Mafatlal Centre, 10th Floor, Nariman Point, Mumbai CIN: U65991MH1996PTC Tel.: Fax:

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1 Jauary 8, 2018 Mafatlal Cetre, 10th Floor, Narima Poit, Mumbai CIN: U65991MH1996PTC Tel.: Fax: Dear Uit Holder, Sub: Chage i Fudametal Attributes of DSP BlackRock Ultra Short Term Fud ( Scheme ) Thak you for ivestig i DSP BlackRock Mutual Fud. We appreciate your trust i us. The Scheme is a ope eded icome scheme of DSP BlackRock Mutual Fud ( Fud ). Securities ad Exchage Board of Idia ( SEBI ) vide its Circular SEBI/HO/IMD/DF3/CIR/P/2017/114 dated October 6, 2017 (Circular) issued directios for Categorizatio ad Ratioalizatio of all the Mutual Fud Schemes i order to brig about uiformity i the practice across Mutual Fuds ad to stadardize the scheme categories ad characteristics of each category. I this regard, i order to stadardize our schemes i lie with the categories as prescribed by SEBI i the said circular, certai chages eeds to be carried out i the features of the Scheme. Such chages shall result i chage i the fudametal attribute of the Scheme, which will attract compliace of Regulatio 18 (15A) of the SEBI (Mutual Fud) Regulatios, 1996 (MF Regulatios) read alogwith Circular. DSP BlackRock Trustee Compay Pvt. Ltd., Trustee to the Fud, has approved the followig chages to the existig features/provisios of the Scheme: Sr. No. Particulars Existig Proposed 1. Name of the Scheme DSP BlackRock Ultra Short Term Fud DSP BlackRock Low Duratio Fud 2. Type of Scheme A Ope eded Icome (Debt) Scheme A ope eded low duratio debt scheme ivestig i debt ad moey market securities such that the Macaulay duratio of the portfolio is betwee 6 moths ad 12 moths (please refer page o. uder the sectio Where will the Scheme ivest? for details o Macaulay s Duratio) 3. Asset Allocatio Uder ormal circumstaces, the asset allocatio of each of the Scheme will be as follows: Uder ormal circumstaces, the asset allocatio of the Scheme will be as follows: Istrumets Moey market securities ad/or debt securities with residual maturity of less tha or equal to 1 year Debt securities with residual maturity of greater tha 1 year Idicative allocatios (% of total assets) Miimum Maximum Risk Profile 80% 100% Low to Medium 0% 20% Low to Medium Istrumets Debt* ad Moey market securities Idicative allocatios (% of total assets) Miimum Maximum Risk Profile 0% 100% Low to Medium *Debt securities may iclude securitised debts up to 50% of the et assets. The Scheme will ivest i Debt ad Moey Market istrumets such that the Macaulay duratio of the portfolio is betwee 6 moths ad 12 moths. The weighted average maturity of the Scheme will be betwee 6 moths ad 1 year. The weighted average maturity will be reckoed o: 1) Maturity date for fixed rate securities 2) Iterest reset date or repricig date for floatig rate securities The Scheme shall ot ivest i securitized debt, fixed icome derivative istrumets, foreig securities ad repurchase ad reverse repurchase agreemets of corporate debt securities. The Scheme will ot egage i short sellig of securities ad securities ledig ad borrowig. The cumulative gross exposure through Debt ad Moey Market securities will ot exceed 100% of the et assets the Scheme. Pedig deploymet of fuds of the Scheme, the AMC may ivest fuds of the Scheme i short-term deposits of scheduled commercial baks, subject to the followig coditios: (i) Short Term for such parkig of fuds by mutual fuds shall be treated as a period ot exceedig 91 days. (ii) Such short term deposits shall be held i the ame of the Scheme (iii) The Scheme shall ot park more tha 15% of its et assets i the short term deposit(s) of all the scheduled commercial baks put together. However, it may be raised to 20% with the prior approval of the Trustee. Also, parkig of fuds i short term deposits of associate ad sposor scheduled commercial baks together shall ot exceed 20% of total deploymet by the Mutual Fud i short term deposits. (iv) The Scheme shall ot park more tha of its et assets i short term deposit(s) with ay oe scheduled commercial bak icludig its subsidiaries. (v) The Trustee shall esure that the fuds of the Scheme are ot parked i the short term deposits of a bak which has ivested i the Scheme. (vi) AMC will ot charge ay ivestmet maagemet ad advisory fees for parkig of fuds i short term deposits of scheduled commercial baks. Page 1 of 16 The cumulative gross exposure through debt securities, moey market securities/ istrumets ad derivatives will ot exceed 100% of the et assets of the Scheme. The Scheme shall ot ivest i foreig debt securities. The Scheme will participate i repo of moey market ad corporate debt securities. The Scheme will ot egage i short sellig of securities ad securities ledig ad borrowig. The Scheme may ivest i derivatives upto 100% of et assets. Pedig deploymet of fuds of the Scheme, the AMC may ivest fuds of the Scheme i short-term deposits of scheduled commercial baks, subject to the followig coditios: (i) Short Term for such parkig of fuds by mutual fuds shall be treated as a period ot exceedig 91 days. (ii) Such short term deposits shall be held i the ame of the Scheme (iii) The Scheme shall ot park more tha 15% of its et assets i the short term deposit(s) of all the scheduled commercial baks put together. However, it may be raised to 20% with the prior approval of the Trustee. Also, parkig of fuds i short term deposits of associate ad sposor scheduled commercial baks together shall ot exceed 20% of total deploymet by the Mutual Fud i short term deposits. (iv) The Scheme shall ot park more tha of its et assets i short term deposit(s) with ay oe scheduled commercial bak icludig its subsidiaries. (v) The Trustee shall esure that the fuds of the Scheme are ot parked i the short term deposits of a bak which has ivested i the Scheme. (vi) AMC will ot charge ay ivestmet maagemet ad advisory fees for parkig of fuds i short term deposits of scheduled commercial baks.

2 Further, i the evet of ay deviatios below the miimum limits or beyod the maximum limits as specified i the above table ad subject to the otes metioed hereiabove, the Ivestmet Maager shall rebalace the portfolio withi 30 days from the date of said deviatio. Where the portfolio is ot rebalaced withi 30 Days, justificatio for the same shall be placed before the Ivestmet Committee ad reasos for the same shall be recorded i writig. The Ivestmet committee shall the decide o the course of actio. However, at all times the portfolio will adhere to the overall ivestmet objectives of the Schemes. Such chages i the ivestmet patter will be for a short term ad for defesive cosideratios ad the itetio beig at all times to seek to protect the iterests of the Uit Holders. I the evet of ay deviatios, the Ivestmet Maager shall rebalace the portfolio withi 30 days from the date of said deviatio. Where the portfolio is ot rebalaced withi 30 Days, justificatio for the same shall be placed before the Ivestmet Committee ad reasos for the same shall be recorded i writig. The Ivestmet Committee shall the decide o the course of actio. However, at all times the portfolio will adhere to the overall ivestmet objectives of the Schemes. Such chages i the ivestmet patter will be for a short term ad for defesive cosideratios ad the itetio beig at all times to seek to protect the iterests of the Uit Holders. Cocept of Macaulay Duratio I the bod market, securities are commoly referred to by their maturities. While this is a useful bechmark, it is deficiet, because it measures oly whe the fial cash flow is paid ad igores all of the iterim flows. Duratio was first described by Frederick Macaulay i I the last 50 years, it has become oe of the most commoly used tools for fixed icome portfolio maagers. Macaulay s duratio of a fixed icome security is the weighted average life of the security, where weights are give to preset value of each cashflows. It is a measure of sesitivity to iterest rate chages i.e. it relates the percet chage i the price of a cash flow to the percet chage i the yield to maturity. Fixed icome securities with higher duratio have higher iterest rate sesitivity i.e. the chages i price of higher duratio bods are higher as compared to lower duratio oes. A zero coupo bod is oe which does ot pay ay iterest ad all paymets are received at maturity. For a zero coupo bod, the duratio is same as residual maturity. The formula for Macaulay s Duratio is as follows: Macaulay's Duratio t1 * CF1 + t 2 * CF = (1 + r1 ) (1 + r ^ t1 CF + CF (1 + r (1 + r 1 ^ t1 1) 2 ^ t 2 2) 2 ^ t 2 2) + t3 * CF t * CF (1 + r3 ) (1 + r ^ t 3 + CF CF (1 + r (1 + r 3 ^ t 3 3) ^ t ) ^ t ) I other words, Macaulay s Duratio ca be expressed as: Macaulay' s Duratio i= 1 = t * CF (1 + r ) CF i= 1 ^ t (1 + r ) ^ t Please ote that the deomiator is also the formula for Preset Value of cash flows of a security i.e. Price of the Bod. where t i is time i years at poit i CF i is the Cash Flow at time, t i r i is the iterest rate used for discoutig cash flow at time, t i Aother measure of iterest rate risk for securities ad other iterest bearig istrumets is Modified Duratio. With a slight modificatio, Macaulay s Duratio is coverted ito Modified Duratio; it provides a good estimate of the volatility or sesitivity of the market value of a bod portfolio to chages i iterest rates. The formula for Modified Duratio is: Macaulay' s Duratio Modified Duratio = YTM [1 + ] where, YTM = Yield to maturity = umber of cash flows i a year Chage i Price of Bod = -ModifiedDuratio*1bp Modified Duratio assumes that the price chages are liear with respect to chages i the yield to maturity. However the true relatioship betwee the bod s price ad the yield to maturity is ot liear. Page 2 of 16

3 4. Risk factors Refer existig disclosure i SID uder Sectio IV. A. Risk factors ad B. Risk Maagemet Strategies The followig shall be added uder Risk factors: Risk associated with ivestmets i repo of corporate debt securities I repo trasactios, also kow as a repo or sale repurchase agreemet, securities are sold with the seller agreeig to buy them back at later date. The repurchase price should be greater tha the origial sale price, the differece effectively represetig iterest. A repo is ecoomically similar to a secured loa, with the buyer receivig corporate debt securities as collateral to protect agaist default. The Scheme may ivest i repo of corporate debt securities which are subject to the followig risks: a. Couterparty Risk: This refers to the iability of the seller to meet the obligatio to buy back securities at the cotracted price. The Ivestmet Maager will edeavour to maage couterparty risk by dealig oly with couterparties havig strog credit profiles assessed through ihouse credit aalysis or with etities regulated by SEBI/RBI/IRDA b. Collateral Risk: I the evet of default by the repo couterparty, the scheme have recourse to the corporate debt securities. Collateral risk arises whe the market value of the securities is iadequate to meet the repo obligatios. This risk is mitigated by restrictig participatio i repo trasactios oly i AA ad above rated moey market ad corporate debt securities. I additio, appropriate haircuts are applied o the market value of the uderlyig securities to adjust for the illiquidity ad iterest rate risk o the uderlyig istrumet. Risk associated with derivatives The Scheme may ivest i fixed icome derivatives for hedgig ad portfolio rebalacig or ay other purposes as may be permitted uder regulatory guidelies. The Scheme may use derivative istrumets like Iterest Rate Swaps, Forward Rate Agreemets or other derivative as may be permitted by SEBI / RBI / such other Regulatory Authority from time to time. The use of derivatives may expose the Scheme to a higher degree of risk. I particular, derivative cotracts ca be highly volatile, ad the amout of iitial margi is geerally small relative to the size of the cotract so that trasactios may be leveraged i terms of market exposure. A relatively small market movemet may have a potetially larger impact o derivatives tha o stadard bods or equities. Leveraged derivative positios ca therefore icrease Scheme volatility. Derivatives require the maiteace of adequate cotrols to moitor the trasactios ad the embedded market risks that they add to the portfolio. Besides the price of the uderlyig asset, the volatility, teor ad iterest rates affect the pricig of derivatives. Other risks i usig derivatives iclude but are ot limited to: a. Couterparty Risk - this occurs whe a couterparty fails to abide by its cotractual obligatios ad therefore, the Schemes are compelled to egotiate with aother couter party, at the the prevailig (possibly ufavourable) market price. For exchage traded derivatives, the risk is mitigated as the exchage provides the guarateed settlemet but oe takes the performace risk o the exchage b. Market Liquidity risk this occurs where the derivatives caot be trasacted due to limited tradig volumes ad/or the trasactio is completed with a severe price impact. c. Model Risk - the risk of mis-pricig or improper valuatio of derivatives d. Basis Risk arises due to a differece i the price movemet of the derivative vis-à-vis that of the security beig hedged Idetificatio ad executio of the strategies to be pursued ivolve ucertaity ad decisio of the Ivestmet Maager may ot always be profitable. No assurace ca be give that the Ivestmet Maager will be able to idetify or execute such strategies. Risks associated with ivestmets i Securitised Assets: A securitizatio trasactio ivolves sale of receivables by the origiator (a bak, o-bakig fiace compay, housig fiace compay, or a maufacturig/service compay) to a Special Purpose Vehicle (SPV), typically set up i the form of a trust. Ivestors are issued rated Pass Through Certificates (PTCs), the proceeds of which are paid as cosideratio to the origiator. I this maer, the origiator, by sellig his loa receivables to a SPV, receives cosideratio from ivestors much before the maturity of the uderlyig loas. Ivestors are paid from the collectios of the uderlyig loas from borrowers. Typically, the trasactio is provided with a limited amout of credit ehacemet (as stipulated by the ratig agecy for a target ratig), which provides protectio to ivestors agaist defaults by the uderlyig borrowers. Page 3 of 16

4 Some of the risk factors typically aalyzed for ay securitizatio trasactio are as follows: Risks associated with asset class: Uderlyig assets i securitised debt may assume differet forms ad the geeral types of receivables iclude commercial vehicles, auto fiace, credit cards, home loas or ay such receipts. Credit risks relatig to these types of receivables deped upo various factors icludig macro ecoomic factors of these idustries ad ecoomies. Specific factors like ature ad adequacy of collateral securig these receivables, adequacy of documetatio i case of auto fiace ad home loas ad itetios ad credit profile of the borrower ifluece the risks relatig to the asset borrowigs uderlyig the securitised debt. Risks associated with pool characteristics: (a) Size of the loa: This geerally idicates the kid of assets fiaced with loas. While a pool of loa assets comprisig of smaller idividual loas provides diversificatio, if there is excessive reliace o very small ticket size, it may result i difficult ad costly recoveries. (b)loa to Value Ratio: This Idicates how much percetage value of the asset is fiaced by borrower s ow equity. The lower LTV, the better it is. This ratio stems from the priciple that where the borrowers ow cotributio of the asset cost is high, the chaces of default are lower. To illustrate for a Truck costig Rs. 20 lakh, if the borrower has himself cotributed Rs.10 lakh ad has take oly Rs. 10 lakh as a loa, he is goig to have lesser propesity to default as he would lose a asset worth Rs. 20 lakh if he defaults i repayig a istallmet. This is as agaist a borrower who may meet oly Rs. 2 lakh out of his ow equity for a truck costig Rs. 20 lakh. Betwee the two scearios give above, the later would have higher risk of default tha the former. (c) Origial maturity of loas ad average seasoig of the pool : Origial maturity idicates the origial repaymet period ad whether the loa teors are i lie with idustry averages ad borrower s repaymet capacity. Average seasoig idicates whether borrowers have already displayed repaymet disciplie. To illustrate, i the case of a persoal loas, if a pool of assets cosist of those who have already repaid 80% of the istallmets without default, this certaily is a superior asset pool tha oe where oly of istallmets have bee paid. I the former case, the portfolio has already demostrated that the repaymet disciplie is far higher. (d)default rate distributio: This idicates how much % of the pool ad overall portfolio of the origiator is curret, how much is i 0-30 DPD (days past due), DPD, DPD ad so o. The ratioale here is very obvious, as agaist 0-30 DPD, the DPD is certaily a higher risk category. Credit Ratig ad Adequacy of Credit Ehacemet: Ulike i plai vailla istrumets, i securitisatio trasactios, it is possible to work towards a target credit ratig, which could be much higher tha the origiator s ow credit ratig. This is possible through a mechaism called Credit ehacemet. The process of Credit ehacemet is fulfilled by filterig the uderlyig asset classes ad applyig selectio criteria, which further dimiishes the risks iheret for a particular asset class. The purpose of credit ehacemet is to esure timely paymet to the ivestors, if the actual collectio from the pool of receivables for a give period is short of the cotractual payout o securitisatio. Securitisatio is ormally o-recourse istrumets ad therefore, the repaymet o securitisatio would have to come from the uderlyig assets ad the credit ehacemet. Therefore the ratig criteria cetrally focus o the quality of the uderlyig assets. The Scheme will predomiatly ivest i those securitisatio issuaces which have AA ad above ratig idicatig high level of safety from credit risk poit of view at the time of makig a ivestmet. However, there is o assurace by the ratig agecy either that the ratig will remai at the same level for ay give period of time or that the ratig will ot be lowered or withdraw etirely by the ratig agecy. Limited Liquidity & Price Risk: Presetly, the secodary market for securitised papers is ot very liquid. There is o assurace that a deep secodary market will develop for such securities. This could limit the ability of the ivestor to resell them. Eve if a secodary market develops ad sales were to take place, these secodary trasactios may be at a discout to the iitial issue price due to chages i the iterest rate structure. Page 4 of 16

5 Limited Recourse to Origiator & Deliquecy: Securitised trasactios are ormally backed by pool of receivables ad credit ehacemet as stipulated by the ratig agecy, which differ from issue to issue. The Credit Ehacemet stipulated represets a limited loss cover to the Ivestors. These Certificates represet a udivided beeficial iterest i the uderlyig receivables ad there is o obligatio of either the Issuer or the seller or the origiator, or the paret or ay affiliate of the seller, issuer ad origiator. No fiacial recourse is available to the Certificate Holders agaist the Ivestors Represetative. Deliquecies ad credit losses may cause depletio of the amout available uder the credit ehacemet ad thereby the ivestor payouts may get affected if the amout available i the credit ehacemet facility is ot eough to cover the shortfall. O persistet default of a obligor to repay his obligatio, the servicer may repossess ad sell the uderlyig Asset. However may factors may affect, delay or prevet the repossessio of such asset or the legth of time required to realize the sale proceeds o such sales. I additio, the price at which such asset may be sold may be lower tha the amout due from that Obligor. Risks due to possible prepaymets: Weighted Teor / Yield: Asset securitisatio is a process whereby commercial or cosumer credits are packaged ad sold i the form of fiacial istrumets Full prepaymet of uderlyig loa cotract may arise uder ay of the followig circumstaces; a. Obligor pays the receivable due from him at ay time prior to the scheduled maturity date of that receivable; or b. Receivable is required to be repurchased by the seller cosequet to its iability to rectify a material misrepresetatio with respect to that Receivable; or c. The servicer recogizig a cotract as a defaulted cotract ad hece repossessig the uderlyig asset ad sellig the same. d. I the evet of prepaymets, ivestors may be exposed to chages i teor ad yield. Bakruptcy of the Origiator or Seller: If origiator becomes subject to bakruptcy proceedigs ad the court i the bakruptcy proceedigs cocludes that the sale from origiator to trust was ot a sale the a Ivestor could experiece losses or delays i the paymets due. All possible care is geerally take i structurig the trasactio so as to miimize the risk of the sale to Trust ot beig costrued as a True Sale. Legal opiio is ormally obtaied to the effect that the assigmet of Receivables to Trust i trust for ad for the beefit of the Ivestors, as evisaged herei, would costitute a true sale. Bakruptcy of the Ivestor s Aget: If Ivestor s aget, becomes subject to bakruptcy proceedigs ad the court i the bakruptcy proceedigs cocludes that the recourse of Ivestor s Aget to the assets/receivables is ot i its capacity as aget/trustee but i its persoal capacity, the a Ivestor could experiece losses or delays i the paymets due uder the agreemet. All possible care is ormally take i structurig the trasactio ad draftig the uderlyig documets so as to provide that the assets/ receivables if ad whe held by Ivestor s Aget is held as aget ad i Trust for the Ivestors ad shall ot form part of the persoal assets of Ivestor s Aget. Legal opiio is ormally obtaied to the effect that the Ivestors Aget s recourse to assets/receivables is restricted i its capacity as aget ad trustee ad ot i its persoal capacity. Risk of co-miglig: The servicers ormally deposit all paymets received from the obligors ito the collectio accout. However, there could be a time gap betwee collectio by a servicer ad depositig the same ito the collectio accout especially cosiderig that some of the collectios may be i the form of cash. I this iterim period, collectios from the loa agreemets may ot be segregated from other fuds of the servicer. If the servicer fails to remit such fuds due to Ivestors, the Ivestors may be exposed to a potetial loss. Due care is ormally take to esure that the Servicer ejoys highest credit ratig o stadaloe basis to miimize comiglig risk. Risks relatig to tax icidece o securitizatio Special Purpose Vehicles: I October 2011, the icome tax authorities issued a claim o certai securitisatio SPVs, statig that the gross icome of such SPVs was liable to tax. The matter is presetly uder sub judice with the Bombay High Court. Several idustry participats approached the Miistry of Fiace (MoF) to seek clarity ad reiforce the pass through status of a securitisatio SPV. The Fiace Bill, 2013, has sought to clarify the tax positio by statig that securitisatio SPVs are ot liable to pay icome tax. However, ay tax icidece o gross icome of SPVs could result i dilutio of payouts to ivestors. Page 5 of 16

6 Risk Factors Associated with Imperfect Hedgig usig Iterest Rate Futures: Basis Risk risk associated with divergece i the price movemet of the portfolio beig hedged ad the price movemet of the derivative servig as the hedge e.g. a loss (gai) i the market value of bods i the portfolio (or the part thereof that is beig hedged), may be accompaied by a disproportioate gai (loss) i the market value of the derivatives beig used to serve as the hedge. This imperfect correlatio betwee the two ivestmets creates the potetial for excess gais or losses i a hedgig strategy, thus addig risk to the positio. Mispricig Risk, or improper valuatio market circumstaces may ecessitate uwidig the derivative positios at sub-optimal prices durig periods of market dislocatio triggered by cotagio or tumult e.g. if the expected upward trajectory of yields reverses course ad begis to spiral dowward, most participats with short Iterest Rate Futures positios are likely to seek a uwidig, leadig to a potetial amplificatio i the adverse price movemet, ad impact therefrom. Correlatio weakeig, ad cosequet risk of regulatory breach SEBI regulatio madates a miimum correlatio criteria of 0.9 (calculated o a 90 day basis) betwee the portfolio beig hedged ad the derivative servig as the hedge; i cases where this limit is breached (i.e. whe the 90-day correlatio falls below 0.9), a rebalacig period of 5 workig days has bee permitted. Iability to satisfy this requiremet withi the stipulated period due to difficulties i re-balacig would lead to a lapse of the exemptio i gross exposure computatio. The etire derivative exposure would the eed to be icluded i gross exposure, which may result i gross exposure i excess of 100% of et asset value; leverage is ot permitted as per SEBI guidelies. The followig shall be added uder Risk Maagemet Strategies: Risk associated with derivatives The guidelies issued by SEBI / RBI from time to time for forward rate agreemets ad iterest rate swaps ad other derivative products would be adhered to. Risk associated with ivestmets i repo of corporate debt securities The Ivestmet Maager will edeavor to maage couterparty risk i corporate debt repos by dealig oly with couterparties havig strog credit profiles. These could iclude SEBI regulated mutual fuds, RBI regulated Baks, No-Bakig Fiace Compaies, Primary Dealers ad IRDA regulated Isurace compaies. Corporates for whom credit limits have bee assiged are eligible couterparties. These corporates should have a miimum ivestmet grade credit ratig. For ew couterparties, approval from Head Risk will be take ad a assessmet will be doe by the Risk & Quatitative Aalysis team. 5. Where will the Scheme ivest? Refer existig disclosure i SID The collateral risk is mitigated by restrictig participatio i repo trasactios oly i AA ad above rated moey market ad corporate debt securities, where potetial for dowgrade/ default is low. I additio, appropriate haircuts are applied o the market value of the uderlyig securities to adjust for the illiquidity ad iterest rate risk o the uderlyig istrumet. The followig shall be added uder Where will the Scheme ivest? Ivestmet i Domestic Securitized Debt Depedig upo the Ivestmet Maager s views, the Scheme may ivest i domestic securitized debt such as ABS or MBS. The ivestmets i domestic securitized debt will be made oly after givig due cosideratio to factors such as but ot limited to the securitizatio structure, quality of uderlyig receivables, credetials of the servicig aget, level of credit ehacemet, liquidity factor, returs provided by the securitized paper visa-vis other comparable ivestmet alteratives. Although the returs provided by securitized debt could be higher, oe must ot lose sight of the fact that risks also exist with regard to ivestmets i securitized debt. Ivestmets i pass-through certificates of a securitizatio trasactio represet a udivided beeficial iterest i the uderlyig receivables ad do ot represet a obligatio of either the issuer or the seller, or the paret of the seller, or ay affiliate of the seller or the issuer or the trustee i its persoal capacity, save to the extet of credit ehacemet to be provided by the credit ehacer. The trust s pricipal asset will be the pool of uderlyig receivables. The ability of the trust to meet its obligatios will be depedet o the receipt ad trasfer to the desigated accout of collectios made by the servicig aget from the pool, the amout available i the cash collateral accout, ad ay other amouts received by the trust pursuat to the terms of the trasactio documets. However, the credit ehacemet stipulated i a securitizatio trasactio represets a limited loss cover oly. Page 6 of 16

7 Deliquecies ad credit losses may cause depletio of the amout available uder the cash collateral accout ad thereby the scheduled payouts to the ivestors may get affected if the amout available i the cash collateral accout is ot eough to cover the shortfall. Further Uit holders are requested to refer below the disclosure relatig to ivestmets i securitized debt, i the SEBI prescribed format: (i) How the risk profile of securitized debt fits ito the risk appetite of the scheme The scheme seeks to geerate a attractive retur, cosistet with prudet risk, from a portfolio which is substatially costituted of quality debt securities. The scheme also seeks to geerate capital appreciatio by ivestig a smaller portio of its corpus i equity ad equity related securities of issuers domiciled i Idia. the ivestmet objective, securitised debt istrumets havig a high credit quality commesurate with other debt istrumets i the portfolio ad i lie with iteral fud maager guidelies will be cosidered for ivestmet. (ii)policy relatig to origiators based o ature of origiator, track record, NPAs, losses i earlier securitized debt, etc The parameters used to evaluate origiators are Track record Willigess to pay, through credit ehacemet facilities etc. Ability to pay Busiess risk assessmet, wherei followig factors are cosidered: - Outlook for the ecoomy (domestic ad global) - Outlook for the idustry - Compay specific factors I additio a detailed review ad assessmet of ratig ratioale is doe icludig iteractios with the origiator as well as ratig agecy. Critical Evaluatio Parameters (for pool loa) regardig the origiator / uderlyig issuer: Default track record/ frequet alteratio of redemptio coditios / coveats High leverage ratios of the ultimate borrower - both o a stadaloe basis as well o a cosolidated level/ group level Higher proportio of re-schedulemet of uderlyig assets of the pool or loa, as the case may be Higher proportio of overdue assets of the pool or the uderlyig loa, as the case may be Poor reputatio i market Isufficiet track record of servicig of the pool or the loa, as the case may be. (iii) Risk mitigatio strategies for ivestmets with each kid of origiator Aalysis of origiator: A idepedet Risk ad Quatitative Aalysis (RQA) team aalyses ad evaluates each origiator ad sets up limits specifyig both the maximum quatum ad maximum teor for ivestmets ad ivestmets are cosidered oly withi these limits. Origiator aalysis typically ecompasses: Size ad reach of the origiator Collectio process, ifrastructure ad follow-up mechaism Quality of MIS Credit ehacemet for differet type of origiator (iv) The level of diversificatio with respect to the uderlyig assets, ad risk mitigatio measures for less diversified ivestmets Eligible assets: Oly assets with a established track record of low deliquecies ad high credit quality over several busiess cycles will be cosidered for ivestmet. Aalysis of pool: Characteristics such as average pool maturity (i moths), average loa to value ratio, average seasoig of the pool, maximum sigle exposure, geographical distributio ad average sigle exposure are studied to determie pool quality Risk mitigatig measures: Credit ehacemet facilities (icludig cash, guaratees, excess iterest spread, subordiate traches), liquidity facilities ad paymet structure are studied i relatio to historical collectio ad default behavior of the asset class to esure adequacy of credit ehacemet i a stress sceario. Page 7 of 16

8 (v) Miimum retetio period of the debt by origiator prior to securitizatio We will follow the guidelies o miimum holdig period requiremets as laid dow by SEBI ad RBI from time to time. (vi) Miimum retetio percetage by origiator of debts to be securitized We will follow the guidelies o miimum holdig period requiremets as laid dow by SEBI ad RBI from time to time. (vii) The mechaism to tackle coflict of iterest whe the Mutual Fud ivests i securitized debt of a origiator ad the origiator i tur makes ivestmets i that particular scheme of the Fud The AMC has a rigorous credit due diligece process for all fixed icome ivestmets, which also ecompasses securitized debt. A dedicated team of credit aalysts is resposible for credit research ad surveillace. (viii) The resources ad mechaism of idividual risk assessmet with the AMC for moitorig ivestmet i securitized debt The AMC has a rigorous risk maagemet process for all fixed icome ivestmets, which also ecompasses securitized debt. A dedicated RQA team is resposible for moitorig risks icludig credit ad liquidity risk. The fuctios of the RQA team iclude: Detailed credit aalysis of issuers: based o the maagemet evaluatio, operatig stregth ad fiacial stregth to determie suitability for ivestmet. Periodic reviews o a quarterly/aual basis are uder take for eligible issuers. Ratigs are moitored o a daily basis ad ay chages are immediately recorded ad suitable actio take. RQA team moitors adherece to sigle ad group level exposure orms, miimum ratig requiremets, liquidity requiremets, ad esures that oly eligible securities are icluded i the fud, i lie with the scheme iformatio documet/iteral templates. For securitized pool loa exposures, the aalysis icludes pool seasoig, pool asset quality, diversificatio, collateral margi, origiator aalysis ad credit ehacemet mechaisms. Pool performace statistics published by ratig agecies are aalyzed for performace of other securitised pools of the same origiator as well as for the performace of the asset class as a whole. Regular iteractios with the ratig agecies are doe to discuss performace treds. Documets are vetted by the legal ad compliace team. I additio, mothly payout reports from the trustees are aalysed for collectio performace ad adequacy of cash collateral. Page 8 of 16

9 Framework that is applied while evaluatig ivestmet decisio relatig to a pool securitizatio trasactio: Characteristics / Type of Pool Characteristics Approximate Average maturity (i Moths) Collateral margi (icludig cash, guaratees, excess iterest spread, subordiate trache) Average Loa to Value Ratio Average seasoig of the Pool Maximum sigle exposure rage Average sigle exposure rage Mortgage Loa average maturity of mortgage loas as per idustry orms. Typically less tha 10 years. The collateral margi will be adequate for the pool to achieve a ratig i the high safety category at the time of iitial ratig. The collateral margi will esure at least a 3 times cover over historical losses observed i the asset class. average Loa to Value ratio of mortgage loas as per idustry orms. Typically less tha 80 per cet. idustry orms ad guidelies laid dow by RBI/SEBI from time to time. Typically, more tha 3 moths Not more tha Not more tha Commercial Vehicle ad Costructio Equipmet average maturity of Commercial Vehicle ad Costructio Equipmet loas as per idustry orms. Typically less tha 4 years. The collateral margi will be adequate for the pool to achieve a ratig i the high safety category at the time of iitial ratig. The collateral margi will esure at least a 3 times cover over historical losses observed i the asset class. average Loa to Value ratio of Commercial Vehicle ad Costructio Equipmet loas as per idustry orms. Typically less tha 85 per cet. idustry orms ad guidelies laid dow by RBI/SEBI from time to time. Typically, more tha 3 moths Not more tha Not more tha CAR 2 wheelers Others average maturity of car loas as per idustry orms. Typically less tha 4 years. The collateral margi will be adequate for the pool to achieve a ratig i the high safety category at the time of iitial ratig. The collateral margi will esure at least a 3 times cover over historical losses observed i the asset class. average Loa to Value ratio of car loas as per idustry orms. Typically less tha 85 per cet. idustry orms ad guidelies laid dow by RBI/SEBI from time to time. Typically, more tha 3 moths Not more tha Not more tha average maturity of two-wheeler loas as per idustry orms. Typically less tha 4 years. The collateral margi will be adequate for the pool to achieve a ratig i the high safety category at the time of iitial ratig. The collateral margi will esure at least a 3 times cover over historical losses observed i the asset class. average Loa to Value ratio of two-wheeler loas as per idustry orms. Typically less tha 85 per cet. idustry orms ad guidelies laid dow by RBI/ SEBI from time to time. Typically, more tha 3 moths Not more tha Not more tha average maturity of the asset class as per idustry orms. The collateral margi will be adequate for the pool to achieve a ratig i the high safety category at the time of iitial ratig. The collateral margi will esure at least a 3 times cover over historical losses observed i the asset class. average Loa to Value ratio of the asset class loas as per idustry orms. idustry orms ad guidelies laid dow by RBI/ SEBI from time to time. Not more tha Not more tha * Kidly ote that all refereces to sigle loa securitizatio has bee removed as securitizatio of sigle corporate loas are o loger evisaged uder revised RBI guidelies o securitizatio The Scheme shall ot ivest i foreig securitized debt. Ivestmets i derivatives SEBI vide its circular o. MFD/CIR/011/061/2000 dated February 1, 2000 has permitted all the mutual fuds to participate i the derivatives tradig subject to observace of guidelies issued by SEBI i this behalf. Pursuat to this, the mutual fuds may use various derivative ad hedgig products from time to time, as would be available ad permitted by SEBI, i a attempt to protect the value of the portfolio ad ehace Uit holders iterest. Derivatives are fiacial cotracts of pre-determied fixed duratio, whose values are derived from the value of a uderlyig primary fiacial istrumet, commodity or idex, such as iterest rates, exchage rates, commodities, ad equities. The fixed Icome derivative market has made cosiderable progress i last two years. Iterest rate swaps have become a itegral part of Risk Maagemet practice for most baks. Corporate Treasury have issued Iovative istrumets like floatig rate debt ad costat maturity swaps. Page 9 of 16

10 1. Iterest Rate Swap (IRS) Ay swap is effectively a exchage of oe set of cash-flows for aother cosidered to be of equal value. If the exchage of cash flows is liked to iterest rates, it becomes a iterest rate swap. A iterest rate swap is a agreemet betwee two parties to exchage future paymet streams based o a otioal amout. Oly the iterest o the otioal amout is swapped, ad the pricipal amout is ever exchaged. I a typical iterest rate swap, oe party agrees to pay a fixed rate over the term of the agreemet ad to receive a variable or floatig rate of iterest. The couterparty receives a stream of fixed rate paymets at regular itervals as described i the agreemet ad pays the floatig rate of iterest. A fixed/ floatig iterest rate swap is characterized by: 1. Fixed iterest rate; 2. Variable or floatig iterest rate, which is periodically reset; 3. Notioal pricipal amout upo which total iterest paymets are based; ad 4. The terms of the agreemet, icludig a schedule of iterest rate reset dates, paymet dates ad termiatio date. The primary reaso for egagig i a iterest rate swap is to hedge the iterest rate exposure. A illustratio could be a istitutio havig logterm fixed rate assets (loger teor securities receivig fixed rate) i a risig iterest rate eviromet; it ca hedge the iterest rate exposure by purchasig a iterest rate swap where the istitutio receives floatig iterest rate ad pays fixed rate. I this case, a iterest rate swap is likely to reduce the duratio ad iterest rate volatility of the fud. Example: Terms: Fixed Iterest Rate : 8.50% p.a. Variable Iterest Rate : NSE Over-Night MIBOR reset daily ad compouded daily Notioal Pricipal Amout : Rs.100 Crore Period of Agreemet : 1 year Paymet Frequecy : Semi-aual Now, suppose the six-moth period from the effective date of the swap to the first paymet date comprises 182 days ad the daily compouded NSE Over-Night MIBOR is 8.15% p.a. o the first paymet date, the the fixed ad variable rate paymet o the first paymet date would be as follows: Fixed rate paymet: Rs. 4,23,83,562 = (Rs.100,00,00,000) x (8.50%) x (182 Days / 365 Days) Variable rate paymet: Rs. 4,06,38,356 = (Rs.100,00,00,000) x (8.15%) x (182 Days / 365 Days) Ofte, a swap agreemet will call for oly the exchage of et amout betwee the couterparties. I the above example, the fixed-rate payer will pay the variable-rate payer a et amout of Rs. 17,45,205 = Rs. 4,23,83,562 - Rs. 4,06,38,356. The secod ad fial paymet will deped o the daily NSE MIBOR compouded daily for the remaiig 183 days. The fixed rate paymet will also chage to reflect the chage i holdig period from 182 days to 183 days. 2. Forward Rate Agreemet (FRA) A FRA is a off balace sheet agreemet to pay or receive o a agreed future date, the differece betwee a agreed iterest rate ad the iterest rate actually prevailig o that future date, calculated o a agreed otioal pricipal amout. It is settled agaist the actual iterest rate prevailig at the begiig of the period to which it relates rather tha paid as a gross amout. A FRA is referred to by the begiig ad ed dates of the period covered. Thus a 5x8 FRA is oe that covers a 3-moth period begiig i 5-moths ad edig i 8-moths. FRAs are purchased to hedge the iterest rate risk; a ivestor facig ucertaity of the iterest rate movemets ca fix the iterest costs by purchasig a FRA. Page 10 of 16

11 A illustratio could be a corporatio havig floatig rate debt liked to a idex such as say, 3-Moth MIBOR. If the existig iterest cost is at 8% o Rs.100 Crore for the ext three moths, the corporatio ca purchase a 3x6 8.1% o Rs.100 Crore ad fix the iterest cost for the 3-6 moths period. If the actual 3-Moth MIBOR after 3-moths is at 8.25%, the corporatio has saved 15 bps i iterest cost. As the settlemet is doe at the begiig of the period, the savigs i iterest expese are discouted to a preset value usig a 3-moth rate to calculate the actual settlemet amout. The flows for the istitutio will be, as follows: Iterest Savigs = Rs. 100 Crore * 15 bps * 92/365 (assumig 92 days i the 3 moth FRA period ad 365 days i the covetioal year) = Rs.3,78, Settlemet Amout = Rs.3,78,082.19/ (1+8.25%*92/365) Please ote that the above examples are hypothetical i ature ad the figures are assumed. 3. Iterest Rate Futures A Iterest Rate Futures ( IRF ) cotract is a agreemet to buy or sell a debt istrumet at a specified future date at a price that is fixed today. The uderlyig security for Iterest Rate Futures is either Govermet Bod or T-Bill. Iterest Rate Futures are Exchage traded ad stadardized cotracts based o 6 year, 10 year ad 13 year Govermet of Idia Security ad 91-day Govermet of Idia Treasury Bill (91DTB). These future cotracts are cash settled. These istrumets ca be used for hedgig the uderlyig cash positios. The overall gross exposure for a fud is computed as sum of exposure to equity, cash, debt istrumets ad derivatives (other tha for hedgig purposes) ad it should ot be more tha 100%. Derivative positio is cosidered to be for hedgig purposes oly if the followig coditios are met: 1. Perfect Hedgig - We hedge the uderlyig usig IRF cotract of same uderlyig 2. Imperfect hedgig the Uderlyig beig hedged ad the IRF cotract has a 90 day correlatio of closig prices of more tha 90%. I case of correlatio breakig at ay time the derivative positio would be couted as a exposure. SEBI allows maximum of 20% imperfect hedgig. For example, assume a portfolio comprisig the followig structure: Security Amout (crs) Price (Rs) IGB 6.79% IGB 6.79% IGB 7.72% Cash 25 Total 200 Assumig the fud maager iteds to hedge the portfolio usig IRF ad uses cotracts o IGB 6.79% 2027 as it is most liquid. Maximum imperfect hedgig allowed, based o SEBI limit of 20% for the above fud is 200*20% = 40 crs Maximum perfect hedgig usig 6.79% 2027 is 100 crs (as amout of 6.79% 2027 i the fud is 100 crs) Total hedge the fud ca do = 100 crs + 40 crs =140 crs Assumig the 90 day historical correlatio betwee the istrumets i the portfolio are as follows 90 day historical IGB 6.79% 2027 IGB 6.79% 2029 IGB 7.72% 2025 correlatio IGB 6.79% IGB 6.79% IGB 7.72% Give that we are usig IRF o 6.79% 2027, we ca hedge 6.79% 2029 usig IRFs as correlatio is more tha 90% upto 40 crs (based o the 20% limit of imperfect hedgig). Sice oe cotract of IRF has a otioal of Rs. 2 lakhs, i this example the fud maager sells Rs. 140 crores/2 lakhs = 7000 cotracts, to hedge his positio. Page 11 of 16

12 Hece after hedgig the fud is as show below: Security Amout (crs) Price (Rs) Commets IGB 6.79% % hedged Perfect hedgig IGB 6.79% % hedged Imperfect hedgig IGB 7.72% Uhedged Cash 25 Uhedged IRF 6.79% Total 200 At maturity of the Iterest Rate Futures Case 1: bods close higher tha at the time the hedge was etered ito Security Amout (crs) Price before hedgig(rs) Price o maturity of hedge (Rs) Gai Net Gai (lakhs) IGB % 2027 IGB % 2029 IGB % 2025 Cash 25 - Without IRF IRF (21.00) 6.79% 2027 Total With IRF 200 (2.25) Case 2: bods close lower tha at the time the hedge was etered ito Security Amout (crs) Price before hedgig(rs) Price o maturity of hedge (Rs) Gai Net Gai (lakhs) IGB (10.00) 6.79% 2027 IGB (6.00) 6.79% 2029 IGB (1.25) 7.72% 2025 Cash 25 - Without (17.25) IRF IRF % 2027 Total with IRF 200 (10.25) As ca be see i the cases above, i case yields move higher, IRFs help i reducig the loss to the fud. With respect to ivestmets made i derivative istrumets, the Scheme shall comply with the followig exposure limits i lie with SEBI Circular Cir/ IMD/DF/11/2010 dated August 18, 2010: 1. The cumulative gross exposure through equity, debt ad derivative positios will ot exceed 100% of the et assets of the respective Scheme. However, the followig shall ot be cosidered while calculatig the gross exposure: a. Security-wise hedged positio ad b. Exposure i cash or cash equivalets with residual maturity of less tha 91 days Page 12 of 16

13 2. The total exposure related to optio premium must ot exceed 20% of the et assets of the Scheme. 3. The Mutual Fud shall ot write optios or purchase istrumets with embedded writte optios. 4. Exposure due to hedgig positios may ot be icluded i the above metioed limits subject to the followig: a. Hedgig positios are the derivative positios that reduce possible losses o a existig positio i securities ad till the existig positio remais. b. Hedgig positios caot be take for existig derivative positios. c. Exposure due to such positios shall have to be added ad treated uder limits metioed i Poit 1. d. Ay derivative istrumet used to hedge has the same uderlyig security as the existig positio beig hedged. e. The quatity of uderlyig associated with the derivative positio take for hedgig purposes does ot exceed the quatity of the existig positio agaist which hedge has bee take. 5. The Mutual Fud may eter ito plai vailla iterest rate swaps for hedgig purposes. The couter party i such trasactios has to be a etity recogized as a market maker by RBI. Further, the value of the otioal pricipal i such cases must ot exceed the value of respective existig assets beig hedged by the scheme. Exposure to a sigle couterparty i such trasactios should ot exceed of the et assets of the scheme. 6. Exposure due to derivative positios take for hedgig purposes i excess of the uderlyig positio agaist which the hedgig positio has bee take, shall be treated uder the limits metioed i poit Defiitio of Exposure i case of Derivative Positios: Each positio take i derivatives shall have a associated exposure as defied uder. Exposure is the maximum possible loss that may occur o a positio. However, certai derivative positios may theoretically have ulimited possible loss. Exposure i derivative positios shall be computed as follows: Positio Log Future Short Future Optio Bought Exposure Futures Price * Lot Size * Number of Cotracts Futures Price * Lot Size * Number of Cotracts Optio Premium Paid * Lot Size * Number of Cotracts Ivestmets i repo of corporate debt securities Guidelies for participatio of mutual fuds i Repo i moey market ad corporate debt securities. SEBI has vide circular o. CIR / IMD / DF / 19 / 2011 dated November 11, 2011 eabled mutual fuds to participate i repos i corporate debt securities as per the guidelies issued by RBI from time to time ad subject to few coditios listed i the circular. Accordigly, the Scheme may participate i Repo i moey market ad corporate debt securities i accordace with directios issued by RBI ad SEBI from time to time ad i accordace with guidelies framed by the Board of AMC ad Trustee Compay i this regard. Coditios applicable: - The et exposure of ay Mutual Fud scheme to repo trasactios i moey market (except for Repo i Govermet Securities & Treasury Bills) ad corporate debt securities shall ot be more tha 10 % of the et assets of the Scheme. The cumulative gross exposure through repo trasactios i moey market securities (except for Repo i Govermet Securities & Treasury Bills) ad corporate debt securities alog with debt ad derivatives shall ot exceed 100% of the et assets of the Scheme. Mutual fuds shall participate i repo trasactios oly i AA ad above rated moey market ad corporate debt securities. These coditios will be subject to ay revisios aouced by SEBI from time to time. Other Guidelies Page 13 of 16 i. Category ad credit ratig of couter party: 1. SEBI regulated mutual fuds 2. RBI regulated Baks, No-Bakig Fiace Compaies, Primary Dealers 3. IRDA regulated Isurace compaies 4. Corporates for whom credit limits have bee assiged are eligible couterparties. These corporates should have a miimum ivestmet grade credit ratig. For ew couterparties, approval from Head Risk will be take ad a assessmet will be doe by the Risk & Quatitative Aalysis team.