Investment lessons from 20162016 was one of those peculiar years for the equity market. It started on amiserable note (market fall until February), saw a magical turn around overthe following months only to see the last 2 months of the year deflate therally. The year also held quite a few investment lessons for mutual fundinvestors. Here are some of them.

If you were swayed by the high returns of small-cap funds in 2015 andjumped into this space, you would have received a rude shock. For 2016, thiscategory delivered a 2.3 per cent return on an average. Just two months ago,until October, the category was clocking one-year returns of 18.5 per cent.

Lesson: Being swayed by high one-year returns and chasing the ‘best’ fundsis going to result in you putting all your money into overheated segments, andbuying at highs.

2014 was a year of optimism with strong economic turnaround leaving themarkets looking out for a sustained rally. The Chinese slowdown shookmarkets suddenly in 2015. And if you believed a bad year is followed by agood one, it was not to be in 2016 as multiple events – Brexit, US electionoutcome, demonetisation to name a few all shocked markets.

Lesson: Getting into equity markets, hoping that the past will repeat itself,that too in the short term, can be risky. And if you came in hoping to makesome quick bucks in a year, you may be in for rude shocks.

Most investors believe they do not need asset allocation and prefer to put alltheir eggs in one basket. If that had been equity in 2016, then its 3% returns(Sensex) would have disappointed you. Adding a third of debt would havedelivered a bit more at 6.7% (Crisil Balanced fund index’ return for 2016) andif you held just 15% in equities and rest in debt, you would have gotten ahandsome 11.6% (Crisil MIP Blended Index).

Lesson: Diversification helps contain shocks. More importantly how youdiversify would be based on your time-frame. The shorter your horizon, thebetter off you are in debt, to avoid jolts to your portfolio.

As 2017 unfolds, there are only few things you need to follow to beat themarkets: Invest through SIPs to ride out volatility, invest across equity anddebt to diversify and avoid chasing high returning categories like mid andsmall cap by capping exposure to them.

Vidya BalaHead – Mutual Fund Research

FundsIndia.com

January 2017 � Volume 07 � 01

Welcome 2017!A very happy newyear to you!

This is the 8th timeI’m writing to wish

FundsIndia investors a happy newyear. I hope we are continuing toprovide you with a healthy dose ofmonthly reading material to keepyou informed in an interesting way.

This past year saw the advent ofseveral new things on our platform- we launched our robo-advisoryservice Money Mitr and Aadhaarbased KYC for new customers. Wealso launched the SIP-Insureservice and the Super SavingsAccount. The mobile and webplatforms were refined as well.

This year will see more dramaticchanges to our platform andservices. The iOS app will get afresh launch and we’ll be launchinga modern, sleek investment flow inour web platform too. We’ll also bemoving to take advantage of newpayment methods such as UPI tomake our payment process faster,simpler, and more robust. Moreimportantly, we’ll be launchingmore products to make it easier foryou to round out your financial lifeon a single platform.

All in all, we are hoping to make2017 an action-packed year forboth us and our customers. I can’twait to get started!

Happy investing!

Srikanth MeenakshiCo-Founder & COOFundsIndia.com

www.fundsindia.com

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

MORE SAVINGS, MORE HAPPINESS

• Long term wealth creation solution.• An Equity Linked Savings Scheme that aims to generate long term capital

appreciation by primarily investing in equity and related securities.

* Investors should consult their financial advisers if in doubt about whether the product is suitable for them.

This product is suitable for investors who are seeking*: Riskometer

Investors understand that their principal

will be at moderately

high risk

Low

Moderately

LowModeratelyHigh

High

Low High

Moderate

• Invest upto ₹ 1,50,000 & Save up to ₹ 46,350^

• ONE time investment for 3 years

• Earn tax free dividends+Tax free Returns#

To know more, visit www.iciciprumf.com or download the IPRUTOUCH app.

^Calculated at the highest tax slab rate applicable for FY 17 on investments u/s 80C. # Distribution of dividend is subject to approval from Trustees & availability of distributable surplus. As per the prevailing tax laws for FY 2017, returns earned after one year are tax-free. Android is a trademark of Google Inc. Apple logo is the trademark of Apple Inc. registered in the U.S. and other countries. App Store is a service mark of Apple Inc.

Invest in ICICI Prudential Long Term Equity Fund (Tax Saving)

This is a sponsored advertisement by ICICI Prudential Mutual Fund

www.fundsindia.com

But what you buy and how you buy would truly matterand this article will seek to address that after letting youknow what to expect in 2017.

Indices 2016 2015

Sensex 2.60% -5.00%

Nifty 50 3.70% -4.10%

S&P BSE 100 4.20% -3.20%

S&P BSE 500 4.30% -0.80%

S&P BSE Midcap 8.50% 7.40%

S&P BSE Small cap 2.30% 6.80%

Returns for calendar years.

Equity markets to be volatile

We believe the equity markets could be volatile for a goodpart of 2017 because of the followingnear-to-medium-term risks, all of which are a spill-overeffect of what went on in 2016.

• Impact of demonetisation on money supply andeconomic growth

• Impact of GST; the pain from which would kick inwell into the year as its implementation has beenpostponed to June from April

• Impact of any higher-than expected rise in crude andcommodity prices on commodity users

• Impact of US Fed rate hikes, if they come in quicksuccession

To add to these, there are too many global factors at play.These include elections due in multiple nations, includingpowerhouses France and Germany across Europe, Brexitbeing implemented, policies of the new US government,

and the rate and extent to which the US Fed hikes rates.The exact outcome and impact of what is yet to happenis best left out at this stage.

What holds is that these have been, and will be,continuously evolving scenarios, impacting eithercorporate earnings growth or FII flows. In other words,you can expect bouts of volatility through the year.

What will keep the market going

Among the various events that will unfold in 2017, Indianmarkets will be clued on the following:

• Budget announcements• Rate cuts• Corporate earnings growth

While there may be much talk of a fiscal stimulus throughthe budget, we believe both rate cut and governmentspending (monetary and fiscal policy) must go hand inhand to tackle not only the pressure of a slowdown fromdemonetisation but also the unwillingness of companiesto borrow and build.

We are not going to get into more details of these macrosat play. What matters to us is earnings, stock marketvaluations and what can deliver in this scenario. Let’s diveinto this.

Why there is upside yet

Despite two years of flat returns, the markets are at a priceearnings (PE) ratio of around 20 times trailing (22 for theNifty) and at 16 times on a forward basis (2017-18), andare considered to be trading marginally at a premium.

If that be the case, where are the returns to be had? Wherewould fund managers go, to pick good stocks for you?

"Though demonetisation will leave its mark, the economy will make a strong comeback. Withre-monetisation expected to get over by March 2017, I think the market will start rallying."Raamdeo Agrawal, Joint MD, Motilal Oswal Financial Services

FundsIndia Views: 2017 – Outlook and strategy

Vidya Bala

If the below data has weakened your faith and interest in equity, then it could be a good thing!

‘The safest and most potentially profitable thing is to buy something when no one likes it’ saidHoward Marks, one of America’s more successful investors. If you are not liking what you areseeing below, then you know Howard Marks’ wisdom should be your strategy for equity in 2017.

www.fundsindia.com

Let us take a broader index like MSCI India (whichrepresents 85% of the India-listed equity universe) to takestock of the valuations and returns of the sectors.

Sector Returns PE

2016 2015 2014 Dec-16 Dec-15 Dec-14

Consumer 5% -7% 31% 20.4 23.7 15discretionary

Consumer -5% 3% 20% 35.4 38.9 44staples

Energy 5% 0% 7% 13.2 12.8 11.1

Financials -4% -5% 47% 16.0 15.2 17.5

Healthcare -15% 7% 42% 26.0 36.8 28.7

Industrials 0% -12% 43% 30.2 30.2 26.4

Tech -9% 4% 15% 16.4 19.7 19.7

Materials 33% -21% -8% 48.3 -58.6 16.1

Telecom -27% -4% -8% 19.2 23.7 28.4

Utilities 11% -10% 13% 15.0 15.7 13.1

Source: MSCI, Morgan Stanley Research

The above table will tell you the returns delivered byrespective sectors and their price earnings ratio at differentpoints in time. Now, the point to note here is that thesectors that are now reasonably valued are not only theones that account for a chunk of the index, but alsoaccount for a chunk of the profits of the index.

In other words, there is still potential in the broad marketsfrom ‘value’ sectors. And a few triggers could move thesevalue sectors around:

• While the banking clean-up may get lengthened a bit ifthere are demonetisation-related defaults, it could wellbe offset by better financial strength and financialturnaround in commodity companies (especially steel)that were large defaulters earlier. High CASA comingfrom demonetisation would likely take care of anyfurther pain in the space

• The energy space has already been boosted post therecent decision of OPEC and certain non-OPECcountries to cut back on crude oil production. Bothupstream and downstream companies can be expected

to benefit from this

• Power utilities, especially regulated ones have betterstanding in a slowdown as their cost-plus model andassured returns provide earnings stability

• Commodity plays could also benefit from any recoveryin global demand coupled with a supply shortagedeveloping in the non-ferrous metal space

• The high sentiments in the US if translated intomeaningful spending, could well lift sentiments for theIT space and current modest valuations could help

Given the low base of earnings for these sectors in theyear gone by and that they account for a chunk of theearnings of the bellwether indices, a modest increase inearnings could deliver returns for the index.

We expect this is where fund managers would try and picktheir stocks. But this does not mean the other sectorswould not provide opportunities. For instance, thecorrection in consumer stocks as well as pharma couldwell provide select stock opportunities.

Hence, even if markets do remain volatile, it may be toopessimistic to assume that the market no longer offersopportunities.

Where to invest in equity

As an investor, we think investing a higher proportion inlarge-cap and multi-cap/diversified funds will yield betterthan going behind mid-caps.

For one, the trailing valuation of midcaps (Nifty FreeFloat Midcap 100) at close to 30 times is overheatedcompared with the large-cap space (Nifty at 22 times).

Two, many of the sectors with potential that we discussedabove have better quality companies in the large-cap spaceand in any turnaround, the larger companies get to reapthe benefits first.

Three, the below chart will tell you that the return onequity in the large-cap space is far superior and deservesbetter valuations compared with midcaps.

We will, over the course of the next few months, comeout with calls on funds that are well-positioned to makethe best of the opportunities in 2017.

"This has been a deep engrained Indian culture, where cheating in taxes is a very acceptable socialbehaviour. If demonetisation can change this thinking, even to a certain extent... this will be a bigtransformation."Uday Kotak , Executive VC, Kotak Mahindra Bank

www.fundsindia.com

www.fundsindia.com

Diversify your debt holding

For those invested in duration funds such as dynamicbond funds, it would have been a super-yielding 2016. Therate cuts and ensuing bond rally ensured double-digitgains. While those investing afresh may still have money tobe made in this space, we would suggest addition ofaccrual funds besides dynamic bond funds.

Why do we say this? For one, the returns from duration isover for a good part, although you can expect it tocomfortably beat the FD returns over the next few years.Two, while rates cuts may have to come about, when andhow calibrated they are would depend on economicgrowth numbers as well as the Fed rate hikes. Three, thereis already a significant pull out in the gilt space by FPIswho have been booking profits earlier. Fresh money fromtheir end may reduce as the Fed rate hikes will reduce thespread between the two nations’ bonds.

On the other hand, there is still plenty of opportunity onthe corporate bond space, where marginally higher yieldsdo not necessarily come with high risk. Adding short-term

debt funds (2 years) or income funds (at least 2-3 years) orquality credit opportunity funds (at least 3 years) if youhave risk appetite for the last, would be a necessarydiversification when you add duration funds.

Holders of bank deposits that mature this year, wouldhave little choice but to go for debt funds to ensure thatthey do not suffer from reinvestment risks.

Asset allocation necessary

2016 illustrated quite well the benefit of asset allocation(see graph). We believe such allocation, based on yourtime-frame and risk profile would be a necessity toshock-proof your portfolio. While the below returnsshould not be expected from debt in 2017, holding debtwill certainly reduce your portfolio volatility while allowingyou to participate in the debt rally that still holds steam.

Vidya BalaHead – Mutual Fund Research

FundsIndia.com

You have the traditional options– provident funds (PPFand EPF), national saving certificates, tax-saving fixeddeposits. Then you have equity linked savings schemes(ELSS, or tax-saving mutual funds), the NPS, and ULIPs.Of all these, tax-saving mutual funds are the perfect mixof tax-efficiency and superior return.

Options such as home loan and education costspermissible under Section 80C are expenses and notinvestments. They don’t help you build wealth.

Higher returns

Tax-saving funds deliver superior returns, because ofwhere they invest. They put their portfolio in equity (orthe stock market), the best asset class for generatinginflation-beating returns over the long term. PPF,tax-saving bank and post office deposits, and NSC arepure-debt instruments. Debt does not always beatinflation and returns lower than equity. The NPS, givenits compulsory debt component, can see returns lower inthe long term than tax-saving funds.

More, in a tax-saving fund, you have more money workingfor you from the outset. Consider ULIPs, which do investin equity. But because of the cost of the insurance coverand other sundry charges, the amount that actually goesinto investment is lower than in a tax-saving fund whereyour entire money is invested.

Remember also that debt investments – which includePPF, deposits, or NSC - are subject to fluctuations anduncertainty in returns. Interest rates on these instrumentsare linked to prevailing rates for government securities andare reset every quarter. Rates on these instruments havefallen in the past year in line with interest rates to 7.8-8%across instruments, from 8.5% last year.

To get an idea of the return gap between tax-saving fundsand traditional options, look at the graph above. It showsyou where a yearly investment of Rs 50,000 in the PPFover the past 16 years would place you now, against asimilar investment in Franklin India Taxshield, a moderaterisk tax-saving fund. You built thrice the corpus throughthe tax-saving fund as compared to PPF, in the sameperiod. So, though tax-saving mutual funds are riskier, theyare well worth the risk.

Tax-exempt at all stages

On instruments such as the NSC and tax-saving deposits,your interest is taxed. Post-tax, a tax-saving FD with aninterest rate of 6.5% actually works out to 5.8, 5.2, and4.5% in the three tax slabs. The NPS has a complicated taxstructure where 40% of a lump-sum withdrawal is taxedat slab rate, and the annuity income from the corpusconverted into annuities is taxed too.

Interest on and withdrawal from EPF and PPF do notsuffer taxes. Tax-saving funds, as they are equity funds, areexempt from long-term capital gains tax (on holding formore than 1 year). Dividends are not taxed. Thus,provident funds and tax-saving funds are on equal footingfar as taxation goes. But on returns, as we have seen,

"I think India is the last frontier for any company, any investment firm that wants to really have amassive global presence.”Deep Nishar, Managing Director, SoftBank Group International

Why ELSS is the best tax-saving option

Bhavana Acharya

With only three months left in the financial year, finding out how to save taxes takes precedence.Under Section 80 C, you have several options. Which one should you choose? Insurance, youwould say. True. But once you take an insurance policy with an adequate sum assured, there isno need to buy more. What about the remaining claim amount of that Section 80C?

www.fundsindia.com

April 2000

PPF Franklin India Taxshield

April 2016

` 52.1 Lakh

` 16.6 Lakh

tax-saving funds score.

Better liquidity

An investment in a tax-saving fund is locked for threeyears, by far the shortest of all tax-saving instruments.PPF has a minimum lock-in of 15 years and allows onlyconditional withdrawal before that. EPF is locked for theterm of your employment. Deposits and the NSC arelocked in for five years. NPS is locked in until you reach60 years, and again only allows conditional withdrawal.ULIPs are five years or more in tenure, and carry heftysurrender charges if redeemed before the policy period.

Ideally, you should not be touching long-term investmentsin the short term. But you may need to liquidate your

investments for some emergency or other requirement.On this count, tax saving fund scores over every otherinvestment - it has the shortest lock-in, it is very easy toredeem, you do not pay any exit loads, and you receive theproceeds within a few days.

So be smart about tax-saving. Look at this list fortax-saving schemes to invest in. They have been selectedafter considering several metrics, including strategy, risk,volatility, and consistency.

Bhavana AcharyaAnalyst – Mutual Fund Research

FundsIndia.com

"Corporate earnings every year are at a new high. A decade from now, the index will be at a newhigh. So, it is valuations I would look at. Highs don't matter."Rajeev Thakkar, CIO, PPFAS Mutual Fund

www.fundsindia.com

Q & AQ. Are the return percentages for different types of debtfunds that we see on different sites calculated before orafter deducting DDT? In other words, are these returnssame in the hands of the investors who opted for dividendoption?

A. Returns shown on websites are the returns of thefund’s portfolio. Those returns are a reflection of how thedebt papers that the fund held did. A fund does notmaintain a separate dividend plan portfolio and a growthplan portfolio. When websites or funds show returns, theyare showing the performance of the fund, and not theplan. Very few websites show returns separately fordividend and growth; where they do, they assumereinvestment of dividend when they show the returns.

For you as an investor in the dividend plan, your ownreturns will be different because you are taking thedividend out at each point. You receive the dividend perunit as declared by the fund. The DDT on this iscalculated separately. Both are deducted from your NAV.Opting for dividend payout means that you are bookingprofit in your investment regularly. This reduces yourinvestment in the fund which in turn reduces your return.

Bhavana AcharyaAnalyst – Mutual Fund Research

FundsIndia.com

This is a sponsored advertisement by LIC Mutual Fund

www.fundsindia.com

DHFLDHFL has declined sharply from Rs 337 to Rs 220 in thelast quarter. It has bounced back sharply from Rs. 220 totest a high of Rs. 258. Currently it needs to trade abovethe resistance level of Rs. 258 to trigger a strong upsidemomentum with a medium-term target of Rs. 292.Resistance is at Rs. 274, while support is placed at Rs. 243and Rs. 227. The upward trend will continue if it tradesabove Rs. 227. Stop loss is placed at Rs. 224.

This column is targeted at investors who are registered customers ofFundsIndia for trading and investing in equity as well as prospectiveinvestors who wish to open an equity account with FundsIndia.

The Nifty produced a double bottom formation in thechart and has made a strong base around 7,900. Theshort-term trend has turned bullish now and there is everypossibility of the Nifty continuing its rally towards itsimmediate target level of 8,500. The latest 50-day SimpleMoving Average (SMA) is at 8,210. The crucial supportfor Nifty is placed at 8,055 and the resistance is at 8,290and 8,500. The trend will remain positive as long as theindex trades above 8,055 levels. But a close below 8055will lead to further weakness to test 7,900 in the shortterm.

Perumal RajaTechnical Analyst - Equity Research Desk

FundsIndia.com

JK TyreThe stock has seen a sharp decline from Rs 161.5 to Rs106 in the last quarter. It has taken strong support aroundthe 200 days SMA of Rs. 108. Major support is at Rs. 112,while resistance is placed at Rs. 121 and Rs. 127. Theupward trend will continue if it trades above Rs. 106. Werecommend buying JK Tyre for a medium term target ofRs. 137 and a stop loss of Rs 106.

Technical View Nifty

Disclaimer: Mutual fund investments are subject to market risks. Please read the scheme information and other related documents beforeinvesting. Past performance is not indicative of future returns. Please consider your specific investment requirements before choosing a fund,or designing a portfolio that suits your needs. Wealth India Financial Services Pvt. Ltd. (ARN code 69583) makes no warranties orrepresentations, express or implied, on products offered through the platform. It accepts no liability for any damages or losses, howevercaused, in connection with the use of, or reliance on its products or related services. The terms and conditions of the website are applicable.Think FundsIndia, a monthly publication of Wealth India Financial Services Pvt. Ltd., is for information purposes only. Think FundsIndiais not, and should not, be construed as a prospectus, scheme information document, offer document or recommendation. Information inthis document has been obtained from sources that are credible and reliable in the opinion of the Editor.Publisher:Wealth India Financial Services Private Ltd. Editor: Srikanth Meenakshi

About us: FundsIndia is India’s friendliest online-only investment platform. Built on robust technology, FundsIndiagives users access to mutual funds from leading fund houses in India, stocks from the BSE, corporate fixed depositsand various other investment products, all in one convenient online location. In short, FundsIndia is your one stopshop to build wealth.

www.fundsindia.com

1. Which Indian airport has become the second airportin the Asia-Pacific region to achieve a carbon neutralstatus?

2. Which state government is behind India’s firstamphibious bus project?

3. Name the person in this picture. He hasrecently been appointed as the chairmanof India’s largest insurance company.

4. Which district in India is set to become India’s firstcarbon neutral district?

5. Which state is home to India’s first cashless bazaar?

Please click here to submit your answers.

Answers for December 2016 Investment Quiz:

1. J Ravichandran 2. 102 3. Uttar Pradesh 4. 7.3%5. N Chandrababu Naidu

The winner of the December 2016 Investment Quiz isSenthil Kumar.

FundsIndia Select Funds Investment QuizTax-saving Funds

These are equity-oriented funds with a lock-in of three years.Investments in these funds qualify for tax deduction up toRs. 1.5 lakh under section 80C of the Income Tax Act, in theyear of investment. The recommended holding period is fiveyears.

Funds RiskLevel

Axis LT Equity Fund (G) High

BNP Paribas LT Equity Fund(G) Moderate

DSPBR Tax Saver Fund-Reg(G) Moderate

Franklin India Taxshield(G) Moderate

ICICI Pru. LT Equity Fund (Tax Saving) (G) High

IDFC Tax Advt.(ELSS) Fund-Reg (G) High

Invesco India Tax Plan (G) High

Please click here for a complete listing of our preferredfunds.

@FundsIndia

We’re happy to announce the launch of the Super Savings Account. A new mutual fund offering, the SuperSavings Account will give you both, the benefits of a savings account – like a debit card, instant withdrawal,etc. – and the growth of a mutual fund.

Let us know what you think of these features at support@fundsindia.com.

www.fundsindia.com