HDFC GILT FUND-LONG TERM PLAN

(Open - ended Income Scheme)

Still remains the best positioned Fixed Income Opportunity *

This product is suitable for investors who are seeking*:

credit risk free returns over medium to long term.
investment in sovereign securities issued by Central/ State Government with
medium to long term maturities.
Low risk
(BLUE)
* Investors should consult their financial advisers if in doubt about whether the
product is suitable for them.

* Based on portfolio positioning vis-a-vis Interest rate Outlook

Note: Risk is represented as:

(BLUE) investors understand that their principal will be at low risk

(YELLOW) investors understand that their principal will be at medium risk
(BROWN) investors understand that their principal will be at high risk

January 16, 2015

Key interest rate determinants and their outlook

Inflation

- CPI in Dec 14 was at 5.0%; likely to remain low

CAD

- FY15 estimated to fall to 1.5% and next year to 0.5%

Fiscal Deficit

- 4.1% in FY15 challenging, but gradual consolidation to continue

US Interest rates - Inspite of a possible Fed hike in 2015, US 10 yr and German 10

yr have rallied by 0.86 bps and 1.49 bps in CY2014

Source: Budget documents, publicly available information, internal estimates

Most indicators point towards lower interest rates

Key macro economic indicators : Sharp improvement

FY13

Falling Fiscal deficit (FD) &

CAD. Stable INR

FY14

FY15E

FY16E

FD (% to GDP)

4.9

4.5

4.1

3.9

CAD (% to GDP)

4.7

1.7

1.5

0.5

54

60

62

60

INR vs USD

Source: Citi, INR VS USD is avg. for the fiscal year, E - Estimate
Two Year Peak

Jan 15

Change (%)

119

49

-59%

94

62

-34%

2168

1774

-18%

Iron Ore

985

505

-49%

Copper

378

251

-34%

17

11

-34%

Wheat

791

538

-32%

Sugar

20

15

-24%

Cotton
Source: Bloomberg

95

59

-38%

in USD

Crude Oil
Coal
Aluminium

Sharp fall in Oil and other

commodity prices

Rice

Low MSP growth

(MSP Minimum Support Prices)

(Cereals have a 14.6% wts in CPI)

Source: Kotak, CLSA

Commodity price fall becoming widespread

S&P GSCI Industrial Metals

500

Brent Crude

140

450

120

400

100

350
80
300
60
250
40

200

20

150
100
Dec-00

Dec-02

Dec-04

Dec-06

Dec-08

Dec-10

Dec-12

*
Source: JP Morgan

0
Dec-14

Source: Citi

E - Estimate

Source: JP Morgan, Bloomberg

China that accounted for almost the entire demand growth of commodities in last 13 years* is slowing

On the other hand, supply is improving for oil / iron ore etc.
5

Key drivers for lower oil prices : Increasing supply, weak demand

Production in Egypt, Nigeria, Sudan, Libya, Iran,

Syria and Iraq is not falling anymore while
production of Shale oil continues to increase in the
US
Source: Publicly available information

Source: Bloomberg

Falling VMT in US - economic slowdown, ecommerce ? (VMT : Vehicle Miles Traveled per year)

Rising mileage

Demand for oil in US

not rising

(>20% of world demand),

is thus
Source: Bloomberg
6

CAD in balance : Is it possible?

Source: Citi, CMIE, Bloomberg

** Six weeks lagged prices due to Indian oil importers credit period, E Estimates

Can such large savings result in INR appreciation despite global dollar strength ?

Source: Citi

Indian Interest rates : High compared to global rates**

10 yr G-sec (%)

12-Sep-08

15-Jan-15

Chg in yld

India

8.28

7.68

-0.60

China

4.05

3.65

-0.40

Japan

1.54

0.35

-1.19

USA

3.72

1.84

-1.88

Italy

4.84

1.74

-3.10

UK

4.60

1.52

-3.08

France

4.41

0.67

-3.74

Germany

4.19

0.48

-3.71

Indian yields are the highest

amongst large economies
compared to pre crisis levels

This points to material room for fall

in interest rates
in India*

Source: Bloomberg

**Above comparison of yields rates has not factored CAD, Inflation and other drivers of yield rates.
* HDFC Mutual Fund/AMC is not guaranteeing/offering/ communicating any indicative yield on investments
made in any of its existing/proposed schemes to be launched.

Indian yields* very high in global context: Above PIGS

* HDFC Mutual Fund/AMC is not guaranteeing/offering/ communicating any indicative yield on investments
made in any of its existing/proposed schemes to be launched.

Real Rates near all time high supportive of lower yields*

6

Real interest rate = Difference betw een CPI & 10Yr Gsec Yield

4
2
0
-2
-4
-6
-8

Dec-14

Jun-14

Dec-13

Jun-13

Dec-12

Jun-12

Dec-11

Jun-11

Dec-10

Jun-10

Dec-09

Jun-09

Dec-08

Jun-08

Dec-07

Jun-07

Dec-06

Jun-06

Dec-05

-10

Source: Bloomberg, BAML,

Positive real interest rates after 5 years

*HDFC Mutual Fund/AMC is not guaranteeing/offering/communicating any indicative yields or guaranteed returns
on investments made in this scheme

10

Rise in US interest rates : A possible risk ?

Chart 1

Chart 2

Spread between US treasury and Emerging market corporate bonds has come down (Chart 1)

However, Spread between India & US treasury is close to all time high (Chart 2)
This creates room for lower rates in India, even if US yields rise

Source: Bloomberg, Credit Suisse ; Chart 1: The data updated till 12th Jan, 2015, Chart 2: The data updated till 14th Jan, 2015.
11

RBI cuts by 25bps in inter-policy move

Key Takeaways
CPI to stay below RBIs glide path RBI now expects inflation to be
below its 6% target by Jan-16

Household Inflation Expectations have moderated to single digits for the

first time in 5 years, adapting to the recent decline in inflation

Guidance Hints at Further Easing: The guidance mentions that

further easing will be dependent on data that confirm disinflationary

pressures and sustained high quality of fiscal consolidation.

Source: RBI policy dated 15-01-2015
12

HDFC Gilt Fund LTP Best suited for a 3 year + horizon*

While inflation has come down, inflationary expectations & wage inflation is likely to take
longer to fall; Also, there is a likelihood of US rates hike in 2015

In view of the above and RBIs resolve to break the back of inflation, rate cuts are likely
to be slow & gradual thus extending the rate cut cycle

Investments in debt funds over 3 years attracts long term capital gains tax

In view of the above, a 3 year investment horizon is ideal for HDFC

GILT FUND LTP.
*HDFC Mutual Fund/AMC is not guaranteeing/offering/communicating any indicative yields or guaranteed returns on
investments made in this scheme
13

Risk Reward Outlook

Risks

Longer the maturity of gilt funds, the higher likely capital gain or loss
Highly sensitive to interest rate movements compared to debt/income funds

Rewards

Current Portfolio strategy focuses on maintaining high modified duration in the range of 810 till interest rates fall materially
Given our view of a fall in interest rates in the medium to long term, there is a potential for
capital gains# (refer next slide for simulation)
Suitable for investors with a longer investment horizon

*HDFC Mutual Fund/AMC is not guaranteeing/offering/communicating any indicative yields or guaranteed returns on
investments made in this scheme
14

Simulation for G-sec security

Given below is the simulation of likely return* of a ~18 year bond namely 8.32%
GOI 2032 (modified duration ~ 9 and YTM 7.83%), under various scenarios
Chg in yld
/ tenor
(days)

1.50%

1.25%

1.00%

0.50%

0.00%

-0.50%

-1.00%

-1.25%

-1.50%

740

2.0%

2.9%

3.9%

5.9%

8.0%

10.1%

12.4%

13.6%

14.8%

1110

4.2%

4.8%

5.4%

6.7%

8.0%

9.3%

10.7%

11.4%

12.1%

1475

5.3%

5.8%

6.2%

7.1%

8.0%

8.9%

9.9%

10.3%

10.8%

1850

6.1%

6.4%

6.7%

7.3%

8.0%

8.7%

9.4%

9.7%

10.1%

XIRR returns for the instruments assuming the fall in yield at the end of the respective period; without factoring re-investment risk
Note 1: Above data shown is hypothetical in nature and based on assumptions, do not reflect actual
investment results, and are not guarantees of future results. Changes in such assumptions could
produce materially different results.
Note 2: Instrument referred above are not recommended by HDFC Mutual Fund/HDFC AMC. The
scheme may or may not have any present or future positions in the said instrument.

*HDFC Mutual Fund/AMC is not guaranteeing/offering/communicating any indicative yields or guaranteed

returns on investments made in this scheme

15

15

Summary

HDFC Gilt Fund Long Term Plan is ideally positioned to benefit from lower rates*
Falling inflation, CAD & fiscal deficit, FII interest in Indian debt, high spread between Indian

and US 10 year, near 2% real yields and above average yields..are all pointing towards
lower yields over the medium term.

A 3 year investment horizon is recommended as it will help increase the tax efficiency**

**In view of the individual circumstances and risk profile, each investor is advised to consult his / her professional advisor
before making a decision to invest.
*HDFC Mutual Fund/AMC is not guaranteeing/offering/communicating any indicative yields or guaranteed returns on
investments made in this scheme
16

Summary of recent Fixed Income presentations of HDFC Mutual Fund

Presentation & Date

Outlook

Fixed Income Update March 12, 2014

Interest rates to moderate across the yield

curve in FY14-15

Next RBI move : Rate cut ? January 28, 2014

Lower rates, though timing is uncertain

Last hike or no hike December 17, 2013

Lower interest rates

For complete presentation please refer website, www.hdfcfund.com

17

Product Features
Type of Scheme

Open-ended Income Scheme

Investment Objective

To generate credit risk free returns through investments in sovereign securities issued by the Central Government and / or a
State Government

Inception Date

July 25, 2001

Load Structure

Entry Load: Not Applicable

Upfront commission shall be paid directly by the investor to the ARN Holder (AMFI registered Distributor) based on the
investors assessment of various factors including the service rendered by the ARN Holder.
Exit Load: Nil

Investment Plans

Long Term Plan, Long Term Plan - Direct Plan

Investment Options

Each Plan offers Growth and Dividend Options. The Dividend Option offers Dividend Payout and Reinvestment facility.

Minimum
Amount

(Under each Plan / Option)

Purchase: Rs 5,000 and any amount thereafter
Additional Purchase: Rs 1,000 and any amount thereafter

Application

Benchmark Index
Long Term Plan: I-Sec Li-Bex

For further details please refer Scheme Information Document

18

Asset Allocation Pattern

Under normal circumstances, the asset allocation (as a % of net assets) of the Schemes
portfolio will be as follows:

Types of Instruments

Long Term Plan

Risk Profile of the

Instrument

Normal Allocation

Normal Deviation

Government of India
Dated Securities

75

25

Sovereign

State
Governments
Dated Securities

15

15

Low

Government of India
Treasury Bills

10

10

Sovereign

In addition to the securities stated in the table above, the respective plans may enter into repos / reverse repos as may be permitted by
the RBI / SEBI
For further details please refer Scheme Information Document

19

Portfolio Composition
(As on December 31, 2014)

Portfolio Classification by Asset Class (%)

Long Term Plan
Government Securities

97.53

Cash, Cash Equivalents and Net Current

Assets

2.47

Additional Information:
Average Portfolio Maturity (years)*: 21.17
Modified duration (years)*: 9.35
Yield to Maturity*: 7.96%
Average AUM (Rs in crore): 578.63**

** Average AUM for the quarter ended December 31, 2014

* Computed on the invested amount
20

Glossary
CAD - Current Account Deficit
FD

- Fiscal Deficit

MBPD- Million barrel per day

CPI - Consumer Price Index
XIRR - Returns the internal rate of return for a schedule of cash flows that is not necessarily periodic.
PIGS Portugal, Italy, Greece and Spain

21

DISCLAIMER
The views expressed herein are based on the basis of internal data, publicly available information
and other sources believed to be reliable. Any calculations made are approximations, meant as
guidelines only, which you must confirm before relying on them. The information contained in this
document is for general purposes only and is not an offer to sell or a solicitation to buy/sell any
mutual fund units/securities. The document is given in summary form and does not purport to be
complete. The document does not have regard to specific investment objectives, financial situation
and the particular needs of any specific person who may receive this document. The information/
data herein alone are not sufficient and should not be used for the development or implementation
of an investment strategy. The same should not be construed as investment advice to any party.
The statements contained herein are based on our current views and involve known and unknown
risks and uncertainties that could cause actual results, performance or events to differ materially
from those expressed or implied in such statements. Neither HDFC Asset Management Company
(HDFC AMC) and HDFC Mutual Fund (the Fund) nor any person connected with them, accepts any
liability arising from the use of this document. The recipient(s) before acting on any information
herein should make his/her/their own investigation and seek appropriate professional advice and
shall alone be fully responsible / liable for any decision taken on the basis of information contained
herein.
MUTUAL FUND INVESTMENTS ARE SUBJECT TO MARKET RISKS, READ ALL SCHEME
RELATED DOCUMENTS CAREFULLY.

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Thank You

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