CRISIL has assigned the first ever rating in India to a mutual fund scheme proposed to be launched based on the Dynamic Portfolio Insurance (DPI) structure. CRISIL has assigned a provisional ‘AAA (so)’ rating to SBI Capital Protection Fund – Series I; a scheme proposed to be launched by SBI Funds Management Private Limited (SBIFMPL), the investment manager for SBI Mutual Fund. The assigned rating indicates the highest degree of certainty regarding timely payment of the face value of units to unit holders on maturity of the scheme. The rating is not a comment on the net asset value (NAV) of the scheme in relation to its face value at any time prior to the scheme’s maturity date.

The rating reflects the significant degree of capital protection expected to be available to investors owing to the frequent rebalancing the portfolio will undergo. If there is a sharp fall in the equity portfolio beyond a tolerance limit, as determined by CRISIL’s analysis of historical equity price movements, conversion to fixed income securities of highest credit quality will occur, which will ensure protection of capital at maturity. The trigger point of conversion to debt is sized in such a way that the future value of this debt at the time of redemption will be at least equal to or greater than the initially-invested amount. In sizing this debt corpus, CRISIL has factored into its analysis, the default risk of debt securities, the reinvestment risk of interim cash flows, expense levels and the tenor risk arising on account of the inability to fully invest the fund’s corpus for the same time frame as that of the fund.

DPI is a form of dynamic portfolio rebalancing that can be used to ensure capital protection at maturity in a mutual fund scheme. The DPI strategy allocates investment monies between equity and debt assets, depending on expectations of market returns and volatility. If equity investments are expected to appreciate and be less volatile, more of the portfolio is invested in equity in an effort to take advantage of the rising equity values. If otherwise, the portfolio is rebalanced to reflect an increased weightage in debt. The DPI strategy maintains a portfolio’s risk exposure at varying multiples (“Multiplier”), within a predefined band, of the excess of wealth in the portfolio over a pre-defined floor level (“Floor”). Active management of the multiplier would be undertaken, based on market conditions and expectations of return and volatility. The floor is computed as the present value of a minimum payoff (initial capital invested) at maturity; the floor increases gradually over the life of the fund to be equal to at least the minimum payoff at the time of maturity. The portfolio’s funds will be constantly rebalanced at regular intervals to reflect the performance of the equity investment and to maintain a constant risk exposure. The exposure to equity will always be maintained at levels such that the fund manager can, at short notice, convert the entire equity investment into debt investments up to an overall predetermined floor, thus ensuring the minimum, specified payoff at maturity.

SBIFMPL has furnished a set of warranties to CRISIL, including a commitment to invest the equity component of the scheme only in stocks with market capitalisation which is at least equal to the least market capitalised stock on the BSE 100 Index, and the debt component of the scheme only in securities of very high credit quality. SBIFMPL will also furnish the regulatory clearance for the scheme, and the final offer document to CRISIL. CRISIL will assign the final ratings to the scheme on receipt of these documents.

About the asset management company
Incorporated in 1987, SBIFMPL is a joint venture between State Bank of India and Société Générale Asset Management (SGAM). As on October 31, 2006, SBIFMPL had 43 schemes under management, with a corpus of Rs.154.96 billion.