HDFC Corporate Bond Fund

HDFC Corporate Bond Fund

(An open ended debt scheme predominantly investing in AA+ and above rated corporate bonds)

January, 2019

A portfolio of high quality corporate bonds!^

This product is suitable for investors who are seeking*: ? Income over short to medium term. ? To generate income/capital appreciation through investments predominantly in AA+ and above rated

corporate Bond. *Investors should consult their financial advisers if in doubt about whether the product is suitable for them.

^Please refer slide 8

Riskometer

Interest Rates Outlook:Forces favouring lower Interest rates

? Real Yields in India at historical high ? CPI outlook remains benign led by food inflation

? Healthy Differential with US Real yields

%

India's Real Rates at near historic

6.0

high

-4.0

-14.0 Jan/03 Apr/06 Jul/09 Oct/12 Jan/16

%

Healthy spread between US and India

Real Rates

3.0

-2.0

-7.0

-12.0 Jan/03 Apr/06 Jul/09 Oct/12 Jan/16

Real Yields = Month-end 10Y GSec Yield and CPI; Updated till 30th Nov'18. CPI-IW is used to calculate real yields for period before 2012

? Sharp fall in oil prices eases pressure on CAD

? Fall in oil prices beneficial for CAD and INR outlook

? Every USD 10 per barrel fall in crude prices results in CAD falling by ~0.4% of GDP

Crude prices (USD /bbl)

CAD as % of GDP

FY16 FY17 FY18 H1FY19

50.2 48.8 56.7 75.0

-1.1 -0.7 -1.9

-2.7

? US Federal Governor's comment that rates are "just below" neutral rate indicates benign outlook for rise in Fed rates ? US 10Y yields have come off materially from the high made in Nov'18

Source: Bloomberg, RBI, Kotak Institutional research.

%

US 10 Year Yield

3.50

3.00

2.50

2.00 Dec-16 Mar-17 Jun-17 Sep-17 Dec-17 Mar-18 Jun-18 Sep-18 Dec-18

2

Interest Rates Outlook:Forces adversely impacting interest rate outlook

Bank credit growth accelerating

? Outpacing the deposit growth ? Recovery in capex cycle likely to accelerate

credit growth further

16.0% 14.0% 12.0% 10.0% 8.0% 6.0% 4.0% 2.0%

Apr-17

Credit Growth Vs. Deposit Growth

Deposit growth %

Credit growth %

Jul-17 Oct-17 Jan-18 Apr-18 Jul-18 Oct-18

15.1% 8.0%

Excess SLR Investments, especially with PSU banks

Excess SLR Securities with PSU Banks

Regulatory Requirement #

Adj SLR*

? Incremental demand for G-sec could remain muted

18.0% Jun/15 Nov/15 Apr/16 Sep/16 Feb/17 Jul/17 Dec/17 May/18 Oct/18

Debt FII Flows remain volatile on back of rising USD and global liquidity unwinding

? Net FII Debt Outflows CY18 stood at USD 6.9 bn

USD bn

3.0 1.3 1.0

Net FII Debt flows

0.0 0.5

0.8 0.7

-1.0

-0.0

-3.0

-1.4 -1.5

-1.6

-2.9

-5.0

-1.4 -1.3

Dec18 Nov18 Oct18 Sep18 Aug18 Jul18 Jun18 May18 Apr18 Mar18 Feb18 Jan18

* Adj SLR = Investments in Statutory Liquidity Ratio (SLR) Securities adjusted for securities under LAF # Regulatory Requirements = SLR + Liquidity coverage requirement requirements (~15-17% of NDTL) ? carve out allowed from SLR Source: RBI, Kotak Institutional research, NSDL

3

Liquidity concerns for NBFCs addressed, outlook is mixed

Liquidity concerns post IL&FS default addressed by

? Timely actions by RBI and Government

? Securitisation / asset sale, unutilised bank lines etc.

bps

325

NBFC Spread rises post IL&FS default*

275

Average AAA Spread

225

Average AA Spread

175

Growth expected to moderate for NBFCs ? Cost of funds rising with widening of spreads ? Risk aversion amongst lenders

Concern over NBFCs / HFCs with higher yielding real estate exposures.

Driven by widening of spreads for NBFCs, even corporate bond spreads have widened

125

75 Jun-18 Jul-18 Aug-18 Sep-18 Oct-18 Nov-18 Dec-18

bps 220 200 180 160 140 120 100

80 60 40

Sep/18

Corporate bond spreads widens^

Oct/18

Nov/18

3 yr AAA Spread 3 yr AA Spread

Dec/18

In our opinion, cautious approach towards credit needs to be maintained

* AAA Average spread is average spread of 10 large AAA rated NBFCs 3 Yr. bond yields over 3 Yr benchmark Gsec. AA Average spread is average spread of 5 large AA rated NBFCs 3 Yr. bond yields over 3 Yr benchmark Gsec ^ AAA spread is spread of 3 Year AAA rated corporate bond yields over 3 Yr benchmark Gsec yields. AA spread is spread of 3 Year AA rated corporate bond yields over 3 Yr benchmark Gsec yields Source: Daily valuation provided by ICRA/CRISIL; Bloomberg; Data is updated till 31st Dec 2018. Refer disclaimer on slide 17

4

Current Fixed Income environment ? Conflicting forces lead to a mixed outlook on interest rates

? Near term challenges of NBFCs have diminished; cautious approach needs to be maintained

? In view of the above, a good strategy for fixed income investments in current market is Controlled duration Low credit risk

HDFC Corporate Bond Fund ticks both the above requirements

Investments must be tailored to investor's individual situation and objectives and therefore, investors should consult their financial advisors to ascertain whether the products are suitable for them.

5

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