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Most of us usually negate the need for an expert to guide us in planning investments for the future. This may have been acceptable in the 90s when the domestic financial markets were still under developed. Today, after witnessing a 180-degree shift, we have a plethora of financial products across asset classes to choose from. Thus, by only investing in traditional financial products like bank fixed deposits (FDs), postal savings and money back insurance policies, we are missing out on a big opportunity to achieve our goals faster. Today, to know the best possible way to achieve the financial goals, one has to engage in a more detailed exercise a.k.a. financial plan - to ensure our goals are achieved with greater confidence. Financial planning is the process of meeting lifetime goals through proper management of finances. Lifetime goals may include buying a house, saving for children's education or planning for retirement. With the advancement of technology and availability of financial tools, financial planning has evolved and become more scientific. Table 1 denotes the difference between traditional and scientific financial planning. Table 1: Scientific Financial Planning vs., Non-Scientific Financial Planning (Traditional) Scientific Financial Planning
1. 2. 3. 4. Looks at a more holistic picture of assets and liabilities, income, expenses and goals Considers every goal and maps products to each goal separately Plan prepared by specialists like certified financial planners Are strategic long-term plans and are monitored for product performance; rebalancing done to maintain asset allocation Products recommended based on an individual's risk profile across asset classes Complete audit trail of all recommendations and changes proposed in the plan at any time Insurance is planned to support exigencies of an individual and are largely term policies Medical insurance is part of the financial planning process 1. 2. 3.
Investment thoughts
India won the Cricket World Cup after three decades. Was Indian skipper M S Dhoni merely lucky or was it hard-work, planning and perseverance that led to the win? As all of us would agree - it was clearly the latter. The same traits matter even while planning for one's finances. It is important to plan right from the time we receive our first pay-cheque so that we can achieve various financial goals- the idea is to sow now to reap later.
Scientific financial planning - the process Scientific financial planning is a five-step process: (i) data gathering and risk profiling through a questionnaire, (ii) analysing needs/ goals, (iii) asset allocation, (iv) product recommendation (including insurance), and (v) portfolio monitoring. Data gathering and risk profiling: Involves analysing information about the person's financial situation (details of assets, liabilities, income, expenses and investments) and administering a questionnaire to assess one's risk appetite. Based on the answers (which are scored), the final score is mapped to a risk profile from low risk appetite to high risk appetite viz., conservative, moderate, moderately aggressive, aggressive and very aggressive. Needs analysis: Involves a discussion on an individual's financial needs such as debt repayment obligations, funds required for children's education/marriage, leisure as well as charity if needed. A financial planner then prepares a cash flow statement based on current state of finances and investments to check whether all goals can be met in the desired time.
4. 5.
5. 6. 7. 8.
6. 7.
8.
Goals
Table 2 shows a typical cash flow based on annual income, expenses, liabilities like EMI, net disposable income after subtracting income from expenses / liabilities. The investor's three goals are met through disposable income and partial withdrawal of investments. It is possible to improve these cash flows and meet additional goals through scientific financial planning wherein investments would be optimally deployed based on risk profile and asset allocation. Asset allocation: This basically maps an investor's risk appetite to a portfolio which contains a mix of asset classes (say equity, debt and gold). The portfolio is allocated across these asset classes in an optimal manner based on a mathematical model. Accordingly, an investor with a lower risk appetite will have a higher allocation to debt while an investor with a higher risk appetite will have higher allocation to equity. A typical asset allocation chart is shown in Table 3. If one observes, the allocation towards gold and equity increases as the portfolio becomes aggressive. As gold and equity have a higher risk -return profile, returns are commensurate with higher risks. Product recommendation: The aforesaid asset allocation is mapped to products across mutual funds, ULIPs, direct equity and insurance, fixed deposits among others. Monitoring the financial plan: A financial plan needs regular monitoring and alterations depending upon a change in the client's financial position and needs. This may include exiting from underperforming products and switching to better products. Further, a reallocation of funds needs to be done if goals are achieved earlier than expected or vice versa.
500,000 550,000 605,000 665,500 732,050 805,255 885,781 974,359 1,071,794 1,178,974
2
125,000 125,000 125,000 125,000 125,000 125,000 125,000 125,000 125,000 125,000
3
250,000 275,000 302,500 332,750 366,025 402,628 442,890 487,179 535,897 589,487
125,000 150,000 177,500 207,750 241,025 277,628 317,890 362,179 410,897 464,487
140,000 324,800 562,576 862,765 500,0001 676,245 1,068,337 500,0002 992,575 1,517,324 2,159,608 1,000,0003
Bought a Car, Marriage Expenses, Downpayment for a second home Goals are subtracted partly from disposable income and partly from investment value
*Data represented by CRISIL Fund Rank 1 indices for equity, long-term debt, short-term debt and liquid retail funds and for gold by returns of LBMA gold prices converted to Indian Rupees (does not consider duties and other aspects of landing costs).
Conclusion: Familiar with market volatilities, today's investors intend to secure their future and meet their financial aspirations through prudent long-term planning. Scientific financial planning is an upcoming and highly advantageous tool for investors to have a holistic view of the past and future finances with embedded goals. Financial institutions such as large banks and financial companies have realised this shift and developed customised financial tools to meet investors' requirements. The challenge is to make this service available across investors . Here, it is apt to say 'if one fails to plan, one plans to fail'.
CRISIL FUNDINSIGHTS
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Market - Overview
Indices
S&P CNX Nifty BSE Sensex
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May 31, 2012
4924 16219
Absolute Change
-324 -1100
% Change
-6.17 -6.35
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With the nearly 6% decline in May, the Indian equity market (S&P CNX Nifty) fell for the third consecutive month due to weak global and domestic cues. Weak global cues included escalating tensions over the European debt crisis, the US reporting disappointing growth numbers and Fitch downgrading Japan's sovereign ratings to A+ from AA citing concerns over the nation's rising public debt. On the domestic front, the rupee hitting a record low against the US dollar, an unexpected rise in April's inflation rate and reports that India may review it's Double Taxation Avoidance Agreement with Mauritius (which renders investments made through the latter tax free) and implement the General Anti Avoidance Rule (GAAR) for foreign investors who evade tax, also dragged down the markets. Selling by foreign institutional investors (FIIs) added to the fall; FIIs were net sellers in equities to the extent of Rs 1,523 cr in May, the second consecutive month of net selling following Rs 568 cr in April. Losses were capped after the Finance Minister deferred implementation of the General Anti-Avoidance Rule (GAAR) by one year. Intermittent positive cues from Europe and strong earnings from banking major State Bank of India also helped erase some losses. Sectoral indices ended lower during the month with CNX Auto declining the most, down almost 16% primarily on profit booking and disappointing April sales by auto major Tata Motors. CNX IT declined the least, falling 1.26%, as IT companies gained following the rupee depreciating in relation to the USD which improved their prospects of higher export revenues; the rupee depreciated by 6.37% during the month from 52.73 per USD on April 30 to 56.09 per USD on May 31.
50000
(Net Flows Rs cr)
7.0
(AUM Rs lakh cr)
6.4 -50000
Note:- The month-end portfolios as of May 2012 and quarterly average assets under management (AUM) as of March 2012 have been considered for the report.
New Stocks Entries and Exits in Mutual Fund Portfolios - May 2012
5.8
Jan-12 Feb-12 Mar-12 Apr-12 May -12 May -11 Jun-11 Jul-11 Aug-11 Sep-11 Oct -11 Nov -11 Dec -11
-100000
Entries Speciality Restaurants Ltd. Mangalore Chemicals & Fertilisers Ltd. Jaypee Infratech Ltd. Claris Lifesciences Ltd. Shanthi Gears Ltd.
Exits Autoline Industries Ltd. Bharti Ventures Ltd BOC India Ltd Everonn Education Ltd. Fertilisers and Chemicals Travancore Ltd. Gitanjali Gems Ltd. Goodricke Group Ltd. Jubilant Industries Ltd. Karuturi Global Ltd. Lupin Laboratories Ltd. McDowell Holdings Ltd. Rane (Madras) Ltd. Reliance Broadcast Network Ltd. S. Kumars Nationwide Ltd. Sarda Energy & Minerals Ltd. Sayaji Hotels Ltd. Shilpa Medicare Ltd. Suashish Diamonds Ltd. Welspun Global Brands Ltd. Welspun Investments & Commercials Ltd.
Category/Index returns Large Cap Funds Diversified Equity Funds Small and Midcap Funds Balanced Funds Monthly Income Plans Long Term Gilt Funds Long Term Debt Funds Short Term Debt Funds Ultra Short Term Funds Liquid Funds Gold Funds* *CRISIL Gold Index Categories as of CRISIL Mutual Fund Ranking March 2012
Absolute Monthly Returns% May 2012 Apr 2012 -5.54 -0.99 -5.64 -1.03 -4.99 0.47 -3.55 0.09 -0.49 0.61 1.99 0.33 0.99 0.87 0.72 0.95 0.80 0.89 0.80 0.85 1.14 2.83
The Indian mutual fund industry's month-end assets under management (AUM) rose for the second consecutive month by around 3% or Rs 19,130 cr to Rs 6.99 lakh cr in May 2012 due to inflows into money market / liquid funds; equity and income funds too witnessed inflows. Money market funds saw net inflows of Rs 25,052 cr, garnering almost 95% of the total inflows (Rs 26,742 cr) seen by the industry in the month; however, inflows were sharply lower compared to Rs 75,752 cr seen in April 2012. Assets of equity funds declined by 5% or Rs 9,220 cr to Rs 1.70 lakh cr in the month as the underlying equity markets represented by the benchmark S&P CNX Nifty fell by over 6% in May, dragged down by weak global and domestic cues; the category, however, witnessed net inflows of Rs. 420 cr in the month. Income funds (including ultra short-term debt funds and fixed maturity plans), continued to see inflows for the second month in a row (Rs 1580 cr in May), sharply lower than Rs 17,874 cr in April, propelled primarily by inflows into new fund offers of fixed maturity plans.
Gilt funds saw the highest outflow of Rs 371 cr across categories; the outflows could be attributed to profit booking as gilt prices saw a sharp upsurge in the month on views of monetary easing by the RBI and gilt purchases by the central bank. On the regulatory front, SEBI decentralised the process of filing offer documents for initial public offerings effective from May 14, 2012. Offer documents can now be filed with the regional offices of SEBI for an issue size of up to Rs 500 cr; for issue size greater than Rs 500 cr, companies will have to continue filing their prospectus with the regulator's head office in Mumbai. SEBI, under the new rules for consent orders, said that offences such as insider trading, front-running, failure to make an open offer to shareholders of a public listed firm, and manipulation of NAV of mutual funds can no longer be settled out of court.
Fund news
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Competition Commission of India (CCI) cleared the proposed taking over of the mutual fund business of Fidelity in India by L&T Finance CCI and RBI approved the proposed acquisition of 26% stake in Reliance Capital's mutual fund arm by Nippon Life Insurance for Rs 1,450 cr.
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Fund focus
HDFC Balanced Fund (CRISIL FUND RANK 1)
Launched in September 2000, HDFC Balanced Fund is an equityoriented hybrid fund with average assets-under-management of Rs 555 cr as of March 2012. The fund has been consistently ranked CRISIL Fund Rank 1 (top 10 percentile of the CRISIL Mutual Fund Rankings) for the past six quarters. The consistent ranking highlights a combination of superior risk-adjusted performance and a disciplined portfolio management.
Balanced HDFC Balanced Fund - Growth HDFC Prudence Fund - Growth -4.47 -4.43 -3.58 -4.08 5.95 -0.87 16.52 6.65 -3.13 15.49 15.87 18.65 11-Sep-00 1-Feb-94 554.93 6248.60 11.80 13.39 0.90 0.85
MIP Aggressive HDFC Monthly Income Plan - LTP - Growth Reliance Monthly Income Plan - Growth -0.80 -0.36 -0.10 1.25 5.16 8.03 4.57 7.37 9.45 9.77 11.02 10.62 26-Dec-03 13-Jan-04 6636.06 4141.96 4.30 3.98 0.71 0.92
MIP Conservative Birla Sun Life Monthly Income - Growth -0.51 0.15 3.92 6.08 7.53 10.99 10-Aug-99 475.68 2.57 0.30
Investment Style
HDFC Balanced Fund benefits from the two asset classes through capital appreciation of equities and stable returns from fixed income instruments. Balanced funds are treated like equityoriented funds for tax purposes wherein dividends and long-term capital gains are tax free provided they invest over 65% in equity. The scheme is mandated to invest 60-80% in equity and the remaining in fixed income securities.
CRISIL Mutual Fund Ranks as of March 2012 Point to Point Returns are as on May 31, 2012 Returns are annualised for periods above 1-year, other wise actualised Risk Ratios are annualised Period for Risk Ratios is two years For Sharpe Ratio the risk free rate is 7.61% - the average 91-day T-Bill auction cut-off rate for two years Average AUM is 3-months average number as disclosed by AMFI for the period January-March 2012 For a detailed write-up on the CRISIL Mutual Fund Ranking and the complete ranking list, please refer to www.crisil.com.
Performance
The fund has outperformed its benchmark (CRISIL Balanced Fund Index) and the category average across various time frames (Chart 1). Despite the market volatility seen over the recent three years, the fund has delivered an annualised return of 16.5%, more than triple that of the benchmark (4.8%) and well above the average returns delivered by the balanced fund category (8.8%). Further, if a person invested Rs.1000 every month in the fund for 10 years ending May 31, 2012 through the Systematic Investment Plan, the corpus would have grown 16.4%. The fund has delivered higher returns at a lower volatility. Over a five-year period, the fund's average volatility was 18% vis--vis the category's 20%.
CREDIT QUALITY Value Large Cap Small & Midcap Diversified (Style Box Legend for Balanced Schemes) Blend Growth High Medium Low High INTREST Medium RATE SENSITIVTY Low (Style Box Legend for Mip Aggressive And Conservative Schemes)
Returns (%)
10
-5
6 Months Absolute
1 Years Annualized
3 Years Annualized
5 Years Annualized
7 Years Annualized
10 Years Annualized
HDFC Mutual Fund Reliance Mutual Fund ICICI Prudential Mutual Fund Birla Sun Life Mutual Fund UTI Mutual Fund SBI Mutual Fund Franklin Templeton Mutual Fund DSP BlackRock Mutual Fund Kotak Mahindra Mutual Fund IDFC Mutual Fund Tata Mutual Fund Sundaram Mutual Fund Deutsche Mutual Fund Religare Mutual Fund Axis Mutual Fund Fidelity Mutual Fund Canara Robeco Mutual Fund JPMorgan Mutual Fund JM Financial Mutual Fund LIC Nomura Mutual Fund IDBI Mutual Fund HSBC Mutual Fund
89879 78112 68718 61143 58922 42042 34493 29298 25738 25450 19818 14099 12145 10465 8815 8688 7663 6369 5885 5799 5482 4859
88628 82306 69368 60377 57817 41552 35642 30565 29738 26476 21473 14775 13314 11814 8598 8797 7356 6759 6915 6223 6102 4897
4421
4805 4349 4582 3942 4616 4390 4600 2086 1308 2084 540 1069 473 858
Goldman Sachs Mutual Fund 4264 Baroda Pioneer Mutual Fund Principal Mutual Fund L&T Mutual Fund Peerless Mutual Fund Taurus Mutual Fund Morgan Stanley Mutual Fund Indiabulls Mutual Fund 4191 4126 3898 3801 3744 2053 1938 1854 1377 1046 910 797
Portfolio Analysis
Over the past three years, the fund has been managed with a fairly stable equity-debt asset allocation mix. The fund invested in the range of 65-71% in equities over this period and the average exposure to equities was 68%. Within equities, the fund maintains a fairly diversified portfolio. At a market capitalization level, the fund uses a combination of large and midcap stocks in its portfolio. The fund has maintained good credit quality in the debt portion of its portfolio. Average exposure to G-Secs and highest rated papers has been 83% of the debt portfolio over the past three years. Average exposure to cash and cash equivalents constituted 8% of the portfolio over past three years, providing sufficient liquidity.
-718 -15.56 -589 -13.42 -856 -18.61 -33 630 -1.60 48.15
-4000 -13.45 -1026 -1655 -676 -1170 -3.87 -7.71 -4.58 -8.78
Pramerica Mutual Fund Union KBC Mutual Fund ING Mutual Fund Sahara Mutual Fund Daiwa Mutual Fund AIG Global Investment Group Mutual Fund Mirae Asset Mutual Fund Edelweiss Mutual Fund Motilal Oswal Mutual Fund Escorts Mutual Fund Quantum Mutual Fund Bharti AXA Mutual Fund IIFL Mutual Fund
-230 -11.03 837 154.92 -24 437 -61 -2.22 92.40 -7.07
-1349 -11.42 217 -109 307 -390 2.52 -1.24 4.17 -5.77
Sector Trends
Banks, Pharmaceuticals Software, Finance and Auto ancillaries have been the most preferred sectors in the fund's portfolio over the last three years constituting 44% of the equity portfolio.
-39 21
-5.42 5.06
Fund Manager
Mr. Chirag Setalvad (Senior Manager-Equities) is a B.Sc in Business Administration from USA. He has over 14 years of experience including five years in HDFC Mutual Fund.
47 180.68
Grand Total 664792 681708 -16916 -2.48 AAUM is quarterly average number and excludes Fund of Funds
Every month, Fund Focus will feature one of the CRISIL Mutual Fund Rank 1 Schemes
The trigger facility assists investors in timely booking profits or minimising losses or even maintaining a pre-defined asset allocation between equity and debt. By opting for this facility, investors need not regularly keep track of their investments. For example, an investor who bought 10 units of an equity fund at a NAV of Rs 80 wants to sell the units when the NAV touches Rs 100. Instead of regularly tracking the NAV, the investor can set a trigger of Rs 100 and the asset management company (AMC) will track the investment on his behalf. Once the NAV reaches Rs 100, the fund house will sell the units. It must be noted that at the trigger level, investors can either redeem units or switch them to another fund of the same fund house.
4.
Advantages Convenience and flexibility of choosing entry and exit points for mutual fund investments No need to track investments on a daily basis Allows profit booking when markets rise and minimises losses when markets fall Allows an investor to shift to a less riskier asset class (debt) when volatility in equity markets rises Inculcates a non emotional based approach to investing Helps maintain asset allocation between mutual fund investments if investors set the right triggers Disadvantages While investors can book profits via the trigger facility, it could happen at a very early stage especially when markets have the potential to rise further An investor's cost / tax outgo could increase due to the triggers. For example, redeeming units within one year in equity funds can attract short-term capital gains tax and also exit load if the investment period is short
5.
For availing the trigger facility, investors have to submit the application form to the fund house by specifying the trigger options as well as the trigger level. Investors are informed about the execution of the trigger facility through the SMS/physical/E-mail account statement as opted in the application form. It can be also be cancelled by giving a letter to that effect.
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