“Stocks hold the key to enriching the

lives of all peoples everywhere”

-Jeremy J. Siegel
 Table of Contents

Financial Truths

Nature of Equities

Attitudinal Disposition of the Average Investor

Systematic Investment Plan

Disclaimer
 Financial Truths

A lot of people must have told you by now that it’s important to get a good
education, so you can find a promising career that pays you a decent wage

But they may not have told you that in the long run, it’s not just how much
money you make that will determine your future prosperity; but it’s how
much of that money you put to work by saving it and investing it
wisely

Source: Learn To Earn, Peter Lynch

 Financial Truths (Contd.)

Learning about investing can be an enriching experience, it can put you on the
road to prosperity for the rest of your life

The best time to get started investing is when you’re young; the more time you
have to let your investments grow, the bigger the fortune you’ll end up with
(also refer slide no. 31)

But this introduction is not just for young people, it’s for novice investors of all
ages who find stocks confusing and who haven’t had a chance to learn the
basics

People are living much longer that they used to, which means they’ll be paying
bills for a lot longer than they used to. In order to cover living expenses they’ll
need extra money and the surest way to get it is by investing wisely and
keeping ahead of inflation

Source: Learn To Earn, Peter Lynch

 What is a stock?

A type of security that signifies ownership in a corporation and represents a

claim on a part of the corporation’s assets and earnings

Ownership is determined by the number of shares a person owns relative to the

total number of corresponding outstanding shares

E.g. if a company has a 1,000 shares outstanding and a person owns 100
shares, that person would own and have claim to 10% of the company’s
assets

Stocks provide you with the right to participate in the company’s

profitability and growth
 Financial Truths (Contd.)

Being a stockholder is the greatest method ever invented to allow masses of

people to participate in the growth and prosperity of the country

When a company sells shares, it uses the money to open new stores, build new
factories, upgrade its merchandise so it can sell more products to more
customers and increase its profits; and as the company gets bigger and more
prosperous, its shares become more valuable, so the investors are rewarded for
putting their money to such good use

A company that prospers gives raises to its workers and moves them up the line
to bigger and more important jobs, pays more taxes to the government on its
increased profits, so the government will have more money to invest in roads,
schools and other projects that benefit society; this whole chain of beneficial
events begins when you invest in a company

Investors are the first link in the capitalist chain

Source: Learn To Earn, Peter Lynch

 The Nature of Equities
(A surprisingly simple asset class)

“In a garden, growth has its season. There are spring and
summer, but there are also fall and winter. And then spring
and summer again. As long as the roots are not severed, all
is well and all will be well”

-Chance the Gardener

 Determinants of stock market
returns over the short term
Over the short term, the movement of the markets are determined by just about anything and everything!!!

Largest News-Related Negative Movements in the DJIA Largest News-Related Positive Movements in the DJIA

Date Change News Headline Date Change News Headline

(%) (%)

Feb 1, 1917 -7.24 Germany announces unrestricted sub Oct 6, 1931 14.87 Hoover urges $500m pool to help banks
warfare
Oct 27, 1997 -7.18 Attack on Hong Kong Dollar Feb 11, 1932 9.47 Liberalization of fed discount policy

Sep 17, 2001 -7.13 WTC and Pentagon Terrorist Attacks Nov 14, 1929 9.36 Fed lowers discount rate/Tax cut proposed

Oct 13, 1989 -6.91 United Airline buyout collapses May 6, 1932 9.08 US steel negotiates 15% wage cut

Jul 30, 1914 -6.90 Outbreak of World War 1 Apr 19, 1933 9.03 US drops gold standard

May 14, 1940 -6.80 Germans invade Holland Sep 5, 1939 7.26 WW 2 begins in Europe

May 21, 1940 -6.78 Allied Reverses in France Jun 20, 1931 6.64 Hoover advocates foreign debt
moratorium
Jul 26, 1934 -6.62 Fighting in Austria, Italy mobilizes Oct 31, 1929 5.82 Fed lowers discount rate

Sep 26, 1955 -6.54 Eisenhower suffers heart attack Apr 20, 1933 5.80 Contd. Rally on dropping of gold standard

Jul 26, 1893 -6.31 Erie Railroad Bankrupt May 2, 1898 5.64 Dewey defeats Spanish

DJIA: Dow Jones Industrial Average

Source: Stocks for the long run, Jeremy Siegel
 Irrationality of the stock market
over the short term
Of the 10 largest daily movements in the DJIA, only 2 can be attributed to news

The record 22.6 percent 1 day fall in the stock market on October 19, 1987, is
not associated with any readily identifiable news event

Confusion among “experts” – November 15, 1991: the DJIA falls over 120 points

Investor’s Business Daily – “Dow plunges 120 in a scary stock sell of:
Biotechs, Programs, Expiration and Congress get the Blame”

Financial Times – “Wall street drops 120 points on Concern at Russian

Moves”

Source: Stocks for the long run, Jeremy Siegel

 “I’d love to be able to predict markets and
anticipate recessions, but since that’s impossible,
I’m satisfied to search out profitable companies
as Buffet is”

- Peter Lynch
 Determinants of stock market
returns over the long term
1. The dividend yield at the time of initial investment

2. The subsequent rate of growth in earnings

3. The change in the price – earnings ratio during the period of investment

The total of these three components explains nearly all of the stock
market returns over extended holding periods

Source: Common Sense on Mutual Funds, John C. Bogle

 Ten – Year Nominal Stock Market Returns
(1927 – 1997)
In no case does the variation reach even a single percentage point!

Periods 1 2 3 1+2+3

Start End Initial 10-Year Closing P/E P/E Calculated Actual Difference
1-Jan. 31-Dec. Dividend AEG* (%) Ratio** Effect*** Return (%) Return (%) (%)
Yield (%) (%)

1927 1936 5.1 -1.9 16.8 4.5 7.7 7.8 -0.1

1930 1939 4.5 -5.7 13.9 0.4 -0.8 -0.1 -0.7

1940 1949 5.0 9.9 7.2 -6.3 8.6 9.2 -0.6

1950 1959 6.8 3.9 17.7 9.4 20.1 19.4 0.7

1960 1969 3.1 5.5 15.9 -1.0 7.6 7.8 -0.2

1970 1979 3.4 9.9 7.3 -7.6 5.7 5.9 -0.2

1980 1989 5.2 4.4 15.5 7.8 17.4 17.5 -0.1

1990 1997 3.1 7.3 24.1 5.7 16.1 16.6 -0.5

Average 4.5 4.2 14.8 1.6 10.3 10.5 -0.2

Source: Common Sense on Mutual Funds, John C. Bogle

Data based on Standard & Poor’s Composite Stock Price Index
* Average earnings growth
** Initial price-earnings ratio: 10.9 times
*** 10-year return generated by change in P/E ratio
Past performance may or may not be sustained in the future
 S&P CNX Nifty – Daily Rolling Returns
(Since Inception – March 31, 2008)
As the time frame increases, the powerful short term influence of speculation recedes, and investment returns conform much more
closely, if not precisely to the investment fundamentals: dividend yields and earnings growth
Investment Horizon

1-Year 3-Years 5-Years 10-Years 15-Years

Total no. of 3491 2992 2489 1236 160

observations

No. of –ve 1359 847 386 6 0

observations

Loss Probability (%) 38.93 28.31 15.51 0.49 -

Max. Rolling Returns 231.97 58.30 44.96 20.36 16.09

(%)

Min. Rolling Returns -51.49 -16.38 -6.55 -1.45 7.31

(%)

Standard Deviation 33.02 17.49 12.21 5.16 1.82

(%)

Risk / Volatility

Past performance may or may not be sustained in the future

 Just how safe is your money invested in
debt over the long term???
Although it might appear to be riskier to accumulate wealth in stocks rather than in bonds over long periods of time, precisely the
opposite is true: The safest long term investment for the preservation and growth of purchasing power clearly has been a
diversified portfolio of equities; when the inflation rate is higher than your return on investment, you’re investing in a lost cause

Maximum and Minimum Real Returns (1802 – 2001)

Holding Period (Years)

1 2 5 10 20 30

Stocks

Max (%) 66.6 41.0 26.7 16.9 12.6 10.6

Min (%) -38.6 -31.6 -11.0 -4.1 1.0 2.6

Bonds

Max (%) 35.1 24.7 17.7 12.4 8.8 7.4

Min (%) -21.9 -15.9 -10.7 -5.4 -3.1 -2.0

T-Bills

Max (%) 23.7 21.6 14.9 11.6 8.3 7.6

Min (%) -15.6 -15.1 -8.2 -5.1 -3.0 -1.8

Source: Stocks for the long run, Jeremy Siegel

US Stocks, Bonds and T-Bills returns
Past performance may or may not be sustained in the future
 Holding Period Comparisons: Percentage of Periods when
stocks outperform Bonds and bills

The probability of under performing bonds and bank accounts in the short term is the primary reason why it is so hard for many
investors to stay in stocks. However the dominance of stocks over the long term is readily apparent!

Holding Period Time Period Stocks Outperform Bonds Stocks Outperform T-Bills

1802 – 2001 61.0 61.5

1 Year
1871 - 2001 60.3 64.1

1802 – 2001 65.3 65.3

2 Years
1871 - 2001 65.6 69.5

1802 – 2001 70.9 74.0

5 Years
1871 - 2001 74.0 77.1

1802 – 2001 80.1 80.1

10 Years
1871 - 2001 82.4 84.7

1802 – 2001 91.7 94.5

20 Years
1871 - 2001 95.4 99.2

1802 – 2001 99.4 97.1

30 Years
1871 - 2001 100.0 100.0

Source: Stocks for the long run, Jeremy Siegel

US Stocks, Bonds and T-Bills Returns
Past performance may or may not be sustained in the future
 So finally… How have equities fared in
comparison to other asset classes?

It can easily be seen that the total return on equities dominates all other assets. Bear markets which so frighten investors, pale in
the context of the upward thrust of total stock returns. Even the cataclysmic stock crash of 1929, which caused a generation of
investors to shun stocks, appears as a mere blip in the stock return index!

Source: Stocks for the long run, Jeremy Siegel

Past performance may or may not be sustained in the future
 To Summarise:

In the short run equity markets are simply volatile

They are driven by innumerable factors which hold no relevance to the actual
underlying fundamentals

Pointless and wasteful exercise to try and understand / justify short term market
movements

Ignore all the noise and focus solely on the long term
Attitudinal disposition of the
average investor
“It is the rare investor who doesn’t secretly harbour the
conviction that he or she has a knack for divining stock prices or
gold prices or interest rates. In spite of the fact that most of us
have been proven wrong again and again, its uncanny how often
people feel most strongly that stocks are going to go up or the
economy is going to improve just when the opposite occurs”
- Peter Lynch
 Attitude towards investing in
equities
Most investors think that buying stocks at low prices and selling them when
prices are high is a favourable strategy

Sounds simple, but trying to time the markets is:

Time consuming

Risky

And almost impossible

 Analysis of investments made in the S&P CNX Nifty
(1990 – 2007)

Had you invested an uniform amount every calendar year since inception when
the closing value of the S&P CNX Nifty was:
The lowest during the relevant calendar year (best case)
The highest during the relevant calendar year (worst case)
This is how your investment would have performed as on March 31, 2008:

Best Case Worst Case

17%* 13%*

Almost impossible scenario of timing your investment perfectly, every year for 17
years in a row, nets you an additional return of merely 4%. Is it worth the risk??

*Compounded Annualised Returns

Past performance may or may not be sustained in the future
 Investing with the “Experts”

Date Business Week Headline DJIA

“Buy” recommendation
August 13, “The Death of Equities” 840 after the near 50% rise
1979 in the market
May 9, 1983 “The Rebirth of Equities” 1200

Source: Common Sense on Mutual Funds, John C. Bogle

 Trying to predict market movements can prove
to be extremely costly!
Forecasters, citing A comparison of the DJIA from 1922-1932 and 1980-1990
the similarities
between the two
periods, were
certain that
disaster loomed
and advised their
clients to sell
everything…

Inspite of the eerie

similarities, the two
events diverged so
dramatically!!

Proved extremely
costly for investors
sitting on the
sidelines.

Source: Stocks for the long run, Jeremy Siegel

 Investor Confidence and Subsequent Dow
Price Returns
“…the psychology of the speculator militates strongly against his success. For by relation of cause and effect, he is most
optimistic when prices are high and most despondent when they are at the bottom” -Benjamin Graham, Security
Analysis

Annualised Returns Subsequent to Sentiment Readings

1970 - 2001
(January 2, 1970 – January 18, 2002)
Sentiment Frequency Three Month (%) Six Month (%) Nine Month (%) Twelve Month
(%)
0.2 – 0.3 1.32% 18.52 15.40 22.79 20.74
Investor confidence falls

Investment Returns Rise

(Lowest) (Highest)
0.3 – 0.4 9.56% 12.23 13.87 16.54 15.81

0.4 – 0.5 17.33% 19.74 15.06 13.25 13.71

0.5 – 0.6 28.57% 15.72 13.63 11.62 10.70

0.6 – 0.7 25.46% 11.78 8.63 8.07 7.54

0.7 – 0.8 12.49% 11.76 7.30 7.45 7.21

0.8 – 0.9 4.54% -0.40 0.31 -2.85 -1.51

0.9 – 1.0 0.72% -1.65 -4.78 -9.98 -10.94

(Highest) (Lowest)
Overall 100.00% 13.78 11.42 10.87 10.19

Source: Stocks for the long run, Jeremy Siegel

 A Whole Lot of Noise
It can be fascinating to observe the market’s reaction to economic data, but most investors will do much better watching from
the sidelines and sticking to a long term investment strategy

Monthly Economic Calendar

Monday Tuesday Wednesday Thursday Friday

1 2 3 4 5
10:00 PMI 8:30 Leading Economic 8:30 Jobless Claims 8:30 Employment Report
Indicator (2 months lag) 4:30 Money Supply

8 9 10 11 12
10:00 Service PMI 8:30 Jobless Claims 8:30 Retail Sales
4:30 Money Supply 8:30 Producer Prices

15 16 17 18 19
8:30 Consumer Prices 8:30 Housing Starts 8:30 Merchandise Trade 10:00 Philadelphia Fed Rep
9:15 Industrial Production 8:30 Jobless Claims 10:00 Consumer Expect
4:30 Money Supply (Univ. of Mich. Prelim)

22 23 24 25 26
8:30 Durable Goods Orders 8:30 Jobless Claims 8:30 GDP
4:30 Money Supply

29 30 31
10:00 Consumer Expect. 10:00 Chicago Purchasing
(Conference Board) Managers

Source: Stocks for the long run, Jeremy Siegel

PMI: Purchasing Managers Index
 Presenting
Systematic Investment Plan
A Prudent Investment Strategy
What is Rupee Cost Averaging (RCA)

RCA refers to an investment technique intended to reduce exposure to risk

associated with making a single large purchase

Invest a fixed amount at regular intervals (e.g. monthly) regardless of the

market levels. In this way more units are purchased when prices are low and
fewer units are purchased when prices are high

Limits / avoids the worst case scenario of an immediate drop in asset value after
a lump sum investment

Investors can expect a reduction in variance in performance by implementing

rupee cost averaging
 Systematic Investment Plan
A Graphical Illustration
Identical amounts invested through a SIP and in one lumpsum. Investor A starts investing Rs. 1,000 every month in an equity
mutual fund scheme starting in January. Investor B invests Rs. 12,000 in one lump sum in the same scheme

Investor A Investor B
Month NAV* Amount Units Amount Units
(Rs.) (Rs.) (Rs.)
January 16.240 1,000 61.5764 12,000 738.9163
February 16.266 1,000 61.4779
March 15.123 1,000 66.1244
April 15.266 1,000 65.5050
May 16.845 1,000 59.3648
June 16.991 1,000 58.8547
July 15.501 1,000 64.5120
August 15.114 1,000 66.1638
September 12.774 1,000 78.2840
October 13.848 1,000 72.2126
November 14.566 1,000 68.6530
December 15.111 1,000 66.1770
Total 12,000 788.9056 12,000 738.9163

*NAV as on the 10th of every month. These are assumed NAVs in a volatile market.
Disclaimer: The illustration above is merely indicative in nature and should not be construed as investment advice. It
does not in any manner imply or suggest performance of any HDFC Mutual Fund Scheme(s). Rupee cost averaging
neither ensures profits nor protects you from making a loss in declining markets.
 Systematic Investment Plan
A Graphical Illustration (Continued)
As seen in the table, by investing through SIP, you end up buying more units when the price is low
and fewer units when the price is high. However over a period of time these market fluctuations
are generally averaged and the average cost of your investment is often reduced.

18 16.991

16
14
12
Rupees

12.774
When the price is the
10 When the price is the
lowest, you buy the
highest, you buy the
8 least number of units highest number of units
6
4 58.8547 78.2840
units units
2
0
Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec
 Systematic Investment Plan
A Graphical Illustration (Continued)
At the end of the 12 months, Investor A has more units than Investor B, even
though they invested the same amount

That’s because the average cost of Investor A’s units is lower than that of
Investor B

Investor B made only one investment and that too when the per unit price was
high

Investor A’s average unit price = 12000 / 788.9056 = Rs. 15.211

Investor B’s average unit price = 12000 / 738.9163 = Rs. 16.240

 Consider another situation
Four investors start investing in the S&P CNX Nifty on the 1st business day of each month at different periods
of time.

Start Date Amount Invested Per month (Rs.)

Investor A October 9, 1990 5,000

Investor B August 1, 1996 7,500

Investor C July 1, 1999 10,000

Investor D June 3, 2002 15,000

 On March 31, 2008 they review their portfolios
and realize this startling fact:

The more you delay starting your investment…

Investor A Investor B Investor C Investor D

SIP Commenced on October 9, 1990 August 1, 1996 July 1, 1999 June 3, 2002

Amount per SIP (Rs.) 5,000 7,500 10,000 15,000

No. of installments 210 140 105 70

Total Amount Invested 1,050,000 1,050,000 1,050,000 1,050,000

(Rs.)
Returns (%) 15 19 24 31

Market Value as on July 4,616,082 3,549,125 3,066,812 2,586,559

31, 2007 (Rs.)

…less is the amount of wealth created, inspite of earning a

substantially higher return and investing more per month!!!

Past performance may or may not be sustained in the future.

Disclaimer: The above investment simulation is for illustrative purposes only and should not be
construed as a promise on minimum returns and safeguard of capital. The AMC / Mutual Fund is
not guaranteeing or promising or forecasting any returns. SIP does not assure a profit or guarantee
protection against a loss in declining market. Entry / Exit load is not taken into consideration in the above investment
simulation.
 Analysis

Investor A’s portfolio is worth 78% more than Investor D’s

This is in spite of Investor D investing three times more per month and
earning a return of more than double than that of Investor A’s
per year on his investment!!!

The benefits of starting early (albeit in smaller amounts) and investing regularly
far outweigh anything else; compound interest is indeed a miracle
 Compound Interest
The Eight Wonder of the World
An analysis of Rs. 10,000/- invested in the S&P CNX NIFTY on July 11, 1990

Date Market Value (Rs.) % of Total Capital Appreciation

Missed

July 11, 1990 10,000

January 2, 1995 40,305 75%
January 1, 1998 36,863 77%
January 1, 2001 42,765 74%
January 1, 2002 35,980 78%
January 1, 2003 37,509 77%
January 1, 2004 65,198 60%
January 2, 2007 136,631 15%
March 31, 2008 161,422

The cost of missing out on just ~22% of the total time (the last 4 years of the 18 year period) under analysis
results in the investor losing out on 77% of the capital appreciation possible by staying invested for the entire
duration. Compound interest is truly a miracle if given the time to work its magic!!

Past performance may or may not be sustained in the future

 To Summarise:

If you start saving and investing early enough, you’ll get to a point where your
money is supporting you

This is what most people hope for, a chance to have financial independence
where they’re free to go places and do what they want, while their money stays
home and works for them

It will never happen unless you get into the habit of saving and investing and
putting aside a certain amount of money every month wisely
A few simple rules to conclude with:

Invest you must – The biggest risk is the long-term risk of not putting your
money to work at a generous return, not the short term risk of price volatility

Time is your friend – Give yourself all the time you can. Start early, even with
a small amount and never stop. Even modest investments in tough times will
help you sustain the pace and will become a habit; compound interest is a
miracle

Stay the course – No matter what happens, stick to your program. It is the
most important single piece of investment wisdom you will receive
“I know the garden very well. I have worked in it all of my
life….Everything in it will grow strong in due course. And
there is plenty of room in it for new trees and new flowers
of all kinds. If you love your garden, you don’t mind
working in it, and waiting. Then in the proper season you
will surely see it flourish”

- Chance the Gardener

DISCLAIMER: This presentation is for information purposes only and is not an offer to sell or a solicitation to buy any mutual
fund units/securities. These views alone are not sufficient and shouldn’t be used for the development or implementation of an
investment strategy. It should not be construed as investment advice to any party. All opinions, figures and estimates included
in this presentation are as of the latest available date and are subject to change without notice. Neither HDFC Asset
Management Company Limited (HDFC AMC), nor any person connected with it, accepts any liability arising from the use or in
respect of anything done in reliance of the contents of this information /data. While utmost care has been exercised while
preparing the presentation, HDFC AMC does not warrant the completeness or accuracy of the information and disclaims all
liabilities, losses and damages arising out of the use of this information. The recipient of this material should rely on their
investigations and take their own professional advice.

Risk Factors: All mutual funds and securities investments are subject to market risks and there can be no assurance that the
Schemes’ objectives will be achieved and the NAV of the Schemes may go up or down depending upon the factors and forces
affecting the securities market. Past performance of the Sponsors and their affiliates / AMC / Mutual Fund and its Scheme(s) do
not indicate the future performance of the Scheme(s) of the Mutual Fund. There is no assurance or guarantee to unit holders as
to the rate of dividend distribution nor that dividends will be paid regularly. Investors in the Schemes are not being offered any
guaranteed / assured returns. The NAV of the units issued under the Schemes may be affected, inter-alia by changes in the
interest rates, trading volumes, settlement periods, transfer procedures and performance of individual securities. The NAV will
inter-alia be exposed to Price / Interest Rate Risk and Credit Risk. Investors should be aware that the fiscal rules/ tax laws may
change and there can be no guarantee that the current tax position may continue indefinitely. In view of individual nature of tax
consequences, each investor is advised to consult his/ her own professional tax advisor. Please read the offer document(s) of
the respective Scheme(s) before investing.

Statutory Details: HDFC Mutual Fund has been set up as a trust sponsored by Housing Development Finance Corporation
Limited and Standard Life Investments Limited (liability restricted to their contribution of Rs. 1 lakh each to the corpus) with
HDFC Trustee Company Limited as the Trustee (Trustee under the Indian Trusts Act, 1882) and with HDFC Asset Management
Company Limited as the Investment Manager.
Thank You