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 its 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, its not just how much money you make that will determine your future prosperity; but its 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 youre young; the more time you have to let your investments grow, the bigger the fortune youll end up with (also refer slide no. 31) But this introduction is not just for young people, its for novice investors of all ages who find stocks confusing and who havent had a chance to learn the basics People are living much longer that they used to, which means theyll be paying bills for a lot longer than they used to. In order to cover living expenses theyll 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 corporations 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 companys assets Stocks provide you with the right to participate in the companys 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 Date Feb 1, 1917 Oct 27, 1997 Sep 17, 2001 Oct 13, 1989 Jul 30, 1914 May 14, 1940 May 21, 1940 Jul 26, 1934 Sep 26, 1955 Jul 26, 1893 Change (%) -7.24 -7.18 -7.13 -6.91 -6.90 -6.80 -6.78 -6.62 -6.54 -6.31 News Headline Germany announces unrestricted sub warfare Attack on Hong Kong Dollar WTC and Pentagon Terrorist Attacks United Airline buyout collapses Outbreak of World War 1 Germans invade Holland Allied Reverses in France Fighting in Austria, Italy mobilizes Eisenhower suffers heart attack Erie Railroad Bankrupt Largest News-Related Positive Movements in the DJIA Date Oct 6, 1931 Feb 11, 1932 Nov 14, 1929 May 6, 1932 Apr 19, 1933 Sep 5, 1939 Jun 20, 1931 Oct 31, 1929 Apr 20, 1933 May 2, 1898 Change (%) 14.87 9.47 9.36 9.08 9.03 7.26 6.64 5.82 5.80 5.64 News Headline Hoover urges $500m pool to help banks Liberalization of fed discount policy Fed lowers discount rate/Tax cut proposed US steel negotiates 15% wage cut US drops gold standard WW 2 begins in Europe Hoover advocates foreign debt moratorium Fed lowers discount rate Contd. Rally on dropping of gold standard 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

Investors 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

Id love to be able to predict markets and anticipate recessions, but since thats impossible, Im 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 Start 1-Jan. End 31-Dec. 1 Initial Dividend Yield (%) 5.1 4.5 5.0 6.8 3.1 3.4 5.2 3.1 4.5 2 10-Year AEG* (%) Closing P/E Ratio** 3 P/E Effect*** (%) 4.5 0.4 -6.3 9.4 -1.0 -7.6 7.8 5.7 1.6 1+2+3 Calculated Return (%) Actual Return (%) Difference (%)

1927 1930 1940 1950 1960 1970 1980 1990 Average

1936 1939 1949 1959 1969 1979 1989 1997

-1.9 -5.7 9.9 3.9 5.5 9.9 4.4 7.3 4.2

16.8 13.9 7.2 17.7 15.9 7.3 15.5 24.1 14.8

7.7 -0.8 8.6 20.1 7.6 5.7 17.4 16.1 10.3

7.8 -0.1 9.2 19.4 7.8 5.9 17.5 16.6 10.5

-0.1 -0.7 -0.6 0.7 -0.2 -0.2 -0.1 -0.5 -0.2

Source: Common Sense on Mutual Funds, John C. Bogle Data based on Standard & Poors 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 Total no. observations No. of observations of 3491 3-Years 2992 5-Years 2489 10-Years 1236 15-Years 160

ve

1359

847

386

Loss Probability (%)

38.93

28.31

15.51

0.49

Max. Rolling Returns (%) Min. Rolling Returns (%) Standard (%) Deviation

231.97

58.30

44.96

20.36

16.09

-51.49

-16.38

-6.55

-1.45

7.31

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, youre investing in a lost cause Maximum and Minimum Real Returns (1802 2001) Holding Period (Years) 1 2 5 Stocks Max (%) Min (%) 66.6 -38.6 41.0 -31.6 26.7 -11.0 Bonds Max (%) Min (%) 35.1 -21.9 24.7 -15.9 17.7 -10.7 T-Bills Max (%) Min (%) 23.7 -15.6 21.6 -15.1 14.9 -8.2 11.6 -5.1 8.3 -3.0 7.6 -1.8 12.4 -5.4 8.8 -3.1 7.4 -2.0 16.9 -4.1 12.6 1.0 10.6 2.6 10 20 30

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 1 Year Time Period 1802 2001 1871 - 2001 1802 2001 2 Years 1871 - 2001 1802 2001 5 Years 1871 - 2001 1802 2001 10 Years 1871 - 2001 1802 2001 20 Years 1871 - 2001 1802 2001 30 Years 1871 - 2001 100.0 100.0 82.4 91.7 95.4 99.4 84.7 94.5 99.2 97.1 65.6 70.9 74.0 80.1 69.5 74.0 77.1 80.1 Stocks Outperform Bonds 61.0 60.3 65.3 Stocks Outperform T-Bills 61.5 64.1 65.3

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 doesnt 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 August 13, 1979 May 9, 1983

Business Week Headline The Death of Equities The Rebirth of Equities

DJIA

Buy recommendation
840 1200

after the near 50% rise

in the market

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

Trying to predict market movements can prove to be extremely costly!

Forecasters, citing 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

A comparison of the DJIA from 1922-1932 and 1980-1990

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 1970 - 2001 Sentiment Frequency 1.32% 9.56% 17.33% 28.57% 25.46% 12.49% 4.54% 0.72% 100.00% Annualised Returns Subsequent to Sentiment Readings (January 2, 1970 January 18, 2002) Three Month (%) 18.52 12.23 19.74 15.72 11.78 11.76 -0.40 -1.65 13.78 Six Month (%) 15.40 13.87 15.06 13.63 8.63 7.30 0.31 -4.78 11.42 Nine Month (%) 22.79 16.54 13.25 11.62 8.07 7.45 -2.85 -9.98 10.87 Twelve Month (%)

Investor confidence falls

0.3 0.4 0.4 0.5 0.5 0.6 0.6 0.7 0.7 0.8 0.8 0.9 0.9 1.0 (Highest) Overall

15.81 13.71 10.70 7.54 7.21 -1.51 -10.94 (Lowest) 10.19

Source: Stocks for the long run, Jeremy Siegel

Investment Returns Rise

0.2 0.3 (Lowest)

20.74 (Highest)

A Whole Lot of Noise

It can be fascinating to observe the markets 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 1 10:00 PMI Tuesday 2 8:30 Leading Economic Indicator (2 months lag) 9 Wednesday 3 Thursday 4 8:30 Jobless Claims 4:30 Money Supply 11 8:30 Jobless Claims 4:30 Money Supply 18 8:30 Merchandise Trade 8:30 Jobless Claims 4:30 Money Supply 25 8:30 Jobless Claims 4:30 Money Supply Friday 5 8:30 Employment Report

8 10:00 Service PMI

10

12 8:30 Retail Sales 8:30 Producer Prices 19 10:00 Philadelphia Fed Rep 10:00 Consumer Expect (Univ. of Mich. Prelim) 26 8:30 GDP

15

16 8:30 Consumer Prices

17 8:30 Housing Starts 9:15 Industrial Production

22

23 8:30 Durable Goods Orders

24

29

30 10:00 Consumer Expect. (Conference Board)

31 10:00 Chicago Purchasing 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 Month January February March April May June July August September October November December Total NAV* (Rs.) 16.240 16.266 15.123 15.266 16.845 16.991 15.501 15.114 12.774 13.848 14.566 15.111 Amount (Rs.) 1,000 1,000 1,000 1,000 1,000 1,000 1,000 1,000 1,000 1,000 1,000 1,000 12,000 Units 61.5764 61.4779 66.1244 65.5050 59.3648 58.8547 64.5120 66.1638 78.2840 72.2126 68.6530 66.1770 788.9056 12,000 738.9163 Amount (Rs.) 12,000 Investor B Units 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 14 12 10 8 6 4 2 0

16.991

Rupees

12.774

When the price is the highest, you buy the least number of units

When the price is the lowest, you buy the highest number of units

58.8547 units

78.2840 units

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 Thats because the average cost of Investor As 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 As average unit price = 12000 / 788.9056 = Rs. 15.211 Investor Bs 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 SIP Commenced on Amount per SIP (Rs.) No. of installments Total Amount Invested (Rs.) Returns (%) Market Value as on July 31, 2007 (Rs.) October 9, 1990 5,000 210 1,050,000 15 4,616,082 Investor B August 1, 1996 7,500 140 1,050,000 19 3,549,125 Investor C July 1, 1999 10,000 105 1,050,000 24 3,066,812 Investor D June 3, 2002 15,000 70 1,050,000 31 2,586,559

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 As portfolio is worth 78% more than Investor Ds 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 As 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 July 11, 1990 January 2, 1995 January 1, 1998 January 1, 2001 January 1, 2002 January 1, 2003 January 1, 2004 January 2, 2007 March 31, 2008 Market Value (Rs.) 10,000 40,305 36,863 42,765 35,980 37,509 65,198 136,631 161,422 75% 77% 74% 78% 77% 60% 15% % of Total Capital Appreciation Missed

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, youll get to a point where your money is supporting you This is what most people hope for, a chance to have financial independence where theyre 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 dont 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 shouldnt 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