mafatlal centre, 10th floor, nariman point, mumbai - 400...

Mafatlal Centre, 10th Floor,Nariman Point, Mumbai - 400 021

CIN: U65991MH1996PTC100444Tel.: 91-22 66578000

Fax: 91-22 66578181

January 31, 2018

Dear Unit Holder,

Sub: Change in Fundamental Attributes of DSP BlackRock Micro Cap Fund ('Scheme')

Thank you for investing in DSP BlackRock Mutual Fund. We appreciate your trust in us.

The Scheme is an open ended equity growth scheme of DSP BlackRock Mutual Fund ('Fund').

Securities and Exchange Board of India ('SEBI') vide its Circular no. SEBI/HO/IMD/DF3/CIR/P/2017/114 dated October 6, 2017 read alongwith Circular no. SEBI/HO/IMD/DF3/CIR/P/2017/126 dated December 4, 2017 (Circular) has issued directions for Categorization and Rationalization of all the Mutual Fund Schemes in order to bring about uniformity in the practiceacross Mutual Funds and to standardize the scheme categories and characteristics of each category.

In this regard, in order to standardize our schemes in line with the categories as prescribed by SEBI in the said circular, certain changes needs to be carried out in the features of theScheme. Such changes shall result in change in the fundamental attribute of the Scheme, which will attract compliance of Regulation 18 (15A) of the SEBI (Mutual Fund) Regulations,1996 (MF Regulations) read alongwith Circular.

DSP BlackRock Trustee Company Pvt. Ltd., Trustee to the Fund, has approved the following changes to the existing features/provisions of the Scheme:

Sr. No. Particulars Existing Proposed

1. Name of Scheme DSP BlackRock Micro Cap Fund DSP BlackRock Small Cap Fund

2. Type of Scheme An Open ended diversified equity growthScheme

Small Cap Fund - An open ended equity scheme predominantly investing in small cap stocks

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3. Product Labeling This open ended equity growth Scheme issuitable for investor who are seeking*

Long-term capital growth

Investment in equity and equity-relatedsecurities in micro cap companies(beyond top 300 companies by marketcapitalization)

This open ended equity Scheme is suitable for investor who are seeking*

Long-term capital growth

Investment in equity and equity-related securities predominantly of small cap companies(beyond top 250 companies by market capitalization)

4. InvestmentObjective

The primary investment objective is to seek togenerate long term capital appreciation from aportfolio that is substantially constituted of equityand equity related securities which are not partof the top 300 companies by marketcapitalization. From time to time, the InvestmentManager will also seek participation in otherequity and equity related securities to achieveoptimal portfolio construction.

This shall be the fundamental attribute of theScheme. There is no assurance that theinvestment objective of the Scheme willbe realized.

The primary investment objective is to seek to generate long term capital appreciation from a portfoliothat is substantially constituted of equity and equity related securities of small cap companies. Fromtime to time, the fund manager will also seek participation in other equity and equity related securitiesto achieve optimal portfolio construction. There is no assurance that the investment objective ofthe Scheme will be realized

RISKOMETER

RISKOMETER

* Investors should consult their financialadvisers if in doubt about whether theScheme is suitable for them.

* Investors should consult their financial advisers if in doubt about whether the Scheme is suitablefor them.


5. Asset Allocation Under normal circumstances, it is anticipatedthat the asset allocation of the Scheme shall beas follows:

Under normal circumstances, it is anticipated that the asset allocation of the Scheme shall be as follows:

1. (a) Equity andequity relatedsecurities which 65% 100% Highare not part of thetop 300 stocks bymarketcapitalization

1. (b) Equity andequity relatedsecurities which 0% 35% Highare in the top 300stocks by marketcapitalization

of 1 (a) & (b) above,investments inADRs, GDRs and 0% 25% Highforeign securities

2. Debt* andMoney Market 0% 35% Low toSecurities Medium

Instruments IndicativeAllocations

(% of total assets)Mini-mum

Maxi-mum

RiskProfile

*Debt instruments may include securitised debtupto 10% of the net assets of the Scheme.

Total gross derivative exposure, investmentin equity and equity related securities andinvestment in debt and money market securitiesin the Scheme shall not exceed 100% of thenet assets of the Scheme. However, securitywise hedge position will not be considered incalculating the above exposure.

Stock lending

Subject to SEBI (MF) Regulations and theapplicable guidelines issued by SEBI, the MutualFund may engage in stock lending. The AMCshall comply with all reporting requirementsand the Trustee shall carry out periodic reviewas required by SEBI guidelines. Stock lendingmeans the lending of stock to another personor entity for a fixed period of time, at a negotiatedcompensation. The securities lent will bereturned by the borrower on expiry of thestipulated period.

The Investment Manager will apply thefollowing limits, should it desire to engage inStock Lending:

1. Not more than 20% of the net assets of aScheme can generally be deployed inStock Lending.

2. Not more than 5% of the net assets of aScheme can generally be deployed inStock Lending to any single counter party.

Overseas Investments

Under normal circumstances the Schemes shallnot have an exposure of more than 25% of its

Instruments Indicative Allocations(% of total assets)

Minimum Maximum

Risk Profile

1 (a) Equity & equity related instruments of small cap 65% 100% Highcompanies#

1 (b) Other equity & equity related instruments which are 0% 35% Highin the top 250 stocks by market capitalization

2. Debt* and Money Market Securities 0% 35% Low to Medium3. Units issued by REITs & InvITs 0% 10% Medium to High

#251st company onwards in terms of full market capitalization would be considered as small capcompanies.

*Debt instruments may include securitised debt upto 10% of the net assets of the Scheme.

The Scheme retains the flexibility to invest across all the securities in the debt and money markets aspermitted by SEBI / RBI from time to time, including schemes of mutual funds.

Stock lending

Subject to SEBI (MF) Regulations and the applicable guidelines issued by SEBI, the Mutual Fund mayengage in stock lending. The AMC shall comply with all reporting requirements and the Trustee shallcarry out periodic review as required by SEBI guidelines. Stock lending means the lending of stock toanother person or entity for a fixed period of time, at a negotiated compensation. The securities lent willbe returned by the borrower on expiry of the stipulated period.

The Investment Manager will apply the following limits, should it desire to engage in StockLending:

1. Not more than 20% of the net assets of a Scheme can generally be deployed in Stock Lending.

2. Not more than 5% of the net assets of a Scheme can generally be deployed in Stock Lending toany single counter party.

Overseas Investments

Under normal circumstances the Schemes shall not have an exposure of more than 25% of its netassets in foreign assets/securities, subject to applicable regulatory limits.

Trading in Derivatives

The net derivative position in the Scheme may be upto 50% of the net assets, subject to applicableregulatory limits, as mentioned in, "Where will the Scheme Invest?".

The cumulative gross exposure through equity, debt, money market instruments and derivativepositions shall not exceed 100% of the net assets of the Scheme.

Pending deployment of funds of the Scheme, the AMC may invest funds of the Scheme in short-termdeposits of scheduled commercial banks, subject to the following conditions issued by SEBI vide itscircular SEBI/IMD/CIR No. 1/91171 /07 dated April 16, 2007:

1. The term 'short term' for parking of funds shall be treated as a period not exceeding 91 days.

2. Such deposits shall be held in the name of the Scheme.

3. The Scheme shall not park more than 15% of its net assets in the short term deposit(s) of all thescheduled commercial banks put together. However, it may be raised to 20% with the priorapproval of the Trustee. Also, parking of funds in short term deposits of associate and sponsorscheduled commercial banks together shall not exceed 20% of total deployment by the MutualFund in short term deposits.

4. The Scheme shall not park more than 10% of its net assets in short term deposit(s) with any onescheduled commercial bank including its subsidiaries.

5. The Trustee shall ensure that the funds of the Scheme are not parked in the short term depositsof a bank which has invested in that Scheme.

6. AMC will not charge any investment management and advisory fees for parking of funds in shortterm deposits of scheduled commercial banks.

The above provisions do not apply to term deposits placed as margins for trading in cash andderivative market.

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net assets in foreign assets/securities, subjectto applicable regulatory limits.


The net derivative position in the Scheme maybe upto 50% of the net assets, subject toapplicable regulatory limits, as mentioned in,"Where will the Scheme Invest?".

In the event of any deviations below theminimum limits or beyond the maximum limitsas specified in the section, 'C. How will theSchemes allocate their assets?' and subject tothe notes mentioned therein, the InvestmentManager shall rebalance the portfolio within 30days from the date of said deviation. Where theportfolio is not rebalanced within 30 Days,justification for the same shall be placed beforethe Investment Committee and reasons for thesame shall be recorded in writing. TheInvestment Committee shall then decide on thecourse of action. However, at all times theportfolio will adhere to the overall investmentobjectives of the Schemes. Such changes inthe investment pattern will be for a short termand for defensive considerations and theintention being at all times to seek to protect theinterests of the Unit Holders.

The Scheme shall rebalance the portfolio in case of any deviation to the asset allocation. Suchrebalancing shall be done within 30 days from the date of occurrence of deviation. Where the portfoliois not rebalanced within 30 Days, justification for the same shall be placed before the InvestmentCommittee and reasons for the same shall be recorded in writing. The Investment committee shall thendecide on the course of action. However, at all times the portfolio will adhere to the overall investmentobjectives of the Schemes. Any alteration in the investment pattern will be for a short term on defensiveconsiderations; the intention being at all times to protect the interests of the Unit Holders.

It may be noted that no prior intimation/indication will be given to investors when the composition/assetallocation pattern under the Scheme undergoes changes within the permitted band as indicated above.

6. Where will theScheme invest?

The Scheme will invest primarily in stocks,which are not part of the top 100 stocks bymarket capitalisation, that the InvestmentManager determines as having strong orimproving fundamentals and have beenoverlooked or under priced, relative to otherstocks. Under normal market conditions,approximately 90% of the portfolio of the Schemewill be invested in equity and equity relatedsecurities. Equity related securities include,but are not limited to, fully convertibledebentures, partly convertible debentures,optionally convertible debentures, unlistedsecurities, convertible preference shares, initialpublic offerings, private placements andwarrants converting into equity securities.Under normal market conditions, approximately10% of the portfolio of the Scheme will beinvested in debt securities and money marketsecurities. This component of the portfolio willprovide the necessary liquidity to meetredemption needs and other liquidityrequirements of the Scheme. Debt securitiesinclude, but are not limited to, non-convertibledebentures, zero coupon securities, non-convertible portion of convertible debentures,floating rate bonds, debt instruments, and anyother such instruments as may be permittedby RBI/SEBI/ such other Regulatory Authorityfrom time to time.

Debt and money market securities include, butare not limited to:

Debt obligations of the Government ofIndia, state and local governments,

Subject to the Regulations and the disclosures as made under the section "How the Scheme willallocate its Assets", the corpus of the Scheme can be invested in any (but not exclusively) of thefollowing securities:

1. Equity and equity related securities

2. Equity Related Instruments, being securities which give the holder of the security right to receiveEquity Shares on pre agreed terms. It includes convertible/optionally convertible/compulsorilyconvertible preference shares, share warrants and any other security which has equity componentembedded in it

3. Equity Derivatives, which are financial instruments, generally traded on the stock exchange, theprice of which is directly dependent upon (i.e., "derived from") the value of equity shares or equityindices. Derivatives involve the trading of rights or obligations based on the underlying, but do notdirectly transfer property

4. Securities created and issued by the Central and State Governments and/or repos/reverse reposin such Government Securities as may be permitted by RBI (including but not limited to couponbearing bonds, zero coupon bonds and treasury bills);

5. Securities guaranteed by the Central and State Governments (including but not limited to couponbearing bonds, zero coupon bonds and treasury bills);

6. Fixed Income Securities of domestic Government agencies and statutory bodies, which may ormay not carry a Central/State Government guarantee;

7. Corporate debt (of both public and private sector undertakings);

8. Money market instruments as permitted by SEBI/RBI;

9. Usance bills;

10. Securitised Debt;

11. The non-convertible part of convertible securities;

12. Any other domestic fixed income securities as permitted by SEBI/ RBI from time to time.

13. Derivative instruments like Interest Rate Swaps, Forward Rate Agreements, Interest RateDerivatives and such other derivative instruments permitted by SEBI/RBI.

14. Investment in units of Real Estate Investment Trust ('REIT') & Infrastructure Investment Trust('InvIT')

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government agencies, statutory bodies,public sector undertakings, scheduledcommercial banks, non-banking financecompanies, development financialinstitutions, supranational financialinstitutions, corporate entities and trusts(securitised debt)

Pass through, Pay through or otherParticipation Certificates, representinginterest in a pool of assets includingreceivables

The non-convertible part of convertiblesecurities

Units of Mutual funds as may be permittedby regulations

Structured Notes

Any other like instruments as may bepermitted by RBI/SEBI from time to time.

From time to time, it is possible that theInvestment Manager may decide to invest ahigher proportion in debt and money marketsecurities, depending on prevailing economicand market conditions and the need to adopt adefensive posture on the portfolio of the Scheme.

The securities mentioned in, "Where will theScheme invest?", could be listed, unlisted,privately placed, secured, unsecured, ratedor unrated (subject to the rating or equivalencyrequirements discussed above) and of anymaturity. The securities may be acquiredthrough secondary market operations, primaryissues/offerings, other public offers, PrivatePlacement and negotiated deals amongst othermechanisms.

Collateralized Borrowing andLending Obligations (CBLO):

Collateralized Borrowing and LendingObligations (CBLO) is a money marketinstrument that enables entities to borrowand lend against sovereign collateralsecurity. The maturity ranges from 1 dayto 90 days and can also be madeavailable upto 1 year. CentralGovernment securities including T-billsare eligible securities that can be used ascollateral for borrowing through CBLO.

Repos:

Repo (Repurchase Agreement) orReverse Repo is a transaction in whichtwo parties agree to sell and purchasethe same security with an agreement topurchase or sell the same security at amutually decided future date and price.The transaction results in collateralizedborrowing or lending of funds.

Investment in Short-Term Deposits

Pending deployment of the funds of theScheme, the AMC may invest funds of

Debt and money market securities include, but are not limited to:

Debt obligations of the Government of India, state and local governments, government agencies,statutory bodies, public sector undertakings, scheduled commercial banks, non-banking financecompanies, development financial institutions, supranational financial institutions, corporate entitiesand trusts (securitised debt)

Pass through, Pay through or other Participation Certificates, representing interest in a pool ofassets including receivables

The non-convertible part of convertible securities

Units of Mutual funds as may be permitted by regulations

Any other like instruments as may be permitted by RBI/SEBI/such other Regulatory Authority from timeto time.

The securities mentioned in, "Where will the Scheme(s) invest?", could be listed, unlisted, privatelyplaced, secured, unsecured, rated or unrated (subject to the rating or equivalency requirementsdiscussed above) and of any maturity. The securities may be acquired through secondary marketoperations, primary issues/offerings, other public offers, Private Placement and negotiated dealsamongst other mechanisms.

The Scheme may invest in other Schemes managed by the AMC or in the Schemes of any otherMutual Fund(s), provided such investment is in conformity to the investment objectives of the Schemeand in terms of the prevailing Regulations. As per the Regulations, no investment management fees willbe charged for such investments and the aggregate inter-scheme investment made by all Schemes ofthe Mutual Fund or in the Scheme under the management of other asset management companies shallnot exceed 5% of the net asset value of the Mutual Fund.

Investment in Short-Term Deposits

Pending deployment of the funds of the Scheme, the AMC may invest funds of the Scheme inshort term deposits of scheduled commercial banks, subject to following conditions issued bySEBI vide its circular SEBI/IMD/CIR No. 1/ 91171 /07 dated April 16, 2007:

(a) Each Scheme shall not park more than 15% of its net assets in the short term deposit(s) ofall the scheduled commercial banks put together. However, it may be raised to 20% with theprior approval of the Trustee. Also, parking of funds in short term deposits of associate andsponsor scheduled commercial banks together shall not exceed 20% of total deployment bythe Mutual Fund in short term deposits.

(b) Each Scheme shall not park more than 10% of its net assets in short term deposit(s) with anyone scheduled commercial bank including its subsidiaries.

(c) The Trustee shall ensure that the funds of each Scheme are not parked in the short termdeposits of a bank which has invested in that Scheme.

(d) AMC will not charge any investment management and advisory fees for parking of funds inshort term deposits of scheduled commercial banks.

(e) The term 'short term' for parking of funds shall be treated as a period not exceeding 91 days.

(f) Such deposits shall be held in the name of the Scheme.

Investment in domestic Securitized Debt:

Depending upon the Investment Manager's views, the Scheme may invest in domestic securitizeddebt such as ABS or MBS. The investments in domestic securitized debt will be made only after givingdue consideration to factors such as but not limited to the securitization structure, quality of underlyingreceivables, credentials of the servicing agent, level of credit enhancement, liquidity factor, returnsprovided by the securitized paper vis-a-vis other comparable investment alternatives.

Although the returns provided by securitized debt could be higher, one must not lose sight of the fact thatrisks also exist with regard to investments in securitized debt. Investments in pass-through certificatesof a securitization transaction represent an undivided beneficial interest in the underlying receivablesand do not represent an obligation of either the issuer or the seller, or the parent of the seller, or anyaffiliate of the seller or the issuer or the trustee in its personal capacity, save to the extent of creditenhancement to be provided by the credit enhancer. The trust's principal asset will be the pool ofunderlying receivables. The ability of the trust to meet its obligations will be dependent on the receiptand transfer to the designated account of collections made by the servicing agent from the pool, theamount available in the cash collateral account, and any other amounts received by the trust pursuant

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the Scheme in short term deposits ofscheduled commercial banks, subject tofollowing conditions issued by SEBI videits circular SEBI/IMD/CIR No. 1/ 91171 /07 dated April 16, 2007:

(a) Each Scheme shall not park morethan 15% of its net assets in theshort term deposit(s) of all thescheduled commercial banks puttogether. However, it may be raisedto 20% with the prior approval of theTrustee. Also, parking of funds inshort term deposits of associate andsponsor scheduled commercialbanks together shall not exceed 20%of total deployment by the MutualFund in short term deposits.

(b) Each Scheme shall not park morethan 10% of its net assets in shortterm deposit(s) with any onescheduled commercial bankincluding its subsidiaries.

(c) The Trustee shall ensure that thefunds of each Scheme are not parkedin the short term deposits of a bankwhich has invested in that Scheme.

(d) AMC will not charge anyinvestment management andadvisory fees for parking of funds inshort term deposits of scheduledcommercial banks.

(e) The term 'short term' for parking offunds shall be treated as a periodnot exceeding 91 days.

(f) Such deposits shall be held in thename of the Scheme.

Investment in domestic Securitized Debt:

Depending upon the Investment Manager'sviews, the Scheme may invest in domesticsecuritized debt such as ABS or MBS. Theinvestments in domestic securitized debt willbe made only after giving due consideration tofactors such as but not limited to the securitizationstructure, quality of underlying receivables,credentials of the servicing agent, level of creditenhancement, liquidity factor, returns providedby the securitized paper vis-a-vis othercomparable investment alternatives.

Although the returns provided by securitizeddebt could be higher, one must not lose sight ofthe fact that risks also exist with regard toinvestments in securitized debt. Investments inpass-through certificates of a securitizationtransaction represent an undivided beneficialinterest in the underlying receivables and donot represent an obligation of either the issuer orthe seller, or the parent of the seller, or anyaffiliate of the seller or the issuer or the trustee inits personal capacity, save to the extent of

to the terms of the transaction documents. However, the credit enhancement stipulated in a securitizationtransaction represents a limited loss cover only. Delinquencies and credit losses may cause depletionof the amount available under the cash collateral account and thereby the scheduled payouts to theinvestors may get affected if the amount available in the cash collateral account is not enough to coverthe shortfall.

Further Unit holders are requested to refer below the disclosure relating to investments in securitizeddebt, in the SEBI prescribed format:

(i) How the risk profile of securitized debt fits into the risk appetite of the Scheme:

The Scheme seeks to generate an attractive return, consistent with prudent risk, from a portfoliowhich is substantially constituted of quality debt securities. The Scheme also seeks to generatecapital appreciation by investing a smaller portion of its corpus in equity and equity relatedsecurities of issuers domiciled in India.

In line with the investment objective, securitised debt instruments having a high credit qualitycommensurate with other debt instruments in the portfolio will be considered for investment.

(ii) Policy relating to originators based on nature of originator, track record, NPAs, lossesin earlier securitized debt, etc

The parameters used to evaluate originators are

Track record

Willingness to pay, through credit enhancement facilities etc.

Ability to pay

Business risk assessment, wherein following factors are considered:- Outlook for the economy (domestic and global)- Outlook for the industry- Company specific factors

In addition a detailed review and assessment of rating rationale is done including interactions withthe originator as well as rating agency.

Critical Evaluation Parameters (for pool loan) regarding the originator / underlying issuer:

Default track record/ frequent alteration of redemption conditions / covenants

High leverage ratios of the ultimate borrower - both on a standalone basis as well on aconsolidated level/ group level

Higher proportion of re-schedulement of underlying assets of the pool or loan, as the casemay be

Higher proportion of overdue assets of the pool or the underlying loan, as the case may be

Poor reputation in market

Insufficient track record of servicing of the pool or the loan, as the case may be.

(iii) Risk mitigation strategies for investments with each kind of originator

Analysis of originator: An independent Risk and Quantitative Analysis (RQA) team analyses andevaluates each originator and sets up limits specifying both the maximum quantum and maximumtenor for investments and investments are considered only within these limits.

Originator analysis typically encompasses:

Size and reach of the originator

Collection process, infrastructure and follow-up mechanism

Quality of MIS

Credit enhancement for different type of originator

(iv) The level of diversification with respect to the underlying assets, and risk mitigationmeasures for less diversified investments

Eligible assets: Only assets with an established track record of low delinquencies and highcredit quality over several business cycles will be considered for investment.

Analysis of pool: Characteristics such as average pool maturity (in months), average loan tovalue ratio, average seasoning of the pool, maximum single exposure, geographical distributionand average single exposure are studied to determine pool quality

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credit enhancement to be provided by the creditenhancer. The trust's principal asset will bethe pool of underlying receivables. The abilityof the trust to meet its obligations will bedependent on the receipt and transfer to thedesignated account of collections made by theservicing agent from the pool, the amountavailable in the cash collateral account, andany other amounts received by the trustpursuant to the terms of the transactiondocuments. However, the credit enhancementstipulated in a securitization transactionrepresents a limited loss cover only.Delinquencies and credit losses may causedepletion of the amount available under thecash collateral account and thereby thescheduled payouts to the investors may getaffected if the amount available in the cashcollateral account is not enough to cover theshortfall.

Further Unit holders are requested to refer belowthe disclosure relating to investments insecuritized debt, in the SEBI prescribed format:

(i) How the risk profile of securitizeddebt fits into the risk appetite of theScheme:

The Scheme seeks to generate anattractive return, consistent with prudentrisk, from a portfolio which is substantiallyconstituted of quality debt securities. TheScheme also seeks to generate capitalappreciation by investing a smaller portionof its corpus in equity and equity relatedsecurities of issuers domiciled in India.

In line with the investment objective,securitised debt instruments having a highcredit quality commensurate with otherdebt instruments in the portfolio will beconsidered for investment.

(ii) Policy relating to originators basedon nature of originator, track record,NPAs, losses in earlier securitizeddebt, etc

The parameters used to evaluateoriginators are

Track record

Willingness to pay, through creditenhancement facilities etc.

Ability to pay

Business risk assessment,wherein following factors areconsidered:- Outlook for the economy

(domestic and global)- Outlook for the industry- Company specific factors

In addition a detailed review andassessment of rating rationale is doneincluding interactions with the originatoras well as rating agency.

Risk mitigating measures: Credit enhancement facilities (including cash, guarantees, excessinterest spread, subordinate tranches), liquidity facilities and payment structure are studied inrelation to historical collection and default behavior of the asset class to ensure adequacy of creditenhancement in a stress scenario.

(v) Minimum retention period of the debt by originator prior to securitization

We will follow the guidelines on minimum holding period requirements as laid down by SEBI andRBI from time to time.

(vi) Minimum retention percentage by originator of debts to be securitized

We will follow the guidelines on minimum holding period requirements as laid down by SEBI andRBI from time to time.

(vii) The mechanism to tackle conflict of interest when the Mutual Fund invests in securitizeddebt of an originator and the originator in turn makes investments in that particularScheme of the Fund

The AMC has an independent RQA team which is distinct from the Sales function and theInvestments function and has a separate reporting and appraisal structure designed to avoidconflict of interest. Investments can be initiated by the fund managers only after the RQA team hasassigned limits for the originator. The originator wise limits specify both the maximum quantumand maximum tenor for investments.

(viii) The resources and mechanism of individual risk assessment with the AMC for monitoringinvestment in securitized debt

The AMC has a rigorous risk management process for all fixed income investments, which alsoencompasses securitized debt. A dedicated RQA team is responsible for monitoring risks includingcredit and liquidity risk. The functions of the RQA team include:

Detailed credit analysis of issuers: based on the management evaluation, operating strength andfinancial strength to determine suitability for investment. Periodic reviews on a quarterly/annualbasis are under taken for eligible issuers. Ratings are monitored on a daily basis and anychanges are immediately recorded and suitable action taken.

RQA team monitors adherence to single and group level exposure norms, minimum ratingrequirements, liquidity requirements, and ensures that only eligible securities are included in thefund, in line with the Scheme information document/internal templates.

For securitized pool loan exposures, the analysis includes pool seasoning, pool asset quality,diversification, collateral margin, originator analysis and credit enhancement mechanisms. Poolperformance statistics published by rating agencies are analyzed for performance of other securitisedpools of the same originator as well as for the performance of the asset class as a whole. Regularinteractions with the rating agencies are done to discuss performance trends. Documents arevetted by the legal and compliance team. In addition, monthly payout reports from the trustees areanalysed for collection performance and adequacy of cash collateral.

Framework that is applied while evaluating investment decision relating to a poolsecuritization transaction:

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Critical Evaluation Parameters (for poolloan) regarding the originator / underlyingissuer:

Default track record/ frequentalteration of redemption conditions /covenants

High leverage ratios of the ultimateborrower - both on a standalonebasis as well on a consolidatedlevel/ group level

Higher proportion of re-schedulementof underlying assets of the pool orloan, as the case may be

Higher proportion of overdue assetsof the pool or the underlying loan,as the case may be

Poor reputation in market

Insufficient track record of servicingof the pool or the loan, as the casemay be.

(iii) Risk mitigation strategies forinvestments with each kind oforiginator

Analysis of originator: An independentRisk and Quantitative Analysis (RQA)team analyses and evaluates eachoriginator and sets up limits specifyingboth the maximum quantum andmaximum tenor for investments andinvestments are considered only withinthese limits.

Originator analysis typicallyencompasses:

Size and reach of the originator

Collection process, infrastructure andfollow-up mechanism

Quality of MIS

Credit enhancement for different typeof originator

(iv) The level of diversification withrespect to the underlying assets, andrisk mitigation measures for lessdiversified investments

Eligible assets: Only assets with anestablished track record of lowdelinquencies and high credit quality overseveral business cycles will beconsidered for investment.

Analysis of pool: Characteristics suchas average pool maturity (in months),average loan to value ratio, averageseasoning of the pool, maximum singleexposure, geographical distribution andaverage single exposure are studied todetermine pool quality

Characteristics/ Type of Pool

Mortgage Loan Commercial Vehicleand

ConstructionEquipment

CAR 2 wheelers Others

ApproximateAverage maturity (inMonths)

In line with averagematurity of mortgage loansas per industry norms.Typically less than 10years.

In line with averagematurity of CommercialVehicle andConstruction Equipmentloans as per industrynorms. Typically lessthan 4 years.

In line withaveragematurity ofcar loans asper industrynorms.Typicallyless than 4years.

In line withaveragematurity oftwo-wheelerloans as perindustrynorms.Typicallyless than 4years.

In line withaveragematurity ofthe assetclass as perindustrynorms.

Collateral margin(including cash,guarantees, excessinterest spread ,subordinate tranche)

The collateral margin willbe adequate for the pool toachieve a rating in the highsafety category at the timeof initial rating. Thecollateral margin willensure at least a 3 timescover over historicallosses observed in theasset class.

The collateral marginwill be adequate for thepool to achieve a ratingin the high safetycategory at the time ofinitial rating. Thecollateral margin willensure at least a 3times cover overhistorical lossesobserved in the assetclass.

Thecollateralmargin willbe adequatefor the poolto achieve arating in thehigh safetycategory atthe time ofinitial rating.Thecollateralmargin willensure atleast a 3times coveroverhistoricallossesobserved inthe assetclass.

Thecollateralmargin willbe adequatefor the poolto achieve arating in thehigh safetycategory atthe time ofinitial rating.Thecollateralmargin willensure atleast a 3times coveroverhistoricallossesobserved inthe assetclass.

Thecollateralmargin willbe adequatefor the pool toachieve arating in thehigh safetycategory atthe time ofinitial rating.

Thecollateralmargin willensure atleast a 3times coveroverhistoricallossesobserved inthe assetclass.

Average Loan toValue Ratio

In line with average Loanto Value ratio of mortgageloans as per industrynorms. Typically less than80 per cent.

In line with averageLoan to Value ratio ofCommercial Vehicleand ConstructionEquipment loans as perindustry norms.Typically less than 85per cent.

In line withaverageLoan toValue ratio ofcar loans asper industrynorms.Typicallyless than 85per cent.

In line withaverageLoan toValue ratio oftwo-wheelerloans as perindustrynorms.Typicallyless than 85per cent.

In line withaverage Loanto Value ratioof the assetclass loansas perindustrynorms.

Average seasoningof the Pool

In line with industry normsand guidelines laid downby RBI/SEBI from time totime. Typically, more than3 months

In line with industrynorms and guidelineslaid down by RBI/SEBIfrom time to time.Typically, more than 3months

n line withindustrynorms andguidelineslaid down byRBI/SEBIfrom time totime.Typically,more than 3months

In line withindustrynorms andguidelineslaid down byRBI/SEBIfrom time totime.Typically,more than 3months

In line withindustrynorms andguidelineslaid down byRBI/SEBIfrom time totime.

Maximum singleexposure range

Not more than 10% Not more than 10% Not morethan 10%

Not morethan 10%

Not morethan 10%

Average singleexposurerange %

Not more than 10% Not more than 10% Not morethan 10%

Not morethan 10%

Not morethan 10%

* Kindly note that all references to single loan securitization has been removed as securitization of single corporate loans areno longer envisaged under revised RBI guidelines on securitization

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The Scheme will not be investing in foreign securitised debt.

Investment in Overseas Financial Assets/Foreign Securities

According to SEBI circular no. SEBI/IMD/CIR No. 7/104753/07 dated September 26, 2007 mutualfunds can invest in ADRs/GDRs/other specified foreign securities and as per SEBI circular no.SEBI/IMD/CIR No. 2/122577/08 dated April 08, 2008, such investments are subject to an overalllimit of US$ 7 bn. for all mutual funds put together. The Mutual Fund has been allowed anindividual limit of US$ 600 mn. The overall ceiling for investment in overseas ETFs that invest insecurities is US$ 1 billion subject to a maximum of US$ 50 million per mutual fund.

The dedicated fund manager appointed for making overseas investments by the Mutual Fund willbe in accordance with the applicable requirements of SEBI. Depending upon the InvestmentManager's views, Scheme would like to seek investment opportunities in the ADR/GDR/overseasmarket.


Risk mitigating measures: Creditenhancement facilities (including cash,guarantees, excess interest spread,subordinate tranches), liquidity facilitiesand payment structure are studied inrelation to historical collection and defaultbehavior of the asset class to ensureadequacy of credit enhancement in astress scenario.

(v) Minimum retention period of the debtby originator prior to securitization

We will follow the guidelines on minimumholding period requirements as laid downby SEBI and RBI from time to time.

(vi) Minimum retention percentage byoriginator of debts to be securitized

We will follow the guidelines on minimumholding period requirements as laid downby SEBI and RBI from time to time.

(vii) The mechanism to tackle conflict ofinterest when the Mutual Fund investsin securitized debt of an originatorand the originator in turn makesinvestments in that particular Schemeof the Fund

The AMC has an independent RQA teamwhich is distinct from the Sales functionand the Investments function and has aseparate reporting and appraisal structuredesigned to avoid conflict of interest.Investments can be initiated by the fundmanagers only after the RQA team hasassigned limits for the originator. Theoriginator wise limits specify both themaximum quantum and maximum tenorfor investments.

(viii) The resources and mechanism ofindividual risk assessment with theAMC for monitoring investment insecuritized debt

The AMC has a rigorous riskmanagement process for all fixed incomeinvestments, which also encompassessecuritized debt. A dedicated RQA teamis responsible for monitoring risksincluding credit and liquidity risk. Thefunctions of the RQA team include:

Detailed credit analysis ofissuers: Based on themanagement evaluation, operatingstrength and financial strength todetermine suitability for investment.Periodic reviews on a quarterly/annual basis are under taken foreligible issuers. Ratings aremonitored on a daily basis and anychanges are immediately recordedand suitable action taken.


The Mutual Fund may use various derivatives and hedging products/ techniques, in order to seek togenerate better returns for the Scheme. Derivatives are financial contracts of pre-determined fixedduration, whose values are derived from the value of an underlying primary financial instrument,commodity or index. The Scheme while investing in equities shall transact in exchange traded equityderivatives only and these instruments may take the form of Index Futures, Index Options, Futures andOptions on individual equities/securities and such other derivative instruments as may be appropriateand permitted under the SEBI Regulations and guidelines from time to time.

Advantages of Trading in Derivatives

Advantages of derivatives are many. The use of derivatives provides flexibility to the Schemesto hedge whole or part of the portfolio. The following section describes some of the more commonderivatives transactions along with their benefits:

Derivatives are financial contracts of pre-determined fixed duration, whose values are derivedfrom the value of an underlying primary financial instrument, commodity or index, such asinterest rates, exchange rates, commodities and equities.

1. Futures

A futures contract is a standardized contract between two parties where one of the partiescommits to sell, and the other to buy, a stipulated quantity of a security at an agreed price on orbefore a given date in future.

Currently, futures contracts have a maximum expiration cycle of 3 months. Three contracts areavailable for trading, with 1 month, 2 months and 3 months expiry respectively. A new contractis introduced on the next trading day following the expiry of the relevant monthly contract. Futurescontracts typically expire on the last Thursday of the month. For example a contract with the April2017 expiration expires on the last Thursday of April 2017 (April 27, 2017).

Basic Structure of an Index Future

The Stock Index futures are instruments designed to give exposure to the equity markets indices.The Stock Exchange, Mumbai (BSE) and The National Stock Exchange (NSE) have trading inindex futures of 1, 2 and 3 month maturities. The pricing of an index future is the function of theunderlying index and short-term interest rates. Index futures are cash settled, there is no deliveryof the underlying stocks.

Example using hypothetical figures:

1 month ABC Index Future

If the Scheme buys 2,000 futures contracts, each contract value is 50 times the futures indexprice.

Purchase Date : April 01, 2017Spot Index : 9200.00Future Price : 9300.00Date of Expiry : April 27, 2017Margin : 10%

Assuming the exchange imposes a total margin of 10%, the Investment Manager will be requiredto provide a total margin of approx. Rs. 93,000,000 (i.e. 10%*9300*2000*50) through eligiblesecurities and cash.

Assuming on the date of expiry, i.e. April 27 , 2017, ABC Index closes at 9350, the net impact willbe a profit of Rs. 5,000,000 for the Scheme, i.e. (9350-9300) * 2000 * 50 (Futures price = Closingspot price = Rs. 9350.00)

Profits for the Scheme = (9350-9300) * 2000*50 = Rs. 5,000,000.

Please note that the above example is given for illustration purposes only. Some assumptionshave been made for the sake of simplicity.

The net impact for the Scheme will be in terms of the difference of the closing price of the indexand cost price. Thus, it is clear from the above example that the profit or loss for the Scheme willbe the difference between the closing price (which can be higher or lower than the purchase price)and the purchase price. The risks associated with index futures are similar to those associatedwith equity investments. Additional risks could be on account of illiquidity and potential mis-pricingof the futures.

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RQA team monitors adherence tosingle and group level exposurenorms, minimum ratingrequirements, liquidity requirements,and ensures that only eligiblesecurities are included in the fund,in line with the Scheme informationdocument/internal templates.

For securitized pool loan exposures, theanalysis includes pool seasoning, poolasset quality, diversification, collateralmargin, originator analysis and creditenhancement mechanisms. Poolperformance statistics published by ratingagencies are analyzed for performanceof other securitised pools of the sameoriginator as well as for the performanceof the asset class as a whole. Regularinteractions with the rating agencies aredone to discuss performance trends.Documents are vetted by the legal andcompliance team. In addition, monthlypayout reports from the trustees areanalysed for collection performance andadequacy of cash collateral.

Framework that is applied while evaluatinginvestment decision relating to a poolsecuritization transaction:

Char-acter-istics/ Type

ofPool

Mort-gageLoan

Commer-cial

Vehicleand

Construc-tion

Equip-ment

CAR 2wheelers

In line withaveragematurity ofCommercialVehicle andConstructionEquipmentloans as perindustrynorms.Typically lessthan 4years.

Inlinewithaver-agematu-rity ofcarloansasperin-dus-trynorms.Typi-callylessthan4years.

Inlinewithaver-agema-turityoftwo-wheelerloansasperin-dus-trynor-ms.Typi-callylessthan4years.

Inlinewithaver-agema-turityoftheassetclassasperin-dus-trynor-ms.

In linewithaveragematurityofmortgageloans asperindustrynorms.Typicallyless than10 years.

Oth-ers

Ap-p r o x i -m a t eAver -a g em a t u -r i ty( inMonths)

Basic Structure of a Stock Future

A futures contract on a stock gives its owner the right and obligation to buy or sell stocks. SingleStock Futures traded on NSE (National Stock Exchange) are cash settled; there is no delivery ofthe underlying stocks on the expiration date. A purchase or sale of futures on a security gives thetrader essentially the same price exposure as a purchase or sale of the security itself. In thisregard, trading stock futures is no different from trading the security itself.


The Scheme holds shares of XYZ Ltd., the current price of which is Rs. 500 per share. TheScheme sells one month futures on the shares of XYZ Ltd. at the rate of Rs. 540.

If the price of the stock falls, the Mutual Fund will suffer losses on the stock position held.However, in such a scenario, there will be a profit on the short futures position.

At the end of the period, the price of the stock falls to Rs. 450 and this fall in the price of the stockresults in a fall in the price of futures to Rs. 470. There will be a loss of Rs. 50 per share (Rs. 500- Rs. 450) on the holding of the stock, which will be offset by the profits of Rs. 70 (Rs. 540 - Rs.470) made on the short futures position.

Please note that the above example is given for illustration purposes only. Some assumptionshave been made for the sake of simplicity. Certain factors like margins and other related costshave been ignored. The risks associated with stock futures are similar to those associated withequity investments. Additional risks could be on account of illiquidity and potential mis-pricing ofthe futures.

2. Options

An option gives a person the right but not an obligation to buy or sell something. An option is acontract between two parties wherein the buyer receives a privilege for which he pays a fee(premium) and the seller accepts an obligation for which he receives a fee. The premium is theprice negotiated and set when the option is bought or sold. A person who buys an option is saidto be long in the option. A person who sells (or writes) an option is said to be short in the option.

An option contract may be of two kinds:

1) Call option

An option that provides the buyer the right to buy is a call option. The buyer of the call optioncan call upon the seller of the option and buy from him the underlying asset at the agreedprice. The seller of the option has to fulfill the obligation upon exercise of the option.

2) Put option

The right to sell is called a put option. Here, the buyer of the option can exercise his right tosell the underlying asset to the seller of the option at the agreed price.

Option contracts are classified into two styles:

(a) European Style

In a European option, the holder of the option can only exercise his right on the date ofexpiration only.

(b) American Style

In an American option, the holder can exercise his right anytime between the purchasedate and the expiration date.

Basic Structure of an Equity Option

In India, options contracts on indices are European style and cash settled whereas, optioncontracts on individual securities are American style and cash settled.

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ofPool

Mort-gageLoan

Commer-cial

Vehicleand

Construc-tion

Equip-ment

CAR 2wheelers

Oth-ers


Market type : NInstrument Type : OPTSTKUnderlying : XYZ Ltd. (XYZ)Purchase date : April 1, 2017Expiry date : April 27, 2017Option Type : Put Option (Purchased)Strike Price : Rs. 9,750.00Spot Price : Rs. 9,800.00Premium : Rs. 200.00Lot Size : 100No. of Contracts : 50

Say, the Mutual Fund purchases on April 1, 2017, 1 month Put Options on XYZ Ltd. (XYZ) on theNSE i.e. put options on 5000 shares (50 contracts of 100 shares each) of XYZ.

As these are American style options, they can be exercised on or before the exercise date i.e.April 27, 2017. If the share price of XYZ Ltd. falls to Rs. 9,500/- on April 27, 2017, and theInvestment Manager decides to exercise the option, the net impact will be as Follows:

Premium Expense = Rs. 200 * 50 * 100 =Rs. 10,00,000/-

Option Exercised at = Rs. 9,500/-Profits for the Mutual Fund = (9,750.00 - 9,500.00) * 50 * 100

= Rs. 12,50,000/-Net Profit = Rs. 12,50,000 - Rs. 10,00,000 = Rs. 2,50,000/-

In the above example, the Investment Manager hedged the market risk on 5000 shares of XYZLtd. by purchasing put options.

Please note that the above example is given for illustration purposes only. Some assumptionshave been made for the sake of simplicity. Certain factors like margins have been ignored. Thepurchase of Put Options does not increase the market risk in the Mutual Fund as the risk isalready in the Mutual Fund's portfolio on account of the underlying asset position (in his exampleshares of XYZ Ltd.). The Premium paid for the option is treated as an expense and added to theholding cost of the relevant security. Additional risks could be on account of illiquidity and potentialmis-pricing of the options.

Exposure to Equity Derivatives

i . Position limit for the Mutual Fund in index options contracts:

a. The Mutual Fund position limit in all index options contracts on a particular underlyingindex shall be Rs. 500 crore or 15% of the total open interest in the market in indexoptions, whichever is higher, per Stock Exchange.

b. This limit would be applicable on open positions in all options contracts on a particularunderlying index.

i i . Position limit for the Mutual Fund in index futures contracts:

a. The Mutual Fund position limit in all index futures contracts on a particular underlyingindex shall be Rs. 500 crore or 15% of the total open interest in the market in indexfutures, whichever is higher, per Stock Exchange.

b. This limit would be applicable on open positions in all futures contracts on a particularunderlying index.

iii. Additional position limit for hedging:

In addition to the position limits at point (i) and (ii) above, Fund may take exposure in equityindex derivatives subject to the following limits:

a. Short positions in index derivatives (short futures, short calls and long puts) shall notexceed (in notional value) the Mutual Fund's holding of stocks.

b. Long positions in index derivatives (long futures, long calls and short puts) shall notexceed (in notional value) the Mutual Fund's holding of cash, government securities,T-Bills and similar instruments.

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Thecollateralmargin willbeadequatefor the poolto achieve arating in thehigh safetycategory atthe time ofinitial rating.Thecollateralmargin willensure atleast a 3times coveroverhistoricallossesobserved inthe assetclass.

Thecollat-eralmar-ginwillbeadeq-uateforthepooltoachi-eve aratingin thehighsafetycat-egoryatthetimeofinitialrat-ing.Thecollat-eralmar-ginwillen-sureatleasta 3timescoveroverhis-toricallossesob-servedin theassetclass.

Thecol-lat-eralmar-ginwillbeadeq-uateforthepooltoachi-evearat-ing inthehighsafetycat-egoryatthetimeofinitialrat-ing.Thecol-lat-eralmar-ginwillen-sureatleasta 3timescoveroverhis-tori-callossesob-servedintheassetclass.

Thecol-lat-eralmar-ginwillbeadeq-uateforthepooltoachi-evearat-ing inthehighsafetycat-egoryatthetimeofinitialrat-ing.Thecol-lat-eralmar-ginwillen-sureatleasta 3timescoveroverhis-tori-callossesob-servedintheassetclass.

Thecollateralmargin willbeadequatefor thepool toachieve arating inthe highsafetycategoryat thetime ofinitialrating.Thecollateralmargin willensure atleast a 3timescoveroverhistoricallossesobservedin theassetclass.

C o l -l a t -e r a lmar -g i n( in -c l u d -i n gc a s h ,g u a r -a n -t e e s ,ex -cessi n t e r -e s tspread,s u b -o r d i -n a t etranche)

In line withaverageLoan toValue ratioofCommercialVehicle andConstructionEquipmentloans as perindustrynorms.Typically lessthan 85 percent.

Inlinewithaver-ageLoantoValueratioof carloansasperin-dus-trynorms.Typi-callylessthan85percent.

Inlinewithaver-ageLoantoValueratiooftwo-wh-eelerloansasperin-dus-trynor-ms.Typi-callylessthan85percent.

Inlinewithaver-ageLoantoValueratiooftheassetclassloansasperin-dus-tryno-rms.

In linewithaverageLoan toValueratio ofmortgageloans asperindustrynorms.Typicallyless than80 percent.

AverageLoantoValueRatio


iv. Position limit for the Mutual Fund for stock based derivative contracts:

The combined futures and options position limit shall be 20% of the applicable Market WidePosition Limit (MWPL).

v. Position limit for the Scheme:

The position limits for the Scheme and disclosure requirements are as follows:

a. For stock option and stock futures contracts, the gross open position across allderivative contracts on a particular underlying stock of a scheme of a Fund shall notexceed the higher of 1% of free float market capitalization (in terms of number ofshares).

Or

5% of the open interest in the derivative contracts on a particular underlying stock (interms of number of contracts).

b. This position limit shall be applicable on the combined position in all derivativecontracts on a underlying stock at a Stock Exchange.

c . For index based contracts, the Mutual Fund shall disclose the total open interest heldby its scheme or all schemes put together in a particular underlying index, if such openinterest equals to or exceeds 15% of the open interest of all derivative contracts on thatunderlying index.

As and when SEBI notifies amended limits in position limits for exchange tradedderivative contracts in future, the aforesaid position limits, to the extent relevant, shallbe read as if they were substituted with the SEBI amended limits.

Exposure Limits:

With respect to investments made in derivative instruments, the Schemes shall comply with thefollowing exposure limits in line with SEBI Circular Cir/IMD/DF/11/2010 dated August 18, 2010:

1. The cumulative gross exposure through equity, debt and derivative positions will notexceed 100% of the net assets of the respective Scheme. However, the following shall notbe considered while calculating the gross exposure:

a. Security-wise hedged position and

b. Exposure in cash or cash equivalents with residual maturity of less than 91 days

2. The total exposure related to option premium must not exceed 20% of the net assets of theScheme.

3. The Mutual Fund shall not write options or purchase instruments with embedded writtenoptions.

4. Exposure due to hedging positions may not be included in the above mentioned limitssubject to the following:

a. Hedging positions are the derivative positions that reduce possible losses on anexisting position in securities and till the existing position remains.

b. Hedging positions cannot be taken for existing derivative positions. Exposure due tosuch positions shall have to be added and treated under limits mentioned in Point 1.

c . Any derivative instrument used to hedge has the same underlying security as theexisting position being hedged.

d. The quantity of underlying associated with the derivative position taken for hedgingpurposes does not exceed the quantity of the existing position against which hedgehas been taken.

5. The Mutual Fund may enter into plain vanilla interest rate swaps for hedging purposes. Thecounter party in such transactions has to be an entity recognized as a market maker by RBI.Further, the value of the notional principal in such cases must not exceed the value ofrespective existing assets being hedged by the scheme. Exposure to a single counterpartyin such transactions should not exceed 10% of the net assets of the scheme.

6. Exposure due to derivative positions taken for hedging purposes in excess of the underlyingposition against which the hedging position has been taken, shall be treated under the limitsmentioned in point 1.

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Not morethan 10%

Notmorethan1 0 %

Notmorethan1 0 %

Notmorethan1 0 %

Not morethan1 0 %

Maxi-mumsingleexpo-surerange

Not morethan 10%

Notmorethan1 0 %

Notmorethan1 0 %

Notmorethan1 0 %

Not morethan1 0 %

Averagesingleexpo-surerange%* Kindly note that all references to single loan securitization hasbeen removed as securitization of single corporate loans areno longer envisaged under revised RBI guidelines onsecuritization

In line withindustrynorms andguidelineslaid down byRBI/SEBIfrom time totime.Typically,more than 3months

Inlinewithin-dus-trynormsandguide-lineslaiddownbyRBI/SEBIfromtimetotime.Typi-cally,morethan3 mo-nths

Inlinewithin-dus-tryno-rmsandgui-delin-eslaiddownbyRBI/SEBIfromtimetotime.Typi-cally,morethan3mo-nths

Inlinewithin-dus-trynor-msandgu-ideli-neslaiddownbyRBI/SEBIfromtimetotime.

In linewithindustrynormsandguidelineslaid downby RBI/SEBI fromtime totime.Typically,morethan 3months

Averageseas-oningof thePool


ofPool

Mort-gageLoan

Commer-cial

Vehicleand

Construc-tion

Equip-ment

CAR 2wheelers

Oth-ers

The Scheme will not be investing in foreignsecuritised debt.

Investment in Overseas FinancialAssets/Foreign Securities

According to SEBI circular no. SEBI/IMD/CIR No. 7/104753/07 dated September26, 2007 mutual funds can invest in ADRs/GDRs/other specified foreign securitiesand as per SEBI circular no. SEBI/IMD/CIR No. 2/122577/08 dated April 08, 2008,such investments are subject to an overalllimit of US$ 7 bn. for all mutual funds puttogether. The Mutual Fund has beenallowed an individual limit of US$ 600mn. The overall ceiling for investment inoverseas ETFs that invest in securitiesis US$ 1 billion subject to a maximum ofUS$ 50 million per mutual fund.

The dedicated fund manager appointedfor making overseas investments by theMutual Fund will be in accordance withthe applicable requirements of SEBI.Depending upon the InvestmentManager's views, Scheme would like toseek investment opportunities in the ADR/GDR/overseas market.


7. Definition of Exposure in case of Derivative Positions:

Each position taken in derivatives shall have an associated exposure as defined under.Exposure is the maximum possible loss that may occur on a position. However, certainderivative positions may theoretically have unlimited possible loss. Exposure in derivativepositions shall be computed as follows:

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The Mutual Fund may use variousderivatives and hedging products/techniques, in order to seek to generatebetter returns for the Scheme. Derivativesare financial contracts of pre-determinedfixed duration, whose values are derivedfrom the value of an underlying primaryfinancial instrument, commodity or index.The Scheme while investing in equitiesshall transact in exchange traded equityderivatives only and these instrumentsmay take the form of Index Futures, IndexOptions, Futures and Options onindividual equities/securities and suchother derivative instruments as may beappropriate and permitted under the SEBIRegulations and guidelines from time totime.

Advantages of Trading in Derivatives

Advantages of derivatives are many.The use of derivatives provides flexibilityto the Schemes to hedge whole or part ofthe portfolio. The following sectiondescribes some of the more commonderivatives transactions along with theirbenefits:

Derivatives are financial contracts of pre-determined fixed duration, whose valuesare derived from the value of anunderlying primary financial instrument,commodity or index, such as interestrates, exchange rates, commodities andequities.

1. Futures

A futures contract is a standardizedcontract between two parties where oneof the parties commits to sell, and theother to buy, a stipulated quantity of asecurity at an agreed price on or before agiven date in future.

Currently, futures contracts have amaximum expiration cycle of 3 months.Three contracts are available for trading,with 1 month, 2 months and 3 monthsexpiry respectively. A new contract isintroduced on the next trading day followingthe expiry of the relevant monthly contract.Futures contracts typically expire on thelast Thursday of the month. For examplea contract with the April 2017 expirationexpires on the last Thursday of April 2017(April 27, 2017).

Basic Structure of an Index Future

The Stock Index futures are instrumentsdesigned to give exposure to the equitymarkets indices. The Stock Exchange,Mumbai (BSE) and The National StockExchange (NSE) have trading in indexfutures of 1, 2 and 3 month maturities.The pricing of an index future is the functionof the underlying index and short-terminterest rates. Index futures are cashsettled, there is no delivery of theunderlying stocks.

Long Future Futures Price * Lot Size * Number of Contracts

Short Future Futures Price * Lot Size * Number of Contracts

Option Bought Option Premium Paid * Lot Size * Number of Contracts

Position Exposure

3. Interest Rate Swap (IRS)

Any swap is effectively an exchange of one set of cash-flows for another considered to be ofequal value. If the exchange of cash flows is linked to interest rates, it becomes an interest rateswap.

An interest rate swap is an agreement between two parties to exchange future payment streamsbased on a notional amount. Only the interest on the notional amount is swapped, and the principalamount is never exchanged.

In a typical interest rate swap, one party agrees to pay a fixed rate over the term of the agreementand to receive a variable or floating rate of interest. The counterparty receives a stream of fixedrate payments at regular intervals as described in the agreement and pays the floating rate ofinterest. A fixed/ floating interest rate swap is characterized by:

1. Fixed interest rate;

2. Variable or floating interest rate, which is periodically reset;

3. Notional principal amount upon which total interest payments are based; and

4. The terms of the agreement, including a schedule of interest rate reset dates, payment datesand termination date.

The primary reason for engaging in an interest rate swap is to hedge the interest rate exposure.An illustration could be an institution having long-term fixed rate assets (longer tenor securitiesreceiving fixed rate) in a rising interest rate environment; it can hedge the interest rate exposureby purchasing an interest rate swap where the institution receives floating interest rate and paysfixed rate. In this case, an interest rate swap is likely to reduce the duration and interest ratevolatility of the fund.

Example:Terms:Fixed Interest Rate : 8.50% p.a.Variable Interest Rate : NSE Over-Night MIBOR reset daily and compounded dailyNotional Principal Amount : Rs.100 CrorePeriod of Agreement : 1 yearPayment Frequency : Semi-annual

Now, suppose the six-month period from the effective date of the swap to the first payment datecomprises 182 days and the daily compounded NSE Over-Night MIBOR is 8.15% p.a. on the firstpayment date, then the fixed and variable rate payment on the first payment date would be as follows:

Fixed rate payment:

Rs. 4,23,83,562 = (Rs.100,00,00,000) x (8.50%) x (182 Days / 365 Days)

Variable rate payment:

Rs. 4,06,38,356 = (Rs.100,00,00,000) x (8.15%) x (182 Days / 365 Days)

Often, a swap agreement will call for only the exchange of net amount between the counterparties. Inthe above example, the fixed-rate payer will pay the variable-rate payer a net amount of Rs. 17,45,205= Rs. 4,23,83,562 - Rs. 4,06,38,356.


The second and final payment will depend on the daily NSE MIBOR compounded daily for theremaining 183 days. The fixed rate payment will also change to reflect the change in holding periodfrom 182 days to 183 days.

4. Forward Rate Agreement (FRA)

An FRA is an off balance sheet agreement to pay or receive on an agreed future date, thedifference between an agreed interest rate and the interest rate actually prevailing on that futuredate, calculated on an agreed notional principal amount. It is settled against the actual interest rateprevailing at the beginning of the period to which it relates rather than paid as a gross amount.

An FRA is referred to by the beginning and end dates of the period covered. Thus a 5x8 FRA isone that covers a 3-month period beginning in 5-months and ending in 8-months. FRAs arepurchased to hedge the interest rate risk; an investor facing uncertainty of the interest ratemovements can fix the interest costs by purchasing an FRA.

An illustration could be a corporation having floating rate debt linked to an index such as say, 3-Month MIBOR. If the existing interest cost is at 8% on Rs.100 Crore for the next three months, thecorporation can purchase a 3x6 FRA @ 8.1% on Rs.100 Crore and fix the interest cost for the 3-6 months period. If the actual 3-Month MIBOR after 3-months is at 8.25%, the corporation hassaved 15 bps in interest cost. As the settlement is done at the beginning of the period, the savingsin interest expense are discounted to a present value using a 3-month rate to calculate the actualsettlement amount.

The flows for the institution will be, as follows:

Interest Savings = Rs. 100 Crore * 15 bps * 92/365(assuming 92 days in the 3 month FRA periodand 365 days in the conventional year)

= Rs.3,78,082.19Settlement Amount = Rs.3,78,082.19/ (1+8.25%*92/365)

Please note that the above examples are hypothetical in nature and the figures are assumed.

5. Interest Rate Futures

An Interest Rate Futures ('IRF') contract is "an agreement to buy or sell a debt instrument at aspecified future date at a price that is fixed today." The underlying security for Interest Rate Futuresis either Government Bond or T-Bill. Interest Rate Futures are Exchange traded and standardizedcontracts based on 6 year, 10 year and 13 year Government of India Security and 91-dayGovernment of India Treasury Bill (91DTB). These future contracts are cash settled. Theseinstruments can be used for hedging the underlying cash positions.

The overall gross exposure for a fund is computed as sum of exposure to equity, cash, debtinstruments and derivatives (other than for hedging purposes) and it should not be more than100%. Derivative position is considered to be for hedging purposes only if the following conditionsare met:

1. Perfect Hedging - We hedge the underlying using IRF contract of same underlying

2. Imperfect hedging - the Underlying being hedged and the IRF contract has a 90 daycorrelation of closing prices of more than 90%. In case of correlation breaking at any time thederivative position would be counted as an exposure. SEBI allows maximum of 20%imperfect hedging.

For example, assume a portfolio comprising the following structure:

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1 month ABC Index Future

If the Scheme buys 2,000 futurescontracts, each contract value is 50 timesthe futures index price.

Purchase Date : April 01, 2017Spot Index : 9200.00Future Price : 9300.00Date of Expiry : April 27, 2017Margin : 10%

Assuming the exchange imposes a totalmargin of 10%, the Investment Managerwill be required to provide a total marginof approx. Rs. 93,000,000 (i.e.10%*9300*2000*50) through eligiblesecurities and cash.

Assuming on the date of expiry, i.e. April27 , 2017, ABC Index closes at 9350, thenet impact will be a profit of Rs. 5,000,000for the Scheme, i.e. (9350-9300) * 2000 *50 (Futures price = Closing spot price =Rs. 9350.00)

Profits for the Scheme = (9350-9300) *2000*50 = Rs. 5,000,000.

Please note that the above example isgiven for illustration purposes only. Someassumptions have been made for the sakeof simplicity.

The net impact for the Scheme will be interms of the difference of the closing priceof the index and cost price. Thus, it isclear from the above example that theprofit or loss for the Scheme will be thedifference between the closing price(which can be higher or lower than thepurchase price) and the purchase price.The risks associated with index futuresare similar to those associated with equityinvestments. Additional risks could be onaccount of illiquidity and potential mis-pricing of the futures.

Basic Structure of a Stock Future

A futures contract on a stock gives itsowner the right and obligation to buy orsell stocks. Single Stock Futures tradedon NSE (National Stock Exchange) arecash settled; there is no delivery of theunderlying stocks on the expiration date.A purchase or sale of futures on a securitygives the trader essentially the same priceexposure as a purchase or sale of thesecurity itself. In this regard, trading stockfutures is no different from trading thesecurity itself.


The Scheme holds shares of XYZ Ltd.,the current price of which is Rs. 500 pershare. The Scheme sells one monthfutures on the shares of XYZ Ltd. at therate of Rs. 540.

If the price of the stock falls, the MutualFund will suffer losses on the stock

Security Amount (crs) Price (Rs)

IGB 6.79% 2027 100 100.40IGB 6.79% 2029 50 98.35IGB 7.72% 2025 25 104.55Cash 25Total 200

Assuming the fund manager intends to hedge the portfolio using IRF and uses contracts on IGB6.79% 2027 as it is most liquid.

Maximum imperfect hedging allowed, based on SEBI limit of 20% for the above fund is 200*20%= 40 crs

Maximum perfect hedging using 6.79% 2027 is 100 crs (as amount of 6.79% 2027 in the fund is100 crs)


Total hedge the fund can do = 100 crs + 40 crs =140 crs

Assuming the 90 day historical correlation between the instruments in the portfolio are as follows

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position held. However, in such ascenario, there will be a profit on the shortfutures position.

At the end of the period, the price of thestock falls to Rs. 450 and this fall in theprice of the stock results in a fall in theprice of futures to Rs. 470. There will bea loss of Rs. 50 per share (Rs. 500 - Rs.450) on the holding of the stock, whichwill be offset by the profits of Rs. 70 (Rs.540 - Rs. 470) made on the short futuresposition.

Please note that the above example isgiven for illustration purposes only. Someassumptions have been made for thesake of simplicity. Certain factors likemargins and other related costs havebeen ignored. The risks associated withstock futures are similar to thoseassociated with equity investments.Additional risks could be on account ofilliquidity and potential mis-pricing of thefutures.

2. Options

An option gives a person the right but notan obligation to buy or sell something. Anoption is a contract between two partieswherein the buyer receives a privilegefor which he pays a fee (premium) andthe seller accepts an obligation for whichhe receives a fee. The premium is theprice negotiated and set when the optionis bought or sold. A person who buys anoption is said to be long in the option. Aperson who sells (or writes) an option issaid to be short in the option.

An option contract may be of two kinds:

1) Call option

An option that provides the buyerthe right to buy is a call option.The buyer of the call option can call uponthe seller of the option and buy from himthe underlying asset at the agreed price.The seller of the option has to fulfill theobligation upon exercise of the option.

2) Put option

The right to sell is called a put option.Here, the buyer of the option can exercisehis right to sell the underlying asset to theseller of the option at the agreed price.

Option contracts are classified into two styles:

(a) European Style

In a European option, the holder of theoption can only exercise his right on thedate of expiration only.

(b) American Style

In an American option, the holder canexercise his right anytime between thepurchase date and the expiration date.

90 day historical correlation IGB 6.79% 2027 IGB 7.72% 2025

IGB 6.79% 2027 1 0.95 0.80IGB 6.79% 2029 0.95 1 0.75IGB 7.72% 2025 0.80 0.75 1

IGB 6.79% 2029

Security

IGB 6.79% 2027 100 100.4 100.5 0.1 10.00

IGB 6.79% 2029 50 98.35 98.5 0.15 7.50

IGB 7.72% 2025 25 104.55 104.6 0.05 1.25

Cash 25 -

Without IRF 18.75

IRF 6.79% 2027 140 100.35 100.5 -0.15 (21.00)

Total With IRF 200 (2.25)

Amount (crs) Price beforehedging

(Rs)

Price onmaturity ofhedge (Rs)

Gain Net Gain(lakhs)

Security

IGB 6.79% 2027 100 100.4 100.3 -0.1 (10.00)

IGB 6.79% 2029 50 98.35 98.23 -0.12 (6.00)

IGB 7.72% 2025 25 104.55 104.5 -0.05 (1.25)

Cash 25 -

Without IRF (17.25)IRF 6.79% 2027 140 100.35 100.3 0.05 7.00

Total with IRF 200 (10.25)

Amount (crs) Price beforehedging

(Rs)

Price onmaturity ofhedge (Rs)

Gain Net Gain(lakhs)

Given that we are using IRF on 6.79% 2027, we can hedge 6.79% 2029 using IRFs as correlationis more than 90% upto 40 crs (based on the 20% limit of imperfect hedging).

Since one contract of IRF has a notional of Rs. 2 lakhs, in this example the fund manager sellsRs. 140 crores/2 lakhs = 7000 contracts, to hedge his position.

Hence after hedging the fund is as shown below:

At maturity of the Interest Rate Futures

Case 1: bonds close higher than at the time the hedge was entered into

Security

IGB 6.79% 2027 100 100.40 100% hedged - Perfect hedging

IGB 6.79% 2029 50 98.35 40% hedged - Imperfect hedging

IGB 7.72% 2025 25 104.55 Unhedged

Cash 25 Unhedged

IRF 6.79% 2027 140 100.35

Total 200

Amount (crs) Price (Rs) Comments

Case 2: bonds close lower than at the time the hedge was entered into

As can be seen in the cases above, in case yields move higher, IRFs help in reducing the lossto the fund.


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Basic Structure of an Equity Option

In India, options contracts on indices areEuropean style and cash settled whereas,option contracts on individual securities areAmerican style and cash settled.


Market type : NInstrument Type : OPTSTKUnderlying : XYZ Ltd. (XYZ)Purchase date : April 1, 2017Expiry date : April 27, 2017Option Type : Put Option

(Purchased)Strike Price : Rs. 9,750.00Spot Price : Rs. 9,800.00Premium : Rs. 200.00Lot Size : 100No. of Contracts : 50

Say, the Mutual Fund purchases on April 1,2017, 1 month Put Options on XYZ Ltd. (XYZ)on the NSE i.e. put options on 5000 shares (50contracts of 100 shares each) of XYZ.

As these are American style options, they canbe exercised on or before the exercise date i.e.April 27, 2017. If the share price of XYZ Ltd.falls to Rs. 9,500/- on April 27, 2017, and theInvestment Manager decides to exercise theoption, the net impact will be as Follows:

Premium Expense = Rs. 200 * 50 * 100= Rs. 10,00,000/-

Option Exercised at = Rs. 9,500/-Profits for the = (9,750.00 -Mutual Fund 9,500.00) * 50 *

100= Rs. 12,50,000/-

Net Profit = Rs. 12,50,000 -Rs. 10,00,000

= Rs. 2,50,000/-In the above example, the Investment Managerhedged the market risk on 5000 shares of XYZLtd. by purchasing put options.

Please note that the above example is givenfor illustration purposes only. Someassumptions have been made for the sake ofsimplicity. Certain factors like margins havebeen ignored. The purchase of Put Optionsdoes not increase the market risk in the MutualFund as the risk is already in the Mutual Fund'sportfolio on account of the underlying assetposition (in his example shares of XYZ Ltd.).The Premium paid for the option is treated as anexpense and added to the holding cost of therelevant security. Additional risks could be onaccount of illiquidity and potential mis-pricing ofthe options.

Exposure to Equity Derivatives

i . Position limit for the Mutual Fund inindex options contracts:

a. The Mutual Fund position limit in allindex options contracts on aparticular underlying index shall beRs. 500 crore or 15% of the totalopen interest in the market in index


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options, whichever is higher, perStock Exchange.

b. This limit would be applicable onopen positions in all optionscontracts on a particular underlyingindex.

i i . Position limit for the Mutual Fund inindex futures contracts:

a. The Mutual Fund position limit in allindex futures contracts on aparticular underlying index shall beRs. 500 crore or 15% of the totalopen interest in the market in indexfutures, whichever is higher, perStock Exchange.

b. This limit would be applicable onopen positions in all futures contractson a particular underlying index.

iii. Additional position limit for hedging:

In addition to the position limits at point (i)and (ii) above, Fund may take exposurein equity index derivatives subject to thefollowing limits:

a. Short positions in index derivatives(short futures, short calls and longputs) shall not exceed (in notionalvalue) the Mutual Fund's holding ofstocks.

b. Long positions in index derivatives(long futures, long calls and shortputs) shall not exceed (in notionalvalue) the Mutual Fund's holding ofcash, government securities, T-Bills and similar instruments.

iv. Position limit for the Mutual Fundfor stock based derivative contracts:

The Mutual Fund position limit in aderivative contract on a particularunderlying stock, i.e. stock optioncontracts and stock futures contracts:

a. For stocks having applicablemarket-wise position limit (MWPL)of Rs. 500 crores or more, thecombined futures and optionsposition limit shall be 20% ofapplicable MWPL or Rs. 300 crores,whichever is lower and withinwhich stock futures position cannotexceed 10% of applicable MWPLor Rs. 150 crores, whichever islower.

b. For stocks having applicablemarket-wise position limit (MWPL)less than Rs. 500 crores, thecombined futures and optionsposition limit would be 20% ofapplicable MWPL and futuresposition cannot exceed 20% ofapplicable MWPL or Rs. 50crorewhich ever is lower.

v. Position limit for the Scheme:


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The position limits for the Scheme anddisclosure requirements are as follows:

a. For stock option and stock futurescontracts, the gross open positionacross all derivative contracts on aparticular underlying stock of ascheme of a Fund shall not exceedthe higher of 1% of free float marketcapitalization (in terms of number ofshares).

Or

5% of the open interest in thederivative contracts on a particularunderlying stock (in terms of numberof contracts).

b. This position limit shall be applicableon the combined position in allderivative contracts on a underlyingstock at a Stock Exchange.

c . For index based contracts, theMutual Fund shall disclose the totalopen interest held by its scheme orall schemes put together in aparticular underlying index, if suchopen interest equals to or exceeds15% of the open interest of allderivative contracts on thatunderlying index.

As and when SEBI notifies amended limitsin position limits for exchange tradedderivative contracts in future, the aforesaidposition limits, to the extent relevant, shallbe read as if they were substituted with theSEBI amended limits.

Exposure Limits:

With respect to investments made in derivativeinstruments, the Schemes shall comply withthe following exposure limits in line with SEBICircular Cir/IMD/DF/11/2010 dated August 18,2010:

1. The cumulative gross exposure throughequity, debt and derivative positions willnot exceed 100% of the net assets of therespective Scheme. However, thefollowing shall not be considered whilecalculating the gross exposure:

a. Security-wise hedged position and

b. Exposure in cash or cashequivalents with residual maturityof less than 91 days

2. The total exposure related to optionpremium must not exceed 20% of the netassets of the Scheme.

3. The Mutual Fund shall not write optionsor purchase instruments with embeddedwritten options.

4. Exposure due to hedging positions maynot be included in the above mentionedlimits subject to the following:

a. Hedging positions are the derivative


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positions that reduce possiblelosses on an existing position insecurities and till the existingposition remains.

b. Hedging positions cannot be takenfor existing derivative positions.Exposure due to such positionsshall have to be added and treatedunder limits mentioned in Point 1.

c . Any derivative instrument used tohedge has the same underlyingsecurity as the existing positionbeing hedged.

d. The quantity of underlyingassociated with the derivativeposition taken for hedging purposesdoes not exceed the quantity of theexisting position against whichhedge has been taken.

5. The Mutual Fund may enter into plainvanilla interest rate swaps for hedgingpurposes. The counter party in suchtransactions has to be an entityrecognized as a market maker by RBI.Further, the value of the notional principalin such cases must not exceed the valueof respective existing assets beinghedged by the scheme. Exposure to asingle counterparty in such transactionsshould not exceed 10% of the net assetsof the scheme.

6. Exposure due to derivative positionstaken for hedging purposes in excess ofthe underlying position against which thehedging position has been taken, shallbe treated under the limits mentioned inpoint 1.

7. Definition of Exposure in case of DerivativePositions:

Each position taken in derivatives shallhave an associated exposure as definedunder. Exposure is the maximumpossible loss that may occur on aposition. However, certain derivativepositions may theoretically haveunlimited possible loss. Exposure inderivative positions shall be computedas follows:

Long Future Futures Price * Lot Size *Number of Contracts

Short Future Futures Price * Lot Size *Number of Contracts

Option Bought Option Premium Paid * LotSize * Number of Contracts

Position Exposure

3. Interest Rate Swap (IRS)

Any swap is effectively an exchange ofone set of cash-flows for anotherconsidered to be of equal value. If theexchange of cash flows is linked tointerest rates, it becomes an interest rateswap.


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An interest rate swap is an agreementbetween two parties to exchange futurepayment streams based on a notionalamount. Only the interest on the notionalamount is swapped, and the principalamount is never exchanged.

In a typical interest rate swap, one partyagrees to pay a fixed rate over the term ofthe agreement and to receive a variableor floating rate of interest. The counterpartyreceives a stream of fixed rate paymentsat regular intervals as described in theagreement and pays the floating rate ofinterest. A fixed/ floating interest rate swapis characterized by:

1. Fixed interest rate;

2. Variable or floating interest rate, which isperiodically reset;

3. Notional principal amount upon which totalinterest payments are based; and

4. The terms of the agreement, including aschedule of interest rate reset dates,payment dates and termination date.

The primary reason for engaging in aninterest rate swap is to hedge the interestrate exposure. An illustration could be aninstitution having long-term fixed rateassets (longer tenor securities receivingfixed rate) in a rising interest rateenvironment; it can hedge the interest rateexposure by purchasing an interest rateswap where the institution receives floatinginterest rate and pays fixed rate. In thiscase, an interest rate swap is likely toreduce the duration and interest ratevolatility of the fund

Example:

Terms:

Fixed Interest Rate : 8.50% p.a.Variable Interest Rate : NSE Over

Night MIBORreset dailyandcompoundeddaily

Notional Principal Amount : Rs.100Crore

Period of Agreement : 1 yearPayment Frequency : Semi-annual

Now, suppose the six-month period from theeffective date of the swap to the first paymentdate comprises 182 days and the dailycompounded NSE Over-Night MIBOR is 8.15%p.a. on the first payment date, then the fixedand variable rate payment on the first paymentdate would be as follows:


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Fixed rate payment:

Rs. 4,23,83,562 = (Rs.100,00,00,000) x(8.50%) x (182 Days / 365 Days)

Variable rate payment:

Rs. 4,06,38,356 = (Rs.100,00,00,000) x(8.15%) x (182 Days / 365 Days)

Often, a swap agreement will call for only theexchange of net amount between thecounterparties. In the above example, the fixed-rate payer will pay the variable-rate payer anet amount of Rs. 17,45,205 = Rs. 4,23,83,562- Rs. 4,06,38,356.

The second and final payment will depend onthe daily NSE MIBOR compounded daily forthe remaining 183 days. The fixed ratepayment will also change to reflect the changein holding period from 182 days to 183 days.

4. Forward Rate Agreement (FRA)

An FRA is an off balance sheet agreementto pay or receive on an agreed futuredate, the difference between an agreedinterest rate and the interest rate actuallyprevailing on that future date, calculatedon an agreed notional principal amount. Itis settled against the actual interest rateprevailing at the beginning of the period towhich it relates rather than paid as a grossamount.

An FRA is referred to by the beginningand end dates of the period covered.Thus a 5x8 FRA is one that covers a 3-month period beginning in 5-months andending in 8-months. FRAs are purchasedto hedge the interest rate risk; an investorfacing uncertainty of the interest ratemovements can fix the interest costs bypurchasing an FRA.

An illustration could be a corporationhaving floating rate debt linked to an indexsuch as say, 3-Month MIBOR. If theexisting interest cost is at 8% on Rs.100Crore for the next three months, thecorporation can purchase a 3x6 FRA @8.1% on Rs.100 Crore and fix the interestcost for the 3-6 months period. If the actual3-Month MIBOR after 3-months is at8.25%, the corporation has saved 15 bpsin interest cost. As the settlement is doneat the beginning of the period, the savingsin interest expense are discounted to apresent value using a 3-month rate tocalculate the actual settlement amount.

The flows for the institution will be, asfollows:

Interest Savings = Rs. 100 Crore* 15 bps * 92365 (assuming92 days in the3 month FRAperiodand 365 daysin theconventionalyear)

= Rs.3,78,082.19


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Settlement Amount = Rs.3,78,082.19/(1+8.25%*92/365)

Please note that the above examples arehypothetical in nature and the figures areassumed.

5. Interest Rate Futures

An Interest Rate Futures ('IRF') contractis "an agreement to buy or sell a debtinstrument at a specified future date at aprice that is fixed today." The underlyingsecurity for Interest Rate Futures is eitherGovernment Bond or T-Bill. Interest RateFutures are Exchange traded andstandardized contracts based on 6 year,10 year and 13 year Government of IndiaSecurity and 91-day Government of IndiaTreasury Bill (91DTB). These futurecontracts are cash settled. Theseinstruments can be used for hedging theunderlying cash positions.

For example, assume a portfolio has Rs.100 crores of Government security 7.59%GOI 2026 with face value Rs. 100/-. Thebond is currently trading in market at105.00.

The futures on 7.59% GOI 2026, expiringon 26th October 2017 is trading onexchange at 105.10.

Instead of exiting the cash position, thefund manager can decide to hedge theposition by selling the same quantity infutures. Since one contract of IRF has anotional of Rs. 2 lakhs, in this examplethe fund manager sells Rs. 100 crores/2lakhs = 5000 contracts, to hedge hisposition.

At maturity, the settlement price of thefutures will be almost same as closingprice of the underlying security.

At maturity of the Interest Rate Futures

Case 1: At maturity Bonds close higher thanthe price at which fund manager hedged theposition, but below the futures price at which hehedged

Closing price of Bondson day of maturity of futures = 105.05Settlement price of futures = 105.05MTM gain on the underlying = (105.05-bond 105.00)

* 100crores/ 100(i.e.facevalue ofbond)

= Rs.5,00,000

The profit on the futures leg is = 5000*2lakhs*(105.10105.05)/ 100


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7. Risk factors Refer existing disclosure in the SID under"Section IV.A" titled "Risk factors" and "SectionIV.B" titled Risk Management Strategies

The following shall be added under "Section IV.A" titled as "Risk factors" in the SID:

Risks associated with Investments in REITs and InvITs:

Risk of lower than expected distributions: The distributions by the REIT or InvIT will be based on thenet cash flows available for distribution. The amount of cash available for distribution principallydepends upon the amount of cash that the REIT/INVIT receives as dividends or the interest andprincipal payments from portfolio assets. The cash flows generated by portfolio assets from operationsmay fluctuate based on, among other things

success and economic viability of tenants and off-takers

economic cycles and risks inherent in the business which may negatively impact valuations,returns and profitability of portfolio assets

force majeure events related such as earthquakes, floods etc. rendering the portfolio assetsinoperable

(i.e.facevalue ofbond) =Rs5,00,000

Overall profit to the fund = Rs10,00,000

Case 2: At maturity bonds close higher thanthe level at which futures were sold

In case, the closing price of bonds on the dayof maturity of futures = 105.20,Settlement price of futures = 105.20The MTM gain on bonds = (105.20

105.00)* 100crores100 (i.e.facevalue ofbond)

= Rs.20,00,000

Loss on futures leg = 5000*2lakhs * (105.10-105.20) /100 (i.e. face valueof bond)

= (Rs10,00,000)

Total Profit to the fund = Rs10,00,000

Case 3: At maturity bonds sells off from levelswere hedges were initiated

In case, the closing price of bonds on the dayof maturity of futures = 104.80,Settlement price of futures = 104.80The MTM loss on bonds = (104.80

105.00)* 100crores

= (Rs.20,00,000)

Profit on futures leg = 5000*2lacs *(105.10-104.80)

= Rs30,00,000

Total Profit to the fund = Rs10,00,000"


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debt service requirements and other liabilities of the portfolio assets

fluctuations in the working capital needs of the portfolio assets

ability of portfolio assets to borrow funds and access capital markets

changes in applicable laws and regulations, which may restrict the payment of dividends byportfolio assets

amount and timing of capital expenditures on portfolio assets

insurance policies may not provide adequate protection against various risks associated withoperations of the REIT/InvIT such as fire, natural disasters, accidents

Price-Risk: The valuation of the REIT/InvIT units may fluctuate based on economic conditions,fluctuations in markets (eg. real estate) in which the REIT/InvIT operates and the resulting impact on thevalue of the portfolio of assets, regulatory changes, force majeure events etc. REITs & InvITs mayhave volatile cash flows. As an indirect shareholder of portfolio assets, unit holders rights are subordinatedto the rights of creditors, debt holders and other parties specified under Indian law in the event ofinsolvency or liquidation of any of the portfolio assets

Interest-Rate Risk: Generally, when interest rates rise, prices of units fall and when interest rates drop,such prices increase.

Liquidity Risk: This refers to the ease with which REIT/InvIT units can be sold. There is noassurance that an active secondary market will develop or be maintained. Hence there would be timewhen trading in the units could be infrequent. The subsequent valuation of illiquid units may reflect adiscount from the market price of comparable securities for which a liquid market exists.

Risk Factors Associated with Imperfect Hedging using Interest Rate Futures

1. Basis Risk - risk associated with divergence in the price movement of the portfolio being hedgedand the price movement of the derivative serving as the hedge e.g. a loss (gain) in the marketvalue of bonds in the portfolio (or the part thereof that is being hedged), may be accompanied bya disproportionate gain (loss) in the market value of the derivatives being used to serve as thehedge. This imperfect correlation between the two investments creates the potential for excessgains or losses in a hedging strategy, thus adding risk to the position.

2. Mispricing Risk, or improper valuation - market circumstances may necessitate unwindingthe derivative positions at sub-optimal prices during periods of market dislocation triggered bycontagion or tumult e.g. if the expected upward trajectory of yields reverses course and beginsto spiral downward, most participants with short Interest Rate Futures positions are likely to seekan unwinding, leading to a potential amplification in the adverse price movement, and impacttherefrom.

3. Correlation weakening, and consequent risk of regulatory breach - SEBI regulation mandatesa minimum correlation criteria of 0.9 (calculated on a 90 day basis) between the portfolio beinghedged and the derivative serving as the hedge; in cases where this limit is breached (i.e. whenthe 90-day correlation falls below 0.9), a rebalancing period of 5 working days has beenpermitted.

Inability to satisfy this requirement within the stipulated period due to difficulties in re-balancingwould lead to a lapse of the exemption in gross exposure computation. The entire derivativeexposure would then need to be included in gross exposure, which may result in gross exposurein excess of 100% of net asset value; leverage is not permitted as per SEBI guidelines.

The following shall be added under "Section IV. B" titled as "Risk Management Strategies" of theSID:

RISK MITIGATION FACTORS:

Risks associated with Investments in REITs and InvITs:

The Investment Manager endeavours to invest in REITS/InvITs, where adequate due diligenceand research has been performed by the Investment Manager. The Investment Manager alsorelies on its own research as well as third party research. This involves one-to-one meetingswith the managements, attending conferences and analyst meets and also tele-conferences. Theanalysis will focus, amongst others, on the predictability and strength of cash flows, value ofassets, capital structure, business prospects, policy environment, strength of management,responsiveness to business conditions, etc.


Page 23 of 24

8. InvestmentRestrictions

Refer existing disclosure in the SID under"Section V.I" titled "What are the InvestmentRestrictions"

The following shall be added under "Section V.I" titled "What are the Investment Restrictions" in the SID:

The Mutual Fund under all its schemes shall not invest more than 10% of units issued by a singleissuer of REIT and InvIT.

The Scheme shall not invest: more than 10% of its NAV in the units of REITs and InvITs; and more than 5% of its NAV in the units of REITs and InvITs issued by a single issuer.

9. NAV as onJanuary 15, 2018(in Rs.)

DSP BlackRock Micro Cap Fund - Direct Plan - Dividend - 45.939DSP BlackRock Micro Cap Fund - Direct Plan - Growth - 75.664DSP BlackRock Micro Cap Fund - Regular Plan - Dividend - 44.503DSP BlackRock Micro Cap Fund - Regular Plan - Growth - 73.292

10. No. of folios ason January15, 2018

Direct Plan: 73,894Regular Plan: 4,57,006

11. AUM as onJanuary15, 2018(in crores)

Direct Plan: 1077.87Regular Plan: 6010.07

Apart from above, there will be no change in any other features of the Scheme.

EXIT OPTION

As the above proposal is a change in Fundamental Attributes of the Scheme, in accordance with Regulation 18(15A) of the SEBI (Mutual Funds) Regulations, 1996 read alongwith SEBICircular no. SEBI/HO/IMD/DF3/CIR/P/2017/114 dated October 6, 2017 and Circular no. SEBI/HO/IMD/DF3/CIR/P/2017/126 dated December 4, 2017 , the existing unitholders under theScheme are hereby given an option to exit, i.e. either redeem their investments or switch their investments to any other scheme of the Fund, within the 30 days exit period startingfrom February 14, 2018 till March 15, 2018 (both days inclusive and upto 3.00 pm on March 15, 2018) at applicable NAV, without payment of any exit load, by filing up the requisitetransaction slip and submitting the same at any of our designated Official Points of Acceptance (list available on www.dspblackrock.com). If you have no objection to the proposedchange, no action needs to be taken and it would be deemed that you have consented to the above change. The offer to exit from the Scheme is optional, at the discretion of the UnitHolder, and not compulsory. The Scheme will adopt the proposed change with effect from March 16, 2018.

Thus, all the applications for redemptions/switch-outs received under the Scheme shall be processed at applicable NAV of the day of receipt of such redemption / switch request, withoutpayment of any exit load, provided the same is received during the exit period of 30 days mentioned above.

Unit Holders who have pledged their units will need to procure a release of pledge prior to submitting their redemption request. In case a lien is marked on units held by a unit holderor units have been frozen/locked pursuant to an order of a governmental authority or a court, redemption/switch-out can be executed only after the lien/order is vacated/revoked withinthe period specified above.

Unitholders should ensure that their change in address or pay-out bank details are updated in records of DSP BlackRock Mutual Fund as required by them, prior to exercising the exitoption for redemption of units.

The redemption proceeds shall be dispatched within 10 business days of receipt of valid redemption request to those unitholders who choose to exercise the exit option.

TAX IMPLICATIONS

Redemption / switch-out of units from the Scheme, during the exit period, may entail capital gain/loss in the hands of the unitholder. Similarly, in case of NRI investors, TDS shall bededucted in accordance with the applicable Tax laws, upon exercise of exit option and the same would be required to be borne by such investor only. In view of individual natureof tax implications, unitholders are advised to consult their tax advisors. For details on Tax implications, please refer to SID of the Scheme and Statement ofAdditional Information available on our website www.dspblackrock.com.

We look forward to your continued support.

Yours sincerely,

For and on behalf ofDSP BlackRock Trustee Company Pvt. Ltd.

Sd/-Director

If undelivered, please return to:DSP BlackRock Mutual Fund

Computer Age Management Services Pvt LtdUttam Building, 2nd Floor, New No 24/22 & Old No 38 and 39

Whites Road, Royapettah, Chennai 600 014.

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