YW20 - Hybrid Equity Fund - Final

PRINCIPAL MUTUAL FUNDExchange Plaza, ‘B’ Wing, Ground Floor, NSE Building, Bandra Kurla Complex, Bandra (East), Mumbai – 400 051.

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INDEPENDENT AUDITORS’ REPORT

TO THE BOARD OF DIRECTORS OF TRUSTEES TO PRINCIPAL MUTUAL FUND – PRINCIPAL HYBRID EQUITY FUND (Erstwhile known as Principal Balanced Fund)

Report on the abridged financial statements

The accompanying abridged financial statements, which comprise of the abridged balance sheet as at 31 March 2018 and the abridged revenue account for the year ended 31 March 2018 and related notes of Principal Hybrid Equity Fund (Erstwhile known as Principal Balanced Fund) are derived from the audited financial statements of the Scheme as at 31 March 2018 and for the year ended 31 March 2018. We expressed an unmodified audit opinion on those financial statements in our report dated 6 July 2018.

These abridged financial statements have been prepared by Principal Trustee Company Private Limited (the ‘Trustees’) to the Principal Mutual Fund (the ‘Fund’) and Principal PNB Asset Management Company Private Limited, the Scheme’s Asset Manager (the ‘AMC’) pursuant to Regulation 56 (1) of Securities and Exchange Board of India (Mutual Funds) Regulations, 1996 and amendments thereto (the ‘SEBI Regulations’) and as per the format prescribed by SEBI vide circular number SEBI/IMD/CIR No.8/132968/2008 dated 24 July 2008 (the ‘Circular’) and are derived from the audited financial statements of the Scheme as at 31 March 2018 and for the year ended 31 March 2018, prepared in accordance with the accounting policies and standards specified in the Ninth Schedule to the SEBI Regulations and accounting principles generally accepted in India to the extent applicable and covered by our report of even date to the Trustees of Principal Mutual Fund.

The abridged financial statements do not contain all the disclosures required by the accounting principles generally accepted in India, including the accounting policies and standards specified in the Ninth Schedule to the SEBI Regulations. Reading the abridged financial statements, therefore, is not a substitute for reading the audited financial statements of the Scheme.

Management’s responsibility for the abridged financial Statements

Management of the Trustees and the AMC are responsible for the preparation of the abridged financial statements from the audited financial statements of the Scheme pursuant to Regulation 56 (1) of the SEBI Regulations, and in accordance with the format prescribed by SEBI vide circular number SEBI/IMD/CIR No.8/132968/2008 dated 24 July 2008.

In preparing the audited financial statements, management is responsible for assessing the Scheme’s ability to continue as a going concern, disclosing, as applicable, matters related to going concern and using the going concern basis of accounting unless management either intends to liquidate the Scheme or to cease operations, or has no realistic alternative but to do so.

Auditor’s responsibilityOur responsibility is to express an opinion on the abridged financial statements based on our procedures, which were conducted in accordance with Standard on Auditing (SA) 810, “Engagements to Report on Summary Financial Statements” issued by the Institute of Chartered Accountants of India.We are also responsible to conclude on the appropriateness of management’s use of the going concern basis of accounting and, based on the audit evidence obtained, whether a material uncertainty exists related to events or conditions that may cast significant doubt on the Scheme’s ability to continue as a going concern. If we conclude that a material uncertainty exists, we are required to draw attention in the auditor’s report to the related disclosures in the financial statements or, if such disclosures are inadequate, to modify the opinion. Our conclusions are based on the audit evidence obtained up to the date of the auditor’s report. However, future events or conditions may cause the Scheme to cease to continue as a going concern.

OpinionIn our opinion, the abridged financial statements, derived from the audited financial statements of the Scheme as at 31 March 2018 and for the year ended 31 March 2018 is a fair summary of those financial statements and is in accordance with the accounting policies and standards specified in the Ninth Schedule to the SEBI Regulations and Generally Accepted Accounting Principles in India to the extent applicable and as per the format prescribed by SEBI circular number SEBI/IMD/CIR No.8/132968/2008 dated 24 July 2008.

Other MatterThe abridged financial statements for the year ended 31 March 2017 were derived from the audited financial statements of the Scheme for the year ended 31 March, 2017 which were audited by another auditor who expressed an unmodified opinion on those statements on 14 July 2017. Our opinion is not modified in respect of this matter.

For B S R & Co. LLPChartered Accountants

Firm’s Registration No: 101248W/W-100022Sd/-

Milind RanadeMumbai Partner06 July 2018 Membership No: 100564

TRUSTEE REPORT

To the Unitholders,

Directors of Principal Trustee Company Private Limited have the pleasure in presenting the Twenty Fourth Annual Report along with the audited financial statements of the Schemes of Principal Mutual Fund for the Financial Year 2017-2018.

1. Scheme Performance, Future Outlook and Operations of the Scheme:

(a) Equity Schemes – Overview during Financial Year 2017-2018

The performance of the equity markets in FY 2017-18 could be split into two time periods. The first period lasted from April 2017 to end- Jnauary 2018, when the markets rallied strongly. The Nifty index was up 21 % for the financial year till January 29, and it was then down about 9% in the next two months till end of March, 2018. In the second period, i.e. from January to March, mid caps substantially underperofrmd the large cap indices, though for the full year, they still did better than the large cap stocks.

Emerging Markets (EMs) globally exhibited similar behaviour, with the MSCI EM index falling 7% from end January to March. Capital flows from non-resident investors into EM equity which were running at about USD 25 Billion per quarter for the first three quarters of the financial year slowed down to about US 17 Billion for the fourth quarter. As far as flows into Indian equity were concerned, FIIs were not very dominant in FY 18, with net equity flows amounting to ` 25,635 crores for the full year. Mutual funds were substantial investors into equity markets in FY 18 as they received inflows of about ` 1.70 lac crores in equity and hybrid funds in the financial year.

The roll out of the GST in July 2017 was a major macroeconomic event of the last year. Though there were initial hiccups the new system gradually stabilized during the course of the year. The government also moderated the tax rates on a few items based on industry feedback.

Macroeconomic parameters for India deteriorated somewhat during the year compared to where they were in the previous year. The rate of inflation which was around 2% in the first quarter of the financial year rose to 4.3% for March 2018. Core inflation also rose in the last quarter. Crude prices were up sharply during the year both as energy demand remained robust on good global growth and action by oil producers to somewhat moderate supplies. Brent crude was up 33% yoy. Higher crude prices were among the reasons for the higher trade and the current account deficit in FY 18. Indian exports grew 9.8% during the year but imports grew at 20%. The trade deficit widened to USD 156 Billion in FY 18 from USD 109 Billion in FY 17.

However, the bottom up picture for the economy was better with consumption demand holding up, capital expenditure on infrastructure continuing and early signs of capital expenditure in other parts of the economy as well.

The current year started with global concerns as the Europen economy showed signs of slowing down even though the US and Japan showed good growth. However, rising interest rates in the US, the stronger Dollar, news on trade friction between the US and its trading partners and weaker capital flows into EMs were of concern and would be watched carefully by investors.

Index 1 Month (%) 3 Months (%) 6 Months (%) 1 Year (%)

Broad Markets

Nifty 50 10114 -3.61 -3.96 3.32 10.25

S&P BSE Sensex 32969 -3.56 -3.20 5.39 11.30

S&P BSE 100 10503 -3.33 -4.78 3.24 10.62

S&P BSE 200 4433 -3.46 -5.26 3.54 11.04

S&P BSE 500 14126 -3.71 -5.85 3.78 11.82

S&P BSE MID CAP 15963 -3.62 -10.44 3.41 13.24

S&P BSE SMALL CAP 16994 -6.25 -11.63 5.47 17.74

Sectoral Performance

S&P BSE AUTO 24057 -3.12 -10.07 -0.51 9.29

S&P BSE Bankex 27198 -3.94 -5.75 0.64 11.37

S&P BSE CD 22262 5.07 -1.88 26.81 45.91

S&P BSE CG 18477 -3.14 -3.43 7.60 12.35

S&P BSE FMCG 10290 -2.06 -3.79 5.29 11.00

S&P BSE HC 13158 -6.77 -11.09 -2.45 -14.07

S&P BSE METAL 13322 -12.20 -10.83 -1.78 12.86

S&P BSE Oil & Gas 14614 -5.75 -10.25 -1.54 7.75

S&P BSE PSU 7861 -5.70 -14.30 -5.54 -8.56

S&P BSE Teck 6513 -3.40 1.64 16.15 12.85

Source – MFI Explorer

(b) Debt Schemes – Overview during Financial Year 2017-2018

During the Financial Year 2017-18, debt market saw two phases in movement in interest rates. While in the first half of the FY yields remained stable with declining bias, towards the second half of the year yields started rising due to variety of factors. Ample banking system liquidity, RBI effecting a rate cut in August 2017 while being on neutral stance, depressed growth conditions, stable global bond yields, appreciating rupee and crude oil prices were the main reason for yields remaining benign. These stable conditins saw some reversal in the second half of the year with inflation and crude oil prices starting to rise, banking system liquidity steadily draining away, rupee facing some volatility, increase on govt borrowing, OMO sales and improvement in growth conditions. From a low of 1.46% in June 2017, CPI rose to touch a high of 5.21% in Dec 2017. WPI ranged from a low of 0.9% to a high of 4.02% during the year. Brent Crude Oil prices ended the year at USD 68.83 per barrel as compared to USD 52.71 in previous March. Real GDP growth for the quarter ending March 2018 was at 7.7% as compared to 6.1% at end of March 2017. The ten yr US treasury yield ended the year at 2.78%, 40 bps higher than a year ago. The key policy rate, the repo rate was lowered to 6.00% by end of March 2018 from 6.25% a year ago. SLR was reduced by 100 bps from 20.5% to 19.5% by end of March 2018. The corridor between repo and reverse repo was narrowed from 50 bps to 25 bps as banking system liquidity rose in order to ensure overnight rates remained in a tigher band. As the banking system liquidity remained high as a hangover from demoetization, RBI conducted OMO sales of government securities worth ` 90,000 cr and issued T bills worth ̀ 1 lakh crores under MSS scheme. Towards the end of the FY, banking system liquidity went into deficit zone due to a combination of factors including steady increase in currency in circulation, OMO sales, MSS issuances and tax revenue outflows.

The ten year benchmark Gsec ended the year at 7.40%, a rise of 74 bps as compared to the yield prevailing at March 2017. Five yr AAA corporate bonds ended the year 40 bps higher at 7.97% and ten year AAA corporate bonds ended 36 bps higher at 8.17%. Yields on one year CDs rose to 7.36%, a rise of 70 bps as compared to previous year end. One year T bill levels also rose to 6.47%, a rise of 37 bps as compared to March 2017.

For the full financial year government’s gross borrowing through dated G secs totaled ` 5.99 lakh crores, higher than previous year. Fiscal deficit for 2017-18 came in at 3.53% of GDP, higher than the initial target of 3.2% of GDP due to several headwinds faced by the economy including issues with GST implementation. Gross borrowing through dated G secs was pegged at` 6.05 lakh crores, which was

PRINCIPAL HYBRID EQUITY FUND (Erstwhile known as Principal Balanced Fund) - ABRIDGED ANNUAL REPORT FOR 2017-18

ABRIDGED ANNUAL REPORT FOR 2017-18

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Principal Emerging Bluechip Fund Change in Fundamental Attributes No change April 23, 2018

Principal Arbitrage Fund Change in type of scheme No change Not applicable

Principal Dividend Yield Fund Change in type of scheme No change Not applicable

Principal Growth Fund Change in type of scheme Principal Multi Cap Growth Fund Not applicable

Principal Dynamic Bond Fund Change in type of scheme No change Not applicable

Principal Tax Savings Fund Change in type of scheme No change Not applicable

Principal Equity Savings Fund Change in Fundamental Attributes No change May 10, 2018

Principal Large Cap Fund Change in Fundamental Attributes Principal Focused Multicap Fund May 10, 2018

Principal Index Fund - Nifty Change in Fundamental Attributes Principal Nifty 100 Equal Weight Fund May 10, 2018

Principal Global Opportunities Fund Change in Fundamental Attributes No change May 14, 2018

Principal Money Manager Fund Change in Fundamental Attributes Principal Ultra Short Term Fund May 16, 2018

Principal Short Term Income Fund Change in Fundamental Attributes Principal Short Term Debt Fund May 18, 2018

Principal Low Duration Fund Change in Fundamental Attributes No change May 18, 2018

Principal Debt Saving Fund Change in Fundamental Attributes Principal Corporate Bond Fund May 18, 2018

Principal Credit Opportunities Fund Change in Fundamental Attributes Principal Credit Risk Fund May 18, 2018

Principal Smart Equity Fund Change in Fundamental Attributes Principal Balanced Advantage Fund June 04, 2018

Principal Personal Tax Saver Fund Change in type of scheme No change June 10, 2018

Principal Cash Management Fund No Change No change Not applicable

Principal Balanced Fund Change in Fundamental Attributes Principal Hybrid Equity Fund June 11, 2018

Principal Asset Allocation Fund of Funds Principal Retirement Savings Fund with three with three separate plans namely: separate plans namely:

i) Conservative Plan Change in Fundamental Attributes i) Conservative Plan June 11, 2018

ii) Moderate Plan ii) Moderate Plan

iii)Aggressive Plan iii)Progressive Plan

Effective date for Change in fundamental attributes

Erstwhile Scheme NameChanges carried out to the scheme (Fundamental Attributes change/

Change in type of scheme/ No Change)Revised Scheme Name

Outlook and Operations of the Scheme:

a. Equity Market:

The macroeconomic parameters for India have somewhat deteriorated in the past year. Specifically, on the fiscal side, slightly lower GST collections than would be need to meet the indirect tax target remain a challenge. Also, if the markets remain weak, meeting the divestment target for the union government may be challenging and given that government expenditure may be higher ahead of elections, fiscal slippage may be a concern for FY 19. Other factors to watch for domestically would be the distribution of monsoon rains, the trend of inflation, the growth in corporate earnings which are expected to improve in FY 19, global commodity prices, the progress in the resolution of cases before the NCLT in the current year and finally, the interest rate trajectory of the Reserve Bank of India. Higher cost of money and the fact that a number of PSU banks may not grow their balance sheets could have potential impact on growth.

Globally, the current year started with concerns on the European economy as it showed signs of slowing down even though the US and Japan showed good growth. However, rising interest rates in the US, the stronger Dollar, news on trade friction between the US and its trading partners and weaker capital flows into EMs were of concern and would be watched carefully by investors. Overall, the environment is that of risk aversion. Equity market valuations are still at a premium to historical valuations. Overall, this should lead to much more moderate returns from equity in the current year compared to the last year.

b. Debt Market:

RBI has effected rate hike in June 2018 while maintaining neutral stance. Going forward we expect RBI may hike key rates in range of 25-50 bps based on evolving market conditions and if there is further rise in CPI and global crude oil prices. CPI is expected to remain within RBI’s comfort band of 4+-2%, however if CPI rises above 6% we can expect further hikes. While growth in terms of GDP growth has shown improvement over past few quarters, rising global trade tensions, depreciating rupee and rising interest rates could impact growth in the second half of the year.

While gilt, corporate bond and money market rates have been rising over past many months, if the macro risk factors further deteriorate yields can go up further. However we believe RBI and government would take appropriate steps to stem any sharp rise in yields. As Banking system liquidity turns decisively negative in seconf half of FY 19 we expect RBI to step up OMO gilt purchases which can cool off yields at the short end.

Operations:

Principal Mutual Fund (PMF) as at March 31, 2018 offered Twenty Two Schemes. These include Ten Equity Schemes (including two Equity Linked Savings Schemes), one Balanced Scheme, One Fund of Funds Scheme (Overseas), Three Fund of Funds (Domestic – one fund with three different Plans), Seven Debt Schemes/Plans including one Liquid Scheme. The total assets under management across all these Schemes as on March 31, 2018 was ̀ 6607.39 Crore.

The AMC operates out of 11 branches, including Mumbai. Increased use of technology coupled with optimum allocation and utilization of resources has helped us to enhance operational efficiency at PMF. During the year, SEBI has introduced significant changes to the MF regulations which has impacted the industry as a whole. PMF has continued to modify its processes, wherever required, to remain compliant with the said regulations at all times.

SEBI circular dated October 6, 2017 w.r.t Categorization and Rationalization of Mutual Fund Schemes was issued in order to bring uniformity across Mutual Fund schemes and to standardize the scheme categories and characteristics of each category.

subsequently reduced by 50,000 cr by the government as yields started rising and concerns on absorption of government bond supply emerged. Centre’s fiscal deficit for FY 19 is pegged at 3.3% of GDP. States gross borrowing in FY 2018 was at ̀ 4.19 lakh crores, 9.7 % higher than previous year.

On the global front the Federal Reserve Bank in the US effected three rates hike- in June 2017, Dec 2017 and March 2018. The Fed Funds rate was in the range of 1.50% - 1.75% at the end of March 2018. Among other important global events, trade protectionism measures imposed by the US Trump government has led to counter tariff impositions by China and other targeted countries leading to fears of escalating trade tensions and impact on global growth. This has led to a flatter yield curve in US with long treasury yields falling lower inspite of rate hikes. FII sales in debt market, rising dollar strength and widening of trade deficit has led to depreciation of rupee with the rupee ending at ` 65.17/ USD as compared to 64.85/ USD a year back.

In market development front, in April 2017, SEBI approved a new framework for consolidation and reissuance of debt securities as part of its efforts to deepen the corporate bond market. Liquidity in the secondary market for corporate bonds will be increased by way of minimal number of ISINs (International Securities Identification Numbers). Under the framework, approved by the Sebi board during its meeting here, an issuer will be permitted a maximum of 12 ISINs maturing per financial year. Furthermore, an entity can issue up to five ISINs every fiscal “for structured debt instruments of a particular category”. Sebi said these restrictions will not be applicable to debt instruments that are used for raising regulatory capital and affordable housing as well as capital gains tax bonds. In Sept 2017, SEBI released a circular on IRFs to allow imperfect (duration) hedging subject to certain limits.

Performance of Scheme as on March 28, 2018:

Principal Hybrid Equity Fund (Erstwhile Principal Balanced Fund) – An open ended hybrid scheme investing predominantly in equity and equity related instruments.

Period Date Appreciation (%)

Scheme Returns CRISIL Hybrid 35+65 - (%)^ Aggressive Index

Regular Plan

Last 1 Year 31-Mar-17 17.88 10.05

Last 3 Years 31-Mar-15 13.57 9.12

Last 5 Years 28-Mar-13 17.85 13.46

Since Inception 14-Jan-00 11.58 NA

Direct Plan

Last 1 Year 31-Mar-17 19.63 10.05

Last 3 Years 31-Mar-15 14.79 9.12

Last 5 Years 28-Mar-13 19.00 13.46

Since Inception 1-Jan-13 16.73 12.05

Note: Past performance may or may not be sustained in the future

^Growth Option

During the Financial Year 2017-2018, the Scheme outperformed its benchmark due to the outperformance of stocks bought in Chemicals, Consumer, Industrials and Fertlisers sectors with the returns from some of these stocks being significantly higher compared to the benchmark.

The net assets of the Scheme amounted ` 1094.12 Crs as at March 31, 2018 as compared to ` 115.91 Crs as at March 31, 2017

In line with the above SEBI circular, below is the gist of changes in the schemes of Principal Mutual Fund:


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Brief background of Sponsors, Trust, Trustee Co. and AMC Co.

A. Sponsor and Constitution of the Mutual FundPrincipal Mutual Fund is sponsored by Principal Financial Services Inc., USA [acting through its wholly owned subsidiary Principal Financial Group (Mauritius) Ltd.]. The Sponsor is the Settlor of the Mutual Fund Trust with Punjab National Bank as co-settlor. The Sponsor and co-settlor have entrusted a sum of ` 25 lakhs to the Trustee as the initial contribution towards the corpus of the Mutual Fund. Principal Financial Services Inc. is a member of the Principal Financial Group - a leading provider of financial products and services globally to businesses and individuals including retirement and investment services, Mutual Funds, life and health insurance, annuities and mortgage banking. Established in 1879, the Principal Financial Group has more than $673.8 billion in assets under management and serves 22 million customers with offices in 19 countries throughout Asia, Australia, Europe, Latin America and North America (as on March 31, 2018). The business of Principal Financial Group (Mauritius) Limited, is to carry out business activities which are not prohibited under the Laws of Mauritius and the laws of the countries where the Company is transacting business and to do all such things as are incidental or conducive to the attainment of the above objects.The present share holding pattern of the AMC is as follows:

Name of the Shareholder % of equity capital

Principal Financial Group (Mauritius) Limited 78.62

Punjab National Bank 21.38

B. Principal Trustee Company Private Limited (“the Trustee”): The Trustee is the exclusive owner of the Trust Fund and holds the same in trust for the benefit of the Unitholders. Principal Trustee Company Private Limited (formerly IDBI-PRINCIPAL Trustee Company Limited), a company incorporated under the Companies Act, 1956 is the Trustee to the Fund with effect from October 18, 2002. Prior to October 18, 2002, Board of Trustees discharged the Trusteeship function of the Fund. The Trustee has the exclusive ownership of the Trust Fund and is vested with the general powers of superintendence, direction and management of the affairs of the Trust.The Trustee has been discharging its duties and carrying out its responsibilities as provided in the SEBI (Mutual Funds) Regulations, 1996 and the Trust Deed. The Trustee seeks to ensure that the Fund and the Schemes floated there under are managed by the AMC in accordance with the Trust Deed, the Regulations, directions and guidelines issued by the SEBI, the Association of Mutual Funds in India and other regulatory agencies.Principal Financial Group (Mauritius) Limited and Punjab National Bank hold 70% and 30% respectively of the paid up equity capital of the Trustee Company.

C. Asset management Company (AMC): Principal Pnb Asset Management Company Private Limited (AMC) is a private limited company incorporated under the Companies Act, 1956 on November 20, 1991 having its Registered Office at Exchange Plaza, ‘B’ Wing, Ground Floor, NSE Building, Bandra Kurla Complex, Bandra (East), Mumbai - 400 051, India. Principal Pnb Asset Management Company Private Limited has been appointed as the Asset Management Company of the Principal Mutual Fund by the Trustee vide Investment Management Agreement (IMA) dated November 25, 1994 executed between Trustee and AMC. The AMC has also been registered as a Portfolio Manager under the provisions of SEBI (Portfolio Manager) Regulations, 1993 vide SEBI Registration no. INP000000951. Further, the AMC has obtained No Objection from SEBI for undertaking activities which are in the nature of advisory services to offshore funds, venture capital funds, financial consultancy and exchange of research pertaining to securities.

2. Liabilities and Responsibilities of Trustee and SettlorThe key responsibility of the Trustee is to safeguard the interest of the Unit holders and inter-alia ensure that Principal Pnb Asset Management Company Private Limited functions in the interest of investors and as laid down under the Securities and Exchange Board of India (Mutual Funds) Regulations, 1996, the provisions of the Investment Management Agreement, Statement of Additional Information and Scheme Information Document of the respective Schemes. From the information provided to the Trustees and the reviews the Trustee has undertaken, the Trustee believes Principal AMC has operated in the interests of the Unit holders. The Sponsor and any of its associates including co-settlors is not responsible or liable for any loss resulting from the operations of the Mutual Fund beyond the initial contribution of an amount of ` 25 lakhs towards setting up of Principal Mutual Fund.

3. Investment Objectives and Policy of Investment of the Current Scheme

Principal Hybrid Equity Fund (Erstwhile known as Principal Balanced Fund) – An open ended hybrid scheme investing predominantly in equity and equity related instruments.The investment objective of the Scheme is to provide long term appreciation and current income by investing in a portfolio of equity & equity related securities and fixed income securities.The Scheme will invest in equity and equity related instruments as well as fixed income bearing instruments rated investment grade or higher or otherwise comparable including units of Liquid / Money Market / Debt Mutual Fund Schemes. The Scheme shall not take high risks in managing equity portion of the portfolio. For the equity portion of the portfolio, companies would be selected after research covering areas such as quality of management, competitive position and financial analysis.

4. Significant Accounting PoliciesThe Significant Accounting Policies form part of the Notes to the Accounts annexed to the Balance Sheet of the Scheme. Accounting policies are in accordance with Securities Exchange Board of India (Mutual Fund) Regulations, 1996.

5. Unclaimed Dividends & Redemptions for the financial year 2017-2018

Scheme Unclaimed Dividends Unclaimed Redemptions

Amount No. of Amount No. of (`) Investors (`) Investors

Principal Hybrid Equity Fund 4053349.93 5455 1233622.76 36

6. Investor Grievances

The data on Investor Grievance as per the SEBI prescribed is enclosed herewith as Annexure I.

7. General Policies & Procedures for exercising the voting rights & Exercise of Proxy Votesa. As per the requirements of the SEBI Circular No. SEBI/IMD/CIR No.18/198647/2010 dated March

15, 2010 and SEBI Circular No. CIR/IMD/DF/05/2014 dated March 24, 2014 the General policies and procedures for exercising voting rights (along with the relevant disclosures) in respect of the shares held by the Schemes of Principal Mutual Fund has been hosted on our website www.principalindia.com

b. During the FY 2017-18, the proxy voting was exercised by Principal Pnb Asset Management Company Private Limited for and on behalf of Principal Mutual Fund ("the Fund"). The summary of proxy votes cast by Principal Mutual Fund/AMC across all the investee companies is as follows:

For complete voting details for the period of 2017-18, unit holders can log on to the website (www.principalindia.com) of the Fund. Further the said Details are also available in the Annual Report for the period 2017-18. A copy thereof is available on the said website of the fund and shall be sent / emailed to the unit holders free of cost on demand.

8. Statutory Informationi. The Sponsors/Co- Settlors are not responsible or liable for any loss resulting from the operations of

the Schemes of Principal Mutual Fund beyond their initial contribution of an amount of ` 25 lakhs towards setting up Principal Mutual Fund, and such other accretions/ additions to the same;

ii. The price and redemption value of the units, and income from them, can go up as well down with fluctuations in the market value of its underlying investment;

iii. Full Annual Report shall be disclosed on the website www.principalindia.com and shall also be available for inspection at the Head Office of Principal Mutual Fund. Present and prospective unitholder can obtain copy of the trust deed, the full Annual Report of the Fund / AMC at a price.

AcknowledgementThe Trustee wish to thank Securities and Exchange Board of India, Reserve Bank of India and Association of Mutual Funds in India for their support and direction. The Trustees also wish to thank all the Unitholders, distributors, key partners and service providers for their commitment and strong support.

For Principal Trustee Company Private Limited

Sd/-

V.S. Mathur

Chairman

Date: July 06, 2018Place: Mumbai

Summary of Votes cast during the F.Y. 2017-2018

F.Y. Quarter Total No. of Resolutions

Break - up of vote decisions

For Against Abstained

2017-2018 April-June 202 185 13 4

2017-2018 July-September 1379 1253 81 45

2017-2018 October - December 42 34 3 5

2017-2018 January- March 59 47 11 1


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INCOME

Dividend 418.58 41.32

Interest 1,267.15 51.28

Realised Gain / (Loss) on Foreign Exchange Transactions - -

Realised Gains / (Losses) on Interscheme sale of investments - -

Realised Gains / (Losses) on External sale / redemption of investments 3,155.21 511.01

Realised Gains / (Losses) on Derivative Transactions - -

Other income (refer note 5 to notes to accounts) 31.63 2.27

(A) 4,872.57 605.88

EXPENSES

Management fees 470.76 71.80

Service tax / GST on Management fees 83.06 10.74

Transfer agents fees and expenses 46.03 5.60

Custodian fees 3.95 0.30

Trusteeship fees 6.31 0.52

Commission to Agents 792.27 46.28

Marketing & Distribution expenses 1.78 2.02

Audit fees 3.10 0.28

Other operating expenses 27.24 3.88

(B) 1,434.50 141.42

NET REALISED GAINS / (LOSSES) FOR THE YEAR (A -B = C) 3,438.07 464.46

Change in Unrealised Depreciation in value of investments (D) 501.14 -

NET GAINS / (LOSSES) FOR THE YEAR (E=(C-D)) 2,936.93 464.46

Change in unrealised appreciation in the value of investments (F) - 716.68

NET SURPLUS / (DEFICIT) FOR THE YEAR ( E + F = G ) 2,936.93 1,181.14

Opening Balance 7,386.75 2,049.73

Add: Balance transfer from Unrealised Appreciation Reserve 861.17 144.48

Less: Balance transfer to Unrealised Appreciation Reserve 424.79 861.17

Add / (Less): Equalisation 48,929.46 5,022.10

Total (Including G) 59,689.52 7,536.28

Dividend appropriation

Less: Income Distributed during the year 2,367.50 149.53

Less: Tax on income distributed during the year - -

Retained Surplus / (Deficit) carried forward to Balance sheet 57,322.02 7,386.75

ABRIDGED BALANCE SHEET AS AT MARCH 31, 2018

(` in Lacs)

Notes to Accounts - Annexure I

As at March 31, 2018

As at March 31, 2017

ABRIDGED REVENUE ACCOUNT FOR THE YEAR ENDED MARCH 31, 2018

(` in Lacs)

Notes to Accounts - Annexure I

Current Year ended

March 31, 2018

PreviousYear ended

March 31, 2017LIABILITIESUnit Capital 24,941.53 2,617.55 Reserves & SurplusUnit Premium Reserves 26,703.71 724.89 Unrealised Appreciation Reserve 424.79 861.17 Other Reserves 57,322.02 7,386.75 Loans & Borrowings - - Current Liabilities & ProvisionsProvision for doubtful Income/Deposits - - Other Current Liabilities & Provisions 4,153.09 795.56 TOTAL 1,13,545.14 12,385.92 ASSETSInvestmentsListed Securities:Equity Shares 71,250.57 7,476.46 Preference Shares - - Equity Linked Debentures - - Other Debentures & Bonds 15,022.70 1,004.91 Securitised Debt securities - - Securities Awaited Listing: - - Equity Shares - - Preference Shares - - Equity Linked Debentures - - Other Debentures & Bonds - - Securitised Debt securities - - Unlisted SecuritiesEquity Shares - - Preference Shares - - Equity Linked Debentures - - Other Debentures & Bonds 528.48 - Securitised Debt securities - - Government Securities 9,910.80 1,152.19 Treasury Bills - 24.74 Commercial Paper 5,119.53 199.00 Certificate of Deposits 3,259.59 - Bill Rediscounting - - Units of Domestic Mutual Fund 1,532.65 857.97 Foreign Securities - - Total Investments 1,06,624.32 10,715.27 Deposits 55.82 3.97 Other Current AssetsCash & Bank Balance 307.16 633.54 CBLO/ Reverse Repo Lending 2,859.69 730.93 Others 3,698.15 302.21 Deferred Revenue Expenditure - - (to the extent not written off)TOTAL 1,13,545.14 12,385.92

NOTES TO ACCOUNTSAnnexure I to the Abridged Balance Sheet and Revenue Account for the Year Ended March 31, 2017

1 Investments : -1.1 Except Government Securities, CBLO's and Treasury Bills (which are held in the name of the Mutual Fund) all other investments of the scheme are registered in the name of Principal Trustee Company Pvt.

Ltd. - Trustee to Principal Mutual Fund for the benefit of the Schemes unitholders.1.2 There was no exposure to derivative products during the year ended March 31, 2018 & previous year ended March 31, 2017.1.3 During the year ended March 31, 2018 the scheme has made investments in securities of the Associate / Group Companies of the Sponsor. Details of Aggregate Value of Investments made by the schemes of

Principal Mutual Fund during the year ended March 31, 2018 is given in Annexure II.The above investments were considered sound before making investment. The AMC evaluated the same on merits and on arm's length basis and in accordance with the investment objectives of the respective Schemes.

1.4 There were no open position of securities borrowed and / or lent by the scheme as at March 31, 2018 and as at March 31, 2017.

1.5 Non Performing Assets as at March 31, 2018 cost was ̀ Nil (as at March 31, 2017 cost was Nil).

1.6 Aggregate value of Unrealised Gain / Loss as at the end of the Financial Year, expressed as a percentage to Net Assets.

(` In Lakhs)

Scheme Year ended March 31, 2018 Year ended March 31, 2017

Unrealised Gain / (Loss) % to Net Assets Unrealised Gain / (Loss) % to Net Assets

Principal Hybrid Equity Fund 360.02 0.33 861.17 7.66

1.7 Aggregate Value of Purchase and Sale made during the year, expressed as a percentage of Average Daily Net Asset Value :

(` In Lakhs)

Year Purchases Sales*

Amount % of Avg. Net Assets Amount % of Avg. Net Assets

March 31, 2018 7,30,828.98 1,364.92 6,35,726.73 1,187.30

March 31, 2017 84,504.75 1,869.19 77,585.04 1,716.13

* Sales includes redemptions / maturities

`

PRINCIPAL HYBRID EQUITY FUND (Erstwhile known as Principal Balanced Fund)


For B S R & Co. LLP For and on behalf of Principal Pnb Asset For and on behalf of Principal Chartered Accountants Management Company Private Limited Trustee Company Private Firm's Registration No: 101248W/W-100022

Sd/- Sd/- Sd/- Sd/- Sd/-Milind Ranade M. M. Chitale Lalit Vij V. S. Mathur H. M. SinghPartner Chairman Managing Director Chairman DirectorMembership No. 100564

Sd/- Sd/-Place : Mumbai P.V.K. Mohan Bekxy KuriakoseDate : July 06, 2018 Fund Manager Fund Manager

Limited


5

1.8 The Aggregate book value of Non-Traded / Thinly traded Debt Investments, which have been valued in good faith in accordance with the guidelines for valuation of securities of Mutual Fund issued by SEBI, expressed as percentage to Net Assets is given below:

(` In Lakhs)

Particulars Year ended March 31, 2018 Year ended March 31, 2017

Amount % of Net Assets Amount % of Net Assets

Book Value 23,891.05 21.84 998.30 8.88

Market / Fair Value 23,930.31 21.87 1,003.81 8.93

2 As per the requirements of Regulation 25 (8) of SEBI Regulation 1996, the details of Payments made to Associates during the year is given in Annexure III.

3 As per the SEBI disclosure wide circular No. MFD/CIR No.3/211/2001 dated April 30, 2001; Scheme does not have a single unit holder holding more than 25% of the NAV at the end as on March 31,2017 and March 31, 2018.

4 Expenses other than management fees are inclusive of service tax / GST wherever applicable.

5 Other Income represents receipts /payments of miscellaneous nature and also includes load on redemption of units net off service tax / GST.

6 Details of movements in Unit Capital during the year is given in Annexure IV.

7 For A.Y. 2009-10 and 2010-11, the Income Tax Authorities had initiated proceedings for recovery of tax, in respect of income from investments made in Pass Through Certificates (PTCs) by some of the Schemes of Principal Mutual Fund (PMF) (viz. Principal Debt Opportunities Fund - Conservative Plan, Principal Debt Opportunities Fund - Corporate Bond Plan, Principal Dynamic Bond Fund, Principal Bank CD Fund, Principal Cash Management Fund, Prinicpal Corporate Bond Fund - MIP, Prinicpal Corporate Bond Fund - Retail Plan, Principal Hybrid Equity Fund, Principal Retail Money Manager Fund, Principal Personal Tax Saver Fund & Principal Income Fund - Short Term Plan). The said demand, raised originally on ITCL (as Trustees to Indian Corporate Loan Securitization Trust 2008 Series 33, Loan Receivable Trust April 2008, Indian Commercial Loan Trust Series II 2008, Indian Commercial Loan Trust Series III 2008 and India Commercial Loan Trust Series I 2010), was sought to be recovered from various Mutual Funds (being Beneficiaries of the Trusts) including PMF. Recently, the ITAT dismissed the contentions/ appeal of the Tax Authorities/ the Revenue for Assessment year 2009-2010 and for most of the trusts for Assessment year 2010-2011, thereby ruling in favor of the Trusts. Till date, the Trusts have not received any intimation from the Honorable High Court that the Tax Authorities / the Revenue have filed an appeal against the order passed by the ITAT. The possibility of the event resulting into a tax liability to the Fund to be remote.

8 In view of the AMFI Best Practices Guidelines Circular No. 56/2015-16, the IEF accrual was set aside in a separate bank account and the consolidated balance across all schemes as on March 31, 2018 is ` 70.10 Lakh. The break-up of which is as under:

(Rs. In Lakhs)

Particulars 2017-18 2016-17

Opening Balance 24.10 20.63

Accretion to Investor Education & Awareness Fund including income earned on investment 128.45 100.97

Less: Uitilisation towards investor education and awareness initiatives including amount contributed to AMFI 82.45 97.50

Closing Balance 70.10 24.10

*Amounting ` 5.85 Lakh transferred to AMFI on 03rd April 2018.

9 Previous Year's figures have been regrouped and reclassified, wherever necessary, to make them comparable with current year's presentation.

10 There was no Contingent Liability for the current financial year & previous financial year.

11 ‘` 0.00' in notes to accounts and annexures indicates amount less than a five hundred and ‘` -' indicates Nil amount.

12 SEBI circular dated October 6, 2017 w.r.t Categorization and Rationalization of Mutual Fund Schemes was issued in order to bring uniformity across Mutual Fund schemes and to standardize the scheme categories and characteristics of each category.

In line with the above SEBI circular, schemes has undergone fundamental attribute change as below:

Scheme Name Erstwhile Scheme Name Changes carried out to the scheme (Fundamental Effective date for ChangeAttributes change/ Change in type of scheme/ No Change) in fundamental attributes

Principal Hybrid Equity Fund Principal Balanced Fund Change in Fundamental Attributes June 11, 2018

Annexure II

Details of Investments made in Associates / Group Companies (` In Lakhs)

Associate Name Scheme Name

March 31, 2018 March 31, 2017

PurchaseSale /

Redemption PurchaseSale /

RedemptionHolding Holding

Atul Ltd Principal Emerging Bluechip Fund 737.49 44.66 1,604.10 152.09 224.32 807.68

Atul Ltd Total 737.49 44.66 1,604.10 152.09 224.32 807.68

Larsen & Toubro Limited Principal Multi Cap Growth Fund 482.38 - 1,805.06 733.03 181.98 1,078.24

Principal Nifty 100 Equal Weight Fund 14.98 10.39 72.62 2.10 57.78 53.92

Principal Focused Multicap Fund - 334.69 1,034.30 744.27 310.31 1,135.12

Principal Dividend Yield Fund 14.86 22.29 167.14 131.76 - 141.74

Principal Personal Tax Saver Fund 275.65 780.99 942.42 822.37 339.81 1,212.39

Principal Balanced Advantage Fund 228.23 347.58 198.55 304.77 219.83 264.47

Principal Tax Savings Fund 316.99 121.59 1,119.01 510.07 138.60 753.98

Principal Equity Savings Fund 137.68 - 133.71 - - -

Principal Hybrid Equity Fund 1,997.86 - 2,197.41 109.32 10.04 134.69

Principal Arbitrage Fund - - - 257.02 258.87 -

Larsen & Toubro Limited Total 3,468.63 1,617.53 7,670.22 3,614.71 1,517.22 4,774.55

Punjab National Bank Principal Index Fund - Midcap - - - 5.90 0.85 5.43

Principal Emerging Bluechip Fund 956.85 928.75 - - - -

Principal Hybrid Equity Fund 800.00 714.02 - - - -

Punjab National Bank Total 1,756.85 1,642.77 - 5.90 0.85 5.43

Grand Total 5,962.97 3,304.96 9,274.32 3,772.70 1,742.39 5,587.66

6


Annexure III Details of Payments made to Associates in terms of regulation 25(8):

I) Brokerage paid to associates/related parties/group companies of Sponsor/Asset Management Company (AMC) for securities transaction

April 01, 2017/Launch date to March 31, 2018/Maturity date April 01, 2016/Launch date to March 31, 2017/Maturity date

Brokerage (` In Lakhs & % of total brokerage

paid by the fund)

Value of transaction (` In Lakhs & % of total value of

transaction of the fund)

Brokerage (` In Lakhs & % of total brokerage

paid by the fund)

Value of transaction (` In Lakhs & % of total value of

transaction of the fund)

Name of associate/related parties/group companies of Sponsor/AMC

Nature of Association /Relation

NIL

ii) Commission paid to associates/related parties/group companies of Sponsor/ Asset Management Company (AMC) for Distribution of units

April 01, 2017/Launch date to March 31, 2018/Maturity date April 01, 2016/Launch date to March 31, 2017/Maturity date

Commission paid ( ` In Lakhs & % of total

commission paid by the fund)

Business given (` In Lakhs & % of total business received

by the fund)

Commission paid (` In Lakhs & % of total

commission paid by the fund)

Business given (` In Lakhs & % of total business received

by the fund)

Name of associate/related parties/group companies of Sponsor/AMC

Nature of Association /Relation

Punjab National Bank Associate of Investment Manager 801,342.88(20.63%) 586.82(14.33%) 3,95,628.99(12.88%) 283.66(15.23%)Principal Retirement Advisors Pvt. Ltd Associate of Investment Manager 637.67(0.02%) 15.15(0.49%) 2,111.06(0.07%) 14.55(0.82%)

Note : Commission paid to associates has been disclosed on payment basis towards the entire mobilisation introduced by the distributors (comprising of existing mobilisation and the new flow during the year). Whereas the details of business given indicates the gross mobilization (net of rejections, if any) during the corresponding period.

Principal Hybrid Equity Fund - Growth Option* 291,73,382 1083,15,531 86,24,464 1288,64,449

Principal Hybrid Equity Fund - Monthly Dividend Option* 821,40,477 890,29,806 425,30,458 1286,39,825

Principal Hybrid Equity Fund - Direct Growth Option* 8,56,021 14,51,337 3,07,121 20,00,237

Principal Hybrid Equity Fund - Direct Plan - Monthly Dividend Option* 6,02,617 33,82,615 17,35,109 22,50,123

Closing Balance

Closing Balance

Redemption

Redemption

Subscription

Subscription

Opening Balance

Opening Balance

Scheme

Scheme

Principal Hybrid Equity Fund - Growth Option* 1288,64,449 6995,53,429 488,01,012 7796,16,865 Principal Hybrid Equity Fund - Monthly Dividend Option* 1286,39,825 15103,13,599 982,47,721 15407,05,703 Principal Hybrid Equity Fund - Direct Growth Option* 20,00,237 1013,21,462 132,67,610 900,54,090 Principal Hybrid Equity Fund - Direct Plan - Monthly Dividend Option* 22,50,123 919,06,282 103,79,926 837,76,479

Annexure IV Details of Movement in Unit Capital for the year ended March 31, 2018

Details of Movement in Unit Capital for the year ended March 31, 2017

* Face Value is Rs. 10 per unit

(` In Lakhs)

Associate Name Scheme NameDividend Income

March 31, 2018 March 31, 2017

Atul Ltd Principal Emerging Bluechip Fund 5.10 3.67

Atul Ltd Total 5.10 3.67

Larsen & Toubro Limited Principal Multi Cap Growth Fund 14.38 12.49

Principal Nifty 100 Equal Weight Fund 0.82 1.18

Principal Focused Multicap Fund 13.11 11.06

Principal Dividend Yield Fund 1.70 1.20

Principal Personal Tax Saver Fund 12.16 11.80

Principal Balanced Advantage Fund 1.58 1.86

Principal Tax Savings Fund 9.57 8.74

Principal Equity Savings Fund - -

Principal Hybrid Equity Fund 3.34 0.84

Principal Arbitrage Fund - 1.37

Larsen & Toubro Limited Total 56.66 50.54

Grand Total 61.76 54.21

For B S R & Co. LLP For and on behalf of Principal Pnb Asset For and on behalf of Principal Chartered Accountants Management Company Private Limited Trustee Company Private LimitedFirm's Registration No: 101248W/W-100022

Sd/- Sd/- Sd/- Sd/- Sd/-Milind Ranade M. M. Chitale Lalit Vij V. S. Mathur H. M. SinghPartner Chairman Managing Director Chairman DirectorMembership No. 100564

Sd/- Sd/-Place : Mumbai P.V.K. Mohan Bekxy KuriakoseDate : July 06, 2018 Fund Manager Fund Manager

7

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

Annexure – I to the Trustee Report :

Redressal of Complaints received against Mutual Funds (MFs) during 2017-2018

Total Number of Folios : 5,13,140

Complaint Type of Complaint # (a) No. of (b) No. of Action on (a) and (b)Code complaints complaints Resolved Non Pending

pending at the received Actionable*beginning of during the Within 30-60 60-180 Beyond 0-3 3-6 6-9 9-12the year Total year Total 30 days days days 180 days months months months months

#Notes: including against its authorised persons/distributors/employees etc. *Non actionable means the compliants that are incomplete/outside the scope of Mutual Fund

I A Non receipt of Dividend on Units - 3 3 - - - - - - - - I B Interest on delay payment of dividend - - - - - - - - - - - I C Non receipt of Redemption Proceeds - 12 12 - - - - - - - -I D Interest on delay payment of redemption - - - - - - - - - - - II A Non receipt of Statement of Account/Unit Certificate - - - - - - - - - - - II B Discrepancy in Statement of Account - 397 397 - - - - - - - -II C Non receipt of Annual Report/Abridged Summary - - - - - - - - - - - III A Wrong switch between Schemes - 1 1 - - - - - - - - III B Unauthorized switch between Schemes - - - - - - - - - - - III C Deviation from Schemes attributes - - - - - - - - - - - III D Wrong or excess charges/load - - - - - - - - - - - III E Non updation of changes viz. address, PAN, bank

details, nomination, etc - - - - - - - - - IV Others - 37 37 - - - - - - - -

Total 0 450 450 0 0 0 0 0 0 0 0


1. NAV per unit (`):

Open 25.95 21.92 62.53 49.21 29.04 24.30 64.82 50.51

High 30.33 25.95 78.87 62.53 34.34 29.04 82.74 64.82

Low 25.90 21.78 62.67 48.90 28.99 24.15 64.97 50.20

End 27.53 25.95 73.61 62.53 31.27 29.04 77.43 64.82

March 31, 2018 March 31, 2017

2. Closing Assets Under Management (` in Lakhs) 1,09,392.04 11,241.69

Average (AAuM) 53,543.91 4,520.9213.Gross income as % of AAuM 9.10% 13.40%

4. Expense Ratio:

a. Total Expense as % of AAuM (plan wise) - Regular plan 2.78% 13.40%

- Direct plan 1.13% 3.16%

b. Management Fee as % of AAuM (plan wise) - Regular plan 0.88% 2.11%

- Direct plan 0.88% 2.11%25. Net Income as a percentage of AAuM 6.42% 10.27%

36. Portfolio turnover ratio 1.39 2.16

7. Total Net Dividend per unit distributed during the year / period (plan wise) March 31, March 31, March 31, March 31, March 31, March 31, March 31, March 31,2018 2017 2018 2017 2018 2017 2018 2017

Individuals/HUF 2.95 1.71 - - 3.33 1.89 - -

Others 2.95 1.71 - - 3.33 1.89 - -

8. Returns (%)* March 31, 2018 March 31, 2017 March 31, 2018 March 31, 2017

a. Last One Year 17.88 27.07 19.63 28.33

Benchmark 10.05 16.10 10.05 16.10

b. Since Inception 11.58 11.23 16.73 15.93

Benchmark NA NA 12.05 10.41

Benchmark CRISIL Hybrid 35+65 - Aggressive Index**

KEY STATISTICS FOR THE YEAR ENDED 31 MARCH 2018

March 31, 2017 (`)

March 31, 2018 (`)

March 31, 2017 (`)

March 31, 2018 (`)

Monthly Dividend Option Growth Option

Direct Plan

March 31, 2017 (`)

March 31, 2018 (`)

March 31, 2017 (`)

March 31, 2018 (`)

Monthly Dividend Option Growth Option

Regular PlanParticulars

Past performance may or may not be sustained in the future*NAV of growth option is considered for computation of returns without considering load. Returns are calculated on the basis of CAGR. For computation of since inception returns the allotment NAV has been taken as ` 10 Performance figures have been computed based on the last declared NAV. Returns have been calculated based on NAV of Growth option, wherever applicable. ** The equity component of CRISIL Hybrid 35+65 - Aggressive Index is represented by total returns variant of S&P BSE 200- indicates NIL1. Gross income = amount against (A) in the Revenue account i.e. Income.2. Net income = amount against (C) in the Revenue account i.e. NET REALISED GAINS / (LOSSES) FOR THE YEAR / PERIOD3. Portfolio Turnover = Lower of sales or purchase divided by the Average AuM for the year/period.4. AAuM=Average daily net assets


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YW20 - Hybrid Equity Fund - Final

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