MF POINTERFor Private Circulation only

Factors one should look while

investing in debt funds

Issue - 91 July, 2013

Global Indices

Benchmark Closing 13-June-13

to 12-July-13

Bovespa 45533 -7.40%

CAC 40 3855 1.60%

DAX 8213 0.90%

Dow Jones 15464 3.10%

FTSE 100 6545 3.90%

Hang Seng 21277 -0.40%

Nikkei 225 14506 9.20%

Shanghai Composite 2039 -7.80%

(continued on page 2)

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Equity Market

Global Equities

• For the month ended 12th July 2013, global equity indices ended on a positive note after positive comments from US Fed Chairman Ben Bernanke.

• U.S. equity markets ended higher at 15,464.30 (Dow Jones) up by 3.1% after the comments on US Fed's easy money policy which is still necessary for growth. The US Fed was worried on weak job markets and concerns that inflation remained below its comfortable zone. Unemployment rate held steady at 7.6 percent as more people entered the workforce. PMI fell to 52.2 in June 2013 from 52.3 in May 2013 showing no significant improvement. Also retail sales increased from April through June at 2.7% p.a., down from 4.2% p.a. during the first three months of the year. However positive data came on jobs front where employers added 195,000 new jobs to their payrolls in the last month which was the third consecutive month of added workforce. Earlier during the month Ben Bernanke had stated on slowing the pace of its bond-buying stimulus later this year and pulling back of $85 billion monthly asset purchases which led to panic in the markets sending stocks and bonds lower and pushed benchmark treasury yields higher during the mid of June.

• Europe saw one of the best months in which data remained positive. In the eurozone, German retail sales rose 0.8% in May 2013, after a 0.1% contraction the previous month, due to positivity seen in global markets.The Purchasing Managers' Indices (PMI) of Euro Zone rose to a 16-month high of 48.8 in June 2013 from 47.7 in May 2013. This increased hopes that euro zone GDP may have stopped contracting in the second quarter after a record six quarters of decline. The ECB kept its record low rates of 0.50% unchanged and may consider cutting rates in its July meeting. Due to this the FTSE rose by 3.9% to 6,545 during the month.

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• On the commodities front, Brent crude oil prices decreased in middle of June and increased to close at $108 a barrel for the month ended 12th July 2013. Globally growth picked up in US and European markets, higher demand let to increase in crude oil prices.

The gold prices fell by 7.2% and closed at $1278.9 for the month ended 12 July 2013. There was lag in physical demand of gold as consumers across the world were reluctant to buy gold even after the price decline.

Domestic Indices:

The Indian Benchmark indices for the month ended 12th July 2013 ended on the positive note with Sensex and Nifty up by 4.8% and 4.3% respectively.

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The Wholesale Price Index (WPI) came at 4.7% in May 2013 from 4.9% in April 2013 and CPI was at higher levels of 9.31% in May 2013 against 9.39% in April 2013. However, the Index of Industrial Production (IIP) for the month April 2013 came at dismal 2% compared with 3.4% in March 2013.

The Indian rupee reached its all time low of 60.7 during the mid of June due to heavy selling by FII in the equity and bond markets. However rupee appreciated by the end of the month to close at 59.6 against the dollar on 12th July 2013.

Bond Market

The benchmark bond yield based on the 10-year paper closed higher by 23bps during the month as FII sold domestic bonds sending the prices lower after the Ben Bernanke statement of removal of stimulus. The RBI kept the rates unchanged in its last policy meet and would review the same at the end of July 2013.

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Top 5/Bottom 5

Equity Schemes

Top Performers Under Performers

Absolute Absolute Scheme Name Ret. % (1M) Scheme Name Ret. % (1M)

Birla SL New Millennium Fund 11.19 HSBC Progressive Themes Fund -6.86

Franklin Infotech Fund 10.99 HSBC Brazil Fund -6.76

FT India Feeder U.S. Opp. Fund 9.80 Sundaram-Select Them.-PSU Opp -5.09

SBI Infotech Fund-Reg 9.66 HDFC Infrastructure Fund -4.92

DSPBR Technology.com Fund 9.59 Baroda Pioneer PSU Equity Fund -4.50

Debt Schemes

Top Performers Under Performers

Annualised AnnualisedScheme Name Ret. % (1M) Scheme Name Ret. % (1M)

Sundaram Gilt Fund 21.63 JPMorgan India Active Bond Fund -24.30

FT India Life Stage FOFs-50s +FR 10.63 Sundaram Flexible-FIP -21.71

SBI Magnum Income FR-LTP 10.18 ICICI Pru Income Opp. Fund -19.27

Escorts Liquid Plan 9.54 ICICI Pru Income-Reg -19.12

Taurus ST Income 9.51 MOSt 10 Year Gilt Fund -17.23

* Returns as on 12th July 2013

Category returns: For the month ended 12th July 2013, a majority of the categories gave positive returns. Pharma and Speciality rose the most by 5.28% and 3.14% respectively. Some of the category which gave negative return included FOF Gold, Banking and Gilt Funds which fell by 3.20%, 0.90% and 0.34% respectively.

* Returns as on 12th July 2013

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In the previous issue we had covered the topic “Taxation on Debt Funds”. Now in this issue we will focus on the important factors which investor should consider while choosing debt funds.

1. It is always advisable to look at post tax returns for debt products comparison.

2. Should you opt for dividend or growth option.

The first and important factor while investing in debt funds is one should always look at “post tax returns” while investing in debt products, else you would be comparing apples with oranges.

As for debt products post tax returns give a more realistic picture rather than pre tax returns. The table below shows the pre and post tax comparison for Tax Free Bonds vs Fixed Deposits for an individual and how the tax slabs play a role in the decision:

Factors one should look while investing in debt funds

The first important point is that one should consider the Marginal tax slab. What we mean by marginal tax slab is the last bracket in which you pay the tax. Thus for example if your annual income is 13 lakhs your marginal tax rate would be 30% and if your annual income is 8 lakhs your marginal tax rate is 20%.

Thus a person falling in 0-10% tax bracket should invest in fixed deposits where he will get higher returns as compared to tax free bonds as the effective post-tax returns are higher. A person in the 20% tax bracket is indifferent as he would get the same returns in either of the investments he chooses. Whereas a person in the 30% tax bracket should only opt for tax free bonds as compared to fixed deposits as he would get higher returns by investing in tax free bonds.

Thus, any investor who falls in the tax slab of more than 30% needs to be extremely conscious of the post tax return as it significant factor in the decision.

Now say if an investor wants to invest in debt mutual funds then one more important factor he needs to check is that which option he wants to opt for “growth” or “dividend”.

Normally, if you need regular income, you would opt for Dividend Payout as an option and Growth if you do not need regular income

Dividends from a mutual fund are not taxed. However, the fund pays a dividend distribution tax (DDT). For more details on DDT check out our March 2013 newsletter.

Investment Avenues Tax Free Bonds Fixed Deposits

Marginal Tax Slab NA 10.00% 20.00% 30.00%

Pre Tax returns 7.20% 9.00% 9.00% 9.00%

Interest Rate Post tax Pre tax Pre tax Pre tax

Effective Post tax rate 7.20% 8.10% 7.20% 6.30%

Factors one should look while investing in debt funds

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Tax Bracket 10.00% 20.00% 30.00%

Effective DDT 22.07% 22.07% 22.07%

Gain/(Loss) (12.07%) (2.07%) 7.93%

Thus a person who falls in the tax bracket of 10% and 20% stands to lose if he opts for dividend payout option whereas a person in the tax bracket of 30% is still benefited by opting for the same.

If you are looking at a long-term investment option and if you are not interested in returns at regular intervals, then you can opt for growth option. In the growth option, the capital gains are taxable in the hands of the investor. For more details on capital gains check out our June 2013 newsletter

The table below shows the gain/loss the person incurs if he has opted for growth option assuming he does not require regular income.

A person who falls in the tax bracket of 10% would be indifferent and hence all individuals should ideally opt for growth option if they do not need regular income. Thus an investor wanting to invest in debt funds should first look at post tax returns and then carefully choose his investment option.

Investment Matrix based on Taxation slabs

Tax Bracket 10.00% 20.00% 30.00%

Tax on capital gains* 10.00% 10.00% 10.00%

Gain/(Loss) 0% 10.00% 20.00%

*Taxation is 10% of gain without indexation or 20% of gain with indexation whichever is less. For calculation we have assumed a worst case scenario of taxation of 10% even though the actual could be lesser.

Income Requirement Income Tax Slabs

10% 20% 30% 33.99%

Require Short Term Taxable instruments Tax Free Bonds/Debt Regular Income Long Term

Do not Short Term Debt Funds (Growth) Debt Funds Require Regular Income Long Term Tax Free Bonds/Debt Funds (Growth)

(NCDs/Bonds/Fixed Deposits) Funds (Dividend Payout)

(Dividend Reinvest)

The table below shows the gain/loss the person incurs if he has opted for dividend payout option adhering to his requirement of getting regular income.

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Different types of risk component in Debt Mutual Funds

Debt Mutual Funds - Risk-o-meter

Category Interest Rate Risk Credit Risk Equity Market Risk

Liquid /Ultra Short Negligible Negligible No

Term Funds

Gilt Funds Medium No No

Short Term Funds Low Low No

Floating Rate Funds Low Low No

Income Funds Medium Medium No

Dynamic Funds Medium Medium No

Monthly Income Medium Medium Yes

Plans

Interest Rate Risk

Interest rate risk affects the value of bonds more directly than stocks, and it is a major risk to all bondholders. As interest rates rise, bond prices fall and vice versa. The rationale is that as interest rates increase, the opportunity cost of holding a bond decreases since investors are able to realize greater yields by switching to other investments that reflect the higher interest rate. For example, a 5% bond is worth more if interest rates decrease since the bondholder receives a fixed rate of return relative to the market, which is offering a lower rate of return as a result of the decrease in rates.

Credit Risk

The higher the perceived credit risk, the higher the rate of interest that investors will demand for lending their capital. Credit risks are calculated based on the borrowers' overall ability to repay. This calculation includes the borrowers' collateral assets, revenue-generating ability and taxing authority (such as for government and municipal bonds). Credit risks are a vital component of fixed-income investing.

Equity Market Risk

Equity risk is the risk that one's investments will depreciate because of stock market dynamics causing one to lose money.

The measure of risk used in the equity markets is typically the standard deviation of a security's price over a number of periods. The standard deviation will explain the normal fluctuations one can expect in that particular security above and below the average.

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Top Performing Debt Funds

Scheme Name Inception Corpus NAV # 1W 1M 3M 6M 1Y 3Y

Date (` Cr.)* ( .) (%) (%) (%) (%) (%) (%)

Ultra Short Term - Less than 90 Days

Templeton India 18-Dec-07 4400.06 15.71 7.7 9.4 9.4 9.6 9.8

Ultra Short

Bond Fund

ICICI Pru Flexible 27-Sep-02 9402.39 224.71 6.9 8.6 8.7 9.1 9.2

Short Term - Upto 365 Days

IDFC SSIF-Invest 14-Jul-00 3236.82 29.32 -5.9 9.7 9.7 12.6

UTI ST Income 19-Sep-07 3770.24 14.35 0.8 8.1 9.2 11.1

Birla SL Medium 25-Mar-09 1112.27 14.35 3.8 14 12.8 12

Income - More than 365 days

IDFC Dynamic 1-Dec-08 7774.44 14.52 -5.6 9.9 9.9 12.9 10.4

SBI Dynamic Bond 13-Jan-04 7658.65 15.32 -7.9 13.3 10.3 13 11.1

Birla SL Dynamic 27-Sep-04 18261.02 20.56 0.9 12.3 10.6 11.3 9.3

MIP - More than 18 months

Birla SL MIP 22-May-04 285.03 21.68 0.9 13.1 7.4 10.7 8.8

IDFC MIP 25-Feb-10 293.01 13.33 1.1 12.1 4.4 13.6 8.7

`

Income Plan

Fund

Term Fund

Bond Fund

Bond Fund

II-Savings 5

# NAV & Returns (upto 12th July 2013) (3Year data is CAGR)* Corpus (as on June 2013)

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Corporate Office Address : Website :

A1, Kailash Industrial Complex, Park Site, Off LBS Marg, Vikhroli West, Mumbai - 400 079. Tel: +91-22-6754 7000 • E mail : mutualfunds@ventura1.com • www.ventura1.com

This document is solely for private circulation only. Mutual funds like securities investments are subject to market risks and other risks. Investors are advised to read the offer document before investing.

Performing Mutual Funds

Scheme Name Corpus NAV (`) Annualised %

( Crs)# Gr Div 1 mth 3 mths 6 mths 1 yr

Income Funds

Birla SL Dynamic Bond Fund-Ret 18,261.02 20.55 11.60

IDFC Dynamic Bond Fund-Reg 7,774.44 14.52 10.58

Ultra Short Term Plan

ICICI Pru Flexible Income Plan-Reg 9,402.39 224.76 101.56

Templeton India Ultra Short Bond Fund 4,400.06 15.72 10.02

Birla SL FRF-Long Term Plan 1,727.15 143.21 100.40

`

0.98 11.77 10.48 11.12

-5.17 9.41 9.77 12.79

8.71 8.70 9.10 9.19

9.47 9.37 9.64 9.77

8.48 9.14 9.26 9.42

*Returns for less than 1 year is absolute (in case of MIP, it is annualized) and more than 1 year are compounded annualized as on 12th July 2013#Corpus as on June 2013 as AMFI has mandated for quarterly AUM declaration.

Scheme Name* Corpus NAV (`) 6 mths 1 yr 3 yrs 5 yrs

(` Crs)# Gr Div (%) (%) (%) (%)

Hybrid - Monthly Income Plans(MIPs)

Birla SL MIP II-Savings 5 285.03 21.68 11.84

IDFC MIP 293.01 13.36 11.73

Reliance MIP 3,306.31 26.01 11.06

Balanced Fund

HDFC Balanced Fund 1,124.46 61.88 18.05

Equity - Large Cap

ICICI Pru Focused BlueChip Eq Fund 4,376.51 18.54 16.71

Birla SL Frontline Equity Fund 3,250.26 100.01 21.22

Franklin India Bluechip Fund 4,939.24 232.57 34.33

HDFC Top 200 Fund 10,874.80 214.42 38.24

Equity - Multi cap

Reliance Equity Opportunities Fund 4,914.62 40.39 22.01

Canara Rob Eq Diver Fund 643.59 62.00 27.02

UTI Opportunities Fund 3,484.65 32.06 14.19

Equity - Midcap

Franklin India Prima Fund 785.00 322.41 32.78

HDFC Mid-Cap Opportunities Fund 2,700.80 17.62 14.80

ICICI Pru Discovery Fund 2,548.05 52.59 18.16

IDFC Premier Equity Fund 3,294.49 37.61 22.20

SBI Emerging Businesses Fund 1,292.84 54.08 15.00

Equity - Thematic

Reliance Pharma Fund 686.53 73.69 46.15

SBI FMCG Fund 207.42 56.15 47.73

Tax Saving Scheme(ELSS)

Franklin India Taxshield 918.11 237.84 29.18

HDFC Long Term Adv Fund 797.60 146.49 29.91

ICICI Pru Tax Plan 1,364.03 148.51 16.96

Sensex 19958.47

Nifty 6009.00

7.43 10.80 8.84 10.54

4.78 14.04 8.74

3.80 9.81 7.62 12.76

5.25 6.28 14.59

15.37 7.45 15.23

19.34 5.94 13.56

10.75 4.97 12.80

7.25 2.83 13.09

6.73 5.78 16.35

10.16 5.11 14.90

0.41 12.93 8.96 15.88

20.26 5.58 13.75

7.39 6.47 16.13

5.24 3.95 17.12

12.36 7.23 15.71

11.46 12.75 15.76

6.86 24.64 11.35 26.67

15.51 35.25 27.90 31.85

12.56 6.93 13.27

11.20 4.47 11.37

9.03 3.15 12.07

1.50 15.82 3.62 8.17

0.97 14.78 3.73 8.21

-4.35

-0.80

-0.69

-3.03

-6.65

-9.67

-2.91

-2.20

-6.41

-10.04

-6.87

-11.71

-2.52

-1.88

-7.90