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A more sustainable equity turnaround in sightIn this newsletter, we have reproduced a blog we had penned some weeksago on signs of recovery in core sectors. We expected these signs to translateinto improvement in corporate performance. Latest corporate results suggestthat such improvement might have just begun.

For the first time in several quarters, there is a sign of sales growth for thebroad universe of listed companies (about 1,300 companies, excluding banks,for which we had data on results as of May 26). Thus far, we have had profitsgrowing due to lower input costs. For the March 2016 quarter, sales expanded1.7 per cent over the March 2015 quarter; as opposed to a decline in sales inMarch 2015 over 2014. Yes, the growth is tepid, but it is still good news forseveral reasons. One, it means there is demand. Two, it means capacityutilisation would improve, thus providing operating leverage and furtherexpansion in profit margins. Three, this could motivate companies to go forfresh investments (given the lowering rate scenario), thus triggering capex.

Very interestingly, interest cost increased by 15 per cent for the March 2016quarter as compared to a year ago. The higher interest cost could mean twothings – one, borrowing cost per se has gone up, or two, companies areborrowing more. But interest as a proportion of earnings before interestdepreciation, taxation and amortisation (EBITDA) has actually fallen. Thatmeans there has not been an increase in cost of borrowing. It’s just thatcompanies are borrowing more for business and the borrowing has translatedinto earnings. That is good news too as money borrowed (at lower costsnow) actually goes into increasing productivity.

There are more positive facts hidden in the numbers. Sectors such as capitalgoods, engineering, automobile, metals and minerals, and infrastructure andconstruction have actually seen an average 8 per cent year-on-year growth intheir sales for the latest ended quarter. This is directly relatable to the coresector recovery that we have discussed in the article inside.

What does all this mean to you? Growth in IT, pharma, or FMCG wouldnot and should not come as a surprise. But that the turnaround is visible insectors that have been ailing for years is a sign of a more sustainable story,and that means that you will be in for surprises in your equity and equityfund portfolio in the months to come.

Vidya BalaHead – Mutual Fund Research

FundsIndia.com

June 2016 � Volume 06 � 06

Easy investingGreetings fromFundsIndia!

By the time you readthis, we would have

launched two significant featureson our platform.

The first is a method by whichaccount-opening becomes mucheasier and paperless – the eKYCroute of getting started usingAadhaar as proof for both identityas well as address. The second isthe newly launched integratedrobo-advisory service named‘Money Mitr’ which makes it achild’s play to figure out how toinvest in mutual funds.

eKYC will help people startinvesting in a painless manner.Money Mitr will seek to answer theperennial question of ‘Whereshould I invest’ in a friendly andcustomised way.

At FundsIndia, we are constantlyon a mission to do two things –deliver good advice to a lot ofpeople using technology, and builda great platform that makes it easyand convenient to follow andexecute the advice received.

Money Mitr and eKYC aresignificant steps forward alongboth these directions, and we’llkeep improving on them in thedays to come.

Happy investing!

Srikanth MeenakshiCo-Founder & COOFundsIndia.com

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This is a sponsored advertisement by ICICI Prudential Mutual Fund

FundsIndia Views: Looking at the core for a recovery

Be it the core production numbers – those that feed intoreal industrial activity, or the other macro indicators suchas transport or credit, all point to a steady recovery.

Their key takeaway is this: failed monsoons, reforms drag,and of course, lack of private capex spending may notreally pull down the pick-up of economic activity. Andthat is a sign of a turnaround for the corporate story.

Core industries

Let’s dive head-on into the numbers that matter the most- the core production numbers that actually feed intoother industrial activity. These numbers are given by theIndex of Eight Core Industries - an index that is lesstracked than the IIP, but accounts for 38 per cent of it. Itis often a lead indicator for the activity in othermanufacturing sectors in the economy.

This index consists of production data for coal, crude oil,natural gas, petroleum refinery products, fertilisers, steel,cement and electricity production.

As can be seen in the graph below, while monthly dipsand V-shaped recoveries are seen, the broader trajectoryhas clearly been up, especially after hitting a low inNovember 2015.

The production of key industries such as steel, coal,cement and electricity have seen a jump ranging from 11per cent to 31 per cent between November 2015 andMarch 2016. The only sectors that have remained flat –crude oil, fertilisers and natural gas – are known to havecapacity constraints.

Transport

Another important indicator of economic activity is thepick in the sales of Commercial Vehicles (CVs). Moredemand for transport vehicles speaks volumes aboutproduction and consumption activity. The data belowshows a steady pickup in the demand for CVs.

Not to be outdone, passenger car sales (more an indicatorof consumption strength), grew every quarter (comparedwith a year ago) in FY-16, except for the last quarter ofMarch 2016, when there was a soft drop over a year ago.

People were travelling in hordes too (an indicator ofbusiness climate). For the quarter ending March 2016alone, passengers who flew by air rose by 24 per cent to230 lakh (source DGCA). And this double digit growthstory has played out from the September 2015 quarter.

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Vidya Bala

“It doesn’t feel like a 7.5 per cent growing economy.” – This is probably the most fashionablyspelt statement in the institutional investor segment at this point in time. And with the Indexfor Industrial Production (IIP) numbers, especially on the capital goods front, not showingmuch of a revival, the hope of private capex spending simply remains wishful.This, together with reforms continuing to act as a drag, has meant continued pressure on theearnings of companies. Or has it? Not entirely.

"Good policy has been essential to our stability."- Raghuram Rajan, Governor, Reserve Bank of India

Index of Eight Core Industries

160.0

165.0

170.0

175.0

180.0

185.0

190.0

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Credit

What are banks doing with their money? Credit growth(money lent by banks), especially for industrial credit, hasbeen lukewarm, no doubt. But it has not been bad, if onesees the lending month after month in recent months. Thegraph below shows – except for March 2016, when therewas a marginal dip – there has been a slow and steadypickup in industrial credit. Service credit has beenrelatively better, seeing no dips post November.

We knew anecdotally (going by the increased lending ofmutual funds and other institutions through debt papers)that companies were borrowing more in the debt market.We took one of the short-term borrowing optionsavailable to companies namely, commercial papers, to seethe growth. The amount outstanding, as borrowed moneyjumped close to 2 times between March 2015 and now, isRs. 3,406 billion. But this is just the due; money lent wouldbe multiple times that since this is typically short-termlending.

More interestingly, lending rates, which were in the rangeof 7.44 -14.92 per cent in March 2015, have come all theway down to 6.84 -11.22 per cent. Clearly, not only arecompanies borrowing, they are borrowing at lower costs,at least for their short-term needs such as working capital.While they may be refinancing some of their high costloans, the jump also means their working capitalrequirements (from improved capacity utilisation) couldbe higher.

But the feel good story comes from our own hands!Personal loans, be it homes, consumer durables, vehicles,or your credit card outstanding, are up by 19 per cent inthe past one year (up to March 18, 2016). Clearly, theconsumption slowdown story notwithstanding, we havebeen spending to rev up the economy’s growth.

Still, if one believes that this does not feel like a roaringeconomy – true, it certainly is not. None of these isactually yet to reflect in the earnings growth of companiesthat are already under tremendous expectations frommarket valuations. Why is this so? Be it the coreproduction numbers or CV sales pickup or credit pickup,all of these are but initial signs of pickup in activity. Theyfeed into the rest of the production activity.

For instance, CV sales happen in anticipation of highervolume of goods to be transported. Higher credit off-takewould be a sign of deployment of money by companiesinto their business. Hence, it is a precursor.

But what about the core production numbers? Why arethey not reflected in Corporate India’s growth? They have,to some extent; but there is no inflation to offer a quickboost to the top line of companies. None of these coreproduction activities had pricing power. Companies havebeen managing earnings expansion through lower inputcosts with volume just turning around.

Hence, the wait will have to be longer for volumes to pushthe sales of Corporate India. The next swing in equitymarkets could, therefore, come from the top line growth,if the core data remains what it is.

But then, seldom does the investing world wait fornumbers. It looks for direction. If these directions provideconfidence for a recovery, then you should probably beinvesting now, not later.

Vidya BalaHead – Mutual Fund Research

FundsIndia.com

"I think, that a large factor of the investment in India really has been motivated by taking yields downfrom 8.5 per cent, more than buying into an economic story."- Michael Spencer, Global Head - Economics, Deutsche Bank

All you wanted to know about mutual fund taxation

What is mutual fund capital gain?

Capital gain is simply the profit on your investment whenyou sell your mutual fund units. It is the differencebetween the market value of your mutual fund units at thetime of sale and the cost of such units. The gains come infrom the appreciation in your fund’s NAV.

Capital gains can be short-term or long-term, dependingon how long you hold the fund units. Holding period isthe number of years between when you first bought a unitand sold it. What is considered short-term and long-termholding varies between equity and debt/gold mutualfunds.

Tax on equity funds

Taxation rules on equity and equity-oriented funds aresimple. A holding period of more than 12 monthsqualifies as long-term holding; less than that is short term.

Equity-oriented funds have no tax on long-term capitalgains; i.e., if you sell your fund after 12 months from thedate you bought it, you don’t pay capital gains tax. Onshort-term holding, the capital gains tax is a flat 15 percent, no matter which tax bracket you belong to. Securitiestransaction tax (at 0.001 per cent) will apply on allredemptions of equity schemes. That works out to aboutone paisa for every Rs 1,000 of redeemed money, andhence is ignorable.

All dividends from equity funds are exempt from tax,irrespective of when you receive it.

To qualify as an equity-oriented scheme as per tax rules,the fund should have at least 65 per cent of its portfolioin domestic equity shares on an average. By this definition,equity-oriented balanced funds are also tax-free after a

one-year holding period, just like equity funds. They arealso taxed at 15 per cent for short-term capital gains.Similarly, arbitrage funds and equity savings funds are alsotreated as equity for tax purposes.

International funds that invest in the stocks of othermarkets such as the US or Europe, will not be consideredto be equity funds as they do not hold domestic stocks tothe extent of 65 per cent (as required by tax laws). Equityfund-of-fund schemes also do not enjoy the tax benefitsof equity funds because they don’t hold stocks; they holdother funds.

Tax on debt funds

Debt funds, as a category, include liquid, ultra short-term,short-term, income accrual, dynamic bond, and gilt funds.It also includes all debt-oriented funds such as MIPs andother hybrid non-equity funds. International funds andgold funds also follow the same taxation as debt funds.

For these funds, short-term is a holding period of lessthan 36 months. Long-term holding is a period more than36 months. On short-term capital gains, you are taxed atyour slab rate. That is, if you’re in the 20 per cent taxbracket, you pay 20 per cent of your capital gains as tax.If you’re in the 10 per cent tax bracket, you pay 10 percent tax on your capital gain.

On long-term capital gains, your tax is 20 per cent of thegain with cost indexation benefits. Indexation is themethod by which your cost is adjusted for inflation. Whatthis does is to effectively reduce your absolute gain, asyour cost goes up and thus reduces your taxable profit.

Dividend on debt funds also suffers tax. You do not paythis tax – called Dividend Distribution Tax (DDT) –directly. The AMC deducts it from your NAV and you get

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Bhavana Acharya

Though tax filing season is still a couple of months away, it always is useful to know how yourincome from investments are taxed. Understanding taxation is important before you make yourmutual fund investments. Here’s putting down what you need to know about taxes and yourfunds.While much of your other income, such as salary or interest income, is taxed at your slab rate,the gains you receive frommutual funds – called capital gains – have separate taxation provisions.They are called capital gains tax.

"India is very important to us for future growth. There are lots of expectations here and it is in thetop priority list for our global operations."- Yoichiro Ueno, CEO, Honda Cars India

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the remaining.

The DDT rate for individuals at present is 28.84 per cent(including surcharge and cess). As dividends are paid outfrom your NAV, your NAV falls post such dividendpayout or reinvestment. Hence, the capital gains, if any,when you sell your units under these options, compared togrowth, will seem lower. But the fact remains that you paidtax on the dividend, which is nothing but part of yourprofit. Hence, it is important for you to know whether itis suitable for you to opt for the dividend option in debt,depending on your tax profile. We’ll explain it in anotherarticle.

Determining holding periods

Now, if you sold all your units at one go having bought iton a single date, it is easy to arrive at the holding period.But what if you redeemed in multiple tranches? What ifyou had invested at multiple points, like you do in a SIP?

The rule the taxman follows is that the first unit youbought is the first you sold. This first-in-first-out rule alsoapplies while determining whether units of tax-savingfunds are free from lock-in. Here’s an example to make itmore clear. Let’s say you invested in a fund at variouspoints of time as below:

Date Units bought

10-Jan-12 50

18-Dec-12 60

15-May-13 20

30-Sep-13 20

18-Jul-14 40

20-July-15 50

30-Nov-15 50

You have 290 units in total today. You decide to sell 100units. Going by the rule, thus, it’s assumed that the 50units bought on the Jan 10, 2012 and 50 of the unitsbought on December 18, 2012 are sold. If the fund is anequity fund, you won’t pay capital gains tax as the holdingperiod of the units is greater than one year. If it was adebt fund, since the holding period from January andDecember 2012 is longer than three years, you will pay

long-term capital gains tax.

What if you sold all 290 units? If it’s an equity fund, forthe units bought in July and November 2015 (100 units),you will pay short-term capital gains tax as the holdingperiod is less than a year. On the remaining 190 units, youpay no tax. If it was a debt fund, then the 160 units youbought from September 2013 onwards will qualify asshort-term. The 130 units you bought between Januaryand May 2013 will qualify as long-term. In other words,the holding period of every unit that you bought is fromthe date of such unit’s purchase.

Consider a Systematic Transfer Plan (STP). Apply the ruleabove. The units you sell is taxed based on the date of itspurchase. That’s easy. But what is the date of purchase ofthe fund you are transferring into? When this money istransferred into another fund, the date of purchase forthis fund would be the date when the units are credited toyou.

For example, say you are doing an STP from Fund X toFund Y for Rs. 1,000 a month. The date of sale for Xfund would be the date of STP. For the Y fund, the dateof purchase would be when new units are credited to youunder Fund Y. This is the case with any switch-out andswitch-in of funds. Thus, date of purchase is the key inputto determine your holding period.

Who pays the tax?

If you are a resident Indian, the fund house will notdeduct any tax (TDS) when you sell your units. You arerequired to show the income and pay taxes, if any, whenyou file your returns. If you are a non-resident Indian,while the tax laws remain the same for capital gains, TDSwill be deducted at the applicable rates, when you sell yourunits.

Remember that any transaction that involves units goingout of your holding qualifies as a redemption. So if you’reswitching units from one scheme to another or from thedividend to growth option (or vice versa), or making aSTP or a Systematic Withdrawal Plan (SWP), they’re allredemptions.

Bhavana AcharyaAnalyst - Mutual Fund Research

FundsIndia.com

"We are looking at the possibility of funding start-ups in the future if the opportunity arises.”- Rajiv Sabharwal, Executive Director, ICICI Bank

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Q: What should be the percentage of debt funds alongwith equity funds in a portfolio for long-term goals likeretirement, children’s education and marriage? How oftenshould a portfolio review be done for the debt fundsduring this goal period?

A: The proportion of debt funds would depend on yourrisk appetite, time frame and how much of debt you havealready allocated for the goal in other debt productsoutside of mutual funds.

For goals over 15 years, around 20-25 per cent of yourportfolio can typically be in debt funds. An importantthing is to rebalance your asset allocation every once in awhile. For instance, a 75:25 portfolio distribution of equityto debt may become 85:15 over a period of time. Thatmeans your equity allocation is inflated. You need torebalance and shift to debt. Also, as you near your goal, say1-2 years ahead of the goal, the allocation in equity cangradually be moved to short-term debt funds using aSystematic Transfer Plan (STP). This will reduce the riskin your portfolio as you move closer to your goal.

On review, in any long-term investment, you need to keepan eye on the performance every once in a while – sayevery six months or every year. This goes for your entireportfolio – both equity and debt. Checking too frequentlywill not help as you will be holding long-term funds. Youneed to give your investments time to deliver. Looking atdaily returns may prevent you from being able to view

Q & A

Index 1 Year 5 Years 10 Years

Nifty 50 -3.2 8.0 10.3

S&P BSE Sensex -4.1 7.6 9.9

Nifty Freefloat Midcap 100 0.8 10.5 11.7

Nifty Freefloat Smallcap 100 -6.2 7.1 6.7

Nifty 100 -2.9 8.5 10.6

Nifty 500 -2.2 8.6 9.9

Nifty Bank -5.8 9.8 15.6

Nifty Energy -1.3 -1.0 5.5

Nifty FMCG 2.0 15.8 15.0

Nifty Infrastructure -14.4 -1.5 2.1

Nifty IT -1.5 11.7 11.4

Returns (in per cent as of May 31, 2016) for less than one year ison an absolute basis, and for more than one year on a compoundedannual basis.

Equity Performance Snapshot

your investments from a long term perspective. Hope thishelps!

Bhavana AcharyaAnalyst - Mutual Fund Research

FundsIndia.com

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Motherson SumiThis stock has seen a massive fall from Rs. 395 to Rs. 207over the past one year. It has formed a strong base aroundRs. 215. Now it needs to trade above the 200-day SMAof Rs. 268 to trigger a strong upside momentum, with amedium-term target of Rs. 340. Resistance is at Rs. 300and Rs. 318. Support is placed at Rs. 250 and Rs. 235. Theupward trend will continue as long as the stock tradesabove Rs. 235. Stop loss is placed at Rs. 230.

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 witnessed a volatile session with a positive biasin the month of May 2016. The short- and medium-termtrend remains positive at this juncture and there is a strongpossibility of the Nifty continuing its rally towards itsimmediate target of 8,520. The index is currently tradingabove the latest 50-day and 200-day Simple MovingAverage (SMA) of 7,755 and 7,788. Crucial support isplaced at 7,920 and 7,720. Major resistance is at 8,160 and8,340. The trend will remain positive as long as the indextrades above 7,720.

Perumal RajaTechnical Analyst - Equity Research Desk

FundsIndia.com

TCSTCS has remained volatile for the past two monthsbuilding strong support at Rs. 2,415. Resistance is atRs. 2,640 and Rs. 2,750. There is a strong consolidationbuilding up in the Rs. 2,415 to Rs. 2,570 price band. Abreakout above Rs. 2,570 will lead to a medium-termupward trend with the target at Rs. 2,900. Major supportis placed at Rs. 2,340. The latest 200-day SMA is atRs. 2,456. The stop loss is placed at Rs. 2,330.

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

"The Make in India project was very clearly for making manufacturing activity a national prioritybecause only then can you create the jobs this country needs."- Nirmala Sitharaman, Minister of State for Commerce and Industry, Goverment of India

1. Which Indian company recently signed a MoU withthe Iranian government to set up a smelter plant inChabahar?

2. Which bank recently launched “SmartUp” a mobileapp for start-ups?

3. What is India’s GDP growth forecast for 2016, as perMoody’s Investors Service?

4. Which state government launched the Green Passagescheme for orphan students?

5. Name the man in the picture. Aprominent Asian businessman andbillionaire, he has authored the book“Making It Big”.

Answers may be sent to quiz@fundsindia.com.Answers for May 2016 Investment Quiz:1. China 2. 6th 3. Iceland 4. The Republic of Nauru5. Cochin (Kochi) International Airport

The winner of the May 2016 Investment Quiz is AayushAgarwal.

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FundsIndia Select Funds Investment QuizHybrid Equity-oriented Funds - Moderate Risk

These are funds that invest over two-thirds of their corpusin equity and the rest in debt. The recommended minimumholding period is 3 years.

HDFC Balanced Fund (G) ICICI Pru BalancedFund (G)

Tata Balanced Fund (G) L&T India PrudenceFund (G)

What is FundsIndia Select Funds: This is a listing ofmutual funds that we think are most investment worthy fora regular investor. We review this list on a quarterly basis.Do note, however, that past performance is not a guaranteeof future results. Please consider your specific investmentrequirements before designing a portfolio that suits yourneeds.

Please click here for a complete listing of our preferredfunds.

@FundsIndiaWe’re glad to announce the launch of two new features on our platform – Money Mitr, and the Aadhaar-based eKYCprocess. Money Mitr is an actively guided robo-advisory service for lump sum and SIP investing. The first of its kindin India, it instantly offers mutual fund recommendations for important life goals. Also, the portfolios built by MoneyMitr will be monitored for their entire lifetime. Meanwhile, our new Aadhaar-based eKYC process will enable newcustomers to open an account and invest instantly by simply entering their Aadhaar number. Together, these twoprocesses will make investing with FundsIndia quick and easy like never before.

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