HDFC Credit Risk Debt Fund

A Disciplined Approach to Credit

Oct 2018

This product is suitable for investors who are seeking*:• Income over short to medium term.• to generate income/capital appreciation by investing predominantly in AA

and below rated corporate debt (excluding AA+ rated corporate bonds)

* Investors should consult their financial advisers if in doubt about whetherthe product is suitable for them.

Riskometer

(An open ended debt scheme predominantly investing in AA and below rated

corporate bonds (excluding AA+ rated corporate bonds)).

Recent stress in NBFC sector triggered by IL&FS default

• Reasons for financial stress

• High proportion of debt funding long term assets & equity investments

• Asset liability mismatch, increased dependence on refinancing

• Gross borrowings of IL&FS stood at INR 910 bn (as of end-Mar’18)

• Of this, INR 600 to 650 bn is in project SPVs and serviced largely through project

flows (refer interview of Hari Sankaran, Vice Chairman and MD of IL&FS in Mint dtd 1st Oct’18)

• Total Debt at risk, thus, is near INR 300 bn, i.e. 0.3% of the total bank credit,

which is not material.

• Since the debt of IL&FS Group is widely held across HNIs, Insurance, Provident

Funds, banks etc., it should not lead to a systemic issue

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Source: Various publicly available information ; IL&FS - Infrastructure Leasing & Financial Services Limited

Build-up of risks in NBFC Sector

• Rapid growth in NBFCs asset book over past 3 years ~15% CAGR

• NBFCs’ share in total credit has increased to 21% in FY18 from 18% in FY14

• Banks exposure to NBFCs/HFCs has also increased to 13.8% in FY18 from 11.7%

in FY14

• Growth in retail asset book coincides with rise in Household financial liabilities

• Net financial savings (as % of GDP) fallen to 7.2% in FY18 from 8.1% in FY16,

despite stable gross savings

• Sharp increase in share of CPs in the borrowing mix of NBFCs – from 4.2% in FY14

to 12.6% in Aug18 leading to ALM mismatch concerns

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Source: Nomura , Global Markets Research , Sept 2018 , RBI

Stocks/Sectors referred in the presentation are illustrative and should not be construed as an investment advice or a research report or a

recommended by HDFC Mutual Fund / AMC. The Fund may or may not have any present or future positions in these sectors. HDFC Mutual

Fund/AMC is not guaranteeing any returns on investments made in the Scheme(s). The data/statistics are given to explain general market

trends in the securities market, it should not be construed as any research report/research recommendation

Sharp rise in spreads for NBFCs in Sep’18

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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

Source: Daily valuation provided by ICRA/CRISIL; Bloomberg

• Recent default by an NBFC raised concerns over other NBFCs’ refinancing capabilities

– Credit spread widen significantly for NBFCs

75

100

125

150

175

200

225

250

Average AAA Spread Average AA Spread

Our Investment Philosophy for Fixed Income

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• Fixed income investment philosophy is focussed on credit quality

• Philosophy of SLR, generally prioritized in that order

Safety – Superior credit quality companies with low probability of default

Liquidity – Endeavour to invest in securities with better liquidity

Returns – Better risk reward ratio

• Even in the best of credit environments, our endeavour is not to take undue credit risk,

even at cost of marginally lower Yield To Maturity (YTM).

Source: Internal

• Emphasis on Four C’s of Credit

Character of Management

Capacity to Pay

Collateral pledged to secure debt

Covenants of debt

• Investment Limit Setting through a Credit Scoring Model which factors – Parentage, Financials,

Rating & Outlook

• Issuer level limits (% of scheme AUM) are function of credit score – better the score, higher the limits

(Within the permitted regulatory limits)

• Cumulative absolute exposure limit across fund house for each issuer and business group

• List of approved issuers & their exposure limits are reviewed periodically

Key Elements of Credit Risk Assessment Framework

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Major Credit Stress cases / downgrades in MF Industry

Month of

downgradeCompany

MF Industry Exposure

(INR Crs)

No. of MFs with

exposures (including

HDFC MF, wherever

applicable)

HDFC MF Exposure

(INR Crs)

Jun-12 Deccan Chronicle Group 100 2 NIL

Aug-15 Amtek Auto Limited 200 1NIL

Dec-15 Jindal Steel & Power - Group 2,640 3NIL

Oct-16 Ballarpur (BILT) 565 5 NIL

Apr-17 Reliance Comm. Group 600 1 NIL

May-17 IDBI Bank 1,435 6 700*

Oct-17 Religare Group 1,269 6 NIL

Dec-17 Jana Small Finance Bank 1,131 11 200*

Jul-18 Sintex Group 358 3 NIL

Aug-18 Reliance Infrastructure 286 3 NIL

Sep-18 IL&FS Group (Downgraded) 3,206 12 NIL

Source: ICRA MFI Explorer

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With the focus on high credit quality, HDFC MF has largely avoided above credit stress cases

* In both the cases, the coupons/principal payments were fully realized

Historical indicators are no guarantee of future results

HDFC Credit Risk Debt Fund Positioning

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HDFC Credit Risk Debt Fund - Diversification Across Sectors

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For complete portfolio details refer www.hdfcfund.com. Portfolio details provided as on Sept 30, 2018. Portfolio holdings are as a percentage of totalportfolio holdings as per AMFI Industry Classification

HDFC Credit Risk Debt Fund - A Well Diversified Portfolio

For complete portfolio details refer www.hdfcfund.com. Portfolio details provided as Sept 30, 2018. Portfolio holdings are as a percentage of total portfolioholdings. Debt instruments referred above are not recommended by HDFC Mutual Fund/AMC. The Fund may or may not have any present or futurepositions in these instruments.

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4.1 4.0 4.0 3.0 2.8 2.4 2.3 2.3 2.3 2.2Sep 18

Across Individual Credits (% top 10 non-AAA individual exposures)

Vedanta Ltd. HPCL-Mittal Energy Ltd TATA International Ltd. The Tata Power Company Ltd.Tata Steel Ltd. Talwandi Sabo Power Ltd Adani Transmission Ltd Simplex Infrastructures LtdPunjab National Bank Nuvoco Vistas Corporation Ltd

29.7 4.5 23.2 22.4 9.7 5.1 3.7 1.7

Sep 18

Across different rating categories

AAA & Cash & Cash Equivalents AA+ AA AA- A+ A A- Unrated

16.8 6.4 4.7 4.3 4.0 2.3 2.3Sep 18

Diversification across Business Groups - % top 10 non-AAA Group exposures

Tata Sons Group Tata Power Group Tata Steel Group Tata Motors GroupVedanta Greenko Adani HPCL

Tata Group

Exposure to lower rated papers v/s others

Source: CRISIL Annual Default and Ratings Transition Study -2017 available on www.crisil.com (Latest available report). Issuer default data over the period of 1988 t to 2017. 11

0.04%0.27%

0.69%0.47%

1.96%

3.95%

0.0%

1.0%

2.0%

3.0%

4.0%

5.0%

1 Year 2 Year 3 Year

CRISIL's comparative Cumulative Default Rates

(CDR) for AA and A rated issuer across tenor

CRISIL AA CRISIL A

10

20

30

40

50

60

70

HDFC CRF MF2 CRF MF1 CRF MF3 CRF MF4 CRF

% Exposure of AUM to A Category and

below/Unrated papers

Top 5 Credit Risk Funds, including HDFC (in terms of AUM) Sept 2018 portfolios Source: Sept 2018 Portfolios, MFI explorer, HDFC CRF –HDFC Credit Risk Debt Fund

Thus, the probability of default is higher for lower rated papersNote: As per SEBI, Credit Risk Funds shall invest mminimum 65% of total

assets in AA* and below rated corporate bonds [*excludes AA+ rated

corporate bonds]

Exposure to relatively riskier^ segments

Top 5 Credit Risk Funds, including HDFC, (in terms of AUM) as per Sept 2018 portfolios Source : Sept 2018 portfolios, HDFC MF InternalClassification. ^Riskier as per HDFC MF ResearchNote: As per SEBI, Credit Risk Funds shall invest mminimum 65% of total assets in AA* and below rated corporate bonds [*excludes AA+rated corporate bonds]

15

20

25

30

35

40

45

50

55

60

HDFC CRF MF1 CRF MF2 CRF MF3CRF MF4 CRF

% Exposure (RE+MFI+LAS+A rated corp)

RE: Real Estate, MFI: Micro Finance Institutions, LAS: Loan against shares (NCD secured against shares), A rated corp: Corporate with Credit rating

in A Category or lower

HDFC Credit Risk Debt Fund – What impacted returns ?

• Significant rise in yields of corporate bonds over last one year

• Conservative positioning with high allocation to AAAs

• Medium duration - slightly longer than others in this category

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Summary – HDFC Credit Risk Debt Fund

• Credit Quality continues to be central focus of our investment

philosophy

• With our credit risk assessment framework we have been able to avoid

any major credit stress/event on our portfolio

• High yields available on good quality credits offers attractive risk reward

trade off

• A well diversified portfolio ideally positioned to take advantage of

current environment

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Returns are not assured / guaranteed. - HDFC Mutual Fund/AMC is not guaranteeing any returns on investments made in this Fund. In view of the

individual circumstances and risk profile, each investor is advised to consult his / her professional advisor before making a decision to invest in the

Scheme.

Portfolio Statistics:

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Portfolio Classification by Issuer Rating Class

(%) ≈

AAA & Equivalent, A1+ & Equivalent 24.64

AA+ 4.49

AA/AA- 45.72

A+ & Below 20.20

Sovereign 0.28

Cash, Cash Equivalents and Net Current

Assets4.67

AUM as on September 30th 2018 (In Rs.

Cr.)17,776.34

Average Maturity Macaulay Duration Modified Duration Yield To Maturity

2.54 years 2.19 years 2.02 years 9.70%

For complete portfolio details refer www.hdfcfund.com. Portfolio details provided as on September 30, 2018.

≈ Based on long term rating.

0.28 1.88

93.17

4.67

SDL CD/CP Credit Exposure Cash,Cash

Equivalents and

Net Current Assets

Portfolio Classification by Asset

Class(%)

Type of SchemeAn open ended debt scheme predominantly investing in AA and below rated corporate bonds (excluding AA+ ratedcorporate bonds).

Inception Date

(Date of allotment)March 25th 2014

Investment ObjectiveTo generate income/capital appreciation by investing predominantly in AA and below rated corporate debt. There is noassurance that the investment objective of the Scheme will be realized.

Fund Manager $ Shobhit Mehrotra

Investment Plan Regular Plan & Direct Plan

Investment OptionsUnder Each Plan: Growth & Dividend. The Dividend Option offers Normal Dividend option and quarterly dividend optionwith Dividend Payout and Reinvestment facility

Minimum Application Amount.(Under Each Plan/Option)

Purchase: Rs. 5,000 and any amount thereafter

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

Load Structure

Entry Load:• Not Applicable. Upfront commission shall be paid directly by the investor to the ARN Holder (AMFI registered

Distributor) based on the investors’ assessment of various factors including the service rendered by the ARNHolder.

Exit Load:In respect of each purchase / switch-in of Units, 15% of the units (“the limit”) may be redeemed without any exitLoad from the date of allotment. Any redemption in excess of the above limit shall be subject to the following exit load:• In respect of each purchase / switch-in of Units, an Exit Load of 1.00% is payable if Units are redeemed / switched-out

within 12 months from the date of allotment.• In respect of each purchase / switch-in of Units, an Exit Load of 0.50% is payable if Units are redeemed / switched-out

after 12 months but within 18 months from the date of allotment.No Exit Load is payable if Units are redeemed / switched out after 18 months from the date of allotment.

Benchmark

Additional Benchmark

CRISIL Short Term Bond Fund Index

CRISIL 10 Year GILT Index

Fund Facts

16$ Dedicated Fund Manager for Overseas Investments: Mr Rakesh Vyas For further details, please refer to the Scheme Information Document.

Asset Allocation

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Under normal circumstances, the asset allocation of the Scheme’s portfolio will be as follows:

Types of InstrumentsMinimum

Allocation (% of total Assets)

Maximum Allocation (% of

total Assets)

Risk Profile of the instrument

Debt (including

securitised debt)

and Money Market

Instruments #

Upto 100 Medium to High

Units issued by

REITs and InvITs0 10 Medium to High

#Minimum 65% of the total assets shall be invested in AA* and below rated corporate debt. (*excludes AA+

rated)

The scheme may invest in the schemes of Mutual Funds in accordance with the applicable extant SEBI (Mutual Funds) Regulations asamended from time to time.The Scheme may invest upto a maximum 75% of the total assets in Foreign Debt Securities.The Scheme may invest upto 100% of its total assets in Derivatives.

For further details, please refer the Scheme Information Document.

Disclaimer & Risk Factors

This presentation dated 24th October, 2018 has been prepared by HDFC Asset Management Company Limited(HDFC AMC) based on internal data, publicly available information and other sources believed to be reliable. Anycalculations made are approximations, meant as guidelines only, which you must confirm before relying onthem. The information contained in this document is for general purposes only. The document is given insummary form and does not purport to be complete. The document does not have regard to specific investmentobjectives, financial situation and the particular needs of any specific person who may receive this document.The information/ data herein alone are not sufficient and should not be used for the development orimplementation of an investment strategy. The statements contained herein are based on our current views andinvolve known and unknown risks and uncertainties that could cause actual results, performance or events todiffer materially from those expressed or implied in such statements. Past performance may or may not besustained in future. Stocks/Sectors referred in the presentation are illustrative and should not be construed as aninvestment advice or a research report or a recommended by HDFC Mutual Fund / AMC. The Fund may or maynot have any present or future positions in these sectors. HDFC Mutual Fund/AMC is not guaranteeing anyreturns on investments made in the Scheme(s). The data/statistics are given to explain general market trends inthe securities market, it should not be construed as any research report/research recommendation. NeitherHDFC AMC and HDFC Mutual Fund nor any person connected with them, accepts any liability arising from theuse of this document. The recipient(s) before acting on any information herein should make his/her/their owninvestigation and seek appropriate professional advice and shall alone be fully responsible / liable for anydecision taken on the basis of information contained herein.

Mutual fund investments are subject to market risks, read all scheme related documents carefully.

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Thank You

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