DEBT FUND ANALYSIS

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

2. Debt Market Outlook • Liquidity scenario is likely to deteriorate from the current level. The CRR hike (applicable from August 30), which will absorb INR 80 bn from the system, and the INR 75 bn outflow from T-bill auction will lead to added pressure, which may push the overnight rate back to 9%-levels. • Though liquidity will be tight, and the cash flow boost received twill restrict a steep jump in borrowing under repo as it is expected to stay below the previous non-reporting week • G-sec prices, which have seen a bull run this week, are likely to run out of steam next week and may even witness a significant pull back Debt Market Update • Market movements • The benchmark bond price witnessed only a singular upward movement; strengthening the bulls in the market for yields to fall by 23bps • Buying pressures stemmed from banks’ requirement for the 25% SLR mandate, the Reserve Bank of India’s (RBI) buying in the G-sec segment, and positive cues extended by USD 119/bbl resistance for crude prices; total average volumes on the NDS-OM were INR 68.61 bn • Annual inflation for the week ended August 16 shied away from the 13%-mark, backtracking 23bps to reach 12.40% from the previous week’s 12.63% Liquidity/borrowings: • Liquidity made bigger strides into the financial system; reflected in the consistent downward trail of the overnight rate, with a sharp plunge on gross inflows worth INR 210 bn over August 28-29(inclusive of redemptions worth INR 100 bn) • The call rates reported a decline of 290bps , with the CBLO and call rates touching an intra-week low of sub-5% • 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 Sun Life 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 12

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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 14

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