive
Franklin Build India Fund
HDFC Infrastructure Fund
ICICI Prudential Infrastructure Fund
Refer to
www.icicidirect.com
for details of the fund
Equity Banking Funds
A turnaround in sentiment for the banking sector on hopes of an
improvement in the economy has resulted in a sharp appreciation in
stock prices. Though the NPA cycle will take a while to recover,
multiples may continue to expand. Credit and deposit growth are
expected to improve from the current 13-15% range with an increase in
capex. We remain positive on the sector with a long term bias
Banking being a relatively high beta sector has delivered higher returns
vis-à-vis the broader market in upturns and can be a preferred sector in
the current market dynamics

Recommended funds

ICICI Prudential Banking & Financial Services
Reliance Banking Fund
UTI Thematic - Banking Sector Fund
Refer to
www.icicidirect.com
Equity FMCG
View
Short-term: Neutral
Long-term: Neutral
With the slower urban demand recovery, volume growth for FMCG
companies continues to remain muted
Considering that commodity prices are falling sharply, FMCG
companies are expected to witness higher advertisement & promotion
spend and an improvement in operating margins
However, FMCG companies are still trading at premium valuation
multiples discounting the three to five years earnings on the back of
premiumisation and a huge opportunity size in certain categories

Recommended funds

ICICI Prudential FMCG Fund
SBI FMCG Fund
Refer to
www.icicidirect.com
Page 7
Equity Pharma Funds
View
Short-term: Neutral
Long-term: Positive

After remaining a laggard during the first half of 2014, pharma stocks
have staged a comeback in the second half on the back of rejuvenated
buying, contrary to our expectations. There were two notable aspects
to this shift - 1) consolidation in the cyclical space and 2) consensus
beating Q1 numbers by most pharma players on the back of robust US
traction and a surprising recovery in domestic formulations

We expect the trend to continue on the back of upbeat Q2 numbers and
strengthening of the US$ vis-à-vis the INR. The BSEHC is trading at
~28x one year forward, almost ~55% premium to Sensex forward PE
as most stocks in the sector have got re-rated. After a brief
consolidation the buying is likely to resume as most stocks will get
valued on the basis of FY17 numbers based on better visibility
Recommended funds

Reliance Pharma Fund
SBI Pharma Fund
UTI-Pharma & Healthcare
Refer to
www.icicidirect.com
Equity Technology Funds
View
Short-term: Neutral
Long-term: Positive

Though dollar revenue growth for tier-Is picked up in a seasonally
strong September quarter, Q3FY15E preview meetings had a cautious
undertone. Tier-Is reported an average ~3.7% sequential growth in Q2
(constant currency organic) and represent healthy acceleration relative
to the average ~2.4% reported in Q1FY15. However, Q3 reported dollar
revenue growth could be modest led by 1) ~150-200 bps of crosscurrency impact due to the depreciation of the euro and pound against
the US dollar and 2) furloughs and holiday season. Retail,
manufacturing and BFSI demand trends continue to be soft while
management commentary suggests customers are increasingly
circumspect to discuss CY15E IT budget trends

Blended valuations at ~15.7x FY16E earnings have moderated from
~16.5x earlier but continue to trade at ~10% premium to the index.
Corrections can be used to accumulate funds given the longer-term
growth prospects
Recommended funds

ICICI Prudential Technology Fund
DSPBR Technology fund
Refer to
www.icicidirect.com
Page 8
Exchange Traded Funds (ETF)
In India, three kinds of ETFs are available: Equity Index ETFs, liquid
ETFs and gold ETFs

An equity index ETF tracks a particular equity index such as the BSE
Sensex, NSE Nifty, Nifty Junior, etc

An equity index ETF scores higher than index funds on several grounds.
The expense of investing in ETFs is relatively less by 0.50-1.00% in
comparison to an index fund. The expense ratio for ETFs is in the range
of 0.50-0.75% excluding brokerage while for index funds the expense
ratio varies in the range of 1.0-1.5%. However, brokerage (which varies)
is applicable on ETFs while there are no entry loads now on index funds

The tracking error, which explains the extent of deviation of returns
from the underlying index, is usually low in ETFs as it tracks the equity
index on a real time basis whereas it is done only once in a day for
index funds

ETFs also provide liquidity as they are traded on stock exchanges and
investors may subscribe or redeem them even on an intra-day basis.
This is unavailable in index funds, which are subscribed/redeemed only
on a closing NAV basis

There are over 400 ETFs traded globally. ETFs are transparent and cost
efficient. The decision on which ETF to buy should be largely governed
by the decision on getting exposure in that asset class

Volumes are higher only in the Goldman Sachs Benchmark ETFs and
tracking error is also lowest at 0.01%. Therefore, it is our top pick for
investors wanting Nifty-linked returns

CPSE ETF is a new entry in the Goldman Sachs ETF offering. The ETF
invests in selective 10 PSU stocks and has been listed on the exchange
since April. IT has delivered healthy 45% return since its launch. Also,
bonus units at the end of the year will also provide additional benefit
while deciding on investment in ETFs. Higher volumes
ensure lower spread and better pricing to investors...
Tracking error, though it should be considered, is not the
5239
Aug-14
5997
5083
Jul-14
5465
5048
4737
4829
Jun-14
3704
Nov-14
Oct-14
Sep-14
Apr-14
1378
1371
Jan-14
Feb-14
1489
Mar-14
1437
| Crore
May-14
Oct-14
Sep-14
Jul-14
-439
Aug-14
Jun-14
May-14
-1213
Apr-14
Feb-14
-133
Mar-14
Jan-14
Dec-13
Oct-13
Nov-13
-80 -19
429 492
211 51
Nov-14
576
5 31
7000
6000
5000
4000
3000
2000
1000
0
4528
Exhibit 10: AUM also sees jump
3087
3500
3000
2500
2000
1500
1000
500
0
-500
-1000
-1500
Sep-13
Net Inflow ( | Cr )
Exhibit 9: CPSE ETF leads to higher inflows and outflows
Dec-13
deciding factor as variation among funds is not huge...
Nov-13
Traded volumes should be the major criterion that is used

Other ETFs
Page 9
Balanced funds
View
Long-term: Neutral
Balanced funds are hybrid funds. More than 65% of the overall portfolio
is invested in equities. Hence, as per provisions of the Income Tax Act,
1961, any capital gains over one year become tax free. Also, dividends
declared by funds are tax free
In case you separately invest 35% of your investible corpus in a debt
fund, the same will be subject to higher taxation. However, if the whole
of the corpus is invested in balanced funds, 100% shall have lower
taxation applicable as mentioned above
After a sharp rally in equity markets, the funds can be a preferred
investment avenue as the debt proportion serves to protect on
intermediate relief rallies or the downturn while providing 65%
participation on further upsides

Investors with a limited investible surplus and a lower risk
appetite but with a willingness to invest in equities can
look to invest in these funds
22769
Nov-14
18277
21080
Oct-14
Sep-14
17293
16217
Jul-14
Aug-14
15914
Jun-14
14728
13370
Apr-14
Nov-14
Oct-14
Sep-14
Aug-14
Jul-14
Jun-14
May-14
Apr-14
Mar-14
Feb-14
Jan-14
Dec-13
Nov-13
-1000
May-14
185
16793
-402
-108 -83
16195
-500
25 -116 -1
Feb-14
-270
Mar-14
0
879
448 732
16047
348
500
Jan-14
1000
25000
23000
21000
19000
17000
15000
13000
16813
Net Inflow ( | Cr )
1500
| Crore
2075
2000
Dec-13
2500
16135
Exhibit 12: Equity led AUM growth…
Nov-13
Exhibit 11: Marginally better inflow
Balanced
Recommended funds

ICICI Prudential Balanced - Advantage Fund

HDFC Balanced Fund

Tata Balanced Fund
Monthly Income Plans (MIP)
View
Short-term: Neutral
Long-term: Positive

MIP should be a preferred debt investment for funds that
need to be parked for over two years

An MIP offers investors an option to invest in debt with some
participation in equity, approximately 10-25% of the portfolio. They are
suitable for investors who seek higher return from a debt portfolio and
are comfortable taking nominal risk. The debt corpus of the portfolio
provides regular income while the equity portion of the fund provides
alpha. However, returns can also get eroded by a fall in equities
MIPs can be classified into aggressive MIP and conservative MIP based
on its equity allocation. Risk averse investors should invest in MIPs with
lower equity allocation to avoid capital erosion
Change in taxation announced in the Union Budget 2014, shall be
applicable to MIP funds (refer to debt funds section for details)
Recommended funds

Birla Sun Life MIP II - Savings 5 Plan

ICICI Prudential MIP 25

DSPBR MIP Fund
Page 10
Arbitrage Funds
View
Long-term: Positive

Arbitrage funds seek to exploit market inefficiencies that get manifested
as mispricing in the cash (stock) and derivative markets

Availability of arbitrage positions depends very much on the market
scenario. A directional movement in the broader index attracts
speculators in the market and cost of funding makes futures positions
biased

Arbitrage funds are classified as equity funds as they invest into equity
share and equity derivative instruments. Since these are classified as
equity funds for taxation, dividends declared by the funds are tax free.
No capital gains will be applicable if they are sold after a year

These funds can be looked upon as an alternative to liquid funds.
However, for these funds, returns totally depend on arbitrage
opportunities available at a particular point of time and investors should
consider reviewing the same before investing. Returns of arbitrage
funds are non-linear and, therefore, unsuitable for investors who want
consistent return across time period

Arbitrage funds should be used as a liquid investment and should not
be a major part of the investor’s portfolio

Availability of arbitrage positions depends very much on the market
scenario. Directional movement in the broader index attracts
speculators in the market while cost of funding makes future positions
biased

In case of positive movement, long build-up in futures puts pricing in an
upward bias and creates a window for direct arbitrage positions

On the other hand, negative bias attracts fresh sellers in the market and
speculators try to sell the stock much cheaper than theoretical prices. In
such situations, reverse arbitrage opportunities arise

On the other hand, a range bound market does not give ample room to
create arbitrage positions
Recommended funds

ICICI Prudential Equity - Arbitrage Fund – Regular
IDFC Arbitrage Fund - (Regular)
Kotak Equity Arbitrage Fund
SBI Arbitrage Opportunities Fund
Page 11
Debt funds
6 months
1 year
Income UST
Income ST
9.1
9.0
9.3
9.2
8.9
8.7
9.0
8.4
10.2
12.8
14.2
15.3
10.0
13.5
18.0
16.0
14.0
12.0
10.0
8.0
6.0
4.0
2.0
0.0
8.5
Short-term (credit opportunities) fund delivers better returns
over a longer period and are more consistent performers
while a drop in yields to 7.93% led gilt funds to outperform
%
Exhibit 13: Total 8-12% annualised return
3year
Income LT
Gilt Funds
Liquid
Source: ACE MF, ICICIdirect.com Research
Note : Returns as on November 24, 2014; Returns over one year are compounded annualised returns
Exhibit 14: Deployment of funds: September 2014
Government Securities
Corporate Debt
1 year and above
Bank CD
182 days to 1 yearBank CD
Treasury Bills
Other Money Market
Investments
Corporate Debt
450000
400000
350000
300000
250000
Bank CD
200000
CP
150000
Less than 90 days
CBLO
100000
Bank CD
50000
90 days to 182
days
0
Mutual funds investment into longer dated - G Sec
increased in the current quarter
CP
PSU Bonds
Securitised Debt
Bank FD
Source: SEBI, ICICIdirect.com Research
Note : Holding as percentage of total AUM
Exhibit 16: Corporate bond curve
8.6
8.8
8.4
8.7
8.7
Yield (%)
Yield (%)
Exhibit 15: G-Sec yield curve
8.2
8.0
8.6
8.5
8.5
8.4
7.8
1yr
1yr
18-Dec-14
3yr
5yr
3yr
5yr
10 yr
10yr
18-Nov-14
8.6
17-Dec-14
18-Nov-14
Page 12
Liquid Funds
System liquidity has remained strong in the current quarter resulting in
a drop in the three months and six months certificate of deposit (CD)
and commercial paper (CP) rates. Rates have eased ~30 bps to 8.38.5% and below. Liquid funds are major investors in these papers.
Since the accrual gets lower liquid funds, returns may trickle down
Changes in taxation rules announced in Union Budget 2014 are also
applicable to liquid funds, which may make them vulnerable to
redemption pressures, as post tax returns in less than a three-year
period get reduced for individuals falling in the higher tax bracket (30%
tax slab) and corporate and returns may, to that extent, be lower
For less than a year, individuals in the higher tax bracket should opt for
dividend option as the dividend distribution tax @ 28.325% is
marginally lower. Also, though the tax arbitrage has been reduced, they
still have the potential to earn better pre-tax returns over savings and
current accounts of banks
Exhibit 17: Call rates near MSF rate
Exhibit 18: …CP/CD yields range bound
10.0
12
11
9.5
9
%
8
9.0
8.5
7
6
Dec-14
Oct-14
Nov-14
Sep-14
228149
278807
245035
184525
244220
Jul-14
282700
Nov-14
Oct-14
Sep-14
May-14
Apr-14
Mar-14
Dec-13
80000
Nov-13
-52,460
259310
133280
258980
250822
Feb-14
180000
Jan-14
230000
181238
246401
280000
Nov-14
Oct-14
-67,318
-5,864
130000
Sep-14
Aug-14
Jul-14
Jun-14
330000
| Crore
25,589
22010
-67697
May-14
Apr-14
Mar-14 -117354
3M CP
Exhibit 20: AUM above | 2 trillion but may see drop next month
100,611
123875
77494
-9629
Jan-14
Feb-14
51436
-66313
Dec-13
Nov-13
Net Inflow ( | Cr )
160000
120000
80000
40000
0
-40000
-80000
-120000
-160000
-200000
Jul-14
3M CD
Call rate
Exhibit 19: Redemption may take place on increase in holding period
Aug-14
Apr-14
Dec-14
Oct-14
Nov-14
Sep-14
Aug-14
Jul-14
Jun-14
Apr-14
May-14
8.0
Aug-14
%
10
Jun-14

215995

Jun-14

May-14
View
Neutral
Money Market
Recommended funds
HDFC Cash Management Fund - Savings Plan
SBI Magnum InstaCash
Reliance Liquid Fund - Treasury Plan

Page 13
Income funds
View
Ultra-short term: Positive
Long-term: Positive

medium term, especially with expectations of an improvement in
corporate profitability and an improved economic outlook. The credit
opportunities funds are also better placed due to stable returns and a
change in taxation warranting a minimum holding period of three years
to avail indexation benefits

We continue to remain positive on corporate bonds with maturity of
one to three years. Exposure to longer-dated gilt/bond strategies could
be suitable for investors with a relatively higher risk profile with a longer
investment horizon

We prefer credit opportunities fund in the income funds category
Long term income funds will be less attractive now as a
longer holding period (more than three years) will
neutralise any capital gains in the near term on account of
relatively lower accrual income

Exhibit 21: Third consecutive month of outflow
Exhibit 22: AUM steady
461114
454495
Jul-14
Aug-14
Sep-14
475968
478982
471651
Jun-14
458009
Apr-14
473887
460671
May-14
447181
431944
Jan-14
Feb-14
424445
Dec-13
Mar-14
431050
450000
Nov-13
| Crore
Nov-14
400000
350000
Oct-14
Nov-14
Oct-14 -10,567
Sep-14 -12,696
-10,080
Jul-14
Jun-14
May-14
Apr-14
Mar-14
Feb-14
Jan-14
Dec-13
Nov-13
-15000
500000
300000
Aug-14
-10000
-9927
-5000
1307
5905
0
-8954
5000
-3333
Net Inflows
(| .Cr)
10000
7838
12955
15000
10096
20000
19,844
15,446
25000
Income
Recommended funds
Ultra-short-term fund returns are attractive on risk adjusted
basis
Short-term funds will benefit as short-term yields are likely
to decline first compared to long-term yields. Credit
opportunities funds earn the highest accrual and are the
best in the category
Dynamic bond funds are suitable for all types of investors
and for longer duration. They can take exposure to all
durations as per the interest rate outlook and switch
between G secs and corporate bonds
Ultra Short Term Funds
Birla Sun Life Savings Fund
Franklin India Ultra Short Term Bond Fund
ICICI Prudential Flexible income
Short Term Funds
Birla Sunlife short term fund
HDFC Short Term Opportunities Fund
ICICI Pru Short Term Plan
Short Term Funds – Credit opportunities
Birla Sunlife Medium term
Franklin India Short term Plan
HDFC Corporate debt opportunities
ICICI Prudential Regular Savings
Long term/Dynamic
Birla Sunlife income plus
ICICI Prudential Dynamic Bond Fund
IDFC dynamic bond fund
Page 14
View
Short-term: Neutral
Long-term: Neutral
Gilt Funds

Government securities markets rallied with benchmark 10 year yields
easing to 7.93% from 8.82% at the start of calendar year

Inflation has come down to its multi-year lows, which has strengthened
hope for rate cuts. We believe rates will come down in the next one or
two years driven by lower inflation resulting in positive real return
creating room for rate cuts

The government has stuck to the fiscal deficit target of 4.1% for FY15
and guided for 3.6% in FY16 and 3% in FY17. The gross borrowing for
the current financial year remains almost same at | 6 lakh crore against
market expectation of increased borrowing

The guidance for lower fiscal deficit in the next three years is positive
for debt markets in the medium-term in terms of G-sec supply

G-sec funds will be less attractive now as the longer holding period
(more than three years) will neutralise any capital gains in the near term
because of lower accrual income
Recommended funds

Birla Sun Life Gilt Plus - PF Plan - Regular
ICICI Prudential LT Gilt Fund - PF Option - Regular
Page 15
Gold ETFs: Global gold price heading towards $1000

International gold prices were volatile during December 2014 as global
news flow on the Russia conflict regenerated the risk-off demand with
the consistent increase in the US dollar putting downward pressure.
Gold prices in the international market were range bound in 2014 and
are almost flat from the start to the end of the year at around US$1200
per ounce. However, Indian prices are down ~10% during the same
period as the premium reduces at which Indian prices were trading due
to import restrictions by the Indian government

International gold prices are denominated in the US dollar and have a
negative correlation with gold prices. On account of the increasing
improvement in the US economy and demand for the US dollar, the US
dollar has appreciated against most global currencies. We expect the
dollar index to continue its upward trajectory and rise to around 90
levels, which may further put pressure on international gold prices

US interest rates are driven by expectations of real interest rates and
inflation expectations. US real interest rates have negative correlation
with gold prices as higher rates increase the opportunity cost of holding
physical gold, which does not yield any interest. With the US Federal
Reserve likely to raise interest rates, real interest rates are likely to move
up lowering the demand for gold

Gold is supposedly a hedge against inflation and, hence, has a positive
correlation with gold prices. Inflationary expectations in the US have
reduced in the last two months due to a fall in global crude oil prices
and other industrial commodities. In the near term, inflation is likely to
remain subdued on weak commodity prices due to concerns over
growth in China and Europe. The same may put pressure on gold
prices. However, inflation in the medium-term is a risk because of the
sustained near zero interest rate policy adopted by the US Federal
Reserve since the Lehman crises

Indian gold prices, however, have been trading at a premium due to the
10% custom duty imposed by the Indian government. The
improvement in outlook of other asset classes, mainly equity markets,
has reduced the attractiveness of Indian gold on a relative basis.
Investors should avoid investing in gold from an absolute return
perspective and utilise it only as a hedge against uncertainty
After a multi-year bull phase during 2004-12, gold prices
continue to get dragged down. Technically, the violation of
the long term trend line highlights the breach of the decade
long trend of outperformance. From a medium-term
horizon, prices are expected to breach below the
immediate support of $1180 and head towards the lower
band of the down trending channel around 1000
-47
-38
-32
Oct-14
Nov-14
-112
Aug-14
Sep-14
-105
Jul-14
Two years of outflow
-588
-600
-227
-146
Apr-14
-341
-149
Mar-14
-178
-165
-157
-131
-400
-288
-294
-206
-107
5
-87
-8
-200
Jun-14
May-14
Feb-14
Jan-14
Dec-13
Nov-13
Oct-13
Sep-13
Aug-13
Jul-13
Jun-13
May-13
Apr-13
Mar-13
Feb-13
-800
Jan-13
Net Inflow ( | Cr )
0
-36
200
81
Exhibit 23: Outflows for second year….
Page 16
Model Portfolios
Equity funds model portfolio
Investors who are wary of investing directly into equities can still get
returns almost as good as equity markets through the mutual fund route.
We have designed three mutual fund model portfolios, namely,
conservative, moderate and aggressive mutual fund portfolios. These
portfolios have been designed keeping in mind various key parameters like
investment horizon, investment objective, scheme ratings, and fund
management.
We have changed the mutual funds portfolio in July, to include midcap
funds as we believe an improvement in the growth scenario may generate
better alpha in midcap stocks over large cap stocks
Exhibit 24: Equity model portfolio
Particulars
Review Interval
Risk Return
Aggressive
Monthly
High Risk- High Return
Funds Allocation
Franklin India Prima Plus
Birla Sunlife Frontline Equity
UTI Opportunites Fund
Reliance Long term Equity
ICICI Prudential Value Discovery
HDFC Midcap Opportunities
Grand Total(a+b)
% Allocation
20
20
20
20
20
100
Moderate
Conservative
Monthly
Quarterly
Medium Risk - Low Risk - Low Return
Medium Return
20
20
20
20
20
100
20
20
20
20
20
100
Source: ICICIdirect.com Research
Exhibit 25: Compounded annualised return since inception
25
20.90
20
19.72
19.57
15.94
(%)
15
10
5
0
Aggressive
Moderate
Conservative
BSE 100
Returns
Source: Crisil Fund Analyser, ICICIdirect.com Research
Portfolio inception date : April 15, 2009)
Page 17
Debt funds model portfolio
We have designed three different mutual fund model portfolios for different
investment duration namely less than six months, six months to one year
and above one year. These portfolios have been designed keeping in mind
various key parameters like investment horizon, interest rate scenarios,
credit quality of the portfolio and fund management, etc.
Exhibit 26: Debt funds model portfolio
Time Horizon
Particulars
0 – 6 months
Objective
Review Interval
Liquidity
Monthly
Very Low Risk Nominal Return
Risk Return
6months - 1 Year
Liquidity with
moderate return
Monthly
Medium Risk Medium Return
Above 1 Year
Above FD
Quarterly
Low Risk - High
Return
% Allocation
Funds Allocation
Ultra Short term Funds
Birla SL Savings Fund
Franklin India Ultra Short Bond Fund
ICICI Pru Flexible Income Plan
Short Term Debt Funds
Birla Sunlife Medium Term Plan
Birla Sunlife Short Term Fund
Birla Sunlife Short Term Opportunites Fund
Franklin India Short Term Income Fund
HDFC Medium Term Opportunities Fund
ICICI Prudential Short Term Fund
IDFC SSI Short Term
Sundaram Select Debt
UTI Short Term Fund
Long Term/Dynamic Debt Funds
IDFC Dynamic Bond fund
Total
20
20
20
20
20
20
20
20
20
20
20
20
20
20
100
20
100
100
Source: ICICIdirect.com Research
%
Exhibit 27: Model portfolio performance : CY14 YTD
9.0
8.0
7.0
6.0
5.0
4.0
3.0
2.0
1.0
0.0
7.88
5.76
6.12
5.94
0-6 Months
6.51
6Months - 1Year
Portfolio
6.52
Above 1yr
Index
Source: Crisil Fund Analyser, , ICICIdirect.com Research
*Index: 0-6 month’s portfolio – Crisil Liquid Fund Index; 6 months-1 year – Crisil Short term Index
Above 1 year: Crisil Composite Bond Index
Page 18
Top Picks
Exhibit 28: Category wise top picks
Equity
Category
Top Picks
Largecaps
Axis Equity Fund
Birla Sunlife Frontline equity Fund
ICICI Pru Focussed Bluechip Equity Fund
UTI Opportunities Fund
Midcaps
HDFC Midcap Opportunities Fund
ICICI Prudential Value Discovery Fund
Franklin India Smaller Companies Fund
SBI Magnum Global Fund
Diversified
Franklin India Prima Plus
Reliance Equity Opportunities
ELSS
Axis Long Term Equity
ICICI Prudential Tax Plan
Franklin India Tax shield
Debt
Liquid Funds
HDFC Cash Mgmnt Saving Plan
ICIC Pru Liquid Plan
Ultra Short Term
Reliance Liquid Treasury Plan
Birla Sunlife Savings Fund
Franklin India Ultra Short Term Bond Fund
ICICI Pru Flexible Income Plan
Short Term
Birla Sunlife Short Term Fund
ICICI Pru Short Term Plan
Credit Opportunities Fund
Birla Sunlife Medium Term Plan
Franklin India Short term Plan
Income Funds
ICICI Prudenti Dynamic Bond Fund
Birla Sun Life Income Plus - Regular Plan
IDFC Dynamic Bond Fund
Gilts Funds
ICICI Pru Gilt Inv. PF Plan
Birla Sunlife Gilt Plus
MIP
Birla Sunlife Savings 5
ICICI Prudential MIP 25
DSP Blackrock MIP
(Refer www.icicidirect.com for details of the fund)
Page 19
Pankaj Pandey
Head – Research
[email protected]
ICICIdirect.com Research Desk,
ICICI Securities Limited,
1st Floor, Akruti Trade Centre,
Road No. 7, MIDC,
Andheri (East)
Mumbai – 400 093
[email protected]
Disclaimer
ICICI Securities Ltd. - AMFI Regn. No.: ARN-0845. Registered office of I-Sec is at ICICI Securities Ltd. - ICICI Centre, H. T. Parekh Marg, Churchgate,
Mumbai - 400020, India. The selection of the Mutual Funds for the purpose of including in the indicative portfolio does not in any way constitute any
recommendation by ICICI Securities Limited (hereinafter referred to as ICICI Securities) with respect to the prospects or performance of these Mutual
Funds. The same should also not be considered as solicitation of offer to buy or sell these securities/units. The investor has the discretion to buy all or
any of the Mutual Fund units forming part of any of the indicative portfolios on icicidirect.com. Before placing an order to buy the securities/units
forming part of the indicative portfolio, the investor has the discretion to deselect any of the securities/units, which he does not wish to buy. Nothing in
the indicative portfolio constitutes investment, legal, accounting and tax advice or a representation that any investment or strategy is suitable or
appropriate to the investor's specific circumstances.
The details included in the indicative portfolio are based on information obtained from public sources and sources believed to be reliable, but no
independent verification has been made nor is its accuracy or completeness guaranteed. The securities included in the indicative portfolio may not be
suitable for all investors, who must make their own investment decisions, based on their own investment objectives, financial positions and needs.
This may not be taken in substitution for the exercise of independent judgement by any investor. The investor should independently evaluate the
investment risks. ICICI Securities and affiliates accept no liabilities for any loss or damage of any kind arising out of the use of this indicative portfolio.
Past performance is not necessarily a guide to future performance. Actual results may differ materially from those set forth in projections. ICICI
Securities may be holding all or any of the securities/units included in the indicative portfolio from time to time. ICICI Securities Limited is not providing
the service of Portfolio Management Services (Discretionary or Non Discretionary) to its clients.
Mutual fund investments are subject to market risks, read all scheme related documents carefully.
Investors should consult their financial advisers if in doubt about whether the product is suitable for them.
The information contained herein is strictly confidential and meant solely for the selected recipient and may not be altered in any way, transmitted to,
copied or distributed, in part or in whole, to any other person or to the media or reproduced in any form, without prior written consent of ICICI
Securities Limited. The contents of this mail are solely for informational purpose and may not be used or considered as an offer document or
solicitation of offer to buy or sell or subscribe for securities or other financial instruments or any other product. While due care has been taken in
preparing this mail, I-Sec and affiliates accept no liabilities for any loss or damage of any kind arising out of any inaccurate, delayed or incomplete
information nor for any actions taken in reliance thereon. This mail/report is not directed or intended for distribution to, or use by, any person or entity
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Page 20