Objections

1. Objections

2. Disagree with the IDFC Investment View • Contention of the client :Do Not Agree Rates Will Come Down • Response – Step 1 : Agree, provide data points to agree • a) At 5.5% GDP growth rate, we are at an incremental Credit Deposit Ratio of 75%, any further growth will only stress ICDR further, and will always have a liquidity deficit overhang • b) At 5.5% GDP growth, we are at an inflationary scenario, with high current account deficit. Such a dichotomy may not last long, and therefore agree that rates may come under stress • Response – Step 2 : Outline our view as : • a) We focus on demand supply dynamics and thus align to various asset classes Gilts, Corporate Bonds or CDs in our bond portfolios – in the period from Jan to Mar 2013, we see a demand for Govt Bonds to the extent of the entire Net supply of INR 80,000 CRS, which will come in by OMOs, Banks SLR Demand and FII demand. As opposed to that we do not have a visibility on the quantum of supply lined up on the Corporate Bond space, and there is no OMO/SLR demand for Corporate Bonds. Our actively managed funds like the SSIF MT, Dynamic Bond Fund are positioned to participate in that part of the yield curve that deliver the best relative value • b) Since we have agreed that short end rates may remain elevated, the ideal portfolio strategy in addition to the above would be to benefit from the accrual from high ST rates through the Short Term Bond Funds route (SSIF ST), which offers participation in the 2 to 3 year corporate bond space

3. Don’t Assure Returns • There are 2 scenarios that we face as investors in the Bond Markets, explain as under : • 1) Falling Rates Scenario – When interest rates begin to move downwards the returns clocked in till so far by way of accrual investment options like FMPs is no longer possible. An investor is thus faced with reinvestment risk. In such a scenario, and investor who looks for assured returns has to give up a substantial upside that an actively managed bond fund can deliver. For instance the 1 Year FMP has on an average delivered 9.75% over the last 1 year, whereas Bond Funds have delivered over 11% during the same time. Why is it not possible for an actively managed Bond Fund to assure returns ? Take the example of the IDFC DBF, it has toggled across maturities from under 2 to more than 10 years. (Chart: Average Maturity Movement of DBF). The IDFC DBF has moved across asset classes like Gilts, Corporate Bonds and CDs in various measures as evidenced in the Chart. Eg : In July we were having NIL allocations to GSEC, but currently over 85% of the portfolio is in the GSEC space. Such a fund seeks to optimise participation in segments of the yield curve that deliver better than value than others, and it is thus impossible to assure returns in such portfolios. • 2) Rising Rates Scenario : In a rising rates scenario an accrual based product is best suited for clients, some examples are FMPs, or passively managed bond portfolios. Such products mirror the current rates for the underlying securities in the market minus the scheme expense. Such an option is better than traditional fixed income options like FDs as they are more tax efficient.

4. Don’t Assure Returns Strictly for Internal Illustration purpose only

5. Don’t Assure Returns Strictly for Internal Illustration purpose only

6. Am Not Comfortable with NBFCs in the Portfolio • NBFCs Vs Corporates– Any AAA rated corporate will never borrow in the market as a corporate that’s rated AAA does not have debt on its books, eg, TCS. However, an NBFC that’s rated AAA, will necessarily always borrow from the market due to the “cash flow” nature of its business, eg HDFC • NBFCs Vs Banks - Banks are sovereign backed (PSU Banks), however NBFCs are equally and in some cases more efficient than Banks • Some of the other parameters we look at are 1)Funding Profile : Diversity in sources of funding, ie funding through Term Loans, NCDs, Assignments (all long term sources of funding , so desirable as opposed to Cash Credit or CPs), Maturity Profile of liabilities and Assets , i.e. healthy asset liability match, 2)Parentage 3)Asset Quality : Asset diversification, healthy mix of secured and unsecured assets, strength of recovery mechanism, Gross NPA, Net NPA 4)Profitability and Net Worth : NIM, ROE, Tier 1 Capital, Capital Adequacy Ratio • If it helps, connect with corporate office to have the client patched in with the NBFC that he is uncomfortable with

7. Am Not Comfortable with NBFCs in the Portfolio Some pointers on 2 of our credits that we are routinely questioned on :

8. Bad Experience with another BU in the Group • Pointers in this regard : • 1) Do not offer explanations, apologies without knowing the full details of the issue • 2) Do not put the group in bad light, however do maintain that we operate as independent entities • 3) Definitely flag off the issue with the relevant BU, and ensure that there is a dialogue between the relevant BU and the client • 4) Explore areas where the client can make use of the Group, for eg, for a Research paper on the client that has been taken negatively, try to explore opportunities to be of value to the client through the DCM Team (fund raising) • 5) Keep your interactions going even if there is a freeze on business from the client, step up the pace in showcasing the GC activities that we do, Teach India to invest, Healthchangers etc. so that the client continues to respect IDFC MF

9. Quarterly Returns Cant Be Negative Data oriented Approach to this Objection : • Show the 3 month rolling return of ST (there has been no instance where the fund has shown negative return on a 3 month rolling return basis over the last 4 years since 2009 • Show the outperformance of our bond funds over liquid fund across cycles • Show a simulation of performance over various rate movements so as to paint a scenario under which returns would be low/negative • Request for a meeting with the Investment Committee of the corporate and make a presentation to the committee to validate the superiority of the Bond Funds proposition in a falling interest rate regime, where liquid funds tend to keep rebasing to lower levels and bond funds outperform. • The SSIF ST is an appropriate fund to begin with particularly given its past track record of protecting against volatility, while at the same time delivering outperformance over liquid funds during periods where rates are stagnant or falling

10. Quarterly Returns Cant Be Negative

11. Quarterly Returns Cant Be Negative Simulation for Impact from rate movement

12. Quarterly Returns Cant Be Negative

13. Quarterly Returns Cant Be Negative

14. Quarterly Returns Cant Be Negative

15. You Don’t Give Exit Calls Approach as Under : • Our Funds have been dynamically managed to ensure that we have always optimised performance for you across the yield curve. Show the Asset Allocation mix of Dynamic and MT over the last few quarters • Also take the client through the MMF IP, and how we have managed maturity of the fund across various levels of the CD rates over the last year, thus optimising returns in a bullish scenario and protecting returns in a bearish scenario • Finally, also quote examples where you have advised the client to exit the product, particularly MMF IP in August last year when we began running down maturities in the fund

16. You Don’t Give Exit Calls Strictly for Internal Illustration purpose only

17. You Don’t Give Exit Calls

18. No Mandate to Invest Approach as Under – Product 1 – IDFC Cash Fund • Take the client through the features of a liquid fund addressing the following aspects : • Safety of the underlying – Show the Credit Quality Pie Chart (100% Highest Rated, available in our Cash Fund One Pagers • Liquidity – Operational convenience of transacting in the liquid fund • Share the NAV movement of the Liquid Fund • Taxation Benefit – An illustration on taxation as opposed to an FD

19. No Mandate to Invest What do other corporates do ?Details as under (Source :AMFI)

20. No Mandate to Invest How Does The Liquid Fund Work ?

21. No Mandate to Invest Approach as Under – Product 2 – IDFC Money Manager Fund – Investment Plan • Uses the same approach in terms of comparisons with Bank FD, with the added benefit of diversifying across a number of Bank CDs as opposed to exposure with only a one or two banks

22. Only 2 Equity funds performing • Comparative performance of other MF Houses are lower • Attached slide for AUM wise break up in quartile • The fund performance is a function of the theme of the fund (do a thematic mapping). Of 312 funds – 14 Global Funds 49- sector /theme funds 13 –arbitrage 27 –Tax funds … so there are only 209 funds in our consideration set (187with more than 3 yrs and 146 with more than 5 years) and we have 6 funds in consideration set … 3 in top quartile

23. Strictly for Internal Illustration purpose only

24. FDs are safer than debt Funds • Perceived safety – 1 Lakh limit in a bank deposit, corporate deposits unsecured. Bond funds are an aggregation of FDs : Bank Deposits and Company Deposits Government deposits and have a Diversified deposit portfolio, hence reduced credit risk. • Liquidity - Cost to liquidity in an FD instrument, don’t get FD for more than 5 years • Returns – Show the FD Vs ST comparison over the last few years (next slide) – 0.8% additional returns on an average over the last 10 years • Tax Benefits for holdings over a year

25. FDs are safer than debt Funds

26. Don’t sell hybrid fund • The cost of rebalancing is prohibitive - STT/Exit load for equity funds (0.25%) and exit loads for Bonds Funds • Best of both worlds – The IDFC MIP offers exposure to 2 of our best funds – Premier (which is otherwise closed for lumpsum investments), and the DBF. • The taxation effect of manual rebalancing will also ensure lower than post-tax returns – Short Term and Long Term Capital Gains • Net brokerage and trail received by you will be higher in hybrid fund considering individual allocation to debt and equity seperately • Actually structure your investment patterns so that you don’t go wrong (asset allocation chart) • Auto Rebalancing

27. Cash fund is underperforming /Composite returns is lower • Cash fund performance comes from 1. Credits and 2. Expenses • On a relative scale, we charge very low expenses to our Cash Fund (below market) • Our Approach to Credits is conservative and prudent, owing to the seriousness of the fiduciary responsibility to investors • A snapshot of the difference that a credit exposure adds to returns is provided in the next slide • What is the chance of a credit defaulting if it is not highest long term rated. (Chart enclosed) • Highest short term rating does not imply highest long term rating aka a credit with a long term rating upto A+ may be given the highest short term rating. And a credit rated A or A+ has a close to 1% chance of default over a 1 year period

28. Ratings and Relevance • Historical data suggests that a AAA rated entity, over a 3 year period, has never defaulted on its debt obligations. This data incorporates all Crisil rated entities since 1988. • Notice the increase in default rates as the credit moves down the rating ladder, A Vs AA and BBB Vs A, thereby suggesting higher probability of default for lower rated entities. • A credit cannot be given highest short term rating if its long term rating is less than AA- or A+,

29. I want a lower expense fund • Implies lower brokerage • Only impacts passive funds (liquid funds) • The management in actively managed funds delivers performance that far outstrips the bps loss from differential expense • There are more things that differentiate funds, eg, portfolio quality, portfolio positioning etc. than only expenses • Highlight differential in expenses as a proportion of returns • Choice based on only one variable (expenses) does directly correlate to the outcome (returns)

30. Expenses are not consistent over long periods of time *- can you guess IDFC DBF line

31. Credit risk is not an issue as promoter will bail out • Promoter will bail out the capital not the returns … aka 2008 • Value is lost prior to bail out and is reflected in drop of NAV • There is a cost to all bail outs – delayed payments, etc. • Credit risk is not about default only it can also lead to lower returns through spread expansion • With IDFC there is no question of this as you may not reach a situation where our credits have to be bailed out • We exercise our fiduciary responsibility with the utmost sincerity to ensure your investments are protected

32. X, Y, Z performance and brokerages is better than you • On the performance side, we believe in consistent performance across all market cycles, and not the best of performance • High brokerage may mean a desperate sale, not valuing the investment value added by the AMC, and we would not want to do either • Partnership between an AMC and a distributor is a mix of pricing, product, value add that the manufacturer adds to the distributor, and if you see that value from us, please continue to recommend us • Your need for brokerage is well justified and we endeavour to grow that variable by helping you grow your volumes rather than your margins. This is also a more sustainable, long term benefit for you as a distributor • Even a highly remunerating product , the volume contribution is minimal • Allow us to demonstrate our value add for some time and then take a call on whether you want to continue with us

33. I have never made money in MF • Use P/E chart , STP tool ,about timing your investments • Staying invested through a cycle makes money …. Panic selling ensures that you take the losses • Even though markets don’t perform –sterling has performed (sterling race) • I think you will find the track record quite compelling. (Showcase Premier and Sterling performance on the equity side and the entire debt pack)

34. I have reached limit of exposure to your fund • Fund House Wise Exposure Limits – Approach with Quarterly/Monthly benchmark depending on where the fund house AUM looks good • Influence the client to not consider FMP exposures as part of the AUM exposure (akin to an FD exposure) • Influence the policy by reaching out to the board, investment committee • Showcase the AUM growth of IDFC over the last few quarters and project potential for further growth and therefore investments from the client • Scheme Wise Exposure Limits -

35. Low duration is safer – they have high YTM in terms. • High YTM comes from low credit quality. Credit quality addressed in the Cash Fund objection, so do not accede to ignoring credit quality • Short term rates and long term ratings for the same co. can be different • In a falling interest rates environment, the higher the duration the better • Lack of correlation between YTM and returns ( MT PPT)

36. Low duration is safer – they have high YTM in terms A belief  lot of investors have  is YTM netted off for expenses is the return they earn. This is true only for FMPs To illustrate this in case of dynamic bond fund in Jan 2011 YTM is 9.2-1% expenses = 8.2%. Had the client redeemed in Jan 2012 after a year, the return is 11.62 % and not 8.2% - this is because of active mgmt.  The YTMs have varied across this periods as given This is because capital gains compensate for lower accrual. The highlighted in yellow are patches were one year is not completed but absolute returns are annualized.

37. FT has a long term track record – I have faith in them • we have also done innovation in our product basket. We were 1st one to launch product in the fixed income product category like Short term fund ,Medium term funds , dynamic bond fund , m transact , game changer tools . While not on similar learning management we have done innovation like Macropoly, Equity bazaar etc. • The objective is not to de-sell Templeton but to also put to have a win-win strategy as how both FT & IDFC have made unique value addition in the MF Industry in India. • However at the same time as an organization we need to ensure that we inculcate the best practices of MF Industry in India and we can do similar stuff through FT. One has to partially agree to this objection. • Please look at promoter will bail out slide

38. I am tax neutral investor • One key requirement of the corporate is day to day cash management of the short term surplus.. In bank FD one has to park money for at least 15 days / 7 days. Even if the corp is tax neutral a cash fund gives more benefit than bank FD. In case of Bank CD/ NCD the corporate runs a risk of getting the right pricing or illiquidity whereas in cash fund he can always withdraw at NAV on T+1 basis and there is a limited to nil liquidity risk. • From a MF manager one has to look at two products a) A 100% fixed income product b) a hybrid product where we have exposure of 10% in Equity & 90% in fixed income paper like MIP / AAFOF. In fixed income investment we are looking at three scenarios of interest rates when interest rates can go up or interest rates can go down or interest rates are range bound.In all such cases our funds have generated better returns than Bank FD. • Some corporate can also invest in MIP where we are in sweet spot where interest rates are likely to go down and equity markets being in green / yellow zone are likely to generate returns better than fixed income investment for next two years. • For SME the Mutual funds have better proposition as there is no TDS and it does not require a fully fledged treasury team to track the interest rates / liquidity / credit risk.

39. No correlation between good performance & low brokerage • This analogy now can be extended to different classes of funds in mutual fund space. • During a bull run of any asset class, excesses get created. Given examples of NFO boom, in infra funds, tech funds etc. Ask the broker did any of these funds or assets create value for the investor. The excel attached shows how fund house start increasing expenses when there is a clear visibility that an asset will do well. • Take some ownership of the overall malice facing industry. Carry a sheet which shows expenses of funds and the returns over a 1 year, 2 year, 3 year period etc. • For debt funds give the rationale that, coupon incomes will drop over the next year once rate cycle is done with we have seen it in the past also. As and when YTM comes down and the capital gain opportunity ceases, higher expenses will be a key determinant of the return. Also highlight investors always come in post returns are generated or large part of opportunity is lost. So all the more reason to ensure a balance in expenses and hence in brokerages.

40. No correlation between good performance & low brokerage - Contd • Show the bond fund performance in 2002-2004 where a secular rate cycle existed and then the reversal from 2004-06. The returns in debt funds dropped from double digits to low single digits. To avoid stark returns differentials it is important to ensure we are not into destructive pricing. • Another example is MIP boom which happened in 2008 post subprime crisis. The MIP funds gave high returns in 2009-10 periods but fell prey to equity market performance of 2010-11. Here again as asset class performance ensured higher expenses went unnoticed. But the same boomeranged when asset class performance went down. • If one were to look at the expenses funds charge over a period of time it is evident that when asset classes start showing scale, the expenses are automatically increased. Make hay while sun shines! In case of IDFC funds, when the asset class shows strength we reduce expenses as can be seen from the excel sheet.

41. Your 4% view didn’t go right • Tell him clearly, you would like to address the issue of 4% call and tell him some data you would like to share with him. (enclosed ) • Use the current market scenario to say that most of the debt fund managers are bullish on the market and expecting a rate cut in Jan/March and hence the maturity is increased. So markets usually behave in herd mentality. So in a euphoric market situation such things happen. • We were the first to give the call so we are remembered …. This cycle too we got it right …. Give us credit for getting the trend right . A person who participated from the time we started the recco. Has still made money aka dynamic bond fund returns this cycle

42. Every one got it wrong…some more than us

43. I don’t buy/sell you so I don’t want to meet u • Compare AMCs and show our the strength and differentiate on the basis of activities we do ( Game changers …. Macropoly, etc.) • Showcase our value addition capabilities … to him and not only the product . The product may be a commodity but as a RM I’m unique in the value I bring . • Showcase our client building / acquisition activities .

44. My large allocations go to Largecap/ Diversified funds • If the reason for investing money in equity funds is to make better returns then it’s always better to focus on how to choose a good fund rather than doing further diversification / carrying a myth that its only Large cap/Diversified funds will do well…Give example • Where will you invest the money, focusing on Large/Mid/Diversified/Small cap funds or Having a simple mantra that “I will invest in a Good Fund”, • What will happen if Largecap Scrip Moves down to Small Cap and you had selected a fund which has higher weightage in those Scrips? • Large Cap is not static in nature even if you look into Sensex 54 Scrip Changes had happened since 1992 and if you think BSE200 is a Largecap Index then 424 scrip changes had happened since 1996 • In both the above cases without looking into cap bias if you had invested in a fund which picks up good businesses irrespective of cap bias the opportunity what the fund might have got by picking up larger number of scrips out of 54 scrips becoming Largecap / 424 scrip becoming large cap

45. You don’t have GOLD ETF • Gold as an asset doesn’t generate income, and therefore can be termed a speculative asset • Indians have huge allocations towards Fixed Deposits, Gold and Real Estate. our effort is to bring in choices that will diversify the investor portfolio to growth assets. • Gold ETF participation can be given thru other platforms, which we are doing in our AAF

46. You don’t have a branch • A branch is dependent on width of distribution and volume of business. Since the distribution has shrunk by almost 70-80 percent in last three years, there is not enough width to justify the existence of a sales person. • If an AMC starts a branch in a city with very feeble distribution width, the sales person may have to meet a distributor 3 times a week to justify his/her existence. If 10 AMC open a branch in such a city, you may end up meeting 30 more AMC guys per week without any significant value addition, This will be in fact detrimental to your business as this will result in less time for sales and client acquisition. • We run a hub and spoke model, where every location is connected to a nodal centre and the RM of the nodal centre takes full responsibility of the spoke locations also. The RM makes sure that all your requirements/concerns are taken care of. • You are my branch in this location, and we choose to enable you through technological, value addition, service and logistical infrastructure to ensure that you don’t miss our physical presence within your close proximity

47. You don’t run any loyalty programs/You don’t do trips/vouchers/events (shudincl sales volume ) • if you look at the full service that we provide which includes consistent performance, cutting edge tools, business insights, learning and development opportunities, meaningful solutions for investors, you will find our pricing reasonable. It will be very helpful for us if you can give us feedback on what else can be done to engage / acquire clients for mutual fund industry. • We have many partners with whom we offer the same range and they highly value the relationship as we have made a material difference in creating wealth for their investors over a period of time. • What are the other parameters on which you evaluate an AMC on a long term basis. (You have to move the discussion to a different subject) • Please refer to slide on I don’t want to buy /sell you

48. Don’t sell me products, Give me a few clients/leads • Please excuse us on this, we don’t have such a practice in our AMC. In fact, AMC who share data with you today, can do the same for your clients in future. • (n case, it is important to name clients, RM can choose to name a few big client who are widely known in the market place – these name are typically the top guys who are large investors and invest with many brokers so it is like public data)

49. What if Kenneth, Suyash leave • Strongly address this objection by highlighting the strong investment philosophy that has been running in IDFC / ex Standard Chartered AMC • Internal processes ensure that 86% of our Equity AUM is in the top quartile in terms of performance vis-à-vis the top 10 Eq schemes in the AMC Industry • There is an investment management process to take care of exits of the top Fund maangers it and there is a sufficient talent in the team to ensure sustainability of the fund performance. • Most of fund house are typically associated with star fund managers in India & Globally Naturally in our case the overall market associates our fund performance to star fund manager like Kenneth / Suyash

50. As an organization IDFC is quite rigid • We agree that in pricing we are inflexible as we have to ensure that we • a) charge moderate expense to the scheme to generate suitable returns to clients • b ) We have to be at times being politely firm in stance that in any transaction all three entities have to make money – customer, distributor and AMC. • So we need to also make money in transaction. As far as comparison with other fund house being made while not having control over practices of other AMC”s, we need to manage our practice as per our mandate. • It is also critical at times not to be flexible as if we go out of legal operational norms we will also commit audit breach. While distributors may accuse / allege that we are inflexible or rigid we need to explain and make distributors understand this. Moreover the regulators have been looking at practices of the financial services through the diligent eyes and as an AMC we cannot be on wrong side of law.