Time To Bond

Fixed Income Update- January 2008

Inflation under control

10 9 8 7 6 5 4 CPI Ind Worker 3 CPI Rural 2 WPI CPI Urban

Low WPI benefits from low manufacturing inflation (3.6%) and government preventing a pass through of high international crude prices. CPI too coming off and will continue to come down further with waning of festival season demand and improvements in supply conditions
Source: Bloomberg

Jan-06 Feb-06 Mar-06 Apr-06 May-06 Jun-06 Jul-06 Aug-06 Sep-06 Oct-06 Nov-06 Dec-06 Jan-07 Feb-07 Mar-07 Apr-07 May-07 Jun-07 Jul-07 Aug-07 Sep-07 Oct-07 Nov-07 Dec-07

Monetary tightening affecting growth

30 IIP 25 20 15 10 5 0 -5 -10 Cons Durables Capital Goods

May-05

May-06

May-07

Mar-05

Mar-06

Nov-05

Nov-06

Mar-07

Jan-05

Jan-06

Jan-07

Jul-05

Jul-06

Sep-05

Sep-06

Jul-07

Moderation in IIP growth led by slowdown in interest rate sensitive sectors. Capacity addition and improvement in infrastructure will reduce inflationary pressures

Source: Bloomberg

Sep-07

Monetary Indicators getting under control

32 30 28 26 24 22 20 18 16 14 12 M3 growth Depos it Growth Credit Growth

Credit growth slowed to 22% from 30% last year and lower than the deposit growth which has increased to 24%. Deceleration in accumulation of forex reserves and slowing credit growth will gradually bring down M3 growth
Source: Bloomberg

Apr-05 Jun-05 Aug-05 Oct-05 Dec-05 Feb-06 Apr-06 Jun-06 Aug-06 Oct-06 Dec-06 Feb-07 Apr-07 Jun-07 Aug-07 Oct-07 Dec-07

RBI Changes Track

1.10 For e x Re s e r ve s M SS 1.05 0.18 0.20

0.16 1.00 0.14 0.95 0.12 0.90 0.10 0.85

0.08

0.80

0.06

May-07

Oct-07

Jun-07

Jul-07

Nov-07

Global financial turmoil has resulted in forex inflows turning uncertain. After withdrawing Rs. 15000 cr. with the CRR hike RBI adds an amount more than that thru Monetary Stabilisation Scheme (MSS) withdrawals. Open Market Operations (OMO) purchases by RBI also help in reducing the supply overhang of G Secs.
Source: Bloomberg

Aug-07

Dec-07

Sep-07

Apr-07

Inflation vigil to continue

120

London Metal Index DJ Agri Comm Index

Brendt Crude

190

100

180

80

170

60

160

40

150

20

140

130

Oil still above $ 90 per barrel, global agricultural commodity prices still high. Strong revenue growth will enable government to take fiscal steps to control primary article inflation. RBI is mindful of potential inflationary pressures.
Source: Bloomberg

Jan-04 Mar-04 May-04 Jul-04 Sep-04 Nov-04 Jan-05 Mar-05 May-05 Jul-05 Sep-05 Nov-05 Jan-06 Mar-06 May-06 Jul-06 Sep-06 Nov-06 Jan-07 Mar-07 May-07 Jul-07 Sep-07 Nov-07

Expectations

Over the longer term interest rates nearing peak of the cycle. 10-Yr G-Sec to be in the range of 7.40% to 7.80% Credit spreads to narrow further. Expectations of any rate cut in January premature. RBI likely to indicate neutral stance in the coming monetary policy.

Our Recommendation Kotak Bond short Term with a time horizon of over 3 months
Performance
Since Allotment 3 Months 6 Months 1 Year (May 2, 2002) 2.27 5.21 9.15 6.78 Kotak Bond Short Term Plan 1.99 4.29 7.98 5.77 Crisil Short Term bond Index

Kotak Bond Regular with a time horizon of over 6 months

Performance
Since Allotment 3 Months 6 Months 1 Year (Nov 25, 1999) 3.89 7.24 9.58 9.72 Kotak Bond Regular - Growth 2.57 5.20 6.92 5.86 Crisil Composite Bond Index

Returns (%) are as on Dec 31, 2007. Returns less than one year are absolute and over one year are Compounded annualised (CAGR).Past performance may or may not be sustained in future.Please read the offer document before investing.

Kotak Bond Regular- Portfolio

PORTFOLIO OF KOTAK BOND AS ON 31-Dec-2007
Industry % to Net /Rating Assets

Issuer / Instrument Debt Instruments Debentures and Bonds Corporate Debt / Financial Institutions LIC Housing Finance Ltd. TAS Trust Series III, TM L Fin. Ser. A1 Indian Retail ABS Trust Series 56 PTC A2 Infrastruture Leasing & Financial Services Limited Corporate Debt / Financial Institutions - Total Public S ector Undertakings Punjab National Bank State Bank Of India. Public S ector Undertakings - Total Government Dated S ecurities 8.33% Government Stock - 2036 7.99% Government Stock - 2017 8.13% Government Stock - 2021 Government Dated S ecurities - Total Money Market Instruments Commercial Paper (CP)/Certificate of Deposits (CD) Corporate Debt / Financial Institutions Unitech Ltd. Corporate Debt / Financial Institutions - Total

AAA AA+(so) AAA LAAA

11.07% 10.95% 3.66% 1.09% 26.77%

High credit quality portfolio with about 32% of the net assets in Govt. stocks and 34% in AAA rated paper.
Average maturity of 10.61 years to yield benefit from any potential softening in interest rates over medium to long term.

AAA AAA

10.78% 9.13% 19.91%

SOV SOV SOV

18.77% 9.16% 4.22% 32.15%

Yield to maturity of 8.75%

F1+(ind)

6.06% 6.06%

Net Current Assets/(Liabilites) Grand Total

15.11% 100.00%

Past performance may or may not be sustained in future.

Kotak Bond Short Term- Portfolio

Investments in high credit quality paper with over 50% in Money market instruments to capitalise on tight liquidity conditions and high short term rates.
PORTFOLIO OF KOTAK BOND SHORT TERM AS ON 31-Dec-2007
Issuer / Instrument Debt Instruments Debentures and Bonds Corporate Debt / Financial Institutions Rabo India Finance Ltd. LIC Housing Finance Ltd. BHW Home Finance Ltd ICICI Bank Ltd. Indiabulls Financial Services Ltd Sundaram Finance Ltd. Tata Sons Ltd. Citicorp Finance (India) Ltd. Mahindra & Mahindra Financial Services Ltd. RB Loan Trust Series V 2007 Ser A1(Unitech) Long Bond Receivables NMBR 400BP 2006 IV PTC A1 Citifinancial Consumer Finance India Ltd. Shriram Transport Finance Co Ltd. Citicorp Maruti Finance Ltd. Indian Cor Loan Sec.Trust Sr XXXVIII - Sr A1 BHPC Auto Sec. Trust JUNE 2005 PTC A3 Public Sector Undertakings Power Finance Corporation Ltd. State Bank Of India. Government Dated Securities Government Stock - 2017 Government Stock - 2010 Industry/Ra % to Net ting Assets

Average maturity of 1.58 years Yield to maturity of 8.75%

Money Market Instruments Commercial Paper (CP)/Certificate of Deposits (CD) Corporate Debt / Financial Institutions Unitech Ltd. ING Vysya Bank Ltd ABN Amro Bank N.V ICICI Home Finance Company Limited Citibank N.A. Centurion Bank of Punjab Ltd. Tata Motors Ltd. ICICI Bank Ltd. ICICI Bank Ltd.

P1+ AAA LAA+ CARE AAA F1+(ind)(SO) LAA+ AAA AAA AA+ F1+(ind)(SO) AAA(so) AAA AA(ind)(SO) AAA P1+(so) AAA(so)

4.45% 3.28% 3.24% 2.19% 2.17% 2.13% 2.13% 2.12% 1.91% 1.60% 1.39% 1.14% 1.08% 1.06% 0.98% 0.31% 31.18% 3.31% 2.28% 5.59% 2.19% 2.09% 4.28%

F1+(ind) P1+ A1+ A1+ P1+ F1+(ind) P1+ P1+ A1+

6.05% 5.21% 4.86% 3.05% 2.07% 1.71% 1.07% 1.04% 1.01% 26.07%

AAA AAA

Public Sector Undertakings State Bank of Travancore Allahabad Bank Punjab National Bank Canara Bank Union Bank of India State Bank Of India. State Bank of Indore National Bank for Agriculture and Rural Development Collateral Borrowing & Lending obligation Net Current Assets/(Liabilites) Grand Total

P1+ P1+ P1+ P1+ A1+ P1+ P1+ CARE AAA

SOV SOV

7.26% 5.33% 5.26% 3.20% 2.09% 1.04% 1.04% 1.02% 26.24% 0.22% 6.42% 100.00%

Past performance may or may not be sustained in future.

Our Investment Philosophy

Emphasis on Credit, Duration & liquidity of assets

Credit
Credit risk analysis by the credit committee Analysis of different rating category universe Compare against benchmark ratios Quarterly result analysis of the companies
Meetings with company management at least once a year for updates

Liquidity
Regular monitoring of Liquidity
Liquidity managed as per interest rate view and investment objective

Duration
Emphasis on modified duration in a way that best fits the investment objective

Investment Strategy

Quality Assets with evaluation of the yield curve, modified duration, the total volume traded etc. DEBT Market

Strong internal credit processes for fresh credit investment

Economy & Market close assessment of the macro economic factors such as money supply, deposit growth etc. and the market factors such as policy risk, money flow etc..

Risk Management

Liquidity Risk
Liquidity risk is managed primarily through the use of Monitoring of daily liquidity requirement and cash flow forecasting Monitoring systems & risk limits Scenario analysis Stress testing

Credit Risk
Use of credit exposure limits Limits based on rating & type of security Deals mostly in highly rated securities Credit exposure are compared against limits on daily basis Regular review of corporate performance and emphasis on management discussion to have a check on potential credit risk

Risk Factors
Mutual Funds and securities investments are subject to market risks and there is no assurance or guarantee that the objectives of the Scheme will be achieved. *As with any securities investment, the NAV of the Units issued under the Scheme can go up or down depending on the factors and forces affecting the capital markets. * Past performance of the Sponsor / Fund / AMC or that of existing Schemes of the Fund does not indicate the future performance of the Scheme. *Kotak Bond and Kotak Short Term Bond, are only the names of the Schemes and does not in any manner indicate either the quality of the Scheme, future prospects or returns. * The NAV of the Scheme may be affected, inter alia, by changes in the market, performance of individual stocks, trading volumes, settlement periods and transfer procedures. * Appreciation of the value of the Units issued under the Scheme can be restricted in the event of a high asset allocation to cash, when stock appreciates. * Tax laws may change, affecting the return on investment in Units. *In the event of receipt of a very large number of redemption requests or very large value redemption requests or of a restructuring of the Schemes portfolio, there may be delays in the redemption of Units. Please refer to the paragraph on "Right to limit Redemption" in the Offer Document. *Kotak Mahindra Bank Limited is not liable or responsible for any loss or shortfall resulting from the operations of the Scheme Statutory: Kotak Mahindra Mutual Fund is a Trust (Indian Trusts Act, 1882). Investment Manager: Kotak Mahindra Asset Management Company Ltd. Sponsor: Kotak Mahindra Bank Ltd. (liability Rs. NIL). Trustee: Kotak Mahindra Trustee Company Ltd. Before investing, please read the Offer Document. Before investing, please read the Offer Document.

Think Investments. Think Kotak