16th February 2012

WF : Your Regular Savings Fund has in a short span since launch crossed the Rs. 1500 cr AuM mark in assets, despite not allowing big ticket institutional money into the fund. What are some of the key factors that have contributed to this very significant success?

Raghav : Yes. We launched the fund in November 2010. By then oil and commodity prices had taken off and quite unexpectedly inflation had resumed an upward trend backed by QE2 in the US and related surge in global liquidity. Considering that rates had already risen and were expected to go up more, it was an opportune time to deploy funds in the market. But the category at large was suffering due to investors' apathy keeping recent returns in mind. We collected just about Rs 100 Crs. in the NFO. But, our experience is that if we launch funds when it is the best time to invest rather than the best time to collect money, they generally go ahead to become scalable products. With market conditions in our favor, even a small corpus could be gainfully deployed and went on to generate returns in line with expectations. Case in point on the equity side is our Focused BlueChip equity fund. Again, launched in the throes of the crisis in 2008, but built great track record and Rs 3500 Crs. plus corpus in a period less than 4 years.

The other important reason for the ability of this fund to scale is that somewhere fund industry is a culprit for the failure of our Income and Gilt Funds to attract sustainable retail flows. While in the end of the last decade Income Funds were supposed to be retail products, over a period of time with the rate cycles turning over and over we have been indulging in "giving a call" on rates. Due to this kind of behavior of industry participants including ourselves, Income and Gilt Funds became opportunistic vehicles to generate quick returns by way of capital appreciation. There are years of double digit return and then there are years of zero returns too giving a return profile that is unpredictable, inconsistent and all over the place. Investors looking for a sustainable asset allocation in fixed income, don't like exaggerated highs and lows, they prefer a smoothened return profile with the outcomes falling in a narrow predictable range. We have understood that the market for stable accrual based products is far bigger than the market for duration management. This is starkly evident from the size of the FMP business that we run as compared to the size of the duration management products that we manage.

The Regular Savings Fund fills a much needed gap for a retail investor. A fixed income fund that aims to generate steady accrual reflective of the current and near term interest rate scenario rather than aggressive duration management. We are clear that for retail investors and even the mass affluent and for most high networth investors, accrual works. For institutions and corporates who manage an active treasury function - that too selectively, duration management works.

WF : What has been your experience in terms of average ticket size from the IFA segment coming into this fund as compared to some of your flagship equity funds?

Raghav : It is widely understood that for the retail business as far as equity funds are concerned, the average ticket sizes fall in the Rs. 25,000/- to Rs. 30,000/- bracket for lumpsum purchases and of course for SIPs it is approximately Rs. 2300/- which again is about the same on an annualized basis. For the Regular Savings Fund, if we remove the HNI / private client segment of the corpus, and concentrate on data coming from the IFA side of the business, the average ticket size is 10 times that of the retail equity business. I am not really surprised to see this data because in the past too when we have had chats with you on the fixed income business, we did discuss our belief that when our IFA friends go to clients and solicit SIPs and equity investments, they most likely come back with the savings balance of the investor. The real "investment balance" has been lying around in traditional products, post offices, fixed deposits of companies and institutions, PPF accounts and other small savings instruments. Only if you offer a steady fixed interest product, will the investor give you a larger share of their investment pie. If you offer only risk based products like equity, they will allocate only their risk capital to you. Whether its equity SIP or equity purchases, it comes from the savings account balance, the surplus money, the risk money and we all know that for an average individual the savings balance is never more than 2-3% of their financial wealth. Whereas for us as a nation of savers, we have 80-90 % of our financial wealth in fixed income products. As per the publically available data as on March 31, 2011 we have bank deposit base of Rs 57.1 lac Crs. And this refers to bank deposits only and therefore, you need to add small savings balances and other such traditional saving products. On the other hand total equity investment of non promoter individuals in equity markets including direct and MF was not over Rs 10 lac Crs. What does that tell us about the ticket sizes which we should expect in fixed income products vis-a-vis equity products?

WF : Will this product be managed closer to a short term fund or a dynamic bond fund? How does the portfolio construct help manage volatility and provide reasonable returns?

Raghav : ICICI Prudential Regular Savings Fund is not going to be close to a dynamically managed bond fund in any manner. The endeavor is to manage it for a stable return profile. Dynamic Bond Funds do tend to use duration management to add to the returns but that may result in volatility of the returns profile. Any publically available analysis on average returns, standard deviation and risk adjusted return should show the ICICI Prudential Regular Savings Fund very favorably stacked on risk adjusted returns and low on standard deviation as compared to Dynamic category of funds.

If I see the short term space (and for sake of convenience I am putting RSF in the short term category here) I find three broad ways in which industry is managing the category currently. And I have no choice but to say that some of the names are misleading and hence this simplification of categories is essential.

1. Largely accrual strategy - No conscious effort to generate appreciation by way of duration play; the intrinsic duration of the portfolio may lead to some incidental appreciation with rates declining but that's not the core intention. Duration is managed only directionally without any sudden view taking. Focus on generating steady above average accrual. The fund may take some illiquid paper to improve accrual. ICICI Prudential Regular Savings Fund falls in this category.

2. Traditional short term bond - High quality liquid portfolio with some directional management of duration. Typically these funds have duration in the range of 1 to 3 years. They use Government Securities for managing liquidity and at times if there is sudden influx of cash they may use Government Securities to hold the duration. But generally the duration of the fund is reflective of the duration of the core portfolio. ICICI Prudential Short Term Plan falls in this category.

3. Dynamic bond - These funds may have a core portfolio similar to the traditional short term funds may be with a lower core duration. They may take Government Securities exposure from time to time in order to add a kicker to the returns profile. Hence the core portfolio may have a completely different duration from the total portfolio duration. ICICI Prudential Income Opportunities Fund falls in this category.

WF : Should advisors position your Regular Savings Fund as an alternative to traditional fixed interest investments?

Raghav : Well we are trying to give our advisors a product that can help them to wean away clients from traditional fixed interest instruments into fixed interest mutual funds.

We all know that investors have been giving SIPs into equity funds to our IFA friends starting in the last 3 -5 years. Average SIP size is Rs 2200/- and let me assume that an investor normally has 2-3 SIPs going. A 5 year SIP of Rs 4,000/- means the investor has given my IFA friend Rs 2.4 lacs. This would have compounded to somewhere in the range of Rs 3 lacs to Rs 3.5 lacs in the last 5 years depending on the scheme. The average investor who does these SIPs is 40 years of age. Now what do you think is this Rs 3.5 lacs as a proportion of the total wealth of this 40 year old individual? The answer lies somewhere in between 5% to 25% depending on the individual circumstances and the geography one talks about but generally not more than that.

Getting access to larger chunk of a client's portfolio is possible only if advisors offer stable return fixed interest products and from that perspective ICICI Prudential Regular Savings Fund can be the ideal product.

Let me also tell you that attracting traditional investors into fixed interest mutual funds is a limited window opportunity. Today when a 1 year bank CD benchmark rate is ~10% (source: Creditmeter / Quant Capital Research) and our Regular Savings Fund has a portfolio YTM of 10.3% as on January 31, 2011, you can go and get investors. A few months later if market yields drop it will be that much more difficult to attract investors.

WF : What needs to be done to make retail debt as an MF segment more popular first with distributors and then with investors?

Raghav : I think the incentive structures are aligned very favorably to get distributors also to be encouraged enough to focus on this segment. I can say we have very good "invitation pricing" going on out here and this is likely to sustain till short term interest rates are high. A lot of people have started taking notice of this. We have easily over 500 active IFAs who are advising investment into Regular Savings Fund to their investors. The logic and set of beliefs that are explained above are being carried by my sales team across the country not only to IFAs empanelled with us but also to IFAs empanelled with the largest of the national distributors in the country. I think if IFAs focus on increasing their total asset base and on ensuring that their advice is working on a larger share of the client's pie we will eventually get there.

1. "What proportion of the client's total assets am I advising?"

2. "Which products can deepen this proportion?"

3. "ASK FOR MORE"

seem to be mantras that every IFA needs to practice.

WF : What are some of the key inhibitions that you see among your distribution partners when it comes to retail debt products and what can be done to dispel these and give them more confidence about this segment?

Raghav : I don't come across any inhibitions really nowadays. I think major issues were:

1. Perception that all fixed income funds are volatile.

2. Fixed income as an asset class is complicated to understand.

3. Commission on fixed income is too low

We are working hard to clear all these myths. I think the first two are our own doing because of the way we promoted Income and Gilt Funds in the past. Income and Gilt Funds are ideal for investors who understand fixed income markets and related nuances slightly better. They are for experienced investors who have an idea of what to expect when interest rates and their determinants become volatile. We believe that retail investors should keep investing regularly either by way of lumpsum or SIP into ICICI Prudential Regular Savings Fund for stable risk adjusted performance. Taking a "call" and generating 20% in 1 year and NIL in another year may not be to their liking.

We manage some of the largest Income and Gilt Funds in the country and we have won Best Debt Fund House from Morningstar 4 years in a row (2012, 2011,2010 and 2009); we are the largest fixed income fund manager in the country (source www.amfiindia.com, compilation of AuM of fixed income schemes), we are clear what is good for our distributors and what suits which segment of investors.

WF : In most developed markets, liquid funds and income funds form a very material portion of retail investors portfolios. What is Prudential's own experience in the UK? What are the present industry statistics in our market? How do you see this changing over the next 5 years and what can catalyse a change?

Raghav : I think there are some very fundamental differences in the structure of the economy. Generally speaking economies can be classified into 4:

1. Bank based financially developed

2. Market based financially developed

3. Bank based financially underdeveloped

4. Market based financially underdeveloped

The state of development of capital markets, interest rate structures and role of banks in the economy plays a large role. Our perception is that we as a country are in early stages of a process of moving from 3 to 2 in the model described above. The fact that all banks in India have capital market entities and capital market businesses in their fold is absolute proof of this slow movement. And with time, like equity management is moving from direct to intermediaries like ourselves; fixed income management of our investors may also move from financial institutions like banks to market linked entities like mutual funds. Over what time frame, is very difficult to predict. We all get impatient when we forget that the history of liberalization of our interest rate structures, capital market machinery and our economy as a whole is still under two decades.

"Picture abhi baaki hai mere dost" as the familiar adage goes!!!

Statutory Details: Settlor of ICICI Prudential Mutual Fund (IPMF): ICICI Bank Ltd. and Prudential plc; IPMF was set up as a Trust sponsored by the settlor in accordance with the provisions of Indian Trust Act, 1882. Trustee: ICICI Prudential Trust Ltd. (IPTL); Investment Manager: ICICI Prudential Asset Management Co. Ltd. (IPAMCL); IPTL & IPAMCL are incorporated under Companies Act, 1956. Liability: Liability of IPMF/Sponsors/IPTL/IPAMCL is limited to Rs. 22.2 lacs collectively. Past performance of the Sponsors, AMC, Fund, and Trustee has no bearing on the expected performance of the mutual fund or any of its schemes. Risk Factors: All investments in Mutual Fund and securities are subject to market risks and the NAV of the Schemes may go up or down, depending upon the factors and forces affecting the securities markets and there can be no assurance that the fund's objectives will be achieved.

Best Fund House Debt by Morningstar India

ICICI Prudential Asset Management Company Limited has been adjudged the winner of the award "Best Fund House: Debt" by Morningstar India in 2012. The award recognizes outperformance over five years, based on the Morningstar Risk-Adjusted Return across its debt funds line-up for the period ending December 31, 2011. 9 fund houses were considered for this award. The award should not be construed as investment advice, an offer, the solicitation of an offer to buy or sell securities by Morningstar. It is neither a certificate of statutory compliance nor a guarantee of future performance.

ICICI Prudential Regular Savings Fund is an open-ended income fund that intends to provide reasonable returns, by maintaining an optimum balance of safety, liquidity and yield, through investments in a basket of debt and money market instruments with a view to delivering consistent performance. However, there can be no assurance that the investment objective of the Scheme will be realized. Entry Load Not Applicable; Exit Load: (i) If the amount sought to be redeemed or switched out, is invested upto 15 months from the date of allotment - 2% of the applicable NAV; (ii) If the amount, sought to be redeemed or switched out, is invested for a period of more than 15 months from the date of allotment - Nil.

ICICI Prudential Short Term Plan (An open-ended Income Fund) is an additional Plan under the existing ICICI Prudential Income Plan with characteristics similar to ICICI Prudential Income Plan. The objective of the Plan is to generate income through investments in a range of debt and money market instruments of various maturities with a view to maximising income while maintaining the optimum balance of yield, safety and liquidity, Entry Load: Nil, Exit Load : (i) If the amount, sought to be redeemed or switched out is invested for a period of upto 6 months from the date of allotment - 0.75% of applicable Net Asset Value; (ii) If the amount, sought to be redeemed or switched out is invested for a period of more than 6 months from the date of allotment - Nil.

ICICI Prudential Income Opportunities Fund is an open-ended income fund that intends to generate income through investments in a range of debt and money market instruments of various credit ratings and maturities with a view to maximizing income while maintaining an optimum balance of yield, safety and liquidity. Entry Load: Nil, Exit Load: Nil.

Significant risk factors for debt oriented Schemes: Investments in the Scheme(s) may be affected by risks relating to trading volumes, settlement periods, interest rate, liquidity or marketability, credit, reinvestment, regulatory, investment in unlisted securities, default risk including the possible loss of principal, derivatives, investment in securitized instruments and risk of Co-mingling etc. The aforesaid are only the names of the schemes and do not in any manner indicate either the quality of the Schemes or their future prospects and returns. Mutual Fund Investments are subject to market risks. Please read the Statement of Additional Information and Scheme Information Document carefully before investing.

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