DEBT FUND ANALYSIS

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

2. Debt Market Outlook • Liquidity is expected to ease from current levels. A steep rise in inflows on account of redemptions and interest payments will inject money into the system • Participants are likely to have made their CRR provisions this will reduce overall pressure on liquidity • Overnight money market rates are expected to soften from present levels; improvement of 200-300bps will not be surprising Debt Market Update • Market movements • The G-sec market was on a negative note as bears clawed down the bond prices on back of tight liquidity and devolvement of the 7.94% 2021 • The 10-year bond is trading at a four week high of 8.73% and the auctioned bonds are trading over 10bps above their cut-offs, participants found these levels too lucrative to miss • Annual inflation for the week ended September 20, 2008, witnessed a pull back falling below the 12% mark to 11.99%. Major contributor to this fall was a pull back in primary articles and food products Liquidity/borrowings: • Liquidity remained constrained for issuers of non-convertible debentures on October 1; the LAF repo reporting the highest-ever borrowing of INR 917.20 bn • Participants remained cash-starved during this non reporting week, as investor demand for fixed income instruments continued to reel (dwindle) under advance tax outflows of INR 400 bn; the daily average LAF repo at INR 908.40 gained INR 270 bn over the previous week • Debt Portfolio Strategy • Liquid Plus Funds are still a safer bet from a short term (3-6 months) horizon • The current FMP yields are high and may not sustain in the long run, therefore investment in long term FMPs is recommended 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 • Birla Sun Life Liquid Plus Fund • DWS Liquid Plus Fund • ICICI Prudential Flexible Income Plan • 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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15. 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 15

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