#The Investment in Securitised Debt will not normally exceed 25% of the net assets of the Scheme.

The Scheme may take derivatives position (both equity and fixed income) based on the opportunities available subject tothe guidelines issued by SEBI from time to time and in line with the investment objective of the Scheme. These may be taken to hedge the portfolio, rebalance the same or to undertake any other strategy as permitted under SEBI (MF) Regulations from time to time. The maximum derivative position will be restricted to 20% of the Net Assets (including cash) of the Scheme.

The Scheme may seek investment opportunity in the Foreign Securities, in accordance with guidelines stipulated in this regard by SEBI and RBI from time to time. Under normal circumstances, exposure to foreign securities subject to regulatory limits shall not be more than 25% of the Scheme's net assets.

In addition to the instruments stated in the table above, the Scheme may enter into repos/reverse repos as may be permitted by RBI. From time to time, the Scheme may hold cash. A part of the net assets may be invested in the Collateralised Borrowing & Lending Obligations (CBLO) or repo or in an alternative investment as may be provided by RBI to meet the liquidity requirements.

The Scheme may engage in short selling of securities in accordance with the framework relating to short selling and securities lending and borrowing specified by SEBI. Subject to the SEBI (MF) Regulations, as applicable from time to time, the Scheme seeks to engage in Stock Lending. Stock Lending means the lending of stock to another person or entity for a fixed period of time, at a negotiated compensation in order to enhance returns of the portfolio. The securities lent will be returned by the borrower on the expiry of the stipulated period.

The AMC shall adhere to the following limits should it engage in Stock Lending:
1. Not more than 25% of the net assets of the Scheme can generally be deployed in Stock Lending.
2. Not more than 5% of the net assets of the Scheme can generally be deployed in Stock Lending to any single approved intermediary.
The Mutual Fund may not be able to sell such lent out securities and this can lead to temporary illiquidity.

Pending deployment of funds of the Scheme in securities in terms of the investment objective of the Scheme the AMC may park the funds of the Scheme in short term deposits of scheduled commercial banks, subject to the guidelines issued by SEBI vide its circular dated April 16, 2007, as amended from time to time.

The investment objective of the Scheme is to generate long-term capital appreciation from a portfolio that is substantially constituted of equity and equity related securities of Small and Mid-Cap companies.

The Investment Manager will also seek participation in other equity and equity related securities to achieve optimal portfolio construction. The Scheme may also invest a certain portion of its corpus in debt and money market securities.

Small and Mid-Cap companies offer higher return potential than large cap companies on one hand but also carry higher risk than large cap companies, particularly over the short and medium term. The following are some of the reasons why Small / Mid cap companies offer higher return potential.

1. Relatively less known by market participants / price discovery by market is not full.
2. Better growth prospects due to presence in a new segment/ area that is growing at a faster pace.
   
3. Ability to gain share due to new technology, better product / service etc.
4. Room for P/E multiples to expand if the company transitions from a small / mid cap to large cap, etc.

To reduce risk, the Fund will maintain a well diversified portfolio. While the portfolio focuses primarily on a buy and hold strategy at most times, it will balance the same with a rational approach to selling when the valuations become too demanding even in the face of reasonable growth prospects in the long run. Though every endeavour will be made to achieve the objectives of the Scheme, the AMC/Sponsors/Trustees do not guarantee that the investment objectives of the Scheme will be achieved. No guaranteed returns are being offered under the Scheme.

Pursuant to the SEBI Regulations, the Scheme shall not make any investment in:

• Any unlisted security of an associate or group company of the Sponsors; or
• Any security issued by way of private placement by an associate or group company of the Sponsors; or
• The listed securities of group companies of the Sponsors which is in excess of 25% of the net assets.

The Scheme may invest in other schemes managed by the AMC or in the schemes of any other mutual funds, provided it is in conformity with the investment objectives of the Scheme and in terms of the prevailing SEBI Regulations. As per the SEBI Regulations, no investment management fees will be charged for such investments and the aggregate inter scheme investment made by all the schemes of HDFC Mutual Fund or in the schemes of other mutual funds shall not exceed 5% of the net asset value of the HDFC Mutual Fund.

The Scheme may also invest in suitable investment avenues in overseas financial markets for the purpose of diversification, commensurate with the Scheme objectives and subject to necessary stipulations by SEBI / RBI. Towards this end, the Mutual Fund may also appoint overseas investment advisors and other service providers, as and when permissible under the regulations.

• Debt Investments

The Scheme will retain the flexibility to invest in the entire range of debt securities and money market instruments. These instruments are more specifically highlighted below:
Debt securities (in the form of non-convertible debentures, bonds, secured premium notes, zero interest bonds, deep discount bonds, floating rate bond / notes, securitised debt, pass through certificates, asset backed securities, mortgage backed securities and any other domestic fixed income securities including structured obligations etc.) include, but are not limited to:

1. Debt obligations of the Government of India, State and local Governments, Government Agencies and statutory bodies (which may or may not carry a state / central government guarantee),
2. Securities that have been guaranteed by Government of India and State Governments,
3. Securities issued by Corporate Entities (Public / Private sector undertakings),
4. Securities issued by Public / Private sector banks and development financial institutions.

Money Market Instruments include

1. Commercial paper
2. Commercial bills
3. Treasury bills
4. Government securities having an unexpired maturity upto one year
5. Collaterilsed Borrowing & Lending Obligations (CBLO)
6. Certificate of deposit
7. Usance bills
8. Permitted securities under a repo / reverse repo agreement
9. Any other like instruments as may be permitted by RBI / SEBI from time to time

Investments will be made through secondary market purchases, initial public offers, other public offers, placements and right offers (including renunciation). The securities could be listed, unlisted, privately placed, secured / unsecured, rated / unrated of any maturity.

The AMC retains the flexibility to invest across all the securities / instruments in debt and money market.

Investment in debt securities will usually be in instruments which have been assessed as .high investment grade. by at least one credit rating agency authorised to carry out such activity under the applicable regulations. In case a debt instrument is not rated, prior approval of the Board of Directors of Trustee and AMC will be obtained for such an investment. Investment in debt instruments shall generally have a low risk profile and those in money market instruments shall have an even lower risk profile. The maturity profile of debt instruments will be selected in accordance with the AMC.s view regarding current market conditions, interest rate outlook and the stability of ratings.

RISK CONTROL

Investments made from the corpus of the Scheme would be in accordance with the investment objective of the Scheme and the provisions of the SEBI Regulations. The AMC will strive to achieve the investment objective by way of a judicious portfolio mix comprising of debt, money market instruments and government securities. Every investment opportunity would be assessed with regard to credit risk, interest rate risk and liquidity risk.

Credit Risk

A detailed credit evaluation of each investment opportunity will be undertaken. The AMC will utilise ratings of recognised rating agencies as an input in the decision making process. Investments in bonds and debentures will usually be in instruments that have been assigned high investment grade ratings by a recognised rating agency. In line with SEBI Circular No. MFD/CIR/9/120/ 2000 dated November 24, 2000, the AMC may constitute committee(s) to approve proposals for investments in unrated instruments. The AMC Board and the Trustee shall approve the detailed parameters for such investments. The details of such investments would be communicated by the AMC to the Trustee in their periodical reports. It would also be clearly mentioned in the reports, how the parameters have been complied with. However, in case any security does not fall under the parameters, the prior approval of Board of AMC and Trustee shall be sought.

Interest Rate Risk

An interest rate scenario analysis would be performed on an on-going basis, considering the impact of the developments on the macro-economic front and the demand and supply of funds. Based on the above analysis, the AMC would manage the investments of the Scheme on a dynamic basis to exploit emerging opportunities in the investment universe and manage risks at all points in time.

Liquidity Risk


The AMC will provide liquidity by maintaining a low average duration of the portfolio and by investing in securities that would result in a staggered maturity profile of the portfolio. Liquidity will also be managed by investing in the Collaterilsed Borrowing ; Lending Obligations (CBLO) / repo market when CBLO money / repo yields are attractive relative to other money market yields. Investment in debt instruments would generally be in securities that have reasonable secondary market activity.

Due to the short duration of the portfolio and the low risk product profile, the effect of volatility in debt markets on the portfolio will be limited. This permits investors to enhance their yields without compromising on the quality of the portfolio.

In the event of a requirement to liquidate all or a substantial part of these investments in a very short duration of time, the AMC may not be able to realize the full value of these securities leading to an adverse impact on the Net Assets of the Scheme.