From the desk of Srikanth Bhagavat

Transferring wealth to the next generation

Positives & Negatives

Let’s Learn!

Fund of the Month

OVERVIEW

communiqué

Growth rate of India being maintained

Improvement in agriculture’s contribution to GDP

Manufacturing growth at 12.4% (y-o-y)

POSITIVES

NEGATIVES

No improvement in global situation. This is reflected in falling crude prices and rising gold prices

Rising interest rates

P/E multiples remain higher than historical averages and more than what our growth rate justifies

Impending large IPOs could suck out liquidity from secondary markets

FROM THE DESK OF SRIKANTH BHAGAVAT

October 2010

It's a complicated life. There are times, when one truly feels that ignorance is bliss!

We are better off not knowing so many things. The pharaohs of Egypt, I believe were

such a people, in spite of their acknowledged prowess in building pyramids. I say they

were ignorant because they believed that they could carry their wealth with them to

their afterlife by stuffing their tombs with their wealth. In India, we know better – we

only carry our Karma to the next life! The wealth ... we leave behind.

It goes without saying that we want to leave behind happiness rather than disputes

among our loved ones. That is where good estate planning comes into play. The

simplest thing is to write out a Will. But will that be solution enough? Aren't twenty

first century problems trickier? Relationships have become complex and unreliable

to say the least. How does one ensure that their wishes for their loved ones get

fulfilled? How does one ensure that an invalid receives adequate attention even after

her benefactor's death? How do you ensure that youngsters do not blow up their

inheritance even before they realise its value?

Good estate planning starts from an assessment of assets, then an assessment of

relationships and then moves on to assessing solutions. But for all this to happen,

one must be aware of what could be the problems to even start looking for solutions.

We discuss this issue in this month's edition of the “Communiqué”.

TRANSFERRING WEALTH TO THE NEXT GENERATIONThe Month of August saw Hexagon hosting a special event for the business families

among our clients on a topic that assumes great importance today not only because

it is an essential component of wealth planning but also because of the plethora of

options available. The event was titled “Transferring wealth to the next generation”.

It was a talk given by two young but immensely knowledgeable lawyers from Nishith

Desai Associates – Ms. Shreya Rao and Ms. Neha Sinha. The idea was to understand

the options available for wealth transfer from a legal perspective and the audience

participated with great interest.

October 2010

Ms. Rao brought out many simple but important points that people need to keep in mind while writing their will, like:

The beneficiaries of the will cannot be witnesses as it leads to a conflict of interest

? It is important that the witnesses be significantly younger than the person who is writing the will as there is a need that the

witnesses outlive the writer of the will. This is because if the witnesses are deceased at the time of the execution of the will, then it can lead to a situation where disputes that arise are difficult to resolve.

? In the case of Parsis and Christians, wills need to be remade on marriage as the will existing till then gets revoked.

The topic of forming trusts and the nuances involved received plenty of attention from the audience. A trust is basically defined as the obligation of a person to take care of someone else's property for the sake of his/herbenefactors (who can be children, adults or the public at large). The trust is formed as a contract and has no legal personality ofits own. An important aspect that was dealt with was when it is advisable to create a trust rather than a will. It is advisable to gofor a trust when:

? You are planning to disinherit a family member

? If any of the heirs are minors

? If anyone relies on you financially

? If any of the recipients are disabled

Trusts also allow people to attach certain conditions to gifts; to protect assets against actual and potential creditors; to create a tax effective structure; to allow administrative, investment and record keeping functions and centralizing property management functions which can be handled more efficiently and at a lower cost. Different needs allow you to create different kinds of trusts like discretionary trusts, non-discretionary trusts, revocable trusts, irrevocable trusts etc. Since the trust behaves like a contract, the terms can be specified in whatever detail required and the structure can be as rigid or flexible as required too. Can the beneficiaries replace the trustee? Yes they can, but on the basis that the trust is not being administered as laid down in the terms as the reason for replacement needs to be defined as a breach of contract. However, if all the beneficiaries agree that the trustee needs to be replaced then they can unanimously do so. Trusts were also established as tax efficient vehicles. Trust income is taxed at the beneficiary/trustee level (where the benefactors and proportion received are clearly mentioned) or at the trustee level only (where the benefactors are ambiguous, like public trusts). Since dividend distribution tax does not come into picture here, it becomes more tax efficient than creating a company. As wealth today is situated not only in India but also abroad, the exercise of wealth transfer gets complicated a fair bit. Understanding the legal context of the various tax and exchange control laws and private International law becomes very important too.

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The idea of the whole presentation was not to confound the audience with legal jargon but to present the complications that arise and provide solutions when one wants to leave behind only wealth and not disputes to the next generation.

October 2010

State of the Markets

FIIs (Foreign institutional investors) are getting aggressive toward our domestic markets. FII equity inflow in the calendar year

has crossed over Rs. 82,900 crore. Of this, 43% (Rs. 35,771 till 28th Sep 2010) came in the last month alone, making it the best

performer and also the most expensive among the other BRIC markets: Brazil, Russia and China.

The BSE's Sensitive Index has gained 25% from its May 2010 low, mainly driven by FII inflows, helping it breach the so-called

psychological 20,000 levels for the first time since January 2008. On trailing PE basis we were trading at 27 times in the peak of

2008 and currently we are trading at 24 times. The Sensex advanced 14% in this calendar year, as compared to negative or

marginal returns elsewhere. Hang Seng (up 1.36%), Dow Jones (up 2.61%), RTSI - Russia (down 4.15%), Shanghai Composite

(down 20.11%) and Bovespa - Brazil (down 2.64%) have all been significant underperformers. Of course, India's robust

economic growth indicators such as 8.5% estimated GDP growth for 2010 and 20% estimated company earnings growth for

the year have helped pull in money.

Globally, analysts have a positive view on emerging markets as they believe that the growth for emerging economies could be

far better than that of developed markets. Also, the emerging markets are becoming indirect beneficiaries (FII flows) of the

stimulus spending in the developed countries.

But, there are also some rising concerns amongst foreign investors, if we look at India on a forward price earnings multiple

(19.6) relative to China (16.28), Brazil (15.17), Russia (7.93), Dow Jones (14.58), UK (11.72), Hang Seng (13.98), France (13),

South Korea (9.77) perceptibly India is now looking as one of the most expensive emerging markets. Hence, on that basis, only

on a valuation basis but not on the basis of the strong macroeconomic fundamentals, there could be some slowdown in the

foreign flow, though the chances of any major reversal are thin. However, given that this rally has been powered by foreign

money and the pace at which this money has come in, has made us cautious.

Given the fact that our domestic markets are driven and dependent on foreign flows, any changes affecting the FII flows will

have significant impact on our secondary markets. Going forward, we are taking a cautious view on the markets due to some of

the major events lined up such as the Coal India & SAIL IPO which can moderate the FII flow to our secondary markets. Also, the

government action on increase in the FII limit into debt markets and he attractive bond rates should draw FII attention.

MF Industry

Mutual funds were seen booking profit during most of the trading sessions over the month. Though, we had very strong FII

inflows into equity markets, mutual funds were seen booking profit during most of the trading sessions in the month. Mutual

funds remained net sellers to the tune of Rs 3,169.3 crore. But, Fund houses' debt investments climbed heavily to Rs 22,241.5

crore over the month from Rs 1,018.2 crore in July, due to positive inflows into debt funds.

Sensex at 20,000: Good, Bad but NOT Ugly - K. Pavan Kumar

Senior Manager-Research

Please contact:

Aravind Thondan: 9008355222, Neelam Pachauria: 9740019203 if you would like to know more about us

Low Moderate High

October 2010

Fund of the month

ICICI Prudential Dynamic fund is managed by an astute fund manager, Mr. Sankaran Naren who has an overall experience of over 19

years in almost the entire spectrum of the financial services industry ranging from stock broking operations to investment banking.

lCICI Prudential Dynamic Plan, unlike various other diversified funds, follows a dynamic asset allocation strategy. Most of the

diversified funds have a static strategy, wherein the movement between asset classes is contained in a narrow range. However for

ICICI Prudential Dynamic Plan the allocation gets adjusted across various assets classes, equity and debt, based upon market

movements and valuations.

Fund Note

This flexibility permits the fund manager to capture upside opportunities

across value and growth, large and mid-cap, index and non-index stocks. On

the flip side, it also has ability to move into cash whenever markets appear to

be overvalued. Simply put, the idea here is to reduce exposure to equities

when stock markets are highly priced and vice versa. Hence this approach

helps mitigate risks during a downside and also provides more stable return

during the market rallies.

The fund has a well-diversified portfolio of 47 stocks across 25 sectors. The top three sectors are Technology, pharmaceuticals and

banks that account for nearly 29% of the portfolio. The fund has been reducing its exposure in Small and Mid-cap space since

December 2009 while increasing exposure to large cap stocks.

Above all we like I-Pru Dynamic for these main reasons:Its ability to

??Sit on greater amounts of cash when markets are in

risky territory

??To pick defensive stocks when it wants to be cautious

??Ride the market on the way up with great sector and

stock picks

??Lower risk profile compared to the peer group

??Significant out performance of the index on the upside

and downside

The asset allocation graph exemplifies the movement from equity to

cash/debt and movement within equity class over a period of 3 years.

During times when bears took over bulls, we can observe the cash

levels moving to as high as 30% of the portfolio. The CAGR as on 6th

September 2010 over the time horizon of 6 months, 1 year, 3 years

and 5 years is 11.30%, 32.64%, 12.27% and 22.77% respectively

beating the benchmark index comfortable across the periods.

Disclaimer: Hexagon Capital Advisors Pvt. Ltd. Has prepared this document and is meant for sole use by the recipient and not for circulation. This document is not to be reported or copied

or made available to others. It should not be considered to be taken as an offer to sell or a solicitation to buy any security. The information contained herein is from sources believed to be

reliable. We strongly recommend that you contact us before making any investment decisions. Hexagon's clients can access the research report at www.hexagononline.com. Contact us at:

Hexagon Capital Advisors Pvt. Ltd. S-209, Suraj Ganga Arcade, 332/7, 15th cross, 2nd Block Jayanagar, Bangalore-560011. Ph: (+91) (080) 26572852. E-mail: contactus@hexagononline.com

ICICI Prudential Dynamic Fund