CRISIL FUND INSIGHTS Monthly funds newsletter from CRISIL Research

Volume – 45 January 2015

Hybrid funds – For those who want the best of equity and debt Investment The year 2014 was good for the financial markets; both the primary asset classes - equity and debt - had a good run. Equities (CNX Nifty index) gained 31% on hopes of economic reforms from the newly elected government. Debt, represented by CRISIL thoughts – AMFI Debt performance index, gained 12% boosted by hopes of cut in interest rate going ahead. While pure asset play or investing in a single asset class can derive higher returns during the strong run of that particular asset class, investors should allocate across two or more asset classes to generate optimum returns as per their risk-return profile. Hybrid mutual funds – a combination of equity and debt – are a good option for basic asset allocation between the two key asset classes. Hybrid: Balanced funds and monthly income plans (MIPs) Balanced funds invest up to 65% in equities and the remaining in debt. The equity component is expected to provide capital appreciation and the debt component a steady income. They are ideal for investors with a moderate risk profile and an investment horizon of over three years. MIPs are debt-oriented hybrid mutual funds with a marginal equity exposure (which can go up to 30%). They were launched with the objective of giving a monthly income to investors and the periodicity depends upon the option chosen by the investor. Typically, MIPs offer monthly, quarterly, half-yearly and annual options. These plans are relatively less risky than pure equity funds but slightly riskier than pure debt funds. MIPs offer growth and dividend (payout and re-investment) options. While fund houses strive to declare regular dividends, they have no such obligation unless the scheme has performed well. Why hybrid funds? Diversification – Spreading one’s investment across different asset classes helps in reducing the systemic risk (market risk) and moderates the effects of individual asset class performance on portfolio returns. Hybrid funds protect the portfolio from the downside risk if either asset class enters a bear phase, i.e. exposure to debt is likely to cushion the downside when the equity market plunges. The presence of debt instruments lends stability and provides regular income to the portfolio; while equities boost returns. Auto-portfolio rebalancing – If one were to hold separate equity and debt portfolios to manage a similar asset allocation, it would have been operationally more tedious besides involving churning cost and tax implications. Further, one may not be able to tactically adjust allocation between equity and debt as per market movements but fund managers are better equipped to take a call based on market movements. Hybrid funds, thus, provide all this in a single structure. Graph 1 shows balanced and MIP funds change equity exposure with the trend in the equity market while Graph 2 highlights these funds taking active debt calls depending on the interest rate trend. 1 Graph 1: Hybrid funds1 equity exposure vs. CNX Nifty movement Tax benefits – Most balanced funds in have 65% exposure to equities on an average 10,000 80 which allows them to be taxed like equity funds (no long-term capital gains tax and 15% 9,000 70 short-term capital gains tax plus the applicable surcharge and cess). While MIPs are 8,000 60 taxed like debt funds, investors can reduce the tax outgo by taking indexation benefit for a 7,000 6,000 50 holding period more than three years. 5,000 40 (%) Performance 4,000 30 3,000 Hybrid funds have been able to generate stable returns over the periods analysed (table 20 2,000

CNXNiftyIndex 1) because of the inherent asset allocation between the two asset classes. As seen in the 1,000 10 table, hybrid funds (CRISIL – AMFI Hybrid Fund Performance index) have outperformed /

0 0 exposure equity Hybrid funds'

05 06 07 08 09 10 13 14 04 11 12

05 06 07 10 11 12 13 14 09

08 or given at par returns compared with the equity asset class while they have generated

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higher returns than debt for all periods analysed.

Jun Jun Jun Jun Jun Jun Jun Jun Jun Jun

Dec Dec Dec Dec Dec Dec Dec Dec Dec Dec Dec CNX NIFTY Index Balanced funds (RHS) MIP (RHS) Table 1 – P2P performance as of December 31, 2014 Graph 2: Hybrid funds1 average maturity vs. 10 yr. gilt yield movement Performance (%) Category 2Y 3Y 5Y 7Y 10Y 6M 1Y 10 9.0 CAGR CAGR CAGR CAGR CAGR 9 Hybrid 8 8.5 CRISIL – AMFI Hybrid Fund Performance Index 9.69 33.81 18.23 18.99 12.37 9.86 14.13 7 CRISIL – AMFI Balance Fund Performance 6 8.0 10.53 42.21 21.82 24.22 14.19 9.85 17.16 5 Index 4 7.5 CRISIL – AMFI MIP Fund Performance Index 7.94 21.64 12.63 13.50 9.69 9.04 9.77 (years) 3 Hybrid benchmarks

2 7.0 CRISIL Balanced Fund Index 8.39 25.34 15.29 17.22 9.40 6.24 12.41 1 CRISIL MIP Blended Fund Index 7.62 16.83 10.45 10.98 8.28 7.35 8.31

0 6.5 Debt Hybrid funds' average maturity maturity average Hybrid funds'

10 year benchmark gilt yield (%) yield yearbenchmark 10 gilt

10 11 13 14 12

09 10 11 11 12 12 13 14 10 13 14

10 11 13 14 12

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- - - - - CRISIL Composite Bond Fund Index 7.36 14.31 8.92 9.06 7.80 7.35 6.70

Equity

Jun Jun Jun Jun Jun

Mar Mar Mar Mar Mar

Sep Sep Sep Sep Sep

Dec Dec Dec Dec Dec Dec Balanced funds MIP 10 year gilt Yield (RHS) CNX Nifty Index 8.82 31.39 18.43 21.40 9.75 4.37 14.81

Summing up Hybrid funds provide investors with a good opportunity to allocate assets and generate higher returns / reduce risks as per the underlying financial market sentiment. Developments in 2014 have put equity and debt in a sweet spot. Further improvement in economic growth due to reforms and softening interest rates may continue to favour both asset classes. At this juncture, hybrid funds can be considered as an attractive wealth creation option for moderate risk takers.

1 Schemes considered are CRISIL Fund Ranked schemes as of December 2014 quarter for balanced funds and MIP – Aggressive funds category.

CRISIL FUND INSIGHTS

■ Indian equity benchmarks CNX Nifty and S&P BSE Sensex concluded the year 2014 on a disappointing note. They lost 3.56% and 4.16%, respectively in December 2014.

Market - Overview ■ However, the indices put up splendid performance in 2014. The CNX Nifty and S&P BSE Sensex rose 31.39% and 29.89%, respectively; the highest calendar year returns in five years.

■ Weak domestic and global indicators pulled down the domestic indices in December. Prominent among them December November Absolute % were the government's inability to pass key bills despite the winter session of the Parliament coming to an end; Indices 31, 2014 28, 2014 Change Change though it pushed legislations through the ordinance route afterwards.. CNX Nifty 8282.70 8588.25 -305.55 -3.56 ■ Other weak cues included a 4.25% fall in domestic industrial output in October and depreciation of the rupee. S&P BSE Sensex 27499.42 28693.99 -1194.57 -4.16 ■ Weakness in global markets amid a sharp slide in oil prices, turbulence in the Russian economy, renewed

political turmoil in Greece and persistent concerns about global economic growth also pulled down the local Indicators December 31, 2014 November 28, 2014 indices. 10 year Gsec 7.86% 8.09% ■ Further losses, however, were capped by gains made after the (RBI) in its bi-monetary Monthly CPI Inflation 5.00% 4.38% policy review on December 2 said that its policy stance could change "early next year" if the current inflation momentum continued. The central backed this stance with a surprise rate cut of 25 bps to 7.75% mid-month in January. ■ Majority of the CNX indices analysed ended lower in December. Bank Nifty was the top gainer in the month; rising 1.21% buoyed by news that the government is considering cutting stake in public sector banks to help raise capital. ■ CNX FMCG index rose 0.49% due to buying interest in defensive counters. ■ CNX Energy index was the top loser, down 8.71% due to margin concerns on account of falling crude oil prices. CNX Realty index fell 7.18% on a report that the government may set up regulatory bodies and appellate authorities for the sector in every state.

Market – Overview

12.0 130,000 Top Stock Exposures – December 2014 Top Sector Exposures – December 2014 1. ICICI Bank Ltd. 1. Banks

11.2 78,000 2. HDFC Bank Ltd. 2. Computers - Software 3. Infosys Ltd. 3. Pharmaceuticals

10.4 26,000 4. State Bank Of India 4. Refineries/Marketing 5. Larsen & Toubro Ltd. 5. Cement

9.6 -26,000 6. Maruti Suzuki India Ltd. 6. Commercial Vehicles

(AUM Rs lakh cr) (AUMlakh Rs (Net Flows Rs cr) FlowsRs (Net 7. Ltd. 7. Engineering

8.8 -78,000 8. Reliance Industries Ltd. 8. Power Equipment 9. ITC Ltd. 9. Passenger/Utility Vehicles

8.0 -130,000 10. Tata Consultancy Services Ltd. 10. Housing Finance

14 14

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13 14 14 14 14 14

14 14 14

14 Note: The month-end portfolios as of December 2014 have been considered for the report.

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Dec Aug Nov Dec May New Stocks Entries and Exits in Mutual Fund Portfolios – December 2014 Net flows (RHS) Industry AUM (month-end) Entries Exits Absolute Monthly Returns% Monte Carlo Fashions Ltd. Hitech Plast Ltd. Category returns Dec-2014 Nov-2014 GMM Pfaudler Ltd. Mahindra Ugine Steel Co. Ltd. CRISIL – AMFI Large Cap Fund Performance Index -2.21 4.15 State Bank Of Mysore Nitesh Estates Ltd. CRISIL – AMFI Diversified Equity Fund Performance Index -1.66 5.00 Onmobile Global Ltd. Sical Logistics Ltd. CRISIL – AMFI Small & Midcap Fund Performance Index 2.46 5.03 Transtream India.com Ltd CRISIL – AMFI ELSS Fund Performance Index -0.91 4.49 Wyeth Ltd. CRISIL – AMFI Balance Fund Performance Index -0.45 3.39 CRISIL – AMFI MIP Fund Performance Index 0.55 2.28 CRISIL – AMFI Gilt Fund Performance Index 2.20 2.05 CRISIL – AMFI Debt Fund Performance Index 1.00 1.32

CRISIL – AMFI Short Term Debt Fund Performance Index 0.70 0.97

CRISIL – AMFI Ultra Short Fund Performance Index 0.68 0.70 CRISIL – AMFI Liquid Fund Performance Index 0.73 0.65 Gold Funds (ETFs and FoFs) 2.64 0.35

■ The Indian mutual fund industry continued the positive trend in the last quarter of the last quarter of 2014. Short-term debt funds rose for the third consecutive quarter, 2014 with average assets under management (AUM) rising to a record high and up 11.48% or by Rs 9,908 cr to Rs 96,210 cr, while ultra short-term debt funds rose exceeding the Rs 11 lakh cr mark. Average AUM rose 4.39% or by Rs 46,541 cr to for the fourth consecutive quarter, up 7.48% or by Rs 7,970 cr to Rs 1.15 lakh cr. Rs 11.06 lakh cr (excluding fund of funds) in the quarter ended December 2014 as ■ Liquid funds were the biggest drag on industry assets, with the category falling per the data released by the Association of Mutual Funds in India (AMFI). 5.24% or by Rs 14,994 cr to Rs 2.71 lakh cr. ■ The industry's average assets increased 26.21% or by Rs 2.30 lakh cr in 2014 - the ■ Assets of fixed maturity plans (FMPs) fell for the second consecutive quarter, down fastest calendar year growth since the industry started declaring quarterly average 4.29% or by Rs 7,085 cr to Rs 1.58 lakh cr. The category was adversely impacted assets in September 2010. by the change in taxation announced in last year's Union Budget. ■ Equity funds, which were the toast of the industry the entire year, were the primary ■ Of the 44 fund houses (including IDFs), 31 posted a rise. The share of the top five driver of industry assets in the latest quarter. The category's average AUM gained was 55%, same as the previous quarter, while the share of 10 mutual funds' assets 15.74% or Rs 45,725 cr to a record high of Rs 3.36 lakh cr. Growth in the equity rose to 79% from 78% in the previous quarter. funds was led by robust inflows and mark to market (MTM) gains. ■ Among regulatory developments, SEBI may clamp down on mutual fund upfront ■ After remaining weak for most of 2014, average assets of long duration debt funds fees; it is concerned over mis-selling due to high commissions. viz., long term debt funds and gilt funds showed gains in the final quarter. Long-term ■ SEBI plans to set up an expert panel to suggest measures for increasing distribution debt funds' average AUM gained 6.42% or Rs 4,224 cr to Rs 70,063 cr while gilt of mutual fund products through digital modes such as internet and mobiles. funds' assets rose 22.86% or by Rs 1,299 cr (first rise in the past six quarters) to Rs 6,984 cr as the categories attracted inflows amidst growing expectation of easing ■ SEBI is considering fresh checks against mis-selling of MFs and flouting of 'open interest rates by the RBI in 2015. bank infrastructure' norms for sale of these financial products. ■ Short-term debt funds and ultra short-term debt funds continued to sustain gains in

 CBDT notified Reliance Retirement Fund as a pension fund for the purpose of Section 80C of the Income Tax Act.

Fund News

CRISIL Fund Rank 1 Schemes - Debt Mutual Funds' Performance Report Fund Focus Point to Point Returns % Average Std. 1 3 6 1 3 Since Inception AUM Style Deviation Sharpe Scheme Name Month Month Month Year Years Inception Date (Rs.Crore) Box (%) Ratio Religare Invesco Credit Opportunities Fund Liquid

(CRISIL FUND RANK 1)

Canara Robeco Liquid 0.71 2.15 4.36 9.04 9.30 8.12 15-Jul-08 2549.08 0.45 10.68

Launched in August 2009, is ranked under the ultra short-term debt

DSP BlackRock Liquidity Fund 0.72 2.17 4.38 9.04 9.29 7.65 23-Nov-05 6913.48 0.45 10.67

fund category of CRISIL Mutual Fund Ranking for the quarter

ended December 2014. It has maintained CRISIL Mutual Fund SBI Premier Liquid Fund 0.71 2.15 4.36 9.04 9.29 7.76 22-Mar-07 24418.82 0.45 10.74

Rank 1 (top 10 percentile) in this category for the past six quarters.

Union KBC Liquid Fund 0.71 2.14 4.36 9.05 9.34 9.30 15-Jun-11 1868.50 0.45 10.60 The fund has an average AUM of Rs 2,346 cr as of December

2014, a growth of nearly three times compared to December 2013. Ultra Short Term

ICICI Prudential Flexible Income Plan 0.71 2.27 4.49 9.49 9.58 7.98 4-Oct-02 12323.12 0.49 11.11 Retail investors can look at ultra short-term debt funds from the

perspective of safety, liquidity and returns. Safety is determined in

Kotak Banking and PSU Debt Fund 0.74 2.12 4.32 9.51 8.97 7.19 29-Dec-98 588.76 0.45 12.12

terms of the credit risk of the portfolio. A small portion from a

Religare Invesco Credit Opportunities Fund 0.78 2.22 4.54 9.45 9.75 8.65 28-Aug-09 2346.19 0.46 11.56 savings bank account can be invested in these funds. However, it

is imperative to look at a combination of returns and portfolio

UTI Treasury Advantage Fund - Institutional 0.77 2.30 4.50 9.31 9.51 8.37 23-Apr-07 6669.72 0.47 11.05 parameters while selecting these funds.

Debt Short Performance

HDFC Short Term Opportunities Fund 0.60 2.74 5.01 10.41 9.61 9.19 25-Jun-10 2819.81 0.83 8.07

The fund has outperformed its benchmark (CRISIL Liquid Fund

L&T Short Term Opportunities Fund 0.66 2.88 5.26 10.41 9.44 9.44 27-Dec-11 452.36 0.96 7.03 Index) and its peers (CRISIL ranked ultra short-term debt funds -

December 2014) across various time frames (see Chart 1). In the Credit Opportunities Fund

short-term period of one year the fund gave returns of 9.41% Franklin India Short Term Income Plan 0.70 3.44 5.96 11.65 10.19 8.29 31-Jan-02 9904.35 0.96 8.85

compared with 9.19% by the benchmark and 9.24% by the peers. Debt Long

Further, the fund’s volatility of returns as measured by standard BNP Paribas Flexi Debt Fund 2.35 6.57 8.48 14.29 10.61 8.65 23-Sep-04 222.42 4.33 1.60

deviation (0.46%) is lower than the category average (0.49%) for

HDFC High Interest Fund - Dynamic Plan 1.98 7.03 9.36 16.14 10.59 9.12 28-Apr-97 971.26 5.02 1.38

the one-year period ended January 23, 2015.

Reliance Dynamic Bond Fund 2.08 7.00 9.00 15.28 10.67 6.27 15-Nov-04 4142.52 5.17 1.36

Chart 1: Performance as on January 23, 2015

Gilt Returns (%) Religare Invesco Credit Opportunities Fund

L&T Gilt 3.13 7.67 10.11 16.34 13.08 8.56 29-Mar-00 51.28 5.72 1.81

12 Crisil Liquid Fund Index

SBI Magnum Gilt Fund - Long Term 3.16 9.26 12.23 19.90 12.27 7.96 23-Dec-00 287.80 7.18 1.30 Ultra ST Debt funds

10

CRISIL Mutual Fund Ranks as of December 2014 8 Point to Point Returns are as on December 31, 2014 6 Returns are annualised for periods above 1-year, otherwise actualised

Risk Ratios are annualised 4 CREDIT QUALITY Risk ratios for Debt Short, Credit Opportunities, Liquid and Ultra Short Term High Medium Low categories are for a period of 1 year; risk free rate: 8.66% (average T-bill 2 High INTEREST auction cut off rate during the period) Medium RATE 0 Risk ratios for Debt Long and Gilt categories are for a period of 3 years; risk free Low SENSITIVITY 6 Months 1 Year 3 Years 5 Years rate: 8.57% (average T-bill auction cut off rate during the period) (Period) Average AUM is 3-months average number as disclosed by AMFI for the period October-December 2014 *returns above 1 year are annualized Portfolio Analysis Average Assets under Management - A Bird's Eye View In the past three years ended November 2014, highest rated Oct - Dec Jul - Sep Oct - Dec Jul - Sep securities (AAA/A1+) accounted for 92% of the fund’s portfolio 2014 2014 Change % 2014 2014 Change % while cash and cash equivalents accounted for around 7%. Mutual Fund Name (Rs.Crore) (Rs.Crore) (Rs.Crore) Change Mutual Fund Name (Rs.Crore) (Rs.Crore) (Rs.Crore) Change Meanwhile, in the past two months, the fund has reduced exposure HDFC Mutual Fund 150468 141481 8987 6.35 PRINCIPAL Mutual Fund 4926 4754 172 3.62 to top rated securities slightly and has invested in lower rated ICICI Prudential Mutual Fund 136763 127664 9100 7.13 Taurus Mutual Fund 4082 4411 -328 -7.45 Reliance Mutual Fund 126069 122068 4001 3.28 BNP Paribas Mutual Fund 3697 3921 -224 -5.72 papers (A, AA, A1 rated) with the average exposure being 7%, in Birla Sun Life Mutual Fund 107968 102616 5352 5.22 Indiabulls Mutual Fund 3087 2905 182 6.26 order to seek higher returns. UTI Mutual Fund 87390 83250 4140 4.97 BOI AXA Mutual Fund 3021 2519 502 19.94 Liquidity SBI Mutual Fund 72141 72850 -709 -0.97 Union KBC Mutual Fund 2873 3192 -319 -10.00 Liquidity is an important parameter for assessing ultra short-term Franklin Templeton Mutual Fund 63643 55611 8032 14.44 Pramerica Mutual Fund 1972 2060 -88 -4.30 debt funds. Illiquid securities hinder the fund’s ability to liquidate IDFC Mutual Fund 47920 45738 2182 4.77 Mirae Asset Mutual Fund 1527 1245 282 22.66 the portfolio at the time of redemption. On the liquidity parameter,

Kotak Mahindra Mutual Fund 38796 37445 1351 3.61 Peerless Mutual Fund 1515 2494 -979 -39.27 as per CRISIL Mutual Fund Ranking for the quarter ended DSP BlackRock Mutual Fund 37532 37483 49 0.13 Motilal Oswal Mutual Fund 1461 1048 413 39.45 December 2014, this fund ranks in the bottom 10% vis-à-vis its Tata Mutual Fund 24251 24544 -293 -1.19 IL&FS Mutual Fund (IDF) 813 792 21 2.67 peer set. Axis Mutual Fund 24115 22508 1606 7.14 PineBridge Mutual Fund 589 666 -77 -11.53 Deutsche Mutual Fund 22670 22508 163 0.72 Edelweiss Mutual Fund 588 380 208 54.76 Average Maturity L&T Mutual Fund 21336 20673 663 3.21 Quantum Mutual Fund 545 490 55 11.28 The fund has consistently maintained a lower average maturity of Religare Invesco Mutual Fund 19832 17647 2184 12.38 PPFAS Mutual Fund 516 479 37 7.65 about 33 days vis-à-vis its peers (131 days) for the past three Sundaram Mutual Fund 19564 18944 621 3.28 IIFCL Mutual Fund (IDF) 320 314 6 2.07 years ended November 2014, indicating lower interest rate risk in JM Financial Mutual Fund 14240 11976 2264 18.90 IIFL Mutual Fund 280 202 78 38.77 the portfolio compared with the category. JPMorgan Mutual Fund 14124 15380 -1256 -8.17 Escorts Mutual Fund 255 253 2 0.93 HSBC Mutual Fund 9101 8878 224 2.52 Sahara Mutual Fund 148 148 -1 -0.42 Fund Manager Baroda Pioneer Mutual Fund 7793 7101 692 9.74 Shriram Mutual Fund 32 29 2 8.31 Mr Nitish Sikand, a commerce graduate and an MBA in Finance, LIC NOMURA Mutual Fund 7618 8158 -540 -6.62 Grand Total 1106279 1059738 46541 4.39 has over 14 years of experience in fixed income markets and Canara Robeco Mutual Fund 7065 8785 -1720 -19.58 AAUM is the quarterly average number and excludes Fund of Funds product development. Goldman Sachs Mutual Fund 6832 6498 334 5.14 Data sorted on latest average AUM numbers Every month, Fund Focus will feature one of the IDBI Mutual Fund 6802 7097 -295 -4.16 CRISIL Mutual Fund Rank 1 or 2 Schemes

CRISIL Mutual Fund Ranking released for the quarter ended December 2014

Mutual Fund Category CRISIL Fund Rank 1 Schemes Mutual Fund Category CRISIL Fund Rank 1 Schemes Birla Sun Life Top 100 Fund HDFC Short Term Opportunities Fund Short Term Income funds Large Cap oriented Equity Franklin India Opportunities Fund L&T Short Term Opportunities Fund funds SBI Blue Chip Fund Credit Opportunities Funds Franklin India Short Term Income Plan Tata Equity Opportunities Fund ICICI Prudential Flexible Income Plan Franklin India High Growth Companies Fund Kotak Banking and PSU Debt Fund Ultra Short-term Debt funds ICICI Prudential Exports and Other Services Fund Religare Invesco Credit Opportunities Fund L&T India Value Fund UTI Treasury Advantage Fund Diversified Equity funds PineBridge India Equity Fund Canara Robeco Liquid Tata Ethical Fund DSP BlackRock Liquidity Fund Liquid funds UTI MNC Fund SBI Premier Liquid Fund Canara Robeco Emerging Equities Union KBC Liquid Fund Small and Mid-Cap Equity L&T Midcap Fund Birla Sun Life India GenNext Fund funds Principal Emerging Bluechip Fund Birla Sun Life MNC Fund Equity Linked Savings Axis Long Term Equity Fund Birla Sun Life Top 100 Fund Schemes (ELSS) Reliance Tax Saver Fund Franklin India High Growth Companies Fund Consistent Performers – Thematic – Infrastructure Franklin Build India Fund ICICI Prudential Exports and Other Services Fund Equity funds funds L&T Infrastructure Fund Reliance Equity Opportunities Fund Goldman Sachs Nifty Exchange Traded Scheme (GS Tata Ethical Fund Index funds Nifty BeES) UTI Equity Fund HDFC Balanced Fund UTI MNC Fund Balanced funds Tata Balanced Fund Consistent Performers – ICICI Prudential Balanced Fund Monthly Income Plan - Birla Sun Life MIP II - Wealth 25 Plan Balanced funds Aggressive ICICI Prudential MIP 25 Consistent Performers – IDFC Dynamic Bond Fund L&T Gilt Debt funds UTI Bond Fund Long Term Gilt funds SBI Magnum Gilt Fund - Long Term BNP Paribas Flexi Debt Fund Long Term Income funds HDFC High Interest Fund - Dynamic Plan Reliance Dynamic Bond Fund

For the detailed list and methodology, please refer to www..com.

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