HDFC Equity Fund ("Fund"), the largest Equity Fund in India completed 20 years recently (inception date Jan 1, 1995). Our sincere thanks to all investors, distributors, well wishers etc. in making this possible. A special thanks to nearly 5,000 investors who have stayed with the Fund right through this 20 year journey. In this journey of 20 years, Rs 10,000 has become ~ Rs. 4.7 lacs as at a CAGR of 21.0% (refer slide 4 of the enclosed presentation).

It is not without reason that Albert Einstein, noted scientist, had said:
"Compound interest is the eighth wonder of the world. He, who understands it, earns it ... he who doesn't ... pays it."

A SIP of just Rs 2,000 per month in HDFC Equity Fund since inception (total investment of Rs. 4.8 lacs) has grown to more than Rs. 1 crore by March 2015 (refer slide 10). The best way to invest in equities is thus, to start early, to invest regularly, to be patient and to stay invested. The longer one stays invested; more are the benefits of compounding.

The track record of this Fund has been possible because of a very disciplined and long term oriented approach to investing that HDFC Mutual stands for, an extremely dedicated, experienced and stable Investments team and the unstinting support of the sponsors and management that has encouraged the Investments team to act with a long term view even under challenging conditions. Slides 3 and 4, detail the several challenging situations that the Fund has withstood in this 20 year journey.

HDFC Equity Fund maintains a predominantly large cap portfolio with controlled exposure to mid caps. The portfolio is always diversified across key sectors and variables of the economy and preference is given for strong & growing companies. The Fund follows a long term approach to investing as can be seen from low portfolio turnover (refer slide 5). Steadfast adherence to these principles has worked well for HDFC Equity Fund over medium to long periods.

In our experience, the key to wealth creation over long periods is in not aiming for highest returns every year, but in avoiding big mistakes each year. It requires several years for an investment of Rs. 20 to grow to Rs. 100 (400% gain) whereas just a loss of 80% can bring back Rs. 100 to Rs. 20/-. Thus, one large mistake can have a big impact on wealth creation in the long term. HDFC Equity Fund has successfully navigated several bubbles / meltdowns i.e. IT, media, real estate, power sector, textile, metals etc in this journey of 20 years. While aiming for good returns, HDFC Equity Fund does not lose sight of managing risks (refer slide 6). A predominantly large cap portfolio, focus on strong companies, effective diversification & focus on value have enabled HDFC Equity Fund to avoid big mistakes & thus create wealth over time.

The attached presentation gives more details of the journey of this Fund so far and highlights the consistency in performance & dividends across good and difficult years.

 The outlook for India and its economy is very positive. In fact, India is in a unique position in the world and both the external and internal environment is favourable. India benefits immensely from low commodity prices, especially oil. Going forward we expect lower interest rates, faster GDP growth, low CAD and improving fiscal deficit. A growth oriented and business friendly government bodes well for economic growth and for businesses. In its latest World Economic Outlook report, the International Monetary Fund (IMF) projected that India will grow 7.5 per cent in 2016, overtaking China which, it projected, will slowdown to 6.3 per cent. India is thus likely to not only emerging as the 5th largest economy in the world around 2020, but also as the fastest growing.

The recent budget too was a very pragmatic one with realistic financial assumptions. In our opinion, the budget sets the economy on a higher and sustainable growth path, desists from populism, and aims to improve business conditions, improve government's functioning and improve delivery of services to citizens while maintaining fiscal discipline.

Given the improving economic outlook, we are optimistic about the outlook for Indian equities. It is wrong to judge markets by absolute level of indices. Sensex at 27,000 levels is up only ~38% since Jan 2008, compared to the nominal GDP growth of over 100% over last 7 years. Markets have thus sharply underperformed nominal GDP growth over the last 7 years, in spite of the sharp up move in 2014.

 

Current P/E multiples of equity markets are reasonable and below long term averages. Further, corporate earnings should be better than estimates as corporate margins are at a 17 year low (Source: BAML) and should improve as capacity utilization and business conditions improve. There is thus room for multiples to expand as growth improves and as interest rates move lower besides strong earnings growth.