DEBT FUND ANALYSIS

1. DEBT FUND ANALYSIS Aug 01, 2008 – Aug 15, 2008

2. Debt Market Outlook • The RBI’s move to hike Repo rate by 50 Bps came as a negative surprise as the market in general was not expecting more than 25 Bps hike in repo rate • As a result the ten year yield ended the week at 9.25% after rising to 9.40% immediately after post policy. The 5 year OIS rates fell to 9.30% after having risen to 9.80% post policy • Medium & long-term rates are likely to stabilise & take fresh directions from movement in commodity prices, oil & WPI numbers. But, the shorter end will continue to under pressure due to tight liquidity prevailing for sometime to come Debt Market Update • Market movements • Indian federal bonds opened positive but slipped after RBI announced its quarterly review policy in which it declared CRR and Repo rate hike by 25 Bps and 50 Bps respectively. The markets recovered slightly from the week’s low due to lower than expected inflation figures and lower international crude prices • India’s July 19 WPI inflation rate came at 11.98% vs 11.89% a week earlier mainly on account of food articles and manufactured products becoming dearer • The Benchmark 10 year yield opened the week at 9.07% & closed the week at 9.25% Liquidity/borrowings: • Liquidity was tight with overnight rates trading around 8.5% in the first half of the week but eased slightly during the week with over night rate dropping to 6% • RBI announced auction of 91day T-bill for Rs3000 Cr under regular auction and 182 day T-Bill for Rs 1500 Cr for the ensuing week, out of which 1000 cr is under MSS • Debt Portfolio Strategy • Liquid Plus Funds are still a safer bet from a short term (3-6 months) horizon • Fixed Maturity Plans to offer better returns as the short term rates to yield higher 2

3. Recommended Debt MF Categories • Liquid Plus Funds: • These funds have favorable portfolio composition. These funds are expected to invest close to 40% on higher side and 25% on the lower side in Corporate Bonds with maturity above 1 year • These funds are able to take advantage of rise in Overnight rates and also increase the portfolio yield by taking call in high duration bonds. In the current scenario where overnight rates are expected to remain high and yields on corporate bond to ease slightly from current levels. These funds are better positioned to take advantage of both the scenarios • These funds provide an indirect bet on Short to Medium term bonds. In case of 100% investment in these bonds an investor can be subject to mark to market compulsion and any rise in rates is likely to hurt the return on investment. However, with investment in Liquid Plus Funds an investor can take advantage of spread investment strategy of these funds • These funds are treated as an income fund and are exempt from the rise in Dividend Distribution Tax. Old rate of Dividend Distribution Tax is applicable to these funds 3

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7. Recommended Schemes in Liquid Plus Funds • Liquid Plus Funds – Retail & Institutional • DWS Money Plus Fund • ICICI Prudential Flexible Income Plan • Birla Liquid Plus Fund • Reliance Liquid Plus Fund 7

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12. Recommended Debt MF Categories • Fixed Maturity Plans: • Product with various maturities • FMPs are available with numerous maturity options –1 month, 3 months, 6 months, 1 year, 3 years and 5 years. One can invest in the relevant plan depending upon his investment horizon and the requirement of cash flows on maturity • Minimal risk • Unlike debt funds, which are exposed to three kinds of risks viz. interest rate, credit and liquidity risk, FMPs are a better option • FMPs are least exposed to interest rate risk as the fund manager holds the instruments till maturity getting a fixed rate of return. Thus FMP can manage to get a specific interest on these instruments and investors have a fair idea about it. This helps investors tailor their investments as per their future cash requirements • They primarily invest in AAA, P1+ or such kind of good rated credit instruments with maturity profile of the securities in line with the maturity of the plan so there is also low credit risk with minimal liquidity risk involved • Tax Efficient Returns • FMPs yield competitive & tax efficient returns as the tax rates on a FMP are comparatively lesser than the tax rates in other debt funds 16

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14. Contact Details Edelweiss Securities Ltd 11th Floor, 1101 A&B Godrej Coliseum Off Eastern Express Highway, Sion (E) Mumbai – 400022 Ph: +91 22 4088 5757 Edelweiss Securities Ltd 10th Floor, Hindustan Times House, 18-20, Kasturba Gandhi Marg, New Delhi - 110001 Ph: +91 11 4367 1111 Edelweiss Securities Ltd 2nd Floor, Savitri Towers, 3A Upper Wood Street, Kolkata – 700017 Ph: +91 33 4010 4646 Edelweiss Securities Ltd 1st Floor, Plot No. 4009, 100 ft Road, HAL II Stage, Bangalore – 560008 Ph: +91 88 4150 1214 Edelweiss Securities Ltd 10th Floor, Arcadia, Nariman Point, Mumbai – 400021 Ph: +91 22 4097 9400 Information/Sales: +91 22 4097 9400 wealthmanagement@edelcap.com 18

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