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					2009 - 2010
INDEX                                                                       Page No.
Trustee Report                                                                  2 - 31
Principal Dividend Yield Fund                                                  32 - 46
Principal Emerging Bluechip Fund                                               47 - 61
Principal Growth Fund                                                          62 - 77
Principal Index Fund                                                           78 - 92
Principal Large Cap Fund                                                      93 - 107
Principal Long Term Equity Fund                                              108 - 122
Principal Long Term Equity Fund - 3 Year Plan Series - II                    123 - 137
Principal Personal Tax Saver Fund                                            138 - 153
Principal Resurgent India Equity Fund                                        154 - 168
Principal Services Industries Fund                                           169 - 183
Principal Tax Saving Fund                                                    184 - 198
Principal Balanced Fund                                                      199 - 213
Principal Child Benefit Fund                                                 214 - 228
Principal Cash Management Fund -Liquid Option                                229 - 249
Principal Floating Rate Fund - Short Maturity Plan                           250 - 267
Principal Money Manager Fund                                                 268 - 282
Principal Floating Rate Fund - Flexible Maturity Plan                        283 - 299
Principal Government Securities Fund-Investment Plan                         300 - 314
Principal Income Fund                                                        315 - 330
Principal Income Fund - Short Term Plan                                      331 - 346
Principal Monthly Income Plan                                                347 - 361
Principal Monthly Income Plan - MIP Plus                                     362 - 376
Principal Ultra Short Term Fund                                              377 - 392
Principal Global Opportunities Fund                                          393 - 407
Principal Pnb Fixed Maturity Plan - 385 Days Series - XI                     408 - 422
Principal Pnb Fixed Maturity Plan - 540 Days Series - IV                     423 - 436

Annexure
Annexure I - Investment Portfolio Information and Industry Classification    437 - 478
Annexure II - 5% Cross Holding Report under Regulation 25(11)                479 - 480
Annexure III - Historical Per Unit Statistics                                482 - 497




                                                   1
ANNUAL REPORT




  PRINCIPAL MUTUAL FUND
  Exchange Plaza, 'B' Wing,
  2nd Floor, NSE Building,
  Bandra Kurla Complex,
  Bandra (East), Mumbai-400 051.

                                             TRUSTEE REPORT

  To the Unitholders,

  Your Directors of Principal Trustee Company Private Limited have the pleasure in presenting Sixteenth Annual
  Report along with the audited financial statements of the Schemes of Principal Mutual Fund for the financial
  year 2009-2010.

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

  (a) Equity Schemes – Overview during Financial Year 2009- 2010

  After a sharp fall in FY’09, the largecap indices like the BSE Sensex rose approx 81% and the Nifty rose 74%
  for the financial year ending March’ 2010, with much of the rally being in the first half of the year. Midcaps and
  smallcaps outperformed the largecaps consistently through the year, with the NSE Midcap index rising approx
  126% and the BSE Smallcap index rising 162% for the same period.
  For the year ended March’ 2010, the following table gives the performance of the key stock market indices :

         Index                   Value on 31.03.09      Value on 31.03.10      % return
         BSE Sensex              9708.50                17527.77               80.54%
         NSE Nifty               3020.95                5249.10                73.76%
         CNX Midcap Index        3407.45                7704.90                126.12%

  Sectors which outperformed during the year ending March’2010 were metals, automobiles, banking, IT, capital
  goods, capital goods, real estate and pharmaceuticals. The sectors which underperformed in this sharp rally
  were telecom, and defensive sectors such as FMCG, oil & gas and power utilities. The base effect was most
  evident in metals, commercial vehicles and capital goods after the meltdown in FY’09. Commodity stocks have
  however weakened of late, post the repeated raising of Reserve Requirement Ratio for Banks in China (in order
  to cool the economy) and the proposal for a new tax on commodities producers in Australia, as well as due to
  the strength in the US dollar.

  FIIs invested around $ 23.2 bn in the financial year ending March’2010. Mutual Funds, however, were net
  sellers of more than Rs 9,000 cr during the year, having been consistent sellers in the second half of the year
  from September’2009 onwards.



                                                         2
ANNUAL REPORT



  The GDP rose 8.6% for the March’2010 quarter, with the annual GDP being 7.4% for the financial year (both
  above expectations), and expected to exceed 8% in the current year. Bank credit, which was lagging in the first
  half of the year, staged a strong pick-up in the second half of the year, and ended the year at 16.7%, surpassing
  Reserve Bank’s target of 16%. With the industrial capex now back on track, the current year is expected to
  show a higher credit growth. Index of Industrial Production (IIP) numbers picked up sharply in the second half
  of the year (from a negative figure in March’2009), pulling up the annual figure to a growth of 10.4% year on
  year. But Wholesale Price Inflation, too, rose in the second half of the year (after being in negative territory in
  June), touching 10% in March. This is currently is a concern, but expected to cool off to 7-8% during the course
  of the current year. Consumer Price Inflation (CPI) has risen to more than 15% levels during the year, primarily
  driven by a surge in food prices. The price of crude (Brent) rose to 83$ by March’2010, a sharp rise of 80%
  during the year. It has subsequently cooled off in the current financial year, though not significantly.


  The Indian rupee appreciated by approx 12% v/s the US dollar during FY10, but has depreciated since
  May’ 2010 (in line with the strength in the US dollar due to concerns in Europe). The rupee appreciation in
  FY’10 was due to very high capital inflows, and since these tend to be volatile, a close watch needs to be kept
  on these. The recent announcement of flexibility in the Chinese currency (there is likely to be a gradual increase
  in the Chinese yuan) is expected to be positive for Asian currencies, including the Indian rupee.


  The second half of FY’10 showed an improvement in corporate performance, driven by the lagged impact of the
  monetary and fiscal stimuli packages by the Government, and a lower base effect, and due to improved
  operating leverage, lower raw material costs and lower manpower costs. But raw material costs have risen since
  then, and human resources and interest costs could gradually rise in the current year. In terms of sectors, strong
  volume growth was witnessed in the automobile sector (two wheelers, passenger cars as well as commercial
  vehicles). The business outlook for the IT sector has been improving towards the end of the year. The telecom
  sector saw sharp downgrades in the course of the year, on the back of intensification of the tariff wars. We are
  positive on the pharma sector, the capital goods sector and the upstream energy sector. We are cautious on the
  metals sector (due to global trends) and the telecom sector.


  The Union Budget in February’2010 was well-received by the Indian equity market as it attempts to maintain a
  balance between economic growth and deficit control. The partial rollback of stimulus measures effected last
  year, in terms of excise duties, was in line with expectations, and the positive surprise came in from the cut in
  personal taxes (an attempt to boost consumption), a cut in surcharge on corporate income tax, as well as the
  fiscal deficit target of 5.5% for FY11 (4.8% and 4.1% for the subsequent years) as against 6.9% for the current
  year. Though the subsequent sharp hike in APM gas price significantly positive indicator of seriousness of
  reforms, partial implementation of Kirit Parekh committee recommendations (likely decontrol of petrol prices)
  is important in the light of a very small provision for oil subsidies in the budget.




                                                         3
ANNUAL REPORT



  Performance of Equity / Balanced / Equity Linked Savings Scheme /Fund of Funds Schemes
  during 2009-2010:

  Principal Dividend Yield Fund - an open ended Equity Scheme

                                                           Appreciation(%)
         Period                       Date                          S&P CNX 500
                                                       NAV^
                                                                       Index
         As On                        31-Mar-10

         Last 1 Year                  31-Mar- 09            88.01             87.95

         Last 3 Years                 30-Mar-07             12.67             11.08

         Last 5 Years                 31-Mar-05             12.50             19.45

         Since Inception              15-Oct-04             14.10             21.22
        Note: Past performance may or may not be sustained in the future

   During the financial year 2009-10, the Scheme slightly outperformed its benchmark. The same was essentially
   due to underweight in telecom sector which contributed positively, while the underweight in the metals and IT
   sectors, contributed negatively to performance of the scheme.

   The net assets of the scheme amounted to Rs. 112.59 Crs as at March 31, 2010 as compared to Rs. 68.40 crs as
   at March 31, 2009.

   Principal Growth Fund – an open ended Equity Scheme

                                                           Appreciation(%)
         Period                      Date                              BSE 200
                                                       NAV^
                                                                        Index
         As On                       31-Mar-10

          Last 1 Year                31-Mar- 09             77.79            92.87

          Last 3 Years               30-Mar-07               2.88            12.19

          Last 5 Years               31-Mar-05              13.32            20.44

          Since Inception            25-Oct-00              18.77            19.55
        Note: Past performance may or may not be sustained in the future

   During the financial year 2009-10, the Scheme underperformed its benchmark. Such under performance was
   primarily due to overweight on pharma and cement sectors and underweight on telecom which contributed
   positively, while the performance was adversely impacted by the underweight in the metals and IT sectors.

   The net assets of the scheme amounted to Rs. 205.65 Crs as at March 31, 2010 as compared to Rs. 137.14 crs as
   at March 31, 2009.



                                                       4
ANNUAL REPORT



  Principal Large Cap Fund - an open ended Equity Scheme

                                                           Appreciation(%)
                   Period                Date                          BSE 100
                                                       NAV^
                                                                        Index
         As On                        31-Mar-10

         Last 1 Year                  31-Mar- 09           100.62            88.17

         Last 3 Years                 30-Mar-07             16.93            12.16

         Since Inception              11-Nov-05             24.34            18.18
        Note: Past performance may or may not be sustained in the future

   During the financial year 2009-10, the Scheme outperformed its benchmark. The same was essentially due to
   the Fund being overweight on pharma and cement sectors, while underweight on telecom, contributed
   positively. The underweight on the metals, and construction sectors, however, contributed negatively to the
   performance of the scheme.

   The net assets of the scheme amounted to Rs. 475.07 Crs as at March 31, 2010 as compared to Rs. 263.84 Crs
   as at March 31, 2009.

   Principal Resurgent India Equity Fund - an open ended Equity Scheme

                                                           Appreciation(%)
         Period                      Date                              BSE 200
                                                    NAV^
                                                                        Index
         As On                       31-Mar-10

         Last 1 Year                 31-Mar- 09             80.02             92.87

         Last 3 Years                30-Mar-07               6.90             12.19

         Last 5 Years                31-Mar-05              17.36             20.44

         Since Inception             30-Jun-00              24.76             16.04
        Note: Past performance may or may not be sustained in the future

   During the financial year 2009-10, the Scheme underperformed its benchmark. Though the overweight on
   pharma and cement sectors and underweight on telecom helped the performance, it was adversely impacted by
   the underweight on the metals sector and the overweight in consumer goods sector.

   The net assets of the scheme is Rs. 135.05 Crs as at March 31, 2010 as compared to Rs. 101.24 crs as at March
   31, 2009.




                                                       5
ANNUAL REPORT




  Principal Index Fund – an open ended Index Scheme

                                                             Appreciation (%)
                    Period                Date                           S&P Nifty
                                                         NAV^
                                                                           Index
          As On                        31-Mar-10

          Last 1 Year                  31-Mar- 09             71.44              73.76

          Last 3 Years                 30-Mar-07               9.36              11.14

          Last 5 Years                 31-Mar-05              18.86              20.85

          Since Inception              27-Jul-99              12.68              13.87
         Note: Past performance may or may not be sustained in the future

   During the financial year 2009-10, the Scheme slightly under performed its benchmark. This was essentially
   due to differences in the timing inflows/outflows and the corresponding purchases/sales of Nifty baskets,
   inclusions/exclusions of stocks in the Nifty (necessitating modifications in the portfolios accordingly), as well
   as transaction costs.

   The net asset of the scheme is Rs. 20.05 Crs as at March 31, 2010 as compared to Rs. 22.59 crs as at March 31,
   2009.

   Principal Services Industries Fund - an open ended Equity Scheme

                                                           Appreciation(%)
          Period                       Date                        CNX Services
                                                         NAV^
                                                                    Sector Index
          As On                        31-Mar-10

          Last 1 Year                  31-Mar- 09             80.87              76.33

          Last 3 Years                 30-Mar-07               7.97               7.74

          Since Inception              06-Mar-06               8.23              11.80
       Note: Past performance may or may not be sustained in the future

   During the financial year 2009-10, the Scheme outperformed its benchmark. The overweight on banking and
   financial services, and the underweight in telecom and power sectors contributed to the out performance.
   However the underweight in the IT sector contributed negatively.

   The net asset of the scheme is Rs. 122.57 Crs as at March 31, 2010 as compared to Rs. 94.20 crs as at March
   31, 2009.




                                                         6
ANNUAL REPORT




  Principal Tax Savings Fund – an open ended Equity Linked Savings Scheme

                                                           Appreciation (%)
                   Period                Date
                                                       NAV##        BSE 200 Index
         As On                        31-Mar-10
         Last 1 Year                  31-Mar- 09            79.25             92.87
         Last 3 Years                 30-Mar-07              3.55             12.19
         Last 5 Years                 31-Mar-05             17.07             20.44
         Since Inception             31-Mar-96             18.73             14.13
        Note: Past performance may or may not be sustained in the future
        ##Returns have been calculated assuming that the Dividend have been re-invested

   During the financial year 2009-10, the Scheme underperformed its benchmark. The same was mainly due to
   overweight on pharma and cement sectors and underweight on telecom which contributed positively. However,
   the performance was adversely impacted by the underweight on the metals sector.

   The net assets of the scheme amounted to Rs. 288.44 Crs as at March 31, 2010 as compared to Rs. 159.69 crs as
   at March 31, 2009.

   Principal Personal Tax Saver Fund – an open ended Equity Linked Savings Scheme

                                                           Appreciation (%)
                   Period                Date
                                                       NAV##        BSE 100 Index
          As On                       31-Mar-10
          Last 1 Year                 31-Mar- 09            91.83             88.17
          Last 3 Years                30-Mar-07             10.96             12.16
          Last 5 Years                31-Mar-05             19.16             21.70
          Since Inception             31-Mar-96             26.45             13.65
        Note: Past performance may or may not be sustained in the future
        ##Returns have been calculated assuming that the Dividend have been re-invested

   During the financial year 2009-10, the Scheme outperformed its benchmark. The Fund was overweight on
   energy as well as media which contributed to the out performance, though the underweight on metals and
   automobile sectors contributed negatively.

   The net assets of the scheme amounted to Rs. 611.25 Crs as at March 31, 2010 as compared to Rs. 296.30 crs as
   at March 31, 2009.




                                                       7
ANNUAL REPORT



  Principal Emerging Bluechip Fund – an open ended Equity Scheme

                                                            Appreciation(%)
         Period                      Date                           CNX       Midcap
                                                   NAV^
                                                                    Index
         As On                       31-Mar-10

         Last 1 Year                 31-Mar- 09            154.54              126.12

         Since Inception             12-Nov-08             118.63                71.40
        Note: Past performance may or may not be sustained in the future

   During the financial year 2009-10, the Scheme outperformed its benchmark. The Fund was overweight in
   Financials and underweight on consumer goods and Energy which contributed positively to the performance,
   while it was underweight on metals, which contributed negatively.

   The net assets of the scheme amounted to Rs. 276.04 Crs as at March 31, 2010 as compared to Rs. 15.26 crs as
   at March 31, 2009.

   Principal Pnb Long Term Equity Fund (earlier known as Principal Pnb Long Term Equity Fund – 3
   Year Plan – Series I) – An open ended equity scheme

                                                   Appreciation(%)
         Period                      Date                           CNX Midcap
                                                   NAV^
                                                                    Index
         As On                       31-Mar-10

         Last 1 Year                 31-Mar- 09            131.63           126.12

         Last 3 Years                30-Mar-07               3.32             16.65

         Since Inception             23-Mar-07               2.92             16.50
        Note: Past performance may or may not be sustained in the future

   During the financial year 2009-10, the Scheme outperformed its benchmark. The same was essentially due to
   the Fund being overweight on automobiles and industrial manufacturing which contributed positively, while
   being underweight on the metals and banking sectors, contributed negatively.

   The net assets of the scheme amounted to Rs. 146 Crs as at March 31, 2010 as compared to Rs. 85.47 crs as at
   March 31, 2009.




                                                       8
ANNUAL REPORT




  Principal Pnb Long Term Equity Fund – 3 year Plan – Series II – a 3 year close ended equity scheme

                                                             Appreciation(%)
                   Period                Date                          CNX Midcap
                                                       NAV^
                                                                         Index
          As On                      31-Mar-10

          Last 1 Year                31-Mar- 09             145.43               126.12

          Since Inception            28-Sep-07                3.95                 4.70
         Note: Past performance may or may not be sustained in the future

   During the financial year 2009-10, the Scheme outperformed its benchmark. The Fund was overweight on the
   auto sector which contributed positively to the performance, while the underweight on Banks hurt the
   performance.

   The net assets of the scheme amounted to Rs. 225.37 Crs as at March 31, 2010 as compared to Rs. 122.88 crs as
   at March 31, 2009.

   Principal Balanced Fund – an open ended Balanced Scheme

                                                             Appreciation (%)
                  Period                Date                         Crisil Balanced
                                                      NAV^
                                                                      Fund Index
          As On                      31-Mar-10

          Last 1 Year                31-Mar- 09             68.15                 47.31

          Last 3 Years               30-Mar-07              12.83                 11.36

          Last 5 Years               31-Mar-05              16.15                 15.91

          Since Inception            14-Jan-00              11.31                   NA
         Note: Past performance may or may not be sustained in the future

   During the financial year 2009-10, the Scheme outperformed its benchmark. The same was essentially due to
   large weight in the Banking sector which helped the performance. However the lower weightage in the metals
   sector contributed negatively.

   The net assets of the scheme amounted to Rs. 35.51 Crs as at March 31, 2010 as compared to Rs. 36.87 crs as at
   March 31, 2009.




                                                        9
ANNUAL REPORT




  Principal Child Benefit Fund – Career Builder Plan - an open ended Balanced Scheme

                                                           Appreciation(%)
                   Period                Date                     Crisil Balanced
                                                       NAV##
                                                                     Fund Index
         As On                        31-Mar-10
         Last 1 Year                  31-Mar- 09            76.05                  47.31
         Last 3 Years                 30-Mar-07             15.07                  11.36
         Last 5 Years                 31-Mar-05             22.64                  15.91
         Since Inception             07-Jan-98             19.08                    NA
        Note: Past performance may or may not be sustained in the future
        ## Returns have been calculated assuming that the Dividend have been re-invested

   During the financial year 2009-10, the Scheme over performed its benchmark. The Fund’s large weightage in
   the Banking sector and the metals sector helped the performance, and so did the low weightage in telecom
   sector. The net assets of the scheme amounted to Rs. 30.27 Crs as at March 31, 2010 as compared to Rs. 17.92
   crs as at March 31, 2009.

   Principal Global Opportunities Fund – an Open ended Fund of Funds Scheme

                                                                Appreciation(%)
                   Period                Date
                                                         NAV^              MSCI World Index

         As On                       31-Mar-10

         Last 1 Year                 31-Mar- 09                52.67                       43.14

         Last 3 Years                30-Mar-07                   2.37                      (8.14)

         Last 5 Years                31-Mar-05                   8.12                       0.34

         Since Inception             29-Mar-04                   8.11                       1.46
        Note: Past performance may or may not be sustained in the future

   During the financial year 2009-10, the Scheme over performed its benchmark. The same was essentially on
   account of a bottom up stock picking strategy and risk controls in the underlying fund. The underlying fund
   continued to prefer companies with positive fundamental change, earnings revision and attractive valuations.

   The net assets of the scheme amounted to Rs. 121.75 Crs as at March 31, 2010 as compared to Rs. 159.19 crs as
   at March 31, 2009.




                                                       10
ANNUAL REPORT



  (b) Debt Schemes – Overview during Financial Year 2009- 2010

  FY’2009-10 saw India transitioning from being an economy facing slowdown to an economy moving firmly on
  a high growth path. Industrial growth gathered momentum during the year, rising from a near-zero level in
  March’2009 (owing primarily to base effect) to 13.9% in March’10. WPI fell to below zero level in June’09,
  before starting on an upward slope and touching 11.04% in March’10, aided largely by the below-normal
  monsoon and the consequent surge up in food prices. Crude prices surged from near $50/barrel in April’09 to
  near $80/barrel by the end of FY’10. Initially, RBI’s focus was on supporting economic growth, which
  manifested itself in the form of a further cut in the repo and reverse-repo rate in April’09 policy, primarily to
  prod the lending rates lower. The easy monetary policy continued for a large part of the year and the system
  remained flush with liquidity. As the Indian economy stabilized and started gathering momentum and inflation
  surged, the focus shifted to maintaining the right balance between growth and inflation. In the October’09
  policy meeting, RBI took the first steps towards the exit policy by raising SLR back to 25% and scrapping the
  refinance window provided to mutual funds and NBFCs, a signal to the market of returning to normalcy. Then
  from the Jan’10 policy onwards, it started on its monetary tightening cycle. By the end of the financial year,
  RBI had hiked the CRR by a cumulative 75 bps and the repo and reverse-repo rate by 25 bps. Sovereign yields
  continued to rise during the year owing to huge government borrowing as well as fears of impending monetary
  tightening. Yield on the 10-yr benchmark security rose from around 6.15% in April’10 to around 7.85% by
  March’10.

  Key Financial Data
                                          Current        Previous        Previous
   Benchmarks                             Month           Month           Year         Change           Change
                                         31-Mar-10       26-Feb-10      31-Mar-09 (Month)           (Since March)
   364Day Tbill (primary)                    5.14%           5.01%          5.50%   0.13%                   -0.36%
   5-year benchmark                            7.53%          7.59%           6.76%     -0.06%                 0.77%
   10-year benchmark                           7.83%          7.89%           7.01%     -0.06%                 0.82%
   30-year benchmark                                                                     0.00%                 0.00%
   91 Day Manufacturing CP(P1+)                5.75%          6.30%           9.20%     -0.55%                -3.45%
   1-yr AAA spreads                            0.96%          1.72%           2.41%     -0.76%                -1.45%
   5-yr AAA spreads                            0.90%          0.98%           1.73%     -0.08%                -0.83%
   5-yr OIS                                    6.88%          7.02%           5.62%     -0.14%                 1.26%
   Bank Rate                                   6.00%          6.00%           6.00%      0.00%                 0.00%
   RBI LAF- Reverse Repo Rate*                 3.50%          3.25%           3.50%      0.25%                 0.00%
   Foreign Exchange Reserve ($ bn)             252.75        253.99            241.6      -1.24                 11.15
   Nymex Crude                                  83.76         79.66            49.66       4.10                 34.10
   US Fed funds rate**                         0.25%          0.25%           0.25%      0.00%                 0.00%
   US 10-yr gilt                               3.83%          3.61%           2.66%      0.22%                 1.17%
   INR/USD                                    44.9175        46.085            50.73     2.53%                11.46%
   INR/Euro                                     60.56         62.81            67.48     3.58%                10.25%
   USD/Euro                                    1.3503        1.3571           1.3327     0.50%                -1.32%
   USD/Yen                                      93.01         89.13            98.49     4.35%                -5.56%
                                                                                                     Source- internal




                                                        11
ANNUAL REPORT


  Performance of Debt and Liquid Schemes / Plans during 2009-2010:

  Principal Floating Rate Fund – Flexible Maturity Plan – an open ended Income Scheme

                                                                     Appreciation(%)
                   Period                Date          NAV^            NAV^
                                                                                        Crisil Liquid
                                                      (Regular      (Institutional
                                                                                        Fund Index
                                                        Plan)           Plan)
         As On                        31-Mar-10

         Last 1 Year                  31-Mar- 09             4.58              4.88                 3.69

         Last 3 Years                 30-Mar-07              7.26              7.52                 6.65

         Last 5 Years                 31-Mar-05              6.97              7.18                 6.24

         Since Inception              14-Sep-04              6.82              7.03                 6.05
        Note: Past performance may or may not be sustained in the future

   During the financial year 2009-10, both the plans i.e. Regular Plan and Institutional Plan of the Scheme over
   performed its benchmark. The same was essentially on account of prudent Asset Liability management and the
   fund remaining invested in a judicious mix of Certificate of Deposits and Commercial Papers.

   The net assets of Flexible Maturity Plan under the scheme accounted to Rs. 1040.58 Crs as at March 31, 2010
   as compared to Rs. 927.89 crs as at March 31, 2009.

   Principal Floating Rate Fund – Short Maturity Plan – Liquid Plan

                                                                     Appreciation(%)
                   Period                Date          NAV^            NAV^
                                                                                        Crisil Liquid
                                                      (Regular      (Institutional
                                                                                        Fund Index
                                                        Plan)           Plan)
          As On                       31-Mar-10

          Last 1 Year                 31-Mar- 09             4.27              4.48                 3.69

          Last 3 Years                30-Mar-07              7.14              7.25                 6.62

          Last 5 Years                31-Mar-05              6.86              6.98                  6.24

          Since Inception             14-Sep-04              6.69              6.82                  6.05
        Note: Past performance may or may not be sustained in the future

   During the financial year 2009-10, both the plans i.e. Regular Plan and Institutional Plan of the Scheme over
   performed its benchmark. The same was essentially on account of prudent Asset Liability management and the
   fund remaining invested in a judicious mix of Certificate of Deposits and Commercial Papers.


   The net assets of the scheme amounted to Rs. 63.41 Crs as at March 31, 2010 as compared to Rs. 121.46 crs as
   at March 31, 2009.


                                                       12
ANNUAL REPORT


  Principal Ultra Short Term Fund – an open ended Debt Scheme

                                                              Appreciation(%)
          Period                       Date                              Crisil Liquid
                                                         NAV^
                                                                         Fund Index
          As On                        31-Mar-10

          Last 1 Year                  31-Mar- 09               4.86               3.69

          Since Inception              06-Nov-07                7.28               6.36
         Note: Past performance may or may not be sustained in the future

   During the financial year 2009-10, the Scheme over performed its benchmark. The same was essentially on
   account of prudent Asset Liability management and the fund remaining invested in a judicious mix of
   Certificate of Deposits and Commercial Papers.

   The net assets of the scheme amounted to Rs. 574.70 Crs as at March 31, 2010 as compared to Rs. 130.11 crs as
   at March 31, 2009.

   Principal Government Securities Fund (Investment Plan) – an open ended dedicated Gilt Scheme investing
   in Government Securities

                                                            Appreciation (%)
                   Period                Date                          I-Sec Composite
                                                       NAV^
                                                                            Index
          As On                      31-Mar-10

          Last 1 Year                31-Mar- 09               3.26                 4.42

          Last 3 Years               30-Mar-07                6.93                 8.74

          Last 5 Years               31-Mar-05                5.99                 7.24

          Since Inception            23-Aug-01                8.09                 N.A
         Note: Past performance may or may not be sustained in the future

   During the financial year 2009-10, the Scheme under performed its benchmark. The Scheme being a Gilt fund,
   it had to maintain a minimum duration even in rising interest rate scenario to maintain disciplined investing and
   to avoid excessive risk taking by drastic alterations in the duration of the fund.

   The net assets of the scheme accounted to Rs. 99.18 Crs as at March 31, 2010 as compared to Rs. 116.47 crs as
   at March 31, 2009.




                                                         13
ANNUAL REPORT



  Principal Income Fund– an open ended Income Scheme

                                                                     Appreciation(%)
                   Period                Date          NAV^             NAV^                 CRISIL
                                                      (Regular       (Institutional       Composite Bond
                                                        Plan)            Plan)              Fund Index
         As On                        31-Mar-10

         Last 1 Year                  31-Mar- 09             7.28              8.09                  5.41

         Last 3 Years                 30-Mar-07              7.64              8.32                  6.99

         Last 5 Years                 31-Mar-05              6.86              7.49                  5.59

         Since Inception              25-Oct-00              8.65                 -                  N.A

         Since Inception              09-May-03                  -             6.81                  4.99
        Note: Past performance may or may not be sustained in the future

   During the financial year 2009-10, both the plans i.e. Regular Plan and Institutional Plan of the Scheme over
   performed its benchmark. The same was essentially on account of active duration management and being
   overweight on corporate bonds which outperformed Government bonds in the aforesaid period.

   The net assets of the scheme amounted to Rs. 57.33 Crs as at March 31, 2010 as compared to Rs. 163.09 crs as
   at March 31, 2009.

   Principal Income Fund – Short Term Plan– an open ended Income Scheme

                                                                      Appreciation(%)
                   Period                Date          NAV^             NAV^               CRISIL Short
                                                      (Regular       (Institutional       Term Bond Fund
                                                        Plan)            Plan)                Index
          As On                       31-Mar-10

          Last 1 Year                 31-Mar- 09             7.85              8.36                  5.88

          Last 3 Years                30-Mar-07              8.77              9.09                  8.14

          Last 5 Years                31-Mar-05              7.61              7.86                  6.78

          Since Inception             24-Apr-02              7.12                     -              6.28

          Since Inception             09-May-03                  -             7.22                  6.05
        Note: Past performance may or may not be sustained in the future

   During the financial year 2009-10, both the plans i.e. Regular Plan and Institutional Plan of the Scheme over
   performed its benchmark. The same has been essentially on account of disciplined investing and maintaining
   low duration and high accrual assets in the portfolio.




                                                       14
ANNUAL REPORT


  The net assets of the scheme accounted to Rs. 117.78 Crs as at March 31, 2010 as compared to Rs. 50.05 crs as
  at March 31, 2009.

  Principal Monthly Income Plan - An open-ended fund. Monthly Income is not assured and is subject to the
  availability of distributable surplus.

                                                              Appreciation(%)
                   Period                Date                        Crisil MIP Blended
                                                       NAV^
                                                                            Index
         As On                        31-Mar-10

         Last 1 Year                  31-Mar- 09            16.07                    14.25

         Last 3 Years                 30-Mar-07             11.16                     8.47

         Last 5 Years                 31-Mar-05              8.98                     8.41

         Since Inception              23-May-02              9.60                     8.95
        Note: Past performance may or may not be sustained in the future

   During the financial year 2009-10, the Scheme over performed its benchmark. The same was essentially on
   account of disciplined investing and maintaining low duration and high accrual assets in the portfolio along
   with opportunistic and active duration management.

   The net assets of the scheme amounted to Rs. 185.70 Crs as at March 31, 2010 as compared to Rs. 37.74 crs as
   at March 31, 2009.

   Principal Monthly Income Plan – MIP Plus - An open-ended fund. Monthly Income is not assured and is
   subject to the availability of distributable surplus.

                                                              Appreciation(%)
                   Period                Date                        Crisil MIP Blended
                                                       NAV^
                                                                            Index
         As On                        31-Mar-10

         Last 1 Year                  31-Mar- 09            21.59                    14.25

         Last 3 Years                 30-Mar-07             12.66                     8.47

         Last 5 Years                 31-Mar-05             10.77                     8.41

         Since Inception              30-Dec-03              9.82                     7.17
        Note: Past performance may or may not be sustained in the future

   During the financial year 2009-10, the Scheme over performed its benchmark. The same was essentially on
   account of disciplined investing and maintaining low duration and high accrual assets in the portfolio along
   with opportunistic and active duration management.


   The net assets of the scheme accounted to Rs. 154.19 Crs as at March 31, 2010 as compared to Rs. 70.57 crs as
   at March 31, 2009.

                                                       15
ANNUAL REPORT



  Principal Cash Management Fund – Liquid Option – an open ended Liquid Scheme

                                                                        Appreciation(%)
                                                                                         NAV^           CRISIL
               Period             Date             NAV^             NAV^
                                                                                      (Institutional   Short Term
                                                  (Regular       (Institutional
                                                                                        Premium        Bond Fund
                                                    Plan)            Plan)
                                                                                          Plan)          Index
          As On               31-Mar-10

          Last 1 Year         31-Mar- 09                3.82               4.08                4.30          3.69

          Last 3 Years        30-Mar-07                 6.50               6.73                7.03          6.62

          Last 5 Years        31-Mar-05                 6.33               6.55                6.83          6.24

          Since Inception     25-Oct-00                 6.29                      -                -           NA

          Since Inception     09-May-03                      -             6.10                    -         5.66

          Since Inception     30-Aug-04                      -                    -            6.66          6.04
         Note: Past performance may or may not be sustained in the future

   During the financial year 2009-10, all the plans under the Scheme i.e. Regular Plan, Institutional Plan and
   Institutional Premium Plan over performed its benchmark. The same was essentially on account of prudent
   Asset Liability management and the fund remaining invested in a judicious mix of Certificate of Deposits and
   Commercial Papers.

   The net assets of the scheme accounted to Rs. 524.30 Crs as at March 31, 2010 as compared to Rs. 1775.04 crs
   as at March 31, 2009.


   Principal Money Manager Fund – an open ended Liquid Scheme

                                                                          Appreciation(%)
                   Period                  Date          NAV^               NAV^
                                                                                               CRISIL Liquid
                                                        (Regular         (Institutional
                                                                                                Fund Index
                                                          Plan)              Plan)
          As On                       31-Mar-10

          Last 1 Year                 31-Mar- 09                 2.60                 0.09                  3.69

          Since Inception             28-Dec-07                  4.84                 2.22                  6.33
         Note: Past performance may or may not be sustained in the future


   Both the plans under the Scheme i.e. Regular Plan and Institutional Plan under performed its benchmark during
   the last financial year. The same was essentially on account of a very small AUM of the fund.

   The net assets of the scheme accounted to Rs. 215.43 crs as at March 31, 2010 as compared to Rs. 0.04 crs as at
   March 31, 2009.

                                                         16
ANNUAL REPORT



    Principal Pnb Fixed Maturity Plan – 385 Days – Series XI – a close ended debt Scheme offering Fixed
    Maturity Plan

                                                                          Appreciation(%)
                     Period                 Date           NAV^             NAV^
                                                                                             CRISIL Liquid
                                                          (Regular       (Institutional
                                                                                              Fund Index
                                                            Plan)            Plan)
           As On                         31-Mar-10

           Last 1 Year                   31-Mar- 09               8.16              8.16                   5.88

           Since Inception               25-Mar-09                8.15              8.15                   5.85
          Note: Past performance may or may not be sustained in the future

    Both the plans under the Scheme i.e. Regular Plan and Institutional Plan over performed its benchmark during
    the last financial year and also since inception. The same has essentially on account of the scheme being a
    Fixed Maturity Plan.

    The net assets of the scheme accounted to Rs. 44.67 crs as at March 31, 2010 as compared to Rs. 41.29 crs as at
    March 31, 2009.

    Principal Pnb Fixed Maturity Plan – 540 Days – Series IV – a close ended debt Scheme offering
    Fixed Maturity Plan

                                                                   Appreciation(%)
                     Period                 Date                          Crisil MIP Blended
                                                           NAV^
                                                                                 Index
           As On                         31-Mar-10

           Since Inception               9-Mar-10                 0.69                       0.42
          Note: Past performance may or may not be sustained in the future

    The scheme since its inception has over performed its benchmark. The same has essentially on account of the
    scheme being a Fixed Maturity Plan.

    The net assets of the scheme accounted to Rs. 6.11 Crs as at March 31, 2010.

      ^Growth Option

    Note: Returns less than one year are calculated on absolute basis and returns for more than one year are
    calculated on Compounded Annualised basis

  Outlook and Operations of the Scheme:

  a. Equity Market:

  Our outlook on the market remains cautiously optimistic in the near-term. The current year could be much more
  of a bottom-up, stock-picker’s market in India than it was in 2009 which was largely a case of P-E re-rating,
  driven by a large liquidity inflow on the back of a resilient economy and political stability. Indian largecap indices

                                                           17
ANNUAL REPORT


  have been flattish in the past few months, and could trade in a narrow range in the near-term, though we could see
  stock-specific movement. Divergence between stock performance and index performance is likely to continue,
  and the current year is likely to be a stock-picker’s market. The global rally in FY10 was driven by a weakening
  dollar, high liquidity and less of bad news, but the scenario has changed since then. The Sensex currently trades at
  above 16xFY11, but below 14xFY12 earnings, for a 15% 3-year CAGR (FY09-FY12), as FY10 was flattish.
  While these valuations are not particularly cheap, the relative growth prospects for many of the Indian corporates
  reaffirms a positive medium-to-long term outlook for Indian equities. Within emerging markets, India (which did
  not have any quarter of negative GDP growth unlike most large economies, last year), coupled with political
  stability and growth visibility, is likely to continue to be one of the favoured markets. Most of the QIP/IPO fund
  raising in FY10 was in the second half, when the markets have been sideways. There is currently a large primary
  market pipeline, to which there could be an addition necessitated by the 25%+ mandatory public float rule
  introduced in June’2010 (which could lead to a large supply of equity paper over the next 3 years, though it also
  means the possibility of a gradual increase in India’s weight in the MSCI Index).


  Global factors such as a resolution/bailout of sovereign credit issues in Europe, US economic data (housing data
  likely to be negative in the near-term post the expiry of tax incentives in April, and unemployment rate continues
  to be a concern), “exit policy”, liquidity , and the relative strength of the US dollar could influence global equity
  flows in the near-term.


  The significantly higher collection from the 3G and BWA telecom auctions (Rs 1.1 lac crore) could significantly
  ease the fiscal burden as it is 200% above what was factored in the Budget. Fiscal deficit could now be below the
  targeted 5.5%. The initial monsoon indications are encouraging, should help rein in food inflation.


  The potential risk factors are : a sudden spike in crude prices, higher inflation sustaining, sharp tightening by the
  RBI, delay by the Government to pursue tax-reforms, delay in Govt spending on infrastructure, a second
  consecutive poor monsoon and a slowdown in capital flows / a firmer dollar vs the Rupee. The other concerns are
  tightening in China (commenced already), sovereign debt events (such as Dubai and now European countries like
  Greece, Spain, etc), Indian political risks (unlikely in the near term), large supply of paper and valuation premium
  rising to unacceptable levels.

  b. Debt Market:

  Inflation is expected to remain high in the upcoming year as the drivers of inflation may likely become more
  broad-based that in the past. Economic growth is expected to remain robust, as has been evidenced in the recent
  IIP and GDP growth figures. This expectation is further bolstered by the predictions of a good monsoon in the
  upcoming year, which should also lead to some respite in food inflation.

  RBI announced the borrowing calendar for issuance of GOI dated securities for H1 FY 11. The borrowings have
  been frontloaded in the first half of the year, as has been the trend over years. The government plans to borrow
  INR 2.87 trillion in H1FY’11 v/s INR.2.95 trillion in H1FY’10 and below market expectation of INR 3 trillion.
  The gross supply amounts to 62.8% of the year’s total borrowings of INR 4.57 trillion. Adjusting for redemptions,
  the net supply of bonds would be INR 2.06 trillion. Though the borrowing calendar has surprised the markets
  positively and may keep the yields under check in the near term, the absolute supply of bonds remains large. The
  net supply of INR 2.06 trillion in H1FY’11 may look benign at the first glance compared to INR.2.19 trillion last
  year, but the last year’s borrowing program received critical support from RBI in the form of OMO purchases,
  thereby reducing the supply to INR1.61 trillion. Assuming that there will be no OMO support in FY-11, the bond
  market will be faced with a higher supply by around 25% over last year. With the supply of bonds likely to
  outpace demand, rising inflation, impending rate hikes and increasing private sector credit demand, sovereign
  yields are expected to remain under pressure during the year.


                                                          18
ANNUAL REPORT



  On the shorter Tenor segment, the total CD issuances in last 2 months stood at around INR.1 trillion. Given the
  critical mass of its outstanding issuances, the CD issuance phenomenon, which was more active during the quarter
  end till recently, may now change to being more spread out during the entire quarter.

  c. Principal Mutual Fund:

  The year 2009-10 was one of the most eventful 12 months in its history with markets (global and domestic) and
  regulatory changes dominating the scene. The major regulatory change in August’2009, on the removal of entry
  load on mutual fund investments, has received the most attention. The need for investor education and to expand
  presence of financial product options like mutual funds in Tier II and Tier II towns was highlighted and from this
  fiscal year investor education meets will be one of our focus areas. The New Direct Tax Code, which should
  replace the half century old Income Tax Act w.e.f. April 2011, is also expected to revolutionize the existing
  taxation system in India, by ushering in changes in the domains of personal and private tax structures. We, at
  Principal Mutual Fund, feel that the trend towards a fee-based advisory service is here to stay and encourage our
  associates upgrade and equip themselves to guide their clients to plan for their future.

  Our schemes continue to perform consistently with Principal Large Cap Fund and Principal Emerging Bluechip
  Fund dominating in the diversified equity funds category. Principal Monthly Income Plan also continues its streak
  of having never missed a dividend payment (monthly and quarterly) since inception and should be an ideal pick of
  new investors looking to invest partly in equity. On the debt side of the business, institutional business would
  continue to be a priority this year and increased interaction with our clients through meets, leadership forums etc
  will be a focus. Lastly, keeping in touch with our investors and reaching out to potential investors through
  targeted online initiatives, emailers and SMS on our products and services has now become a necessity. Latest
  industry developments, regulatory changes, local and global investments trends, in-depth understanding of
  industry best practices etc has long moved from being 'good-to-know' to 'must-know' and plays a key role in
  serving Unitholders better.

  Operations:
  Principal Mutual Fund as at March 31, 2010 manages twenty two schemes. These include Eleven Equity Schemes
  including Two Equity Linked Savings Schemes, Two Balanced Schemes, One Fund of Fund Scheme (Overseas)
  and 8 Debt Schemes including 3 liquid schemes / plans. The total assets under management from all these
  schemes as on March 31, 2010 were over Rs.5,843/- Crores.
  To render timely and efficient customer service, the AMC has been effectively networking through over 40
  locations and over 100 Investor Service Centres. Service levels at the branches have been satisfactorily
  maintained to cope up with the continuously expanding client base and requirements. Further, in keeping with the
  emerging trends, we continue to keep in touch with our investors and reach out to potential investors through
  targeted online initiatives and Emailers on our products and services.




                                                         19
ANNUAL REPORT



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

  A. Constitution of the Mutual Fund

  Principal Mutual Fund (formerly known as IDBI-PRINCIPAL Mutual Fund and herein referred to as the
  “Mutual Fund”) has been constituted as a trust on November 25, 1994 in accordance with the provision of the
  Indian Trusts Act, 1882 (2 of 1882).

  The Fund was initially set up by Industrial Development Bank of India (IDBI) in 1994 by execution of a Trust
  Deed, under which IDBI was the sole Settlor, Sponsor and principal Trustee and an initial amount of Rs.1 lakh
  and additional amount of Rs.24.99 crore was settled as the trust corpus. Accordingly the Board of Trustees were
  vested with all the rights, duties and responsibilities vis-à-vis functioning of the Mutual Fund. The said Trust
  Deed has been registered under the Indian Registration Act, 1908 and the Mutual Fund was registered with
  SEBI on December 13, 1994 under Registration Code MF/019/94/0

  Subsequently, on March 31, 2000, Principal Financial Services Inc. USA became the deemed sponsor (along
  with the IDBI) by acquiring 50% stake in IDBI-PRINCIPAL Asset Management Company Limited, where after
  and pursuant to the SEBI letter dated October 18, 2002 all rights, responsibilities and duties of the Board of
  Trustees were transferred in favour of IDBI – Principal Trustee Company Ltd. On June 23, 2003, Principal
  Financial Services Inc. USA became the sole sponsor by acquiring 100% stake in IDBIPRINCIPAL Asset
  Management Company Limited, through its wholly owned subsidiary Principal Financial Group (Mauritius)
  Limited (Principal Mauritius). Principal Mauritius thus became the sole settlor of the Fund and the name of the
  Trustee Company and of the Asset Management Company was changed respectively to Principal Trustee
  Company Pvt. Ltd. and Principal Asset Management Company Private Limited to reflect the change in
  ownership. In tune with the industry standards and practices, Principal Mauritius, the Settlor, maintains a corpus
  of Rs.25 lakh in the Trust in place of the original contribution of Rs. 1 lakh and additional contribution of
  Rs.24.99 crore vide execution of a supplemental trust deed dated April 16, 2004. On May 5, 2004, Punjab
  National Bank (PNB) and Vijaya Bank (VB) became equity shareholders and they hold equity shares to the
  extent of 30% and 5% respectively of the equity capital of both Principal Trustee Company Private Limited and
  Principal Pnb Asset Management Company Private Limited (earlier name - Principal Asset Management
  Company Private Limited). Pursuant to this change in ownership, certain amendments have been made to the
  Principal Mutual Fund vide Supplemental Trust Deed dated 5th May 2004, to reflect, amongst other
  amendments, the addition of Punjab National Bank and Vijaya Bank as the co-settlors to the Fund. Accordingly,
  Principal Mauritius, Punjab National Bank and Vijaya Bank have 65%, 30% and 5% rights, title, interest and
  obligations respectively as co-settlors to Principal Mutual Fund.

  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. 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.

  3. Liabilities and Responsibilities of Trustee and Settlor

  The main responsibility of the Trustee is to safeguard the interest of the Unit holders and inter-alia ensure that
  Principal Pnb Asset Management Company 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 Trust
  Deed, Statement of Additional Information and Scheme Information Document of the respective Schemes.


                                                          20
ANNUAL REPORT


  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 Rs. 25 lakhs towards
  setting up of Principal Mutual Fund.

  4. Investment Objectives and Policy of Investment of the Current Scheme(s)

  EQUITY SCHEMES:

  a.    Principal Dividend Yield Fund - an open ended Equity Scheme

        The Investment Objective of the Scheme would be to provide capital appreciation and / or dividend
        distribution by investing predominantly in a well-diversified portfolio of companies that have a relatively
        high dividend yield.

        The scheme would invest predominantly (at least 65% of the net assets) in companies that have a
        relatively high dividend yield (i.e. last declared dividend divided by the current market price), at the time
        of making the investment. The Fund is defining dividend yield as "high" if it is in excess of 1.5 times that
        of the prevailing dividend yield of the NSE Nifty.

  b.    Principal Growth Fund- an open ended Equity Scheme

        The investment objective of the scheme is to achieve long-term capital appreciation.

        The scheme will invest its assets in a portfolio of equity and equity related instruments. The focus of the
        investment strategy would be to identify stocks which can provide capital appreciation in the long term.
        Companies selected for the portfolio which in the opinion of the AMC would possess some of the
        characteristics in the nature of superior management quality, distinct and sustainable competitive
        advantage, good growth prospects and strong financial strength. The aim will be to build a diversified
        portfolio across major industries and economic sectors by using "Fundamental Analysis" approach as its
        selection process.

  c.    Principal Large Cap Fund - an open ended Equity Scheme

        The investment objective of the scheme is to provide capital appreciation and /or dividend distribution by
        predominantly investing in companies having a large market capitalization.

        For the purpose of this Fund, Large Cap Companies are defined as those having market capitalization
        greater than Rs.750 crore as on the date of investment (or any such amount as may be specified by India
        Index Services Ltd (IISL) from time to time) being the upper limit of market capitalisation as a criteria for
        inclusion of a company in CNX Midcap 200 Index. However, should IISL come out with a definition of
        ‘Large Cap companies’, the same will be utilized.

        The scheme would invest at least 65% of its assets in companies having a market capitalization greater
        than Rs.750 crores as on the date of investment (or any such amount as may be specified by India Index
        Services and Products Ltd. (IISL) from time to time) being the upper limit of market capitalisation as a
        criteria for inclusion of a company in CNX Midcap 200 Index. The scheme may also invest in companies
        other than large cap upto the permissible limits.




                                                          21
ANNUAL REPORT


  d.   Principal Resurgent India Equity Fund - an open ended Equity Scheme

       The investment objective of the scheme is to generate long term capital appreciation by investing in
       equity and equity related securities of Indian Companies that are perceived to be potential growth stories.

       To achieve the objective of the Scheme, assets under the Scheme will be invested in equity and equity
       related instruments with emphasis on companies with potential growth stories. The balance will be
       invested in wide range of debt and money market instruments. The focus of Investment Strategy would be
       to identify stocks, which can provide capital appreciation in the long term. Within this, the Scheme will
       focus on Companies that are perceived as potential growth stories as a result of a turnaround,
       restructuring or acquisition strategy being followed by them.

  e.   Principal Index Fund – an open ended Index Scheme

       The investment objective of the scheme is to invest principally in securities that comprise S&P CNX
       Nifty (NSE) and subject to tracking errors endeavour to attain results commensurate with the Nifty.

       The scheme has been designed with the intention of tracking the movement of securities (from time to
       time) included in the Nifty. The Scheme plans to do this by investing the entire corpus in the stocks that
       comprise the Nifty in similar weights to the weightage given by Nifty so that the portfolio would
       appreciate or depreciate (subject to tracking errors) in more or less the same manner as the Nifty

  f.   Principal Tax Savings Fund – an open ended Equity Linked Savings Scheme

       The investment objective is to build a high quality growth-oriented portfolio to provide long-term capital
       gains to the investors. The scheme aims at providing returns through capital appreciation.

       The scheme will invest its assets in a portfolio of equity and equity related instruments. The focus of the
       investment strategy would be to identify stocks which can provide capital appreciation in the long term.
       The aim will be to build a diversified portfolio across major industries and economic sectors by using
       "fundamental analysis" as its selection process.

  g.   Principal Services Industries Fund - an open ended Equity Scheme

       The investment objective of the scheme is to provide capital appreciation and income distribution to the
       unit holders by investing predominantly in equity/equity related securities of the companies belonging to
       the services industries and the balance in debt securities and money market instruments including call
       money.

       The scheme will inter-alia invests in companies, which are engaged in the following Service industries:
       Banks, Courier, Finance, Gas, Healthcare Services, Hotels, Industrial Services, Media & Entertainment,
       Power, Retailing, Software, Telecom-Services, Trading, Transportation and Travel.The Investment
       Manager may add such other sector/group of industries which broadly satisfy the category of services
       industries based on AMFI classification.

  h.   Principal Personal Tax Saver Fund – an open ended Equity Linked Savings Scheme

       The investment objective of the scheme is to provide long term growth of capital. The Investment
       Manager will aim to achieve a return on assets in excess of the performance of BSE 100 Index.

       The strategy will be to allocate the assets of the Scheme between permissible securities in line with the
       portfolio profile described above, with the objective of achieving capital appreciation. The Fund


                                                        22
ANNUAL REPORT


       Managers will follow an active investment strategy depending on the market situation and after
       considering the macroeconomic conditions including the prevailing political conditions, the economic
       environment (including interest rates and inflation) and to adhere to the need for a diversified portfolio in
       accordance with the applicable guidelines.

  i.   Principal Emerging Bluechip Fund - an open ended Equity Scheme

       The primary objective of the scheme is to achieve long term capital appreciation by investing in equity &
       equity related instruments of Mid Cap & Small Cap Companies.

       The investment strategy of the fund will be based on market cap of the stocks. The fund will
       predominantly invest in midcap stocks and small cap stocks to tap high growth opportunities offered by
       such stocks. For the purpose of maintaining liquidity or tap market opportunities; the fund may also invest
       in large cap stocks. Stocks selection will be primarily on bottom up approach on stock-by-stock basis. As
       part of its objective of maximizing investor's wealth creation potential over the longer duration, the fund
       may also invest in equity and equity related instruments of unlisted companies in line with SEBI
       regulations. A part of the portfolio will also tap arbitrage opportunities in the domestic markets like equity
       & equity related instruments, convertible preference shares, and convertible debentures.

  j.   Principal Pnb Long Term Equity Fund (Earlier known as Principal Pnb Long Term Equity Fund – 3
       year Plan – Series I) – An open-ended equity scheme

       The primary objective of the Scheme is to achieve long term capital appreciation by investing in equity
       and equity related instruments.

       The investment policy of the Scheme is to build and maintain a diversified portfolio of equity stocks that
       have the potential to appreciate in the long run basis the market cap of the stocks. The core portfolio will
       be built on longer time perspective to capture the maximum wealth creation potential for the investors.
       The aim will be to build a portfolio that adequately reflects a cross-section of the growth areas of the
       economy from time to time with focus on companies which due to their size, business cycle, liquidity,
       market trends or unique propositions require a longer holding period for unlocking the growth potential
       and that will balance the same with a rational approach to selling, when the valuations become too
       demanding for unlocking the growth potential.

  k.   Principal Pnb Long Term Equity Fund – 3 year Plan – Series II – a 3 year close ended equity scheme

       The primary objective of the Scheme is to achieve long term capital appreciation by investing in equity
       and equity related instruments.

       The investment policy will be based on market cap of the stocks. The fund will predominantly invest in
       midcap stocks and small cap stocks to tap high growth opportunities offered by such stocks. For the
       purpose of maintaining liquidity or tap market opportunities; the fund may also invest in large cap stocks.
       Stocks selection will be primarily on bottom up approach on stock by stock basis. Since the fund is
       oriented towards investment in stocks of the companies that have the potential to appreciate in the long
       run, the fund may invest in equity and equity related securities of the companies that have the potential to
       appreciate in the long run and are attractive in the view of the fund manager.




                                                          23
ANNUAL REPORT



       BALANCED SCHEMES:

  l.   Principal Balanced Fund – an open ended Balanced Scheme

       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. 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.

  m.   Principal Child Benefit Fund – an open ended Balanced Scheme

       To generate regular returns and /or capital appreciation / accretion with the aim of giving lump sum
       capital growth to the Beneficiary.

       The scheme would invest primarily in equity and equity related instruments besides debt securities. The
       equity securities shall be of such companies that have predictable earnings and which based on growth
       prospects which the fund manager believes are undervalued in the market place with the objective of
       capital appreciation. The Debt Securities shall be purchased for Capital appreciation purposes if the fund
       manager believes that declining interest rates may increase market value.

       FUND OF FUND SCHEME:

  n.   Principal Global Opportunities Fund – an Open ended Fund of Funds Scheme

       The investment objective of the Scheme is to provide long term capital appreciation by predominantly
       investing in overseas mutual fund schemes, and a certain portion of its corpus in Money Market Securities
       and/or units of Money Market / Liquid Schemes of Principal Mutual Fund.

       The Scheme will be predominantly investing in overseas mutual fund schemes. Currently Principal
       Global Investors - Emerging Market Equity Fund (PGI-EMEF) - a fund advised by Principal Global
       Investors - LLC (USA) has been identified as the overseas mutual fund portfolio for the purpose.
       Trustees, at their discretion, may decide to shift full or part of the investments to any other similar
       overseas mutual fund scheme(s). The Scheme may also invest, in the units of other similar overseas
       mutual fund schemes, which may constitute a significant part of its corpus, and a certain portion of its
       corpus in Money Market Securities and/or units of Money Market / Liquid Schemes of Principal Mutual
       Fund, in order to meet liquidity requirement from time to time.

       DEBT SCHEMES:

  o.   Principal Floating Rate Fund
       Principal Floating Rate Fund – Short Maturity Plan – Liquid Plan

       The investment objective of the Scheme is to generate income consistent with the prudent risk from a
       portfolio comprising substantially of floating rate debt instruments, fixed rate debt instruments swapped
       for floating rate return, and also fixed rate instruments and money market instruments.




                                                        24
ANNUAL REPORT


       The assets of the scheme will be allocated between various fixed rate securities and floating rate securities
       and it may use derivatives like swaps and FRAs with the objective of achieving stable returns.

       Principal Floating Rate Fund – Flexible Maturity Plan – an open ended Income Scheme

       The investment objective of the scheme is to generate income consistent with the prudent risk from a
       portfolio comprising substantially of floating rate debt instruments, fixed rate debt instruments swapped
       for floating rate return, and also fixed rate instruments and money market instruments.

       The assets of the scheme will be allocated between various fixed rate securities and floating rate securities
       and it may use derivatives like swaps and FRAs with the objective of achieving stable returns.

  p.   Principal Ultra Short Term Fund – an open ended Debt Scheme

       The investment objective of the scheme is to generate regular income through investments in debt
       securities and money market instruments.

       The Scheme will be invested in debt securities and money market instruments and would endeavor to
       preserve capital and offer relatively higher return and with relatively moderate liquidity.

  q.   Principal Government Securities Fund – an open ended dedicated Gilt Scheme

       The investment objective of the Scheme is to generate return through investment in sovereign securities
       and thus provide capital gains and income distribution to its Unitholders.

       To achieve the investment objective, assets under the Scheme will be invested solely in government
       securities. However to meet temporary liquidity needs the Scheme may invest in overnight call money
       /notice money/bank deposits and/or repos. The Scheme may also invest a part of its assets in financial
       derivatives such as options and futures & IRS (comprising of government securities) that are permitted or
       may become permissible under SEBI/RBI Regulations.

  r.   Principal Income Fund – an open ended Income Scheme

       The investment objective of the Scheme is to generate regular income and capital appreciation/ accretion
       through investment in debt instruments and related securities besides preservation of capital.

       The scheme will aim to invest its assets in a portfolio of debt instruments and related securities of
       government, quasi-government, corporate issuers and money market instruments with varying risks -
       rated investment grade or higher or otherwise comparable (if not rated).

       Principal Income Fund – Short Term Plan– an open ended Income Scheme

       The investment objective of the Scheme is to generate regular income and capital appreciation/ accretion
       through investment in debt instruments and related securities besides preservation of capital and to
       achieve stable returns over short-term investment horizons.

       The Scheme aims to invest its assets in a portfolio of debt instruments and related securities of
       government, quasi-government, corporate issuers and money market instruments (rated investment grade
       or higher or other-wise comparable, if not rated) with average residual maturity of upto 36 months and
       varying risks.




                                                         25
ANNUAL REPORT


  s.   Principal Monthly Income Plan - An open-ended fund. Monthly Income is not assured and is subject to
       the availability of distributable surplus.

       The Investment Objective of the scheme is to generate regular income through investments in fixed
       income securities so as to make periodical income distribution to the Unitholders and also to generate
       long-term capital appreciation by investing a portion of the Scheme’s assets in equity and equity related
       instruments.

       The Scheme will invest in a wide range of fixed income and money market instruments and a small part
       of its assets in equity/equity related instruments. Further the Scheme may also invest in financial
       derivatives such as options and futures & IRS that are permitted or may become permissible under
       SEBI/RBI Regulations.

       Principal Monthly Income Plan – MIP Plus - An open-ended fund. Monthly Income is not assured and
       is subject to the availability of distributable surplus.

       The investment objective of the scheme is to generate regular income through investments in fixed
       income securities so as to make periodical income distribution to the Unitholders and also to generate
       long-term capital appreciation by investing a portion of the Scheme’s assets in equity and equity related
       instruments and to cater to investors seeking a slightly more aggressive exposure to equity markets.

       The Scheme will invest in a wide range of fixed income and money market instruments and a small part
       of its assets in equity/equity related instruments. Further the Scheme may also invest in financial
       derivatives such as options and futures & IRS that are permitted or may become permissible under
       SEBI/RBI Regulations.

  t.   Principal Cash Management Fund – Liquid Option – an open ended Liquid Scheme

       The investment objective of the scheme is to provide investors with as high a level of income available
       from short-term investments as is considered consistent with preservation of capital and maintenance of
       liquidity, by investing in a portfolio of money market and investment grade debt instruments.

       The scheme will invest its assets in a portfolio of money market instruments. The investments will be in
       securities, which the Investment Manager believes present minimal liquidity and/or credit risks.

  u.   Principal Money Manager Fund – an open ended Liquid Scheme

       The investment objective of the scheme is to generate steady return by investing in debt and money
       market securities.

       The portfolio of the scheme will be predominantly invested in overnight repo, CBLO, floating rate
       instruments and other fixed income instruments.

  v.   Fixed Maturity Plans– close ended debt scheme(s) offering fixed maturity plan

       Principal Pnb Fixed Maturity Plans –385 Days – Series XI

       The investment objective of the scheme being to build an income oriented portfolio and provide returns
       alongwith regular liquidity to investors.

       The Scheme invests in a distinct portfolio of Debt / Money Market Instruments and Government
       Securities maturing on or before the maturity of the Scheme.


                                                       26
ANNUAL REPORT



       Principal Pnb Fixed Maturity Plans – 540 Days – Series IV

       The investment objective of the scheme is to build an income oriented portfolio and generate returns
       through investment in Debt/Money Market Instruments and Government Securities.

       The Scheme invests in a distinct portfolio of Debt/Money Market and Government Securities maturing on
       or before the date of the maturity of the Scheme.

  5. Significant Accounting Policies

       The 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.

  6.            Unclaimed Dividends & Redemptions for the financial year 2009 -2010


                                                              Unclaimed Dividends          Unclaimed Redemptions
                                                              Amount                       Amount
           Sr                                                 (Rs. in      No. of           (Rs. in    No.       of
          No.                      Scheme                      Lacs)     Investors           Lacs)     Investors
          1       Principal Income Fund                           13.16        1537               6.60          107
          2       Principal Monthly Income Plan                     7.42       1159             13.33           722
          3       Principal Ultra Short Term Fund                   0.02           2              0.87            2
          4       Principal Monthly Income Plan -MIP                9.43       2424               4.75           78
                  Plus
          5       Principal Income Fund - Short Term Plan           0.49             61           0.35            5
          6       Principal Government Securities Fund-             0.15             72
                  Investment Plan
          7       Principal Government Securities Fund-             0.04             14           0.12            1
                  Savings Plan$$
          8       Principal Trust Benefit Fund$$                    0.37             3            0.07             3
          9       Principal Growth Fund                           107.45          7340           68.67           359
          10      Principal Cash Management Fund -                  0.19            13            3.41           135
                  Liquid Option
          11      Principal Equity Fund$$                          77.72          5566           16.55           204
          12      Principal Dividend Yield Fund                    99.14          7090           25.80           186
          13      Principal Balanced Fund                          30.30           451           11.44            27
          14      Principal Child Benefit Fund                         -             -            1.24             8
          15      Principal Index Fund                              0.38             7            1.04             7
          16      Principal Tax Savings Fund                      422.49         26068           34.03           244
          17      Principal Focussed Advantage Fund$$              31.97          1326            8.06            65
          18      Principal Floating Rate Fund-Flexible             0.21           230            0.63            25
                  Maturity Plan
          19      Principal Floating   Rate   Fund-Short            0.45             85           0.46            67
                  Maturity Plan



                                                       27
ANNUAL REPORT



     20    Principal Emerging Bluechip Fund                  0.70     26         0.10     1

     21    Principal Global Opportunities Fund                 -        -       26.45    34
     22    Principal Personal Tax Saver Fund              454.57    20042        0.19     5
     23    Principal PNB Debt Fund$$                           -        -        0.85     9
     24    Principal Junior Cap Fund$$                         -        -        8.27    90
     25    Principal Large Cap Fund                        41.35     2151       24.02   136
     26    Principal Resurgent India Equity Fund           87.27     1785       20.23    71
     27    Principal Services Industries Fund                  -        -       22.88   129
     28    Principal Pnb Fixed Duration Fund – 3            0.89       22       24.06    83
           Year Plan – Series I$$
     29    Principal Pnb Long Term Equity Fund                  -       -        0.57     4
     30    Principal Money value bond$$                         -       -        3.97     2
     31    Principal Deposit Fund – Fixed Maturity              -       -        0.05     1
           Plan - 91 Days $$
     32    Principal Deposit Fund – Fixed Maturity              -       -        1.09     2
           plan 371 Days (October’ 2005) $$
     33    Principal Deposit Fund – Fixed Maturity              -       -        0.01     1
           plan 371 Days $$
     34    Principal Pnb Fixed Maturity Plan – 385              -       -        1.21     4
           Days – Series IV$$
     35    Principal Pnb Fixed Maturity Plan – 460           0.16       3           -      -
           Days – Series II$$
     36    Principal Pnb Fixed Maturity Plan – 460                               1.08     2
           Days – Series IV$$
     37    Principal Pnb Fixed Maturity Plan – 91            0.11       1           -      -
           Days – Series V$$
     38    Principal Pnb Fixed Maturity Plan – 91            0.14       2           -      -
           Days – Series VII$$
     39    Principal Pnb Fixed Maturity Plan – 91            0.05       1           -      -
           Days – Series XVIII$$
     40    Principal Pnb Fixed Maturity Plan – 385                               0.68     2
           Days – Series VII$$
     41    Principal Pnb Fixed Maturity Plan – 385                              18.06     1
           Days – Series VIII$$
     42    Principal Pnb Fixed Maturity Plan – 91            0.01       1           -      -
           Days – Series XIII$$
     43    Principal Pnb Fixed Maturity Plan – 91            0.02       1           -      -
           Days – Series XIV$$
     44    Principal Pnb Fixed Maturity Plan – 91            0.02       1        2.06     2
           Days – Series XV$$
     45    Principal Pnb Fixed Maturity Plan – 91            0.08       3          2    2.47
           Days – Series XVI$$
     46    Principal Pnb Fixed Maturity Plan – 91                           0.0017374     1
           Days – Series XIX$$
           Totals                                         1386.72   77487      355.70   2827
    $$Schemes Merged / Redeemed


                                                     28
ANNUAL REPORT




  7.      Investor Grievances

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

  8.      Statutory Information

       a. 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 Rs.25 lakhs towards
          setting up Principal Mutual Fund, and such other accretions/ additions to the same
       b. 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.
       c. 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.

  Acknowledgement

  The Trustee wish to thank the 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 for
  their strong support.

  For Principal Trustee Company Private Limited


  Sd/-
  B. G. Deshmukh
  Chairman

  Date: July 9, 2010
  Place: Mumbai




                                                         29
ANNUAL REPORT



     ANNEXURE I
     Redressal of Complaints received against Mutual Funds(MFs) during 2009-10:

     Principal Mutual Fund
     Total number of folios as on March 31, 2010 – 9,96,009

Comp         Type of           (a) No. of                                            Action on (a) and (b)
 laint      Complaint#        complaints
Code                          pending at     (b) No              Resolved                         Non                  Pending
                                   the          of                                               Actiona
                              beginning     complai    Withi   30-        60-         Beyond      ble*        0-3      3-6       6-9    9-12
                              of the year      nts     n 30     60        180          180                   months   months     mo     mont
                                            received   days    days       days         days                                      nths    hs
                                             during
                                               the
                                              year
IA        Non receipt of              86        3101   2847     133         31               -          -       176        -        -      -
          Dividend    on
          Units

IB        Interest on delay            4         20       11      8              -           -          -         5        -        -      -
          payment        of
          dividend

IC        Non receipt of              19       2696    2552      75         15               -          -        73        -        -      -
          Redemption
          Proceeds

ID        Interest on delay             -        26       23      2          1               -          -         -        -        -      -
          payment        of
          redemption

IIA       Non receipt of               7        927     923       2          5               -          -         4        -        -      -
          Statement    of
          Account/Unit
          Certificate

IIB       Discrepancy in              17       2908    2878      16          3               -          -        28        -        -      -
          Statement   of
          Account

IIC       Non- receipt of               -          -       -          -          -           -          -         -        -        -      -
          Annual
          Report/Abridged
          Summary

IIIA      Wrong switch                 1         36       33      4              -           -          -         -        -        -      -
          between
          Schemes

IIIB      Unauthorised                  -          -       -          -          -           -          -         -        -        -      -
          switch between
          schemes




                                                                 30
ANNUAL REPORT




IIIC   Deviation from            -         -       -       -       -         -         -         -   -   -   -
       Scheme
       attributes
IIID   Wrong or excess           -        22      21       1       -         -         -         -   -   -   -
       charges/load
IIIE   Non updation of           6       383     376       8       2         -         -        3    -   -   -
       changes       viz.
       address, PAN,
       bank       details,
       nomination, etc
IV     Others                   21     1186     1091      63       8         -         -        45   -   -   -
       TOTAL                   161    11305    10755     312      65         -         -       334   -   -   -

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




                                                          31
ANNUAL REPORT




       PRINCIPAL DIVIDEND YIELD FUND




                    32
ANNUAL REPORT


                                              AUDITORS’ REPORT


     TO THE TRUSTEE OF
     PRINCIPAL MUTUAL FUND

     We have audited the attached Balance Sheet as at March 31, 2010, the Revenue Account and the Cash
     Flow Statement for the year ended on that date, annexed thereto of Principal Dividend Yield Fund (the
     scheme) of the Principal Mutual Fund. These financial statements are the responsibility of the
     Management. Our responsibility is to express an opinion on these financial statements based on our audit.
     We report that:

     1.      Our audit was conducted in accordance with generally accepted Standards on Auditing in India.
             These Standards require that we plan and perform the audit to obtain reasonable assurance about
             whether the financial statements are free of material misstatements. An audit includes examining
             on a test basis, evidence supporting the amounts and disclosures in the financial statements. An
             audit also includes assessing the accounting principles used and significant estimates made by the
             Management, as well as evaluating the overall financial statement presentation. We believe that
             our audit provides a reasonable basis for our opinion.

     2.      We have obtained all information and explanations, which, to the best of our knowledge and belief
             were necessary for the purpose of our audit.

     3.      The Balance Sheet, the Revenue Account and the Cash Flow Statement are in agreement with the
             books of account of the Scheme.

     4.      In our opinion, valuation methods for Non Traded Securities, adopted by the scheme are fair and
             reasonable and are in accordance with the guidelines for valuation issued by SEBI and approved
             by the Trustees.

     5.      The accounts have been prepared in accordance with the accounting policies adopted by the
             trustees of the Fund and as specified in the Ninth Schedule to the SEBI (Mutual Funds)
             Regulations, 1996.

     6.      In our opinion and to the best of our information and according to the explanations given to us, the
             said accounts give the information required by the SEBI (Mutual Funds) Regulations, 1996 and
             give a true and fair view in accordance with the generally accepted accounting principles in India:

             a.   in the case of Balance Sheet, of the state of affairs of the scheme as at March 31, 2010;

             b.   in the case of Revenue Account, of the surplus of the scheme for the year ended on that date;
                  and

             c.   in the case of Cash Flow Statement, of the cash flows for the year ended on that date.

                                                                                         For N. M. Raiji & Co.
                                                                                        Chartered Accountants
                                                                                Firm Registration No. 108296W


                                                                                                          Sd/-
                                                                                               Vinay D. Balse
                                                                                                      Partner
                                                                                         Membership No. 39434
     Place : Mumbai
     Date : July 09, 2010




                                                         33
ANNUAL REPORT




                                                   PRINCIPAL MUTUAL FUND
                                                PRINCIPAL DIVIDEND YIELD FUND
                                                 Balance Sheet as at March 31, 2010


                                                                   Schedule           March 31, 2010             March 31, 2009
                                                                                             Rupees                     Rupees
 LIABILITIES
 Unit Capital                                                         1                  646,398,761               745,340,846
 Reserves & Surplus                                                   2                  479,478,494               (61,376,025)
 Current Liabilities and Provisions                                   3                   32,117,881                30,932,025
 Total                                                                                 1,157,995,136               714,896,846

 ASSETS
 Investments                                                          4                1,084,138,967               599,034,133
 Deposits                                                             5                   54,874,088                67,685,098
 Other Current Assets                                                 6                   18,982,081                31,200,609
 Deferred Revenue Expenditure - not written off                       8                            -                16,977,006
 Total                                                                                 1,157,995,136               714,896,846

 Significant Accounting Policies and Notes to Accounts                9
 The Schedules form an integral part of the Financial Statements



 As per our report of even date attached.




 For N. M. Raiji & Co.                For and on behalf of Principal Pnb        For and on behalf of Principal
 Chartered Accountants                Asset Management Company Pvt. Ltd          Trustee Company Pvt. Ltd

 Sd/-                                 Sd/-                                      Sd/-                                       Sd/-
 Vinay D. Balse                       M. M. Chitale                             B.G. Deshmukh                     H. M. Singh
 Partner                              Chairman                                  Chairman                              Director


                                      Sd/-                        Sd/-
 Place : Mumbai                       Rajan Ghotgalkar          Shyam Bhat
 Date : July 09, 2010                 Managing Director          Fund Manager




                                                                      34
ANNUAL REPORT

                                                            PRINCIPAL MUTUAL FUND
                                                        PRINCIPAL DIVIDEND YIELD FUND
                                                   Revenue Account for the year ended March 31, 2010
                                                                              Schedule                         Current Year                            Previous Year
                                                                                                                    Rupees                                   Rupees

 INCOME

 Dividend                                                                                                          22,883,940                             33,119,807
 Interest and Discount Income                                                     7                                 1,987,984                              3,986,934
 Profit on Sale / Redemption of Investments (other than inter-scheme
 transfer / sale)                                                                                              342,909,268                                          -
 Other Income (Refer Note III(17) to Schedule 9)                                                                       452                                          -

 Total                                                                                                         367,781,644                                37,106,741



 EXPENSES AND LOSSES


 Loss on Sale / Redemption of Investments (Other than inter-scheme
 transfer / sales)                                                                                                          -                            318,972,976

 Loss on inter-scheme transfer / sale of investments                                                                        -                                935,931
 Management Fees                                                                                                   12,624,990                              5,605,188
 Trusteeship Fees                                                                                                     102,761                                 90,045
 Agent's Commission                                                                                                 2,055,912                              1,552,364
 Publicity & Marketing Expenses                                                                                     5,202,214                              8,542,768
 Audit Fees                                                                                                            82,548                                109,457
 Custodian's Fees and Expenses                                                                                        248,746                                233,116
 Registrar's Fees and Expenses                                                                                      2,088,543                              1,341,903
 Other Operating Expenses                                                                                           3,001,909                              4,132,814
 Deferred Revenue Expenditure written off                                                                          16,977,006                             30,983,021

 Total                                                                                                          42,384,629                               372,499,583
 Surplus / (Deficit) for the year                                                                              325,397,015                              (335,392,842)

 Net change in Unrealised gain / (loss) in the Value of Investments (Refer
 Note III(2) to Schedule 9)                                                                                    259,989,580                               (66,362,482)

 Net Surplus / (Deficit) including Net change in Unrealised Appreciation /
 (Depreciation) for the year                                                                                   585,386,595                              (401,755,324)


 Appropriation

 Opening Balance                                                                                               359,740,490                               767,174,638
 Add: Net Surplus including Net change in Unrealised Appreciation /
 (Depreciation) for the year                                                                                   585,386,595                              (401,755,324)
 Unrealised Appreciation in value of Investments as at the beginning of the
 year                                                                                                                       -                                       -

 Unrealised Appreciation in value of Investments as at the end of year                                         (189,971,544)                                       -
 Add/(Less) : Income Equalisation                                                                              (464,370,625)                              (5,675,074)
 Dividend Distribution                                                                                                    -                                   (3,750)
 Dividend Tax                                                                                                             -                                        -
 Net Surplus Transferred to Balance Sheet                                                                       290,784,916                              359,740,490

 Significant Accounting Policies and Notes to Accounts                            9

 The Schedules form an integral part of the Financial Statements

 As per our report of even date attached.

 For N. M. Raiji & Co.                                                        For and on behalf of Principal Pnb                For and on behalf of Principal
 Chartered Accountants                                                        Asset Management Company Pvt. Ltd                  Trustee Company Pvt. Ltd


 Sd/-                                                                         Sd/-                                              Sd/-                      Sd/-
 Vinay D. Balse                                                               M. M. Chitale                                     B.G. Deshmukh             H. M. Singh
 Partner                                                                      Chairman                                          Chairman                      Director

                                                                              Sd/-                             Sd/-
 Place : Mumbai                                                               Rajan Ghotgalkar               Shyam Bhat
 Date : July 09, 2010                                                         Managing Director              Fund Manager




                                                                                              35
ANNUAL REPORT




  SCHEDULE 6 - OTHER CURRENT ASSETS                                       March 31, 2010    March 31, 2009
                                                                                 Rupees            Rupees
  Balances with Banks and Reserve Bank of India in Current Account           14,492,641        24,202,000
  Unit Subscription Receivable                                                  310,000           119,644
  Contract for Sale of Investment                                             3,110,508         5,748,985
  Outstanding and Accrued Income                                              1,066,454         1,129,980
  Inter-Scheme Dues                                                                2,408                 -
  Receivable from the Asset Management Company                                        70                 -

                                                                              18,982,081        31,200,609




  SCHEDULE 7 - INTEREST & DISCOUNT INCOME                                 March 31, 2010    March 31, 2009
                                                                                 Rupees            Rupees
  Debentures/Bonds                                                            1,270,527         1,218,508
  Commercial Paper / Certificate of Deposits / Usance Bills                            -          767,898
  Collateralised Lending & Reverse Repo                                         717,457         1,731,727
  Others (net) - (Refer Note III(4) to Schedule 9)                                     -          268,801

                                                                               1,987,984         3,986,934




  SCHEDULE 8 - DEFERRED REVENUE EXPENDITURE                               March 31, 2010    March 31, 2009
                                                                                 Rupees            Rupees

  At the beginning of the year                                                16,977,006        47,960,027

  Amount amortised during the year                                           (16,977,006)      (30,983,021)

  At the end of the year                                                               -        16,977,006




                                                                     37
ANNUAL REPORT

                                               PRINCIPAL MUTUAL FUND
                                           PRINCIPAL DIVIDEND YIELD FUND
                                   Cash Flow Statement For The Year Ended March 31, 2010

                                                                                                        March 31, 2010            March 31, 2009
                                                                                                            Amount                    Amount
                                                                                                                 (Rs.)                     (Rs.)
 A. Cash flow from Operating Activities
    Surplus / (Deficit) for the year                                                                       325,397,015              (335,392,842)
    Add: Deferred Revenue Expenditure amortised (Non-cash)                                                  16,977,006                30,983,021
    Surplus before adjustments                                                                             342,374,021              (304,409,821)
    Adjustments for:-
    (Increase)/Decrease in Investments (at cost)                                                          (225,115,254)             398,698,320
    (Increase)/Decrease in Other Current Assets                                                              2,701,933               (3,223,458)
    Increase/(Decrease) in Current Liabilities                                                               9,968,452              (20,485,259)

    Net cash generated from Operations                                                   (a)               129,929,152                70,579,782


 B. Cash flow from Financing Activities
    Decrease in Unit Capital                                                                               (98,942,085)              (29,406,626)
    Decrease in Reserves                                                                                   (44,532,076)               (6,623,468)
    Adjustments for:-
    Increase/(Decrease) in Sundry Creditors for redeemed units and dividend                                  (8,782,596)              17,441,559
    (Increase)/Decrease in Sundry Debtors for units issued                                                     (192,764)                  47,302
    Dividend / Distribution Tax paid during the year                                                                  -                   (3,750)

    Net cash used in Financing Activities                                                (b)              (152,449,521)              (18,544,983)

    Net Increase / (Decrease) in Cash and Cash Equivalents                             (a + b)             (22,520,369)               52,034,799

    Cash and Cash Equivalents as at the :-
    Beginning of the year                                                                                   91,887,098                39,852,299
    End of the year                                                                                         69,366,729                91,887,098




    Note : Cash and Cash Equivalents includes the following :
            (1) Balances with Banks                                                                         14,492,641                24,202,000
            (2) Collateralised Lending                                                                      54,874,088                67,685,098




    The above cash flow statement has been prepared under the indirect method setout in Accounting Standard (AS-3) issued by the Institute of
    Chartered Accountants of India.

    As per our report of even date attached.




    For N. M. Raiji & Co.                       For and on behalf of Principal Pnb               For and on behalf of Principal
    Chartered Accountants                    Asset Management Company Pvt. Ltd                    Trustee Company Pvt. Ltd

    Sd/-                                         Sd/-                                            Sd/-                                Sd/-
    Vinay D. Balse                              M. M. Chitale                                    B.G. Deshmukh                      H. M. Singh
    Partner                                     Chairman                                         Chairman                               Director


                                               Sd/-                              Sd/-
    Place : Mumbai                              Rajan Ghotgalkar                   Shyam Bhat
    Date : July 09, 2010                        Managing Director                Fund Manager




                                                                                38
ANNUAL REPORT




                                 PRINCIPAL MUTUAL FUND

                           PRINCIPAL DIVIDEND YIELD FUND

                                             SCHEDULE - 9

     SIGNIFICANT ACCOUNTING POLICIES AND NOTES TO ACCOUNTS FORMING PART OF
                                   ACCOUNTS

     I. BACKGROUND INFORMATION

        A. Organisation

        Principal Mutual Fund (formerly known as IDBI-PRINCIPAL Mutual Fund) has been constituted as a
        Trust in accordance with the provisions of the Indian Trusts Act, 1882 (2 of 1882). The Mutual Fund
        is registered with the Securities and Exchange Board of India (SEBI) under registration no.
        MF/019/94/0 dated December 13, 1994.

        The Fund was initially set up by Industrial Development Bank of India (IDBI) in 1994 by execution of
        a Trust Deed dated November 25, 1994, under which IDBI was the sole Settlor, Sponsor and Principal
        Trustee. Subsequently, on March 31, 2000, Principal Financial Services Inc. USA became the deemed
        sponsor along with IDBI by acquiring 50% stake in IDBI-PRINCIPAL Asset Management Company
        Limited. Pursuant to SEBI Letter dated October 18, 2002, the IDBI-PRINCIPAL Trustee Company
        Limited took over the trusteeship and the associated responsibilities and obligations of the IDBI-
        PRINCIPAL Mutual Fund. The Name of the Trustee Company was changed to Principal Trustee
        Company Limited w.e.f. June 27, 2003. The Name of the Trustee Company was changed to Principal
        Trustee Company Private Limited w.e.f. October 20, 2003.

        On June 23, 2003, Principal Financial Services Inc. USA, acquired a 100% stake in IDBI-PRINCIPAL
        Asset Management Company Limited, through its wholly owned subsidiary, Principal Financial
        Group (Mauritius) Limited. Accordingly, Principal Financial Services Inc. USA, became the Sole
        Sponsor of the Fund and Principal Financial Group (Mauritius) Limited has became the Sole Settlor
        of the Fund. The name of the Asset Management Company was changed to Principal Asset
        Management Company Limited w.e.f. June 27, 2003, and on October 20, 2003 was again changed to
        Principal Asset Management Company Private Limited (PAMC).

        On May 5, 2004, Punjab National Bank and Vijaya Bank acquired 30% stake and 5% stake
        respectively in Principal Asset Management Company Private Limited, as well as in Principal Trustee
        Company Private Limited and became the co-settlers to the Fund. The name of the Asset
        Management Company changed to Principal Pnb Asset Management Company Private Limited w.e.f
        January 24, 2005.

        B. Scheme

        Principal Dividend Yield Fund is an open ended scheme of Principal Mutual Fund launched for initial
        subscription on September 06, 2004. The Scheme’s initial offer closed on September 27, 2004. The
        allotment date for the IPO units is 15 October 2004. The Scheme has a dividend plan and a growth
        plan.




                                                     39
ANNUAL REPORT




       The investment objective of the scheme would be to provide capital appreciation and/or dividend
       distribution by investing predominantly in a well-diversified portfolio of companies that have a
       relatively high dividend yield.


     II. SIGNIFICANT ACCOUNTING POLICIES

          1. Basis of Accounting

                    The scheme maintains books of account on an accrual basis.

          2. Investments

              2.1     Investment transactions are accounted on trade dates.

              2.2     The cost of investment includes brokerage, premium paid on acquisition, transaction
                      charges and other costs associated with purchase of investments.

              2.3     Bonus entitlements are recognized on ex-bonus dates.


          3. Portfolio Valuation

              3.1     Investments are valued on the Balance Sheet date as per the recommendations of
                      SEBI.

              3.2     Traded securities (excluding government securities and Treasury bills) are valued at
                      the last quoted closing price on the principal stock exchange on which the security is
                      traded.

              3.3     A security (other than debt securities), which is not traded on any stock exchange on
                      a particular valuation day, is valued at the price at which it was traded on the selected
                      stock exchange, as the case may be, on the earliest previous day, such day not being
                      more than thirty days prior to the valuation date.

              3.4     A debt security (other than government securities), which is not traded on any stock
                      exchange on any particular valuation day, is considered as ‘Non-Traded Security’.
                      A debt Security (other than government securities) is considered as ‘Thinly-Traded
                      Security’, if on the valuation date, there are no individual trades in that security in
                      marketable lots (presently Rs 5 Crore) on the principal stock exchange.

                      Investment in non-traded / thinly traded debt securities including securitised debt
                      (other than government securities) with a residual maturity greater than 182 days are
                      valued using CRISIL Bond Valuer, which is based on the concept of using spread
                      over Government Securities to arrive at yields for pricing.

              3.5     Investments in traded/non-traded/thinly traded government securities are valued at the
                      prices released by CRISIL, which is an approved agency recommended by the
                      Association of Mutual Funds of India (AMFI).




                                                     40
ANNUAL REPORT




           3.6    Treasury bills are valued at cost plus the difference between the redemption value and
                  the cost, spread uniformly over the remaining maturity period of the instrument.
                  Treasury Bills listed on a recognised stock exchange are valued at the last quoted
                  weighted average yield, on the principal exchange on which the security is traded. If
                  no sale is reported at that date, Treasury Bills are valued at fair value, as determined
                  in good faith by Principal Pnb Asset Management Company Private Limited, under
                  procedures approved by the Trustees of Principal Mutual Fund, in accordance with
                  the guidelines for valuation of securities for mutual funds issued by SEBI.

           3.7    Money Market securities and non-traded debt securities, with residual maturity of
                  upto 182 days, are valued at cost (including accrued interest), plus the difference
                  between the redemption value (inclusive of interest) and the cost, spread uniformly
                  over the remaining maturity period of the instrument.

           3.8    Thinly traded Equity shares /Equity related securities/non-traded securities (other
                  than Government Securities) are valued in good faith by the investment manager, on
                  the basis of valuation principles laid down by SEBI.

           3.9    Investment in non-traded debt securities, including securitised debt (other than
                  government securities) with a residual maturity greater than 182 days, are valued
                  using CRISIL Bond Valuer, which is based on the concept of using spread to maturity
                  to arrive at the yields for pricing.

           3.10   Securities in the nature of Floating Rate Notes (FRN) are valued at cost plus the
                  difference between the redemption value and the cost, spread uniformly over the
                  remaining maturity period of the instrument. FRNs listed on a recognised stock
                  exchange are valued at the last quoted closing price on the principal exchange, on
                  which the security is traded. If no sale is reported at that date FRNs are valued at fair
                  value, as determined in good faith by Principal Pnb Asset Management Company
                  Private Limited, under procedures approved by the Trustees of Principal Mutual
                  Fund, in accordance with the guidelines for valuation of securities for mutual funds
                  issued by SEBI.

           3.11   Securitised Debt are valued at fair value, as determined in good faith by Principal Pnb
                  Asset Management Company Private Limited, under procedures approved by the
                  Trustees of Principal Mutual Fund, in accordance with the guidelines for valuation of
                  securities for mutual funds issued by SEBI.

           3.12   Interest Rate Swaps with a maturity period of more than 182 days are marked to
                  market by recording the net present values of the difference in outflows and inflows
                  as unrealised appreciation / depreciation. Interest Rate Swaps with a maturity of 182
                  days and less are amortised over the balance contracted period.

           3.13   Investments in Call money, bills purchased under re-discounting scheme and term
                  deposits with banks are valued at cost plus accruals.

           3.14   An investment is regarded as non-performing if the interest and /or principal amount
                  has not been received or remains outstanding for one quarter from the day such
                  income or installment has fallen due.




                                                 41
ANNUAL REPORT




            3.15    Appreciation/Depreciation, as the case may be, in the value of securities at the year-
                    end is computed for the scheme, whereby the aggregate market value of all securities
                    taken together is compared with the aggregate cost of acquisition. Such net balance is
                    charged to Revenue Account.

            3.16    The above policies are followed as and when applicable.

         4. Income Recognition

            4.1     Dividend income is accrued on ex-dividend date.

            4.2     Profit or loss on sale of investments is arrived at by applying weighted average cost
                    on trade date.

            4.3     Interest on debentures and other fixed income investments is recognized on accrual
                    basis.

            4.4     In respect of Interest Rate Swaps, interest expense and income are accrued on a net
                    basis daily.

            4.5     Income on non-performing assets (NPA) is recognized on cash basis.

         5. Management Fees

            Investment Management fees payable to Principal Pnb Asset Management Co. Pvt. Ltd. is
            computed on the basis of Average Daily Net Assets Value.

         6. Income Equalisation Reserve and Unit Premium Reserve

            a.       Upto March 14, 2010, upon purchase/sale of units by the Scheme, an appropriate part
            of the purchase / sale price was credited / debited to the Income Equalisation Reserve
            Account. The balance amount of the purchase/sale price after reducing the face value was
            transferred to Unit Premium Reserve Account.

            b.      With effect from March 15, 2010, pursuant to the issue of SEBI circular no.
            SEBI/IMD/CIR no 18/198647/2010 dated March 15, 2010, upon purchase/sale of units by the
            Scheme, where the purchase/sale price is higher than the face value per unit, the amount
            representing unrealized gain and balance in the Unit Premium Reserve Account is
            credited/debited to Unit Premium Reserve Account. The balance amount of the purchase/sale
            price after reducing the face value is transferred to Income Equalization Reserve Account.
            Upon purchase/sale of units by the Scheme, where the purchase/sale price is lower than the
            face value per unit, the difference between the sale price and face value is debited to Income
            Equalization Reserve Account. Distributable surplus is arrived at after excluding unrealized
            gains. Balance lying to the credit of Unit Premium Reserve Account is not considered for the
            purpose of dividend distribution. Where the Unit Premium Reserve has a debit balance, the
            excess thereof over the unrealized gain is also deducted in arriving at the distributable surplus.

            c.     The balance in Income Equalization Reserve Account is transferred to the Revenue
            Account at the end of the year.




                                                    42
ANNUAL REPORT




         7. Provisions

            (i) In the case of interest accrued on investments, provision is made in respect of amounts
            which have not been received for a period of 3 months beyond the due date. No further
            accrual of income is made in respect of such investments.

            (ii) Provision is made in respect of the principal amount of securities, in accordance with
            valuation principles laid down by SEBI.

            (iii) Provision is made in respect of accrued dividend, which has not been received for a
            period of twelve months beyond the due date.

         8. Entry and Exit Load

            a) Upto July 31, 2009 load charged at the time of purchase/sale of units was utilized for
               incurring distribution and marketing expenses. Out of the residual amount, amounts
               considered to be in excess of future requirements by the Trustees were recognized as
               income, and the residual amount was carried forward into the next year.

            b) With effect from August 1, 2009 In accordance with the SEBI circular dated June 30, 2009:

               i) No entry load is charged on fresh purchase applications received after August 1, 2009
               (except on SIPs registered prior to August 1, 2009 which is utilised for incurring
               distribution and marketing expenses. Out of the residual amount, amounts considered to be
               in excess of future requirements by the Trustees are recognized as income, and the residual
               amount carried forward into the next year Load Charges).
               ii) Exit load charged in excess of 1% is recognized as income of the scheme immediately.
               iii) Exit load charged upto 1% is parked in a Liability Account, which is utilized for
               incurring distribution and marketing expenses. Out of the residual amount, amounts
               considered to be in excess of future requirements by the Trustees are recognized as
               income, and the residual amount carried forward into the next year.


         9. Deferred Revenue Expenditure

            Deferred Revenue expenses pertain to expenses incurred during the New Fund Offer period at
            the time of launch of the scheme. The same is being amortised over a period of five years
            from the date of allotment of units.




                                                   43
ANNUAL REPORT
         III   NOTES TO ACCOUNTS

         1     The scheme has growth and dividend options. A combined Balance sheet, Revenue Account and Cash Flow are prepared for the scheme.

         2     The Cost and Market Value / Fair Value of investments are given below:

                                                                                                                                                                                                      (Rs. In Lacs)
                                                                                                                                                                        Net Appreciation / (Depreciation) in value
                                                                                     Cost / Amortised cost                       Market Value / Fair Value
                                                                                                                                                                                     of investments
                Investments                                                  March 31, 2010        March 31, 2009          March 31, 2010         March 31, 2009          March 31, 2010        March 31, 2009
 PDYF6          Equity Shares                                                         8,877.87              6,590.02              10,777.58                5,889.84                1,899.72              (700.18)
 PDYF7
                Debentures and Bonds Unlisted / Privately Placed                          63.80                 100.50                   63.80                 100.50                       -                        -

                TOTAL                                                                  8,941.67               6,690.52              10,841.39                5,990.34                1,899.72             (700.18)

               Net Change in unrealised appreciation in the value of investment for the year ended March 31, 2010 is Rs. 2599.90 Lacs

         3     The industry-wise 'Statement of Portfolio Holding' as on March 31, 2010 (Referred to in Schedule 4 to the Balance Sheet) is given in Annexure I.

         4     Interest and Discount - Others (Net) includes amounts received from and paid to other schemes of the Fund on account of delay in the movement of unit subscription
               application money of one scheme residing in the other scheme, calculated for the period of the delay on the basis of the prevailing CBLO rates.


         5     The aggregate book value and fair value of non traded / thinly traded investments, which have been valued in good faith in accordance with the guidelines for valuation of
               securities for Mutual Funds issued by SEBI, are given below:

                                                                                                        (Rs. In Lacs)
                                                                             March 31, 2010        March 31, 2009
                                      Particulars                              Amount                Amount
                Book Value                                                               63.80                 100.54
                Market / Fair Value                                                      63.80                 100.54

         6     Net Asset Value per unit of various options are as under:


                Name of the Option                                           March 31, 2010        March 31, 2009
                Growth                                                                  20.55                 10.93
                Dividend                                                                15.16                  8.07


         7     Aggregate value of Purchases and Sales made during the year, expressed as a percentage of Average Daily Net Asset Value are as under:

                                                                                          Purchases                                        Sales *

                                                                           Amount (Rs. In lacs) % of Avg. Net Assets Amount (Rs. In lacs) % of Avg. Net Assets
                                   March 31, 2010                                   89,426.60               870.28            90,740.55               883.07
                                   March 31, 2009                                   21,907.22               243.30            22,724.68               252.38
               * Sales includes redemptions / maturities

         8     Contracts for sale pending deliveries as on March 31, 2010, amounting to Rs 31.11 lacs (Previous Year : Rs. 57.49 Lacs) have been excluded from the
               Investments, whereas purchases of securities by the scheme, the deliveries of which were pending as on March 31, 2010, amounting to Rs.93.75 lacs
               (Previous Year: Rs. 18.40 Lacs) have been included in investments.

         9     Details of Management Fees paid to Principal Pnb Asset Management Co. Pvt. Ltd. and its computation thereof:
                                                                                                                           (Rs. In Lacs)
                                                                                                                  % of Management
                                                                           Average Daily Net                      Fees to Avergae Net
                                                                           Asset Value          Management Fees   Asset Value
                                  March 31, 2010                                     10,275.62             126.25                  1.23
                                  March 31, 2009                                       9,004.26             56.05                  0.62

         10    As per the requirement of Regulation 25(11) of SEBI (Mutual Fund) Regulations, 1996, details of Investments made by the Fund in companies, where
               the companies' investments in any of Principal Mutual Fund schemes exceeds 5% of the scheme's Net Asset Value, is given in Annexure II.



         11    Total Income and Recurring Expenditure for the year expressed as a percentage of Average Daily Net Asset Value:


                                                                     (As a % of Average Daily Net Asset Value)
                                                                                           Recurring
                                                                           Income          Expenditure
                                 March 31, 2010                                      35.79               2.47
                                 March 31, 2009                                       4.12               2.40
               Income / Expenditure excludes appreciation/depreciation on investment.

         12    Particulars of Unclaimed Dividends and Unclaimed Redemptions are as under:

                                                                                     Unclaimed Dividends                          Unclaimed Redemptions

                                                                        No. of Investors        Amount (Rs. In lacs) No. of Investors           Amount (Rs. In lacs)
                                   March 31, 2010                                       7,090                  99.14                     186                   25.80
                                   March 31, 2009                                      13,384                 190.82                     339                   38.90
               Note : For want of relevant information from banks, in respect of dividends and redemptions effected through DDs, the liability for unencashed and
               expired DDs (if any) and the corresponding bank balance for the same may not have been accounted in the books.




                                                                                                              44
ANNUAL REPORT
   13     Disclosure as per SEBI circular MFD/CIR No. 3/211/2001 dated April 30, 2001 :
          The Scheme does not have a single unitholder holding more than 25% of the NAV as on March 31, 2010.

   14     The Scheme has entered into transactions with certain related parties. The information required in this regard in accordance with Accounting Standard
          18 on 'Related Party Disclosures' issued by The Institute of Chartered Accountants of India (ICAI) and Regulation 25(8) of the SEBI (Mutual Funds)
          Regulations, 1996, are as under :


   (i)    Related Party relationships

          Name                                                    Description of relationship
          Principal Financial Services Inc., USA                  Sponsor of the Fund
          Principal Trustee Company Private Ltd.                  Trustee of the Fund

          Principal Pnb Asset Management Company Private Ltd. Subsidiary of the Sponsor and the Scheme's asset manager

          Pnb Principal Insurance Broking Private Limited         Subsidiary of the Sponsor
          Principal Consulting (India) Private Limited            Subsidiary of the Sponsor

          Pnb Principal Financial Planners Private Limited        Subsidiary of the Sponsor
          Principal Pnb Life Insurance Company Limited            Subsidiary of the Sponsor
          Principal Financial Group (Mauritius) Limited           A Company holding substantial interest in the share capital of the
                                                                  Scheme's asset manager
          Punjab National Bank                                    A Company holding substantial interest in the share capital of the
                                                                  Scheme's asset manager
          PNB Gilts Limited                                       Subsidiary of Punjab National Bank
          PNB Housing Finance Limited                             Subsidiary of Punjab National Bank

          Schemes of the Fund under common control of the
          Sponsor

          Principal Child Benefit Fund                            Principal Long Term Equity Fund 3 Year Plan Series II
          Principal Pnb FMP 385 Days Series XI                    Principal Monthly Income Plan
          Principal Pnb FMP 540 Days Series IV                    Principal Monthly Income Plan - MIP Plus
          Principal Floating Rate Fund - Flexible Maturity Plan   Principal Balanced Fund
          Principal Floating Rate Fund - Short Maturity Plan      Principal Dividend Yield Fund
          Principal Govt. Securities Fund - Investment Plan       Principal Emerging Bluechip Fund
          Principal Global Opportunities Fund                     Principal Money Manager Fund
          Principal Growth Fund                                   Principal Personal Tax Saver Fund
          Principal Income Fund                                   Principal Resurgent India Equity Fund
          Principal Index Fund                                    Principal Income Fund - Short Term Plan
          Principal Services Industries Fund                      Principal Tax Savings Fund
          Principal Large Cap Fund                                Principal Junior Cap Fund
          Principal Ultra Short Term Fund                         Principal Govt. Securities Fund - Saving Plan
          Principal Cash Management Fund - Liquid Option          Principal Pnb Fixed Duration Fund 3 Year Plan Series I
          Principal Long Term Equity Fund                         Principal Pnb FMP 460 Days Series IV
          Principal Pnb FMP 540 Days Series II                    Principal Pnb FMP 385 Days Series VIII
          Principal Pnb FMP 385 Days Series VII                   Principal Pnb FMP 385 Days Series IX



   (ii)   Transactions, if any, with the above mentioned related parties, as defined under Accounting Standard 18 and Regulation 25(8) of the SEBI Regulations
          are given below:


                                                                                                                                                                      (Rs. In Lacs)
          Name of the Related Party                               Nature of                For the year ended Outstanding as at            For the year ended Outstanding as at
                                                                  Transactions              March 31, 2010    March 31, 2010                March 31, 2009    March 31, 2009

                                                                  Fees for Trusteeship
          Principal Trustee Company Private Ltd.                                                           1.03                    0.08                   0.90                0.05
                                                                  Services


          Principal Pnb Asset Management Company Private Ltd. Fees for Management                        126.25                   11.58                  56.05                 -
                                                              Services

                                                                  Investor
          Principal Consulting (India) Private Limited.           Communication                           10.55                        -                 12.61                0.76
                                                                  Service Fees


          Punjab National Bank                                    Bank Charges                              -                          -                  0.31                 -




          Investments in Schemes of Mutual Fund by related
          parties


          Principal Pnb Asset Management Company Private Ltd. Purchase                                      -                                              -
                                                                  Sale                                      -                                            43.72
                                                                  Holding as at March
                                                                                                                                       -                                       -
                                                                  31



          Investment in Associates by the Scheme
          Larsen & Toubro Limited                                 Purchase                               159.41                                            -
                                                                  Sale/Redemption                           -                                              -
                                                                  Holding as at March
                                                                                                                                163.09                                         -
                                                                  31




                                                                                                        45
ANNUAL REPORT




     (iii)      Commission Paid to Associates / Related Parties / Group Companies of Sponsor AMC



                                                                                                                          % of Commission                                    % of Business Given
                                                                                                  Commission Paid                                  Business Given (Rs.
                Name of the Associates                                      Period covered                                paid to total                                      to total Business
                                                                                                  (Rs)                                             In Crores)
                                                                                                                          Commission paid                                    Received


                Punjab National Bank                                        FY 2009-10                       312,040.67                  16.35%                       0.00                0.16%
                                                                            FY 2008-09                       364,075.64                  13.82%                       0.03                1.65%

                PNB Gilts Ltd                                               FY 2009-10                            34.84                    0.00%                      -                     -
                                                                            FY 2008-09                            37.53                    0.00%                      -                     -

                Note: Commission paid to associates has been disclosed on payment basis and business given indicates Gross Mobilisation (net of rejections, if any)
                       during the corresponding period for which the commission paid has been disclosed.

     15         Outstanding and accrued income is net of provision for doubtful income amounting to Rs. 85.16 Lacs (Previous Year Rs. 85.16 Lacs) and investment
                is net of provision of Rs. 180.00 (Previous year :Rs. 182.39).

     16         Commission to Agents and Publicity expenses amounting to Rs 0.04 Lacs (Previous Year : 7.85 lacs) are utilised from load collected.

     17         Other Income includes exit load collected in excess of 1% from the Investors at the time of redemption.

     18         As per the disclosure requirement under Accounting Standard 17 on 'Segment Reporting' issued by ICAI, the Scheme operates only in one segment,
                viz, primarily generate returns, based on the Scheme's Investment Objectives.


     19         The historical per unit statistics are given in Annexure III.

     20         Previous Year's figures have been regrouped and reclassified, wherever necessary, to make them comparable.

     21          'Rs. 0.00' indicates amount less than a lac and 'Rs. -' indicates Nil amount.


       As per our report of even date attached.

       For N. M. Raiji & Co.                                                For and on behalf of Principal Pnb                                     For and on behalf of Principal
       Chartered Accountants                                                Asset Management Company Pvt. Ltd                                       Trustee Company Pvt. Ltd

       Sd/-                                                                 Sd/-                                                                   Sd/-                                            Sd/-
       Vinay D. Balse                                                       M. M. Chitale                                                          B.G. Deshmukh                                   H. M. Singh
       Partner                                                              Chairman                                                               Chairman                                        Director


                                                                            Sd/-                          Sd/-
       Place : Mumbai                                                       Rajan Ghotgalkar             Shyam Bhat
       Date: July 09, 2010                                                  Managing Director            Fund Manager




                                                                                                         46
ANNUAL REPORT




   PRINCIPAL EMERGING BLUECHIP FUND




                  47
ANNUAL REPORT


                                              AUDITORS’ REPORT


     TO THE TRUSTEE OF
     PRINCIPAL MUTUAL FUND

     We have audited the attached Balance Sheet as at March 31, 2010, the Revenue Account and the Cash
     Flow Statement for the year ended on that date, annexed thereto of Principal Emerging Bluechip Fund
     (the scheme) of the Principal Mutual Fund. These financial statements are the responsibility of the
     Management. Our responsibility is to express an opinion on these financial statements based on our audit.
     We report that:

     1.      Our audit was conducted in accordance with generally accepted Standards on Auditing in India.
             These Standards require that we plan and perform the audit to obtain reasonable assurance about
             whether the financial statements are free of material misstatements. An audit includes examining
             on a test basis, evidence supporting the amounts and disclosures in the financial statements. An
             audit also includes assessing the accounting principles used and significant estimates made by the
             Management, as well as evaluating the overall financial statement presentation. We believe that
             our audit provides a reasonable basis for our opinion.

     2.      We have obtained all information and explanations, which, to the best of our knowledge and belief
             were necessary for the purpose of our audit.

     3.      The Balance Sheet, the Revenue Account and the Cash Flow Statement are in agreement with the
             books of account of the Scheme.

     4.      In our opinion, valuation methods for Non Traded Securities, adopted by the scheme are fair and
             reasonable and are in accordance with the guidelines for valuation issued by SEBI and approved
             by the Trustees.

     5.      The accounts have been prepared in accordance with the accounting policies adopted by the
             trustees of the Fund and as specified in the Ninth Schedule to the SEBI (Mutual Funds)
             Regulations, 1996.

     6.      In our opinion and to the best of our information and according to the explanations given to us, the
             said accounts give the information required by the SEBI (Mutual Funds) Regulations, 1996 and
             give a true and fair view in accordance with the generally accepted accounting principles in India:

             a.   in the case of Balance Sheet, of the state of affairs of the scheme as at March 31, 2010;

             b.   in the case of Revenue Account, of the surplus of the scheme for the year ended on that date;
                  and

             c.   in the case of Cash Flow Statement, of the cash flows for the year ended on that date.

                                                                                         For N. M. Raiji & Co.
                                                                                        Chartered Accountants
                                                                                Firm Registration No. 108296W


                                                                                                          Sd/-
                                                                                               Vinay D. Balse
                                                                                                      Partner
                                                                                         Membership No. 39434
     Place : Mumbai
     Date : July 09, 2010




                                                         48
ANNUAL REPORT

                                                   PRINCIPAL MUTUAL FUND
                                             PRINCIPAL EMERGING BLUECHIP FUND
                                                 Balance Sheet as at March 31, 2010


                                                                   Schedule               March 31, 2010             March 31, 2009
                                                                                                 Rupees                     Rupees
 LIABILITIES
 Unit Capital                                                                  1            1,046,257,024               133,808,818
 Reserves & Surplus                                                            2            1,714,192,256                20,999,469
 Current Liabilities and Provisions                                            3               63,135,563                17,889,412
 Total                                                                                      2,823,584,843               172,697,699

 ASSETS
 Investments                                                                   4            2,420,194,411               133,309,563
 Deposits                                                                      5              292,141,138                33,992,507
 Other Current Assets                                                          6              111,249,294                 5,395,629
 Total                                                                                      2,823,584,843               172,697,699

 Significant Accounting Policies and Notes to Accounts                         8
 The Schedules form an integral part of the Financial Statements



 As per our report of even date attached.




 For N. M. Raiji & Co.                For and on behalf of Principal Pnb           For and on behalf of Principal
 Chartered Accountants                Asset Management Company Pvt. Ltd             Trustee Company Pvt. Ltd

 Sd/-                                 Sd/-                                         Sd/-                             Sd/-
 Vinay D. Balse                       M. M. Chitale                                B.G. Deshmukh                    H. M. Singh
 Partner                              Chairman                                     Chairman                         Director


                                      Sd/-                     Sd/-
 Place : Mumbai                       Rajan Ghotgalkar     P.V.K. Mohan
 Date : July 09, 2010                 Managing Director   Fund Manager




                                                                          49
ANNUAL REPORT

                                                          PRINCIPAL MUTUAL FUND
                                                   PRINCIPAL EMERGING BLUECHIP FUND
                                                 Revenue Account for the year ended March 31, 2010
                                                                             Schedule                     March 31, 2010                            March 31, 2009
                                                                                                                 Rupees                                    Rupees

 INCOME

 Dividend                                                                                                     13,140,180                                   324,770
 Interest and Discount Income                                                    7                             3,140,272                                   633,423
 Profit on Sale / Redemption of Investments (other than inter-scheme
 transfer / sale)                                                                                            280,572,054                                25,854,907

 Total                                                                                                       296,852,506                                26,813,100


 EXPENSES AND LOSSES


 Management Fees                                                                                                  7,313,690                                729,467
 Trusteeship Fees                                                                                                   132,018                                  6,086
 Agent's Commission                                                                                               9,844,076                                257,813
 Publicity & Marketing Expenses                                                                                   5,191,915                                 58,123
 Audit Fees                                                                                                         103,048                                  9,868
 Custodian's Fees and Expenses                                                                                      337,963                                 11,638
 Registrar's Fees and Expenses                                                                                    2,439,666                                 80,137
 Other Operating Expenses                                                                                         6,223,998                                267,656

 Total                                                                                                        31,586,374                                 1,420,788
 Surplus for the year / period                                                                               265,266,132                                25,392,312

 Net change in Unrealised gain / (loss) in the Value of Investments (Refer
 Note III(2) to Schedule 8)                                                                                  513,739,399                                (4,653,946)

 Net Surplus including Net change in Unrealised Appreciation /
 (Depreciation) for the year / period                                                                        779,005,531                                20,738,366


 Appropriation

 Opening Balance                                                                                              (9,608,323)                                        -
 Add: Net Surplus including Net change in Unrealised Appreciation /
 (Depreciation) for the year / period                                                                        779,005,531                                20,738,366
 Unrealised Appreciation in value of Investments as at the beginning of
 the year                                                                                                                 -                                      -
 Unrealised Appreciation in value of Investments as at the end of year /
 period                                                                                                     (509,085,453)                                        -
 Add/(Less) : Income Equalisation                                                                            373,927,633                               (30,346,689)
 Dividend Distribution                                                                                      (108,792,912)                                        -
 Dividend Tax                                                                                                          -                                         -
 Net Surplus / (Deficit) Transferred to Balance Sheet                                                        525,446,476                                (9,608,323)

 Significant Accounting Policies and Notes to Accounts                           8

 The Schedules form an integral part of the Financial Statements

 As per our report of even date attached.

 For N. M. Raiji & Co.                                                       For and on behalf of Principal Pnb               For and on behalf of Principal
 Chartered Accountants                                                       Asset Management Company Pvt. Ltd                 Trustee Company Pvt. Ltd


 Sd/-                                                                        Sd/-                                             Sd/-                     Sd/-
 Vinay D. Balse                                                              M. M. Chitale                                    B.G. Deshmukh            H. M. Singh
 Partner                                                                     Chairman                                         Chairman                 Director

                                                                             Sd/-                          Sd/-
 Place : Mumbai                                                              Rajan Ghotgalkar              P.V.K. Mohan
 Date : July 09, 2010                                                        Managing Director             Fund Manager




                                                                                        50
ANNUAL REPORT

                                                                          PRINCIPAL MUTUAL FUND
                                                                    PRINCIPAL EMERGING BLUECHIP FUND
                                                       Schedules forming part of the Financial Statements as at March 31, 2010
 SCHEDULE 1 - UNIT CAPITAL                                                            March 31, 2010                                              March 31, 2009
                                                                              Units                          Rupees                       Units                           Rupees
 (A)       Growth Option
 Initial Capital Issued and Subscribed :
 Units of Rs. 10 each fully paid up                                   9,814,367.110                      98,143,671               9,814,367.110                        98,143,671

 Outstanding :
 At the beginning of the year / period                                9,671,726.761                      96,717,268               9,814,367.109                        98,143,671
 Issued during the year / period                                     72,621,750.400                     726,217,504               2,984,423.474                        29,844,235
                                                                     82,293,477.161                     822,934,772              12,798,790.583                       127,987,906
 Repurchased during the year / period                                29,849,046.100                     298,490,461               3,127,063.822                        31,270,638
 At the end of the year / period (A)                                 52,444,431.061                     524,444,311               9,671,726.761                        96,717,268


 (B)       Dividend Option
 Initial Capital Issued and Subscribed :
 Units of Rs. 10 each fully paid up                                   3,659,599.840                      36,595,998               3,659,599.840                        36,595,998

 Outstanding :
 At the beginning of the year / period                                3,709,155.068                      37,091,550               3,659,599.844                        36,595,998
 Issued during the year / period                                     76,396,906.000                     763,969,060                 768,960.644                         7,689,606
                                                                     80,106,061.068                     801,060,610               4,428,560.488                        44,285,604
 Repurchased during the year / period                                27,924,789.700                     279,247,897                 719,405.420                         7,194,054
 At the end of the year / period (B)                                 52,181,271.368                     521,812,713               3,709,155.068                        37,091,550




 TOTAL (A+B)                                                        104,625,702.429                    1,046,257,024             13,380,881.829                       133,808,818




 SCHEDULE 2 - RESERVES AND SURPLUS                                                                                               March 31, 2010                    March 31, 2009
 UPR                                                                                                                                   Rupees                            Rupees

 Unit Premium Reserve
 At the beginning of the year                                                                                                       30,607,792                                  -
 Net addition / (deduction) during the year / period                                                                               649,052,535                         30,607,792
 At the end of the year / period                                                                                                   679,660,327                         30,607,792


 Balance in Revenue Account                                                                                                        525,446,476                         (9,608,323)


 Unrealised Appreciation in value of Investments                                                                                   509,085,453                                  -

 Total                                                                                                                            1,714,192,256                        20,999,469



 SCHEDULE 3 - CURRENT LIABILITIES AND
 PROVISIONS                                                                                                                  March 31, 2010                        March 31, 2009
                                                                                                                                    Rupees                                Rupees
 Contracts for Purchase of Investments                                                                                              954,483                            15,836,895
 Unit Repurchase Amount Payable                                                                                                  31,077,828                             1,194,959
 Registrar's Fees and Expenses                                                                                                      460,911                                41,325
 Custodian's Fees and Expenses                                                                                                       54,158                                 2,684
 Inter-Scheme Dues (net)                                                                                                         19,489,333                                     -
 Management Fees                                                                                                                          -                               139,638
 Trusteeship Fees                                                                                                                    19,574                                 1,117
 Audit Fees                                                                                                                         103,048                                 9,868
 Agent's Commission Payable                                                                                                       7,735,328                               142,363
 Publicity and Marketing Expenses                                                                                                   427,303                                 5,181
 Dividend and Dividend Tax Payable                                                                                                   69,738                                     -
 Other Current Liabilities                                                                                                        2,437,899                               472,382
 Unit Capital Pending Allotment                                                                                                     305,960                                43,000

                                                                                                                                    63,135,563                         17,889,412




                                                                                            51
ANNUAL REPORT




  SCHEDULE 4 - INVESTMENTS                                                March 31, 2010   March 31, 2009
  (Refer to attached statement of Portfolio holding as at
  March 31, 2010)                                                                Rupees           Rupees
  Equity Shares                                                            2,420,194,411      133,309,563

                                                                           2,420,194,411      133,309,563



  SCHEDULE 5 - DEPOSITS                                                   March 31, 2010   March 31, 2009
                                                                                 Rupees           Rupees
  Collateralised Lending                                                    292,141,138        33,992,507

                                                                             292,141,138       33,992,507



  SCHEDULE 6 - OTHER CURRENT ASSETS                                       March 31, 2010   March 31, 2009
                                                                                 Rupees           Rupees
  Balances with Banks and Reserve Bank of India in Current Account             4,081,545          917,140
  Unit Subscription Receivable                                                80,255,566        2,989,923
  Contract for Sale of Investment                                             23,354,317        1,425,320
  Outstanding and Accrued Income                                                 733,581           63,246
  Receivable from the Asset Management Company                                 2,824,285                -

                                                                             111,249,294        5,395,629




  SCHEDULE 7 - INTEREST & DISCOUNT INCOME                                 March 31, 2010   March 31, 2009
                                                                                 Rupees           Rupees
  Government Securites / Treasury Bills                                           21,681           78,590
  Commercial Paper / Certificate of Deposits / Usance Bills                            -            9,468
  Collateralised Lending & Reverse Repo                                        3,112,899          543,317
  Others (net) - (Refer Note III(4) to Schedule 8)                                 5,692            2,048
                                                                               3,140,272          633,423




                                                                     52
ANNUAL REPORT

                                                 PRINCIPAL MUTUAL FUND
                                          PRINCIPAL EMERGING BLUECHIP FUND
                                     Cash Flow Statement For The Year Ended March 31, 2010

                                                                                                          March 31, 2010            March 31, 2009
                                                                                                              Amount                    Amount
                                                                                                                   (Rs.)                     (Rs.)
 A. Cash flow from Operating Activities
    Surplus for the year                                                                                     265,266,132                25,392,312
    Adjustments for:-
    (Increase)/Decrease in Investments (at cost)                                                          (1,773,145,449)             (137,963,509)
    (Increase)/Decrease in Other Current Assets                                                              (25,423,617)               (1,488,566)
    Increase/(Decrease) in Current Liabilities                                                                (4,389,011)               16,651,453

    Net cash generated from / (used in) Operations                                         (a)            (1,537,691,945)               (97,408,310)


 B. Cash flow from Financing Activities
    Increase in Unit Capital                                                                                 912,448,206               133,808,818
    Increase in Reserves                                                                                   1,022,980,168                   261,103
    Adjustments for:-
    Increase in Sundry Creditors for redeemed units and dividend                                              49,372,202                  1,194,959
    Increase in Sundry Debtors for units issued                                                              (77,002,683)                (2,946,923)
    Dividend paid during the year                                                                           (108,792,912)                         -

    Net cash generated from Financing Activities                                           (b)             1,799,004,981               132,317,957

    Net Increase in Cash and Cash Equivalents                                            (a + b)             261,313,036                34,909,647

    Cash and Cash Equivalents as at the :-
    Beginning of the year                                                                                     34,909,647                         -
    End of the year                                                                                          296,222,683                34,909,647




    Note : Cash and Cash Equivalents includes the following :
            (1) Balances with Banks                                                                            4,081,545                   917,140
            (2) Collateralised Lending                                                                       292,141,138                33,992,507




    The above cash flow statement has been prepared under the indirect method setout in Accounting Standard (AS-3) issued by the Institute of
    Chartered Accountants of India.

    As per our report of even date attached.




    For N. M. Raiji & Co.                       For and on behalf of Principal Pnb                 For and on behalf of Principal
    Chartered Accountants                    Asset Management Company Pvt. Ltd                     Trustee Company Pvt. Ltd

    Sd/-                                     Sd/-                                                  Sd/-                             Sd/-
    Vinay D. Balse                            M. M. Chitale                                        B.G. Deshmukh                    H. M. Singh
    Partner                                  Chairman                                              Chairman                         Director


                                                Sd/-                           Sd/-
    Place : Mumbai                           Rajan Ghotgalkar                    P.V.K. Mohan
    Date : July 09, 2010                     Managing Director                  Fund Manager



                                                                          53
ANNUAL REPORT




                                 PRINCIPAL MUTUAL FUND

                       PRINCIPAL EMERGING BLUECHIP FUND

                                             SCHEDULE - 8

     SIGNIFICANT ACCOUNTING POLICIES AND NOTES TO ACCOUNTS FORMING PART OF
                                   ACCOUNTS

     I. BACKGROUND INFORMATION

        A. Organisation

        Principal Mutual Fund (formerly known as IDBI-PRINCIPAL Mutual Fund) has been constituted as a
        Trust in accordance with the provisions of the Indian Trusts Act, 1882 (2 of 1882). The Mutual Fund
        is registered with the Securities and Exchange Board of India (SEBI) under registration no.
        MF/019/94/0 dated December 13, 1994.

        The Fund was initially set up by Industrial Development Bank of India (IDBI) in 1994 by execution of
        a Trust Deed dated November 25, 1994, under which IDBI was the sole Settlor, Sponsor and Principal
        Trustee. Subsequently, on March 31, 2000, Principal Financial Services Inc. USA became the deemed
        sponsor along with IDBI by acquiring 50% stake in IDBI-PRINCIPAL Asset Management Company
        Limited. Pursuant to SEBI Letter dated October 18, 2002, the IDBI-PRINCIPAL Trustee Company
        Limited took over the trusteeship and the associated responsibilities and obligations of the IDBI-
        PRINCIPAL Mutual Fund. The Name of the Trustee Company was changed to Principal Trustee
        Company Limited w.e.f. June 27, 2003. The Name of the Trustee Company was changed to Principal
        Trustee Company Private Limited w.e.f. October 20, 2003.

        On June 23, 2003, Principal Financial Services Inc. USA, acquired a 100% stake in IDBI-PRINCIPAL
        Asset Management Company Limited, through its wholly owned subsidiary, Principal Financial
        Group (Mauritius) Limited. Accordingly, Principal Financial Services Inc. USA, became the Sole
        Sponsor of the Fund and Principal Financial Group (Mauritius) Limited has became the Sole Settlor
        of the Fund. The name of the Asset Management Company was changed to Principal Asset
        Management Company Limited w.e.f. June 27, 2003, and on October 20, 2003 was again changed to
        Principal Asset Management Company Private Limited (PAMC).

        On May 5, 2004, Punjab National Bank and Vijaya Bank acquired 30% stake and 5% stake
        respectively in Principal Asset Management Company Private Limited, as well as in Principal Trustee
        Company Private Limited and became the co-settlers to the Fund. The name of the Asset
        Management Company changed to Principal Pnb Asset Management Company Private Limited w.e.f
        January 24, 2005.

        B. Scheme

        Principal Emerging BlueChip Fund is an open ended scheme of Principal Mutual Fund launched for
        initial subscription on September 22, 2008. The Scheme’s initial offer closed on October 10, 2008.
        The allotment date for the IPO units is 12 November 2008. The Scheme has a dividend plan and a
        growth plan.




                                                     54
ANNUAL REPORT




       The primary objective of the Scheme is to achieve long-term capital appreciation by investing in
       equity & equity related instruments of mid cap & small cap companies.


     II. SIGNIFICANT ACCOUNTING POLICIES

          1. Basis of Accounting

                    The scheme maintains books of account on an accrual basis.

          2. Investments

              2.1     Investment transactions are accounted on trade dates.

              2.2     The cost of investment includes brokerage, premium paid on acquisition, transaction
                      charges and other costs associated with purchase of investments.

              2.3     Bonus entitlements are recognized on ex-bonus dates.


          3. Portfolio Valuation

              3.1     Investments are valued on the Balance Sheet date as per the recommendations of
                      SEBI.

              3.2     Traded securities (excluding government securities and Treasury bills) are valued at
                      the last quoted closing price on the principal stock exchange on which the security is
                      traded.

              3.3     A security (other than debt securities), which is not traded on any stock exchange on
                      a particular valuation day, is valued at the price at which it was traded on the selected
                      stock exchange, as the case may be, on the earliest previous day, such day not being
                      more than thirty days prior to the valuation date.

              3.4     A debt security (other than government securities), which is not traded on any stock
                      exchange on any particular valuation day, is considered as ‘Non-Traded Security’.
                      A debt Security (other than government securities) is considered as ‘Thinly-Traded
                      Security’, if on the valuation date, there are no individual trades in that security in
                      marketable lots (presently Rs 5 Crore) on the principal stock exchange.

                      Investment in non-traded / thinly traded debt securities including securitised debt
                      (other than government securities) with a residual maturity greater than 182 days are
                      valued using CRISIL Bond Valuer, which is based on the concept of using spread
                      over Government Securities to arrive at yields for pricing.

              3.5     Investments in traded/non-traded/thinly traded government securities are valued at the
                      prices released by CRISIL, which is an approved agency recommended by the
                      Association of Mutual Funds of India (AMFI).

              3.6     Treasury bills are valued at cost plus the difference between the redemption value and
                      the cost, spread uniformly over the remaining maturity period of the instrument.



                                                     55
ANNUAL REPORT




                  Treasury Bills listed on a recognised stock exchange are valued at the last quoted
                  weighted average yield, on the principal exchange on which the security is traded. If
                  no sale is reported at that date, Treasury Bills are valued at fair value, as determined
                  in good faith by Principal Pnb Asset Management Company Private Limited, under
                  procedures approved by the Trustees of Principal Mutual Fund, in accordance with
                  the guidelines for valuation of securities for mutual funds issued by SEBI.

           3.7    Money Market securities and non-traded debt securities, with residual maturity of
                  upto 182 days, are valued at cost (including accrued interest), plus the difference
                  between the redemption value (inclusive of interest) and the cost, spread uniformly
                  over the remaining maturity period of the instrument.

           3.8    Thinly traded Equity shares /Equity related securities/non-traded securities (other
                  than Government Securities) are valued in good faith by the investment manager, on
                  the basis of valuation principles laid down by SEBI.

           3.9    Investment in non-traded debt securities, including securitised debt (other than
                  government securities) with a residual maturity greater than 182 days, are valued
                  using CRISIL Bond Valuer, which is based on the concept of using spread to maturity
                  to arrive at the yields for pricing.

           3.10   Securities in the nature of Floating Rate Notes (FRN) are valued at cost plus the
                  difference between the redemption value and the cost, spread uniformly over the
                  remaining maturity period of the instrument. FRNs listed on a recognised stock
                  exchange are valued at the last quoted closing price on the principal exchange, on
                  which the security is traded. If no sale is reported at that date FRNs are valued at fair
                  value, as determined in good faith by Principal Pnb Asset Management Company
                  Private Limited, under procedures approved by the Trustees of Principal Mutual
                  Fund, in accordance with the guidelines for valuation of securities for mutual funds
                  issued by SEBI.

           3.11   Securitised Debt are valued at fair value, as determined in good faith by Principal Pnb
                  Asset Management Company Private Limited, under procedures approved by the
                  Trustees of Principal Mutual Fund, in accordance with the guidelines for valuation of
                  securities for mutual funds issued by SEBI.

           3.12   Interest Rate Swaps with a maturity period of more than 182 days are marked to
                  market by recording the net present values of the difference in outflows and inflows
                  as unrealised appreciation / depreciation. Interest Rate Swaps with a maturity of 182
                  days and less are amortised over the balance contracted period.

           3.13   Investments in Call money, bills purchased under re-discounting scheme and term
                  deposits with banks are valued at cost plus accruals.

           3.14   An investment is regarded as non-performing if the interest and /or principal amount
                  has not been received or remains outstanding for one quarter from the day such
                  income or installment has fallen due.

           3.15   Appreciation/Depreciation, as the case may be, in the value of securities at the year-
                  end is computed for the scheme, whereby the aggregate market value of all securities




                                                 56
ANNUAL REPORT




                    taken together is compared with the aggregate cost of acquisition. Such net balance is
                    charged to Revenue Account.

            3.16    The above policies are followed as and when applicable.

         4. Income Recognition

            4.1     Dividend income is accrued on ex-dividend date.

            4.2     Profit or loss on sale of investments is arrived at by applying weighted average cost
                    on trade date.

            4.3     Interest on debentures and other fixed income investments is recognized on accrual
                    basis.

            4.4     In respect of Interest Rate Swaps, interest expense and income are accrued on a net
                    basis daily.

            4.5     Income on non-performing assets (NPA) is recognized on cash basis.

         5. Management Fees

            Investment Management fees payable to Principal Pnb Asset Management Co. Pvt. Ltd. is
            computed on the basis of Average Daily Net Assets Value.

         6. Income Equalisation Reserve and Unit Premium Reserve

            a.       Upto March 14, 2010, upon purchase/sale of units by the Scheme, an appropriate part
            of the purchase / sale price was credited / debited to the Income Equalisation Reserve
            Account. The balance amount of the purchase/sale price after reducing the face value was
            transferred to Unit Premium Reserve Account.

            b.      With effect from March 15, 2010, pursuant to the issue of SEBI circular no.
            SEBI/IMD/CIR no 18/198647/2010 dated March 15, 2010, upon purchase/sale of units by the
            Scheme, where the purchase/sale price is higher than the face value per unit, the amount
            representing unrealized gain and balance in the Unit Premium Reserve Account is
            credited/debited to Unit Premium Reserve Account. The balance amount of the purchase/sale
            price after reducing the face value is transferred to Income Equalization Reserve Account.
            Upon purchase/sale of units by the Scheme, where the purchase/sale price is lower than the
            face value per unit, the difference between the sale price and face value is debited to Income
            Equalization Reserve Account. Distributable surplus is arrived at after excluding unrealized
            gains. Balance lying to the credit of Unit Premium Reserve Account is not considered for the
            purpose of dividend distribution. Where the Unit Premium Reserve has a debit balance, the
            excess thereof over the unrealized gain is also deducted in arriving at the distributable surplus.

            c.     The balance in Income Equalization Reserve Account is transferred to the Revenue
            Account at the end of the year.




                                                    57
ANNUAL REPORT




         7. Provisions

            (i) In the case of interest accrued on investments, provision is made in respect of amounts
            which have not been received for a period of 3 months beyond the due date. No further
            accrual of income is made in respect of such investments.

            (ii) Provision is made in respect of the principal amount of securities, in accordance with
            valuation principles laid down by SEBI.

            (iii) Provision is made in respect of accrued dividend, which has not been received for a
            period of twelve months beyond the due date.

         8. Entry and Exit Load

            a) Upto July 31, 2009 load charged at the time of purchase/sale of units was utilized for
               incurring distribution and marketing expenses. Out of the residual amount, amounts
               considered to be in excess of future requirements by the Trustees were recognized as
               income, and the residual amount was carried forward into the next year.

            b) With effect from August 1, 2009 In accordance with the SEBI circular dated June 30, 2009:

               i) No entry load is charged on fresh purchase applications received after August 1, 2009
               (except on SIPs registered prior to August 1, 2009 which is utilised for incurring
               distribution and marketing expenses. Out of the residual amount, amounts considered to be
               in excess of future requirements by the Trustees are recognized as income, and the residual
               amount carried forward into the next year Load Charges).
               ii) Exit load charged in excess of 1% is recognized as income of the scheme immediately.
               iii) Exit load charged upto 1% is parked in a Liability Account, which is utilized for
               incurring distribution and marketing expenses. Out of the residual amount, amounts
               considered to be in excess of future requirements by the Trustees are recognized as
               income, and the residual amount carried forward into the next year.




                                                   58
ANNUAL REPORT
         III   NOTES TO ACCOUNTS

         1     The scheme has growth and dividend options. A combined Balance sheet, Revenue Account and Cash Flow are prepared for the scheme.

               Pursuant to SEBI approval vide its letter dated May 18, 2009, Principal Junior Cap Fund was merged with Principal Emerging Blue chip fund as at the close of August 14,
               2009, by virtue of which net assets of Principal Junior Cap Fund as at close of August 14, 2009 aggregating to Rs 3,069.34 Lacs for Dividend Option and Rs 2,862.95 Lacs
               for Growth Option, less tax deducted at source, if any, were merged with the Dividend Option and Growth Option of Principal Emerging Blue Chip Fund respectively.
               Accordingly, Unit holders of Dividend Option and Growth Option of Principal Junior Cap Fund were alloted units based on net asset value per unit of respective plans of
               Principal Emerging Blue Chip Fund as on August 14, 2009.




         2     The Cost and Market Value / Fair Value of investments are given below:

                                                                                                                                                                                                      (Rs. In Lacs)
                                                                                                                                                                        Net Appreciation / (Depreciation) in value
                                                                                    Cost / Amortised cost                        Market Value / Fair Value
                                                                                                                                                                                     of investments
                Investments                                                March 31, 2010          March 31, 2009         March 31, 2010          March 31, 2009          March 31, 2010        March 31, 2009
 PEBF6          Equity Shares                                                     19,111.09                 1,379.64             24,201.94                 1,333.10                5,090.85                (46.54)
                TOTAL                                                             19,111.09                 1,379.64             24,201.94                 1,333.10                5,090.85                (46.54)

               Net Change in unrealised appreciation in the value of investment for the year ended March 31, 2010 is Rs. 5137.39 Lacs

         3     The industry-wise 'Statement of Portfolio Holding' as on March 31, 2010 (Referred to in Schedule 4 to the Balance Sheet) is given in Annexure I.

         4     Interest and Discount - Others (Net) includes amounts received from and paid to other schemes of the Fund on account of delay in the movement of unit subscription
               application money of one scheme residing in the other scheme, calculated for the period of the delay on the basis of the prevailing CBLO rates.


         5     The aggregate book value and fair value of non traded / thinly traded investments, which have been valued in good faith in accordance with the guidelines for valuation of
               securities for Mutual Funds issued by SEBI, is Rs Nil (Previous Year: Rs Nil)


         6     Net Asset Value per unit of various options are as under:


                Name of the Option                                         March 31, 2010          March 31, 2009
                Growth                                                                 29.45                   11.57
                Dividend                                                               23.31                   11.57


         7     Aggregate value of Purchases and Sales made during the year, expressed as a percentage of Average Daily Net Asset Value, are as under:

                                                                                          Purchases                                        Sales *

                                                                        Amount (Rs. In lacs) % of Avg. Net Assets Amount (Rs. In lacs) % of Avg. Net Assets
                                   March 31, 2010                               319,625.89               2,421.52         302,150.23               2,289.12
                                   March 31, 2009                                14,848.88               1,082.84          13,744.02               1,002.27
               * Sales includes redemptions / maturities

         8     Contracts for sale pending deliveries as on March 31, 2010, amounting to Rs 233.54 lacs (Previous Year : Rs. Nil) have been excluded from the
               Investments, whereas purchases of securities by the scheme, the deliveries of which were pending as on March 31, 2010, amounting to Rs.824.35 lacs
               (Previous Year: Rs. Nil) have been included in investments.

         9     Details of Management Fees paid to Principal Pnb Asset Management Co. Pvt. Ltd. and its computation thereof:
                                                                                                                          (Rs. In Lacs)
                                                                                                                 % of Management
                                                                                                                 Fees to Average
                                                                        Average Daily Net                        Daily Net Asset
                                                                        Asset Value           Management Fees    Value
                                  March 31, 2010                                    13,199.38              73.14                   0.55
                                  March 31, 2009                                     1,371.29               7.29                   1.20

         10    As per the requirement of Regulation 25(11) of SEBI (Mutual Fund) Regulations, 1996, details of Investments made by the Fund in companies, where
               the companies' investments in any of Principal Mutual Fund schemes exceeds 5% of the scheme's Net Asset Value, is given in Annexure II.


         11    Total Income and Recurring Expenditure for the year expressed as a percentage of Average Daily Net Asset Value:


                                                                      (As a % of Average Daily Net Asset Value)
                                                                                            Recurring
                                                                     Income                 Expenditure
                                 March 31, 2010                                       22.49                2.39
                                 March 31, 2009                                        1.57                2.33
               Income / Expenditure excludes appreciation/depreciation on investment.




                                                                                                              59
ANNUAL REPORT
   12     Particulars of Unclaimed Dividends and Unclaimed Redemptions are as under:

                                                                               Unclaimed Dividends                          Unclaimed Redemptions

                                                                  No. of Investors         Amount (Rs. In lacs) No. of Investors           Amount (Rs. In lacs)
                              March 31, 2010                                           26                    0.70                      91                   8.37
                              March 31, 2009                                             -                       -                       -                      -
          Note : For want of relevant information from banks, in respect of dividends and redemptions effected through DDs, the liability for unencashed and
          expired DDs (if any) and the corresponding bank balance for the same may not have been accounted in the books.


   13     Disclosure as per SEBI circular MFD/CIR No. 3/211/2001 dated April 30, 2001 :
          The Scheme does not have a single unitholder holding more than 25% of the NAV as on March 31, 2010.

   14     The Scheme has entered into transactions with certain related parties. The information required in this regard in accordance with Accounting Standard
          18 on 'Related Party Disclosures' issued by The Institute of Chartered Accountants of India (ICAI) and Regulation 25(8) of the SEBI (Mutual Funds)
          Regulations, 1996, are as under :


   (i)    Related Party relationships

          Name                                                    Description of relationship
          Principal Financial Services Inc., USA                  Sponsor of the Fund
          Principal Trustee Company Private Ltd.                  Trustee of the Fund
          Principal Pnb Asset Management Company Private
          Ltd.                                                    Subsidiary of the Sponsor and the Scheme's asset manager

          Pnb Principal Insurance Broking Private Limited         Subsidiary of the Sponsor
          Principal Consulting (India) Private Limited            Subsidiary of the Sponsor

          Pnb Principal Financial Planners Private Limited        Subsidiary of the Sponsor
          Principal Pnb Life Insurance Company Limited            Subsidiary of the Sponsor
          Principal Financial Group (Mauritius) Limited           A Company holding substantial interest in the share capital of the
                                                                  Scheme's asset manager
          Punjab National Bank                                    A Company holding substantial interest in the share capital of the
                                                                  Scheme's asset manager
          PNB Gilts Limited                                       Subsidiary of Punjab National Bank
          PNB Housing Finance Limited                             Subsidiary of Punjab National Bank

          Schemes of the Fund under common control of the
          Sponsor

          Principal Child Benefit Fund                            Principal Long Term Equity Fund 3 Year Plan Series II
          Principal Pnb FMP 385 Days Series XI                    Principal Monthly Income Plan
          Principal Pnb FMP 540 Days Series IV                    Principal Monthly Income Plan - MIP Plus
          Principal Floating Rate Fund - Flexible Maturity Plan   Principal Balanced Fund
          Principal Floating Rate Fund - Short Maturity Plan      Principal Dividend Yield Fund
          Principal Govt. Securities Fund - Investment Plan       Principal Emerging Bluechip Fund
          Principal Global Opportunities Fund                     Principal Money Manager Fund
          Principal Growth Fund                                   Principal Personal Tax Saver Fund
          Principal Income Fund                                   Principal Resurgent India Equity Fund
          Principal Index Fund                                    Principal Income Fund - Short Term Plan
          Principal Services Industries Fund                      Principal Tax Savings Fund
          Principal Large Cap Fund                                Principal Junior Cap Fund
          Principal Ultra Short Term Fund                         Principal Govt. Securities Fund - Saving Plan
          Principal Cash Management Fund - Liquid Option          Principal Pnb Fixed Duration Fund 3 Year Plan Series I
          Principal Long Term Equity Fund                         Principal Pnb FMP 460 Days Series IV
          Principal Pnb FMP 540 Days Series II                    Principal Pnb FMP 385 Days Series VIII
          Principal Pnb FMP 385 Days Series VII                   Principal Pnb FMP 385 Days Series IX



   (ii)   Transactions, if any, with the above mentioned related parties, as defined under Accounting Standard 18 and Regulation 25(8) of the SEBI Regulations
          are given below:


                                                                                                                                                                         (Rs. In Lacs)
          Name of the Related Party                               Nature of                 For the year ended Outstanding as at              For the year ended Outstanding as at
                                                                  Transactions               March 31, 2010    March 31, 2010                  March 31, 2009    March 31, 2009

                                                                  Fees for Trusteeship
          Principal Trustee Company Private Ltd.                                                             1.32                      0.20                  0.06                 0.01
                                                                  Services


          Principal Pnb Asset Management Company Private
                                                                  Fees for Management                      73.14                          -                  7.29                 1.40
          Ltd.
                                                                  Services

                                                                  Investor
          Principal Consulting (India) Private Limited.           Communication                            10.56                          -                  0.74                 0.16
                                                                  Service Fees


          Punjab National Bank                                    Bank Charges                                  -                         -                  0.03                    -




          Investment in Associates by the Scheme
          Larsen & Toubro Limited                                 Purchase                                     -                                          101.71
                                                                  Sale/Redemption                          52.67                                           69.93
                                                                  Holding as at March
                                                                                                                                          -                                      36.59
                                                                  31




                                                                                                        60
ANNUAL REPORT



     (iii)      Commission Paid to Associates / Related Parties / Group Companies of Sponsor AMC



                                                                                                                        % of Commission                                 % of Business Given
                                                                                                 Commission Paid                               Business Given (Rs.
                Name of the Associates                                     Period covered                               paid to total                                   to total Business
                                                                                                 (Rs)                                          In Crores)
                                                                                                                        Commission paid                                 Received


                Punjab National Bank                                       FY 2009-10                    1,826,071.81                  5.92%                   26.92                  9.60%
                                                                           FY 2008-09                      163,363.53                  3.96%                    0.66                  4.10%

                Pnb Principal Financial Planners Pvt Ltd                   FY 2009-10                        6,109.25                  0.02%                     0.33                 0.12%
                                                                           FY 2008-09                        7,243.88                  0.18%                     0.08                 0.48%

                Note: Commission paid to associates has been disclosed on payment basis and business given indicates Gross Mobilisation (net of rejections, if any)
                       during the corresponding period for which the commission paid has been disclosed.

     15         Commission to Agents and Publicity expenses amounting to Rs 232.03 Lacs (Previous Year : 8.77 lacs) are utilised from load collected.


     16         As per the disclosure requirement under Accounting Standard 17 on 'Segment Reporting' issued by ICAI, the Scheme operates only in one segment,
                viz, primarily generate returns, based on the Scheme's Investment Objectives.


     17         The historical per unit statistics are given in Annexure III.

     18         Previous Year's figures have been regrouped and reclassified, wherever necessary. Since the scheme was launched on September 22, 2008, the previous year's figures are not
                comparable.

     19          'Rs. 0.00' indicates amount less than a lac and 'Rs. -' indicates Nil amount.


       As per our report of even date attached.

       For N. M. Raiji & Co.                                               For and on behalf of Principal Pnb                                  For and on behalf of Principal
       Chartered Accountants                                               Asset Management Company Pvt. Ltd                                    Trustee Company Pvt. Ltd

       Sd/-                                                                Sd/-                                                                Sd/-                                           Sd/-
       Vinay D. Balse                                                      M. M. Chitale                                                       B.G. Deshmukh                                  H. M. Singh
       Partner                                                             Chairman                                                            Chairman                                       Director


                                                                           Sd/-                       Sd/-
       Place : Mumbai                                                      Rajan Ghotgalkar           P.V.K. Mohan
       Date: July 09, 2010                                                 Managing Director          Fund Manager




                                                                                                       61
ANNUAL REPORT




            PRINCIPAL GROWTH FUND




                      62
ANNUAL REPORT


                                              AUDITORS’ REPORT

     TO THE TRUSTEE OF
     PRINCIPAL MUTUAL FUND

     We have audited the attached Balance Sheet as at March 31, 2010, the Revenue Account and the Cash
     Flow Statement for the year ended on that date, annexed thereto of Principal Growth Fund (the scheme)
     of the Principal Mutual Fund. These financial statements are the responsibility of the Management. Our
     responsibility is to express an opinion on these financial statements based on our audit. We report that:

     1.      Our audit was conducted in accordance with generally accepted Standards on Auditing in India.
             These Standards require that we plan and perform the audit to obtain reasonable assurance about
             whether the financial statements are free of material misstatements. An audit includes examining
             on a test basis, evidence supporting the amounts and disclosures in the financial statements. An
             audit also includes assessing the accounting principles used and significant estimates made by the
             Management, as well as evaluating the overall financial statement presentation. We believe that
             our audit provides a reasonable basis for our opinion.

     2.      We have obtained all information and explanations, which, to the best of our knowledge and belief
             were necessary for the purpose of our audit.

     3.      The Balance Sheet, the Revenue Account and the Cash Flow Statement are in agreement with the
             books of account of the Scheme.

     4.      In our opinion, valuation methods for Non Traded Securities, adopted by the scheme are fair and
             reasonable and are in accordance with the guidelines for valuation issued by SEBI and approved
             by the Trustees.

     5.      The accounts have been prepared in accordance with the accounting policies adopted by the
             trustees of the Fund and as specified in the Ninth Schedule to the SEBI (Mutual Funds)
             Regulations, 1996.

     6.      In our opinion and to the best of our information and according to the explanations given to us, the
             said accounts give the information required by the SEBI (Mutual Funds) Regulations, 1996 and
             give a true and fair view in accordance with the generally accepted accounting principles in India:

             a.   in the case of Balance Sheet, of the state of affairs of the scheme as at March 31, 2010;

             b.   in the case of Revenue Account, of the surplus of the scheme for the year ended on that date;
                  and

             c.   in the case of Cash Flow Statement, of the cash flows for the year ended on that date.

                                                                                         For N. M. Raiji & Co.
                                                                                        Chartered Accountants
                                                                                Firm Registration No. 108296W


                                                                                                          Sd/-
                                                                                               Vinay D. Balse
                                                                                                      Partner
                                                                                         Membership No. 39434
     Place : Mumbai
     Date : July 09, 2010




                                                         63
ANNUAL REPORT

                                                        PRINCIPAL MUTUAL FUND
                                                        PRINCIPAL GROWTH FUND
                                                      Balance Sheet as at March 31, 2010


                                                                   Schedule             March 31, 2010                  March 31, 2009
                                                                                               Rupees                          Rupees
 LIABILITIES
 Unit Capital                                                                 1              607,121,862                   731,335,608
 Reserves & Surplus                                                           2            1,449,404,942                   639,961,875
 Current Liabilities and Provisions                                           3               52,734,848                    49,025,828
 Total                                                                                     2,109,261,652                 1,420,323,311

 ASSETS
 Investments                                                                  4            1,991,651,872                 1,230,700,288
 Deposits                                                                     5               68,233,486                   126,373,228
 Other Current Assets                                                         6               49,376,294                    51,139,307
 Deferred Revenue Expenditure - not written off                               8                        -                    12,110,488
 Total                                                                                     2,109,261,652                 1,420,323,311

 Significant Accounting Policies and Notes to Accounts                        9
 The Schedules form an integral part of the Financial Statements



 As per our report of even date attached.




 For N. M. Raiji & Co.                For and on behalf of Principal Pnb          For and on behalf of Principal
 Chartered Accountants                Asset Management Company Pvt. Ltd            Trustee Company Pvt. Ltd

 Sd/-                                 Sd/-                                        Sd/-                             Sd/-
 Vinay D. Balse                       M. M. Chitale                               B.G. Deshmukh                    H. M. Singh
 Partner                              Chairman                                    Chairman                         Director


                                      Sd/-                 Sd/-
 Place : Mumbai                       Rajan Ghotgalkar     Shyam Bhat
 Date : July 09, 2010                 Managing Director    Fund Manager




                                                                           64
ANNUAL REPORT

                                                           PRINCIPAL MUTUAL FUND
                                                           PRINCIPAL GROWTH FUND
                                                  Revenue Account for the year ended March 31, 2010
                                                                           Schedule                      March 31, 2010                            March 31, 2009
                                                                                                                Rupees                                    Rupees

 INCOME

 Dividend                                                                                                       24,196,656                             30,545,164
 Interest and Discount Income                                                  7                                 4,288,661                             14,000,965
 Profit on Sale / Redemption of Investments (other than inter-scheme
 transfer / sale)                                                                                           645,212,160                                         -
 Provision no longer required written back                                                                            -                                   141,600
 Other Income (Refer Note III(17) to Schedule 9)                                                                  7,857                                       557

 Total                                                                                                      673,705,334                                44,688,286



 EXPENSES AND LOSSES


 Loss on Sale / Redemption of Investments (Other than inter-scheme
 transfer / sales)                                                                                                       -                          1,345,684,737
 Loss on inter-scheme transfer / sale of investments                                                                     -                              1,321,209
 Management Fees                                                                                                22,055,415                             14,294,097
 Trusteeship Fees                                                                                                  196,120                                186,097
 Agent's Commission                                                                                              8,133,793                              8,437,548
 Publicity & Marketing Expenses                                                                                  5,854,447                              9,004,042
 Audit Fees                                                                                                        116,872                                160,907
 Custodian's Fees and Expenses                                                                                     477,547                                497,736
 Registrar's Fees and Expenses                                                                                   3,640,975                              2,702,978
 Other Operating Expenses                                                                                        6,018,551                              8,670,481
 Deferred Revenue Expenditure Written off                                                                       12,110,488                             12,702,091

 Total                                                                                                       58,604,208                             1,403,661,923
 Surplus / (Deficit) for the year                                                                           615,101,126                            (1,358,973,637)

 Net change in Unrealised gain in the Value of Investments (Refer Note
 III(2) to Schedule 9)                                                                                      413,263,456                               177,030,316

 Net Surplus / (Deficit) including Net change in Unrealised Appreciation
 / (Depreciation) for the year                                                                             1,028,364,582                           (1,181,943,321)


 Appropriation

 Opening Balance                                                                                            629,707,141                             1,813,921,902
 Add: Net Surplus including Net change in Unrealised Appreciation /
 (Depreciation) for the year                                                                               1,028,364,582                           (1,181,943,321)
 Unrealised Appreciation in value of Investments as at the beginning of
 the year                                                                                                                -                                        -

 Unrealised Appreciation in value of Investments as at the end of year                                      (356,559,981)                                       -
 Add/(Less) : Income Equalisation                                                                           (222,064,637)                              (2,271,440)
 Dividend Distribution                                                                                                 -                                        -
 Dividend Tax                                                                                                          -                                        -
 Net Surplus Transferred to Balance Sheet                                                                  1,079,447,105                              629,707,141

 Significant Accounting Policies and Notes to Accounts                         9

 The Schedules form an integral part of the Financial Statements

 As per our report of even date attached.

 For N. M. Raiji & Co.                                                     For and on behalf of Principal Pnb                    For and on behalf of Principal
 Chartered Accountants                                                     Asset Management Company Pvt. Ltd                      Trustee Company Pvt. Ltd

 Sd/-
 Vinay D. Balse                                                            Sd/-                                              Sd/-                  Sd/-
 Partner                                                                   M. M. Chitale                                     B.G. Deshmukh         H. M. Singh
                                                                           Chairman                                          Chairman              Director

                                                                           Sd/-                         Sd/-
 Place : Mumbai                                                            Rajan Ghotgalkar             Shyam Bhat
 Date : July 09, 2010                                                      Managing Director            Fund Manager




                                                                                           65
ANNUAL REPORT
                                                                              PRINCIPAL MUTUAL FUND
                                                                              PRINCIPAL GROWTH FUND
                                                           Schedules forming part of the Financial Statements as at March 31, 2010
 SCHEDULE 1 - UNIT CAPITAL                                                                 March 31, 2010                                             March 31, 2009
                                                                                  Units                         Rupees                       Units                            Rupees
 (A)       Growth Option
 Initial Capital Issued and Subscribed :
 Units of Rs. 10 each fully paid up                                        2,871,615.100                     28,716,151               2,871,615.100                       28,716,151

 Outstanding :
 At the beginning of the year                                             27,395,208.553                    273,952,085              26,494,306.647                      264,943,066
 Issued during the year                                                    1,284,940.900                     12,849,409               2,608,857.881                       26,088,579
                                                                          28,680,149.453                    286,801,494              29,103,164.528                      291,031,645
 Repurchased during the year                                               4,770,287.500                     47,702,875               1,707,955.975                       17,079,560
 At the end of the year (A)                                               23,909,861.953                    239,098,619              27,395,208.553                      273,952,085


 (B)       Dividend Option
 Initial Capital Issued and Subscribed :
 Units of Rs. 10 each fully paid up                                       23,969,640.100                    239,696,401              23,969,640.100                      239,696,401

 Outstanding :
 At the beginning of the year                                             45,738,352.240                    457,383,522              49,258,762.871                      492,587,629
 Issued during the year                                                    1,290,959.700                     12,909,597               2,539,699.636                       25,396,996
                                                                          47,029,311.940                    470,293,119              51,798,462.507                      517,984,625
 Repurchased during the year                                              10,226,987.600                    102,269,876               6,060,110.267                       60,601,103
 At the end of the year (B)                                               36,802,324.340                    368,023,243              45,738,352.240                      457,383,522


 TOTAL (A+B)                                                              60,712,186.293                    607,121,862              73,133,560.793                      731,335,607




 SCHEDULE 2 - RESERVES AND SURPLUS                                                                                                   March 31, 2010                    March 31, 2009
 UPR                                                                                                                                       Rupees                            Rupees

 Unit Premium Reserve
 At the beginning of the year                                                                                                           10,254,734                        11,436,182
 Net addition / (deduction) during the year                                                                                              3,143,122                        (1,181,448)
 At the end of the year                                                                                                                 13,397,856                        10,254,734


 Balance in Revenue Account                                                                                                           1,079,447,105                      629,707,141


 Unrealised Appreciation in value of Investments                                                                                       356,559,981                                  -

 Total                                                                                                                                1,449,404,942                      639,961,875



 SCHEDULE 3 - CURRENT LIABILITIES AND
 PROVISIONS                                                                                                                          March 31, 2010                    March 31, 2009
                                                                                                                                           Rupees                            Rupees
 Contracts for Purchase of Investments                                                                                                            -                       25,627,963
 Unit Repurchase Amount Payable                                                                                                         19,513,312                         6,052,199
 Registrar's Fees and Expenses                                                                                                             439,259                           470,561
 Custodian's Fees and Expenses                                                                                                              43,581                            27,675
 Management Fees                                                                                                                         1,957,590                         1,660,089
 Trusteeship Fees                                                                                                                           15,162                            10,873
 Audit Fees                                                                                                                                116,872                           160,907
 Agent's Commission Payable                                                                                                              4,779,134                         3,851,094
 Publicity and Marketing Expenses                                                                                                        1,027,529                           127,327
 Dividend and Dividend Tax Payable                                                                                                      21,762,066                         9,001,927
 Other Current Liabilities                                                                                                               3,080,343                         2,030,212
 Unit Capital Pending Allotment                                                                                                                   -                            5,000

                                                                                                                                        52,734,848                        49,025,828



 SCHEDULE 4 - INVESTMENTS                                                                                                            March 31, 2010                    March 31, 2009
 (Refer to attached statement of Portfolio holding as at
 March 31, 2010)                                                                                                                            Rupees                            Rupees
 Debentures and Bonds Listed / Awaiting Listing                                                                                                   -                        19,658,340
 Debentures and Bonds Unlisted / Privately Placed                                                                                        12,823,599                        20,100,000
 Equity Shares                                                                                                                        1,978,828,273                     1,190,941,948

                                                                                                                                      1,991,651,872                     1,230,700,288



 SCHEDULE 5 - DEPOSITS                                                                                                               March 31, 2010                    March 31, 2009
                                                                                                                                           Rupees                            Rupees
 Collateralised Lending                                                                                                                 68,233,486                       126,373,228

                                                                                                                                        68,233,486                       126,373,228




                                                                                                       66
ANNUAL REPORT




  SCHEDULE 6 - OTHER CURRENT ASSETS                                       March 31, 2010    March 31, 2009
                                                                                Rupees            Rupees
  Balances with Banks and Reserve Bank of India in Current Account           33,921,285        16,208,921
  Unit Subscription Receivable                                                  315,000           183,062
  Contract for Sale of Investment                                            14,751,683        33,564,482
  Outstanding and Accrued Income                                                157,396         1,182,842
  Inter-Scheme Dues                                                             230,845                  -
  Receivable from the Asset Management Company                                       85                  -

                                                                             49,376,294        51,139,307




  SCHEDULE 7 - INTEREST & DISCOUNT INCOME                                 March 31, 2010    March 31, 2009
                                                                                Rupees            Rupees
  Debebtures/Bonds                                                            3,078,041         3,184,856
  Commercial Paper / Certificate of Deposits / Usance Bills                            -        2,570,149
  Collateralised Lending & Reverse Repo                                       1,210,620         3,010,140
  Others (net) - (Refer Note III(4) to Schedule 9)                                     -        5,235,820
                                                                              4,288,661        14,000,965




  SCHEDULE 8 - DEFERRED REVENUE EXPENDITURE                               March 31, 2010    March 31, 2009
                                                                                Rupees            Rupees

  At the beginning of the year                                               12,110,488        24,812,579

  Amount amortised during the year                                           (12,110,488)      (12,702,091)

  At the end of the year                                                               -       12,110,488




                                                                     67
ANNUAL REPORT

                                                    PRINCIPAL MUTUAL FUND
                                                   PRINCIPAL GROWTH FUND
                                       Cash Flow Statement For The Year Ended March 31, 2010

                                                                                                        March 31, 2010                  March 31, 2009
                                                                                                             Amount                          Amount
                                                                                                                 (Rs.)                           (Rs.)
 A. Cash flow from Operating Activities
    Surplus / (Deficit) for the year                                                                       615,101,126                   (1,358,973,637)
    Add: Deferred Revenue Expenditure amortised (Non-cash)                                                  12,110,488                       12,702,091
    Surplus before adjustments                                                                             627,211,614                   (1,346,271,546)
    Adjustments for:-
    (Increase)/Decrease in Investments (at cost)                                                          (347,688,127)                   1,501,085,515
    (Increase)/Decrease in Other Current Assets                                                             19,838,160                        1,175,963
    Increase/(Decrease) in Current Liabilities                                                             (22,507,233)                     (15,637,865)

    Net cash generated from Operations                                                    (a)              276,854,414                     140,352,067


 B. Cash flow from Financing Activities
    Decrease in Unit Capital                                                                              (124,213,746)                     (26,195,087)
    Decrease in Reserves                                                                                  (218,921,515)                      (3,452,888)
    Adjustments for:-
    Increase in Sundry Creditors for redeemed units and dividend                                            26,221,252                        4,114,453
    (Increase)/Decrease in Sundry Debtors for units issued                                                    (367,783)                         520,174
    Dividend / Distribution Tax paid during the year                                                                 -                                -

    Net cash used in Financing Activities                                                 (b)             (317,281,792)                     (25,013,348)

    Net Increase / (Decrease) in Cash and Cash Equivalents                              (a + b)            (40,427,378)                    115,338,719

    Cash and Cash Equivalents as at the :-
    Beginning of the year                                                                                  142,582,149                      27,243,430
    End of the year                                                                                        102,154,771                     142,582,149




    Note : Cash and Cash Equivalents includes the following :
            (1) Balances with Banks                                                                         33,921,285                      16,208,921
            (2) Collateralised Lending                                                                      68,233,486                     126,373,228




    The above cash flow statement has been prepared under the indirect method setout in Accounting Standard (AS-3) issued by the Institute of Chartered
    Accountants of India.

    As per our report of even date attached.




    For N. M. Raiji & Co.                       For and on behalf of Principal Pnb                For and on behalf of Principal
    Chartered Accountants                    Asset Management Company Pvt. Ltd                     Trustee Company Pvt. Ltd

    Sd/-                                        Sd/-                                              Sd/-                                     Sd/-
    Vinay D. Balse                               M. M. Chitale                                    B.G. Deshmukh                            H. M. Singh
    Partner                                     Chairman                                          Chairman                                     Director


                                                  Sd/-                     Sd/-
    Place : Mumbai                             Rajan Ghotgalkar           Shyam Bhat
    Date : July 09, 2010                       Managing Director         Fund Manager




                                                                            68
ANNUAL REPORT




                                 PRINCIPAL MUTUAL FUND

                                 PRINCIPAL GROWTH FUND

                                             SCHEDULE - 9

     SIGNIFICANT ACCOUNTING POLICIES AND NOTES TO ACCOUNTS FORMING PART OF
                                   ACCOUNTS

     I. BACKGROUND INFORMATION

        A. Organisation

        Principal Mutual Fund (formerly known as IDBI-PRINCIPAL Mutual Fund) has been constituted as a
        Trust in accordance with the provisions of the Indian Trusts Act, 1882 (2 of 1882). The Mutual Fund
        is registered with the Securities and Exchange Board of India (SEBI) under registration no.
        MF/019/94/0 dated December 13, 1994.

        The Fund was initially set up by Industrial Development Bank of India (IDBI) in 1994 by execution of
        a Trust Deed dated November 25, 1994, under which IDBI was the sole Settlor, Sponsor and Principal
        Trustee. Subsequently, on March 31, 2000, Principal Financial Services Inc. USA became the deemed
        sponsor along with IDBI by acquiring 50% stake in IDBI-PRINCIPAL Asset Management Company
        Limited. Pursuant to SEBI Letter dated October 18, 2002, the IDBI-PRINCIPAL Trustee Company
        Limited took over the trusteeship and the associated responsibilities and obligations of the IDBI-
        PRINCIPAL Mutual Fund. The Name of the Trustee Company was changed to Principal Trustee
        Company Limited w.e.f. June 27, 2003. The Name of the Trustee Company was changed to Principal
        Trustee Company Private Limited w.e.f. October 20, 2003.

        On June 23, 2003, Principal Financial Services Inc. USA, acquired a 100% stake in IDBI-PRINCIPAL
        Asset Management Company Limited, through its wholly owned subsidiary, Principal Financial
        Group (Mauritius) Limited. Accordingly, Principal Financial Services Inc. USA, became the Sole
        Sponsor of the Fund and Principal Financial Group (Mauritius) Limited has became the Sole Settlor
        of the Fund. The name of the Asset Management Company was changed to Principal Asset
        Management Company Limited w.e.f. June 27, 2003, and on October 20, 2003 was again changed to
        Principal Asset Management Company Private Limited (PAMC).

        On May 5, 2004, Punjab National Bank and Vijaya Bank acquired 30% stake and 5% stake
        respectively in Principal Asset Management Company Private Limited, as well as in Principal Trustee
        Company Private Limited and became the co-settlers to the Fund. The name of the Asset
        Management Company changed to Principal Pnb Asset Management Company Private Limited w.e.f
        January 24, 2005.

        B. Scheme

        Principal Growth Fund is an open-ended scheme of Principal Mutual Fund and was launched on
        October 3, 2000. The duration of the scheme is perpetual. The scheme closed for initial subscription
        on October 21, 2000 and re-opened for issues and redemption of units on November 30, 2000.




                                                     69
ANNUAL REPORT




       On April 30, 2004, PNB Mutual Fund (PNB MF) - PNB Equity Growth Fund merged into the
       Principal Growth Fund vide agreement dated August 25, 2003 between the Board of Trustees /
       Directors, as applicable of PNB MF, PNB Asset Management Company Limited (PNB AMC), the
       Investment Manager of PNB MF, Principal Trustee Company Private Limited and Principal Asset
       Management Company Private Limited.

       On May 14, 2004, SUN F&C Emerging Technologies Fund which was an open ended equity scheme
       of SUN F&C Mutual Fund (SUN F&C MF) launched on February 4, 2000 has been merged into
       Principal Growth Fund vide agreement dated June 30, 2003 between the Board of Trustees / Directors,
       as applicable of SUN F&C MF, SUN F&C Asset Management (India) Private Limited (SUN F&C
       AMC), the Investment Manager of SUN F&C MF, Principal Trustee Company Private Limited and
       Principal Asset Management Company Private Limited. The total net assets taken over by the scheme
       as at May 14, 2004 is Rs.301417542 /-

       Further on May 14, 2004, SUN F&C Value Fund which was an open ended equity scheme of SUN
       F&C Mutual Fund (SUN F&C MF) launched on May 23, 1997 has also been merged into Principal
       Growth Fund vide agreement dated June 30, 2003 between the Board of Trustees / Directors, as
       applicable of SUN F&C MF, SUN F&C Asset Management (India) Private Limited (SUN F&C
       AMC), the Investment Manager of SUN F&C MF, Principal Trustee Company Private Limited and
       Principal Asset Management Company Private Limited. The total net assets taken over by the scheme
       as at May 14, 2004 is Rs. 851,22,582/-

       SEBI has vide its letter dated March 18, 2004 addressed to PNB AMC and PMF AMC and vide its
       letter dated March 5, 2004 addressed to SUN F&C AMC and PMF AMC has given its no objection
       for the above mergers and for handing over the trusteeship, management and administration business
       of the scheme to PMF AMC (Also refer note VI).

       As per the directive of SEBI vide its letter dated June 20, 2007 Principal Focussed Advantage Fund
       has been closed and subsequently merged on November 02, 2007 with Principal Growth Fund.

       The investment objective of the scheme is to achieve long-term capital appreciation


     II. SIGNIFICANT ACCOUNTING POLICIES

           1. Basis of Accounting

                     The scheme maintains books of account on an accrual basis.

           2. Investments

               2.1     Investment transactions are accounted on trade dates.

               2.2     The cost of investment includes brokerage, premium paid on acquisition, transaction
                       charges and other costs associated with purchase of investments.

               2.3     Bonus entitlements are recognized on ex-bonus dates.


           3. Portfolio Valuation




                                                     70
ANNUAL REPORT




           3.1   Investments are valued on the Balance Sheet date as per the recommendations of
                 SEBI.

           3.2   Traded securities (excluding government securities and Treasury bills) are valued at
                 the last quoted closing price on the principal stock exchange on which the security is
                 traded.

           3.3   A security (other than debt securities), which is not traded on any stock exchange on
                 a particular valuation day, is valued at the price at which it was traded on the selected
                 stock exchange, as the case may be, on the earliest previous day, such day not being
                 more than thirty days prior to the valuation date.

           3.4   A debt security (other than government securities), which is not traded on any stock
                 exchange on any particular valuation day, is considered as ‘Non-Traded Security’.
                 A debt Security (other than government securities) is considered as ‘Thinly-Traded
                 Security’, if on the valuation date, there are no individual trades in that security in
                 marketable lots (presently Rs 5 Crore) on the principal stock exchange.

                 Investment in non-traded / thinly traded debt securities including securitised debt
                 (other than government securities) with a residual maturity greater than 182 days are
                 valued using CRISIL Bond Valuer, which is based on the concept of using spread
                 over Government Securities to arrive at yields for pricing.

           3.5   Investments in traded/non-traded/thinly traded government securities are valued at the
                 prices released by CRISIL, which is an approved agency recommended by the
                 Association of Mutual Funds of India (AMFI).

           3.6   Treasury bills are valued at cost plus the difference between the redemption value and
                 the cost, spread uniformly over the remaining maturity period of the instrument.
                 Treasury Bills listed on a recognised stock exchange are valued at the last quoted
                 weighted average yield, on the principal exchange on which the security is traded. If
                 no sale is reported at that date, Treasury Bills are valued at fair value, as determined
                 in good faith by Principal Pnb Asset Management Company Private Limited, under
                 procedures approved by the Trustees of Principal Mutual Fund, in accordance with
                 the guidelines for valuation of securities for mutual funds issued by SEBI.

           3.7   Money Market securities and non-traded debt securities, with residual maturity of
                 upto 182 days, are valued at cost (including accrued interest), plus the difference
                 between the redemption value (inclusive of interest) and the cost, spread uniformly
                 over the remaining maturity period of the instrument.

           3.8   Thinly traded Equity shares /Equity related securities/non-traded securities (other
                 than Government Securities) are valued in good faith by the investment manager, on
                 the basis of valuation principles laid down by SEBI.

           3.9   Investment in non-traded debt securities, including securitised debt (other than
                 government securities) with a residual maturity greater than 182 days, are valued
                 using CRISIL Bond Valuer, which is based on the concept of using spread to maturity
                 to arrive at the yields for pricing.




                                                71
ANNUAL REPORT




            3.10   Securities in the nature of Floating Rate Notes (FRN) are valued at cost plus the
                   difference between the redemption value and the cost, spread uniformly over the
                   remaining maturity period of the instrument. FRNs listed on a recognised stock
                   exchange are valued at the last quoted closing price on the principal exchange, on
                   which the security is traded. If no sale is reported at that date FRNs are valued at fair
                   value, as determined in good faith by Principal Pnb Asset Management Company
                   Private Limited, under procedures approved by the Trustees of Principal Mutual
                   Fund, in accordance with the guidelines for valuation of securities for mutual funds
                   issued by SEBI.

            3.11   Securitised Debt are valued at fair value, as determined in good faith by Principal Pnb
                   Asset Management Company Private Limited, under procedures approved by the
                   Trustees of Principal Mutual Fund, in accordance with the guidelines for valuation of
                   securities for mutual funds issued by SEBI.

            3.12   Interest Rate Swaps with a maturity period of more than 182 days are marked to
                   market by recording the net present values of the difference in outflows and inflows
                   as unrealised appreciation / depreciation. Interest Rate Swaps with a maturity of 182
                   days and less are amortised over the balance contracted period.

            3.13   Investments in Call money, bills purchased under re-discounting scheme and term
                   deposits with banks are valued at cost plus accruals.

            3.14   An investment is regarded as non-performing if the interest and /or principal amount
                   has not been received or remains outstanding for one quarter from the day such
                   income or installment has fallen due.

            3.15   Appreciation/Depreciation, as the case may be, in the value of securities at the year-
                   end is computed for the scheme, whereby the aggregate market value of all securities
                   taken together is compared with the aggregate cost of acquisition. Such net balance is
                   charged to Revenue Account.

            3.16   The above policies are followed as and when applicable.

         4. Income Recognition

            4.1    Dividend income is accrued on ex-dividend date.

            4.2    Profit or loss on sale of investments is arrived at by applying weighted average cost
                   on trade date.

            4.3    Interest on debentures and other fixed income investments is recognized on accrual
                   basis.

            4.4    In respect of Interest Rate Swaps, interest expense and income are accrued on a net
                   basis daily.

            4.5    Income on non-performing assets (NPA) is recognized on cash basis.

         5. Management Fees




                                                  72
ANNUAL REPORT




            Investment Management fees payable to Principal Pnb Asset Management Co. Pvt. Ltd. is
            computed on the basis of Average Daily Net Assets Value.

         6. Income Equalisation Reserve and Unit Premium Reserve

            a.       Upto March 14, 2010, upon purchase/sale of units by the Scheme, an appropriate part
            of the purchase / sale price was credited / debited to the Income Equalisation Reserve
            Account. The balance amount of the purchase/sale price after reducing the face value was
            transferred to Unit Premium Reserve Account.

            b.      With effect from March 15, 2010, pursuant to the issue of SEBI circular no.
            SEBI/IMD/CIR no 18/198647/2010 dated March 15, 2010, upon purchase/sale of units by the
            Scheme, where the purchase/sale price is higher than the face value per unit, the amount
            representing unrealized gain and balance in the Unit Premium Reserve Account is
            credited/debited to Unit Premium Reserve Account. The balance amount of the purchase/sale
            price after reducing the face value is transferred to Income Equalization Reserve Account.
            Upon purchase/sale of units by the Scheme, where the purchase/sale price is lower than the
            face value per unit, the difference between the sale price and face value is debited to Income
            Equalization Reserve Account. Distributable surplus is arrived at after excluding unrealized
            gains. Balance lying to the credit of Unit Premium Reserve Account is not considered for the
            purpose of dividend distribution. Where the Unit Premium Reserve has a debit balance, the
            excess thereof over the unrealized gain is also deducted in arriving at the distributable surplus.

            c.     The balance in Income Equalization Reserve Account is transferred to the Revenue
            Account at the end of the year.



         7. Provisions

            (i) In the case of interest accrued on investments, provision is made in respect of amounts
            which have not been received for a period of 3 months beyond the due date. No further
            accrual of income is made in respect of such investments.

            (ii) Provision is made in respect of the principal amount of securities, in accordance with
            valuation principles laid down by SEBI.

            (iii) Provision is made in respect of accrued dividend, which has not been received for a
            period of twelve months beyond the due date.

         8. Entry and Exit Load

            a) Upto July 31, 2009 load charged at the time of purchase/sale of units was utilized for
               incurring distribution and marketing expenses. Out of the residual amount, amounts
               considered to be in excess of future requirements by the Trustees were recognized as
               income, and the residual amount was carried forward into the next year.

            b) With effect from August 1, 2009 In accordance with the SEBI circular dated June 30, 2009:

               i) No entry load is charged on fresh purchase applications received after August 1, 2009
               (except on SIPs registered prior to August 1, 2009 which is utilised for incurring



                                                    73
ANNUAL REPORT




              distribution and marketing expenses. Out of the residual amount, amounts considered to be
              in excess of future requirements by the Trustees are recognized as income, and the residual
              amount carried forward into the next year Load Charges).
              ii) Exit load charged in excess of 1% is recognized as income of the scheme immediately.
              iii) Exit load charged upto 1% is parked in a Liability Account, which is utilized for
              incurring distribution and marketing expenses. Out of the residual amount, amounts
              considered to be in excess of future requirements by the Trustees are recognized as
              income, and the residual amount carried forward into the next year.


         9. Deferred Revenue Expenditure

            Umamortised balance of deferred revenue expenditure aggregating Rs. 3,00,32,617.00 of
            Principal Focussed Advantage Fund as at November 02, 2007 (merger date) will continue to
            be amortised in Principal Growth Fund in accordance with the accounting policy laid down in
            Securities and Exchange Board of India (Mutual Fund) Regulations, 1996 . The unit holders
            of Principal Focussed Advantage Fund have been allotted proportionate number of units in
            Principal Growth Fund based on the net asset value (including deferred revenue expenditure)
            of the Scheme as of November 02, 2007.




                                                 74
ANNUAL REPORT
     III   NOTES TO ACCOUNTS

      1    The scheme has growth and dividend options. A combined Balance sheet, Revenue Account and Cash Flow are prepared for the scheme.

      2    The Cost and Market Value / Fair Value of investments are given below:

                                                                                                                                                                                                        (Rs. In Lacs)
                                                                                                                                                                          Net Appreciation / (Depreciation) in value
                                                                                   Cost / Amortised cost                          Market Value / Fair Value
                                                                                                                                                                                       of investments
            Investments                                                  March 31, 2010            March 31, 2009           March 31, 2010          March 31, 2009          March 31, 2010         March 31, 2009
 GROWTH6    Equity Shares                                                       16,222.68                   12,478.93               19,788.28               11,909.42                3,565.60               (569.51)
 GROWTH7
            Debentures and Bonds Unlisted / Privately Placed                          128.24                     201.00                  128.24                  201.00                        -                       -
 GROWTH2    Debentures / Bonds Listed / Awaiting listing on
                                                                                            -                    194.10                        -                 196.58                        -                2.48
            recognized stock exchanges
            TOTAL                                                                  16,350.92                 12,874.04               19,916.52                12,307.00                3,565.60             (567.03)

           Net Change in unrealised appreciation in the value of investment for the year ended March 31, 2010 is Rs. 4132.63 Lacs

      3    The industry-wise 'Statement of Portfolio Holding' as on March 31, 2010 (Referred to in Schedule 4 to the Balance Sheet) is given in Annexure I.

      4    Interest and Discount - Others (Net) includes amounts received from and paid to other schemes of the Fund on account of delay in the movement of unit subscription application
           money of one scheme residing in the other scheme, calculated for the period of the delay on the basis of the prevailing CBLO rates.



      5    The aggregate book value and fair value of non traded / thinly traded investments, which have been valued in good faith in accordance with the guidelines for valuation of securities
           for Mutual Funds issued by SEBI, are given below:

                                                                                                         (Rs. In Lacs)
                                                                         March 31, 2010            March 31, 2009
                                  Particulars                              Amount                    Amount
            Book Value                                                              128.24                     395.16
            Market / Fair Value                                                     128.24                     397.66

      6    Net Asset Value per unit of various options are as under:


            Name of the Option                                           March 31, 2010            March 31, 2009
            Growth                                                                   50.67                      28.50
            Dividend                                                                 22.96                      12.91


      7    Aggregate value of Purchases and Sales made during the year, expressed as a percentage of Average Daily Net Asset Value, are as under:

                                                                                         Purchases                                          Sales *

                                                                       Amount (Rs. In lacs) % of Avg. Net Assets Amount (Rs. In lacs) % of Avg. Net Assets
                                March 31, 2010                                 162,624.33                   829.25       166,204.73                 847.50
                                March 31, 2009                                  53,843.89                   289.34        55,468.15                 298.07
           * Sales includes redemptions / maturities

      8    Contracts for sale pending deliveries as on March 31, 2010, amounting to Rs. 147.52 lacs (Previous Year : Rs. 335.64 Lacs) have been excluded from the
           Investments, whereas purchases of securities by the scheme, the deliveries of which were pending as on March 31, 2010, amounting to Rs. 57.59 lacs
           (Previous Year: Rs. 256.28 Lacs) have been included in investments.


      9    Details of Management Fees paid to Principal Pnb Asset Management Co. Pvt. Ltd. and its computation thereof:
                                                                                                                           (Rs. In Lacs)
                                                                                                                  % of Management
                                                                       Average Daily Net                          Fees to Daily Net
                                                                       Asset Value           Management Fees      Asset Value
                               March 31, 2010                                      19,611.13               220.55                   1.12
                               March 31, 2009                                      18,609.34               142.94                   0.77

     10    As per the requirement of Regulation 25(11) of SEBI (Mutual Fund) Regulations, 1996, details of Investments made by the Fund in companies, where the
           companies' investments in any of Principal Mutual Fund schemes exceeds 5% of the scheme's Net Asset Value, is given in Annexure II.



     11    Total Income and Recurring Expenditure for the year expressed as a percentage of Average Daily Net Asset Value:


                                                                        (As a % of Average Daily Net Asset Value)

                                                                       Income                   Recurring Expenditure
                              March 31, 2010                                            34.35                    2.37
                              March 31, 2009                                             2.40                    2.36
           Income / Expenditure excludes appreciation/depreciation on investment.

     12    Particulars of Unclaimed Dividends and Unclaimed Redemptions are as under:

                                                                                   Unclaimed Dividends                             Unclaimed Redemptions

                                                                     No. of Investors        Amount (Rs. In lacs)   No. of Investors          Amount (Rs. In lacs)
                                March 31, 2010                                       14,232                  217.14                      628                 93.28
                                March 31, 2009                                         6,041                  90.02                      338                 56.56
           Note: For want of relevant information from banks, in respect of dividends and redemptions effected through DDs, the liability for unencashed and
           expired DDs (if any) and the corresponding bank balance for the same may not have been accounted in the books.




                                                                                                      75
ANNUAL REPORT
   13     Disclosure as per SEBI circular MFD/CIR No. 3/211/2001 dated April 30, 2001 :
          The Scheme does not have a single unitholder holding more than 25% of the NAV as on March 31, 2010.

   14     The Scheme has entered into transactions with certain related parties. The information required in this regard in accordance with Accounting Standard 18
          on 'Related Party Disclosures' issued by The Institute of Chartered Accountants of India (ICAI) and Regulation 25(8) of the SEBI (Mutual Funds)
          Regulations, 1996, are as under :



   (i)    Related Party relationships

          Name                                                      Description of relationship
          Principal Financial Services Inc., USA                    Sponsor of the Fund
          Principal Trustee Company Private Ltd.                    Trustee of the Fund

          Principal Pnb Asset Management Company Private Ltd.       Subsidiary of the Sponsor and the Scheme's asset manager

          Pnb Principal Insurance Broking Private Limited           Subsidiary of the Sponsor
          Principal Consulting (India) Private Limited              Subsidiary of the Sponsor

          Pnb Principal Financial Planners Private Limited          Subsidiary of the Sponsor
          Principal Pnb Life Insurance Company Limited              Subsidiary of the Sponsor
          Principal Financial Group (Mauritius) Limited             A Company holding substantial interest in the share capital of the
                                                                    Scheme's asset manager
          Punjab National Bank                                      A Company holding substantial interest in the share capital of the
                                                                    Scheme's asset manager
          PNB Gilts Limited                                         Subsidiary of Punjab National Bank
          PNB Housing Finance Limited                               Subsidiary of Punjab National Bank

          Schemes of the Fund under common control of the
          Sponsor

          Principal Child Benefit Fund                              Principal Long Term Equity Fund 3 Year Plan Series II
          Principal Pnb FMP 385 Days Series XI                      Principal Monthly Income Plan
          Principal Pnb FMP 540 Days Series IV                      Principal Monthly Income Plan - MIP Plus
          Principal Floating Rate Fund - Flexible Maturity Plan     Principal Balanced Fund
          Principal Floating Rate Fund - Short Maturity Plan        Principal Dividend Yield Fund
          Principal Govt. Securities Fund - Investment Plan         Principal Emerging Bluechip Fund
          Principal Global Opportunities Fund                       Principal Money Manager Fund
          Principal Growth Fund                                     Principal Personal Tax Saver Fund
          Principal Income Fund                                     Principal Resurgent India Equity Fund
          Principal Index Fund                                      Principal Income Fund - Short Term Plan
          Principal Services Industries Fund                        Principal Tax Savings Fund
          Principal Large Cap Fund                                  Principal Junior Cap Fund
          Principal Ultra Short Term Fund                           Principal Govt. Securities Fund - Saving Plan
          Principal Cash Management Fund - Liquid Option            Principal Pnb Fixed Duration Fund 3 Year Plan Series I
          Principal Long Term Equity Fund                           Principal Pnb FMP 460 Days Series IV
          Principal Pnb FMP 540 Days Series II                      Principal Pnb FMP 385 Days Series VIII
          Principal Pnb FMP 385 Days Series VII                     Principal Pnb FMP 385 Days Series IX



   (ii)   Transactions, if any, with the above mentioned related parties, as defined under Accounting Standard 18 and Regulation 25(8) of the SEBI Regulations are
          given below:


                                                                                                                                                                             (Rs. In Lacs)
          Name of the Related Party                                 Nature of                   For the year ended       Outstanding as at        For the year ended Outstanding as at
                                                                    Transactions                 March 31, 2010          March 31, 2010            March 31, 2009    March 31, 2009

                                                                    Fees for Trusteeship
          Principal Trustee Company Private Ltd.                                                                 1.96                      0.15                  1.86                 0.11
                                                                    Services



          Principal Pnb Asset Management Company Private Ltd.       Fees for Management                       220.55                      19.58               142.94                 16.60
                                                                    Services

                                                                    Investor
          Principal Consulting (India) Private Limited.             Communication                               20.37                         -                 26.05                 1.52
                                                                    Service Fees

          Punjab National Bank                                      Bank Charges                                     -                        -                  0.46                    -


          Investment in Associates by the Scheme
          Larsen & Toubro Limited                                   Purchase                                  296.27                                           890.70
                                                                    Sale/Redemption                           652.96                                         1,071.65
                                                                    Holding as at March
                                                                                                                                         605.05                                    489.45
                                                                    31

          Punjab National Bank                                      Purchase                                     8.34                                                -
                                                                    Sale/Redemption                              8.81                                                -
                                                                    Holding as at March
                                                                                                                                              -                                          -
                                                                    31




                                                                                                    76
ANNUAL REPORT




    (iii)      Commission Paid to Associates / Related Parties / Group Companies of Sponsor AMC



                                                                                                                        % of Commission                                     % of Business Given
                                                                                                                                                   Business Given (Rs.
               Name of the Associates                                          Period covered      Commission Paid (Rs) paid to total                                       to total Business
                                                                                                                                                   In Crores)
                                                                                                                        Commission paid                                     Received



               Punjab National Bank                                            FY 2009-10                       375,592.34                 4.77%                     0.04                 0.52%
                                                                               FY 2008-09                       496,722.73                 4.10%                     0.09                 0.51%

               Pnb Principal Financial Planners Pvt Ltd                        FY 2009-10                            8,026.04              0.10%                     0.00                 0.04%
                                                                               FY 2008-09                           11,166.49              0.09%                     0.01                 0.06%

               Note: Commission paid to associates has been disclosed on payment basis and business given indicates Gross Mobilisation (net of rejections, if any)
                      during the corresponding period for which the commission paid has been disclosed.

     15        Outstanding and accrued income is net of provision for doubtful income amounting to Rs. 8.70 Lacs (Previous Year Rs. 8.70 Lacs) and investment is net of
               provision of Rs. 68.25 Lacs (Previous year :Rs. 68.25 Lacs).

     16        Commission to Agents and Publicity expenses amounting to Rs 0.07 Lacs (Previous Year : 28.79 lacs) are utilised from load collected.

     17        Other Income includes exit load collected in excess of 1% from the Investors at the time of redemption.

     18        Provision written back pertains to recovery on account of NPA's provided for in the earlier years.

     19        As per the disclosure requirement under Accounting Standard 17 on 'Segment Reporting' issued by ICAI, the Scheme operates only in one segment, viz,
               primarily generate returns, based on the Scheme's Investment Objectives.


     20        The historical per unit statistics are given in Annexure III.

     21        Previous Year's figures have been regrouped and reclassified, wherever necessary, to make them comparable.

     22        'Rs. 0.00' indicates amount less than a lac and 'Rs. -' indicates Nil amount.



     As per our report of even date attached.

     For N. M. Raiji & Co.                                                     For and on behalf of Principal Pnb                                  For and on behalf of Principal
     Chartered Accountants                                                     Asset Management Company Pvt. Ltd                                    Trustee Company Pvt. Ltd

     Sd/-                                                                       Sd/-                                                                Sd/-                                          Sd/-
     Vinay D. Balse                                                            M. M. Chitale                                                       B.G. Deshmukh                                  H. M. Singh
     Partner                                                                   Chairman                                                            Chairman                                       Director


                                                                               Sd/-                 Sd/-
     Place : Mumbai                                                            Rajan Ghotgalkar     Shyam Bhat
     Date: July 09, 2010                                                       Managing Director    Fund Manager




                                                                                                     77
ANNUAL REPORT




                PRINCIPAL INDEX FUND




                         78
ANNUAL REPORT


                                              AUDITORS’ REPORT


     TO THE TRUSTEE OF
     PRINCIPAL MUTUAL FUND

     We have audited the attached Balance Sheet as at March 31, 2010, the Revenue Account and the Cash
     Flow Statement for the year ended on that date, annexed thereto of Principal Index Fund (the scheme) of
     the Principal Mutual Fund. These financial statements are the responsibility of the Management. Our
     responsibility is to express an opinion on these financial statements based on our audit. We report that:

     1.      Our audit was conducted in accordance with generally accepted Standards on Auditing in India.
             These Standards require that we plan and perform the audit to obtain reasonable assurance about
             whether the financial statements are free of material misstatements. An audit includes examining
             on a test basis, evidence supporting the amounts and disclosures in the financial statements. An
             audit also includes assessing the accounting principles used and significant estimates made by the
             Management, as well as evaluating the overall financial statement presentation. We believe that
             our audit provides a reasonable basis for our opinion.

     2.      We have obtained all information and explanations, which, to the best of our knowledge and belief
             were necessary for the purpose of our audit.

     3.      The Balance Sheet, the Revenue Account and the Cash Flow Statement are in agreement with the
             books of account of the Scheme.

     4.      In our opinion, valuation methods for Non Traded Securities, adopted by the scheme are fair and
             reasonable and are in accordance with the guidelines for valuation issued by SEBI and approved
             by the Trustees.

     5.      The accounts have been prepared in accordance with the accounting policies adopted by the
             trustees of the Fund and as specified in the Ninth Schedule to the SEBI (Mutual Funds)
             Regulations, 1996.

     6.      In our opinion and to the best of our information and according to the explanations given to us, the
             said accounts give the information required by the SEBI (Mutual Funds) Regulations, 1996 and
             give a true and fair view in accordance with the generally accepted accounting principles in India:

             a.   in the case of Balance Sheet, of the state of affairs of the scheme as at March 31, 2010;

             b.   in the case of Revenue Account, of the surplus of the scheme for the year ended on that date;
                  and

             c.   in the case of Cash Flow Statement, of the cash flows for the year ended on that date.


                                                                                         For N. M. Raiji & Co.
                                                                                        Chartered Accountants
                                                                                Firm Registration No. 108296W


                                                                                                          Sd/-
                                                                                               Vinay D. Balse
                                                                                                      Partner
                                                                                         Membership No. 39434
     Place : Mumbai
     Date : July 09, 2010




                                                         79
ANNUAL REPORT

                                                        PRINCIPAL MUTUAL FUND
                                                         PRINCIPAL INDEX FUND
                                                      Balance Sheet as at March 31, 2010


                                                                   Schedule             March 31, 2010                  March 31, 2009
                                                                                               Rupees                          Rupees
 LIABILITIES
 Unit Capital                                                                 1             66,809,365                     143,303,194
 Reserves & Surplus                                                           2            133,702,586                      79,822,090
 Current Liabilities and Provisions                                           3                900,391                      21,961,644
 Total                                                                                     201,412,342                     245,086,928

 ASSETS
 Investments                                                                  4            199,305,199                     221,264,283
 Deposits                                                                     5                631,095                      14,496,800
 Other Current Assets                                                         6              1,476,048                       9,325,845
 Total                                                                                     201,412,342                     245,086,928

 Significant Accounting Policies and Notes to Accounts                        8
 The Schedules form an integral part of the Financial Statements



 As per our report of even date attached.




 For N. M. Raiji & Co.                For and on behalf of Principal Pnb          For and on behalf of Principal
 Chartered Accountants                Asset Management Company Pvt. Ltd            Trustee Company Pvt. Ltd

 Sd/-                                 Sd/-                                        Sd/-                              Sd/-
 Vinay D. Balse                       M. M. Chitale                               B.G. Deshmukh                    H. M. Singh
 Partner                              Chairman                                    Chairman                         Director


                                      Sd/-                 Sd/-
 Place : Mumbai                       Rajan Ghotgalkar     Shyam Bhat
 Date : July 09, 2010                 Managing Director    Fund Manager




                                                                           80
ANNUAL REPORT

                                                           PRINCIPAL MUTUAL FUND
                                                            PRINCIPAL INDEX FUND
                                                  Revenue Account for the year ended March 31, 2010
                                                                           Schedule                     March 31, 2010                            March 31, 2009
                                                                                                               Rupees                                    Rupees

 INCOME

 Dividend                                                                                                       2,503,968                             13,938,777
 Interest and Discount Income                                                  7                                   33,403                                855,380
 Profit on Sale / Redemption of Investments (other than inter-scheme
 transfer / sale)                                                                                          25,494,352                                            -

 Total                                                                                                     28,031,723                                 14,794,157



 EXPENSES AND LOSSES


 Loss on Sale / Redemption of Investments (Other than inter-scheme
 transfer / sales)                                                                                                     -                           1,500,354,348
 Management Fees                                                                                                 846,036                               1,322,337
 Trusteeship Fees                                                                                                 23,045                                 127,830
 Agent's Commission                                                                                              133,470                              11,322,652
 Publicity & Marketing Expenses                                                                                   15,884                                 847,324
 Audit Fees                                                                                                        2,367                                   3,698
 Custodian's Fees and Expenses                                                                                    57,451                                 357,697
 Registrar's Fees and Expenses                                                                                   327,813                               1,738,422
 Other Operating Expenses                                                                                        523,990                               3,967,739

                                                                                                                1,930,056                          1,520,042,047
 Less: Excess of Expenditure Over Permissible Limit to be Recovered
 from AMC                                                                                                           -                                    (661,819)
 Total                                                                                                      1,930,056                               1,519,380,228
 Surplus / (Deficit) for the year                                                                          26,101,667                              (1,504,586,071)

 Net change in Unrealised gain / (loss) in the Value of Investments
 (Refer Note III(2) to Schedule 8)                                                                         99,890,702                                 (56,158,900)

 Net Surplus / (Deficit) including Net change in Unrealised Appreciation
 / (Depreciation) for the year                                                                            125,992,369                              (1,560,744,971)


 Appropriation

 Opening Balance                                                                                           86,420,175                                166,119,327
 Add: Net Surplus including Net change in Unrealised Appreciation /
 (Depreciation) for the year                                                                              125,992,369                              (1,560,744,971)
 Unrealised Appreciation in value of Investments as at the beginning of
 the year                                                                                                               -                                        -

 Unrealised Appreciation in value of Investments as at the end of year                                    (38,199,332)                                         -
 Add/(Less) : Income Equalisation                                                                         (66,293,780)                             2,324,316,707
 Dividend Distribution                                                                                              -                               (843,270,888)
 Dividend Tax                                                                                                       -                                          -
 Net Surplus Transferred to Balance Sheet                                                                 107,919,432                                 86,420,175

 Significant Accounting Policies and Notes to Accounts                         8

 The Schedules form an integral part of the Financial Statements

 As per our report of even date attached.

 For N. M. Raiji & Co.                                                     For and on behalf of Principal Pnb                   For and on behalf of Principal
 Chartered Accountants                                                     Asset Management Company Pvt. Ltd                     Trustee Company Pvt. Ltd

 Sd/-
 Vinay D. Balse                                                            Sd/-                                             Sd/-                  Sd/-
 Partner                                                                   M. M. Chitale                                    B.G. Deshmukh         H. M. Singh
                                                                           Chairman                                         Chairman              Director

                                                                           Sd/-                         Sd/-
 Place : Mumbai                                                            Rajan Ghotgalkar             Shyam Bhat
 Date : July 09, 2010                                                      Managing Director            Fund Manager




                                                                                           81
ANNUAL REPORT
                                                                              PRINCIPAL MUTUAL FUND
                                                                                PRINCIPAL INDEX FUND
                                                           Schedules forming part of the Financial Statements as at March 31, 2010
 SCHEDULE 1 - UNIT CAPITAL                                                                March 31, 2010                                                March 31, 2009
                                                                                  Units                       Rupees                           Units                            Rupees
 (A)       Growth Option
 Initial Capital Issued and Subscribed :
 Units of Rs. 10 each fully paid up                                       3,367,216.100                    33,672,161                  3,367,216.100                        33,672,161

 Outstanding :
 At the beginning of the year                                             5,479,880.731                    54,798,807                  4,329,661.616                        43,296,616
 Issued during the year                                                   3,545,247.500                    35,452,475                 10,041,151.115                       100,411,511
                                                                          9,025,128.231                    90,251,282                 14,370,812.731                       143,708,127
 Repurchased during the year                                              4,970,589.200                    49,705,892                  8,890,932.000                        88,909,320
 At the end of the year (A)                                               4,054,539.031                    40,545,390                  5,479,880.731                        54,798,807


 (B)       Dividend Option
 Initial Capital Issued and Subscribed :
 Units of Rs. 10 each fully paid up                                       3,390,851.926                    33,908,519                  3,390,851.926                        33,908,519

 Outstanding :
 At the beginning of the year                                             8,850,438.693                    88,504,387                  1,782,782.956                         17,827,830
 Issued during the year                                                     345,960.200                     3,459,602                240,080,748.444                      2,400,807,484
                                                                          9,196,398.893                    91,963,989                241,863,531.400                      2,418,635,314
 Repurchased during the year                                              6,570,001.400                    65,700,014                233,013,092.707                      2,330,130,927
 At the end of the year (B)                                               2,626,397.493                    26,263,975                  8,850,438.693                         88,504,387


 TOTAL (A+B)                                                              6,680,936.524                    66,809,365                 14,330,319.424                       143,303,194




 SCHEDULE 2 - RESERVES AND SURPLUS                                                                                                    March 31, 2010                     March 31, 2009
 UPR                                                                                                                                        Rupees                             Rupees

 Unit Premium Reserve
 At the beginning of the year                                                                                                             (6,598,085)                       (36,623,969)
 Net addition / (deduction) during the year                                                                                               (5,818,093)                        30,025,884
 At the end of the year                                                                                                                  (12,416,178)                        (6,598,085)


 Balance in Revenue Account                                                                                                             107,919,432                         86,420,175


 Unrealised Appreciation in value of Investments                                                                                          38,199,332                                  -

 Total                                                                                                                                  133,702,586                         79,822,090


 SCHEDULE 3 - CURRENT LIABILITIES AND
 PROVISIONS                                                                                                                           March 31, 2010                     March 31, 2009
                                                                                                                                            Rupees                             Rupees
 Contracts for Purchase of Investments                                                                                                             -                                  -
 Unit Repurchase Amount Payable                                                                                                             178,959                         16,670,018
 Registrar's Fees and Expenses                                                                                                               26,709                            103,882
 Custodian's Fees and Expenses                                                                                                                4,589                              9,106
 Inter Scheme Dues                                                                                                                          248,953                                   -
 Trusteeship Fees                                                                                                                             1,590                              3,411
 Audit Fees                                                                                                                                   2,367                              3,698
 Agent's Commission Payable                                                                                                                 207,089                            176,181
 Publicity and Marketing Expenses                                                                                                             1,337                              1,770
 Dividend and Dividend Tax Payable                                                                                                           37,837                                   -
 Other Current Liabilities                                                                                                                  190,961                          4,868,578
 Unit Capital Pending Allotment                                                                                                                    -                           125,000

                                                                                                                                            900,391                         21,961,644



 SCHEDULE 4 - INVESTMENTS                                                                                                             March 31, 2010                     March 31, 2009
 (Refer to attached statement of Portfolio holding as at
 March 31, 2010)                                                                                                                            Rupees                             Rupees
 Equity Shares                                                                                                                          199,305,199                        221,264,283

                                                                                                                                        199,305,199                        221,264,283




 SCHEDULE 5 - DEPOSITS                                                                                                                March 31, 2010                     March 31, 2009
                                                                                                                                            Rupees                             Rupees
 Collateralised Lending                                                                                                                     631,095                         14,496,800

                                                                                                                                            631,095                         14,496,800




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 SCHEDULE 6 - OTHER CURRENT ASSETS                                       March 31, 2010   March 31, 2009
                                                                               Rupees           Rupees
 Balances with Banks and Reserve Bank of India in Current Account              246,338          449,056
 Unit Subscription Receivable                                                    5,000          152,749
 Contract for Sale of Investment                                               699,197        7,972,904
 Outstanding and Accrued Income                                                 33,007           89,317
 Receivable from the Asset Management Company                                  492,506          661,819

                                                                             1,476,048        9,325,845




 SCHEDULE 7 - INTEREST & DISCOUNT INCOME                                 March 31, 2010   March 31, 2009
                                                                               Rupees           Rupees
 Collateralised Lending & Reverse Repo                                          35,405          754,088
 Others (net) - (Refer Note III(4) to Schedule 8)                               (2,002)         101,292
                                                                                33,403          855,380




                                                                    83
ANNUAL REPORT

                                                      PRINCIPAL MUTUAL FUND
                                                       PRINCIPAL INDEX FUND
                                         Cash Flow Statement For The Year Ended March 31, 2010

                                                                                                        March 31, 2010                   March 31, 2009
                                                                                                             Amount                           Amount
                                                                                                                 (Rs.)                            (Rs.)
 A. Cash flow from Operating Activities
    Surplus / (Deficit) for the year                                                                         26,101,667                   (1,504,586,071)
    Adjustments for:-
    (Increase)/Decrease in Investments (at cost)                                                            121,849,787                      (97,715,530)
    Decrease in Other Current Assets                                                                          7,499,330                       (1,692,579)
    Decrease in Current Liabilities                                                                          (4,731,985)                     (33,120,107)

    Net cash generated from / (used in) Operations                                        (a)               150,718,799                   (1,637,114,287)


 B. Cash flow from Financing Activities
    Increase/(Decrease) in Unit Capital                                                                     (76,493,829)                     82,178,748
    Increase/(Decrease) in Reserves                                                                         (72,111,873)                  2,354,342,591
    Adjustments for:-
    Increase/(Decrease) in Sundry Creditors for redeemed units and dividend                                 (16,204,269)                     13,808,770
    (Increase)/Decrease in Sundry Debtors for units issued                                                       22,749                      10,480,002
    Dividend paid during the year                                                                                     -                    (843,270,888)

    Net cash (used in) / generated from Financing Activities                              (b)              (164,787,222)                  1,617,539,223

    Net Decrease in Cash and Cash Equivalents                                           (a + b)             (14,068,423)                     (19,575,064)

    Cash and Cash Equivalents as at the :-
    Beginning of the year                                                                                    14,945,856                      34,520,920
    End of the year                                                                                             877,433                      14,945,856




    Note : Cash and Cash Equivalents includes the following :
            (1) Balances with Banks                                                                             246,338                         449,056
            (2) Collateralised Lending                                                                          631,095                      14,496,800




    The above cash flow statement has been prepared under the indirect method setout in Accounting Standard (AS-3) issued by the Institute of Chartered
    Accountants of India.

    As per our report of even date attached.




    For N. M. Raiji & Co.                       For and on behalf of Principal Pnb                For and on behalf of Principal
    Chartered Accountants                    Asset Management Company Pvt. Ltd                     Trustee Company Pvt. Ltd

    Sd/-                                           Sd/-                                           Sd/-                                      Sd/-
    Vinay D. Balse                                  M. M. Chitale                                 B.G. Deshmukh                             H. M. Singh
    Partner                                        Chairman                                       Chairman                                      Director


                                                  Sd/-                        Sd/-
    Place : Mumbai                             Rajan Ghotgalkar           Shyam Bhat
    Date : July 09, 2010                       Managing Director         Fund Manager




                                                                              84
ANNUAL REPORT




                                 PRINCIPAL MUTUAL FUND

                                   PRINCIPAL INDEX FUND

                                             SCHEDULE - 8

     SIGNIFICANT ACCOUNTING POLICIES AND NOTES TO ACCOUNTS FORMING PART OF
                                   ACCOUNTS

     I. BACKGROUND INFORMATION

        A. Organisation

        Principal Mutual Fund (formerly known as IDBI-PRINCIPAL Mutual Fund) has been constituted as a
        Trust in accordance with the provisions of the Indian Trusts Act, 1882 (2 of 1882). The Mutual Fund
        is registered with the Securities and Exchange Board of India (SEBI) under registration no.
        MF/019/94/0 dated December 13, 1994.

        The Fund was initially set up by Industrial Development Bank of India (IDBI) in 1994 by execution of
        a Trust Deed dated November 25, 1994, under which IDBI was the sole Settlor, Sponsor and Principal
        Trustee. Subsequently, on March 31, 2000, Principal Financial Services Inc. USA became the deemed
        sponsor along with IDBI by acquiring 50% stake in IDBI-PRINCIPAL Asset Management Company
        Limited. Pursuant to SEBI Letter dated October 18, 2002, the IDBI-PRINCIPAL Trustee Company
        Limited took over the trusteeship and the associated responsibilities and obligations of the IDBI-
        PRINCIPAL Mutual Fund. The Name of the Trustee Company was changed to Principal Trustee
        Company Limited w.e.f. June 27, 2003. The Name of the Trustee Company was changed to Principal
        Trustee Company Private Limited w.e.f. October 20, 2003.

        On June 23, 2003, Principal Financial Services Inc. USA, acquired a 100% stake in IDBI-PRINCIPAL
        Asset Management Company Limited, through its wholly owned subsidiary, Principal Financial
        Group (Mauritius) Limited. Accordingly, Principal Financial Services Inc. USA, became the Sole
        Sponsor of the Fund and Principal Financial Group (Mauritius) Limited has became the Sole Settlor
        of the Fund. The name of the Asset Management Company was changed to Principal Asset
        Management Company Limited w.e.f. June 27, 2003, and on October 20, 2003 was again changed to
        Principal Asset Management Company Private Limited (PAMC).

        On May 5, 2004, Punjab National Bank and Vijaya Bank acquired 30% stake and 5% stake
        respectively in Principal Asset Management Company Private Limited, as well as in Principal Trustee
        Company Private Limited and became the co-settlers to the Fund. The name of the Asset
        Management Company changed to Principal Pnb Asset Management Company Private Limited w.e.f
        January 24, 2005.

        B. Scheme

        Principal Index Fund is an open-ended scheme of Principal Mutual Fund and was launched on June
        16, 1999. The duration of the scheme is perpetual.

        The investment objective of the Scheme is to invest principally in securities that comprise S&P CNX
        Nifty (NSE) and subject to tracking errors endeavour to attain results commensurate with the Nifty.



                                                     85
ANNUAL REPORT




     II. SIGNIFICANT ACCOUNTING POLICIES

          1. Basis of Accounting

                   The scheme maintains books of account on an accrual basis.

          2. Investments

             2.1    Investment transactions are accounted on trade dates.

             2.2    The cost of investment includes brokerage, premium paid on acquisition, transaction
                    charges and other costs associated with purchase of investments.

             2.3    Bonus entitlements are recognized on ex-bonus dates.


          3. Portfolio Valuation

             3.1    Investments are valued on the Balance Sheet date as per the recommendations of
                    SEBI.

             3.2    Traded securities (excluding government securities and Treasury bills) are valued at
                    the last quoted closing price on the principal stock exchange on which the security is
                    traded.

             3.3    A security (other than debt securities), which is not traded on any stock exchange on
                    a particular valuation day, is valued at the price at which it was traded on the selected
                    stock exchange, as the case may be, on the earliest previous day, such day not being
                    more than thirty days prior to the valuation date.

             3.4    A debt security (other than government securities), which is not traded on any stock
                    exchange on any particular valuation day, is considered as ‘Non-Traded Security’.
                    A debt Security (other than government securities) is considered as ‘Thinly-Traded
                    Security’, if on the valuation date, there are no individual trades in that security in
                    marketable lots (presently Rs 5 Crore) on the principal stock exchange.

                    Investment in non-traded / thinly traded debt securities including securitised debt
                    (other than government securities) with a residual maturity greater than 182 days are
                    valued using CRISIL Bond Valuer, which is based on the concept of using spread
                    over Government Securities to arrive at yields for pricing.

             3.5    Investments in traded/non-traded/thinly traded government securities are valued at the
                    prices released by CRISIL, which is an approved agency recommended by the
                    Association of Mutual Funds of India (AMFI).

             3.6    Treasury bills are valued at cost plus the difference between the redemption value and
                    the cost, spread uniformly over the remaining maturity period of the instrument.
                    Treasury Bills listed on a recognised stock exchange are valued at the last quoted
                    weighted average yield, on the principal exchange on which the security is traded. If
                    no sale is reported at that date, Treasury Bills are valued at fair value, as determined



                                                   86
ANNUAL REPORT




                  in good faith by Principal Pnb Asset Management Company Private Limited, under
                  procedures approved by the Trustees of Principal Mutual Fund, in accordance with
                  the guidelines for valuation of securities for mutual funds issued by SEBI.

           3.7    Money Market securities and non-traded debt securities, with residual maturity of
                  upto 182 days, are valued at cost (including accrued interest), plus the difference
                  between the redemption value (inclusive of interest) and the cost, spread uniformly
                  over the remaining maturity period of the instrument.

           3.8    Thinly traded Equity shares /Equity related securities/non-traded securities (other
                  than Government Securities) are valued in good faith by the investment manager, on
                  the basis of valuation principles laid down by SEBI.

           3.9    Investment in non-traded debt securities, including securitised debt (other than
                  government securities) with a residual maturity greater than 182 days, are valued
                  using CRISIL Bond Valuer, which is based on the concept of using spread to maturity
                  to arrive at the yields for pricing.

           3.10   Securities in the nature of Floating Rate Notes (FRN) are valued at cost plus the
                  difference between the redemption value and the cost, spread uniformly over the
                  remaining maturity period of the instrument. FRNs listed on a recognised stock
                  exchange are valued at the last quoted closing price on the principal exchange, on
                  which the security is traded. If no sale is reported at that date FRNs are valued at fair
                  value, as determined in good faith by Principal Pnb Asset Management Company
                  Private Limited, under procedures approved by the Trustees of Principal Mutual
                  Fund, in accordance with the guidelines for valuation of securities for mutual funds
                  issued by SEBI.

           3.11   Securitised Debt are valued at fair value, as determined in good faith by Principal Pnb
                  Asset Management Company Private Limited, under procedures approved by the
                  Trustees of Principal Mutual Fund, in accordance with the guidelines for valuation of
                  securities for mutual funds issued by SEBI.

           3.12   Interest Rate Swaps with a maturity period of more than 182 days are marked to
                  market by recording the net present values of the difference in outflows and inflows
                  as unrealised appreciation / depreciation. Interest Rate Swaps with a maturity of 182
                  days and less are amortised over the balance contracted period.

           3.13   Investments in Call money, bills purchased under re-discounting scheme and term
                  deposits with banks are valued at cost plus accruals.

           3.14   An investment is regarded as non-performing if the interest and /or principal amount
                  has not been received or remains outstanding for one quarter from the day such
                  income or installment has fallen due.

           3.15   Appreciation/Depreciation, as the case may be, in the value of securities at the year-
                  end is computed for the scheme, whereby the aggregate market value of all securities
                  taken together is compared with the aggregate cost of acquisition. Such net balance is
                  charged to Revenue Account.

           3.16   The above policies are followed as and when applicable.



                                                 87
ANNUAL REPORT




         4. Income Recognition

            4.1     Dividend income is accrued on ex-dividend date.

            4.2     Profit or loss on sale of investments is arrived at by applying weighted average cost
                    on trade date.

            4.3     Interest on debentures and other fixed income investments is recognized on accrual
                    basis.

            4.4     In respect of Interest Rate Swaps, interest expense and income are accrued on a net
                    basis daily.

            4.5     Income on non-performing assets (NPA) is recognized on cash basis.

         5. Management Fees

            Investment Management fees payable to Principal Pnb Asset Management Co. Pvt. Ltd. is
            computed on the basis of Average Daily Net Assets Value.

         6. Income Equalisation Reserve and Unit Premium Reserve

            a.       Upto March 14, 2010, upon purchase/sale of units by the Scheme, an appropriate part
            of the purchase / sale price was credited / debited to the Income Equalisation Reserve
            Account. The balance amount of the purchase/sale price after reducing the face value was
            transferred to Unit Premium Reserve Account.

            b.      With effect from March 15, 2010, pursuant to the issue of SEBI circular no.
            SEBI/IMD/CIR no 18/198647/2010 dated March 15, 2010, upon purchase/sale of units by the
            Scheme, where the purchase/sale price is higher than the face value per unit, the amount
            representing unrealized gain and balance in the Unit Premium Reserve Account is
            credited/debited to Unit Premium Reserve Account. The balance amount of the purchase/sale
            price after reducing the face value is transferred to Income Equalization Reserve Account.
            Upon purchase/sale of units by the Scheme, where the purchase/sale price is lower than the
            face value per unit, the difference between the sale price and face value is debited to Income
            Equalization Reserve Account. Distributable surplus is arrived at after excluding unrealized
            gains. Balance lying to the credit of Unit Premium Reserve Account is not considered for the
            purpose of dividend distribution. Where the Unit Premium Reserve has a debit balance, the
            excess thereof over the unrealized gain is also deducted in arriving at the distributable surplus.

            c.     The balance in Income Equalization Reserve Account is transferred to the Revenue
            Account at the end of the year.




                                                    88
ANNUAL REPORT




         7. Provisions

            (i) In the case of interest accrued on investments, provision is made in respect of amounts
            which have not been received for a period of 3 months beyond the due date. No further
            accrual of income is made in respect of such investments.

            (ii) Provision is made in respect of the principal amount of securities, in accordance with
            valuation principles laid down by SEBI.

            (iii) Provision is made in respect of accrued dividend, which has not been received for a
            period of twelve months beyond the due date.

         8. Entry and Exit Load

            a) Upto July 31, 2009 load charged at the time of purchase/sale of units was utilized for
               incurring distribution and marketing expenses. Out of the residual amount, amounts
               considered to be in excess of future requirements by the Trustees were recognized as
               income, and the residual amount was carried forward into the next year.

            b) With effect from August 1, 2009 In accordance with the SEBI circular dated June 30, 2009:

               i) No entry load is charged on fresh purchase applications received after August 1, 2009
               (except on SIPs registered prior to August 1, 2009 which is utilised for incurring
               distribution and marketing expenses. Out of the residual amount, amounts considered to be
               in excess of future requirements by the Trustees are recognized as income, and the residual
               amount carried forward into the next year Load Charges).
               ii) Exit load charged in excess of 1% is recognized as income of the scheme immediately.
               iii) Exit load charged upto 1% is parked in a Liability Account, which is utilized for
               incurring distribution and marketing expenses. Out of the residual amount, amounts
               considered to be in excess of future requirements by the Trustees are recognized as
               income, and the residual amount carried forward into the next year.




                                                   89
ANNUAL REPORT
      III   NOTES TO ACCOUNTS

      1     The scheme has growth and dividend options. A combined Balance sheet, Revenue Account and Cash Flow are prepared for the scheme.

      2     The Cost and Market Value / Fair Value of investments are given below:

                                                                                                                                                                                                     (Rs. In Lacs)
                                                                                                                                                                       Net Appreciation / (Depreciation) in value
                                                                                   Cost / Amortised cost                        Market Value / Fair Value
                                                                                                                                                                                   of investments
             Investments                                                  March 31, 2010          March 31, 2009          March 31, 2010          March 31, 2009          March 31, 2010       March 31, 2009
 INDEX6      Equity Shares                                                         1,611.06                2,829.56                1,993.05                2,212.64                  381.99             (616.91)
             TOTAL                                                                 1,611.06                2,829.56                1,993.05                2,212.64                  381.99             (616.91)

            Net Change in unrealised appreciation in the value of investment for the year ended March 31, 2010 is Rs. 998.91 Lacs

      3     The industry-wise 'Statement of Portfolio Holding' as on March 31, 2010 (Referred to in Schedule 4 to the Balance Sheet) is given in Annexure I.

      4     Interest and Discount - Others (Net) includes amounts received from and paid to other schemes of the Fund on account of delay in the movement of unit subscription application
            money of one scheme residing in the other scheme, calculated for the period of the delay on the basis of the prevailing CBLO rates.


      5     The aggregate book value and fair value of non traded / thinly traded investments, which have been valued in good faith in accordance with the guidelines for valuation of
            securities for Mutual Funds issued by SEBI, is Rs Nil (Previous Year: Rs Nil)

      6     Net Asset Value per unit of various options are as under:


             Name of the Option                                           March 31, 2010          March 31, 2009
             Growth                                                                   35.82                   20.90
             Dividend                                                                 21.04                   12.27


      7     Aggregate value of Purchases and Sales made during the year, expressed as a percentage of Average Daily Net Asset Value, are as under:

                                                                                           Purchases                                      Sales *

                                                                        Amount (Rs. In lacs) % of Avg. Net Assets Amount (Rs. In lacs) % of Avg. Net Assets
                                 March 31, 2010                                    5,561.31                241.33           7,173.71                 311.30
                                 March 31, 2009                                  63,223.55                 493.67          47,243.43                 368.89
            * Sales includes redemptions / maturities

      8     Contracts for sale pending deliveries as on March 31, 2010, amounting to Rs. 6.99 lacs (Previous Year : Rs. 79.73 Lacs) have been excluded from the
            Investments.

      9     Details of Management Fees paid to Principal Pnb Asset Management Co. Pvt. Ltd. and its computation thereof:
                                                                                                                          (Rs. In Lacs)
                                                                                                                 % of Management
                                                                        Average Daily Net                        Fee to Average Net
                                                                        Asset Value           Management Fees    Asset Value
                                March 31, 2010                                       2,304.47               8.46                   0.37
                                March 31, 2009                                      12,806.93              13.22                   0.10

      10    As per the requirement of Regulation 25(11) of SEBI (Mutual Fund) Regulations, 1996, details of Investments made by the Fund in companies, where
            the companies' investments in any of Principal Mutual Fund schemes exceeds 5% of the scheme's Net Asset Value, is given in Annexure II.


      11    Total Income and Recurring Expenditure for the year expressed as a percentage of Average Daily Net Asset Value:


                                                                    (As a % of Average Daily Net Asset Value)
                                                                                         Recurring
                                                                        Income           Expenditure
                               March 31, 2010                                      12.16                 0.84
                               March 31, 2009                                       1.16                 1.49
            Income / Expenditure excludes appreciation/depreciation on investment.

      12    Particulars of Unclaimed Dividends and Unclaimed Redemptions are as under:

                                                                                   Unclaimed Dividends                           Unclaimed Redemptions

                                                                        No. of Investors        Amount (Rs. In lacs) No. of Investors          Amount (Rs. In lacs)
                                 March 31, 2010                                              7                   0.38                        7                 1.04
                                 March 31, 2009                                               -                      -                       6                 0.97
            Note : For want of relevant information from banks, in respect of dividends and redemptions effected through DDs, the liability for unencashed and
            expired DDs (if any) and the corresponding bank balance for the same may not have been accounted in the books.


      13    Disclosure as per SEBI circular MFD/CIR No. 3/211/2001 dated April 30, 2001 :
            The Scheme does not have a single unitholder holding more than 25% of the NAV as on March 31, 2010.

      14    The Scheme has entered into transactions with certain related parties. The information required in this regard in accordance with Accounting Standard 18
            on 'Related Party Disclosures' issued by The Institute of Chartered Accountants of India (ICAI) and Regulation 25(8) of the SEBI (Mutual Funds)
            Regulations, 1996, are as under :




                                                                                                       90
ANNUAL REPORT

   (i)    Related Party relationships

          Name                                                     Description of relationship
          Principal Financial Services Inc., USA                   Sponsor of the Fund
          Principal Trustee Company Private Ltd.                   Trustee of the Fund

          Principal Pnb Asset Management Company Private Ltd.      Subsidiary of the Sponsor and the Scheme's asset manager

          Pnb Principal Insurance Broking Private Limited          Subsidiary of the Sponsor
          Principal Consulting (India) Private Limited             Subsidiary of the Sponsor

          Pnb Principal Financial Planners Private Limited         Subsidiary of the Sponsor
          Principal Pnb Life Insurance Company Limited             Subsidiary of the Sponsor
          Principal Financial Group (Mauritius) Limited            A Company holding substantial interest in the share capital of the
                                                                   Scheme's asset manager
          Punjab National Bank                                     A Company holding substantial interest in the share capital of the
                                                                   Scheme's asset manager
          PNB Gilts Limited                                        Subsidiary of Punjab National Bank
          PNB Housing Finance Limited                              Subsidiary of Punjab National Bank

          Schemes of the Fund under common control of the
          Sponsor

          Principal Child Benefit Fund                             Principal Long Term Equity Fund 3 Year Plan Series II
          Principal Pnb FMP 385 Days Series XI                     Principal Monthly Income Plan
          Principal Pnb FMP 540 Days Series IV                     Principal Monthly Income Plan - MIP Plus
          Principal Floating Rate Fund - Flexible Maturity Plan    Principal Balanced Fund
          Principal Floating Rate Fund - Short Maturity Plan       Principal Dividend Yield Fund
          Principal Govt. Securities Fund - Investment Plan        Principal Emerging Bluechip Fund
          Principal Global Opportunities Fund                      Principal Money Manager Fund
          Principal Growth Fund                                    Principal Personal Tax Saver Fund
          Principal Income Fund                                    Principal Resurgent India Equity Fund
          Principal Index Fund                                     Principal Income Fund - Short Term Plan
          Principal Services Industries Fund                       Principal Tax Savings Fund
          Principal Large Cap Fund                                 Principal Junior Cap Fund
          Principal Ultra Short Term Fund                          Principal Govt. Securities Fund - Saving Plan
          Principal Cash Management Fund - Liquid Option           Principal Pnb Fixed Duration Fund 3 Year Plan Series I
          Principal Long Term Equity Fund                          Principal Pnb FMP 460 Days Series IV
          Principal Pnb FMP 540 Days Series II                     Principal Pnb FMP 385 Days Series VIII
          Principal Pnb FMP 385 Days Series VII                    Principal Pnb FMP 385 Days Series IX



   (ii)   Transactions, if any, with the above mentioned related parties, as defined under Accounting Standard 18 and Regulation 25(8) of the SEBI Regulations
          are given below:


                                                                                                                                                                          (Rs. In Lacs)
          Name of the Related Party                                Nature of                For the year ended Outstanding as at               For the year ended Outstanding as at
                                                                   Transactions              March 31, 2010    March 31, 2010                   March 31, 2009    March 31, 2009

                                                                   Fees for Trusteeship
          Principal Trustee Company Private Ltd.                                                              0.23                      0.02                  1.28                0.03
                                                                   Services



          Principal Pnb Asset Management Company Private Ltd.      Fees for Management                        8.46                         -                 13.22                 -
                                                                   Services

                                                                   Investor
          Principal Consulting (India) Private Limited.            Communication                              2.47                         -                 17.90                0.48
                                                                   Service Fees



          Punjab National Bank                                     Bank Charges                                    -                       -                  0.01                 -


          Investments in Schemes of Mutual Fund by related
          parties


          Principal Pnb Asset Management Company Private Ltd.      Purchase                                        -                                         55.00
                                                                   Sale                                            -                                        101.02
                                                                   Holding as at March
                                                                                                                                           -                                       -
                                                                   31

          Investment in Associates by the Scheme
          Larsen & Toubro Limited                                  Purchase                               163.16                                         1,588.75
                                                                   Sale/Redemption                        136.74                                           926.72
                                                                   Holding as at March
                                                                                                                                  128.40                                         45.03
                                                                   31


          Punjab National Bank                                     Purchase                                 6.40                                           344.72
                                                                   Sale/Redemption                         19.01                                           323.64
                                                                   Holding as at March
                                                                                                                                   18.21                                         15.03
                                                                   31




                                                                                                  91
ANNUAL REPORT




    (iii)      Commission Paid to Associates / Related Parties / Group Companies of Sponsor AMC



                                                                                                                        % of Commission                             % of Business Given
                                                                                                   Commission Paid                              Business Given (Rs.
               Name of the Associates                                          Period covered                           paid to total                               to total Business
                                                                                                   (Rs)                                         In Crores)
                                                                                                                        Commission paid                             Received



               Punjab National Bank                                            FY 2009-10                    9,767.49                   0.67%                    0.04                0.33%
                                                                               FY 2008-09                   25,693.34                   0.07%                    0.10                0.02%

               Note: Commission paid to associates has been disclosed on payment basis and business given indicates Gross Mobilisation (net of rejections, if any)
                     during the corresponding period for which the commission paid has been disclosed.

    15         Commission to Agents and Publicity expenses amounting to Rs 11.87 Lacs (Previous Year : 317.29 lacs) are utilised from load collected.

    16         As per the disclosure requirement under Accounting Standard 17 on 'Segment Reporting' issued by ICAI, the Scheme operates only in one segment, viz, primarily generate returns, based on the
               Scheme's Investment Objectives.

    17         The historical per unit statistics are given in Annexure III.

    18         Previous Year's figures have been regrouped and reclassified, wherever necessary, to make them comparable.

    19         'Rs. 0.00' indicates amount less than a lac and 'Rs. -' indicates Nil amount.



     As per our report of even date attached.

     For N. M. Raiji & Co.                                                     For and on behalf of Principal Pnb                               For and on behalf of Principal
     Chartered Accountants                                                     Asset Management Company Pvt. Ltd                                 Trustee Company Pvt. Ltd

     Sd/-                                                                      Sd/-                                                             Sd/-                                         Sd/-
     Vinay D. Balse                                                            M. M. Chitale                                                    B.G. Deshmukh                                H. M. Singh
     Partner                                                                   Chairman                                                         Chairman                                     Director


                                                                               Sd/-                Sd/-
     Place : Mumbai                                                            Rajan Ghotgalkar    Shyam Bhat
     Date: July 09, 2010                                                       Managing Director   Fund Manager




                                                                                                      92
ANNUAL REPORT




          PRINCIPAL LARGE CAP FUND




                     93
ANNUAL REPORT


                                              AUDITORS’ REPORT


     TO THE TRUSTEE OF
     PRINCIPAL MUTUAL FUND

     We have audited the attached Balance Sheet as at March 31, 2010, the Revenue Account and the Cash
     Flow Statement for the year ended on that date, annexed thereto of Principal Large Cap Fund (the
     scheme) of the Principal Mutual Fund. These financial statements are the responsibility of the
     Management. Our responsibility is to express an opinion on these financial statements based on our audit.
     We report that:

     1.      Our audit was conducted in accordance with generally accepted Standards on Auditing in India.
             These Standards require that we plan and perform the audit to obtain reasonable assurance about
             whether the financial statements are free of material misstatements. An audit includes examining
             on a test basis, evidence supporting the amounts and disclosures in the financial statements. An
             audit also includes assessing the accounting principles used and significant estimates made by the
             Management, as well as evaluating the overall financial statement presentation. We believe that
             our audit provides a reasonable basis for our opinion.

     2.      We have obtained all information and explanations, which, to the best of our knowledge and belief
             were necessary for the purpose of our audit.

     3.      The Balance Sheet, the Revenue Account and the Cash Flow Statement are in agreement with the
             books of account of the Scheme.

     4.      In our opinion, valuation methods for Non Traded Securities, adopted by the scheme are fair and
             reasonable and are in accordance with the guidelines for valuation issued by SEBI and approved
             by the Trustees.

     5.      The accounts have been prepared in accordance with the accounting policies adopted by the
             trustees of the Fund and as specified in the Ninth Schedule to the SEBI (Mutual Funds)
             Regulations, 1996.

     6.      In our opinion and to the best of our information and according to the explanations given to us, the
             said accounts give the information required by the SEBI (Mutual Funds) Regulations, 1996 and
             give a true and fair view in accordance with the generally accepted accounting principles in India:

             a.   in the case of Balance Sheet, of the state of affairs of the scheme as at March 31, 2010;

             b.   in the case of Revenue Account, of the surplus of the scheme for the year ended on that date;
                  and

             c.   in the case of Cash Flow Statement, of the cash flows for the year ended on that date.

                                                                                         For N. M. Raiji & Co.
                                                                                        Chartered Accountants
                                                                                Firm Registration No. 108296W


                                                                                                          Sd/-
                                                                                               Vinay D. Balse
                                                                                                      Partner
                                                                                         Membership No. 39434
     Place : Mumbai
     Date : July 09, 2010




                                                         94
ANNUAL REPORT

                                                        PRINCIPAL MUTUAL FUND
                                                       PRINCIPAL LARGE CAP FUND
                                                      Balance Sheet as at March 31, 2010


                                                                    Schedule            March 31, 2010                  March 31, 2009
                                                                                               Rupees                          Rupees
 LIABILITIES
 Unit Capital                                                          1                   2,132,147,380                 2,230,590,530
 Reserves & Surplus                                                    2                   2,618,561,744                   415,601,416
 Current Liabilities and Provisions                                    3                      47,363,850                   114,125,635
 TOTAL                                                                                     4,798,072,974                 2,760,317,581

 ASSETS
 Investments                                                           4                   4,613,580,317                 2,569,287,754
 Deposits                                                              5                      99,778,741                    88,981,137
 Other Current Assets                                                  6                      84,713,916                   102,048,690
 Deferred Revenue Expenditure - not written off                        8                               -                             -
 Total                                                                                     4,798,072,974                 2,760,317,581

 Significant Accounting Policies and Notes to Accounts                 9
 The Schedules form an integral part of the Financial Statements



 As per our report of even date attached.




 For N. M. Raiji & Co.                For and on behalf of Principal Pnb         For and on behalf of Principal
 Chartered Accountants                Asset Management Company Pvt. Ltd           Trustee Company Pvt. Ltd

 Sd/-                                 Sd/-                                       Sd/-                             Sd/-
 Vinay D. Balse                       M. M. Chitale                              B.G. Deshmukh                     H. M. Singh
 Partner                              Chairman                                   Chairman                         Director


                                      Sd/-                 Sd/-
 Place : Mumbai                       Rajan Ghotgalkar     Rajat Jain
 Date : July 09, 2010                 Managing Director    Fund Manager




                                                                           95
ANNUAL REPORT

                                                               PRINCIPAL MUTUAL FUND
                                                              PRINCIPAL LARGE CAP FUND
                                                      Revenue Account for the year ended March 31, 2010
                                                                              Schedule                         March 31, 2010                              March 31, 2009
                                                                                                                      Rupees                                      Rupees

 INCOME

 Dividend                                                                                                            59,386,193                                42,128,865
 Interest and Discount Income                                                     7                                   8,166,390                                 9,817,343
 Profit on Sale / Redemption of Investments (other than inter-scheme
 transfer / sale)                                                                                                   804,674,518                                           -
 Other Income (Refer Note III(16) to Schedule 9)                                                                          4,118                                          49

 Total                                                                                                              872,231,219                                51,946,257



 EXPENSES AND LOSSES


 Loss on Sale / Redemption of Investments (Other than inter-scheme
 transfer / sales)                                                                                                            -                             1,153,970,291
 Loss on inter-scheme transfer / sale of investments                                                                          -                                 1,889,430
 Management Fees                                                                                                     37,975,069                                17,858,095
 Trusteeship Fees                                                                                                       413,759                                   306,222
 Agent's Commission                                                                                                  16,764,005                                29,103,025
 Publicity & Marketing Expenses                                                                                      16,334,175                                 4,204,794
 Audit Fees                                                                                                             149,012                                   192,527
 Custodian's Fees and Expenses                                                                                          992,707                                   831,522
 Registrar's Fees and Expenses                                                                                        6,758,014                                 4,349,589
 Other Operating Expenses                                                                                            15,423,663                                14,457,145
 Deferred Revenue Expenditure written off                                                                                     -                                11,609,227

 Total                                                                                                               94,810,404                              1,238,771,867
 Surplus / (Deficit) for the year                                                                                   777,420,815                             (1,186,825,610)

 Net change in Unrealised gain / (loss) in the Value of Investments (Refer
 Note III(2) to Schedule 9)                                                                                        1,775,297,949                             (202,914,788)

 Net Surplus / (Deficit) including Net change in Unrealised Appreciation /
 (Depreciation) for the year                                                                                       2,552,718,764                            (1,389,740,398)


 Appropriation

 Opening Balance                                                                                                    659,865,140                             1,877,120,358
 Add: Net Surplus including Net change in Unrealised Appreciation /
 (Depreciation) for the year                                                                                       2,552,718,764                            (1,389,740,398)
 Unrealised Appreciation in value of Investments as at the beginning of the
 year                                                                                                                          -                                          -

 Unrealised Appreciation in value of Investments as at the end of year                                              (994,157,311)                                       -
 Add/(Less) : Income Equalisation                                                                                   (362,057,929)                             172,485,180
 Dividend Distribution                                                                                              (235,928,343)                                       -
 Dividend Tax                                                                                                                  -                                        -
 Net Surplus Transferred to Balance Sheet                                                                          1,620,440,321                              659,865,140

 Significant Accounting Policies and Notes to Accounts                            9

 The Schedules form an integral part of the Financial Statements

 As per our report of even date attached.

 For N. M. Raiji & Co.                                                        For and on behalf of Principal Pnb                        For and on behalf of Principal
 Chartered Accountants                                                        Asset Management Company Pvt. Ltd                          Trustee Company Pvt. Ltd

 Sd/-
 Vinay D. Balse                                                               Sd/-                                                  Sd/-                  Sd/-
 Partner                                                                      M. M. Chitale                                         B.G. Deshmukh         H. M. Singh
                                                                              Chairman                                              Chairman              Director

                                                                              Sd/-                          Sd/-
 Place : Mumbai                                                               Rajan Ghotgalkar              Rajat Jain
 Date : July 09, 2010                                                         Managing Director             Fund Manager




                                                                                              96
ANNUAL REPORT
                                                                              PRINCIPAL MUTUAL FUND
                                                                             PRINCIPAL LARGE CAP FUND
                                                           Schedules forming part of the Financial Statements as at 31 March, 2010
 SCHEDULE 1 - UNIT CAPITAL                                                               March 31, 2010                                                 March 31, 2009
                                                                                 Units                          Rupees                         Units                            Rupees
 (A)       Growth Option
 Initial Capital Issued and Subscribed :
 Units of Rs. 10 each fully paid up                                    140,251,935.917                    1,402,519,359              140,251,935.917                      1,402,519,359

 Outstanding :
 At the beginning of the year                                          108,377,431.243                    1,083,774,312               89,750,076.018                        897,500,760
 Issued during the year                                                 68,827,703.000                      688,277,030               49,363,275.985                        493,632,760
                                                                       177,205,134.243                    1,772,051,342              139,113,352.003                      1,391,133,520
 Repurchased during the year                                            81,557,358.700                      815,573,587               30,735,920.760                        307,359,208
 At the end of the year (A)                                             95,647,775.543                      956,477,755              108,377,431.243                      1,083,774,312


 (B)       Dividend Option
 Initial Capital Issued and Subscribed :
 Units of Rs. 10 each fully paid up                                    214,829,713.430                    2,148,297,134              214,829,713.430                      2,148,297,134

 Outstanding :
 At the beginning of the year                                          114,681,621.800                    1,146,816,218              109,870,197.600                      1,098,701,976
 Issued during the year                                                 59,250,535.800                      592,505,358               20,858,999.100                        208,589,991
                                                                       173,932,157.600                    1,739,321,576              130,729,196.700                      1,307,291,967
 Repurchased during the year                                            56,365,195.100                      563,651,951               16,047,574.900                        160,475,749
 At the end of the year (B)                                            117,566,962.500                    1,175,669,625              114,681,621.800                      1,146,816,218




 TOTAL (A+B)                                                           213,214,738.043                    2,132,147,380              223,059,053.043                      2,230,590,530




 SCHEDULE 2 - RESERVES AND SURPLUS                                                                                                    March 31, 2010                     March 31, 2009
 UPR                                                                                                                                        Rupees                             Rupees

 Unit Premium Reserve
 At the beginning of the year                                                                                                           (244,263,724)                      (242,533,716)
 Net addition / (deduction) during the year                                                                                              248,227,836                         (1,730,008)
 At the end of the year                                                                                                                    3,964,112                       (244,263,724)


 Balance in Revenue Account                                                                                                            1,620,440,321                       659,865,140


 Unrealised Appreciation in value of Investments                                                                                        994,157,311                                   -

 Total                                                                                                                                 2,618,561,744                       415,601,416


 SCHEDULE 3 - CURRENT LIABILITIES AND
 PROVISIONS                                                                                                                           March 31, 2010                     March 31, 2009
                                                                                                                                            Rupees                             Rupees
 Contracts for Purchase of Investments                                                                                                             -                        94,244,406
 Unit Repurchase Amount Payable                                                                                                          17,836,904                          8,804,228
 Registrar's Fees and Expenses                                                                                                              766,420                            755,351
 Custodian's Fees and Expenses                                                                                                              100,312                             55,142
 Management Fees                                                                                                                          7,054,307                                   -
 Trusteeship Fees                                                                                                                            34,696                             20,521
 Audit Fees                                                                                                                                 149,012                            192,527
 Agent's Commission Payable                                                                                                               9,602,063                          4,873,052
 Publicity and Marketing Expenses                                                                                                           765,533                            101,084
 Dividend and Dividend Tax Payable                                                                                                        4,134,814                          2,114,508
 Other Current Liabilities                                                                                                                6,882,279                          2,891,316
 Unit Capital Pending Allotment                                                                                                              37,510                             73,500

                                                                                                                                         47,363,850                        114,125,635


 SCHEDULE 4 - INVESTMENTS                                                                                                             March 31, 2010                     March 31, 2009
 (Refer to attached statement of Portfolio holding as at
 March 31, 2010)                                                                                                                             Rupees                             Rupees
 Debentures and Bonds Unlisted / Privately Placed                                                                                         21,330,924                         33,500,000
 Mutual Fund Units                                                                                                                                 -                            100,018
 Equity Shares                                                                                                                         4,592,249,393                      2,535,687,736

                                                                                                                                       4,613,580,317                      2,569,287,754


 SCHEDULE 5 - DEPOSITS                                                                                                                March 31, 2010                     March 31, 2009
                                                                                                                                            Rupees                             Rupees
 Collateralised Lending                                                                                                                  99,778,741                         88,981,137

                                                                                                                                          99,778,741                        88,981,137




                                                                                                   97
ANNUAL REPORT




  SCHEDULE 6 - OTHER CURRENT ASSETS                                       March 31, 2010   March 31, 2009
                                                                                Rupees           Rupees
  Balances with Banks and Reserve Bank of India in Current Account           30,267,766        5,137,951
  Unit Subscription Receivable                                               35,307,027       18,008,323
  Contract for Sale of Investment                                             9,541,100       78,334,956
  Outstanding and Accrued Income                                              2,117,227          567,460
  Inter-Scheme Dues                                                           7,435,330                 -
  Receivable from the Asset Management Company                                   45,466                 -

                                                                             84,713,916      102,048,690




  SCHEDULE 7 - INTEREST & DISCOUNT INCOME                                 March 31, 2010   March 31, 2009
                                                                                Rupees           Rupees
  Debentures/Bonds                                                            4,239,263        3,743,753
  Government Securites / Treasury Bills                                                -          91,556
  Commercial Paper / Certificate of Deposits / Usance Bills                            -       2,128,915
  Collateralised Lending & Reverse Repo                                       3,925,127        3,834,648
  Others (net) - (Refer Note III(4) to Schedule 9)                                2,000           18,471
                                                                              8,166,390        9,817,343




  SCHEDULE 8 - DEFERRED REVENUE EXPENDITURE                               March 31, 2010   March 31, 2009
                                                                                Rupees           Rupees

  At the beginning of the year                                                        -       11,609,227

  Amount amortised during the year                                                    -       (11,609,227)

  At the end of the year                                                              -                 -




                                                                     98
ANNUAL REPORT

                                                     PRINCIPAL MUTUAL FUND
                                                   PRINCIPAL LARGE CAP FUND
                                        Cash Flow Statement For The Year Ended March 31, 2010

                                                                                                        March 31, 2010                   March 31, 2009
                                                                                                             Amount                           Amount
                                                                                                                 (Rs.)                            (Rs.)
 A. Cash flow from Operating Activities
    Surplus / (Deficit) for the year                                                                       777,420,815                   (1,186,825,610)
    Add: Deferred Revenue Expenditure amortised (Non-cash)                                                           -                       11,609,227
    Surplus before adjustments                                                                             777,420,815                   (1,175,216,383)
    Adjustments for:-
    (Increase)/Decrease in Investments (at cost)                                                           (268,994,613)                    792,802,628
    (Increase)/Decrease in Other Current Assets                                                              67,198,623                     (55,548,350)
    Decrease in Current Liabilities                                                                         (77,778,777)                    (31,750,239)

    Net cash generated from / (used in) Operations                                        (a)              497,846,048                     (469,712,344)


 B. Cash flow from Financing Activities
    Increase/(Decrease) in Unit Capital                                                                     (98,443,150)                    234,387,794
    Decrease in Reserves                                                                                   (113,830,093)                    170,755,172
    Adjustments for:-
    Increase in Sundry Creditors for redeemed units and dividend                                             11,052,982                       6,261,582
    (Increase)/Decrease in Sundry Debtors for units issued                                                  (24,770,024)                    125,251,010
    Dividend paid during the year                                                                          (235,928,343)                              -

    Net cash (used in) / generated from Financing Activities                              (b)              (461,918,628)                    536,655,558

    Net Increase in Cash and Cash Equivalents                                           (a + b)              35,927,420                      66,943,214

    Cash and Cash Equivalents as at the :-
    Beginning of the year                                                                                   94,119,088                       27,175,874
    End of the year                                                                                        130,046,508                       94,119,088




    Note : Cash and Cash Equivalents includes the following :
            (1) Balances with Banks                                                                          30,267,766                       5,137,951
            (2) Collateralised Lending                                                                       99,778,741                      88,981,137




    The above cash flow statement has been prepared under the indirect method setout in Accounting Standard (AS-3) issued by the Institute of Chartered
    Accountants of India.

    As per our report of even date attached.




    For N. M. Raiji & Co.                       For and on behalf of Principal Pnb                For and on behalf of Principal
    Chartered Accountants                    Asset Management Company Pvt. Ltd                     Trustee Company Pvt. Ltd

    Sd/-                                         Sd/-                                             Sd/-                                      Sd/-
    Vinay D. Balse                              M. M. Chitale                                     B.G. Deshmukh                             H. M. Singh
    Partner                                     Chairman                                          Chairman                                      Director


                                                 Sd/-                         Sd/-
    Place : Mumbai                            Rajan Ghotgalkar            Rajat Jain
    Date : July 09, 2010                      Managing Director          Fund Manager




                                                                            99
ANNUAL REPORT




                                 PRINCIPAL MUTUAL FUND

                               PRINCIPAL LARGE CAP FUND

                                             SCHEDULE - 9

     SIGNIFICANT ACCOUNTING POLICIES AND NOTES TO ACCOUNTS FORMING PART OF
                                   ACCOUNTS

     I. BACKGROUND INFORMATION

        A. Organisation

        Principal Mutual Fund (formerly known as IDBI-PRINCIPAL Mutual Fund) has been constituted as a
        Trust in accordance with the provisions of the Indian Trusts Act, 1882 (2 of 1882). The Mutual Fund
        is registered with the Securities and Exchange Board of India (SEBI) under registration no.
        MF/019/94/0 dated December 13, 1994.

        The Fund was initially set up by Industrial Development Bank of India (IDBI) in 1994 by execution of
        a Trust Deed dated November 25, 1994, under which IDBI was the sole Settlor, Sponsor and Principal
        Trustee. Subsequently, on March 31, 2000, Principal Financial Services Inc. USA became the deemed
        sponsor along with IDBI by acquiring 50% stake in IDBI-PRINCIPAL Asset Management Company
        Limited. Pursuant to SEBI Letter dated October 18, 2002, the IDBI-PRINCIPAL Trustee Company
        Limited took over the trusteeship and the associated responsibilities and obligations of the IDBI-
        PRINCIPAL Mutual Fund. The Name of the Trustee Company was changed to Principal Trustee
        Company Limited w.e.f. June 27, 2003. The Name of the Trustee Company was changed to Principal
        Trustee Company Private Limited w.e.f. October 20, 2003.

        On June 23, 2003, Principal Financial Services Inc. USA, acquired a 100% stake in IDBI-PRINCIPAL
        Asset Management Company Limited, through its wholly owned subsidiary, Principal Financial
        Group (Mauritius) Limited. Accordingly, Principal Financial Services Inc. USA, became the Sole
        Sponsor of the Fund and Principal Financial Group (Mauritius) Limited has became the Sole Settlor
        of the Fund. The name of the Asset Management Company was changed to Principal Asset
        Management Company Limited w.e.f. June 27, 2003, and on October 20, 2003 was again changed to
        Principal Asset Management Company Private Limited (PAMC).

        On May 5, 2004, Punjab National Bank and Vijaya Bank acquired 30% stake and 5% stake
        respectively in Principal Asset Management Company Private Limited, as well as in Principal Trustee
        Company Private Limited and became the co-settlers to the Fund. The name of the Asset
        Management Company changed to Principal Pnb Asset Management Company Private Limited w.e.f
        January 24, 2005.

        B. Scheme

        Principal Large Cap Fund is an open-ended scheme of Principal Mutual Fund launched for initial
        subscription on September 23, 2005. The Scheme’s initial offer closed on October 21, 2005. The
        allotment date for the IPO units was November 11, 2005.

        The Investment Objective of the scheme would be to provide capital appreciation and /or dividend
        distribution by predominantly investing in companies having a large market capitalization.



                                                    100
ANNUAL REPORT




       For the purpose of this Fund, Large Cap Companies are defined as those having market capitalization
       greater than Rs.750 crores as on the date of investment (or any such amount as may be specified by
       India Index Services and Products Ltd. (IISL) from time to time) being the upper limit of market
       capitalisation as a criteria for inclusion of a company in CNX Midcap 200 Index. However, should
       IISL come out with a definition of ‘Large Cap companies’, the same will be utilised.


     II. SIGNIFICANT ACCOUNTING POLICIES

          1. Basis of Accounting

                    The scheme maintains books of account on an accrual basis.

          2. Investments

              2.1     Investment transactions are accounted on trade dates.

              2.2     The cost of investment includes brokerage, premium paid on acquisition, transaction
                      charges and other costs associated with purchase of investments.

              2.3     Bonus entitlements are recognized on ex-bonus dates.


          3. Portfolio Valuation

              3.1     Investments are valued on the Balance Sheet date as per the recommendations of
                      SEBI.

              3.2     Traded securities (excluding government securities and Treasury bills) are valued at
                      the last quoted closing price on the principal stock exchange on which the security is
                      traded.

              3.3     A security (other than debt securities), which is not traded on any stock exchange on
                      a particular valuation day, is valued at the price at which it was traded on the selected
                      stock exchange, as the case may be, on the earliest previous day, such day not being
                      more than thirty days prior to the valuation date.

              3.4     A debt security (other than government securities), which is not traded on any stock
                      exchange on any particular valuation day, is considered as ‘Non-Traded Security’.
                      A debt Security (other than government securities) is considered as ‘Thinly-Traded
                      Security’, if on the valuation date, there are no individual trades in that security in
                      marketable lots (presently Rs 5 Crore) on the principal stock exchange.

                      Investment in non-traded / thinly traded debt securities including securitised debt
                      (other than government securities) with a residual maturity greater than 182 days are
                      valued using CRISIL Bond Valuer, which is based on the concept of using spread
                      over Government Securities to arrive at yields for pricing.




                                                    101
ANNUAL REPORT




           3.5    Investments in traded/non-traded/thinly traded government securities are valued at the
                  prices released by CRISIL, which is an approved agency recommended by the
                  Association of Mutual Funds of India (AMFI).

           3.6    Treasury bills are valued at cost plus the difference between the redemption value and
                  the cost, spread uniformly over the remaining maturity period of the instrument.
                  Treasury Bills listed on a recognised stock exchange are valued at the last quoted
                  weighted average yield, on the principal exchange on which the security is traded. If
                  no sale is reported at that date, Treasury Bills are valued at fair value, as determined
                  in good faith by Principal Pnb Asset Management Company Private Limited, under
                  procedures approved by the Trustees of Principal Mutual Fund, in accordance with
                  the guidelines for valuation of securities for mutual funds issued by SEBI.

           3.7    Money Market securities and non-traded debt securities, with residual maturity of
                  upto 182 days, are valued at cost (including accrued interest), plus the difference
                  between the redemption value (inclusive of interest) and the cost, spread uniformly
                  over the remaining maturity period of the instrument.

           3.8    Thinly traded Equity shares /Equity related securities/non-traded securities (other
                  than Government Securities) are valued in good faith by the investment manager, on
                  the basis of valuation principles laid down by SEBI.

           3.9    Investment in non-traded debt securities, including securitised debt (other than
                  government securities) with a residual maturity greater than 182 days, are valued
                  using CRISIL Bond Valuer, which is based on the concept of using spread to maturity
                  to arrive at the yields for pricing.

           3.10   Securities in the nature of Floating Rate Notes (FRN) are valued at cost plus the
                  difference between the redemption value and the cost, spread uniformly over the
                  remaining maturity period of the instrument. FRNs listed on a recognised stock
                  exchange are valued at the last quoted closing price on the principal exchange, on
                  which the security is traded. If no sale is reported at that date FRNs are valued at fair
                  value, as determined in good faith by Principal Pnb Asset Management Company
                  Private Limited, under procedures approved by the Trustees of Principal Mutual
                  Fund, in accordance with the guidelines for valuation of securities for mutual funds
                  issued by SEBI.

           3.11   Securitised Debt are valued at fair value, as determined in good faith by Principal Pnb
                  Asset Management Company Private Limited, under procedures approved by the
                  Trustees of Principal Mutual Fund, in accordance with the guidelines for valuation of
                  securities for mutual funds issued by SEBI.


           3.12   Interest Rate Swaps with a maturity period of more than 182 days are marked to
                  market by recording the net present values of the difference in outflows and inflows
                  as unrealised appreciation / depreciation. Interest Rate Swaps with a maturity of 182
                  days and less are amortised over the balance contracted period.

           3.13   Investments in Call money, bills purchased under re-discounting scheme and term
                  deposits with banks are valued at cost plus accruals.




                                                102
ANNUAL REPORT




            3.14    An investment is regarded as non-performing if the interest and /or principal amount
                    has not been received or remains outstanding for one quarter from the day such
                    income or installment has fallen due.

            3.15    Appreciation/Depreciation, as the case may be, in the value of securities at the year-
                    end is computed for the scheme, whereby the aggregate market value of all securities
                    taken together is compared with the aggregate cost of acquisition. Such net balance is
                    charged to Revenue Account.

            3.16    The above policies are followed as and when applicable.

         4. Income Recognition

            4.1     Dividend income is accrued on ex-dividend date.

            4.2     Profit or loss on sale of investments is arrived at by applying weighted average cost
                    on trade date.

            4.3     Interest on debentures and other fixed income investments is recognized on accrual
                    basis.

            4.4     In respect of Interest Rate Swaps, interest expense and income are accrued on a net
                    basis daily.

            4.5     Income on non-performing assets (NPA) is recognized on cash basis.

         5. Management Fees

            Investment Management fees payable to Principal Pnb Asset Management Co. Pvt. Ltd. is
            computed on the basis of Average Daily Net Assets Value.

         6. Income Equalisation Reserve and Unit Premium Reserve

            a.       Upto March 14, 2010, upon purchase/sale of units by the Scheme, an appropriate part
            of the purchase / sale price was credited / debited to the Income Equalisation Reserve
            Account. The balance amount of the purchase/sale price after reducing the face value was
            transferred to Unit Premium Reserve Account.

            b.      With effect from March 15, 2010, pursuant to the issue of SEBI circular no.
            SEBI/IMD/CIR no 18/198647/2010 dated March 15, 2010, upon purchase/sale of units by the
            Scheme, where the purchase/sale price is higher than the face value per unit, the amount
            representing unrealized gain and balance in the Unit Premium Reserve Account is
            credited/debited to Unit Premium Reserve Account. The balance amount of the purchase/sale
            price after reducing the face value is transferred to Income Equalization Reserve Account.
            Upon purchase/sale of units by the Scheme, where the purchase/sale price is lower than the
            face value per unit, the difference between the sale price and face value is debited to Income
            Equalization Reserve Account. Distributable surplus is arrived at after excluding unrealized
            gains. Balance lying to the credit of Unit Premium Reserve Account is not considered for the
            purpose of dividend distribution. Where the Unit Premium Reserve has a debit balance, the
            excess thereof over the unrealized gain is also deducted in arriving at the distributable surplus.




                                                   103
ANNUAL REPORT




            c.     The balance in Income Equalization Reserve Account is transferred to the Revenue
            Account at the end of the year.

         7. Provisions

            (i) In the case of interest accrued on investments, provision is made in respect of amounts
            which have not been received for a period of 3 months beyond the due date. No further
            accrual of income is made in respect of such investments.

            (ii) Provision is made in respect of the principal amount of securities, in accordance with
            valuation principles laid down by SEBI.

            (iii) Provision is made in respect of accrued dividend, which has not been received for a
            period of twelve months beyond the due date.

         8. Entry and Exit Load

            a) Upto July 31, 2009 load charged at the time of purchase/sale of units was utilized for
               incurring distribution and marketing expenses. Out of the residual amount, amounts
               considered to be in excess of future requirements by the Trustees were recognized as
               income, and the residual amount was carried forward into the next year.

            b) With effect from August 1, 2009 In accordance with the SEBI circular dated June 30, 2009:

               i) No entry load is charged on fresh purchase applications received after August 1, 2009
               (except on SIPs registered prior to August 1, 2009 which is utilised for incurring
               distribution and marketing expenses. Out of the residual amount, amounts considered to be
               in excess of future requirements by the Trustees are recognized as income, and the residual
               amount carried forward into the next year Load Charges).
               ii) Exit load charged in excess of 1% is recognized as income of the scheme immediately.
               iii) Exit load charged upto 1% is parked in a Liability Account, which is utilized for
               incurring distribution and marketing expenses. Out of the residual amount, amounts
               considered to be in excess of future requirements by the Trustees are recognized as
               income, and the residual amount carried forward into the next year.

         9. Deferred Revenue Expenditure

            Deferred Revenue expenses pertain to expenses incurred during the New Fund Offer period at
            the time of launch of the scheme. The same is being amortised over a period of three years
            from the date of allotment of units.




                                                  104
ANNUAL REPORT
         III   NOTES TO ACCOUNTS

         1     The scheme has growth and dividend options. A combined Balance sheet, Revenue Account and Cash Flow are prepared for the scheme.

         2     The Cost and Market Value / Fair Value of investments are given below:

                                                                                                                                                                                                         (Rs. In Lacs)
                                                                                                                                                                           Net Appreciation / (Depreciation) in value
                                                                                      Cost / Amortised cost                        Market Value / Fair Value
                                                                                                                                                                                       of investments
                Investments                                                  March 31, 2010          March 31, 2009          March 31, 2010          March 31, 2009          March 31, 2010         March 31, 2009
 LCAP6          Equity Shares                                                       35,980.92               33,168.28               45,922.49               25,356.88                 9,941.57             (7,811.41)
 LCAP7
                Debentures and Bonds Unlisted / Privately Placed                          213.31                  335.00                  213.31                  335.00                        -                    -
 LCAP4          Mutual Fund Units                                                              -                    1.00                       -                    1.00                       -                 0.00
                TOTAL                                                                  36,194.23               33,504.28               46,135.80               25,692.88                9,941.57           (7,811.41)

               Net Change in unrealised appreciation in the value of investment for the year ended March 31, 2010 is Rs. 17752.98 Lacs

         3     The industry-wise 'Statement of Portfolio Holding' as on March 31, 2010 (Referred to in Schedule 4 to the Balance Sheet) is given in Annexure I.

         4     Interest and Discount - Others (Net) includes amounts received from and paid to other schemes of the Fund on account of delay in the movement of unit subscription application
               money of one scheme residing in the other scheme, calculated for the period of the delay on the basis of the prevailing CBLO rates.


         5     The aggregate book value and fair value of non traded / thinly traded investments, which have been valued in good faith in accordance with the guidelines for valuation of
               securities for Mutual Funds issued by SEBI, are given below:

                                                                                                          (Rs. In Lacs)
                                                                             March 31, 2010          March 31, 2009
                                      Particulars                              Amount                  Amount
                Book Value                                                              213.31                  335.00
                Market / Fair Value                                                     213.31                  335.00

         6     Net Asset Value per unit of various options are as under:


                Name of the Option                                           March 31, 2010          March 31, 2009
                Growth                                                                   26.00                   12.96
                Dividend                                                                 19.25                   10.82


         7     Aggregate value of Purchases and Sales made during the year, expressed as a percentage of Average Daily Net Asset Value, are as under:

                                                                                            Purchases                                        Sales *

                                                                           Amount (Rs. In lacs) % of Avg. Net Assets Amount (Rs. In lacs) % of Avg. Net Assets
                                    March 31, 2010                                 458,994.12               1,109.34         464,284.64               1,122.13
                                    March 31, 2009                                  68,795.33                 224.66          65,287.91                 213.20
               * Sales includes redemptions / maturities

         8     Contracts for sale pending deliveries as on March 31, 2010, amounting to Rs. 95.41 lacs (Previous Year : Rs. 783.35 Lacs) have been excluded from the
               Investments, whereas purchases of securities by the scheme, the deliveries of which were pending as on March 31, 2010, amounting to Rs. 603.09 lacs
               (Previous Year: Rs. 942.44 Lacs) have been included in investments.


         9     Details of Management Fees paid to Principal Pnb Asset Management Co. Pvt. Ltd. and its computation thereof:
                                                                                                                            (Rs. In Lacs)
                                                                                                                    % of Management
                                                                           Average Daily Net                        Fees Average Net
                                                                           Asset Value           Management Fees    Asset Value
                                   March 31, 2010                                      41,375.25             379.75                  0.92
                                   March 31, 2009                                      30,622.17             178.58                  0.58

         10    As per the requirement of Regulation 25(11) of SEBI (Mutual Fund) Regulations, 1996, details of Investments made by the Fund in companies, where
               the companies' investments in any of Principal Mutual Fund schemes exceeds 5% of the scheme's Net Asset Value, is given in Annexure II.


         11    Total Income and Recurring Expenditure for the year expressed as a percentage of Average Daily Net Asset Value:


                                                                       (As a % of Average Daily Net Asset Value)
                                                                                            Recurring
                                                                       Income               Expenditure
                                  March 31, 2010                                      21.08                 2.29
                                  March 31, 2009                                       1.70                 2.33
               Income / Expenditure exclude appreciation/depreciation on investment.

         12    Particulars of Unclaimed Dividends and Unclaimed Redemptions are as under:

                                                                                      Unclaimed Dividends                           Unclaimed Redemptions

                                                                          No. of Investors        Amount (Rs. In lacs) No. of Investors           Amount (Rs. In lacs)
                                    March 31, 2010                                          2,151                 41.35                      136                 24.02
                                    March 31, 2009                                          1,213                 21.15                       61                 12.53
               Note : For want of relevant information from banks, in respect of dividends and redemptions effected through DDs, the liability for unencashed and
               expired DDs (if any) and the corresponding bank balance for the same may not have been accounted in the books.




                                                                                                        105
ANNUAL REPORT
   13     Disclosure as per SEBI circular MFD/CIR No. 3/211/2001 dated April 30, 2001 :
          The Scheme does not have a single unitholder holding more than 25% of the NAV as on March 31, 2010.

   14     The Scheme has entered into transactions with certain related parties. The information required in this regard in accordance with Accounting Standard 18
          on 'Related Party Disclosures' issued by The Institute of Chartered Accountants of India (ICAI) and Regulation 25(8) of the SEBI (Mutual Funds)
          Regulations, 1996, are as under :


   (i)    Related Party relationships

          Name                                                      Description of relationship
          Principal Financial Services Inc., USA                    Sponsor of the Fund
          Principal Trustee Company Private Ltd.                    Trustee of the Fund

          Principal Pnb Asset Management Company Private Ltd.       Subsidiary of the Sponsor and the Scheme's asset manager

          Pnb Principal Insurance Broking Private Limited           Subsidiary of the Sponsor
          Principal Consulting (India) Private Limited              Subsidiary of the Sponsor

          Pnb Principal Financial Planners Private Limited          Subsidiary of the Sponsor
          Principal Pnb Life Insurance Company Limited              Subsidiary of the Sponsor
          Principal Financial Group (Mauritius) Limited             A Company holding substantial interest in the share capital of the
                                                                    Scheme's asset manager
          Punjab National Bank                                      A Company holding substantial interest in the share capital of the
                                                                    Scheme's asset manager
          PNB Gilts Limited                                         Subsidiary of Punjab National Bank
          PNB Housing Finance Limited                               Subsidiary of Punjab National Bank

          Schemes of the Fund under common control of the
          Sponsor

          Principal Child Benefit Fund                              Principal Long Term Equity Fund 3 Year Plan Series II
          Principal Pnb FMP 385 Days Series XI                      Principal Monthly Income Plan
          Principal Pnb FMP 540 Days Series IV                      Principal Monthly Income Plan - MIP Plus
          Principal Floating Rate Fund - Flexible Maturity Plan     Principal Balanced Fund
          Principal Floating Rate Fund - Short Maturity Plan        Principal Dividend Yield Fund
          Principal Govt. Securities Fund - Investment Plan         Principal Emerging Bluechip Fund
          Principal Global Opportunities Fund                       Principal Money Manager Fund
          Principal Growth Fund                                     Principal Personal Tax Saver Fund
          Principal Income Fund                                     Principal Resurgent India Equity Fund
          Principal Index Fund                                      Principal Income Fund - Short Term Plan
          Principal Services Industries Fund                        Principal Tax Savings Fund
          Principal Large Cap Fund                                  Principal Junior Cap Fund
          Principal Ultra Short Term Fund                           Principal Govt. Securities Fund - Saving Plan
          Principal Cash Management Fund - Liquid Option            Principal Pnb Fixed Duration Fund 3 Year Plan Series I
          Principal Long Term Equity Fund                           Principal Pnb FMP 460 Days Series IV
          Principal Pnb FMP 540 Days Series II                      Principal Pnb FMP 385 Days Series VIII
          Principal Pnb FMP 385 Days Series VII                     Principal Pnb FMP 385 Days Series IX



   (ii)   Transactions, if any, with the above mentioned related parties, as defined under Accounting Standard 18 and Regulation 25(8) of the SEBI Regulations
          are given below:


                                                                                                                                                                           (Rs. In Lacs)
          Name of the Related Party                                 Nature of                For the year ended Outstanding as at               For the year ended Outstanding as at
                                                                    Transactions              March 31, 2010    March 31, 2010                   March 31, 2009    March 31, 2009

                                                                    Fees for Trusteeship
          Principal Trustee Company Private Ltd.                                                               4.14                      0.35                  3.06                 0.21
                                                                    Services



          Principal Pnb Asset Management Company Private Ltd.       Fees for Management                     379.75                   70.54                   178.58                    -
                                                                    Services

                                                                    Investor
          Principal Consulting (India) Private Limited.             Communication                            42.21                          -                 42.87                 2.87
                                                                    Service Fees

          Punjab National Bank                                      Bank Charges                                  -                         -                  0.55                    -


          Investments in Schemes of Mutual Fund by related
          parties


          Principal Pnb Asset Management Company Private Ltd.       Purchase                                      -                                               -
                                                                    Sale                                          -                                          134.87
                                                                    Holding as at March
                                                                                                                                            -                                          -
                                                                    31

          Investment in Associates by the Scheme
          Larsen & Toubro Limited                                   Purchase                                952.83                                           756.39
                                                                    Sale/Redemption                         546.24                                         1,188.69
                                                                    Holding as at March
                                                                                                                                  1,467.77                                       704.97
                                                                    31




                                                                                                  106
ANNUAL REPORT




    (iii)      Commission Paid to Associates / Related Parties / Group Companies of Sponsor AMC



                                                                                                                          % of Commission                           % of Business Given
                                                                                                   Commission Paid                              Business Given (Rs.
               Name of the Associates                                          Period covered                             paid to total                             to total Business
                                                                                                   (Rs)                                         In Crores)
                                                                                                                          Commission paid                           Received



               Punjab National Bank                                            FY 2009-10                  2,721,207.86                 5.58%                        9.42         4.25%
                                                                               FY 2008-09                  2,144,240.83                 4.90%                        2.63         1.90%

               Pnb Principal Financial Planners Pvt Ltd                        FY 2009-10                      2,537.44                 0.01%                        0.30         0.14%
                                                                               FY 2008-09                        884.90                 0.00%                        0.00         0.00%

               Note: Commission paid to associates has been disclosed on payment basis and business given indicates Gross Mobilisation (net of rejections, if any)
                     during the corresponding period for which the commission paid has been disclosed.

    15         Commission to Agents and Publicity expenses amounting to Rs 319.35 Lacs (Previous Year : 255.60 lacs) are utilised from load collected.

    16         Other Income includes exit load collected in excess of 1% from the Investors at the time of redemption.

    17         As per the disclosure requirement under Accounting Standard 17 on 'Segment Reporting' issued by ICAI, the Scheme operates only in one segment, viz,
               primarily generate returns, based on the Scheme's Investment Objectives.


    18         The historical per unit statistics are given in Annexure III.

    19         Previous Year's figures have been regrouped and reclassified, wherever necessary, to make them comparable.

    20         'Rs. 0.00' indicates amount less than a lac and 'Rs. -' indicates Nil amount.



     As per our report of even date attached.

     For N. M. Raiji & Co.                                                     For and on behalf of Principal Pnb                               For and on behalf of Principal
     Chartered Accountants                                                     Asset Management Company Pvt. Ltd                                 Trustee Company Pvt. Ltd

     Sd/-                                                                      Sd/-                                                             Sd/-                                      Sd/-
     Vinay D. Balse                                                            M. M. Chitale                                                    B.G. Deshmukh                             H. M. Singh
     Partner                                                                   Chairman                                                         Chairman                                  Director


                                                                               Sd/-                Sd/-
     Place : Mumbai                                                            Rajan Ghotgalkar    Rajat Jain
     Date: July 09, 2010                                                       Managing Director   Fund Manager




                                                                                                    107
ANNUAL REPORT




           PRINCIPAL PNB LONG TERM
                 EQUITY FUND




                      108
ANNUAL REPORT



                                              AUDITORS’ REPORT

     TO THE TRUSTEE OF
     PRINCIPAL MUTUAL FUND

     We have audited the attached Balance Sheet as at March 31, 2010, the Revenue Account and the Cash
     Flow Statement for the year ended on that date, annexed thereto of Principal Pnb Long Term Equity
     Fund (the scheme) of the Principal Mutual Fund. These financial statements are the responsibility of the
     Management. Our responsibility is to express an opinion on these financial statements based on our audit.
     We report that:

     1.      Our audit was conducted in accordance with generally accepted Standards on Auditing in India.
             These Standards require that we plan and perform the audit to obtain reasonable assurance about
             whether the financial statements are free of material misstatements. An audit includes examining
             on a test basis, evidence supporting the amounts and disclosures in the financial statements. An
             audit also includes assessing the accounting principles used and significant estimates made by the
             Management, as well as evaluating the overall financial statement presentation. We believe that
             our audit provides a reasonable basis for our opinion.

     2.      We have obtained all information and explanations, which, to the best of our knowledge and belief
             were necessary for the purpose of our audit.

     3.      The Balance Sheet, the Revenue Account and the Cash Flow Statement are in agreement with the
             books of account of the Scheme.

     4.      In our opinion, valuation methods for Non Traded Securities, adopted by the scheme are fair and
             reasonable and are in accordance with the guidelines for valuation issued by SEBI and approved
             by the Trustees.

     5.      The accounts have been prepared in accordance with the accounting policies adopted by the
             trustees of the Fund and as specified in the Ninth Schedule to the SEBI (Mutual Funds)
             Regulations, 1996.

     6.      In our opinion and to the best of our information and according to the explanations given to us, the
             said accounts give the information required by the SEBI (Mutual Funds) Regulations, 1996 and
             give a true and fair view in accordance with the generally accepted accounting principles in India:

             a.   in the case of Balance Sheet, of the state of affairs of the scheme as at March 31, 2010;

             b.   in the case of Revenue Account, of the surplus of the scheme for the year ended on that date;
                  and

             c.   in the case of Cash Flow Statement, of the cash flows for the year ended on that date.

                                                                                         For N. M. Raiji & Co.
                                                                                        Chartered Accountants
                                                                                Firm Registration No. 108296W


                                                                                                          Sd/-
                                                                                               Vinay D. Balse
                                                                                                      Partner
                                                                                         Membership No. 39434
     Place : Mumbai
     Date : July 09, 2010




                                                         109
ANNUAL REPORT

                                                 PRINCIPAL MUTUAL FUND
                                          PRINCIPAL PNB LONG TERM EQUITY FUND
                                               Balance Sheet as at March 31, 2010


                                                                   Schedule         March 31, 2010              March 31, 2009
                                                                                           Rupees                      Rupees
 LIABILITIES
 Unit Capital                                                         1              1,338,372,900               1,813,062,510
 Reserves & Surplus                                                   2                121,656,575                (958,320,332)
 Current Liabilities and Provisions                                   3                 52,654,603                   4,035,243
 Total                                                                               1,512,684,078                 858,777,421

 ASSETS
 Investments                                                          4              1,442,260,583                 808,324,951
 Deposits                                                             5                 42,555,610                  14,496,800
 Other Current Assets                                                 6                 27,867,885                     992,241
 Deferred Revenue Expenditure - not written off                       8                          -                  34,963,429
 Total                                                                               1,512,684,078                 858,777,421

 Significant Accounting Policies and Notes to Accounts                9
 The Schedules form an integral part of the Financial Statements



 As per our report of even date attached.




 For N. M. Raiji & Co.                For and on behalf of Principal Pnb      For and on behalf of Principal
 Chartered Accountants                Asset Management Company Pvt. Ltd        Trustee Company Pvt. Ltd

 Sd/-                                 Sd/-                                    Sd/-                             Sd/-
 Vinay D. Balse                       M. M. Chitale                           B.G. Deshmukh                    H. M. Singh
 Partner                              Chairman                                Chairman                         Director


                                      Sd/-                 Sd/-
 Place : Mumbai                       Rajan Ghotgalkar     P.V.K. Mohan
 Date : July 09, 2010                 Managing Director    Fund Manager




                                                                      110
ANNUAL REPORT

                                                             PRINCIPAL MUTUAL FUND
                                                     PRINCIPAL PNB LONG TERM EQUITY FUND
                                                    Revenue Account for the year ended 31 March, 2010
                                                                             Schedule                       March 31, 2010                           March 31, 2009
                                                                                                                   Rupees                                   Rupees

 INCOME

 Dividend                                                                                                          21,931,626                             26,617,456
 Interest and Discount Income                                                    7                                  3,321,012                              6,445,741
 Profit on Sale / Redemption of Investments (other than inter-scheme
 transfer / sale)                                                                                                 253,687,156                                        -

 Total                                                                                                            278,939,794                             33,063,197



 EXPENSES AND LOSSES


 Loss on Sale / Redemption of Investments (Other than inter-scheme
 transfer / sales)                                                                                                          -                           577,951,454
 Loss on inter-scheme transfer / sale of investments                                                                        -                               617,665
 Management Fees                                                                                                   18,267,108                            16,554,655
 Trusteeship Fees                                                                                                     159,501                               148,054
 Agent's Commission                                                                                                 6,698,121                             5,921,672
 Publicity & Marketing Expenses                                                                                     4,486,401                             2,259,049
 Audit Fees                                                                                                            83,485                               109,630
 Custodian's Fees and Expenses                                                                                        379,409                               385,572
 Registrar's Fees and Expenses                                                                                      2,857,176                             2,136,703
 Other Operating Expenses                                                                                           5,060,185                             6,926,836
 Deferred Revenue Expenditure written off                                                                          34,545,290                            36,258,585

 Total                                                                                                             72,536,676                            649,269,875
 Surplus / (Deficit) for the year                                                                                 206,403,118                           (616,206,678)

 Net change in Unrealised gain / (loss) in the Value of Investments (Refer
 Note III(2) to Schedule 9)                                                                                       903,292,645                           (808,248,484)

 Net Surplus / (Deficit) including Net change in Unrealised Appreciation /
 (Depreciation) for the year                                                                                 1,109,695,763                            (1,424,455,162)


 Appropriation

 Opening Balance                                                                                              (917,465,367)                             439,366,846
 Add: Net Surplus including Net change in Unrealised Appreciation /
 (Depreciation) for the year                                                                                 1,109,695,763                            (1,424,455,162)
 Unrealised Appreciation in value of Investments as at the beginning of
 the year                                                                                                                   -                             60,267,171

 Unrealised Appreciation in value of Investments as at the end of year                                        (155,311,332)                                        -
 Add/(Less) : Income Equalisation                                                                              (33,955,459)                                7,355,778
 Dividend Distribution                                                                                                   -                                         -
 Dividend Tax                                                                                                            -                                         -
 Net Surplus / (Deficit) Transferred to Balance Sheet                                                            2,963,605                              (917,465,367)

 Significant Accounting Policies and Notes to Accounts                           9

 The Schedules form an integral part of the Financial Statements

 As per our report of even date attached.

 For N. M. Raiji & Co.                                                       For and on behalf of Principal Pnb                     For and on behalf of Principal
 Chartered Accountants                                                       Asset Management Company Pvt. Ltd                       Trustee Company Pvt. Ltd

 Sd/-
 Vinay D. Balse                                                              Sd/-                                               Sd/-                  Sd/-
 Partner                                                                     M. M. Chitale                                      B.G. Deshmukh         H. M. Singh
                                                                             Chairman                                           Chairman              Director

                                                                             Sd/-                          Sd/-
 Place : Mumbai                                                              Rajan Ghotgalkar              P.V.K. Mohan
 Date : July 09, 2010                                                        Managing Director             Fund Manager


                                                                                        111
ANNUAL REPORT

                                                                      PRINCIPAL MUTUAL FUND
                                                              PRINCIPAL PNB LONG TERM EQUITY FUND
                                                   Schedules forming part of the Financial Statements as at March 31, 2010
 SCHEDULE 1 - UNIT CAPITAL                                                         March 31, 2010                                               March 31, 2009
                                                                           Units                          Rupees                       Units                            Rupees
 (A)        Growth Option
 Initial Capital Issued and Subscribed :
 Units of Rs. 10 each fully paid up                                 135,693.951                        1,356,940                135,693.951                           1,356,940

 Outstanding :
 At the beginning of the year                                    105,754,821.569                    1,057,548,216            107,783,596.325                      1,077,835,963
 Issued during the year                                                1,904.800                           19,048                  5,985.090                             59,851
                                                                 105,756,726.369                    1,057,567,264            107,789,581.415                      1,077,895,814
 Repurchased during the year                                      17,668,336.600                      176,683,366              2,034,759.846                         20,347,598
 At the end of the year (A)                                       88,088,389.769                      880,883,898            105,754,821.569                      1,057,548,216


 (B)       Dividend Option
 Initial Capital Issued and Subscribed :
 Units of Rs. 10 each fully paid up                                   82,310.472                         823,105                  82,310.472                            823,105

 Outstanding :
 At the beginning of the year                                     75,551,428.918                     755,514,289              77,162,466.399                        771,624,664
 Issued during the year                                                2,930.000                          29,300                  31,799.468                            317,995
                                                                  75,554,358.918                     755,543,589              77,194,265.867                        771,942,659
 Repurchased during the year                                      29,805,458.700                     298,054,587               1,642,836.949                         16,428,369
 At the end of the year (B)                                       45,748,900.218                     457,489,002              75,551,428.918                        755,514,289




 TOTAL (A+B)                                                     133,837,289.987                    1,338,372,900            181,306,250.487                      1,813,062,505




 SCHEDULE 2 - RESERVES AND SURPLUS                                                                                            March 31, 2010                     March 31, 2009
 UPR                                                                                                                                Rupees                             Rupees

 Unit Premium Reserve
 At the beginning of the year                                                                                                    (40,854,965)                       (40,843,802)
 Net addition / (deduction) during the year                                                                                        4,236,603                            (11,163)
 At the end of the year                                                                                                          (36,618,362)                       (40,854,965)


 Balance in Revenue Account                                                                                                        2,963,605                       (917,465,367)


 Unrealised Appreciation in value of Investments                                                                                155,311,332                                   -

 Total                                                                                                                          121,656,575                        (958,320,332)


 SCHEDULE 3 - CURRENT LIABILITIES AND
 PROVISIONS                                                                                                                  March 31, 2010                      March 31, 2009
                                                                                                                                    Rupees                              Rupees
 Unit Repurchase Amount Payable                                                                                                 38,023,485                              212,981
 Registrar's Fees and Expenses                                                                                                      353,987                             307,291
 Custodian's Fees and Expenses                                                                                                       39,099                              17,044
 Inter Scheme Dues                                                                                                                7,276,159                                   -
 Management Fees                                                                                                                  1,743,107                             752,261
 Trusteeship Fees                                                                                                                    13,258                               6,728
 Audit Fees                                                                                                                          83,485                             109,630
 Agent's Commission Payable                                                                                                       2,583,737                             937,701
 Publicity and Marketing Expenses                                                                                                   321,317                              52,492
 Dividend and Dividend Tax Payable                                                                                                        -                              28,774
 Other Current Liabilities                                                                                                        2,216,969                           1,610,341

                                                                                                                                  52,654,603                          4,035,243




                                                                                           112
ANNUAL REPORT




  SCHEDULE 4 - INVESTMENTS                                                 March 31, 2010    March 31, 2009
  (Refer to attached statement of Portfolio holding as at
  March 31, 2010)                                                                 Rupees            Rupees
  Debentures and Bonds Unlisted / Privately Placed                              8,507,325        13,400,000
  Government Securities/Treasury bills                                                  -         9,324,000
  Equity Shares                                                             1,433,753,258       785,600,951

                                                                            1,442,260,583       808,324,951



  SCHEDULE 5 - DEPOSITS                                                    March 31, 2010    March 31, 2009
                                                                                  Rupees            Rupees
  Collateralised Lending                                                       42,555,610        14,496,800

                                                                               42,555,610        14,496,800



  SCHEDULE 6 - OTHER CURRENT ASSETS                                        March 31, 2010    March 31, 2009
                                                                                  Rupees            Rupees
  Balances with Banks and Reserve Bank of India in Current Account              6,376,935           212,119
  Unit Subscription Receivable                                                        500                 -
  Contract for Sale of Investment                                              20,983,406                 -
  Outstanding and Accrued Income                                                  507,044           780,122

                                                                               27,867,885           992,241




  SCHEDULE 7 - INTEREST & DISCOUNT INCOME                                  March 31, 2010    March 31, 2009
                                                                                  Rupees            Rupees
  Debentures/Bonds                                                              1,694,038         1,748,896
  Government Securites / Treasury Bills                                            26,889           249,050
  Commercial Paper / Certificate of Deposits / Usance Bills                             -         1,710,327
  Collateralised Lending & Reverse Repo                                         1,600,085         2,715,714
  Others (net) - (Refer Note III(4) to Schedule 9)                                      -            21,754
                                                                                3,321,012         6,445,741


  SCHEDULE 8 - DEFERRED REVENUE
  EXPENDITURE                                                              March 31, 2010    March 31, 2009
                                                                                  Rupees            Rupees

  At the beginning of the year                                                 34,963,429        72,233,653

  Amount amortised during the year                                            (34,545,290)      (36,258,585)
  Recovery of proportionate unamortised amount from investors
  exiting before amortisation is complete (Refer Note II (11) to
  Schedule 9)                                                                    (418,139)       (1,011,639)

  At the end of the year                                                                -        34,963,429




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ANNUAL REPORT

                                                 PRINCIPAL MUTUAL FUND
                                       PRINCIPAL PNB LONG TERM EQUITY FUND
                                    Cash Flow Statement For The Year Ended March 31, 2010

                                                                                                        March 31, 2010            March 31, 2009
                                                                                                            Amount                    Amount
                                                                                                                 (Rs.)                     (Rs.)
 A. Cash flow from Operating Activities
    Surplus / (Deficit) for the year                                                                       206,403,118              (616,206,678)
    Add: Deferred Revenue Expenditure amortised (Non-cash)                                                  34,545,290                36,258,585
    Surplus before adjustments                                                                             240,948,408              (579,948,093)
    Adjustments for:-
    (Increase)/Decrease in Investments (at cost)                                                           269,357,013              623,777,065
    (Increase)/Decrease in Other Current Assets                                                            (20,710,328)              17,166,094
    Increase/(Decrease) in Current Liabilities                                                               3,561,471              (12,449,284)

    Net cash generated from Operations                                                   (a)               493,156,564                48,545,782


 B. Cash flow from Financing Activities
    Decrease in Unit Capital                                                                              (474,689,610)              (36,398,122)
    Increase/(Decrease) in Reserves                                                                        (29,718,856)                7,344,615
    Adjustments for:-
    Increase/(Decrease) in Sundry Creditors for redeemed units and dividend                                 45,476,028               (18,895,171)
    Increase in Sundry Debtors for units issued                                                                   (500)                 (146,225)

    Net cash used in Financing Activities                                                (b)              (458,932,938)              (48,094,903)

    Net Increase in Cash and Cash Equivalents                                          (a + b)              34,223,626                   450,879

    Cash and Cash Equivalents as at the :-
    Beginning of the year                                                                                   14,708,919                14,258,040
    End of the year                                                                                         48,932,544                14,708,919




    Note : Cash and Cash Equivalents includes the following :
            (1) Balances with Banks                                                                          6,376,935                   212,119
            (2) Collateralised Lending                                                                      42,555,610                14,496,800




    The above cash flow statement has been prepared under the indirect method setout in Accounting Standard (AS-3) issued by the Institute of
    Chartered Accountants of India.

    As per our report of even date attached.




    For N. M. Raiji & Co.                       For and on behalf of Principal Pnb               For and on behalf of Principal
    Chartered Accountants                    Asset Management Company Pvt. Ltd                    Trustee Company Pvt. Ltd

    Sd/-                                       Sd/-                                               Sd/-                              Sd/-
    Vinay D. Balse                              M. M. Chitale                                    B.G. Deshmukh                      H. M. Singh
    Partner                                    Chairman                                          Chairman                                Director


                                                Sd/-                         Sd/-
    Place : Mumbai                            Rajan Ghotgalkar            P.V.K. Mohan
    Date : July 09, 2010                      Managing Director          Fund Manager




                                                                           114
ANNUAL REPORT




                                 PRINCIPAL MUTUAL FUND

                    PRINCIPAL PNB LONG TERM EQUITY FUND

                                             SCHEDULE - 9

     SIGNIFICANT ACCOUNTING POLICIES AND NOTES TO ACCOUNTS FORMING PART OF
                                   ACCOUNTS

     I. BACKGROUND INFORMATION

        A. Organisation

        Principal Mutual Fund (formerly known as IDBI-PRINCIPAL Mutual Fund) has been constituted as a
        Trust in accordance with the provisions of the Indian Trusts Act, 1882 (2 of 1882). The Mutual Fund
        is registered with the Securities and Exchange Board of India (SEBI) under registration no.
        MF/019/94/0 dated December 13, 1994.

        The Fund was initially set up by Industrial Development Bank of India (IDBI) in 1994 by execution of
        a Trust Deed dated November 25, 1994, under which IDBI was the sole Settlor, Sponsor and Principal
        Trustee. Subsequently, on March 31, 2000, Principal Financial Services Inc. USA became the deemed
        sponsor along with IDBI by acquiring 50% stake in IDBI-PRINCIPAL Asset Management Company
        Limited. Pursuant to SEBI Letter dated October 18, 2002, the IDBI-PRINCIPAL Trustee Company
        Limited took over the trusteeship and the associated responsibilities and obligations of the IDBI-
        PRINCIPAL Mutual Fund. The Name of the Trustee Company was changed to Principal Trustee
        Company Limited w.e.f. June 27, 2003. The Name of the Trustee Company was changed to Principal
        Trustee Company Private Limited w.e.f. October 20, 2003.

        On June 23, 2003, Principal Financial Services Inc. USA, acquired a 100% stake in IDBI-PRINCIPAL
        Asset Management Company Limited, through its wholly owned subsidiary, Principal Financial
        Group (Mauritius) Limited. Accordingly, Principal Financial Services Inc. USA, became the Sole
        Sponsor of the Fund and Principal Financial Group (Mauritius) Limited has became the Sole Settlor
        of the Fund. The name of the Asset Management Company was changed to Principal Asset
        Management Company Limited w.e.f. June 27, 2003, and on October 20, 2003 was again changed to
        Principal Asset Management Company Private Limited (PAMC).

        On May 5, 2004, Punjab National Bank and Vijaya Bank acquired 30% stake and 5% stake
        respectively in Principal Asset Management Company Private Limited, as well as in Principal Trustee
        Company Private Limited and became the co-settlers to the Fund. The name of the Asset
        Management Company changed to Principal Pnb Asset Management Company Private Limited w.e.f
        January 24, 2005.

        B. Scheme

        Principal Pnb Long Term Equity Fund (erstwhile known as Principal Pnb Long Term Equity Fund – 3
        year Plan – Series I) was launched as a 3 year close ended equity scheme with an automatic
        conversion into an open ended scheme upon maturity. The said scheme was launched for initial
        subscription on January 24, 2007. The Scheme’s New Fund Offer (NFO) closed on February 23, 2007




                                                    115
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       and the allotment date for the NFO Units was March 23, 2007. The Scheme in accordance with the
       terms of the Offer Document has been converted into an open ended scheme on March 23, 2010.

       The primary objective of the Scheme is to achieve long-term capital appreciation by investing in
       equity and equity related instruments.

     II. SIGNIFICANT ACCOUNTING POLICIES

          1. Basis of Accounting

                    The scheme maintains books of account on an accrual basis.

          2. Investments

              2.1     Investment transactions are accounted on trade dates.

              2.2     The cost of investment includes brokerage, premium paid on acquisition, transaction
                      charges and other costs associated with purchase of investments.

              2.3     Bonus entitlements are recognized on ex-bonus dates.

          3. Portfolio Valuation

              3.1     Investments are valued on the Balance Sheet date as per the recommendations of
                      SEBI.

              3.2     Traded securities (excluding government securities and Treasury bills) are valued at
                      the last quoted closing price on the principal stock exchange on which the security is
                      traded.

              3.3     A security (other than debt securities), which is not traded on any stock exchange on
                      a particular valuation day, is valued at the price at which it was traded on the selected
                      stock exchange, as the case may be, on the earliest previous day, such day not being
                      more than thirty days prior to the valuation date.

              3.4     A debt security (other than government securities), which is not traded on any stock
                      exchange on any particular valuation day, is considered as ‘Non-Traded Security’.
                      A debt Security (other than government securities) is considered as ‘Thinly-Traded
                      Security’, if on the valuation date, there are no individual trades in that security in
                      marketable lots (presently Rs 5 Crore) on the principal stock exchange.

                      Investment in non-traded / thinly traded debt securities including securitised debt
                      (other than government securities) with a residual maturity greater than 182 days are
                      valued using CRISIL Bond Valuer, which is based on the concept of using spread
                      over Government Securities to arrive at yields for pricing.

              3.5     Investments in traded/non-traded/thinly traded government securities are valued at the
                      prices released by CRISIL, which is an approved agency recommended by the
                      Association of Mutual Funds of India (AMFI).




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           3.6    Treasury bills are valued at cost plus the difference between the redemption value and
                  the cost, spread uniformly over the remaining maturity period of the instrument.
                  Treasury Bills listed on a recognised stock exchange are valued at the last quoted
                  weighted average yield, on the principal exchange on which the security is traded. If
                  no sale is reported at that date, Treasury Bills are valued at fair value, as determined
                  in good faith by Principal Pnb Asset Management Company Private Limited, under
                  procedures approved by the Trustees of Principal Mutual Fund, in accordance with
                  the guidelines for valuation of securities for mutual funds issued by SEBI.

           3.7    Money Market securities and non-traded debt securities, with residual maturity of
                  upto 182 days, are valued at cost (including accrued interest), plus the difference
                  between the redemption value (inclusive of interest) and the cost, spread uniformly
                  over the remaining maturity period of the instrument.

           3.8    Thinly traded Equity shares /Equity related securities/non-traded securities (other
                  than Government Securities) are valued in good faith by the investment manager, on
                  the basis of valuation principles laid down by SEBI.

           3.9    Investment in non-traded debt securities, including securitised debt (other than
                  government securities) with a residual maturity greater than 182 days, are valued
                  using CRISIL Bond Valuer, which is based on the concept of using spread to maturity
                  to arrive at the yields for pricing.

           3.10   Securities in the nature of Floating Rate Notes (FRN) are valued at cost plus the
                  difference between the redemption value and the cost, spread uniformly over the
                  remaining maturity period of the instrument. FRNs listed on a recognised stock
                  exchange are valued at the last quoted closing price on the principal exchange, on
                  which the security is traded. If no sale is reported at that date FRNs are valued at fair
                  value, as determined in good faith by Principal Pnb Asset Management Company
                  Private Limited, under procedures approved by the Trustees of Principal Mutual
                  Fund, in accordance with the guidelines for valuation of securities for mutual funds
                  issued by SEBI.

           3.11   Securitised Debt are valued at fair value, as determined in good faith by Principal Pnb
                  Asset Management Company Private Limited, under procedures approved by the
                  Trustees of Principal Mutual Fund, in accordance with the guidelines for valuation of
                  securities for mutual funds issued by SEBI.

           3.12   Interest Rate Swaps with a maturity period of more than 182 days are marked to
                  market by recording the net present values of the difference in outflows and inflows
                  as unrealised appreciation / depreciation. Interest Rate Swaps with a maturity of 182
                  days and less are amortised over the balance contracted period.

           3.13   Investments in Call money, bills purchased under re-discounting scheme and term
                  deposits with banks are valued at cost plus accruals.

           3.14   An investment is regarded as non-performing if the interest and /or principal amount
                  has not been received or remains outstanding for one quarter from the day such
                  income or installment has fallen due.




                                                117
ANNUAL REPORT




            3.15    Appreciation/Depreciation, as the case may be, in the value of securities at the year-
                    end is computed for the scheme, whereby the aggregate market value of all securities
                    taken together is compared with the aggregate cost of acquisition. Such net balance is
                    charged to Revenue Account.

            3.16    The above policies are followed as and when applicable.

         4. Income Recognition

            4.1     Dividend income is accrued on ex-dividend date.

            4.2     Profit or loss on sale of investments is arrived at by applying weighted average cost
                    on trade date.

            4.3     Interest on debentures and other fixed income investments is recognized on accrual
                    basis.

            4.4     In respect of Interest Rate Swaps, interest expense and income are accrued on a net
                    basis daily.

            4.5     Income on non-performing assets (NPA) is recognized on cash basis.

         5. Management Fees

            Investment Management fees payable to Principal Pnb Asset Management Co. Pvt. Ltd. is
            computed on the basis of Average Daily Net Assets Value.

         6. Income Equalisation Reserve and Unit Premium Reserve

            a.       Upto March 14, 2010, upon purchase/sale of units by the Scheme, an appropriate part
            of the purchase / sale price was credited / debited to the Income Equalisation Reserve
            Account. The balance amount of the purchase/sale price after reducing the face value was
            transferred to Unit Premium Reserve Account.

            b.      With effect from March 15, 2010, pursuant to the issue of SEBI circular no.
            SEBI/IMD/CIR no 18/198647/2010 dated March 15, 2010, upon purchase/sale of units by the
            Scheme, where the purchase/sale price is higher than the face value per unit, the amount
            representing unrealized gain and balance in the Unit Premium Reserve Account is
            credited/debited to Unit Premium Reserve Account. The balance amount of the purchase/sale
            price after reducing the face value is transferred to Income Equalization Reserve Account.
            Upon purchase/sale of units by the Scheme, where the purchase/sale price is lower than the
            face value per unit, the difference between the sale price and face value is debited to Income
            Equalization Reserve Account. Distributable surplus is arrived at after excluding unrealized
            gains. Balance lying to the credit of Unit Premium Reserve Account is not considered for the
            purpose of dividend distribution. Where the Unit Premium Reserve has a debit balance, the
            excess thereof over the unrealized gain is also deducted in arriving at the distributable surplus.

            c.     The balance in Income Equalization Reserve Account is transferred to the Revenue
            Account at the end of the year.




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         7. Provisions

            (i) In the case of interest accrued on investments, provision is made in respect of amounts
            which have not been received for a period of 3 months beyond the due date. No further
            accrual of income is made in respect of such investments.

            (ii) Provision is made in respect of the principal amount of securities, in accordance with
            valuation principles laid down by SEBI.

            (iii) Provision is made in respect of accrued dividend, which has not been received for a
            period of twelve months beyond the due date.

         8. Entry and Exit Load

            a) Upto July 31, 2009 load charged at the time of purchase/sale of units was utilized for
               incurring distribution and marketing expenses. Out of the residual amount, amounts
               considered to be in excess of future requirements by the Trustees were recognized as
               income, and the residual amount was carried forward into the next year.

            b) With effect from August 1, 2009 In accordance with the SEBI circular dated June 30, 2009:

               i) No entry load is charged on fresh purchase applications received after August 1, 2009
               (except on SIPs registered prior to August 1, 2009 which is utilised for incurring
               distribution and marketing expenses. Out of the residual amount, amounts considered to be
               in excess of future requirements by the Trustees are recognized as income, and the residual
               amount carried forward into the next year Load Charges).
               ii) Exit load charged in excess of 1% is recognized as income of the scheme immediately.
               iii) Exit load charged upto 1% is parked in a Liability Account, which is utilized for
               incurring distribution and marketing expenses. Out of the residual amount, amounts
               considered to be in excess of future requirements by the Trustees are recognized as
               income, and the residual amount carried forward into the next year.


         9. Deferred Revenue Expenditure

            Deferred Revenue expenses pertain to expenses incurred during the New Fund Offer ("NFO")
            period at the time of launch of the scheme. The same is being amortised over a period of three
            years from the date of allotment of units. Pursuant to SEBI Circular no. SEBI/IMD/CIR/ No.
            1/64057/06 dated April 4th, 2006, in case an investor exits from a closed-ended scheme
            before amortisation is completed, the Asset Management Company shall redeem the units
            only after recovering the balance proportionate unamortised NFO expenses.




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ANNUAL REPORT
         III   NOTES TO ACCOUNTS

         1     The scheme has growth and dividend options. A combined Balance sheet, Revenue Account and Cash Flow are prepared for the scheme.

         2     The Cost and Market Value / Fair Value of investments are given below:

                                                                                                                                                                                                          (Rs. In Lacs)
                                                                                                                                                                           Net Appreciation / (Depreciation) in value
                                                                                      Cost / Amortised cost                        Market Value / Fair Value
                                                                                                                                                                                        of investments
                Investments                                                   March 31, 2010          March 31, 2009         March 31, 2010          March 31, 2009          March 31, 2010         March 31, 2009
 LTEF6          Equity Shares                                                        12,784.42               15,335.11               14,337.53                7,856.01                1,553.11             (7,479.10)
 LTEF3          Government Securities/Treasury bills                                         -                    93.95                      -                   93.24                       -                  (0.71)
 LTEF7
                Debentures and Bonds Unlisted / Privately Placed                              85.07               134.00                   85.07                  134.00                        -                       -

                TOTAL                                                                  12,869.49               15,563.06               14,422.61                8,083.25                1,553.11            (7,479.81)

               Net Change in unrealised appreciation in the value of investment for the year ended March 31, 2010 is Rs. 9032.93 Lacs

         3     The industry-wise 'Statement of Portfolio Holding' as on March 31, 2010 (Referred to in Schedule 4 to the Balance Sheet) is given in Annexure I.

         4     Interest and Discount - Others (Net) includes amounts received from and paid to other schemes of the Fund on account of delay in the movement of unit subscription application
               money of one scheme residing in the other scheme, calculated for the period of the delay on the basis of the prevailing CBLO rates.



         5     The aggregate book value and fair value of non traded / thinly traded investments, which have been valued in good faith in accordance with the guidelines for valuation of
               securities for Mutual Funds issued by SEBI, are given below:

                                                                                                           (Rs. In Lacs)
                                                                              March 31, 2010          March 31, 2009
                                      Particulars                               Amount                  Amount
                Book Value                                                                85.07                  134.00
                Market / Fair Value                                                       85.07                  134.00

         6     Net Asset Value per unit of various options are as under:


                Name of the Option                                            March 31, 2010          March 31, 2009
                Growth                                                                    10.91                    4.71
                Dividend                                                                  10.91                    4.71


         7     Aggregate value of Purchases and Sales made during the year, expressed as a percentage of Average Daily Net Asset Value are as under:

                                                                                              Purchases                                      Sales *

                                                                           Amount (Rs. In lacs) % of Avg. Net Assets Amount (Rs. In lacs) % of Avg. Net Assets
                                    March 31, 2010                                 168,699.25               1,057.71         173,667.43               1,088.86
                                    March 31, 2009                                  26,078.10                 176.14          26,594.30                 179.63
               * Sales includes redemptions / maturities

         8     Contracts for sale pending deliveries as on March 31, 2010, amounting to Rs. 209.83 lacs (Previous Year : Rs. Nil) have been excluded from the
               Investments.

         9     Details of Management Fees paid to Principal Pnb Asset Management Co. Pvt. Ltd. and its computation thereof:
                                                                                                         (Rs. In Lacs)
                                                                                                                       % of Management
                                                                       Average Daily Net                               Fees to Average Net
                                                                       Asset Value           Management Fees           Asset Value
                                 March 31, 2010                                    15,949.47                   182.67                   1.15
                                 March 31, 2009                                    14,804.91                   165.55                   1.12

         10    As per the requirement of Regulation 25(11) of SEBI (Mutual Fund) Regulations, 1996, details of Investments made by the Fund in companies, where
               the companies' investments in any of Principal Mutual Fund schemes exceeds 5% of the scheme's Net Asset Value, is given in Annexure II.



         11    Total Income and Recurring Expenditure for the year expressed as a percentage of Average Daily Net Asset Value are as under:


                                                                        (As a % of Average Daily Net Asset Value)
                                                                                             Recurring
                                                                       Income                Expenditure
                                  March 31, 2010                                       17.49                 2.38
                                  March 31, 2009                                        2.23                 2.33
               Income / Expenditure excludes appreciation/depreciation on investment.

         12    Particulars of Unclaimed Dividends and Unclaimed Redemptions are as under:

                                                                                      Unclaimed Dividends                           Unclaimed Redemptions

                                                                           No. of Investors       Amount (Rs. In lacs) No. of Investors           Amount (Rs. In lacs)
                                    March 31, 2010                                              -                      -                        4                  0.57
                                    March 31, 2009                                              -                      -                        1                  0.29
               Note : For want of relevant information from banks, in respect of dividends and redemptions effected through DDs, the liability for unencashed and
               expired DDs (if any) and the corresponding bank balance for the same may not have been accounted in the books.


         13    Disclosure as per SEBI circular MFD/CIR No. 3/211/2001 dated April 30, 2001 :
               The Scheme does not have a single unitholder holding more than 25% of the NAV as on March 31, 2010.




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ANNUAL REPORT
   14      The Scheme has entered into transactions with certain related parties. The information required in this regard in accordance with Accounting Standard 18
           on 'Related Party Disclosures' issued by The Institute of Chartered Accountants of India (ICAI) and Regulation 25(8) of the SEBI (Mutual Funds)
           Regulations, 1996, are as under :



   (i)     Related Party relationships

           Name                                                      Description of relationship
           Principal Financial Services Inc., USA                    Sponsor of the Fund
           Principal Trustee Company Private Ltd.                    Trustee of the Fund

           Principal Pnb Asset Management Company Private Ltd.       Subsidiary of the Sponsor and the Scheme's asset manager

           Pnb Principal Insurance Broking Private Limited           Subsidiary of the Sponsor
           Principal Consulting (India) Private Limited              Subsidiary of the Sponsor

           Pnb Principal Financial Planners Private Limited          Subsidiary of the Sponsor
           Principal Pnb Life Insurance Company Limited              Subsidiary of the Sponsor
           Principal Financial Group (Mauritius) Limited             A Company holding substantial interest in the share capital of the
                                                                     Scheme's asset manager
           Punjab National Bank                                      A Company holding substantial interest in the share capital of the
                                                                     Scheme's asset manager
           PNB Gilts Limited                                         Subsidiary of Punjab National Bank
           PNB Housing Finance Limited                               Subsidiary of Punjab National Bank

           Schemes of the Fund under common control of the
           Sponsor

           Principal Child Benefit Fund                              Principal Long Term Equity Fund 3 Year Plan Series II
           Principal Pnb FMP 385 Days Series XI                      Principal Monthly Income Plan
           Principal Pnb FMP 540 Days Series IV                      Principal Monthly Income Plan - MIP Plus
           Principal Floating Rate Fund - Flexible Maturity Plan     Principal Balanced Fund
           Principal Floating Rate Fund - Short Maturity Plan        Principal Dividend Yield Fund
           Principal Govt. Securities Fund - Investment Plan         Principal Emerging Bluechip Fund
           Principal Global Opportunities Fund                       Principal Money Manager Fund
           Principal Growth Fund                                     Principal Personal Tax Saver Fund
           Principal Income Fund                                     Principal Resurgent India Equity Fund
           Principal Index Fund                                      Principal Income Fund - Short Term Plan
           Principal Services Industries Fund                        Principal Tax Savings Fund
           Principal Large Cap Fund                                  Principal Junior Cap Fund
           Principal Ultra Short Term Fund                           Principal Govt. Securities Fund - Saving Plan
           Principal Cash Management Fund - Liquid Option            Principal Pnb Fixed Duration Fund 3 Year Plan Series I
           Principal Long Term Equity Fund                           Principal Pnb FMP 460 Days Series IV
           Principal Pnb FMP 540 Days Series II                      Principal Pnb FMP 385 Days Series VIII
           Principal Pnb FMP 385 Days Series VII                     Principal Pnb FMP 385 Days Series IX

   (ii)    Transactions, if any, with the above mentioned related parties, as defined under Accounting Standard 18 and Regulation 25(8) of the SEBI Regulations
           are given below:
                                                                                                                                                                              (Rs. In Lacs)
           Name of the Related Party                                 Nature of                For the year ended Outstanding as at                 For the year ended Outstanding as at
                                                                     Transactions              March 31, 2010    March 31, 2010                     March 31, 2009    March 31, 2009

                                                                     Fees for Trusteeship
           Principal Trustee Company Private Ltd.                                                               1.60                       0.13                   1.48                     0.07
                                                                     Services



           Principal Pnb Asset Management Company Private Ltd.       Fees for Management                     182.67                       17.43                 165.55                     7.52
                                                                     Services

                                                                     Investor
           Principal Consulting (India) Private Limited.             Communication                            15.90                           -                  20.73                     0.94
                                                                     Service Fees



           Punjab National Bank                                      Bank Charges                                  -                          -                   0.31                      -




   (iii)   Commission Paid to Associates / Related Parties / Group Companies of Sponsor AMC



                                                                                                                       % of Commission                                      % of Business Given
                                                                                             Commission Paid                                      Business Given (Rs.
           Name of the Associates                                    Period covered                                    paid to total                                        to total Business
                                                                                             (Rs)                                                 In Crores)
                                                                                                                       Commission paid                                      Received



           Punjab National Bank                                      FY 2009-10                        1,573,613.21                  27.40%                          -                      -
                                                                     FY 2008-09                        1,705,417.46                  26.06%                       0.00                    1.68%

           Pnb Principal Financial Planners Pvt Ltd                  FY 2009-10                            2,856.66                   0.05%                             -                   -
                                                                     FY 2008-09                            3,234.87                   0.05%                             -                   -

           Note: Commission paid to associates has been disclosed on payment basis and business given indicates Gross Mobilisation (net of rejections, if any)
                  during the corresponding period for which the commission paid has been disclosed.




                                                                                                   121
ANNUAL REPORT



    15        As per the disclosure requirement under Accounting Standard 17 on 'Segment Reporting' issued by ICAI, the Scheme operates only in one segment, viz,
              primarily generate returns, based on the Scheme's Investment Objectives.


    16        The historical per unit statistics are given in Annexure III.

    17        Previous Year's figures have been regrouped and reclassified, wherever necessary, to make them comparable.

    18        'Rs. 0.00' indicates amount less than a lac and 'Rs. -' indicates Nil amount.




    As per our report of even date attached.

    For N. M. Raiji & Co.                                                     For and on behalf of Principal Pnb                            For and on behalf of Principal
    Chartered Accountants                                                     Asset Management Company Pvt. Ltd                              Trustee Company Pvt. Ltd

    Sd/-                                                                       Sd/-                                                          Sd/-                            Sd/-
    Vinay D. Balse                                                            M. M. Chitale                                                 B.G. Deshmukh                    H. M. Singh
    Partner                                                                   Chairman                                                      Chairman                         Director


                                                                              Sd/-                Sd/-
    Place : Mumbai                                                            Rajan Ghotgalkar    P.V.K. Mohan
    Date: July 09, 2010                                                       Managing Director   Fund Manager




                                                                                                     122
ANNUAL REPORT




         PRINCIPAL LONG TERM EQUITY
         FUND - 3 YEAR PLAN SERIES - II




                       123
ANNUAL REPORT



                                              AUDITORS’ REPORT

     TO THE TRUSTEE OF
     PRINCIPAL MUTUAL FUND

     We have audited the attached Balance Sheet as at March 31, 2010, the Revenue Account and the Cash
     Flow Statement for the year ended on that date, annexed thereto of Principal Pnb Long Term Equity
     Fund - 3 Year Plan- Series II (the scheme) of the Principal Mutual Fund. These financial statements are
     the responsibility of the Management. Our responsibility is to express an opinion on these financial
     statements based on our audit. We report that:

     1.      Our audit was conducted in accordance with generally accepted Standards on Auditing in India.
             These Standards require that we plan and perform the audit to obtain reasonable assurance about
             whether the financial statements are free of material misstatements. An audit includes examining
             on a test basis, evidence supporting the amounts and disclosures in the financial statements. An
             audit also includes assessing the accounting principles used and significant estimates made by the
             Management, as well as evaluating the overall financial statement presentation. We believe that
             our audit provides a reasonable basis for our opinion.

     2.      We have obtained all information and explanations, which, to the best of our knowledge and belief
             were necessary for the purpose of our audit.

     3.      The Balance Sheet, the Revenue Account and the Cash Flow Statement are in agreement with the
             books of account of the Scheme.

     4.      In our opinion, valuation methods for Non Traded Securities, adopted by the scheme are fair and
             reasonable and are in accordance with the guidelines for valuation issued by SEBI and approved
             by the Trustees.

     5.      The accounts have been prepared in accordance with the accounting policies adopted by the
             trustees of the Fund and as specified in the Ninth Schedule to the SEBI (Mutual Funds)
             Regulations, 1996.

     6.      In our opinion and to the best of our information and according to the explanations given to us, the
             said accounts give the information required by the SEBI (Mutual Funds) Regulations, 1996 and
             give a true and fair view in accordance with the generally accepted accounting principles in India:

             a.   in the case of Balance Sheet, of the state of affairs of the scheme as at March 31, 2010;

             b.   in the case of Revenue Account, of the surplus of the scheme for the year ended on that date;
                  and

             c.   in the case of Cash Flow Statement, of the cash flows for the year ended on that date.

                                                                                         For N. M. Raiji & Co.
                                                                                        Chartered Accountants
                                                                                Firm Registration No. 108296W


                                                                                                          Sd/-
                                                                                               Vinay D. Balse
                                                                                                      Partner
                                                                                         Membership No. 39434
     Place : Mumbai
     Date : July 09, 2010




                                                         124
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                                          PRINCIPAL MUTUAL FUND
                        PRINCIPAL PNB LONG TERM EQUITY FUND 3 YEAR PLAN SERIES - II
                                        Balance Sheet as at March 31, 2010


                                                                   Schedule             March 31, 2010               March 31, 2009
                                                                                               Rupees                       Rupees
 LIABILITIES
 Unit Capital                                                          1                 2,045,930,069                 2,737,947,933
 Reserves & Surplus                                                    2                   207,874,685                (1,509,186,032)
 Current Liabilities and Provisions                                    3                    15,739,958                     4,018,427
 Total                                                                                   2,269,544,712                 1,232,780,328

 ASSETS
 Investments                                                           4                 2,167,928,103                1,118,179,018
 Deposits                                                              5                    49,632,715                   21,495,264
 Other Current Assets                                                  6                    31,745,494                   11,429,501
 Deferred Revenue Expenditure - not written off                        8                    20,238,400                   81,676,545
 Total                                                                                   2,269,544,712                1,232,780,328

 Significant Accounting Policies and Notes to Accounts                 9
 The Schedules form an integral part of the Financial Statements


 As per our report of even date attached.




 For N. M. Raiji & Co.                For and on behalf of Principal Pnb         For and on behalf of Principal
 Chartered Accountants                Asset Management Company Pvt. Ltd           Trustee Company Pvt. Ltd

 Sd/-                                 Sd/-                                       Sd/-                             Sd/-
 Vinay D. Balse                       M. M. Chitale                              B.G. Deshmukh                    H. M. Singh
 Partner                              Chairman                                   Chairman                         Director


                                      Sd/-                 Sd/-
 Place : Mumbai                       Rajan Ghotgalkar     P.V.K. Mohan
 Date : July 09, 2010                 Managing Director    Fund Manager




                                                                           125
ANNUAL REPORT

                                                      PRINCIPAL MUTUAL FUND
                                    PRINCIPAL PNB LONG TERM EQUITY FUND 3 YEAR PLAN SERIES - II
                                             Revenue Account for the year ended March 31, 2010
                                                                             Schedule                        March 31, 2010                             March 31, 2009
                                                                                                                    Rupees                                     Rupees

 INCOME

 Dividend                                                                                                          29,955,416                               40,653,906
 Interest and Discount Income                                                    7                                  3,826,910                                5,653,178
 Profit on Sale / Redemption of Investments (other than inter-scheme
 transfer / sale)                                                                                                 232,592,860                                          -

 Total                                                                                                            266,375,186                               46,307,084



 EXPENSES AND LOSSES


 Loss on Sale / Redemption of Investments (Other than inter-scheme
 transfer / sales)                                                                                                          -                              636,979,285
 Loss on inter-scheme transfer / sale of investments                                                                        -                                  378,680
 Management Fees                                                                                                   25,156,685                               18,724,242
 Trusteeship Fees                                                                                                     231,854                                  193,666
 Agent's Commission                                                                                                11,133,150                                8,448,918
 Publicity & Marketing Expenses                                                                                     5,151,409                                4,161,382
 Audit Fees                                                                                                            98,143                                  127,836
 Custodian's Fees and Expenses                                                                                        555,439                                  499,197
 Registrar's Fees and Expenses                                                                                      3,928,427                                2,771,510
 Other Operating Expenses                                                                                           7,213,441                                8,606,174
 Deferred Revenue Expenditure written off                                                                          53,030,422                               56,587,828

 Total                                                                                                            106,498,970                              737,478,718
 Surplus / (Deficit) for the year                                                                                 159,876,216                             (691,171,634)

 Net change in Unrealised gain / (loss) in the Value of Investments (Refer
 Note III(2) to Schedule 9)                                                                                   1,599,215,764                               (792,398,586)

 Net Surplus / (Deficit) including Net change in Unrealised Appreciation /
 (Depreciation) for the year                                                                                  1,759,091,980                              (1,483,570,220)


 Appropriation

 Opening Balance                                                                                             (1,529,697,549)                              (102,494,868)
 Add: Net Surplus including Net change in Unrealised Appreciation /
 (Depreciation) for the year                                                                                  1,759,091,980                              (1,483,570,220)
 Unrealised Appreciation in value of Investments as at the beginning of
 the year                                                                                                                    -                                         -

 Unrealised Appreciation in value of Investments as at the end of year                                            (543,296,773)                                       -
 Add/(Less) : Income Equalisation                                                                                  100,929,519                               56,367,539
 Dividend Distribution                                                                                                       -                                        -
 Dividend Tax                                                                                                                -                                        -
 Net Deficit Transferred to Balance Sheet                                                                         (212,972,823)                          (1,529,697,549)

 Significant Accounting Policies and Notes to Accounts                           9

 The Schedules form an integral part of the Financial Statements

 As per our report of even date attached.

 For N. M. Raiji & Co.                                                       For and on behalf of Principal Pnb                       For and on behalf of Principal
 Chartered Accountants                                                       Asset Management Company Pvt. Ltd                         Trustee Company Pvt. Ltd

 Sd/-
 Vinay D. Balse                                                              Sd/-                                                 Sd/-                  Sd/-
 Partner                                                                     M. M. Chitale                                        B.G. Deshmukh         H. M. Singh
                                                                             Chairman                                             Chairman              Director

                                                                             Sd/-                          Sd/-
 Place : Mumbai                                                              Rajan Ghotgalkar              P.V.K. Mohan
 Date : July 09, 2010                                                        Managing Director             Fund Manager




                                                                                          126
ANNUAL REPORT

                                                                        PRINCIPAL MUTUAL FUND
                                                   PRINCIPAL PNB LONG TERM EQUITY FUND 3 YEAR PLAN SERIES - II
                                                     Schedules forming part of the Financial Statements as at 31 March, 2010
 SCHEDULE 1 - UNIT CAPITAL                                                           March 31, 2010                                         March 31, 2009
                                                                             Units                          Rupees                  Units                            Rupees
 (A)       Growth Option
 Initial Capital Issued and Subscribed :
 Units of Rs. 10 each fully paid up                                237,084,329.127                    2,370,843,291     237,084,329.127                       2,370,843,291

 Outstanding :
 At the beginning of the year                                      221,986,169.545                    2,219,861,695     230,093,050.980                       2,300,930,510
 Issued during the year                                                    498.700                            4,987                -                                      -
                                                                   221,986,668.245                    2,219,866,682     230,093,050.980                       2,300,930,510
 Repurchased during the year                                        52,973,520.700                      529,735,207       8,106,881.435                          81,068,814
 At the end of the year (A)                                        169,013,147.545                    1,690,131,475     221,986,169.545                       2,219,861,695


 (B)       Dividend Option
 Initial Capital Issued and Subscribed :
 Units of Rs. 10 each fully paid up                                 56,504,839.838                     565,048,398       56,504,839.838                         565,048,398

 Outstanding :
 At the beginning of the year                                       51,808,623.714                     518,086,237       55,843,380.899                         558,433,809
 Issued during the year                                                  4,983.800                          49,838                 -                                      -
                                                                    51,813,607.514                     518,136,075       55,843,380.899                         558,433,809
 Repurchased during the year                                        16,233,748.100                     162,337,481        4,034,757.185                          40,347,572
 At the end of the year (B)                                         35,579,859.414                     355,798,594       51,808,623.714                         518,086,237


 TOTAL (A+B)                                                       204,593,006.959                    2,045,930,069     273,794,793.259                       2,737,947,933




 SCHEDULE 2 - RESERVES AND SURPLUS                                                                                       March 31, 2010                      March 31, 2009
 UPR                                                                                                                           Rupees                              Rupees

 Unit Premium Reserve
 At the beginning of the year                                                                                                20,511,517                          22,019,620
 Net addition / (deduction) during the year                                                                                (142,960,782)                         (1,508,103)
 At the end of the year                                                                                                    (122,449,265)                         20,511,517


 Balance in Revenue Account                                                                                                (212,972,823)                      (1,529,697,549)


 Unrealised Appreciation in value of Investments                                                                           543,296,773                                     -

 Total                                                                                                                     207,874,685                        (1,509,186,032)



 SCHEDULE 3 - CURRENT LIABILITIES
 AND PROVISIONS                                                                                                         March 31, 2010                       March 31, 2009
                                                                                                                               Rupees                               Rupees
 Unit Repurchase Amount Payable                                                                                              2,701,011                                    -
 Registrar's Fees and Expenses                                                                                                 466,613                              407,211
 Custodian's Fees and Expenses                                                                                                  55,250                               24,273
 Inter Scheme Dues                                                                                                               3,887                                    -
 Management Fees                                                                                                             2,407,143                               31,785
 Trusteeship Fees                                                                                                               19,242                                9,727
 Audit Fees                                                                                                                     98,143                              127,836
 Agent's Commission Payable                                                                                                  4,994,381                            1,424,483
 Publicity and Marketing Expenses                                                                                            1,973,734                               61,209
 Other Current Liabilities                                                                                                   3,020,554                            1,931,903

                                                                                                                               15,739,958                         4,018,427




                                                                                          127
ANNUAL REPORT



  SCHEDULE 4 - INVESTMENTS                                                 March 31, 2010    March 31, 2009
  (Refer to attached statement of Portfolio holding as at
  March 31, 2010)                                                                 Rupees            Rupees
  Debentures and Bonds Unlisted / Privately Placed                             12,823,599        20,100,000
  Government Securities/Treasury bills                                                  -         9,324,000
  Equity Shares                                                             2,155,104,504     1,088,755,018

                                                                            2,167,928,103     1,118,179,018



  SCHEDULE 5 - DEPOSITS                                                    March 31, 2010    March 31, 2009
                                                                                  Rupees            Rupees
  Collateralised Lending                                                       49,632,715        21,495,264

                                                                               49,632,715        21,495,264




  SCHEDULE 6 - OTHER CURRENT ASSETS                                        March 31, 2010    March 31, 2009
                                                                                  Rupees            Rupees
  Balances with Banks and Reserve Bank of India in Current Account              4,120,973           298,600
  Unit Subscription Receivable                                                          -           209,808
  Contract for Sale of Investment                                              26,174,353         9,766,597
  Outstanding and Accrued Income                                                1,450,168         1,154,496

                                                                               31,745,494        11,429,501



  SCHEDULE 7 - INTEREST & DISCOUNT
  INCOME                                                                   March 31, 2010    March 31, 2009
                                                                                  Rupees            Rupees
  Debentures/Bonds                                                              2,545,225         2,251,490
  Government Securites / Treasury Bills                                            26,889            17,456
  Commercial Paper / Certificate of Deposits / Usance Bills                             -         1,187,947
  Collateralised Lending & Reverse Repo                                         1,254,796         2,160,259
  Others (net) - (Refer Note III(4) to Schedule 9)                                      -            36,026
                                                                                3,826,910         5,653,178



  SCHEDULE 8 - DEFERRED REVENUE
  EXPENDITURE                                                              March 31, 2010    March 31, 2009
                                                                                  Rupees            Rupees

  At the beginning of the year                                                 81,676,545       142,440,061

  Amount amortised during the year                                            (53,030,422)      (56,587,828)
  Recovery of proportionate unamortised amount from investors
  exiting before amortisation is complete (Refer Note II (11) to
  Schedule 9)                                                                  (8,407,723)       (4,175,688)

  At the end of the year                                                       20,238,400        81,676,545




                                                                     128
ANNUAL REPORT

                                         PRINCIPAL MUTUAL FUND
                      PRINCIPAL PNB LONG TERM EQUITY FUND 3 YEAR PLAN SERIES - II
                             Cash Flow Statement For The Year Ended March 31, 2010

                                                                                                        March 31, 2010            March 31, 2009
                                                                                                            Amount                    Amount
                                                                                                                 (Rs.)                     (Rs.)
 A. Cash flow from Operating Activities
    Surplus / (Deficit) for the year                                                                       159,876,216              (691,171,634)
    Add: Deferred Revenue Expenditure amortised (Non-cash)                                                  53,030,422                56,587,828
    Surplus before adjustments                                                                             212,906,638              (634,583,806)
    Adjustments for:-
    (Increase)/Decrease in Investments (at cost)                                                           549,466,678               676,923,451
    (Increase)/Decrease in Other Current Assets                                                            (16,703,428)               25,337,354
    Increase/(Decrease) in Current Liabilities                                                               9,016,633               (23,507,168)

    Net cash generated from / (used in) Operations                                       (a)               754,686,521                44,169,831


 B. Cash flow from Financing Activities
    Increase/(Decrease) in Unit Capital                                                                   (692,017,864)             (121,416,386)
    Increase/(Decrease) in Reserves                                                                        (42,031,263)               54,859,436
    Adjustments for:-
    Increase/(Decrease) in Sundry Creditors for redeemed units and dividend                                 11,112,621                (4,046,712)
    (Increase)/Decrease in Sundry Debtors for units issued                                                     209,808                   (53,857)

    Net cash (used in) / generated from Financing Activities                             (b)              (722,726,698)              (70,657,519)

    Net Increase / (Decrease) in Cash and Cash Equivalents                             (a + b)              31,959,823               (26,487,688)

    Cash and Cash Equivalents as at the :-
    Beginning of the year                                                                                   21,793,864                48,281,552
    End of the year                                                                                         53,753,687                21,793,864




    Note : Cash and Cash Equivalents includes the following :
            (1) Balances with Banks                                                                          4,120,973                   298,600
            (2) Collateralised Lending                                                                      49,632,715                21,495,264




    The above cash flow statement has been prepared under the indirect method setout in Accounting Standard (AS-3) issued by the Institute of
    Chartered Accountants of India.

    As per our report of even date attached.




    For N. M. Raiji & Co.                       For and on behalf of Principal Pnb               For and on behalf of Principal
    Chartered Accountants                    Asset Management Company Pvt. Ltd                    Trustee Company Pvt. Ltd

    Sd/-                                       Sd/-                                               Sd/-                               Sd/-
    Vinay D. Balse                              M. M. Chitale                                    B.G. Deshmukh                       H. M. Singh
    Partner                                    Chairman                                          Chairman                            Director


                                                Sd/-                          Sd/-
    Place : Mumbai                            Rajan Ghotgalkar            P.V.K. Mohan
    Date : July 09, 2010                      Managing Director          Fund Manager




                                                                           129
ANNUAL REPORT




                                 PRINCIPAL MUTUAL FUND

    PRINCIPAL PNB LONG TERM EQUITY FUND 3 YEAR PLAN – SERIES II

                                             SCHEDULE - 9

     SIGNIFICANT ACCOUNTING POLICIES AND NOTES TO ACCOUNTS FORMING PART OF
                                   ACCOUNTS

     I. BACKGROUND INFORMATION

        A. Organisation

        Principal Mutual Fund (formerly known as IDBI-PRINCIPAL Mutual Fund) has been constituted as a
        Trust in accordance with the provisions of the Indian Trusts Act, 1882 (2 of 1882). The Mutual Fund
        is registered with the Securities and Exchange Board of India (SEBI) under registration no.
        MF/019/94/0 dated December 13, 1994.

        The Fund was initially set up by Industrial Development Bank of India (IDBI) in 1994 by execution of
        a Trust Deed dated November 25, 1994, under which IDBI was the sole Settlor, Sponsor and Principal
        Trustee. Subsequently, on March 31, 2000, Principal Financial Services Inc. USA became the deemed
        sponsor along with IDBI by acquiring 50% stake in IDBI-PRINCIPAL Asset Management Company
        Limited. Pursuant to SEBI Letter dated October 18, 2002, the IDBI-PRINCIPAL Trustee Company
        Limited took over the trusteeship and the associated responsibilities and obligations of the IDBI-
        PRINCIPAL Mutual Fund. The Name of the Trustee Company was changed to Principal Trustee
        Company Limited w.e.f. June 27, 2003. The Name of the Trustee Company was changed to Principal
        Trustee Company Private Limited w.e.f. October 20, 2003.

        On June 23, 2003, Principal Financial Services Inc. USA, acquired a 100% stake in IDBI-PRINCIPAL
        Asset Management Company Limited, through its wholly owned subsidiary, Principal Financial
        Group (Mauritius) Limited. Accordingly, Principal Financial Services Inc. USA, became the Sole
        Sponsor of the Fund and Principal Financial Group (Mauritius) Limited has became the Sole Settlor
        of the Fund. The name of the Asset Management Company was changed to Principal Asset
        Management Company Limited w.e.f. June 27, 2003, and on October 20, 2003 was again changed to
        Principal Asset Management Company Private Limited (PAMC).

        On May 5, 2004, Punjab National Bank and Vijaya Bank acquired 30% stake and 5% stake
        respectively in Principal Asset Management Company Private Limited, as well as in Principal Trustee
        Company Private Limited and became the co-settlers to the Fund. The name of the Asset
        Management Company changed to Principal Pnb Asset Management Company Private Limited w.e.f
        January 24, 2005.

        B. Scheme

        Principal Pnb Long Term Equity fund - 3 Year Plan - Series II is a closed ended scheme of Principal
        Mutual Fund offering investment plan having maturity period of 3 years. The scheme was launched
        for initial subscription on August 03, 2007. The Scheme’s New Fund offer (NFO) closed on August
        31, 2007. The allotment date for the NFO units was September 28, 2007.




                                                    130
ANNUAL REPORT




       The primary objective of the Scheme is to achieve long-term capital appreciation by investing in
       equity and equity related instruments

     II. SIGNIFICANT ACCOUNTING POLICIES

          1. Basis of Accounting

                    The scheme maintains books of account on an accrual basis.

          2. Investments

              2.1     Investment transactions are accounted on trade dates.

              2.2     The cost of investment includes brokerage, premium paid on acquisition, transaction
                      charges and other costs associated with purchase of investments.

              2.3     Bonus entitlements are recognized on ex-bonus dates.


          3. Portfolio Valuation

              3.1     Investments are valued on the Balance Sheet date as per the recommendations of
                      SEBI.

              3.2     Traded securities (excluding government securities and Treasury bills) are valued at
                      the last quoted closing price on the principal stock exchange on which the security is
                      traded.

              3.3     A security (other than debt securities), which is not traded on any stock exchange on
                      a particular valuation day, is valued at the price at which it was traded on the selected
                      stock exchange, as the case may be, on the earliest previous day, such day not being
                      more than thirty days prior to the valuation date.

              3.4     A debt security (other than government securities), which is not traded on any stock
                      exchange on any particular valuation day, is considered as ‘Non-Traded Security’.
                      A debt Security (other than government securities) is considered as ‘Thinly-Traded
                      Security’, if on the valuation date, there are no individual trades in that security in
                      marketable lots (presently Rs 5 Crore) on the principal stock exchange.

                      Investment in non-traded / thinly traded debt securities including securitised debt
                      (other than government securities) with a residual maturity greater than 182 days are
                      valued using CRISIL Bond Valuer, which is based on the concept of using spread
                      over Government Securities to arrive at yields for pricing.

              3.5     Investments in traded/non-traded/thinly traded government securities are valued at the
                      prices released by CRISIL, which is an approved agency recommended by the
                      Association of Mutual Funds of India (AMFI).

              3.6     Treasury bills are valued at cost plus the difference between the redemption value and
                      the cost, spread uniformly over the remaining maturity period of the instrument.




                                                    131
ANNUAL REPORT




                  Treasury Bills listed on a recognised stock exchange are valued at the last quoted
                  weighted average yield, on the principal exchange on which the security is traded. If
                  no sale is reported at that date, Treasury Bills are valued at fair value, as determined
                  in good faith by Principal Pnb Asset Management Company Private Limited, under
                  procedures approved by the Trustees of Principal Mutual Fund, in accordance with
                  the guidelines for valuation of securities for mutual funds issued by SEBI.

           3.7    Money Market securities and non-traded debt securities, with residual maturity of
                  upto 182 days, are valued at cost (including accrued interest), plus the difference
                  between the redemption value (inclusive of interest) and the cost, spread uniformly
                  over the remaining maturity period of the instrument.

           3.8    Thinly traded Equity shares /Equity related securities/non-traded securities (other
                  than Government Securities) are valued in good faith by the investment manager, on
                  the basis of valuation principles laid down by SEBI.

           3.9    Investment in non-traded debt securities, including securitised debt (other than
                  government securities) with a residual maturity greater than 182 days, are valued
                  using CRISIL Bond Valuer, which is based on the concept of using spread to maturity
                  to arrive at the yields for pricing.

           3.10   Securities in the nature of Floating Rate Notes (FRN) are valued at cost plus the
                  difference between the redemption value and the cost, spread uniformly over the
                  remaining maturity period of the instrument. FRNs listed on a recognised stock
                  exchange are valued at the last quoted closing price on the principal exchange, on
                  which the security is traded. If no sale is reported at that date FRNs are valued at fair
                  value, as determined in good faith by Principal Pnb Asset Management Company
                  Private Limited, under procedures approved by the Trustees of Principal Mutual
                  Fund, in accordance with the guidelines for valuation of securities for mutual funds
                  issued by SEBI.

           3.11   Securitised Debt are valued at fair value, as determined in good faith by Principal Pnb
                  Asset Management Company Private Limited, under procedures approved by the
                  Trustees of Principal Mutual Fund, in accordance with the guidelines for valuation of
                  securities for mutual funds issued by SEBI.

           3.12   Interest Rate Swaps with a maturity period of more than 182 days are marked to
                  market by recording the net present values of the difference in outflows and inflows
                  as unrealised appreciation / depreciation. Interest Rate Swaps with a maturity of 182
                  days and less are amortised over the balance contracted period.

           3.13   Investments in Call money, bills purchased under re-discounting scheme and term
                  deposits with banks are valued at cost plus accruals.

           3.14   An investment is regarded as non-performing if the interest and /or principal amount
                  has not been received or remains outstanding for one quarter from the day such
                  income or installment has fallen due.

           3.15   Appreciation/Depreciation, as the case may be, in the value of securities at the year-
                  end is computed for the scheme, whereby the aggregate market value of all securities




                                                132
ANNUAL REPORT




                    taken together is compared with the aggregate cost of acquisition. Such net balance is
                    charged to Revenue Account.

            3.16    The above policies are followed as and when applicable.

         4. Income Recognition

            4.1     Dividend income is accrued on ex-dividend date.

            4.2     Profit or loss on sale of investments is arrived at by applying weighted average cost
                    on trade date.

            4.3     Interest on debentures and other fixed income investments is recognized on accrual
                    basis.

            4.4     In respect of Interest Rate Swaps, interest expense and income are accrued on a net
                    basis daily.

            4.5     Income on non-performing assets (NPA) is recognized on cash basis.

         5. Management Fees

            Investment Management fees payable to Principal Pnb Asset Management Co. Pvt. Ltd. is
            computed on the basis of Average Daily Net Assets Value.

         6. Income Equalisation Reserve and Unit Premium Reserve

            a.       Upto March 14, 2010, upon purchase/sale of units by the Scheme, an appropriate part
            of the purchase / sale price was credited / debited to the Income Equalisation Reserve
            Account. The balance amount of the purchase/sale price after reducing the face value was
            transferred to Unit Premium Reserve Account.

            b.      With effect from March 15, 2010, pursuant to the issue of SEBI circular no.
            SEBI/IMD/CIR no 18/198647/2010 dated March 15, 2010, upon purchase/sale of units by the
            Scheme, where the purchase/sale price is higher than the face value per unit, the amount
            representing unrealized gain and balance in the Unit Premium Reserve Account is
            credited/debited to Unit Premium Reserve Account. The balance amount of the purchase/sale
            price after reducing the face value is transferred to Income Equalization Reserve Account.
            Upon purchase/sale of units by the Scheme, where the purchase/sale price is lower than the
            face value per unit, the difference between the sale price and face value is debited to Income
            Equalization Reserve Account. Distributable surplus is arrived at after excluding unrealized
            gains. Balance lying to the credit of Unit Premium Reserve Account is not considered for the
            purpose of dividend distribution. Where the Unit Premium Reserve has a debit balance, the
            excess thereof over the unrealized gain is also deducted in arriving at the distributable surplus.

            c.     The balance in Income Equalization Reserve Account is transferred to the Revenue
            Account at the end of the year.




                                                   133
ANNUAL REPORT




         7. Provisions

            (i) In the case of interest accrued on investments, provision is made in respect of amounts
            which have not been received for a period of 3 months beyond the due date. No further
            accrual of income is made in respect of such investments.

            (ii) Provision is made in respect of the principal amount of securities, in accordance with
            valuation principles laid down by SEBI.

            (iii) Provision is made in respect of accrued dividend, which has not been received for a
            period of twelve months beyond the due date.

         8. Entry and Exit Load

            a) Upto July 31, 2009 load charged at the time of purchase/sale of units was utilized for
               incurring distribution and marketing expenses. Out of the residual amount, amounts
               considered to be in excess of future requirements by the Trustees were recognized as
               income, and the residual amount was carried forward into the next year.

            b) With effect from August 1, 2009 In accordance with the SEBI circular dated June 30, 2009:

               i) No entry load is charged on fresh purchase applications received after August 1, 2009
               (except on SIPs registered prior to August 1, 2009 which is utilised for incurring
               distribution and marketing expenses. Out of the residual amount, amounts considered to be
               in excess of future requirements by the Trustees are recognized as income, and the residual
               amount carried forward into the next year Load Charges).
               ii) Exit load charged in excess of 1% is recognized as income of the scheme immediately.
               iii) Exit load charged upto 1% is parked in a Liability Account, which is utilized for
               incurring distribution and marketing expenses. Out of the residual amount, amounts
               considered to be in excess of future requirements by the Trustees are recognized as
               income, and the residual amount carried forward into the next year.

         9. Deferred Revenue Expenditure

            Deferred Revenue expenses pertain to expenses incurred during the New Fund Offer ("NFO")
            period at the time of launch of the scheme. The same is being amortised over a period of three
            years from the date of allotment of units. Pursuant to SEBI Circular no. SEBI/IMD/CIR/ No.
            1/64057/06 dated April 4th, 2006, in case an investor exits from a closed-ended scheme
            before amortisation is completed, the Asset Management Company shall redeem the units
            only after recovering the balance proportionate unamortised NFO expenses.




                                                  134
ANNUAL REPORT
      III   NOTES TO ACCOUNTS

       1    The scheme has growth and dividend options. A combined Balance sheet, Revenue Account and Cash Flow are prepared for the scheme.

       2    The Cost and Market Value / Fair Value of investments are given below:

                                                                                                                                                                                                      (Rs. In Lacs)
                                                                                                                                                                        Net Appreciation / (Depreciation) in value
                                                                                  Cost / Amortised cost                         Market Value / Fair Value
                                                                                                                                                                                    of investments
             Investments                                                  March 31, 2010          March 31, 2009          March 31, 2010          March 31, 2009          March 31, 2010        March 31, 2009
 LTEFS26     Equity Shares                                                       16,118.08               21,446.03               21,551.05               10,887.55                 5,432.97           (10,558.48)
 LTEFS23     Government Securities/Treasury bills                                        -                    93.95                      -                    93.24                       -                 (0.71)
 LTEFS27
             Debentures and Bonds Unlisted / Privately Placed                          128.24                  201.00                  128.24                  201.00                       -                     -

             TOTAL                                                                  16,246.31               21,740.98              21,679.28               11,181.79                 5,432.97          (10,559.19)

            Net Change in unrealised appreciation in the value of investment for the year ended March 31, 2010 is Rs. 15992.16 Lacs

       3    The industry-wise 'Statement of Portfolio Holding' as on March 31, 2010 (Referred to in Schedule 4 to the Balance Sheet) is given in Annexure I.

       4    Interest and Discount - Others (Net) includes amounts received from and paid to other schemes of the Fund on account of delay in the movement of unit subscription application
            money of one scheme residing in the other scheme, calculated for the period of the delay on the basis of the prevailing CBLO rates.


       5    The aggregate book value and fair value of non traded / thinly traded investments, which have been valued in good faith in accordance with the guidelines for valuation of
            securities for Mutual Funds issued by SEBI, are given below:

                                                                                                       (Rs. In Lacs)
                                                                          March 31, 2010          March 31, 2009
                                   Particulars                              Amount                  Amount
             Book Value                                                              128.24                  201.00
             Market / Fair Value                                                     128.24                  201.00

       6    Net Asset Value per unit of various options are as under:


             Name of the Option                                           March 31, 2010          March 31, 2009
             Growth                                                                   11.02                    4.49
             Dividend                                                                 11.02                    4.49


       7    Aggregate value of Purchases and Sales made during the year, expressed as a percentage of Average Daily Net Asset Value are as under:

                                                                                         Purchases                                        Sales *

                                                                        Amount (Rs. In lacs) % of Avg. Net Assets Amount (Rs. In lacs) % of Avg. Net Assets
                                 March 31, 2010                                 142,507.37                 614.67         150,061.94                 647.25
                                 March 31, 2009                                  30,838.21                 159.24          31,299.46                 161.62
            * Sales includes redemptions / maturities

       8    Contracts for sale pending deliveries as on March 31, 2010, amounting to Rs 261.74 lacs (Previous Year : Rs. Nil) have been excluded from the
            Investments.

       9    Details of Management Fees paid to Principal Pnb Asset Management Co. Pvt. Ltd. and its computation thereof:
                                                                                                                          (Rs. In Lacs)
                                                                                                                 % of Management
                                                                                                                 Fees to Average
                                                                        Average Daily Net                        Daily Net Asset
                                                                        Asset Value           Management Fees    Value
                                March 31, 2010                                      23,184.40             251.57                   1.09
                                March 31, 2009                                      19,366.30             187.24                   0.97

      10    As per the requirement of Regulation 25(11) of SEBI (Mutual Fund) Regulations, 1996, details of Investments made by the Fund in companies, where
            the companies' investments in any of Principal Mutual Fund schemes exceeds 5% of the scheme's Net Asset Value, is given in Annexure II.



      11    Total Income and Recurring Expenditure for the year expressed as a percentage of Average Daily Net Asset Value are as under:


                                                                    (As a % of Average Daily Net Asset Value)
                                                                                         Recurring
                                                                    Income               Expenditure
                               March 31, 2010                                      11.49                 2.31
                               March 31, 2009                                       2.39                 2.25
            Income / Expenditure exclude appreciation/depreciation on investment.

      12    Unclaimed dividends and Unclaimed redemptions as on March 31, 2010 are Rs. Nil (Previous year : Rs. Nil)

      13    Disclosure as per SEBI circular MFD/CIR No. 3/211/2001 dated April 30, 2001 :
            The Scheme does not have a single unitholder holding more than 25% of the NAV as on March 31, 2010.




                                                                                                     135
ANNUAL REPORT
   14      The Scheme has entered into transactions with certain related parties. The information required in this regard in accordance with Accounting Standard 18
           on 'Related Party Disclosures' issued by The Institute of Chartered Accountants of India (ICAI) and Regulation 25(8) of the SEBI (Mutual Funds)
           Regulations, 1996, are as under :


   (i)     Related Party relationships

           Name                                                      Description of relationship
           Principal Financial Services Inc., USA                    Sponsor of the Fund
           Principal Trustee Company Private Ltd.                    Trustee of the Fund

           Principal Pnb Asset Management Company Private Ltd.       Subsidiary of the Sponsor and the Scheme's asset manager

           Pnb Principal Insurance Broking Private Limited           Subsidiary of the Sponsor
           Principal Consulting (India) Private Limited              Subsidiary of the Sponsor

           Pnb Principal Financial Planners Private Limited          Subsidiary of the Sponsor
           Principal Pnb Life Insurance Company Limited              Subsidiary of the Sponsor
           Principal Financial Group (Mauritius) Limited             A Company holding substantial interest in the share capital of the
                                                                     Scheme's asset manager
           Punjab National Bank                                      A Company holding substantial interest in the share capital of the
                                                                     Scheme's asset manager
           PNB Gilts Limited                                         Subsidiary of Punjab National Bank
           PNB Housing Finance Limited                               Subsidiary of Punjab National Bank

           Schemes of the Fund under common control of the
           Sponsor

           Principal Child Benefit Fund                              Principal Long Term Equity Fund 3 Year Plan Series II
           Principal Pnb FMP 385 Days Series XI                      Principal Monthly Income Plan
           Principal Pnb FMP 540 Days Series IV                      Principal Monthly Income Plan - MIP Plus
           Principal Floating Rate Fund - Flexible Maturity Plan     Principal Balanced Fund
           Principal Floating Rate Fund - Short Maturity Plan        Principal Dividend Yield Fund
           Principal Govt. Securities Fund - Investment Plan         Principal Emerging Bluechip Fund
           Principal Global Opportunities Fund                       Principal Money Manager Fund
           Principal Growth Fund                                     Principal Personal Tax Saver Fund
           Principal Income Fund                                     Principal Resurgent India Equity Fund
           Principal Index Fund                                      Principal Income Fund - Short Term Plan
           Principal Services Industries Fund                        Principal Tax Savings Fund
           Principal Large Cap Fund                                  Principal Junior Cap Fund
           Principal Ultra Short Term Fund                           Principal Govt. Securities Fund - Saving Plan
           Principal Cash Management Fund - Liquid Option            Principal Pnb Fixed Duration Fund 3 Year Plan Series I
           Principal Long Term Equity Fund                           Principal Pnb FMP 460 Days Series IV
           Principal Pnb FMP 540 Days Series II                      Principal Pnb FMP 385 Days Series VIII
           Principal Pnb FMP 385 Days Series VII                     Principal Pnb FMP 385 Days Series IX



   (ii)    Transactions, if any, with the above mentioned related parties, as defined under Accounting Standard 18 and Regulation 25(8) of the SEBI Regulations
           are given below:


                                                                                                                                                                             (Rs. In Lacs)
           Name of the Related Party                                 Nature of                For the year ended Outstanding as at                For the year ended Outstanding as at
                                                                     Transactions              March 31, 2010    March 31, 2010                    March 31, 2009    March 31, 2009

                                                                     Fees for Trusteeship
           Principal Trustee Company Private Ltd.                                                               2.32                      0.19                   1.94                 0.10
                                                                     Services



           Principal Pnb Asset Management Company Private Ltd.       Fees for Management                     251.57                   24.07                    187.24                 0.32
                                                                     Services

                                                                     Investor
           Principal Consulting (India) Private Limited.             Communication                            23.03                          -                  27.11                 1.36
                                                                     Service Fees



           Punjab National Bank                                      Bank Charges                                  -                         -                   0.36                    -




   (iii)   Commission Paid to Associates / Related Parties / Group Companies of Sponsor AMC



                                                                                                                       % of Commission                               % of Business Given
                                                                                             Commission Paid                                     Business Given (Rs.
           Name of the Associates                                    Period covered                                    paid to total                                 to total Business
                                                                                             (Rs)                                                In Crores)
                                                                                                                       Commission paid                               Received



           Punjab National Bank                                      FY 2009-10                        1,962,553.86                 22.39%                          -                    -
                                                                     FY 2008-09                        1,888,843.14                 20.22%                          -                    -

           Pnb Principal Financial Planners Pvt Ltd                  FY 2009-10                           12,632.16                   0.14%                         -                    -
                                                                     FY 2008-09                           11,653.11                   0.12%                         -                    -

           Note: Commission paid to associates has been disclosed on payment basis and business given indicates Gross Mobilisation (net of rejections, if any)
                 during the corresponding period for which the commission paid has been disclosed.




                                                                                                   136
ANNUAL REPORT




    15        As per the disclosure requirement under Accounting Standard 17 on 'Segment Reporting' issued by ICAI, the Scheme operates only in one segment, viz,
              primarily generate returns, based on the Scheme's Investment Objectives.


    16        The historical per unit statistics are given in Annexure III.

    17        Previous Year's figures have been regrouped and reclassified, wherever necessary, to make them comparable.

    18        'Rs. 0.00' indicates amount less than a lac and 'Rs. -' indicates Nil amount.



    As per our report of even date attached.

    For N. M. Raiji & Co.                                                     For and on behalf of Principal Pnb                           For and on behalf of Principal
    Chartered Accountants                                                     Asset Management Company Pvt. Ltd                             Trustee Company Pvt. Ltd

    Sd/-                                                                      Sd/-                                                         Sd/-                             Sd/-
    Vinay D. Balse                                                            M. M. Chitale                                                B.G. Deshmukh                    H. M. Singh
    Partner                                                                   Chairman                                                     Chairman                         Director


                                                                              Sd/-                Sd/-
    Place : Mumbai                                                            Rajan Ghotgalkar    P.V.K. Mohan
    Date: July 09, 2010                                                       Managing Director   Fund Manager




                                                                                                    137
ANNUAL REPORT




   PRINCIPAL PERSONAL TAX SAVER FUND




                  138
ANNUAL REPORT


                                              AUDITORS’ REPORT


     TO THE TRUSTEE OF
     PRINCIPAL MUTUAL FUND

     We have audited the attached Balance Sheet as at March 31, 2010, the Revenue Account and the Cash
     Flow Statement for the year ended on that date, annexed thereto of Principal Personal Tax Saver Fund
     (the scheme) of the Principal Mutual Fund. These financial statements are the responsibility of the
     Management. Our responsibility is to express an opinion on these financial statements based on our audit.
     We report that:

     1.      Our audit was conducted in accordance with generally accepted Standards on Auditing in India.
             These Standards require that we plan and perform the audit to obtain reasonable assurance about
             whether the financial statements are free of material misstatements. An audit includes examining
             on a test basis, evidence supporting the amounts and disclosures in the financial statements. An
             audit also includes assessing the accounting principles used and significant estimates made by the
             Management, as well as evaluating the overall financial statement presentation. We believe that
             our audit provides a reasonable basis for our opinion.

     2.      We have obtained all information and explanations, which, to the best of our knowledge and belief
             were necessary for the purpose of our audit.

     3.      The Balance Sheet, the Revenue Account and the Cash Flow Statement are in agreement with the
             books of account of the Scheme.

     4.      In our opinion, valuation methods for Non Traded Securities, adopted by the scheme are fair and
             reasonable and are in accordance with the guidelines for valuation issued by SEBI and approved
             by the Trustees.

     5.      The accounts have been prepared in accordance with the accounting policies adopted by the
             trustees of the Fund and as specified in the Ninth Schedule to the SEBI (Mutual Funds)
             Regulations, 1996.

     6.      In our opinion and to the best of our information and according to the explanations given to us, the
             said accounts give the information required by the SEBI (Mutual Funds) Regulations, 1996 and
             give a true and fair view in accordance with the generally accepted accounting principles in India:

             a.   in the case of Balance Sheet, of the state of affairs of the scheme as at March 31, 2010;

             b.   in the case of Revenue Account, of the surplus of the scheme for the year ended on that date;
                  and

             c.   in the case of Cash Flow Statement, of the cash flows for the year ended on that date.

                                                                                         For N. M. Raiji & Co.
                                                                                        Chartered Accountants
                                                                                Firm Registration No. 108296W


                                                                                                          Sd/-
                                                                                               Vinay D. Balse
                                                                                                      Partner
                                                                                         Membership No. 39434
     Place : Mumbai
     Date : July 09, 2010




                                                         139
ANNUAL REPORT

                                                     PRINCIPAL MUTUAL FUND
                                               PRINCIPAL PERSONAL TAX SAVER FUND
                                                   Balance Sheet as at March 31, 2010


                                                                   Schedule             March 31, 2010             March 31, 2009
                                                                                               Rupees                     Rupees
 LIABILITIES
 Unit Capital                                                                 1             676,066,675               632,968,538
 Reserves & Surplus                                                           2           5,436,401,691             2,350,454,017
 Current Liabilities and Provisions                                           3              75,353,621                91,369,568
 Total                                                                                    6,187,821,987             3,074,792,123
 ASSETS
 Investments                                                                  4           5,793,692,668             2,798,992,593
 Deposits                                                                     5             320,447,825               175,062,910
 Other Current Assets                                                         6              73,681,494               100,736,620
 Total                                                                                    6,187,821,987             3,074,792,123

 Significant Accounting Policies and Notes to Accounts                        8
 The Schedules form an integral part of the Financial Statements



 As per our report of even date attached.




 For N. M. Raiji & Co.                For and on behalf of Principal Pnb          For and on behalf of Principal
 Chartered Accountants                Asset Management Company Pvt. Ltd            Trustee Company Pvt. Ltd

 Sd/-                                 Sd/-                                        Sd/-                                Sd/-
 Vinay D. Balse                       M. M. Chitale                               B.G. Deshmukh                      H. M. Singh
 Partner                              Chairman                                    Chairman                               Director


                                      Sd/-                        Sd/-
 Place : Mumbai                       Rajan Ghotgalkar            Rajat Jain
 Date : July 09, 2010                 Managing Director          Fund Manager




                                                                           140
ANNUAL REPORT

                                                                   PRINCIPAL MUTUAL FUND
                                                            PRINCIPAL PERSONAL TAX SAVER FUND
                                                          Revenue Account for the year ended March 31, 2010
                                                                           Schedule                             March 31, 2010                                     March 31, 2009
                                                                                                                      Rupees                                             Rupees

 INCOME

 Dividend                                                                                                          61,114,569                                         54,944,870
 Interest and Discount Income                                                  7                                   15,304,485                                         28,983,202
 Profit on Sale / Redemption of Investments (other than inter-scheme
 transfer / sale)                                                                                                 566,508,104                                                   -
 Profit on inter-scheme transfer / sale of investments                                                              1,221,605                                                   -

 Total                                                                                                            644,148,763                                         83,928,072



 EXPENSES AND LOSSES


 Loss on Sale / Redemption of Investments (Other than inter-scheme
 transfer / sales)                                                                                                          -                                       2,068,808,343
 Loss on inter-scheme transfer / sale of investments                                                                        -                                           7,010,935
 Management Fees                                                                                                   39,070,973                                          18,681,917
 Trusteeship Fees                                                                                                     510,263                                             338,865
 Agent's Commission                                                                                                34,334,108                                          17,244,478
 Publicity & Marketing Expenses                                                                                     7,858,663                                          13,201,585
 Audit Fees                                                                                                           598,663                                             720,918
 Custodian's Fees and Expenses                                                                                      1,227,706                                             899,844
 Registrar's Fees and Expenses                                                                                     11,842,921                                           5,421,766
 Other Operating Expenses                                                                                          18,916,182                                          22,047,318

 Total                                                                                                            114,359,479                                       2,154,375,969
 Net Surplus / (Deficit) for the year                                                                             529,789,284                                      (2,070,447,897)

 Net change in Unrealised gain / (loss) in the Value of Investments
 (Refer Note III(2) to Schedule 8)                                                                               2,261,996,580                                        (30,522,137)

 Net Surplus / (Deficit) including Net change in Unrealised Appreciation
 / (Depreciation) for the year                                                                                   2,791,785,864                                     (2,100,970,034)


 Appropriation

 Opening Balance                                                                                                 1,953,536,482                                      3,039,575,718
 Add: Net Surplus including Net change in Unrealised Appreciation /
 (Depreciation) for the year                                                                                     2,791,785,864                                     (2,100,970,034)
 Unrealised Appreciation in value of Investments as at the beginning of
 the year                                                                                                                    -                                                  -

 Unrealised Appreciation in value of Investments as at the end of year                                          (1,307,935,270)                                                 -
 Add/(Less) : Income Equalisation                                                                                  209,444,260                                      1,017,599,267
 Dividend Distribution (Refer Note III(15) to Schedule 8)                                                            1,127,998                                         (2,668,469)
 Dividend Tax                                                                                                                -                                                  -
 Net Surplus Transferred to Balance Sheet                                                                        3,647,959,334                                      1,953,536,482

 Significant Accounting Policies and Notes to Accounts                         8

 The Schedules form an integral part of the Financial Statements

 As per our report of even date attached.

 For N. M. Raiji & Co.                                                     For and on behalf of Principal Pnb                     For and on behalf of Principal
 Chartered Accountants                                                     Asset Management Company Pvt. Ltd                       Trustee Company Pvt. Ltd


 Sd/-                                                                      Sd/-                                                   Sd/-                                Sd/-
 Vinay D. Balse                                                            M. M. Chitale                                          B.G. Deshmukh                      H. M. Singh
 Partner                                                                   Chairman                                               Chairman                              Director


                                                                           Sd/-                            Sd/-
 Place : Mumbai                                                            Rajan Ghotgalkar                Rajat Jain
 Date : July 09, 2010                                                      Managing Director               Fund Manager




                                                                                           141
ANNUAL REPORT
                                                                                  PRINCIPAL MUTUAL FUND
                                                                           PRINCIPAL PERSONAL TAX SAVER FUND
                                                               Schedules forming part of the Financial Statements as at March 31, 2010
 SCHEDULE 1 - UNIT CAPITAL                                                                         March 31, 2010                                           March 31, 2009
                                                                                           Units                                 Rupees            Units                            Rupees
 (A)       Principal Personal Tax Saver Fund
 Initial Capital Issued and Subscribed : @
 Units of Rs. 10 each fully paid up                                                          -                                                      -

 Outstanding :
 At the beginning of the year                                                    63,296,853.806                              632,968,538   44,478,203.369                      444,782,034
 Issued during the year                                                           4,784,078.700                               47,840,787   19,067,356.226                      190,673,562
                                                                                 68,080,932.506                              680,809,325   63,545,559.595                      635,455,596
 Repurchased during the year                                                        474,265.000                                4,742,650      248,705.789                        2,487,058
 At the end of the year (A)                                                      67,606,667.506                              676,066,675   63,296,853.806                      632,968,538




 TOTAL (A)                                                                       67,606,667.506                              676,066,675   63,296,853.806                      632,968,538

 @ : The scheme has been taken over from Sun F&C Mutual Fund. Initial Capital details are not available as per our records

 SCHEDULE 2 - RESERVES AND SURPLUS                                                                                                         March 31, 2010                    March 31, 2009
 UPR                                                                                                                                             Rupees                            Rupees

 Unit Premium Reserve
 At the beginning of the year                                                                                                                396,917,535                       397,163,249
 Net addition / (deduction) during the year                                                                                                   83,589,552                          (245,714)
 At the end of the year                                                                                                                      480,507,087                       396,917,535


 Balance in Revenue Account                                                                                                                 3,647,959,334                     1,953,536,482


 Unrealised Appreciation in value of Investments                                                                                            1,307,935,270                                 -

 Total                                                                                                                                      5,436,401,691                     2,350,454,017



 SCHEDULE 3 - CURRENT LIABILITIES AND
 PROVISIONS                                                                                                                                March 31, 2010                    March 31, 2009
                                                                                                                                                 Rupees                            Rupees
 Contracts for Purchase of Investments                                                                                                                  -                       35,328,342
 Unit Repurchase Amount Payable                                                                                                                1,094,510                           186,134
 Registrar's Fees and Expenses                                                                                                                 1,789,981                         1,419,125
 Custodian's Fees and Expenses                                                                                                                   129,111                            58,519
 Inter Scheme Dues                                                                                                                                      -                           75,285
 Management Fees                                                                                                                               5,244,626                                  -
 Trusteeship Fees                                                                                                                                 44,094                            22,725
 Audit Fees                                                                                                                                      598,663                           720,918
 Agent's Commission Payable                                                                                                                   13,494,374                         6,100,453
 Publicity and Marketing Expenses                                                                                                                975,341                           699,399
 Dividend and Dividend Tax Payable                                                                                                            45,456,980                        39,201,380
 Other Current Liabilities                                                                                                                     6,521,941                         7,290,288
 Unit Capital Pending Allotment                                                                                                                    4,000                           267,000

                                                                                                                                              75,353,621                        91,369,568



 SCHEDULE 4 - INVESTMENTS                                                                                                                  March 31, 2010                    March 31, 2009
 (Refer to attached statement of Portfolio holding as at
 March 31, 2010)                                                                                                                                  Rupees                            Rupees
 Debentures and Bonds Listed / Awaiting Listing                                                                                                 5,053,550                       124,208,175
 Debentures and Bonds Unlisted / Privately Placed                                                                                              25,584,620                        40,200,000
 Asset Backed Securities                                                                                                                                -                        20,101,264
 Government Securities/Treasury bills                                                                                                                   -                        27,972,000
 Commercial Paper / Certificate of Deposit                                                                                                              -                        56,056,680
 Equity Shares                                                                                                                              5,763,054,498                     2,530,454,474

                                                                                                                                            5,793,692,668                     2,798,992,593



 SCHEDULE 5 - DEPOSITS                                                                                                                     March 31, 2010                    March 31, 2009
                                                                                                                                                 Rupees                            Rupees
 Collateralised Lending                                                                                                                      320,447,825                       175,062,910

                                                                                                                                             320,447,825                       175,062,910




                                                                                                             142
ANNUAL REPORT




  SCHEDULE 6 - OTHER CURRENT ASSETS                                        March 31, 2010   March 31, 2009
                                                                                 Rupees           Rupees
  Balances with Banks and Reserve Bank of India in Current Account            47,290,804       50,182,767
  Unit Subscription Receivable                                                16,258,608       41,434,740
  Contract for Sale of Investment                                              6,788,122        2,743,675
  Outstanding and Accrued Income                                               2,029,888        5,873,336
  Inter-Scheme Dues                                                              901,923                 -
  Receivable from the Asset Management Company                                    18,061                 -
  Other Current Assets                                                           394,088          502,102

                                                                              73,681,494      100,736,620




  SCHEDULE 7 - INTEREST & DISCOUNT INCOME                                  March 31, 2010   March 31, 2009
                                                                                 Rupees           Rupees
  Debentures/Bonds                                                             9,213,232        9,505,917
  Government Securites / Treasury Bills                                        1,374,189        1,363,458
  Commercial Paper / Certificate of Deposits / Usance Bills                      294,111       11,137,398
  Collateralised Lending & Reverse Repo                                        4,422,953        6,944,964
  Others (net) - (Refer Note III(4) to Schedule 8)                                      -          31,465
                                                                              15,304,485       28,983,202




                                                                     143
ANNUAL REPORT

                                                     PRINCIPAL MUTUAL FUND
                                             PRINCIPAL PERSONAL TAX SAVER FUND
                                        Cash Flow Statement For The Year Ended March 31, 2010

                                                                                                        March 31, 2010                   March 31, 2009
                                                                                                            Amount                           Amount
                                                                                                                 (Rs.)                            (Rs.)
 A. Cash flow from Operating Activities
    Surplus / (Deficit) for the year                                                                        529,789,284                   (2,070,447,897)
    Adjustments for:-
    (Increase)/Decrease in Investments (at cost)                                                           (732,703,495)                  2,270,796,909
    (Increase)/Decrease in Other Current Assets                                                                (111,046)                     23,182,670
    Increase/(Decrease) in Current Liabilities                                                              (22,841,638)                     (9,270,145)

    Net cash generated from / (used in) Operations                                        (a)              (225,866,895)                    214,261,537


 B. Cash flow from Financing Activities
    Increase in Unit Capital                                                                                 43,098,137                     188,186,504
    Increase/(Decrease) in Reserves                                                                         293,033,812                   1,017,353,553
    Adjustments for:-
    Increase/(Decrease) in Sundry Creditors for redeemed units and dividend                                   7,088,691                   (1,615,314,565)
    Decrease in Sundry Debtors for units issued                                                              24,011,209                      309,146,514
    Dividend paid during the year (Refer Note III(15) to Schedule 8)                                          1,127,998                       (2,668,469)

    Net cash (used in) / generated from Financing Activities                              (b)               368,359,847                    (103,296,463)

    Net Increase in Cash and Cash Equivalents                                           (a + b)             142,492,952                     110,965,074

    Cash and Cash Equivalents as at the :-
    Beginning of the year                                                                                   225,245,677                     114,280,603
    End of the year                                                                                         367,738,629                     225,245,677




    Note : Cash and Cash Equivalents includes the following :
            (1) Balances with Banks                                                                          47,290,804                      50,182,767
            (2) Collateralised Lending                                                                      320,447,825                     175,062,910




    The above cash flow statement has been prepared under the indirect method setout in Accounting Standard (AS-3) issued by the Institute of Chartered
    Accountants of India.

    As per our report of even date attached.




    For N. M. Raiji & Co.                      For and on behalf of Principal Pnb                 For and on behalf of Principal
    Chartered Accountants                     Asset Management Company Pvt. Ltd                    Trustee Company Pvt. Ltd

    Sd/-                                     Sd/-                                                  Sd/-                                    Sd/-
    Vinay D. Balse                            M. M. Chitale                                       B.G. Deshmukh                            H. M. Singh
    Partner                                  Chairman                                             Chairman                                      Director


                                                Sd/-                        Sd/-
    Place : Mumbai                             Rajan Ghotgalkar             Rajat Jain
    Date : July 09, 2010                       Managing Director           Fund Manager




                                                                              144
ANNUAL REPORT




                                 PRINCIPAL MUTUAL FUND

                      PRINCIPAL PERSONAL TAX SAVER FUND

                                             SCHEDULE - 8

     SIGNIFICANT ACCOUNTING POLICIES AND NOTES TO ACCOUNTS FORMING PART OF
                                   ACCOUNTS

     I. BACKGROUND INFORMATION

        A. Organisation

        Principal Mutual Fund (formerly known as IDBI-PRINCIPAL Mutual Fund) has been constituted as a
        Trust in accordance with the provisions of the Indian Trusts Act, 1882 (2 of 1882). The Mutual Fund
        is registered with the Securities and Exchange Board of India (SEBI) under registration no.
        MF/019/94/0 dated December 13, 1994.

        The Fund was initially set up by Industrial Development Bank of India (IDBI) in 1994 by execution of
        a Trust Deed dated November 25, 1994, under which IDBI was the sole Settlor, Sponsor and Principal
        Trustee. Subsequently, on March 31, 2000, Principal Financial Services Inc. USA became the deemed
        sponsor along with IDBI by acquiring 50% stake in IDBI-PRINCIPAL Asset Management Company
        Limited. Pursuant to SEBI Letter dated October 18, 2002, the IDBI-PRINCIPAL Trustee Company
        Limited took over the trusteeship and the associated responsibilities and obligations of the IDBI-
        PRINCIPAL Mutual Fund. The Name of the Trustee Company was changed to Principal Trustee
        Company Limited w.e.f. June 27, 2003. The Name of the Trustee Company was changed to Principal
        Trustee Company Private Limited w.e.f. October 20, 2003.

        On June 23, 2003, Principal Financial Services Inc. USA, acquired a 100% stake in IDBI-PRINCIPAL
        Asset Management Company Limited, through its wholly owned subsidiary, Principal Financial
        Group (Mauritius) Limited. Accordingly, Principal Financial Services Inc. USA, became the Sole
        Sponsor of the Fund and Principal Financial Group (Mauritius) Limited has became the Sole Settlor
        of the Fund. The name of the Asset Management Company was changed to Principal Asset
        Management Company Limited w.e.f. June 27, 2003, and on October 20, 2003 was again changed to
        Principal Asset Management Company Private Limited (PAMC).

        On May 5, 2004, Punjab National Bank and Vijaya Bank acquired 30% stake and 5% stake
        respectively in Principal Asset Management Company Private Limited, as well as in Principal Trustee
        Company Private Limited and became the co-settlers to the Fund. The name of the Asset
        Management Company changed to Principal Pnb Asset Management Company Private Limited w.e.f
        January 24, 2005.

        B. Scheme

        Principal Personal Tax Saver Fund (formerly Sun F&C Mutual Fund – Sun F&C Personal Tax Saver
        Fund) (the “Scheme”) is an open-ended Equity Linked Saving scheme (ELSS) of Principal Mutual
        Fund which was taken over from SUN F&C Mutual Fund (SUN F&C MF) vide agreement dated June
        30, 2003 between the Board of Trustees / Directors, as applicable of SUN F&C MF, SUN F&C Asset
        Management (India) Private Limited (SUN F&C AMC), the Investment Manager of SUN F&C MF,



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ANNUAL REPORT




       Principal Trustee Company Private Limited and Principal Asset Management Company Private
       Limited. As per the agreement, the Scheme has been taken over and run separately by Principal
       Mutual Fund as Principal Personal Tax Saver Fund with effect from May 15, 2004.

       SEBI has vide its letter dated March 5, 2004 addressed to SUN F&C AMC and PMF AMC has given
       its no objection for the above takeover and for handing over the trusteeship, management and
       administration business of the scheme to PMF AMC. (Also Refer Note VI).

       The investment objective of the scheme is to provide long term growth of capital. The Investment
       Manager will aim to achieve a return on assets in excess of the performance of BSE 100 Index.


     II. SIGNIFICANT ACCOUNTING POLICIES

          1. Basis of Accounting

                    The scheme maintains books of account on an accrual basis.

          2. Investments

              2.1     Investment transactions are accounted on trade dates.

              2.2     The cost of investment includes brokerage, premium paid on acquisition, transaction
                      charges and other costs associated with purchase of investments.

              2.3     Bonus entitlements are recognized on ex-bonus dates.


          3. Portfolio Valuation

              3.1     Investments are valued on the Balance Sheet date as per the recommendations of
                      SEBI.

              3.2     Traded securities (excluding government securities and Treasury bills) are valued at
                      the last quoted closing price on the principal stock exchange on which the security is
                      traded.

              3.3     A security (other than debt securities), which is not traded on any stock exchange on
                      a particular valuation day, is valued at the price at which it was traded on the selected
                      stock exchange, as the case may be, on the earliest previous day, such day not being
                      more than thirty days prior to the valuation date.

              3.4     A debt security (other than government securities), which is not traded on any stock
                      exchange on any particular valuation day, is considered as ‘Non-Traded Security’.
                      A debt Security (other than government securities) is considered as ‘Thinly-Traded
                      Security’, if on the valuation date, there are no individual trades in that security in
                      marketable lots (presently Rs 5 Crore) on the principal stock exchange.
                      Investment in non-traded / thinly traded debt securities including securitised debt
                      (other than government securities) with a residual maturity greater than 182 days are
                      valued using CRISIL Bond Valuer, which is based on the concept of using spread
                      over Government Securities to arrive at yields for pricing.



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           3.5    Investments in traded/non-traded/thinly traded government securities are valued at the
                  prices released by CRISIL, which is an approved agency recommended by the
                  Association of Mutual Funds of India (AMFI).

           3.6    Treasury bills are valued at cost plus the difference between the redemption value and
                  the cost, spread uniformly over the remaining maturity period of the instrument.
                  Treasury Bills listed on a recognised stock exchange are valued at the last quoted
                  weighted average yield, on the principal exchange on which the security is traded. If
                  no sale is reported at that date, Treasury Bills are valued at fair value, as determined
                  in good faith by Principal Pnb Asset Management Company Private Limited, under
                  procedures approved by the Trustees of Principal Mutual Fund, in accordance with
                  the guidelines for valuation of securities for mutual funds issued by SEBI.

           3.7    Money Market securities and non-traded debt securities, with residual maturity of
                  upto 182 days, are valued at cost (including accrued interest), plus the difference
                  between the redemption value (inclusive of interest) and the cost, spread uniformly
                  over the remaining maturity period of the instrument.

           3.8    Thinly traded Equity shares /Equity related securities/non-traded securities (other
                  than Government Securities) are valued in good faith by the investment manager, on
                  the basis of valuation principles laid down by SEBI.

           3.9    Investment in non-traded debt securities, including securitised debt (other than
                  government securities) with a residual maturity greater than 182 days, are valued
                  using CRISIL Bond Valuer, which is based on the concept of using spread to maturity
                  to arrive at the yields for pricing.

           3.10   Securities in the nature of Floating Rate Notes (FRN) are valued at cost plus the
                  difference between the redemption value and the cost, spread uniformly over the
                  remaining maturity period of the instrument. FRNs listed on a recognised stock
                  exchange are valued at the last quoted closing price on the principal exchange, on
                  which the security is traded. If no sale is reported at that date FRNs are valued at fair
                  value, as determined in good faith by Principal Pnb Asset Management Company
                  Private Limited, under procedures approved by the Trustees of Principal Mutual
                  Fund, in accordance with the guidelines for valuation of securities for mutual funds
                  issued by SEBI.

           3.11   Securitised Debt are valued at fair value, as determined in good faith by Principal Pnb
                  Asset Management Company Private Limited, under procedures approved by the
                  Trustees of Principal Mutual Fund, in accordance with the guidelines for valuation of
                  securities for mutual funds issued by SEBI.

           3.12   Interest Rate Swaps with a maturity period of more than 182 days are marked to
                  market by recording the net present values of the difference in outflows and inflows
                  as unrealised appreciation / depreciation. Interest Rate Swaps with a maturity of 182
                  days and less are amortised over the balance contracted period.

           3.13   Investments in Call money, bills purchased under re-discounting scheme and term
                  deposits with banks are valued at cost plus accruals.




                                                147
ANNUAL REPORT




            3.14    An investment is regarded as non-performing if the interest and /or principal amount
                    has not been received or remains outstanding for one quarter from the day such
                    income or installment has fallen due.

            3.15    Appreciation/Depreciation, as the case may be, in the value of securities at the year-
                    end is computed for the scheme, whereby the aggregate market value of all securities
                    taken together is compared with the aggregate cost of acquisition. Such net balance is
                    charged to Revenue Account.

            3.16    The above policies are followed as and when applicable.

         4. Income Recognition

            4.1     Dividend income is accrued on ex-dividend date.

            4.2     Profit or loss on sale of investments is arrived at by applying weighted average cost
                    on trade date.

            4.3     Interest on debentures and other fixed income investments is recognized on accrual
                    basis.

            4.4     In respect of Interest Rate Swaps, interest expense and income are accrued on a net
                    basis daily.

            4.5     Income on non-performing assets (NPA) is recognized on cash basis.

         5. Management Fees

            Investment Management fees payable to Principal Pnb Asset Management Co. Pvt. Ltd. is
            computed on the basis of Average Daily Net Assets Value.

         6. Income Equalisation Reserve and Unit Premium Reserve

            a.       Upto March 14, 2010, upon purchase/sale of units by the Scheme, an appropriate part
            of the purchase / sale price was credited / debited to the Income Equalisation Reserve
            Account. The balance amount of the purchase/sale price after reducing the face value was
            transferred to Unit Premium Reserve Account.

            b.      With effect from March 15, 2010, pursuant to the issue of SEBI circular no.
            SEBI/IMD/CIR no 18/198647/2010 dated March 15, 2010, upon purchase/sale of units by the
            Scheme, where the purchase/sale price is higher than the face value per unit, the amount
            representing unrealized gain and balance in the Unit Premium Reserve Account is
            credited/debited to Unit Premium Reserve Account. The balance amount of the purchase/sale
            price after reducing the face value is transferred to Income Equalization Reserve Account.
            Upon purchase/sale of units by the Scheme, where the purchase/sale price is lower than the
            face value per unit, the difference between the sale price and face value is debited to Income
            Equalization Reserve Account. Distributable surplus is arrived at after excluding unrealized
            gains. Balance lying to the credit of Unit Premium Reserve Account is not considered for the
            purpose of dividend distribution. Where the Unit Premium Reserve has a debit balance, the
            excess thereof over the unrealized gain is also deducted in arriving at the distributable surplus.




                                                   148
ANNUAL REPORT




            c.     The balance in Income Equalization Reserve Account is transferred to the Revenue
            Account at the end of the year.

         7. Provisions

            (i) In the case of interest accrued on investments, provision is made in respect of amounts
            which have not been received for a period of 3 months beyond the due date. No further
            accrual of income is made in respect of such investments.

            (ii) Provision is made in respect of the principal amount of securities, in accordance with
            valuation principles laid down by SEBI.

            (iii) Provision is made in respect of accrued dividend, which has not been received for a
            period of twelve months beyond the due date.

         8. Entry and Exit Load

            a) Upto July 31, 2009 load charged at the time of purchase/sale of units was utilized for
               incurring distribution and marketing expenses. Out of the residual amount, amounts
               considered to be in excess of future requirements by the Trustees were recognized as
               income, and the residual amount was carried forward into the next year.

            b) With effect from August 1, 2009 In accordance with the SEBI circular dated June 30, 2009:

               i) No entry load is charged on fresh purchase applications received after August 1, 2009
               (except on SIPs registered prior to August 1, 2009 which is utilised for incurring
               distribution and marketing expenses. Out of the residual amount, amounts considered to be
               in excess of future requirements by the Trustees are recognized as income, and the residual
               amount carried forward into the next year Load Charges).
               ii) Exit load charged in excess of 1% is recognized as income of the scheme immediately.
               iii) Exit load charged upto 1% is parked in a Liability Account, which is utilized for
               incurring distribution and marketing expenses. Out of the residual amount, amounts
               considered to be in excess of future requirements by the Trustees are recognized as
               income, and the residual amount carried forward into the next year.




                                                  149
        ANNUAL REPORT
        III   NOTES TO ACCOUNTS

        1     The Scheme is an Equity Oriented Scheme with a single plan.

        2     The Cost and Market Value / Fair Value of investments are given below:

                                                                                                                                                                                                     (Rs. In Lacs)
                                                                                                                                                                      Net Appreciation / (Depreciation) in value
                                                                                   Cost / Amortised cost                       Market Value / Fair Value
                                                                                                                                                                                   of investments
               Investments                                                March 31, 2010         March 31, 2009          March 31, 2010          March 31, 2009         March 31, 2010         March 31, 2009
PTSF6          Equity Shares                                                      44,553.79              34,852.01               57,630.54               25,304.54              13,076.75             (9,547.46)
PTSF3          Government Securities/Treasury bills                                       -                 281.86                       -                  279.72                      -                  (2.14)
PTSF1          Commercial Paper/Certificate of Deposit                                    -                 560.57                       -                  560.57                      -                       -
PTSF5          Asset Backed Securities                                                    -                 199.60                       -                  201.01                      -                    1.41
PTSF7
               Debentures and Bonds Unlisted / Privately Placed                        255.85                 402.00                  255.85                 402.00                        -                       -
PTSF2          Debentures / Bonds Listed / Awaiting listing on
                                                                                        47.94               1,234.51                   50.54               1,242.08                    2.60                  7.58
               recognized stock exchanges
               TOTAL                                                               44,857.57               37,530.54               57,936.93              27,989.93               13,079.35            (9,540.61)

              Net Change in unrealised appreciation in the value of investment for the year ended March 31, 2010 is Rs. 22619.97 Lacs

        3     The industry-wise 'Statement of Portfolio Holding' as on March 31, 2010 (Referred to in Schedule 4 to the Balance Sheet) is given in Annexure I.


        4     Interest and Discount - Others (Net) includes amounts received from and paid to other schemes of the Fund on account of delay in the movement of unit subscription
              application money of one scheme residing in the other scheme, calculated for the period of the delay on the basis of the prevailing CBLO rates.


        5     The aggregate book value and fair value of non traded / thinly traded investments, which have been valued in good faith in accordance with the guidelines for valuation of
              securities for Mutual Funds issued by SEBI, are given below:

                                                                                                      (Rs. In Lacs)
                                                                          March 31, 2010         March 31, 2009
                                     Particulars                            Amount                 Amount
               Book Value                                                            303.78               1,836.11
               Market / Fair Value                                                   306.38               1,845.12

        6     Net Asset Value per unit of various plans are as under:


               Name of the Scheme                                         March 31, 2010         March 31, 2009
               Principal Personal Tax Saver Fund                                      90.41                  47.13


        7     Aggregate value of Purchases and Sales made during the year, expressed as a percentage of Average Daily Net Asset Value, are as under:

                                                                                         Purchases                                       Sales *

                                                                        Amount (Rs. In lacs) % of Avg. Net Assets Amount (Rs. In lacs) % of Avg. Net Assets
                                  March 31, 2010                                 486,935.98                954.31          483,932.97                948.42
                                  March 31, 2009                                 140,108.29                413.46          142,517.76                420.57
              * Sales includes redemptions / maturities

        8     Contracts for sale pending deliveries as on March 31, 2010, amounting to Rs. 67.88 lacs (Previous Year : Rs. 27.44 Lacs) have been excluded from the
              Investments, whereas purchases of securities by the scheme, the deliveries of which were pending as on March 31, 2010, amounting to Rs. Nil
              (Previous Year: Rs. 353.28 Lacs) have been included in investments.


        9     Details of Management Fees paid to Principal Pnb Asset Management Co. Pvt. Ltd. and its computation thereof:
                                                                                                                          (Rs. In Lacs)
                                                                                                                 % of Management
                                                                        Average Daily Net                        Fee to Average Net
                                                                        Asset Value           Management Fees    Asset Value
                                  March 31, 2010                                    51,025.11             390.71                   0.77
                                  March 31, 2009                                    33,886.46             186.82                   0.55

        10    As per the requirement of Regulation 25(11) of SEBI (Mutual Fund) Regulations, 1996, details of Investments made by the Fund in companies, where
              the companies' investments in any of Principal Mutual Fund schemes exceeds 5% of the scheme's Net Asset Value, is given in Annexure II.


        11    Total Income and Recurring Expenditure for the year expressed as a percentage of Average Daily Net Asset Value:


                                                                     (As a % of Average Daily Net Asset Value)
                                                                                           Recurring
                                                                    Income                 Expenditure
                                March 31, 2010                                       12.62                2.24
                                March 31, 2009                                        2.48                2.32
              Income / Expenditure excludes appreciation/depreciation on investment.




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ANNUAL REPORT

12    Particulars of Unclaimed Dividends and Unclaimed Redemptions are as under:

                                                                          Unclaimed Dividends                           Unclaimed Redemptions

                                                               No. of Investors        Amount (Rs. In lacs) No. of Investors         Amount (Rs. In lacs)
                          March 31, 2010                                       20,042                 454.57                       5                  0.19
                          March 31, 2009                                       19,196                 392.01                       -                      -
      Note : For want of relevant information from banks, in respect of dividends and redemptions effected through DDs, the liability for unencashed and
      expired DDs (if any) and the corresponding bank balance for the same may not have been accounted in the books.


13    Disclosure as per SEBI circular MFD/CIR No. 3/211/2001 dated April 30, 2001 :
      The Scheme does not have a single unitholder holding more than 25% of the NAV as on March 31, 2010.

14    The Scheme has entered into transactions with certain related parties. The information required in this regard in accordance with Accounting Standard
      18 on 'Related Party Disclosures' issued by The Institute of Chartered Accountants of India (ICAI) and Regulation 25(8) of the SEBI (Mutual Funds)
      Regulations, 1996, are as under :


(i)   Related Party relationships

      Name                                                    Description of relationship
      Principal Financial Services Inc., USA                  Sponsor of the Fund
      Principal Trustee Company Private Ltd.                  Trustee of the Fund

      Principal Pnb Asset Management Company Private Ltd. Subsidiary of the Sponsor and the Scheme's asset manager

      Pnb Principal Insurance Broking Private Limited         Subsidiary of the Sponsor
      Principal Consulting (India) Private Limited            Subsidiary of the Sponsor

      Pnb Principal Financial Planners Private Limited        Subsidiary of the Sponsor
      Principal Pnb Life Insurance Company Limited            Subsidiary of the Sponsor
      Principal Financial Group (Mauritius) Limited           A Company holding substantial interest in the share capital of the
                                                              Scheme's asset manager
      Punjab National Bank                                    A Company holding substantial interest in the share capital of the
                                                              Scheme's asset manager
      PNB Gilts Limited                                       Subsidiary of Punjab National Bank
      PNB Housing Finance Limited                             Subsidiary of Punjab National Bank

      Schemes of the Fund under common control of the
      Sponsor

      Principal Child Benefit Fund                            Principal Long Term Equity Fund 3 Year Plan Series II
      Principal Pnb FMP 385 Days Series XI                    Principal Monthly Income Plan
      Principal Pnb FMP 540 Days Series IV                    Principal Monthly Income Plan - MIP Plus
      Principal Floating Rate Fund - Flexible Maturity Plan   Principal Balanced Fund
      Principal Floating Rate Fund - Short Maturity Plan      Principal Dividend Yield Fund
      Principal Govt. Securities Fund - Investment Plan       Principal Emerging Bluechip Fund
      Principal Global Opportunities Fund                     Principal Money Manager Fund
      Principal Growth Fund                                   Principal Personal Tax Saver Fund
      Principal Income Fund                                   Principal Resurgent India Equity Fund
      Principal Index Fund                                    Principal Income Fund - Short Term Plan
      Principal Services Industries Fund                      Principal Tax Savings Fund
      Principal Large Cap Fund                                Principal Junior Cap Fund
      Principal Ultra Short Term Fund                         Principal Govt. Securities Fund - Saving Plan
      Principal Cash Management Fund - Liquid Option          Principal Pnb Fixed Duration Fund 3 Year Plan Series I
      Principal Long Term Equity Fund                         Principal Pnb FMP 460 Days Series IV
      Principal Pnb FMP 540 Days Series II                    Principal Pnb FMP 385 Days Series VIII
      Principal Pnb FMP 385 Days Series VII                   Principal Pnb FMP 385 Days Series IX




                                                                                                151
 ANNUAL REPORT

(ii)    Transactions, if any, with the above mentioned related parties, as defined under Accounting Standard 18 and Regulation 25(8) of the SEBI
        Regulations are given below:


                                                                                                                                                                        (Rs. In Lacs)
        Name of the Related Party                                Nature of                For the year ended Outstanding as at               For the year ended Outstanding as at
                                                                 Transactions              March 31, 2010    March 31, 2010                   March 31, 2009    March 31, 2009


        Principal Trustee Company Private Ltd.                   Fees for Trusteeship                      5.10                      0.44                   3.39                      0.23
                                                                 Services


        Principal Pnb Asset Management Company Private Ltd. Fees for Management                          390.71                   52.45                   186.82                            -
                                                            Services

                                                                 Investor
        Principal Consulting (India) Private Limited.            Communication                            51.25                         -                  47.44                      3.18
                                                                 Service Fees


        Punjab National Bank                                     Bank Charges                                  -                        -                   3.32                            -




        Investment in Associates by the Scheme
        Larsen & Toubro Limited                                  Purchase                                728.93                                         1,946.77
                                                                 Sale/Redemption                         806.44                                         2,014.27
                                                                 Holding as at March
                                                                                                                               2,054.06                                           1,000.05
                                                                 31


        Punjab National Bank                                     Purchase                                      -                                           11.61
                                                                 Sale/Redemption                               -                                           42.43
                                                                 Holding as at March
                                                                                                                                        -                                                   -
                                                                 31


        Shriram Transport Finance Co Ltd                         Purchase                                      -                                               -
                                                                 Sale/Redemption                               -                                          539.37
                                                                 Holding as at March
                                                                                                                                        -                                                   -
                                                                 31




(iii)   Commission Paid to Associates / Related Parties / Group Companies of Sponsor AMC


                                                                                                                   % of Commission                                    % of Business Given
                                                                                         Commission Paid                                    Business Given (Rs.
        Name of the Associates                                   Period covered                                    paid to total                                      to total Business
                                                                                         (Rs)                                               In Crores)
                                                                                                                   Commission paid                                    Received


        Punjab National Bank                                     FY 2009-10                        1,257,099.02                  3.76%                      2.10                    4.97%
                                                                 FY 2008-09                        1,691,375.08                  1.88%                      4.89                    1.66%

        PNB Gilts Ltd                                            FY 2009-10                               48.27                  0.00%                            -                         -
                                                                 FY 2008-09                               24.68                  0.00%                            -                         -

        Pnb Principal Financial Planners Pvt Ltd                 FY 2009-10                           12,353.24                  0.04%                      0.01                    0.03%
                                                                 FY 2008-09                           21,252.46                  0.02%                      0.04                    0.02%

        Note: Commission paid to associates has been disclosed on payment basis and business given indicates Gross Mobilisation (net of rejections, if any)
              during the corresponding period for which the commission paid has been disclosed.

15      The credit balance in Dividend Distribution Account in the current year represents excess dividend distribution recorded in earlier years written back.

16      Investment is net of provision of Rs Nil (Previous Year : Rs 0.02 Lacs)

17      Commission to Agents and Publicity expenses amounting to Rs 43.48 Lacs (Previous Year : 286.41 lacs) are utilised from load collected.

18      The scheme is bearing insurance premium charges on the life insurance cover provided to the investors, in terms of the offer document. Insurance
        premium amount is amortised over a period of twelve(12) months.

19      As per the disclosure requirement under Accounting Standard 17 on 'Segment Reporting' issued by ICAI, the Scheme operates only in one segment, viz, primarily generate returns, based on the
        Scheme's Investment Objectives.




                                                                                                    152
ANNUAL REPORT




20         The historical per unit statistics are given in Annexure III.

21         Previous Year's figures have been regrouped and reclassified, wherever necessary, to make them comparable.

22          'Rs. 0.00' indicates amount less than a lac and 'Rs. -' indicates Nil amount.


 As per our report of even date attached.

 For N. M. Raiji & Co.                                                 For and on behalf of Principal Pnb               For and on behalf of Principal
 Chartered Accountants                                                 Asset Management Company Pvt. Ltd                 Trustee Company Pvt. Ltd

  Sd/-                                                                  Sd/-                                             Sd/-                            Sd/-
 Vinay D. Balse                                                        M. M. Chitale                                    B.G. Deshmukh                    H. M. Singh
 Partner                                                               Chairman                                         Chairman                         Director


                                                                       Sd/-                     Sd/-
 Place : Mumbai                                                        Rajan Ghotgalkar         Rajat Jain
 Date: July 09, 2010                                                   Managing Director        Fund Manager




                                                                                                153
ANNUAL REPORT




                PRINCIPAL RESURGENT
                  INDIA EQUITY FUND




                        154
ANNUAL REPORT


                                              AUDITORS’ REPORT


     TO THE TRUSTEE OF
     PRINCIPAL MUTUAL FUND

     We have audited the attached Balance Sheet as at March 31, 2010, the Revenue Account and the Cash
     Flow Statement for the year ended on that date, annexed thereto of Principal Resurgent India Equity
     Fund (the scheme) of the Principal Mutual Fund. These financial statements are the responsibility of the
     Management. Our responsibility is to express an opinion on these financial statements based on our audit.
     We report that:

     1.      Our audit was conducted in accordance with generally accepted Standards on Auditing in India.
             These Standards require that we plan and perform the audit to obtain reasonable assurance about
             whether the financial statements are free of material misstatements. An audit includes examining
             on a test basis, evidence supporting the amounts and disclosures in the financial statements. An
             audit also includes assessing the accounting principles used and significant estimates made by the
             Management, as well as evaluating the overall financial statement presentation. We believe that
             our audit provides a reasonable basis for our opinion.

     2.      We have obtained all information and explanations, which, to the best of our knowledge and belief
             were necessary for the purpose of our audit.

     3.      The Balance Sheet, the Revenue Account and the Cash Flow Statement are in agreement with the
             books of account of the Scheme.

     4.      In our opinion, valuation methods for Non Traded Securities, adopted by the scheme are fair and
             reasonable and are in accordance with the guidelines for valuation issued by SEBI and approved
             by the Trustees.

     5.      The accounts have been prepared in accordance with the accounting policies adopted by the
             trustees of the Fund and as specified in the Ninth Schedule to the SEBI (Mutual Funds)
             Regulations, 1996.

     6.      In our opinion and to the best of our information and according to the explanations given to us, the
             said accounts give the information required by the SEBI (Mutual Funds) Regulations, 1996 and
             give a true and fair view in accordance with the generally accepted accounting principles in India:

             a.   in the case of Balance Sheet, of the state of affairs of the scheme as at March 31, 2010;

             b.   in the case of Revenue Account, of the surplus of the scheme for the year ended on that date;
                  and

             c.   in the case of Cash Flow Statement, of the cash flows for the year ended on that date.

                                                                                         For N. M. Raiji & Co.
                                                                                        Chartered Accountants
                                                                                Firm Registration No. 108296W


                                                                                                          Sd/-
                                                                                               Vinay D. Balse
                                                                                                      Partner
                                                                                         Membership No. 39434
     Place : Mumbai
     Date : July 09, 2010




                                                         155
ANNUAL REPORT



                                                  PRINCIPAL MUTUAL FUND
                                          PRINCIPAL RESURGENT INDIA EQUITY FUND
                                                Balance Sheet as at March 31, 2010


                                                                    Schedule            March 31, 2010            March 31, 2009
                                                                                               Rupees                    Rupees
  LIABILITIES
  Unit Capital                                                         1                   928,604,220             1,257,385,702
  Reserves & Surplus                                                   2                   421,890,581              (245,003,138)
  Current Liabilities and Provisions                                   3                    33,208,628                31,015,540
  Total                                                                                  1,383,703,429             1,043,398,104

  ASSETS
  Investments                                                          4                 1,307,852,086               911,103,200
  Deposits                                                             5                    47,024,197                90,080,918
  Other Current Assets                                                 6                    28,827,146                42,213,986
  Total                                                                                  1,383,703,429             1,043,398,104

  Significant Accounting Policies and Notes to Accounts                8
  The Schedules form an integral part of the Financial Statements



  As per our report of even date attached.




  For N. M. Raiji & Co.                For and on behalf of Principal Pnb        For and on behalf of Principal
  Chartered Accountants                Asset Management Company Pvt. Ltd          Trustee Company Pvt. Ltd

  Sd/-                                 Sd/-                                      Sd/-                                Sd/-
  Vinay D. Balse                       M. M. Chitale                             B.G. Deshmukh                      H. M. Singh
  Partner                              Chairman                                  Chairman                                Director


                                       Sd/-                        Sd/-
  Place : Mumbai                       Rajan Ghotgalkar            Shyam Bhat
  Date : July 09, 2010                 Managing Director          Fund Manager




                                                                     156
ANNUAL REPORT

                                                          PRINCIPAL MUTUAL FUND
                                                 PRINCIPAL RESURGENT INDIA EQUITY FUND
                                                 Revenue Account for the year ended March 31, 2010
                                                                             Schedule                    March 31, 2010                           March 31, 2009
                                                                                                                Rupees                                   Rupees

 INCOME

 Dividend                                                                                                    17,933,487                               26,240,369
 Interest and Discount Income                                                    7                            2,949,867                                6,359,490
 Profit on Sale / Redemption of Investments (other than inter-scheme
 transfer / sale)                                                                                           357,425,598                                         -
 Other Income (Refer Note III(17) to Schedule 8)                                                                  1,731                                         -

 Total                                                                                                      378,310,683                               32,599,859



 EXPENSES AND LOSSES


 Loss on Sale / Redemption of Investments (Other than inter-scheme
 transfer / sales)                                                                                                    -                              788,455,484
 Loss on inter-scheme transfer / sale of investments                                                                  -                                1,451,460
 Management Fees                                                                                             16,306,027                                9,077,736
 Trusteeship Fees                                                                                               138,066                                  139,614
 Agent's Commission                                                                                           5,898,648                               10,606,990
 Publicity & Marketing Expenses                                                                               3,530,512                                4,511,661
 Audit Fees                                                                                                      88,078                                  128,589
 Custodian's Fees and Expenses                                                                                  335,407                                  376,656
 Registrar's Fees and Expenses                                                                                2,639,679                                2,081,142
 Other Operating Expenses                                                                                     4,625,576                                6,974,134

 Total                                                                                                       33,561,993                               823,803,466
 Surplus / (Deficit) for the year                                                                           344,748,690                              (791,203,607)

 Net change in Unrealised gain in the Value of Investments (Refer Note
 III(2) to Schedule 8)                                                                                      413,946,875                               11,810,200

 Net Surplus / (Deficit) including Net change in Unrealised Appreciation /
 (Depreciation) for the year                                                                                758,695,565                              (779,393,407)


 Appropriation

 Opening Balance                                                                                           (489,963,898)                             262,300,066
 Add: Net Surplus including Net change in Unrealised Appreciation /
 (Depreciation) for the year                                                                                758,695,565                              (779,393,407)
 Unrealised Appreciation in value of Investments as at the beginning of
 the year                                                                                                             -                                         -

 Unrealised Appreciation in value of Investments as at the end of year                                     (239,008,306)                                        -
 Add/(Less) : Income Equalisation                                                                            33,596,762                                27,696,168
 Dividend Distribution (Refer Note III(15) to Schedule 8)                                                        51,373                                  (566,725)
 Dividend Tax                                                                                                         -                                         -
 Net Surplus / (Deficit) Transferred to Balance Sheet                                                        63,371,496                              (489,963,898)

 Significant Accounting Policies and Notes to Accounts                           8

 The Schedules form an integral part of the Financial Statements

 As per our report of even date attached.

 For N. M. Raiji & Co.                                                       For and on behalf of Principal Pnb            For and on behalf of Principal
 Chartered Accountants                                                       Asset Management Company Pvt. Ltd              Trustee Company Pvt. Ltd


 Sd/-                                                                        Sd/-                                          Sd/-                       Sd/-
 Vinay D. Balse                                                              M. M. Chitale                                 B.G. Deshmukh             H. M. Singh
 Partner                                                                     Chairman                                      Chairman                      Director

                                                                             Sd/-                          Sd/-
 Place : Mumbai                                                              Rajan Ghotgalkar             Shyam Bhat
 Date : July 09, 2010                                                        Managing Director            Fund Manager




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ANNUAL REPORT

                                                                               PRINCIPAL MUTUAL FUND
                                                                     PRINCIPAL RESURGENT INDIA EQUITY FUND
                                                            Schedules forming part of the Financial Statements as at March 31, 2010
 SCHEDULE 1 - UNIT CAPITAL                                                                    March 31, 2010                                             March 31, 2009
                                                                                      Units                                  Rupees             Units                            Rupees
 (A)        Growth Option
 Initial Capital Issued and Subscribed : @
 Units of Rs. 10 each fully paid up                                                    -                                          -              -                                     -

 Outstanding :
 At the beginning of the year                                                 3,715,871.277                            37,158,713       3,897,567.121                         38,975,671
 Issued during the year                                                         261,058.600                             2,610,586       1,390,714.610                         13,907,146
                                                                              3,976,929.877                            39,769,299       5,288,281.731                         52,882,817
 Repurchased during the year                                                  1,170,975.900                            11,709,759       1,572,410.454                         15,724,105
 At the end of the year (A)                                                   2,805,953.977                            28,059,540       3,715,871.277                         37,158,713


 (B)       Dividend Option
 Initial Capital Issued and Subscribed :
 Units of Rs. 10 each fully paid up                                                    -                                          -              -                                     -

 Outstanding :
 At the beginning of the year                                              122,022,699.777                          1,220,226,998     122,339,711.392                      1,223,397,114
 Issued during the year                                                      2,798,482.500                             27,984,825      14,963,554.790                        149,635,548
                                                                           124,821,182.277                          1,248,211,823     137,303,266.182                      1,373,032,662
 Repurchased during the year                                                34,766,714.300                            347,667,143      15,280,566.405                        152,805,664
 At the end of the year (B)                                                 90,054,467.977                            900,544,680     122,022,699.777                      1,220,226,998


 TOTAL (A+B)                                                                92,860,421.954                            928,604,220     125,738,571.054                      1,257,385,711

 @ : The scheme has been taken over from Sun F&C Mutual Fund. Initial Capital details are not available as per our records

 SCHEDULE 2 - RESERVES AND SURPLUS                                                                                                     March 31, 2010                     March 31, 2009
 UPR                                                                                                                                         Rupees                             Rupees

 Unit Premium Reserve
 At the beginning of the year                                                                                                             244,960,759                        245,851,711
 Net addition / (deduction) during the year                                                                                              (125,449,980)                          (890,952)
 At the end of the year                                                                                                                   119,510,779                        244,960,759


 Balance in Revenue Account                                                                                                               63,371,496                        (489,963,898)


 Unrealised Appreciation in value of Investments                                                                                         239,008,306                                   -

 Total                                                                                                                                   421,890,581                        (245,003,139)


 SCHEDULE 3 - CURRENT LIABILITIES AND
 PROVISIONS                                                                                                                           March 31, 2010                      March 31, 2009
                                                                                                                                             Rupees                              Rupees
 Contracts for Purchase of Investments                                                                                                     7,173,014                          13,267,947
 Unit Repurchase Amount Payable                                                                                                            7,099,434                           2,683,436
 Registrar's Fees and Expenses                                                                                                               313,420                             363,541
 Custodian's Fees and Expenses                                                                                                                29,000                              20,763
 Management Fees                                                                                                                           1,374,344                                   -
 Trusteeship Fees                                                                                                                             10,058                               8,100
 Audit Fees                                                                                                                                   88,078                             128,589
 Agent's Commission Payable                                                                                                                2,783,969                           2,369,745
 Publicity and Marketing Expenses                                                                                                          1,639,600                              81,127
 Dividend and Dividend Tax Payable                                                                                                       11,277,909                           10,666,288
 Other Current Liabilities                                                                                                                 1,419,802                           1,426,004

                                                                                                                                           33,208,628                         31,015,540




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ANNUAL REPORT




  SCHEDULE 4 - INVESTMENTS                                                 March 31, 2010   March 31, 2009
  (Refer to attached statement of Portfolio holding as at
  March 31, 2010)                                                                 Rupees           Rupees
  Debentures and Bonds Unlisted / Privately Placed                             10,696,751       16,750,000
  Equity Shares                                                             1,297,155,335      894,353,200

                                                                            1,307,852,086      911,103,200



  SCHEDULE 5 - DEPOSITS                                                    March 31, 2010   March 31, 2009
                                                                                  Rupees           Rupees
  Collateralised Lending                                                       47,024,197       90,080,918

                                                                               47,024,197       90,080,918



  SCHEDULE 6 - OTHER CURRENT ASSETS                                        March 31, 2010   March 31, 2009
                                                                                  Rupees           Rupees
  Balances with Banks and Reserve Bank of India in Current Account            15,197,617        13,580,723
  Unit Subscription Receivable                                                     23,000          134,400
  Contract for Sale of Investment                                              13,239,390       26,991,108
  Outstanding and Accrued Income                                                  361,647        1,507,755
  Inter-Scheme Dues                                                                 5,327                -
  Receivable from the Asset Management Company                                        165                -

                                                                               28,827,146       42,213,986




  SCHEDULE 7 - INTEREST & DISCOUNT INCOME                                  March 31, 2010   March 31, 2009
                                                                                  Rupees           Rupees
  Debentures/Bonds                                                              2,121,715        2,128,622
  Commercial Paper / Certificate of Deposits / Usance Bills                             -        1,882,268
  Reverse Repo                                                                          -                -
  Collateralised Lending & Reverse Repo                                           828,152        2,337,586
  Others (net) - (Refer Note III(4) to Schedule 8)                                      -           11,014
                                                                                2,949,867        6,359,490




                                                                     159
ANNUAL REPORT

                                                PRINCIPAL MUTUAL FUND
                                      PRINCIPAL RESURGENT INDIA EQUITY FUND
                                    Cash Flow Statement For The Year Ended March 31, 2010

                                                                                                        March 31, 2010            March 31, 2009
                                                                                                            Amount                    Amount
                                                                                                                 (Rs.)                     (Rs.)
 A. Cash flow from Operating Activities
    Surplus / (Deficit) for the year                                                                       344,748,690              (791,203,607)
    Adjustments for:-
    (Increase)/Decrease in Investments (at cost)                                                            17,197,990               827,400,556
    (Increase)/Decrease in Other Current Assets                                                             14,897,661                17,813,349
    Increase/(Decrease) in Current Liabilities                                                              (2,834,532)               (2,272,327)

    Net cash generated from Operations                                                       (a)           374,009,809                51,737,971


 B. Cash flow from Financing Activities
    Decrease in Unit Capital                                                                              (328,781,483)               (4,987,075)
    Decrease in Reserves                                                                                   (91,853,218)               26,805,216
    Adjustments for:-
    Increase/(Decrease) in Sundry Creditors for redeemed units and dividend                                   5,027,619              (46,699,591)
    Decrease in Sundry Debtors for units issued                                                                 106,073                8,446,235
    Dividend paid during the year (Refer Note III(15) to Schedule 8)                                             51,373                 (566,725)

    Net cash used in Financing Activities                                                    (b)          (415,449,636)              (17,001,940)

    Net Increase/(Decrease) in Cash and Cash Equivalents                                 (a + b)           (41,439,827)               34,736,031

    Cash and Cash Equivalents as at the :-
    Beginning of the year                                                                                  103,661,641                68,925,610
    End of the year                                                                                         62,221,814               103,661,641




    Note : Cash and Cash Equivalents includes the following :
            (1) Balances with Banks                                                                         15,197,617                13,580,723
            (2) Collateralised Lending                                                                      47,024,197                90,080,918




    The above cash flow statement has been prepared under the indirect method setout in Accounting Standard (AS-3) issued by the Institute of
    Chartered Accountants of India.

    As per our report of even date attached.




    For N. M. Raiji & Co.                     For and on behalf of Principal Pnb                   For and on behalf of Principal
    Chartered Accountants                    Asset Management Company Pvt. Ltd                      Trustee Company Pvt. Ltd

    Sd/-                                     Sd/-                                                   Sd/-                         Sd/-
    Vinay D. Balse                            M. M. Chitale                                        B.G. Deshmukh                 H. M. Singh
    Partner                                  Chairman                                              Chairman                      Director


                                                 Sd/-                           Sd/-
    Place : Mumbai                           Rajan Ghotgalkar                  Shyam Bhat
    Date : July 09, 2010                     Managing Director                Fund Manager



                                                                         160
ANNUAL REPORT




                                 PRINCIPAL MUTUAL FUND

                   PRINCIPAL RESURGENT INDIA EQUITY FUND

                                              SCHEDULE -8

     SIGNIFICANT ACCOUNTING POLICIES AND NOTES TO ACCOUNTS FORMING PART OF
                                   ACCOUNTS

     I. BACKGROUND INFORMATION

        A. Organisation

        Principal Mutual Fund (formerly known as IDBI-PRINCIPAL Mutual Fund) has been constituted as a
        Trust in accordance with the provisions of the Indian Trusts Act, 1882 (2 of 1882). The Mutual Fund
        is registered with the Securities and Exchange Board of India (SEBI) under registration no.
        MF/019/94/0 dated December 13, 1994.

        The Fund was initially set up by Industrial Development Bank of India (IDBI) in 1994 by execution of
        a Trust Deed dated November 25, 1994, under which IDBI was the sole Settlor, Sponsor and Principal
        Trustee. Subsequently, on March 31, 2000, Principal Financial Services Inc. USA became the deemed
        sponsor along with IDBI by acquiring 50% stake in IDBI-PRINCIPAL Asset Management Company
        Limited. Pursuant to SEBI Letter dated October 18, 2002, the IDBI-PRINCIPAL Trustee Company
        Limited took over the trusteeship and the associated responsibilities and obligations of the IDBI-
        PRINCIPAL Mutual Fund. The Name of the Trustee Company was changed to Principal Trustee
        Company Limited w.e.f. June 27, 2003. The Name of the Trustee Company was changed to Principal
        Trustee Company Private Limited w.e.f. October 20, 2003.

        On June 23, 2003, Principal Financial Services Inc. USA, acquired a 100% stake in IDBI-PRINCIPAL
        Asset Management Company Limited, through its wholly owned subsidiary, Principal Financial
        Group (Mauritius) Limited. Accordingly, Principal Financial Services Inc. USA, became the Sole
        Sponsor of the Fund and Principal Financial Group (Mauritius) Limited has became the Sole Settlor
        of the Fund. The name of the Asset Management Company was changed to Principal Asset
        Management Company Limited w.e.f. June 27, 2003, and on October 20, 2003 was again changed to
        Principal Asset Management Company Private Limited (PAMC).

        On May 5, 2004, Punjab National Bank and Vijaya Bank acquired 30% stake and 5% stake
        respectively in Principal Asset Management Company Private Limited, as well as in Principal Trustee
        Company Private Limited and became the co-settlers to the Fund. The name of the Asset
        Management Company changed to Principal Pnb Asset Management Company Private Limited w.e.f
        January 24, 2005.

        B. Scheme

        Principal Resurgent India equity Fund (formerly Sun F&C Mutual Fund – Sun F&C Resurgent India
        Equity Fund) (the “Scheme”) is an open-ended growth scheme of Principal Mutual Fund which was
        taken over from SUN F&C Mutual Fund (SUN F&C MF) vide agreement dated June 30, 2003
        between the Board of Trustees / Directors, as applicable of SUN F&C MF, SUN F&C Asset
        Management (India) Private Limited (SUN F&C AMC), the Investment Manager of SUN F&C MF,
        Principal Trustee Company Private Limited and Principal Asset Management Company Private



                                                    161
ANNUAL REPORT




       Limited. The Scheme was originally launched on April 17, 2000 as SUN F&C Resurgent India Equity
       Fund under the aegis of SUN F&C MF. As per the agreement, the Scheme has been taken over and
       run separately by Principal Mutual Fund as Principal Resurgent India Fund with effect from May 15,
       2004. The total net assets taken over by the scheme as at May 14, 2004 is Rs. 37,926,871 /-

       SEBI has vide its letter dated March 5, 2004 addressed to SUN F&C AMC and PMF AMC has given
       its no objection for the above takeover and for handing over the trusteeship, management and
       administration business of the scheme to PMF AMC. (Also Refer Note VI).

       The duration of the scheme is perpetual. The scheme has two plans – Dividend Plan & Growth Plan.

       The investment objective of the scheme is to generate long term capital appreciation by investing in
       equity and equity related securities of Indian Companies that are perceived to be potential growth
       stories.

     II. SIGNIFICANT ACCOUNTING POLICIES

          1. Basis of Accounting

                    The scheme maintains books of account on an accrual basis.

          2. Investments

              2.1     Investment transactions are accounted on trade dates.

              2.2     The cost of investment includes brokerage, premium paid on acquisition, transaction
                      charges and other costs associated with purchase of investments.

              2.3     Bonus entitlements are recognized on ex-bonus dates.


          3. Portfolio Valuation

              3.1     Investments are valued on the Balance Sheet date as per the recommendations of
                      SEBI.

              3.2     Traded securities (excluding government securities and Treasury bills) are valued at
                      the last quoted closing price on the principal stock exchange on which the security is
                      traded.

              3.3     A security (other than debt securities), which is not traded on any stock exchange on
                      a particular valuation day, is valued at the price at which it was traded on the selected
                      stock exchange, as the case may be, on the earliest previous day, such day not being
                      more than thirty days prior to the valuation date.

              3.4     A debt security (other than government securities), which is not traded on any stock
                      exchange on any particular valuation day, is considered as ‘Non-Traded Security’.
                      A debt Security (other than government securities) is considered as ‘Thinly-Traded
                      Security’, if on the valuation date, there are no individual trades in that security in
                      marketable lots (presently Rs 5 Crore) on the principal stock exchange.




                                                    162
ANNUAL REPORT




                  Investment in non-traded / thinly traded debt securities including securitised debt
                  (other than government securities) with a residual maturity greater than 182 days are
                  valued using CRISIL Bond Valuer, which is based on the concept of using spread
                  over Government Securities to arrive at yields for pricing.

           3.5    Investments in traded/non-traded/thinly traded government securities are valued at the
                  prices released by CRISIL, which is an approved agency recommended by the
                  Association of Mutual Funds of India (AMFI).

           3.6    Treasury bills are valued at cost plus the difference between the redemption value and
                  the cost, spread uniformly over the remaining maturity period of the instrument.
                  Treasury Bills listed on a recognised stock exchange are valued at the last quoted
                  weighted average yield, on the principal exchange on which the security is traded. If
                  no sale is reported at that date, Treasury Bills are valued at fair value, as determined
                  in good faith by Principal Pnb Asset Management Company Private Limited, under
                  procedures approved by the Trustees of Principal Mutual Fund, in accordance with
                  the guidelines for valuation of securities for mutual funds issued by SEBI.

           3.7    Money Market securities and non-traded debt securities, with residual maturity of
                  upto 182 days, are valued at cost (including accrued interest), plus the difference
                  between the redemption value (inclusive of interest) and the cost, spread uniformly
                  over the remaining maturity period of the instrument.

           3.8    Thinly traded Equity shares /Equity related securities/non-traded securities (other
                  than Government Securities) are valued in good faith by the investment manager, on
                  the basis of valuation principles laid down by SEBI.

           3.9    Investment in non-traded debt securities, including securitised debt (other than
                  government securities) with a residual maturity greater than 182 days, are valued
                  using CRISIL Bond Valuer, which is based on the concept of using spread to maturity
                  to arrive at the yields for pricing.

           3.10   Securities in the nature of Floating Rate Notes (FRN) are valued at cost plus the
                  difference between the redemption value and the cost, spread uniformly over the
                  remaining maturity period of the instrument. FRNs listed on a recognised stock
                  exchange are valued at the last quoted closing price on the principal exchange, on
                  which the security is traded. If no sale is reported at that date FRNs are valued at fair
                  value, as determined in good faith by Principal Pnb Asset Management Company
                  Private Limited, under procedures approved by the Trustees of Principal Mutual
                  Fund, in accordance with the guidelines for valuation of securities for mutual funds
                  issued by SEBI.
           3.11   Securitised Debt are valued at fair value, as determined in good faith by Principal Pnb
                  Asset Management Company Private Limited, under procedures approved by the
                  Trustees of Principal Mutual Fund, in accordance with the guidelines for valuation of
                  securities for mutual funds issued by SEBI.

           3.12   Interest Rate Swaps with a maturity period of more than 182 days are marked to
                  market by recording the net present values of the difference in outflows and inflows
                  as unrealised appreciation / depreciation. Interest Rate Swaps with a maturity of 182
                  days and less are amortised over the balance contracted period.



                                                163
ANNUAL REPORT




            3.13    Investments in Call money, bills purchased under re-discounting scheme and term
                    deposits with banks are valued at cost plus accruals.

            3.14    An investment is regarded as non-performing if the interest and /or principal amount
                    has not been received or remains outstanding for one quarter from the day such
                    income or installment has fallen due.

            3.15    Appreciation/Depreciation, as the case may be, in the value of securities at the year-
                    end is computed for the scheme, whereby the aggregate market value of all securities
                    taken together is compared with the aggregate cost of acquisition. Such net balance is
                    charged to Revenue Account.

            3.16    The above policies are followed as and when applicable.

         4. Income Recognition

            4.1     Dividend income is accrued on ex-dividend date.

            4.2     Profit or loss on sale of investments is arrived at by applying weighted average cost
                    on trade date.

            4.3     Interest on debentures and other fixed income investments is recognized on accrual
                    basis.

            4.4     In respect of Interest Rate Swaps, interest expense and income are accrued on a net
                    basis daily.

            4.5     Income on non-performing assets (NPA) is recognized on cash basis.

         5. Management Fees

            Investment Management fees payable to Principal Pnb Asset Management Co. Pvt. Ltd. is
            computed on the basis of Average Daily Net Assets Value.

         6. Income Equalisation Reserve and Unit Premium Reserve

            a.       Upto March 14, 2010, upon purchase/sale of units by the Scheme, an appropriate part
            of the purchase / sale price was credited / debited to the Income Equalisation Reserve
            Account. The balance amount of the purchase/sale price after reducing the face value was
            transferred to Unit Premium Reserve Account.
            b.       With effect from March 15, 2010, pursuant to the issue of SEBI circular no.
            SEBI/IMD/CIR no 18/198647/2010 dated March 15, 2010, upon purchase/sale of units by the
            Scheme, where the purchase/sale price is higher than the face value per unit, the amount
            representing unrealized gain and balance in the Unit Premium Reserve Account is
            credited/debited to Unit Premium Reserve Account. The balance amount of the purchase/sale
            price after reducing the face value is transferred to Income Equalization Reserve Account.
            Upon purchase/sale of units by the Scheme, where the purchase/sale price is lower than the
            face value per unit, the difference between the sale price and face value is debited to Income
            Equalization Reserve Account. Distributable surplus is arrived at after excluding unrealized
            gains. Balance lying to the credit of Unit Premium Reserve Account is not considered for the



                                                 164
ANNUAL REPORT




            purpose of dividend distribution. Where the Unit Premium Reserve has a debit balance, the
            excess thereof over the unrealized gain is also deducted in arriving at the distributable surplus.

            c.     The balance in Income Equalization Reserve Account is transferred to the Revenue
            Account at the end of the year.

         7. Provisions

            (i) In the case of interest accrued on investments, provision is made in respect of amounts
            which have not been received for a period of 3 months beyond the due date. No further
            accrual of income is made in respect of such investments.

            (ii) Provision is made in respect of the principal amount of securities, in accordance with
            valuation principles laid down by SEBI.

            (iii) Provision is made in respect of accrued dividend, which has not been received for a
            period of twelve months beyond the due date.

         8. Entry and Exit Load

            a) Upto July 31, 2009 load charged at the time of purchase/sale of units was utilized for
               incurring distribution and marketing expenses. Out of the residual amount, amounts
               considered to be in excess of future requirements by the Trustees were recognized as
               income, and the residual amount was carried forward into the next year.

            b) With effect from August 1, 2009 In accordance with the SEBI circular dated June 30, 2009:

               i) No entry load is charged on fresh purchase applications received after August 1, 2009
               (except on SIPs registered prior to August 1, 2009 which is utilised for incurring
               distribution and marketing expenses. Out of the residual amount, amounts considered to be
               in excess of future requirements by the Trustees are recognized as income, and the residual
               amount carried forward into the next year Load Charges).
               ii) Exit load charged in excess of 1% is recognized as income of the scheme immediately.
               iii) Exit load charged upto 1% is parked in a Liability Account, which is utilized for
               incurring distribution and marketing expenses. Out of the residual amount, amounts
               considered to be in excess of future requirements by the Trustees are recognized as
               income, and the residual amount carried forward into the next year.




                                                   165
ANNUAL REPORT
        III   NOTES TO ACCOUNTS

        1     The scheme has growth and dividend options. A combined Balance sheet, Revenue Account and Cash Flow are prepared for the scheme.

        2     The Cost and Market Value / Fair Value of investments are given below:

                                                                                                                                                                                                      (Rs. In Lacs)
                                                                                                                                                                        Net Appreciation / (Depreciation) in value
                                                                                    Cost / Amortised cost                       Market Value / Fair Value
                                                                                                                                                                                    of investments
               Investments                                                  March 31, 2010          March 31, 2009        March 31, 2010          March 31, 2009          March 31, 2010        March 31, 2009
 RIF6          Equity Shares                                                       10,581.47               10,692.92             12,971.55                 8,943.53                2,390.08            (1,749.39)
 RIF7
               Debentures and Bonds Unlisted / Privately Placed                          106.97                167.50                  106.97                  167.50                       -                     -

               TOTAL                                                                  10,688.44             10,860.42               13,078.52                9,111.03                2,390.08           (1,749.39)

              Net Change in unrealised appreciation in the value of investment for the year ended March 31, 2010 is Rs. 4,139.47 Lacs

        3     The industry-wise 'Statement of Portfolio Holding' as on March 31, 2010 (Referred to in Schedule 4 to the Balance Sheet) is given in Annexure I.

        4     Interest and Discount - Others (Net) includes amounts received from and paid to other schemes of the Fund on account of delay in the movement of unit subscription
              application money of one scheme residing in the other scheme, calculated for the period of the delay on the basis of the prevailing CBLO rates.


        5     The aggregate book value and fair value of non traded / thinly traded investments, which have been valued in good faith in accordance with the guidelines for valuation of
              securities for Mutual Funds issued by SEBI, are given below:

                                                                                                         (Rs. In Lacs)
                                                                            March 31, 2010          March 31, 2009
                                     Particulars                              Amount                  Amount
               Book Value                                                              106.97                  167.50
               Market / Fair Value                                                     106.97                  167.50

        6     Net Asset Value per unit of various options are as under:


               Name of the Option                                           March 31, 2010          March 31, 2009
               Growth                                                                   86.57                   48.09
               Dividend                                                                 12.30                    6.83

        7     Aggregate value of Purchases and Sales made during the year, expressed as a percentage of Average Daily Net Asset Value, are as under:

                                                                                             Purchases                                     Sales *

                                                                          Amount (Rs. In lacs) % of Avg. Net Assets Amount (Rs. In lacs) % of Avg. Net Assets
                                  March 31, 2010                                  108,353.76                 784.83         112,539.98                 815.15
                                  March 31, 2009                                   29,325.49                 210.05          29,778.35                 213.29
              * Sales includes redemptions / maturities

        8     Contracts for sale pending deliveries as on March 31, 2010, amounting to Rs. 132.39 lacs (Previous Year : Rs. 269.91 Lacs)have been excluded from
              the Investments, whereas purchases of securities by the scheme, the deliveries of which were pending as on March 31, 2010, amounting to Rs. 114.92
              lacs (Previous Year: Rs. 132.68 Lacs) have been included in investments.

        9     Details of Management Fees paid to Principal Pnb Asset Management Co. Pvt. Ltd. and its computation thereof:
                                                                                                                            (Rs. In Lacs)
                                                                                                                   % of Management
                                                                          Average Daily Net                        Fees to Average Net
                                                                          Asset Value           Management Fees    Asset Value
                                  March 31, 2010                                      13,806.05             163.06                   1.18
                                  March 31, 2009                                      13,961.33              90.78                   0.65

        10    As per the requirement of Regulation 25(11) of SEBI (Mutual Fund) Regulations, 1996, details of Investments made by the Fund in companies, where
              the companies' investments in any of Principal Mutual Fund schemes exceeds 5% of the scheme's Net Asset Value, is given in Annexure II.



        11    Total Income and Recurring Expenditure for the year expressed as a percentage of Average Daily Net Asset Value:

                                                                     (As a % of Average Daily Net Asset Value)
                                                                                           Recurring
                                                                          Income           Expenditure
                                March 31, 2010                                       27.40                2.43
                                March 31, 2009                                        2.34                2.43
              Income / Expenditure excludes appreciation/depreciation on investment.

        12    Particulars of Unclaimed Dividends and Unclaimed Redemptions are as under:

                                                                                     Unclaimed Dividends                         Unclaimed Redemptions

                                                                          No. of Investors     Amount (Rs. In lacs) No. of Investors           Amount (Rs. In lacs)
                                  March 31, 2010                                         1,785                  87.27                       71                 20.23
                                  March 31, 2009                                         1,912                 106.66                       49                 20.98
              Note : For want of relevant information from banks, in respect of dividends and redemptions effected through DDs, the liability for unencashed and
              expired DDs (if any) and the corresponding bank balance for the same may not have been accounted in the books.


        13    Disclosure as per SEBI circular MFD/CIR No. 3/211/2001 dated April 30, 2001 :
              The Scheme does not have a single unitholder holding more than 25% of the NAV as on March 31, 2010.




                                                                                                         166
ANNUAL REPORT

   14     The Scheme has entered into transactions with certain related parties. The information required in this regard in accordance with Accounting Standard
          18 on 'Related Party Disclosures' issued by The Institute of Chartered Accountants of India (ICAI) and Regulation 25(8) of the SEBI (Mutual Funds)
          Regulations, 1996, are as under :



   (i)    Related Party relationships

          Name                                                     Description of relationship
          Principal Financial Services Inc., USA                   Sponsor of the Fund
          Principal Trustee Company Private Ltd.                   Trustee of the Fund

          Principal Pnb Asset Management Company Private Ltd.      Subsidiary of the Sponsor and the Scheme's asset manager
          Pnb Principal Insurance Broking Private Limited          Subsidiary of the Sponsor
          Principal Consulting (India) Private Limited             Subsidiary of the Sponsor
          Pnb Principal Financial Planners Private Limited         Subsidiary of the Sponsor
          Principal Pnb Life Insurance Company Limited             Subsidiary of the Sponsor
          Principal Financial Group (Mauritius) Limited            A Company holding substantial interest in the share capital of the
                                                                   Scheme's asset manager
          Punjab National Bank                                     A Company holding substantial interest in the share capital of the
                                                                   Scheme's asset manager
          PNB Gilts Limited                                        Subsidiary of Punjab National Bank
          PNB Housing Finance Limited                              Subsidiary of Punjab National Bank

          Schemes of the Fund under common control of the
          Sponsor

          Principal Child Benefit Fund                             Principal Long Term Equity Fund 3 Year Plan Series II
          Principal Pnb FMP 385 Days Series XI                     Principal Monthly Income Plan
          Principal Pnb FMP 540 Days Series IV                     Principal Monthly Income Plan - MIP Plus
          Principal Floating Rate Fund - Flexible Maturity Plan    Principal Balanced Fund
          Principal Floating Rate Fund - Short Maturity Plan       Principal Dividend Yield Fund
          Principal Govt. Securities Fund - Investment Plan        Principal Emerging Bluechip Fund
          Principal Global Opportunities Fund                      Principal Money Manager Fund
          Principal Growth Fund                                    Principal Personal Tax Saver Fund
          Principal Income Fund                                    Principal Resurgent India Equity Fund
          Principal Index Fund                                     Principal Income Fund - Short Term Plan
          Principal Services Industries Fund                       Principal Tax Savings Fund
          Principal Large Cap Fund                                 Principal Junior Cap Fund
          Principal Ultra Short Term Fund                          Principal Govt. Securities Fund - Saving Plan
          Principal Cash Management Fund - Liquid Option           Principal Pnb Fixed Duration Fund 3 Year Plan Series I
          Principal Long Term Equity Fund                          Principal Pnb FMP 460 Days Series IV
          Principal Pnb FMP 540 Days Series II                     Principal Pnb FMP 385 Days Series VIII
          Principal Pnb FMP 385 Days Series VII                    Principal Pnb FMP 385 Days Series IX



   (ii)   Transactions, if any, with the above mentioned related parties, as defined under Accounting Standard 18 and Regulation 25(8) of the SEBI Regulations
          are given below:


                                                                                                                                                                          (Rs. In Lacs)
          Name of the Related Party                                Nature of                For the year ended Outstanding as at               For the year ended Outstanding as at
                                                                   Transactions              March 31, 2010    March 31, 2010                   March 31, 2009    March 31, 2009

                                                                   Fees for Trusteeship
          Principal Trustee Company Private Ltd.                                                              1.38                      0.10                  1.40                 0.08
                                                                   Services



          Principal Pnb Asset Management Company Private Ltd. Fees for Management                          163.06                   13.74                    90.78                    -
                                                              Services

                                                                   Investor
          Principal Consulting (India) Private Limited.            Communication                            14.54                          -                 19.55                 1.13
                                                                   Service Fees



          Punjab National Bank                                     Bank Charges                                  -                         -                  0.37                    -




          Investment in Associates by the Scheme
          Larsen & Toubro Limited                                  Purchase                                249.75                                           649.98
                                                                   Sale/Redemption                         459.50                                           824.53
                                                                   Holding as at March
                                                                                                                                   435.44                                       339.06
                                                                   31


          Punjab National Bank                                     Purchase                                   3.91                                                -
                                                                   Sale/Redemption                            3.70                                                -                   -
                                                                   Holding as at March
                                                                                                                                           -
                                                                   31




                                                                                                   167
ANNUAL REPORT




    (iii)      Commission Paid to Associates / Related Parties / Group Companies of Sponsor AMC



                                                                                                                             % of Commission                           % of Business Given
                                                                                                 Commission Paid                                   Business Given (Rs.
               Name of the Associates                                      Period covered                                    paid to total                             to total Business
                                                                                                 (Rs)                                              In Crores)
                                                                                                                             Commission paid                           Received



               Punjab National Bank                                        FY 2009-10                         73,276.91                   1.13%                     0.09             1.94%
                                                                           FY 2008-09                        128,845.48                   0.76%                     0.33             0.66%

               PNB Gilts Ltd                                               FY 2009-10                                    -                     -                         -               -
                                                                           FY 2008-09                                    -                     -                         -               -

               Pnb Principal Financial Planners Pvt Ltd                    FY 2009-10                          1,224.32                   0.02%                          -               -
                                                                           FY 2008-09                          6,272.01                   0.04%                          -               -

               Note: Commission paid to associates has been disclosed on payment basis and business given indicates Gross Mobilisation (net of rejections, if any)
                     during the corresponding period for which the commission paid has been disclosed.

    15         The credit balance in Dividend Distribution Account in the current year represents excess dividend distribution recorded in earlier years written back.

    16         Commission to Agents and Publicity expenses amounting to Rs 6.98 Lacs (Previous Year : 116.67 lacs) are utilised from load collected.

    17         Other Income includes exit load collected in excess of 1% from the Investors at the time of redemption.

    18         As per the disclosure requirement under Accounting Standard 17 on 'Segment Reporting' issued by ICAI, the Scheme operates only in one segment,
               viz, primarily generate returns, based on the Scheme's Investment Objectives.


    19         The historical per unit statistics are given in Annexure III.

    20         Previous Year's figures have been regrouped and reclassified, wherever necessary, to make them comparable.

    21         'Rs. 0.00' indicates amount less than a lac and 'Rs. -' indicates Nil amount.



     As per our report of even date attached.

     For N. M. Raiji & Co.                                                 For and on behalf of Principal Pnb                                      For and on behalf of Principal
     Chartered Accountants                                                 Asset Management Company Pvt. Ltd                                        Trustee Company Pvt. Ltd

     Sd/-                                                                  Sd/-                                                                    Sd/-                                      Sd/-
     Vinay D. Balse                                                        M. M. Chitale                                                           B.G. Deshmukh                             H. M. Singh
     Partner                                                               Chairman                                                                Chairman                                  Director


                                                                           Sd/-                         Sd/-
     Place : Mumbai                                                        Rajan Ghotgalkar             Shyam Bhat
     Date: July 09, 2010                                                   Managing Director            Fund Manager




                                                                                                      168
ANNUAL REPORT




   PRINCIPAL SERVICES INDUSTRIES FUND




                   169
ANNUAL REPORT


                                              AUDITORS’ REPORT


     TO THE TRUSTEE OF
     PRINCIPAL MUTUAL FUND

     We have audited the attached Balance Sheet as at March 31, 2010, the Revenue Account and the Cash
     Flow Statement for the year ended on that date, annexed thereto of Principal Services Industries Fund
     (the scheme) of the Principal Mutual Fund. These financial statements are the responsibility of the
     Management. Our responsibility is to express an opinion on these financial statements based on our audit.
     We report that:

     1.      Our audit was conducted in accordance with generally accepted Standards on Auditing in India.
             These Standards require that we plan and perform the audit to obtain reasonable assurance about
             whether the financial statements are free of material misstatements. An audit includes examining
             on a test basis, evidence supporting the amounts and disclosures in the financial statements. An
             audit also includes assessing the accounting principles used and significant estimates made by the
             Management, as well as evaluating the overall financial statement presentation. We believe that
             our audit provides a reasonable basis for our opinion.

     2.      We have obtained all information and explanations, which, to the best of our knowledge and belief
             were necessary for the purpose of our audit.

     3.      The Balance Sheet, the Revenue Account and the Cash Flow Statement are in agreement with the
             books of account of the Scheme.

     4.      In our opinion, valuation methods for Non Traded Securities, adopted by the scheme are fair and
             reasonable and are in accordance with the guidelines for valuation issued by SEBI and approved
             by the Trustees.

     5.      The accounts have been prepared in accordance with the accounting policies adopted by the
             trustees of the Fund and as specified in the Ninth Schedule to the SEBI (Mutual Funds)
             Regulations, 1996.

     6.      In our opinion and to the best of our information and according to the explanations given to us, the
             said accounts give the information required by the SEBI (Mutual Funds) Regulations, 1996 and
             give a true and fair view in accordance with the generally accepted accounting principles in India:

             a.   in the case of Balance Sheet, of the state of affairs of the scheme as at March 31, 2010;

             b.   in the case of Revenue Account, of the surplus of the scheme for the year ended on that date;
                  and

             c.   in the case of Cash Flow Statement, of the cash flows for the year ended on that date.

                                                                                         For N. M. Raiji & Co.
                                                                                        Chartered Accountants
                                                                                Firm Registration No. 108296W


                                                                                                          Sd/-
                                                                                               Vinay D. Balse
                                                                                                      Partner
                                                                                         Membership No. 39434
     Place : Mumbai
     Date : July 09, 2010




                                                         170
ANNUAL REPORT

                                                        PRINCIPAL MUTUAL FUND
                                                  PRINCIPAL SERVICES INDUSTRIES FUND
                                                      Balance Sheet as at March 31, 2010


                                                                   Schedule                  March 31, 2010                  March 31, 2009
                                                                                                   Rupees                          Rupees
 LIABILITIES
 Unit Capital                                                         1                          936,156,959                  1,234,692,843
 Reserves & Surplus                                                   2                          289,565,486                   (292,864,091)
 Current Liabilities and Provisions                                   3                           21,431,743                     22,775,800
 Total                                                                                         1,247,154,188                    964,604,552

 ASSETS
 Investments                                                          4                        1,177,482,770                   853,569,870
 Deposits                                                             5                           57,355,890                    96,928,659
 Other Current Assets                                                 6                           12,315,528                    14,106,023
 Deferred Revenue Expenditure - not written off                       8                                    -                             -
 Total                                                                                         1,247,154,188                   964,604,552

 Significant Accounting Policies and Notes to Accounts                9
 The Schedules form an integral part of the Financial Statements


 As per our report of even date attached.




 For N. M. Raiji & Co.                For and on behalf of Principal Pnb            For and on behalf of Principal
 Chartered Accountants                Asset Management Company Pvt. Ltd              Trustee Company Pvt. Ltd

 Sd/-                                 Sd/-                                          Sd/-                             Sd/-
 Vinay D. Balse                       M. M. Chitale                                 B.G. Deshmukh                    H. M. Singh
 Partner                              Chairman                                      Chairman                         Director


                                      Sd/-                 Sd/-
 Place : Mumbai                       Rajan Ghotgalkar     Shyam Bhat
 Date : July 09, 2010                 Managing Director    Fund Manager




                                                                              171
ANNUAL REPORT

                                                             PRINCIPAL MUTUAL FUND
                                                      PRINCIPAL SERVICES INDUSTRIES FUND
                                                    Revenue Account for the year ended March 31, 2010
                                                                              Schedule                      March 31, 2010                          March 31, 2009
                                                                                                                   Rupees                                  Rupees

 INCOME

 Dividend                                                                                                      14,081,090                               19,735,881
 Interest and Discount Income                                                     7                             3,802,914                                8,498,666
 Profit on Sale / Redemption of Investments (other than inter-scheme
 transfer / sale)                                                                                             498,786,031                                          -
 Other Income (Refer Note III(16) to Schedule 9)                                                                   21,162                                          -

 Total                                                                                                        516,691,197                               28,234,547



 EXPENSES AND LOSSES


 Loss on Sale / Redemption of Investments (Other than inter-scheme
 transfer / sales)                                                                                                      -                              634,135,789
 Loss on inter-scheme transfer / sale of investments                                                                    -                                3,515,998
 Management Fees                                                                                               15,524,578                                8,558,177
 Trusteeship Fees                                                                                                 130,347                                  120,089
 Agent's Commission                                                                                             6,606,972                                6,885,354
 Publicity & Marketing Expenses                                                                                 1,985,639                                4,951,302
 Audit Fees                                                                                                        94,036                                  138,928
 Custodian's Fees and Expenses                                                                                    307,840                                  315,284
 Registrar's Fees and Expenses                                                                                  2,595,984                                1,783,834
 Other Operating Expenses                                                                                       4,578,594                                6,164,582
 Deferred Revenue Expenditure written off                                                                               -                               47,161,008

 Total                                                                                                         31,823,990                               713,730,345
 Surplus / (Deficit) for the year                                                                             484,867,207                              (685,495,798)

 Net change in Unrealised gain in the Value of Investments (Refer Note
 III(2) to Schedule 9)                                                                                        230,687,295                               44,383,440

 Net Surplus / (Deficit) including Net change in Unrealised Appreciation /
 (Depreciation) for the year                                                                                  715,554,502                              (641,112,358)


 Appropriation

 Opening Balance                                                                                              173,117,465                              813,652,957
 Add: Net Surplus including Net change in Unrealised Appreciation /
 (Depreciation) for the year                                                                                  715,554,502                              (641,112,358)
 Unrealised Appreciation in value of Investments as at the beginning of the
 year                                                                                                                    -                                         -

 Unrealised Appreciation in value of Investments as at the end of year                                        (135,923,542)                                      -
 Add/(Less) : Income Equalisation                                                                             (531,131,596)                                576,866
 Dividend Distribution                                                                                         (64,072,440)                                      -
 Dividend Tax                                                                                                            -                                       -
 Net Surplus Transferred to Balance Sheet                                                                      157,544,389                             173,117,465

 Significant Accounting Policies and Notes to Accounts                            9

 The Schedules form an integral part of the Financial Statements

 As per our report of even date attached.

 For N. M. Raiji & Co.                                                        For and on behalf of Principal Pnb                  For and on behalf of Principal
 Chartered Accountants                                                        Asset Management Company Pvt. Ltd                    Trustee Company Pvt. Ltd

 Sd/-
 Vinay D. Balse                                                               Sd/-                                            Sd/-                  Sd/-
 Partner                                                                      M. M. Chitale                                   B.G. Deshmukh         H. M. Singh
                                                                              Chairman                                        Chairman              Director

                                                                              Sd/-                          Sd/-
 Place : Mumbai                                                               Rajan Ghotgalkar              Shyam Bhat
 Date : July 09, 2010                                                         Managing Director             Fund Manager




                                                                                              172
ANNUAL REPORT
                                                                              PRINCIPAL MUTUAL FUND
                                                                       PRINCIPAL SERVICES INDUSTRIES FUND
                                                           Schedules forming part of the Financial Statements as at March 31, 2010
 SCHEDULE 1 - UNIT CAPITAL                                                                March 31, 2010                                                March 31, 2009
                                                                                  Units                          Rupees                        Units                            Rupees
 (A)       Growth Option
 Initial Capital Issued and Subscribed :
 Units of Rs. 10 each fully paid up                                     259,428,399.901                    2,594,283,999             259,428,399.901                      2,594,283,999

 Outstanding :
 At the beginning of the year                                            68,182,972.664                     681,829,727               67,754,780.966                       677,547,810
 issued during the year                                                     877,004.100                       8,770,041                6,136,325.698                        61,363,257
                                                                         69,059,976.764                     690,599,768               73,891,106.664                       738,911,067
 Repurchased during the year                                             17,872,229.900                     178,722,299                5,708,134.000                        57,081,340
 At the end of the Year (A)                                              51,187,746.864                     511,877,469               68,182,972.664                       681,829,727


 (B)       Dividend Option
 Initial Capital Issued and Subscribed :
 Units of Rs. 10 each fully paid up                                     302,904,469.043                    3,029,044,690             302,904,469.043                      3,029,044,690

 Outstanding :
 At the beginning of the year                                            55,286,311.530                     552,863,116               61,757,362.563                       617,573,626
 issued during the year                                                   2,354,793.900                      23,547,939                1,036,267.100                        10,362,671
                                                                         57,641,105.430                     576,411,055               62,793,629.663                       627,936,297
 Repurchased during the year                                             15,213,156.500                     152,131,565                7,507,318.133                        75,073,181
 At the end of the Year (B)                                              42,427,948.930                     424,279,490               55,286,311.530                       552,863,116


 TOTAL (A+B)                                                             93,615,695.794                     936,156,959              123,469,284.194                      1,234,692,843




 SCHEDULE 2 - RESERVES AND SURPLUS                                                                                                    March 31, 2010                     March 31, 2009
 UPR                                                                                                                                        Rupees                             Rupees

 Unit Premium Reserve
 At the beginning of the year                                                                                                           (465,981,556)                      (465,607,906)
 Net addition / (deduction) during the year                                                                                              462,079,111                           (373,650)
 At the end of the Year                                                                                                                   (3,902,445)                      (465,981,556)


 Balance in Revenue Account                                                                                                             157,544,389                        173,117,465


 Unrealised Appreciation in value of Investments                                                                                        135,923,542                                   -

 Total                                                                                                                                  289,565,486                        (292,864,091)



 SCHEDULE 3 - CURRENT LIABILITIES AND
 PROVISIONS                                                                                                                           March 31, 2010                     March 31, 2009
                                                                                                                                            Rupees                             Rupees
 Contracts for Purchase of Investments                                                                                                             -                        13,525,540
 Unit Repurchase Amount Payable                                                                                                          12,666,684                          3,135,561
 Registrar's Fees and Expenses                                                                                                              313,831                            358,568
 Custodian's Fees and Expenses                                                                                                               27,512                             19,084
 Management Fees                                                                                                                          1,275,706                                   -
 Trusteeship Fees                                                                                                                             9,177                              7,578
 Audit Fees                                                                                                                                  94,036                            138,928
 Agent's Commission Payable                                                                                                               4,298,683                          3,162,826
 Publicity and Marketing Expenses                                                                                                           299,163                             81,227
 Other Current Liabilities                                                                                                                2,446,951                          2,346,488

                                                                                                                                          21,431,743                        22,775,800


 SCHEDULE 4 - INVESTMENTS                                                                                                             March 31, 2010                     March 31, 2009
 (Refer to attached statement of Portfolio holding as at
 March 31, 2010)                                                                                                                             Rupees                            Rupees
 Debentures and Bonds Listed / Awaiting Listing                                                                                                    -                        19,775,310
 Debentures and Bonds Unlisted / Privately Placed                                                                                          8,507,325                        13,400,000
 Equity Shares                                                                                                                         1,168,975,445                       820,394,560

                                                                                                                                       1,177,482,770                       853,569,870



 SCHEDULE 5 - DEPOSITS                                                                                                                March 31, 2010                     March 31, 2009
                                                                                                                                            Rupees                             Rupees
 Collateralised Lending                                                                                                                  57,355,890                         96,928,659

                                                                                                                                          57,355,890                        96,928,659




                                                                                                    173
ANNUAL REPORT




  SCHEDULE 6 - OTHER CURRENT ASSETS                                        March 31, 2010   March 31, 2009
                                                                                 Rupees           Rupees
  Balances with Banks and Reserve Bank of India in Current Account             6,202,935        2,502,614
  Unit Subscription Receivable                                                     6,000           10,413
  Contract for Sale of Investment                                              5,939,433        9,823,218
  Outstanding and Accrued Income                                                 104,419        1,769,778
  Inter-Scheme Dues                                                               62,741                 -

                                                                              12,315,528       14,106,023




  SCHEDULE 7 - INTEREST & DISCOUNT INCOME                                  March 31, 2010   March 31, 2009
                                                                                 Rupees           Rupees
  Debentures/Bonds                                                             2,165,957        2,670,121
  Commercial Paper / Certificate of Deposits / Usance Bills                             -       3,123,244
  Collateralised Lending & Reverse Repo                                        1,636,957        2,694,417
  Others (net) - (Refer Note III(4) to Schedule 9)                                      -          10,884
                                                                               3,802,914        8,498,666




  SCHEDULE 8 - DEFERRED REVENUE EXPENDITURE                                March 31, 2010   March 31, 2009
                                                                                 Rupees           Rupees

  At the beginning of the year                                                         -        47,161,008
  Amount amortised during the year                                                     -       (47,161,008)

  At the end of the year                                                               -                 -




                                                                     174
ANNUAL REPORT

                                                     PRINCIPAL MUTUAL FUND
                                             PRINCIPAL SERVICES INDUSTRIES FUND
                                        Cash Flow Statement For The Year Ended March 31, 2010

                                                                                                        March 31, 2010                   March 31, 2009
                                                                                                             Amount                           Amount
                                                                                                                 (Rs.)                            (Rs.)
 A. Cash flow from Operating Activities
    Surplus / (Deficit) for the year                                                                        484,867,207                    (685,495,798)
    Add: Deferred Revenue Expenditure amortised (Non-cash)                                                            -                      47,161,008
    Surplus before adjustments                                                                              484,867,207                    (638,334,790)
    Adjustments for:-
    (Increase)/Decrease in Investments (at cost)                                                            (93,225,605)                    763,303,640
    Decrease in Other Current Assets                                                                          5,549,144                       6,328,149
    Decrease in Current Liabilities                                                                         (10,875,180)                    (14,741,392)

    Net cash generated from Operations                                                    (a)               386,315,566                     116,555,607


 B. Cash flow from Financing Activities
    Decrease in Unit Capital                                                                               (298,535,884)                     (60,428,592)
    Increase/(Decrease) in Reserves                                                                         (69,052,485)                         203,216
    Adjustments for:-
    Increase in Sundry Creditors for redeemed units and dividend                                              9,531,123                       (4,462,351)
    Decrease in Sundry Debtors for units issued                                                                 (58,328)                         608,524
    Dividend paid during the year                                                                           (64,072,440)                               -

    Net cash used in Financing Activities                                                 (b)              (422,188,014)                     (64,079,203)

    Net Increase / (Decrease) in Cash and Cash Equivalents                              (a + b)             (35,872,448)                     52,476,404

    Cash and Cash Equivalents as at the :-
    Beginning of the year                                                                                    99,431,273                      46,954,869
    End of the year                                                                                          63,558,825                      99,431,273




    Note : Cash and Cash Equivalents includes the following :
            (1) Balances with Banks                                                                           6,202,935                       2,502,614
            (2) Collateralised Lending                                                                       57,355,890                      96,928,659




    The above cash flow statement has been prepared under the indirect method setout in Accounting Standard (AS-3) issued by the Institute of Chartered
    Accountants of India.

    As per our report of even date attached.




    For N. M. Raiji & Co.                       For and on behalf of Principal Pnb                For and on behalf of Principal
    Chartered Accountants                    Asset Management Company Pvt. Ltd                     Trustee Company Pvt. Ltd

    Sd/-                                        Sd/-                                              Sd/-                                      Sd/-
    Vinay D. Balse                               M. M. Chitale                                    B.G. Deshmukh                             H. M. Singh
    Partner                                     Chairman                                          Chairman                                      Director


                                                  Sd/-                        Sd/-
    Place : Mumbai                             Rajan Ghotgalkar           Shyam Bhat
    Date : July 09, 2010                       Managing Director         Fund Manager




                                                                           175
ANNUAL REPORT




                                 PRINCIPAL MUTUAL FUND

                      PRINCIPAL SERVICES INDUSTRIES FUND

                                              SCHEDULE - 9

     SIGNIFICANT ACCOUNTING POLICIES AND NOTES TO ACCOUNTS FORMING PART OF
                                   ACCOUNTS

     I. BACKGROUND INFORMATION

        A. Organisation

        Principal Mutual Fund (formerly known as IDBI-PRINCIPAL Mutual Fund) has been constituted as a
        Trust in accordance with the provisions of the Indian Trusts Act, 1882 (2 of 1882). The Mutual Fund
        is registered with the Securities and Exchange Board of India (SEBI) under registration no.
        MF/019/94/0 dated December 13, 1994.

        The Fund was initially set up by Industrial Development Bank of India (IDBI) in 1994 by execution of
        a Trust Deed dated November 25, 1994, under which IDBI was the sole Settlor, Sponsor and Principal
        Trustee. Subsequently, on March 31, 2000, Principal Financial Services Inc. USA became the deemed
        sponsor along with IDBI by acquiring 50% stake in IDBI-PRINCIPAL Asset Management Company
        Limited. Pursuant to SEBI Letter dated October 18, 2002, the IDBI-PRINCIPAL Trustee Company
        Limited took over the trusteeship and the associated responsibilities and obligations of the IDBI-
        PRINCIPAL Mutual Fund. The Name of the Trustee Company was changed to Principal Trustee
        Company Limited w.e.f. June 27, 2003. The Name of the Trustee Company was changed to Principal
        Trustee Company Private Limited w.e.f. October 20, 2003.

        On June 23, 2003, Principal Financial Services Inc. USA, acquired a 100% stake in IDBI-PRINCIPAL
        Asset Management Company Limited, through its wholly owned subsidiary, Principal Financial
        Group (Mauritius) Limited. Accordingly, Principal Financial Services Inc. USA, became the Sole
        Sponsor of the Fund and Principal Financial Group (Mauritius) Limited has became the Sole Settlor
        of the Fund. The name of the Asset Management Company was changed to Principal Asset
        Management Company Limited w.e.f. June 27, 2003, and on October 20, 2003 was again changed to
        Principal Asset Management Company Private Limited (PAMC).

        On May 5, 2004, Punjab National Bank and Vijaya Bank acquired 30% stake and 5% stake
        respectively in Principal Asset Management Company Private Limited, as well as in Principal Trustee
        Company Private Limited and became the co-settlers to the Fund. The name of the Asset
        Management Company changed to Principal Pnb Asset Management Company Private Limited w.e.f
        January 24, 2005.

        B. Scheme

        Principal Service Industries Fund is an open ended scheme of Principal Mutual Fund launched for
        initial subscription on January 09, 2006. The Scheme’s initial offer closed on February 07, 2006. The
        allotment date for the IPO units was March 06, 2006.




                                                     176
ANNUAL REPORT




       The investment objective of the scheme is to provide capital appreciation and income distribution to
       the unit holders by investing predominantly in equity/equity related securities of the companies
       belonging to the services industries and the balance in debt securities and money market instruments
       including call money.


     II. SIGNIFICANT ACCOUNTING POLICIES

          1. Basis of Accounting

                    The scheme maintains books of account on an accrual basis.

          2. Investments

              2.1     Investment transactions are accounted on trade dates.

              2.2     The cost of investment includes brokerage, premium paid on acquisition, transaction
                      charges and other costs associated with purchase of investments.

              2.3     Bonus entitlements are recognized on ex-bonus dates.


          3. Portfolio Valuation

              3.1     Investments are valued on the Balance Sheet date as per the recommendations of
                      SEBI.

              3.2     Traded securities (excluding government securities and Treasury bills) are valued at
                      the last quoted closing price on the principal stock exchange on which the security is
                      traded.

              3.3     A security (other than debt securities), which is not traded on any stock exchange on
                      a particular valuation day, is valued at the price at which it was traded on the selected
                      stock exchange, as the case may be, on the earliest previous day, such day not being
                      more than thirty days prior to the valuation date.

              3.4     A debt security (other than government securities), which is not traded on any stock
                      exchange on any particular valuation day, is considered as ‘Non-Traded Security’.
                      A debt Security (other than government securities) is considered as ‘Thinly-Traded
                      Security’, if on the valuation date, there are no individual trades in that security in
                      marketable lots (presently Rs 5 Crore) on the principal stock exchange.

                      Investment in non-traded / thinly traded debt securities including securitised debt
                      (other than government securities) with a residual maturity greater than 182 days are
                      valued using CRISIL Bond Valuer, which is based on the concept of using spread
                      over Government Securities to arrive at yields for pricing.

              3.5     Investments in traded/non-traded/thinly traded government securities are valued at the
                      prices released by CRISIL, which is an approved agency recommended by the
                      Association of Mutual Funds of India (AMFI).




                                                    177
ANNUAL REPORT




           3.6    Treasury bills are valued at cost plus the difference between the redemption value and
                  the cost, spread uniformly over the remaining maturity period of the instrument.
                  Treasury Bills listed on a recognised stock exchange are valued at the last quoted
                  weighted average yield, on the principal exchange on which the security is traded. If
                  no sale is reported at that date, Treasury Bills are valued at fair value, as determined
                  in good faith by Principal Pnb Asset Management Company Private Limited, under
                  procedures approved by the Trustees of Principal Mutual Fund, in accordance with
                  the guidelines for valuation of securities for mutual funds issued by SEBI.

           3.7    Money Market securities and non-traded debt securities, with residual maturity of
                  upto 182 days, are valued at cost (including accrued interest), plus the difference
                  between the redemption value (inclusive of interest) and the cost, spread uniformly
                  over the remaining maturity period of the instrument.

           3.8    Thinly traded Equity shares /Equity related securities/non-traded securities (other
                  than Government Securities) are valued in good faith by the investment manager, on
                  the basis of valuation principles laid down by SEBI.

           3.9    Investment in non-traded debt securities, including securitised debt (other than
                  government securities) with a residual maturity greater than 182 days, are valued
                  using CRISIL Bond Valuer, which is based on the concept of using spread to maturity
                  to arrive at the yields for pricing.

           3.10   Securities in the nature of Floating Rate Notes (FRN) are valued at cost plus the
                  difference between the redemption value and the cost, spread uniformly over the
                  remaining maturity period of the instrument. FRNs listed on a recognised stock
                  exchange are valued at the last quoted closing price on the principal exchange, on
                  which the security is traded. If no sale is reported at that date FRNs are valued at fair
                  value, as determined in good faith by Principal Pnb Asset Management Company
                  Private Limited, under procedures approved by the Trustees of Principal Mutual
                  Fund, in accordance with the guidelines for valuation of securities for mutual funds
                  issued by SEBI.

           3.11   Securitised Debt are valued at fair value, as determined in good faith by Principal Pnb
                  Asset Management Company Private Limited, under procedures approved by the
                  Trustees of Principal Mutual Fund, in accordance with the guidelines for valuation of
                  securities for mutual funds issued by SEBI.

           3.12   Interest Rate Swaps with a maturity period of more than 182 days are marked to
                  market by recording the net present values of the difference in outflows and inflows
                  as unrealised appreciation / depreciation. Interest Rate Swaps with a maturity of 182
                  days and less are amortised over the balance contracted period.

           3.13   Investments in Call money, bills purchased under re-discounting scheme and term
                  deposits with banks are valued at cost plus accruals.

           3.14   An investment is regarded as non-performing if the interest and /or principal amount
                  has not been received or remains outstanding for one quarter from the day such
                  income or installment has fallen due.




                                                178
ANNUAL REPORT




            3.15    Appreciation/Depreciation, as the case may be, in the value of securities at the year-
                    end is computed for the scheme, whereby the aggregate market value of all securities
                    taken together is compared with the aggregate cost of acquisition. Such net balance is
                    charged to Revenue Account.

            3.16    The above policies are followed as and when applicable.

         4. Income Recognition

            4.1     Dividend income is accrued on ex-dividend date.

            4.2     Profit or loss on sale of investments is arrived at by applying weighted average cost
                    on trade date.

            4.3     Interest on debentures and other fixed income investments is recognized on accrual
                    basis.

            4.4     In respect of Interest Rate Swaps, interest expense and income are accrued on a net
                    basis daily.

            4.5     Income on non-performing assets (NPA) is recognized on cash basis.

         5. Management Fees

            Investment Management fees payable to Principal Pnb Asset Management Co. Pvt. Ltd. is
            computed on the basis of Average Daily Net Assets Value.

         6. Income Equalisation Reserve and Unit Premium Reserve

            a.       Upto March 14, 2010, upon purchase/sale of units by the Scheme, an appropriate part
            of the purchase / sale price was credited / debited to the Income Equalisation Reserve
            Account. The balance amount of the purchase/sale price after reducing the face value was
            transferred to Unit Premium Reserve Account.

            b.      With effect from March 15, 2010, pursuant to the issue of SEBI circular no.
            SEBI/IMD/CIR no 18/198647/2010 dated March 15, 2010, upon purchase/sale of units by the
            Scheme, where the purchase/sale price is higher than the face value per unit, the amount
            representing unrealized gain and balance in the Unit Premium Reserve Account is
            credited/debited to Unit Premium Reserve Account. The balance amount of the purchase/sale
            price after reducing the face value is transferred to Income Equalization Reserve Account.
            Upon purchase/sale of units by the Scheme, where the purchase/sale price is lower than the
            face value per unit, the difference between the sale price and face value is debited to Income
            Equalization Reserve Account. Distributable surplus is arrived at after excluding unrealized
            gains. Balance lying to the credit of Unit Premium Reserve Account is not considered for the
            purpose of dividend distribution. Where the Unit Premium Reserve has a debit balance, the
            excess thereof over the unrealized gain is also deducted in arriving at the distributable surplus.

            c.     The balance in Income Equalization Reserve Account is transferred to the Revenue
            Account at the end of the year.




                                                   179
ANNUAL REPORT




         7. Provisions

            (i) In the case of interest accrued on investments, provision is made in respect of amounts
            which have not been received for a period of 3 months beyond the due date. No further
            accrual of income is made in respect of such investments.

            (ii) Provision is made in respect of the principal amount of securities, in accordance with
            valuation principles laid down by SEBI.

            (iii) Provision is made in respect of accrued dividend, which has not been received for a
            period of twelve months beyond the due date.

         8. Entry and Exit Load

            a) Upto July 31, 2009 load charged at the time of purchase/sale of units was utilized for
               incurring distribution and marketing expenses. Out of the residual amount, amounts
               considered to be in excess of future requirements by the Trustees were recognized as
               income, and the residual amount was carried forward into the next year.

            b) With effect from August 1, 2009 In accordance with the SEBI circular dated June 30, 2009:

               i) No entry load is charged on fresh purchase applications received after August 1, 2009
               (except on SIPs registered prior to August 1, 2009 which is utilised for incurring
               distribution and marketing expenses. Out of the residual amount, amounts considered to be
               in excess of future requirements by the Trustees are recognized as income, and the residual
               amount carried forward into the next year Load Charges).
               ii) Exit load charged in excess of 1% is recognized as income of the scheme immediately.
               iii) Exit load charged upto 1% is parked in a Liability Account, which is utilized for
               incurring distribution and marketing expenses. Out of the residual amount, amounts
               considered to be in excess of future requirements by the Trustees are recognized as
               income, and the residual amount carried forward into the next year.

         9. Deferred Revenue Expenditure

            Deferred Revenue expenses pertain to expenses incurred during the New Fund Offer period at
            the time of launch of the scheme. The same is being amortised over a period of three years
            from the date of allotment of units.




                                                  180
ANNUAL REPORT
      III     NOTES TO ACCOUNTS

          1   The scheme has growth and dividend options. A combined Balance sheet, Revenue Account and Cash Flow are prepared for the scheme.

          2   The Cost and Market Value / Fair Value of investments are given below:

                                                                                                                                                                                                        (Rs. In Lacs)
                                                                                                                                                                          Net Appreciation / (Depreciation) in value
                                                                                    Cost / Amortised cost                         Market Value / Fair Value
                                                                                                                                                                                      of investments
               Investments                                                  March 31, 2010          March 31, 2009          March 31, 2010          March 31, 2009          March 31, 2010        March 31, 2009
 INFRA6        Equity Shares                                                       10,330.52                 9,153.66              11,689.75                 8,203.95                1,359.24              (949.71)
 INFRA7
               Debentures and Bonds Unlisted / Privately Placed                           85.07                  134.00                   85.07                  134.00                       -                     -
 INFRA2        Debentures / Bonds Listed / Awaiting listing on
                                                                                               -                 195.68                        -                 197.75                       -                 2.08
               recognized stock exchanges
               TOTAL                                                                  10,415.59                9,483.34              11,774.83                 8,535.70                1,359.24             (947.64)

              Net Change in unrealised appreciation in the value of investment for the year ended March 31, 2010 is Rs. 2306.87 Lacs

          3   The industry-wise 'Statement of Portfolio Holding' as on March 31, 2010 (Referred to in Schedule 4 to the Balance Sheet) is given in Annexure I.

          4   Interest and Discount - Others (Net) includes amounts received from and paid to other schemes of the Fund on account of delay in the movement of unit subscription application
              money of one scheme residing in the other scheme, calculated for the period of the delay on the basis of the prevailing CBLO rates.


          5   The aggregate book value and fair value of non traded / thinly traded investments, which have been valued in good faith in accordance with the guidelines for valuation of
              securities for Mutual Funds issued by SEBI, are given below:

                                                                                                         (Rs. In Lacs)
                                                                            March 31, 2010          March 31, 2009
                                     Particulars                              Amount                  Amount
               Book Value                                                               85.07                  329.68
               Market / Fair Value                                                      85.07                  331.75

          6   Net Asset Value per unit of various options are as under:


               Name of the Option                                           March 31, 2010          March 31, 2009
               Growth                                                                   13.80                    7.63
               Dividend                                                                 12.24                    7.63


          7   Aggregate value of Purchases and Sales made during the year, expressed as a percentage of Average Daily Net Asset Value, are as under:

                                                                                           Purchases                                        Sales *

                                                                          Amount (Rs. In lacs) % of Avg. Net Assets Amount (Rs. In lacs) % of Avg. Net Assets
                                   March 31, 2010                                 196,090.30               1,504.43         200,564.38               1,538.76
                                   March 31, 2009                                  46,678.36                 388.71          47,993.17                 399.66
              * Sales includes redemptions / maturities

          8   Contracts for sale pending deliveries as on March 31, 2010, amounting to Rs. 59.39 lacs (Previous Year : Rs. 98.23 Lacs) have been excluded from the
              Investments, whereas purchases of securities by the scheme, the deliveries of which were pending as on March 31, 2010, amounting to Rs. Nil (Previous
              Year: Rs. 135.26 Lacs) have been included in investments.



          9   Details of Management Fees paid to Principal Pnb Asset Management Co. Pvt. Ltd. and its computation thereof:
                                                                                                                            (Rs. In Lacs)
                                                                                                                   % of Management
                                                                          Average Daily Net                        Fees to Average Net
                                                                          Asset Value           Management Fees    Asset Value
                                  March 31, 2010                                      13,034.17             155.25                   1.19
                                  March 31, 2009                                      12,008.57              85.58                   0.71

      10      As per the requirement of Regulation 25(11) of SEBI (Mutual Fund) Regulations, 1996, details of Investments made by the Fund in companies, where
              the companies' investments in any of Principal Mutual Fund schemes exceeds 5% of the scheme's Net Asset Value, is given in Annexure II.



      11      Total Income and Recurring Expenditure for the year expressed as a percentage of Average Daily Net Asset Value are as under:


                                                                      (As a % of Average Daily Net Asset Value)
                                                                                           Recurring
                                                                      Income               Expenditure
                                 March 31, 2010                                      39.64                 2.44
                                 March 31, 2009                                       2.35                 2.41
              Income / Expenditure excludes appreciation/depreciation on investment.

      12      Particulars of Unclaimed Dividends and Unclaimed Redemptions are as under:

                                                                                     Unclaimed Dividends                           Unclaimed Redemptions

                                                                         No. of Investors        Amount (Rs. In lacs) No. of Investors           Amount (Rs. In lacs)
                                   March 31, 2010                                              -                       -                    129                  22.88
                                   March 31, 2009                                              -                       -                     62                  13.63
              Note : For want of relevant information from banks, in respect of dividends and redemptions effected through DDs, the liability for unencashed and
              expired DDs (if any) and the corresponding bank balance for the same may not have been accounted in the books.




                                                                                                       181
ANNUAL REPORT



    13     Disclosure as per SEBI circular MFD/CIR No. 3/211/2001 dated April 30, 2001 :
           The Scheme does not have a single unitholder holding more than 25% of the NAV as on March 31, 2010.

    14     The Scheme has entered into transactions with certain related parties. The information required in this regard in accordance with Accounting Standard 18
           on 'Related Party Disclosures' issued by The Institute of Chartered Accountants of India (ICAI) and Regulation 25(8) of the SEBI (Mutual Funds)
           Regulations, 1996, are as under :


    (i)    Related Party relationships

           Name                                                      Description of relationship
           Principal Financial Services Inc., USA                    Sponsor of the Fund
           Principal Trustee Company Private Ltd.                    Trustee of the Fund

           Principal Pnb Asset Management Company Private Ltd.       Subsidiary of the Sponsor and the Scheme's asset manager

           Pnb Principal Insurance Broking Private Limited           Subsidiary of the Sponsor
           Principal Consulting (India) Private Limited              Subsidiary of the Sponsor

           Pnb Principal Financial Planners Private Limited          Subsidiary of the Sponsor
           Principal Pnb Life Insurance Company Limited              Subsidiary of the Sponsor
           Principal Financial Group (Mauritius) Limited             A Company holding substantial interest in the share capital of the
                                                                     Scheme's asset manager
           Punjab National Bank                                      A Company holding substantial interest in the share capital of the
                                                                     Scheme's asset manager
           PNB Gilts Limited                                         Subsidiary of Punjab National Bank
           PNB Housing Finance Limited                               Subsidiary of Punjab National Bank

           Schemes of the Fund under common control of the
           Sponsor

           Principal Child Benefit Fund                              Principal Long Term Equity Fund 3 Year Plan Series II
           Principal Pnb FMP 385 Days Series XI                      Principal Monthly Income Plan
           Principal Pnb FMP 540 Days Series IV                      Principal Monthly Income Plan - MIP Plus
           Principal Floating Rate Fund - Flexible Maturity Plan     Principal Balanced Fund
           Principal Floating Rate Fund - Short Maturity Plan        Principal Dividend Yield Fund
           Principal Govt. Securities Fund - Investment Plan         Principal Emerging Bluechip Fund
           Principal Global Opportunities Fund                       Principal Money Manager Fund
           Principal Growth Fund                                     Principal Personal Tax Saver Fund
           Principal Income Fund                                     Principal Resurgent India Equity Fund
           Principal Index Fund                                      Principal Income Fund - Short Term Plan
           Principal Services Industries Fund                        Principal Tax Savings Fund
           Principal Large Cap Fund                                  Principal Junior Cap Fund
           Principal Ultra Short Term Fund                           Principal Govt. Securities Fund - Saving Plan
           Principal Cash Management Fund - Liquid Option            Principal Pnb Fixed Duration Fund 3 Year Plan Series I
           Principal Long Term Equity Fund                           Principal Pnb FMP 460 Days Series IV
           Principal Pnb FMP 540 Days Series II                      Principal Pnb FMP 385 Days Series VIII
           Principal Pnb FMP 385 Days Series VII                     Principal Pnb FMP 385 Days Series IX



    (ii)   Transactions, if any, with the above mentioned related parties, as defined under Accounting Standard 18 and Regulation 25(8) of the SEBI Regulations
           are given below:


                                                                                                                                                                            (Rs. In Lacs)
           Name of the Related Party                                 Nature of                For the year ended Outstanding as at               For the year ended Outstanding as at
                                                                     Transactions              March 31, 2010    March 31, 2010                   March 31, 2009    March 31, 2009

                                                                     Fees for Trusteeship
           Principal Trustee Company Private Ltd.                                                               1.30                      0.09                  1.20                 0.08
                                                                     Services



           Principal Pnb Asset Management Company Private Ltd.       Fees for Management                     155.25                   12.76                    85.58                    -
                                                                     Services

                                                                     Investor
           Principal Consulting (India) Private Limited.             Communication                            13.78                          -                 16.81                 1.06
                                                                     Service Fees

           Punjab National Bank                                      Bank Charges                                  -                         -                  0.40                    -


           Investment in Associates by the Scheme
           Larsen & Toubro Limited                                   Purchase                                      -                                           79.08
                                                                     Sale/Redemption                               -                                          687.16
                                                                     Holding as at March
                                                                                                                                             -                                          -
                                                                     31




                                                                                                 182
ANNUAL REPORT




   (iii)      Commission Paid to Associates / Related Parties / Group Companies of Sponsor AMC



                                                                                                                         % of Commission                           % of Business Given
                                                                                                  Commission Paid                              Business Given (Rs.
              Name of the Associates                                          Period covered                             paid to total                             to total Business
                                                                                                  (Rs)                                         In Crores)
                                                                                                                         Commission paid                           Received



              Punjab National Bank                                            FY 2009-10                    914,466.58                15.38%                    0.06             2.59%
                                                                              FY 2008-09                  1,082,019.72                11.43%                    0.15             1.58%

              Pnb Principal Financial Planners Pvt Ltd                        FY 2009-10                        104.30                 0.00%                        -                -
                                                                              FY 2008-09                        112.14                 0.00%                        -                -

              Note: Commission paid to associates has been disclosed on payment basis and business given indicates Gross Mobilisation (net of rejections, if any)
                    during the corresponding period for which the commission paid has been disclosed.

   15         Commission to Agents and Publicity expenses amounting to Rs 1.96 Lacs (Previous Year : 16.01 lacs) are utilised from load collected.

   16         Other Income includes exit load collected in excess of 1% from the Investors at the time of redemption.

   17         As per the disclosure requirement under Accounting Standard 17 on 'Segment Reporting' issued by ICAI, the Scheme operates only in one segment, viz,
              primarily generate returns, based on the Scheme's Investment Objectives.


   18         The historical per unit statistics are given in Annexure III.

   19         Previous Year's figures have been regrouped and reclassified, wherever necessary, to make them comparable.

   20         'Rs. 0.00' indicates amount less than a lac and 'Rs. -' indicates Nil amount.



    As per our report of even date attached.

    For N. M. Raiji & Co.                                                     For and on behalf of Principal Pnb                               For and on behalf of Principal
    Chartered Accountants                                                     Asset Management Company Pvt. Ltd                                 Trustee Company Pvt. Ltd

    Sd/-                                                                      Sd/-                                                             Sd/-                                      Sd/-
    Vinay D. Balse                                                            M. M. Chitale                                                    B.G. Deshmukh                             H. M. Singh
    Partner                                                                   Chairman                                                         Chairman                                  Director


                                                                              Sd/-                Sd/-
    Place : Mumbai                                                            Rajan Ghotgalkar    Shyam Bhat
    Date: July 09, 2010                                                       Managing Director   Fund Manager




                                                                                                      183
ANNUAL REPORT




         PRINCIPAL TAX SAVINGS FUND




                     184
ANNUAL REPORT


                                              AUDITORS’ REPORT


     TO THE TRUSTEE OF
     PRINCIPAL MUTUAL FUND

     We have audited the attached Balance Sheet as at March 31, 2010, the Revenue Account and the Cash
     Flow Statement for the year ended on that date, annexed thereto of Principal Tax Savings Fund (the
     scheme) of the Principal Mutual Fund. These financial statements are the responsibility of the
     Management. Our responsibility is to express an opinion on these financial statements based on our audit.
     We report that:

     1.      Our audit was conducted in accordance with generally accepted Standards on Auditing in India.
             These Standards require that we plan and perform the audit to obtain reasonable assurance about
             whether the financial statements are free of material misstatements. An audit includes examining
             on a test basis, evidence supporting the amounts and disclosures in the financial statements. An
             audit also includes assessing the accounting principles used and significant estimates made by the
             Management, as well as evaluating the overall financial statement presentation. We believe that
             our audit provides a reasonable basis for our opinion.

     2.      We have obtained all information and explanations, which, to the best of our knowledge and belief
             were necessary for the purpose of our audit.

     3.      The Balance Sheet, the Revenue Account and the Cash Flow Statement are in agreement with the
             books of account of the Scheme.

     4.      In our opinion, valuation methods for Non Traded Securities, adopted by the scheme are fair and
             reasonable and are in accordance with the guidelines for valuation issued by SEBI and approved
             by the Trustees.

     5.      The accounts have been prepared in accordance with the accounting policies adopted by the
             trustees of the Fund and as specified in the Ninth Schedule to the SEBI (Mutual Funds)
             Regulations, 1996.

     6.      In our opinion and to the best of our information and according to the explanations given to us, the
             said accounts give the information required by the SEBI (Mutual Funds) Regulations, 1996 and
             give a true and fair view in accordance with the generally accepted accounting principles in India:

             a.   in the case of Balance Sheet, of the state of affairs of the scheme as at March 31, 2010;

             b.   in the case of Revenue Account, of the surplus of the scheme for the year ended on that date;
                  and

             c.   in the case of Cash Flow Statement, of the cash flows for the year ended on that date.

                                                                                         For N. M. Raiji & Co.
                                                                                        Chartered Accountants
                                                                                Firm Registration No. 108296W


                                                                                                          Sd/-
                                                                                               Vinay D. Balse
                                                                                                      Partner
                                                                                         Membership No. 39434
     Place : Mumbai
     Date : July 09, 2010




                                                         185
ANNUAL REPORT

                                                        PRINCIPAL MUTUAL FUND
                                                      PRINCIPAL TAX SAVINGS FUND
                                                      Balance Sheet as at March 31, 2010


                                                                   Schedule              March 31, 2010            March 31, 2009
                                                                                                Rupees                    Rupees
 LIABILITIES
 Unit Capital                                                          1                     392,739,707              391,199,559
 Reserves & Surplus                                                    2                   2,491,701,939            1,211,454,379
 Current Liabilities and Provisions                                    3                      61,916,531               72,162,226
 Total                                                                                     2,946,358,177            1,674,816,164

 ASSETS
 Investments                                                           4                   2,771,370,142            1,403,978,494
 Deposits                                                              5                     100,454,010              182,960,705
 Other Current Assets                                                  6                      74,534,025               87,876,965
 Total                                                                                     2,946,358,177            1,674,816,164

 Significant Accounting Policies and Notes to Accounts                 8
 The Schedules form an integral part of the Financial Statements


 As per our report of even date attached.




 For N. M. Raiji & Co.                For and on behalf of Principal Pnb          For and on behalf of Principal
 Chartered Accountants                Asset Management Company Pvt. Ltd            Trustee Company Pvt. Ltd

 Sd/-                                 Sd/-                                        Sd/-                               Sd/-
 Vinay D. Balse                       M. M. Chitale                               B.G. Deshmukh                      H. M. Singh
 Partner                              Chairman                                    Chairman                                Director


                                      Sd/-                        Sd/-
 Place : Mumbai                       Rajan Ghotgalkar           Shyam Bhat
 Date : July 09, 2010                 Managing Director          Fund Manager




                                                                           186
ANNUAL REPORT

                                                                PRINCIPAL MUTUAL FUND
                                                              PRINCIPAL TAX SAVINGS FUND
                                                       Revenue Account for the year ended March 31, 2010
                                                                             Schedule                             March 31, 2010                                March 31, 2009
                                                                                                                         Rupees                                        Rupees

 INCOME

 Dividend                                                                                                            29,902,317                                       31,863,312
 Interest and Discount Income                                                    7                                    4,739,460                                       11,747,982
 Profit on Sale / Redemption of Investments (other than inter-scheme
 transfer / sale)                                                                                                   562,355,521                                                 -

 Total                                                                                                              596,997,298                                       43,611,294



 EXPENSES AND LOSSES


 Loss on Sale / Redemption of Investments (Other than inter-scheme
 transfer / sales)                                                                                                            -                                  1,307,100,781
 Loss on inter-scheme transfer / sale of investments                                                                          -                                      2,890,781
 Management Fees                                                                                                     27,686,195                                     14,036,434
 Trusteeship Fees                                                                                                       251,870                                        205,893
 Agent's Commission                                                                                                   7,635,100                                     11,531,609
 Publicity & Marketing Expenses                                                                                       6,599,086                                      4,758,624
 Audit Fees                                                                                                             270,322                                        338,225
 Custodian's Fees and Expenses                                                                                          605,436                                        544,595
 Registrar's Fees and Expenses                                                                                        5,679,731                                      3,174,624
 Other Operating Expenses                                                                                            10,438,263                                     14,232,657

 Total                                                                                                               59,166,003                                  1,358,814,223
 Surplus / (Deficit) for the year                                                                                   537,831,295                                 (1,315,202,929)

 Net change in Unrealised gain / (loss) in the Value of Investments (Refer
 Note III(2) to Schedule 8)                                                                                         744,808,925                                      (117,396,913)

 Net Surplus / (Deficit) including Net change in Unrealised Appreciation /
 (Depreciation) for the year                                                                                       1,282,640,220                                (1,432,599,842)


 Appropriation

 Opening Balance                                                                                                   1,205,176,575                                 2,592,442,195
 Add: Net Surplus including Net change in Unrealised Appreciation /
 (Depreciation) for the year                                                                                       1,282,640,220                                (1,432,599,842)
 Unrealised Appreciation in value of Investments as at the beginning of
 the year                                                                                                                      -                                                -

 Unrealised Appreciation in value of Investments as at the end of year                                              (441,447,551)                                            -
 Add/(Less) : Income Equalisation                                                                                        502,432                                   307,637,973
 Dividend Distribution (Refer Note III(15) to Schedule 8)                                                                (15,938)                                 (262,303,751)
 Dividend Tax                                                                                                                  -                                             -
 Net Surplus Transferred to Balance Sheet                                                                          2,046,855,738                                 1,205,176,575

 Significant Accounting Policies and Notes to Accounts                           8

 The Schedules form an integral part of the Financial Statements

 As per our report of even date attached.

 For N. M. Raiji & Co.                                                       For and on behalf of Principal Pnb                     For and on behalf of Principal
 Chartered Accountants                                                       Asset Management Company Pvt. Ltd                       Trustee Company Pvt. Ltd


 Sd/-                                                                        Sd/-                                                   Sd/-                              Sd/-
 Vinay D. Balse                                                              M. M. Chitale                                          B.G. Deshmukh                    H. M. Singh
 Partner                                                                     Chairman                                               Chairman                             Director

                                                                             Sd/-                                  Sd/-
 Place : Mumbai                                                              Rajan Ghotgalkar                       Shyam Bhat
 Date : July 09, 2010                                                        Managing Director                     Fund Manager




                                                                                          187
ANNUAL REPORT




                                                                              PRINCIPAL MUTUAL FUND
                                                                            PRINCIPAL TAX SAVINGS FUND
                                                           Schedules forming part of the Financial Statements as at March 31, 2010
 SCHEDULE 1 - UNIT CAPITAL                                                                March 31, 2010                                               March 31, 2009
                                                                                  Units                        Rupees                         Units                            Rupees
 (A)       Principal Tax Savings Fund
 Initial Capital Issued and Subscribed :
 Units of Rs. 10 each fully paid up                                      53,416,450.000                    534,164,500               53,416,450.000                       534,164,500

 Outstanding :
 At the beginning of the year                                            39,119,955.914                    391,199,559               32,419,275.139                       324,192,751
 Issued during the year                                                   1,973,151.500                     19,731,515                7,214,448.586                        72,144,486
                                                                         41,093,107.414                    410,931,074               39,633,723.725                       396,337,237
 Repurchased during the year                                              1,819,136.700                     18,191,367                  513,767.811                         5,137,678
 At the end of the year (A)                                              39,273,970.714                    392,739,707               39,119,955.914                       391,199,559




 TOTAL (A)                                                               39,273,970.714                    392,739,707               39,119,955.914                       391,199,559




 SCHEDULE 2 - RESERVES AND SURPLUS                                                                                                   March 31, 2010                     March 31, 2009
 UPR                                                                                                                                       Rupees                             Rupees

 Unit Premium Reserve
 At the beginning of the year                                                                                                             6,277,804                         4,966,762
 Net addition / (deduction) during the year                                                                                              (2,879,154)                        1,311,042
 At the end of the year                                                                                                                   3,398,650                         6,277,804


 Balance in Revenue Account                                                                                                           2,046,855,738                      1,205,176,575


 Unrealised Appreciation in value of Investments                                                                                       441,447,551                                   -

 Total                                                                                                                                2,491,701,939                      1,211,454,379


 SCHEDULE 3 - CURRENT LIABILITIES AND
 PROVISIONS                                                                                                                          March 31, 2010                     March 31, 2009
                                                                                                                                           Rupees                             Rupees
 Contracts for Purchase of Investments                                                                                                            -                        29,418,469
 Unit Repurchase Amount Payable                                                                                                          7,962,902                          3,748,410
 Registrar's Fees and Expenses                                                                                                             825,216                            717,908
 Custodian's Fees and Expenses                                                                                                              60,387                             31,194
 Inter Scheme Dues                                                                                                                         299,215                              9,665
 Management Fees                                                                                                                         2,634,311                                   -
 Trusteeship Fees                                                                                                                           21,123                             12,505
 Audit Fees                                                                                                                                270,322                            338,225
 Agent's Commission Payable                                                                                                              3,056,462                          2,320,368
 Publicity and Marketing Expenses                                                                                                          417,277                            199,111
 Dividend and Dividend Tax Payable                                                                                                      42,249,009                         31,341,429
 Other Current Liabilities                                                                                                               4,114,307                          3,428,343
 Unit Capital Pending Allotment                                                                                                              6,000                            596,600

                                                                                                                                        61,916,531                         72,162,226



 SCHEDULE 4 - INVESTMENTS                                                                                                            March 31, 2010                     March 31, 2009
 (Refer to attached statement of Portfolio holding as at
 March 31, 2010)                                                                                                                            Rupees                             Rupees
 Debentures and Bonds Unlisted / Privately Placed                                                                                        14,950,380                         23,450,000
 Equity Shares                                                                                                                        2,756,419,762                      1,380,528,494

                                                                                                                                      2,771,370,142                      1,403,978,494



 SCHEDULE 5 - DEPOSITS                                                                                                               March 31, 2010                     March 31, 2009
                                                                                                                                           Rupees                             Rupees
 Collateralised Lending                                                                                                                100,454,010                        182,960,705

                                                                                                                                       100,454,010                        182,960,705




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ANNUAL REPORT




  SCHEDULE 6 - OTHER CURRENT ASSETS                                        March 31, 2010   March 31, 2009
                                                                                 Rupees           Rupees
  Balances with Banks and Reserve Bank of India in Current Account            46,880,184       39,637,881
  Unit Subscription Receivable                                                 3,638,997       11,697,559
  Contract for Sale of Investment                                             20,019,533       33,808,414
  Outstanding and Accrued Income                                                 183,501        1,050,643
  Receivable from the Asset Management Company                                    14,498                 -
  Other Current Assets                                                         3,797,312        1,682,468

                                                                              74,534,025       87,876,965




  SCHEDULE 7 - INTEREST & DISCOUNT INCOME                                  March 31, 2010   March 31, 2009
                                                                                 Rupees           Rupees
  Debentures/Bonds                                                             2,968,735        3,190,822
  Commercial Paper / Certificate of Deposits / Usance Bills                             -       3,447,277
  Collateralised Lending & Reverse Repo                                        1,770,725        5,092,784
  Others (net) - (Refer Note III(4) to Schedule 8)                                      -          17,099
                                                                               4,739,460       11,747,982




                                                                     189
ANNUAL REPORT

                                                   PRINCIPAL MUTUAL FUND
                                                 PRINCIPAL TAX SAVINGS FUND
                                       Cash Flow Statement For The Year Ended March 31, 2010

                                                                                                       March 31, 2010                   March 31, 2009
                                                                                                           Amount                           Amount
                                                                                                                (Rs.)                            (Rs.)
 A. Cash flow from Operating Activities
    Surplus / (Deficit) for the year                                                                      537,831,295                    (1,315,202,929)
    Adjustments for:-
    (Increase)/Decrease in Investments (at cost)                                                         (622,582,724)                   1,220,128,017
    (Increase)/Decrease in Other Current Assets                                                            12,526,681                       17,674,464
    Increase/(Decrease) in Current Liabilities                                                            (25,066,717)                     (84,984,774)

    Net cash generated from / (used in) Operations                                       (a)              (97,291,465)                     (162,385,222)


 B. Cash flow from Financing Activities
    Increase in Unit Capital                                                                                1,540,148                       67,006,808
    Increase/(Decrease) in Reserves                                                                        (2,376,722)                     308,949,015
    Adjustments for:-
    Increase/(Decrease) in Sundry Creditors for redeemed units and dividend                                15,411,622                        (1,981,307)
    Decrease in Sundry Debtors for units issued                                                             7,467,962                       159,815,975
    Dividend paid during the year                                                                             (15,938)                     (262,303,751)

    Net cash generated from Financing Activities                                         (b)               22,027,072                      271,486,740

    Net Increase/(Decrease) in Cash and Cash Equivalents                               (a + b)            (75,264,393)                     109,101,518

    Cash and Cash Equivalents as at the :-
    Beginning of the year                                                                                 222,598,586                      113,497,068
    End of the year                                                                                       147,334,193                      222,598,586




    Note : Cash and Cash Equivalents includes the following :
             (1) Balances with Banks                                                                       46,880,184                       39,637,881
             (2) Collateralised Lending                                                                   100,454,010                      182,960,705




    The above cash flow statement has been prepared under the indirect method setout in Accounting Standard (AS-3) issued by the Institute of Chartered
    Accountants of India.

    As per our report of even date attached.




    For N. M. Raiji & Co.                      For and on behalf of Principal Pnb                For and on behalf of Principal
    Chartered Accountants                    Asset Management Company Pvt. Ltd                    Trustee Company Pvt. Ltd

    Sd/-                                     Sd/-                                                 Sd/-                                      Sd/-
    Vinay D. Balse                           M. M. Chitale                                       B.G. Deshmukh                             H. M. Singh
    Partner                                  Chairman                                            Chairman                                      Director


                                              Sd/-                                  Sd/-
    Place : Mumbai                            Rajan Ghotgalkar                    Shyam Bhat
    Date : July 09, 2010                      Managing Director                 Fund Manager




                                                                              190
ANNUAL REPORT




                                 PRINCIPAL MUTUAL FUND

                             PRINCIPAL TAX SAVINGS FUND

                                             SCHEDULE - 8

     SIGNIFICANT ACCOUNTING POLICIES AND NOTES TO ACCOUNTS FORMING PART OF
                                   ACCOUNTS

     I. BACKGROUND INFORMATION

        A. Organisation

        Principal Mutual Fund (formerly known as IDBI-PRINCIPAL Mutual Fund) has been constituted as a
        Trust in accordance with the provisions of the Indian Trusts Act, 1882 (2 of 1882). The Mutual Fund
        is registered with the Securities and Exchange Board of India (SEBI) under registration no.
        MF/019/94/0 dated December 13, 1994.

        The Fund was initially set up by Industrial Development Bank of India (IDBI) in 1994 by execution of
        a Trust Deed dated November 25, 1994, under which IDBI was the sole Settlor, Sponsor and Principal
        Trustee. Subsequently, on March 31, 2000, Principal Financial Services Inc. USA became the deemed
        sponsor along with IDBI by acquiring 50% stake in IDBI-PRINCIPAL Asset Management Company
        Limited. Pursuant to SEBI Letter dated October 18, 2002, the IDBI-PRINCIPAL Trustee Company
        Limited took over the trusteeship and the associated responsibilities and obligations of the IDBI-
        PRINCIPAL Mutual Fund. The Name of the Trustee Company was changed to Principal Trustee
        Company Limited w.e.f. June 27, 2003. The Name of the Trustee Company was changed to Principal
        Trustee Company Private Limited w.e.f. October 20, 2003.

        On June 23, 2003, Principal Financial Services Inc. USA, acquired a 100% stake in IDBI-PRINCIPAL
        Asset Management Company Limited, through its wholly owned subsidiary, Principal Financial
        Group (Mauritius) Limited. Accordingly, Principal Financial Services Inc. USA, became the Sole
        Sponsor of the Fund and Principal Financial Group (Mauritius) Limited has became the Sole Settlor
        of the Fund. The name of the Asset Management Company was changed to Principal Asset
        Management Company Limited w.e.f. June 27, 2003, and on October 20, 2003 was again changed to
        Principal Asset Management Company Private Limited (PAMC).

        On May 5, 2004, Punjab National Bank and Vijaya Bank acquired 30% stake and 5% stake
        respectively in Principal Asset Management Company Private Limited, as well as in Principal Trustee
        Company Private Limited and became the co-settlers to the Fund. The name of the Asset
        Management Company changed to Principal Pnb Asset Management Company Private Limited w.e.f
        January 24, 2005.

        B. Scheme

        Principal Tax Savings Fund was initially launched as a close-ended ELSS scheme of Principal Mutual
        Fund on January 1, 1996.The scheme has subsequently been converted to an open ended scheme
        w.e.f. April 12, 2001 as per the notification dated 22nd December, 1998 of Ministry of Finance,
        Department of Economic Affairs (Capital Markets Division) Government of India.




                                                    191
ANNUAL REPORT




       Tax Savings Fund is an open-ended growth scheme with the objective of building a high quality
       growth-oriented portfolio to provide long-term capital gains to the investors. The scheme aims at
       providing returns through capital appreciation


     II. SIGNIFICANT ACCOUNTING POLICIES

          1. Basis of Accounting

                    The scheme maintains books of account on an accrual basis.

          2. Investments

              2.1     Investment transactions are accounted on trade dates.

              2.2     The cost of investment includes brokerage, premium paid on acquisition, transaction
                      charges and other costs associated with purchase of investments.

              2.3     Bonus entitlements are recognized on ex-bonus dates.


          3. Portfolio Valuation

              3.1     Investments are valued on the Balance Sheet date as per the recommendations of
                      SEBI.

              3.2     Traded securities (excluding government securities and Treasury bills) are valued at
                      the last quoted closing price on the principal stock exchange on which the security is
                      traded.

              3.3     A security (other than debt securities), which is not traded on any stock exchange on
                      a particular valuation day, is valued at the price at which it was traded on the selected
                      stock exchange, as the case may be, on the earliest previous day, such day not being
                      more than thirty days prior to the valuation date.

              3.4     A debt security (other than government securities), which is not traded on any stock
                      exchange on any particular valuation day, is considered as ‘Non-Traded Security’.
                      A debt Security (other than government securities) is considered as ‘Thinly-Traded
                      Security’, if on the valuation date, there are no individual trades in that security in
                      marketable lots (presently Rs 5 Crore) on the principal stock exchange.

                      Investment in non-traded / thinly traded debt securities including securitised debt
                      (other than government securities) with a residual maturity greater than 182 days are
                      valued using CRISIL Bond Valuer, which is based on the concept of using spread
                      over Government Securities to arrive at yields for pricing.

              3.5     Investments in traded/non-traded/thinly traded government securities are valued at the
                      prices released by CRISIL, which is an approved agency recommended by the
                      Association of Mutual Funds of India (AMFI).




                                                    192
ANNUAL REPORT




           3.6    Treasury bills are valued at cost plus the difference between the redemption value and
                  the cost, spread uniformly over the remaining maturity period of the instrument.
                  Treasury Bills listed on a recognised stock exchange are valued at the last quoted
                  weighted average yield, on the principal exchange on which the security is traded. If
                  no sale is reported at that date, Treasury Bills are valued at fair value, as determined
                  in good faith by Principal Pnb Asset Management Company Private Limited, under
                  procedures approved by the Trustees of Principal Mutual Fund, in accordance with
                  the guidelines for valuation of securities for mutual funds issued by SEBI.

           3.7    Money Market securities and non-traded debt securities, with residual maturity of
                  upto 182 days, are valued at cost (including accrued interest), plus the difference
                  between the redemption value (inclusive of interest) and the cost, spread uniformly
                  over the remaining maturity period of the instrument.

           3.8    Thinly traded Equity shares /Equity related securities/non-traded securities (other
                  than Government Securities) are valued in good faith by the investment manager, on
                  the basis of valuation principles laid down by SEBI.

           3.9    Investment in non-traded debt securities, including securitised debt (other than
                  government securities) with a residual maturity greater than 182 days, are valued
                  using CRISIL Bond Valuer, which is based on the concept of using spread to maturity
                  to arrive at the yields for pricing.

           3.10   Securities in the nature of Floating Rate Notes (FRN) are valued at cost plus the
                  difference between the redemption value and the cost, spread uniformly over the
                  remaining maturity period of the instrument. FRNs listed on a recognised stock
                  exchange are valued at the last quoted closing price on the principal exchange, on
                  which the security is traded. If no sale is reported at that date FRNs are valued at fair
                  value, as determined in good faith by Principal Pnb Asset Management Company
                  Private Limited, under procedures approved by the Trustees of Principal Mutual
                  Fund, in accordance with the guidelines for valuation of securities for mutual funds
                  issued by SEBI.

           3.11   Securitised Debt are valued at fair value, as determined in good faith by Principal Pnb
                  Asset Management Company Private Limited, under procedures approved by the
                  Trustees of Principal Mutual Fund, in accordance with the guidelines for valuation of
                  securities for mutual funds issued by SEBI.

           3.12   Interest Rate Swaps with a maturity period of more than 182 days are marked to
                  market by recording the net present values of the difference in outflows and inflows
                  as unrealised appreciation / depreciation. Interest Rate Swaps with a maturity of 182
                  days and less are amortised over the balance contracted period.

           3.13   Investments in Call money, bills purchased under re-discounting scheme and term
                  deposits with banks are valued at cost plus accruals.

           3.14   An investment is regarded as non-performing if the interest and /or principal amount
                  has not been received or remains outstanding for one quarter from the day such
                  income or installment has fallen due.




                                                193
ANNUAL REPORT




            3.15    Appreciation/Depreciation, as the case may be, in the value of securities at the year-
                    end is computed for the scheme, whereby the aggregate market value of all securities
                    taken together is compared with the aggregate cost of acquisition. Such net balance is
                    charged to Revenue Account.

            3.16    The above policies are followed as and when applicable.

         4. Income Recognition

            4.1     Dividend income is accrued on ex-dividend date.

            4.2     Profit or loss on sale of investments is arrived at by applying weighted average cost
                    on trade date.

            4.3     Interest on debentures and other fixed income investments is recognized on accrual
                    basis.

            4.4     In respect of Interest Rate Swaps, interest expense and income are accrued on a net
                    basis daily.

            4.5     Income on non-performing assets (NPA) is recognized on cash basis.

         5. Management Fees

            Investment Management fees payable to Principal Pnb Asset Management Co. Pvt. Ltd. is
            computed on the basis of Average Daily Net Assets Value.

         6. Income Equalisation Reserve and Unit Premium Reserve

            a.       Upto March 14, 2010, upon purchase/sale of units by the Scheme, an appropriate part
            of the purchase / sale price was credited / debited to the Income Equalisation Reserve
            Account. The balance amount of the purchase/sale price after reducing the face value was
            transferred to Unit Premium Reserve Account.

            b.      With effect from March 15, 2010, pursuant to the issue of SEBI circular no.
            SEBI/IMD/CIR no 18/198647/2010 dated March 15, 2010, upon purchase/sale of units by the
            Scheme, where the purchase/sale price is higher than the face value per unit, the amount
            representing unrealized gain and balance in the Unit Premium Reserve Account is
            credited/debited to Unit Premium Reserve Account. The balance amount of the purchase/sale
            price after reducing the face value is transferred to Income Equalization Reserve Account.
            Upon purchase/sale of units by the Scheme, where the purchase/sale price is lower than the
            face value per unit, the difference between the sale price and face value is debited to Income
            Equalization Reserve Account. Distributable surplus is arrived at after excluding unrealized
            gains. Balance lying to the credit of Unit Premium Reserve Account is not considered for the
            purpose of dividend distribution. Where the Unit Premium Reserve has a debit balance, the
            excess thereof over the unrealized gain is also deducted in arriving at the distributable surplus.

            c.     The balance in Income Equalization Reserve Account is transferred to the Revenue
            Account at the end of the year.




                                                   194
ANNUAL REPORT




         7. Provisions

            (i) In the case of interest accrued on investments, provision is made in respect of amounts
            which have not been received for a period of 3 months beyond the due date. No further
            accrual of income is made in respect of such investments.

            (ii) Provision is made in respect of the principal amount of securities, in accordance with
            valuation principles laid down by SEBI.

            (iii) Provision is made in respect of accrued dividend, which has not been received for a
            period of twelve months beyond the due date.

         8. Entry and Exit Load

            a) Upto July 31, 2009 load charged at the time of purchase/sale of units was utilized for
               incurring distribution and marketing expenses. Out of the residual amount, amounts
               considered to be in excess of future requirements by the Trustees were recognized as
               income, and the residual amount was carried forward into the next year.

            b) With effect from August 1, 2009 In accordance with the SEBI circular dated June 30, 2009:

               i) No entry load is charged on fresh purchase applications received after August 1, 2009
               (except on SIPs registered prior to August 1, 2009 which is utilised for incurring
               distribution and marketing expenses. Out of the residual amount, amounts considered to be
               in excess of future requirements by the Trustees are recognized as income, and the residual
               amount carried forward into the next year Load Charges).
               ii) Exit load charged in excess of 1% is recognized as income of the scheme immediately.
               iii) Exit load charged upto 1% is parked in a Liability Account, which is utilized for
               incurring distribution and marketing expenses. Out of the residual amount, amounts
               considered to be in excess of future requirements by the Trustees are recognized as
               income, and the residual amount carried forward into the next year.




                                                  195
ANNUAL REPORT
      III     NOTES TO ACCOUNTS

          1   The Scheme is an Equity Oriented Scheme with a single plan.

          2   The Cost and Market Value / Fair Value of investments are given below:

                                                                                                                                                                                                        (Rs. In Lacs)
                                                                                                                                                                          Net Appreciation / (Depreciation) in value
                                                                                     Cost / Amortised cost                        Market Value / Fair Value
                                                                                                                                                                                       of investments
               Investments                                                  March 31, 2010          March 31, 2009          March 31, 2010          March 31, 2009          March 31, 2010         March 31, 2009
 TAX966        Equity Shares                                                       23,149.72               16,838.90                27,564.20               13,805.28                4,414.48             (3,033.61)
 TAX967
               Debentures and Bonds Unlisted / Privately Placed                          149.50                  234.50                  149.50                  234.50                        -                       -

               TOTAL                                                                  23,299.23               17,073.40              27,713.70               14,039.78                 4,414.48            (3,033.61)

              Net Change in unrealised appreciation in the value of investment for the year ended March 31, 2010 is Rs. 7448.09 Lacs

          3   The industry-wise 'Statement of Portfolio Holding' as on March 31, 2010 (Referred to in Schedule 4 to the Balance Sheet) is given in Annexure I.


          4   Interest and Discount - Others (Net) includes amounts received from and paid to other schemes of the Fund on account of delay in the movement of unit subscription application
              money of one scheme residing in the other scheme, calculated for the period of the delay on the basis of the prevailing CBLO rates.

          5   The aggregate book value and fair value of non traded / thinly traded investments, which have been valued in good faith in accordance with the guidelines for valuation of
              securities for Mutual Funds issued by SEBI, are given below:

                                                                                                         (Rs. In Lacs)
                                                                            March 31, 2010          March 31, 2009
                                     Particulars                              Amount                  Amount
               Book Value                                                              149.50                  234.50
               Market / Fair Value                                                     149.50                  234.50

          6   Net Asset Value per unit of various plans are as under:


               Name of the Scheme                                           March 31, 2010          March 31, 2009
               Principal Tax Saving Fund                                                73.44                   40.97


          7   Aggregate value of Purchases and Sales made during the year, expressed as a percentage of Average Daily Net Asset Value, are as under:

                                                                                           Purchases                                        Sales *

                                                                         Amount (Rs. In lacs) % of Avg. Net Assets Amount (Rs. In lacs) % of Avg. Net Assets
                                   March 31, 2010                                235,705.60                 935.85         235,947.88                 936.81
                                   March 31, 2009                                 63,030.68                 306.14          62,263.57                 302.41
              * Sales includes redemptions / maturities

          8   Contracts for sale pending deliveries as on March 31, 2010, amounting to Rs 200.20 lacs (Previous Year : Rs. 338.08 Lacs) have been excluded from the
              Investments, whereas purchases of securities by the scheme, the deliveries of which were pending as on March 31, 2010, amounting to Rs.72.62 lacs
              (Previous Year: Rs. 294.18 Lacs) have been included in investments.


          9   Details of Management Fees paid to Principal Pnb Asset Management Co. Pvt. Ltd. and its computation thereof:
                                                                                                                           (Rs. In Lacs)
                                                                                                                  % of Management
                                                                         Average Daily Net                        Fee to Average Net
                                                                         Asset Value           Management Fees    Asset Value
                                  March 31, 2010                                     25,186.29             276.86                   1.10
                                  March 31, 2009                                     20,588.97             140.36                   0.68

      10      As per the requirement of Regulation 25(11) of SEBI (Mutual Fund) Regulations, 1996, details of Investments made by the Fund in companies, where
              the companies' investments in any of Principal Mutual Fund schemes exceeds 5% of the scheme's Net Asset Value, is given in Annexure II.



      11      Total Income and Recurring Expenditure for the year expressed as a percentage of Average Daily Net Asset Value:


                                                                       (As a % of Average Daily Net Asset Value)
                                                                                            Recurring
                                                                         Income             Expenditure
                                 March 31, 2010                                       23.70                 2.35
                                 March 31, 2009                                        2.12                 2.37
              Income / Expenditure excludes appreciation/depreciation on investment.

      12      Particulars of Unclaimed Dividends and Unclaimed Redemptions are as under:

                                                                                     Unclaimed Dividends                           Unclaimed Redemptions

                                                                         No. of Investors        Amount (Rs. In lacs) No. of Investors           Amount (Rs. In lacs)
                                   March 31, 2010                                        26,068                 422.49                      244                  34.03
                                   March 31, 2009                                        21,669                 313.41                      233                  33.07
              Note : For want of relevant information from banks, in respect of dividends and redemptions effected through DDs, the liability for unencashed and
              expired DDs (if any) and the corresponding bank balance for the same may not have been accounted in the books.



      13      Disclosure as per SEBI circular MFD/CIR No. 3/211/2001 dated April 30, 2001 :
              The Scheme does not have a single unitholder holding more than 25% of the NAV as on March 31, 2010.




                                                                                                       196
ANNUAL REPORT
   14     The Scheme has entered into transactions with certain related parties. The information required in this regard in accordance with Accounting Standard 18
          on 'Related Party Disclosures' issued by The Institute of Chartered Accountants of India (ICAI) and Regulation 25(8) of the SEBI (Mutual Funds)
          Regulations, 1996, are as under :


   (i)    Related Party relationships

          Name                                                      Description of relationship
          Principal Financial Services Inc., USA                    Sponsor of the Fund
          Principal Trustee Company Private Ltd.                    Trustee of the Fund

          Principal Pnb Asset Management Company Private Ltd.       Subsidiary of the Sponsor and the Scheme's asset manager

          Pnb Principal Insurance Broking Private Limited           Subsidiary of the Sponsor
          Principal Consulting (India) Private Limited              Subsidiary of the Sponsor

          Pnb Principal Financial Planners Private Limited          Subsidiary of the Sponsor
          Principal Pnb Life Insurance Company Limited              Subsidiary of the Sponsor
          Principal Financial Group (Mauritius) Limited             A Company holding substantial interest in the share capital of the
                                                                    Scheme's asset manager
          Punjab National Bank                                      A Company holding substantial interest in the share capital of the
                                                                    Scheme's asset manager
          PNB Gilts Limited                                         Subsidiary of Punjab National Bank
          PNB Housing Finance Limited                               Subsidiary of Punjab National Bank

          Schemes of the Fund under common control of the
          Sponsor

          Principal Child Benefit Fund                              Principal Long Term Equity Fund 3 Year Plan Series II
          Principal Pnb FMP 385 Days Series XI                      Principal Monthly Income Plan
          Principal Pnb FMP 540 Days Series IV                      Principal Monthly Income Plan - MIP Plus
          Principal Floating Rate Fund - Flexible Maturity Plan     Principal Balanced Fund
          Principal Floating Rate Fund - Short Maturity Plan        Principal Dividend Yield Fund
          Principal Govt. Securities Fund - Investment Plan         Principal Emerging Bluechip Fund
          Principal Global Opportunities Fund                       Principal Money Manager Fund
          Principal Growth Fund                                     Principal Personal Tax Saver Fund
          Principal Income Fund                                     Principal Resurgent India Equity Fund
          Principal Index Fund                                      Principal Income Fund - Short Term Plan
          Principal Services Industries Fund                        Principal Tax Savings Fund
          Principal Large Cap Fund                                  Principal Junior Cap Fund
          Principal Ultra Short Term Fund                           Principal Govt. Securities Fund - Saving Plan
          Principal Cash Management Fund - Liquid Option            Principal Pnb Fixed Duration Fund 3 Year Plan Series I
          Principal Long Term Equity Fund                           Principal Pnb FMP 460 Days Series IV
          Principal Pnb FMP 540 Days Series II                      Principal Pnb FMP 385 Days Series VIII
          Principal Pnb FMP 385 Days Series VII                     Principal Pnb FMP 385 Days Series IX



   (ii)   Transactions, if any, with the above mentioned related parties, as defined under Accounting Standard 18 and Regulation 25(8) of the SEBI Regulations
          are given below:


                                                                                                                                                                            (Rs. In Lacs)
          Name of the Related Party                                 Nature of                For the year ended Outstanding as at                For the year ended Outstanding as at
                                                                    Transactions              March 31, 2010    March 31, 2010                    March 31, 2009    March 31, 2009

                                                                    Fees for Trusteeship
          Principal Trustee Company Private Ltd.                                                               2.52                       0.21                  2.06                 0.13
                                                                    Services



          Principal Pnb Asset Management Company Private Ltd.       Fees for Management                     276.86                       26.34               140.36                     -
                                                                    Services

                                                                    Investor
          Principal Consulting (India) Private Limited.             Communication                            25.55                           -                 28.82                 1.75
                                                                    Service Fees

          Punjab National Bank                                      Bank Charges                                  -                          -                  1.76                    -


          Investment in Associates by the Scheme
          Larsen & Toubro Limited                                   Purchase                                378.82                                          1,019.80
                                                                    Sale/Redemption                         612.13                                            380.38
                                                                    Holding as at March
                                                                                                                                    778.98                                        523.69
                                                                    31

          Punjab National Bank                                      Purchase                                   3.18                                                -
                                                                    Sale/Redemption                            2.87                                                -
                                                                    Holding as at March
                                                                                                                                             -                                          -
                                                                    31




                                                                                                  197
ANNUAL REPORT



    (iii)      Commission Paid to Associates / Related Parties / Group Companies of Sponsor AMC



                                                                                                                            % of Commission                                  % of Business Given
                                                                                                   Commission Paid                               Business Given (Rs.
               Name of the Associates                                          Period covered                               paid to total                                    to total Business
                                                                                                   (Rs)                                          In Crores)
                                                                                                                            Commission paid                                  Received



               Punjab National Bank                                            FY 2009-10                    850,657.67                 10.71%                       0.57                  3.68%
                                                                               FY 2008-09                  1,232,922.84                  4.37%                       1.56                  2.21%

               PNB Gilts Ltd                                                   FY 2009-10                           40.83                0.00%                           -                         -
                                                                               FY 2008-09                           21.55                0.00%                           -                         -

               Pnb Principal Financial Planners Pvt Ltd                        FY 2009-10                      5,117.01                  0.06%                       0.00                  0.03%
                                                                               FY 2008-09                      9,749.92                  0.03%                       0.02                  0.02%

               Note: Commission paid to associates has been disclosed on payment basis and business given indicates Gross Mobilisation (net of rejections, if any)
                      during the corresponding period for which the commission paid has been disclosed.

    15         The amount of Rs 15,938 appearing as dividend distribution in F.Y. 2009-10 reflects a short provision made for dividend disitribution for F.Y. 2008-09.

    16         Outstanding and accrued income is net of provision for doubtful income amounting to Rs.0.55 lacs (Previous Year : Rs.0.55 lacs)

    17         Commission to Agents and Publicity expenses amounting to Rs 6.02 Lacs (Previous Year : 106.58 lacs) are utilised from load collected.

    18         The scheme is bearing insurance premium charges on the life insurance cover provided to the investors, in terms of the offer document. Insurance
               premium amount is amortised over a period of twelve(12) months.

    19         As per the disclosure requirement under Accounting Standard 17 on 'Segment Reporting' issued by ICAI, the Scheme operates only in one segment, viz,
               primarily generate returns, based on the Scheme's Investment Objectives.


    20         The historical per unit statistics are given in Annexure III.

    21         Previous Year's figures have been regrouped and reclassified, wherever necessary, to make them comparable.

    22         'Rs. 0.00' indicates amount less than a lac and 'Rs. -' indicates Nil amount.



     As per our report of even date attached.

     For N. M. Raiji & Co.                                                     For and on behalf of Principal Pnb                                For and on behalf of Principal
     Chartered Accountants                                                     Asset Management Company Pvt. Ltd                                  Trustee Company Pvt. Ltd

      Sd/-                                                                      Sd/-                                                              Sd/-                                                 Sd/-
     Vinay D. Balse                                                            M. M. Chitale                                                     B.G. Deshmukh                                         H. M. Singh
     Partner                                                                   Chairman                                                          Chairman                                              Director


                                                                               Sd/-                     Sd/-
     Place : Mumbai                                                            Rajan Ghotgalkar         Shyam Bhat
     Date: July 09, 2010                                                       Managing Director        Fund Manager




                                                                                                      198
ANNUAL REPORT




          PRINCIPAL BALANCED FUND




                    199
ANNUAL REPORT



                                              AUDITORS’ REPORT

     TO THE TRUSTEE OF
     PRINCIPAL MUTUAL FUND

     We have audited the attached Balance Sheet as at March 31, 2010, the Revenue Account and the Cash
     Flow Statement for the year ended on that date, annexed thereto of Principal Balanced Fund (the scheme)
     of the Principal Mutual Fund. These financial statements are the responsibility of the Management. Our
     responsibility is to express an opinion on these financial statements based on our audit. We report that:

     1.      Our audit was conducted in accordance with generally accepted Standards on Auditing in India.
             These Standards require that we plan and perform the audit to obtain reasonable assurance about
             whether the financial statements are free of material misstatements. An audit includes examining
             on a test basis, evidence supporting the amounts and disclosures in the financial statements. An
             audit also includes assessing the accounting principles used and significant estimates made by the
             Management, as well as evaluating the overall financial statement presentation. We believe that
             our audit provides a reasonable basis for our opinion.

     2.      We have obtained all information and explanations, which, to the best of our knowledge and belief
             were necessary for the purpose of our audit.

     3.      The Balance Sheet, the Revenue Account and the Cash Flow Statement are in agreement with the
             books of account of the Scheme.

     4.      In our opinion, valuation methods for Non Traded Securities, adopted by the scheme are fair and
             reasonable and are in accordance with the guidelines for valuation issued by SEBI and approved
             by the Trustees.

     5.      The accounts have been prepared in accordance with the accounting policies adopted by the
             trustees of the Fund and as specified in the Ninth Schedule to the SEBI (Mutual Funds)
             Regulations, 1996.

     6.      In our opinion and to the best of our information and according to the explanations given to us, the
             said accounts give the information required by the SEBI (Mutual Funds) Regulations, 1996 and
             give a true and fair view in accordance with the generally accepted accounting principles in India:

             a.   in the case of Balance Sheet, of the state of affairs of the scheme as at March 31, 2010;

             b.   in the case of Revenue Account, of the surplus of the scheme for the year ended on that date;
                  and

             c.   in the case of Cash Flow Statement, of the cash flows for the year ended on that date.

                                                                                         For N. M. Raiji & Co.
                                                                                        Chartered Accountants
                                                                                Firm Registration No. 108296W


                                                                                                          Sd/-
                                                                                               Vinay D. Balse
                                                                                                      Partner
                                                                                         Membership No. 39434
     Place : Mumbai
     Date : July 09, 2010




                                                         200
ANNUAL REPORT

                                                        PRINCIPAL MUTUAL FUND
                                                       PRINCIPAL BALANCED FUND
                                                      Balance Sheet as at March 31, 2010


                                                                    Schedule                March 31, 2010              March 31, 2009
                                                                                                   Rupees                      Rupees
 LIABILITIES
 Unit Capital                                                           1                      200,898,409                 372,273,210
 Reserves & Surplus                                                     2                      154,195,730                  (3,621,665)
 Current Liabilities and Provisions                                     3                        8,134,056                  14,657,432
 Total                                                                                         363,228,195                 383,308,977

 ASSETS
 Investments                                                            4                      352,389,732                 349,728,932
 Deposits                                                               5                        2,147,016                  21,795,197
 Other Current Assets                                                   6                        8,691,447                  11,784,848
 Total                                                                                         363,228,195                 383,308,977

 Significant Accounting Policies and Notes to Accounts                  8
 The Schedules form an integral part of the Financial Statements



 As per our report of even date attached.




 For N. M. Raiji & Co.                For and on behalf of Principal Pnb              For and on behalf of Principal
 Chartered Accountants                Asset Management Company Pvt. Ltd                Trustee Company Pvt. Ltd

 Sd/-                                 Sd/-                                            Sd/-                             Sd/-
 Vinay D. Balse                       M. M. Chitale                                   B.G. Deshmukh                     H. M. Singh
 Partner                              Chairman                                        Chairman                         Director


                                      Sd/-                   Sd/-            Sd/-
 Place : Mumbai                       Rajan Ghotgalkar       P.V.K. Mohan    Shobit Gupta
 Date : July 09, 2010                 Managing Director      Fund Manager Fund Manager




                                                                       201
ANNUAL REPORT

                                                                 PRINCIPAL MUTUAL FUND
                                                                PRINCIPAL BALANCED FUND
                                                        Revenue Account for the year ended March 31, 2010
                                                                              Schedule                             March 31, 2010                           March 31, 2009
                                                                                                                          Rupees                                   Rupees

 INCOME

 Dividend                                                                                                                4,004,076                               6,768,720
 Interest and Discount Income                                                     7                                      6,866,008                              17,553,740
 Profit on Sale / Redemption of Investments (other than inter-scheme
 transfer / sale)                                                                                                       40,699,301                                       -
 Profit on inter-scheme transfer / sale of investments                                                                      74,500                                       -
 Other Income                                                                                                                    -                                  11,598

 Total                                                                                                                  51,643,885                              24,334,058



 EXPENSES AND LOSSES


 Loss on Sale / Redemption of Investments (Other than inter-scheme
 transfer / sales)                                                                                                               -                             423,311,763
 Loss on inter-scheme transfer / sale of investments                                                                             -                               2,450,085
 Management Fees                                                                                                         4,871,528                               5,035,362
 Trusteeship Fees                                                                                                           40,399                                  62,510
 Agent's Commission                                                                                                        341,090                                 902,302
 Publicity & Marketing Expenses                                                                                          2,913,325                               6,484,142
 Audit Fees                                                                                                                  9,952                                  13,661
 Custodian's Fees and Expenses                                                                                              78,756                                 160,725
 Registrar's Fees and Expenses                                                                                             625,855                                 873,755
 Other Operating Expenses                                                                                                1,214,846                               2,079,239

 Total                                                                                                                  10,095,751                             441,373,544
 Surplus / (Deficit) for the year                                                                                       41,548,134                            (417,039,486)

 Net change in Unrealised gain in the Value of Investments (Refer Note
 III(2) to Schedule 8)                                                                                                 180,391,490                             178,815,553

 Net Surplus / (Deficit) including Net change in Unrealised Appreciation /
 (Depreciation) for the year                                                                                           221,939,624                            (238,223,933)


 Appropriation

 Opening Balance                                                                                                       (49,036,836)                            210,926,993
 Add: Net Surplus including Net change in Unrealised Appreciation /
 (Depreciation) for the year                                                                                           221,939,624                            (238,223,933)
 Unrealised Appreciation in value of Investments as at the beginning of the
 year                                                                                                                            -                                         -

 Unrealised Appreciation in value of Investments as at the end of year                                                 (56,678,914)                                       -
 Add/(Less) : Income Equalisation                                                                                      (49,645,145)                             (21,739,896)
 Dividend Distribution                                                                                                           -                                        -
 Dividend Tax                                                                                                                    -                                        -
 Net Suplus / (Deficit) Transferred to Balance Sheet                                                                    66,578,729                              (49,036,836)

 Significant Accounting Policies and Notes to Accounts                            8

 The Schedules form an integral part of the Financial Statements

 As per our report of even date attached.

 For N. M. Raiji & Co.                                                        For and on behalf of Principal Pnb                          For and on behalf of Principal
 Chartered Accountants                                                        Asset Management Company Pvt. Ltd                            Trustee Company Pvt. Ltd

 Sd/-
 Vinay D. Balse                                                               Sd/-                                                    Sd/-                 Sd/-
 Partner                                                                      M. M. Chitale                                           B.G. Deshmukh        H. M. Singh
                                                                              Chairman                                                Chairman             Director

                                                                              Sd/-                      Sd/-               Sd/-
 Place : Mumbai                                                               Rajan Ghotgalkar          P.V.K. Mohan      Shobit Gupta
 Date : July 09, 2010                                                         Managing Director         Fund Manager     Fund Manager




                                                                                              202
ANNUAL REPORT

                                                                              PRINCIPAL MUTUAL FUND
                                                                             PRINCIPAL BALANCED FUND
                                                           Schedules forming part of the Financial Statements as at March 31, 2010
 SCHEDULE 1 - UNIT CAPITAL                                                                    March 31, 2010                                            March 31, 2009
                                                                                      Units                                  Rupees            Units                            Rupees
 (A)        Growth Option
 Initial Capital Issued and Subscribed : @
 Units of Rs. 10 each fully paid up                                                    -                                          -             -                                     -

 Outstanding :
 At the beginning of the year                                                 3,926,775.586                            39,267,756      7,324,445.919                         73,244,459
 Issued during the year                                                       2,121,797.500                            21,217,975        970,956.501                          9,709,565
                                                                              6,048,573.086                            60,485,731      8,295,402.420                         82,954,024
 Repurchased during the year                                                  2,539,404.400                            25,394,044      4,368,626.834                         43,686,268
 At the end of the year (A)                                                   3,509,168.686                            35,091,687      3,926,775.586                         39,267,756


 (B)       Dividend Option
 Initial Capital Issued and Subscribed :
 Units of Rs. 10 each fully paid up                                                    -                                          -             -                                     -

 Outstanding :
 At the beginning of the year                                               33,300,545.370                            333,005,454     90,200,304.365                        902,003,044
 Issued during the year                                                      1,716,803.400                             17,168,034      4,096,520.069                         40,965,201
                                                                            35,017,348.770                            350,173,488     94,296,824.434                        942,968,244
 Repurchased during the year                                                18,436,676.600                            184,366,766     60,996,279.064                        609,962,791
 At the end of the year (B)                                                 16,580,672.170                            165,806,722     33,300,545.370                        333,005,454


 TOTAL (A+B)                                                                20,089,840.856                            200,898,409     37,227,320.956                        372,273,210

 @ : The scheme has been taken over from Sun F&C Mutual Fund. Initial Capital details are not available as per our records

 SCHEDULE 2 - RESERVES AND SURPLUS                                                                                                    March 31, 2010                     March 31, 2009
 UPR                                                                                                                                        Rupees                             Rupees

 Unit Premium Reserve
 At the beginning of the year                                                                                                             45,415,171                        161,028,815
 Net addition / (deduction) during the year                                                                                              (14,477,084)                      (115,613,644)
 At the end of the year                                                                                                                   30,938,087                         45,415,171


 Balance in Revenue Account                                                                                                               66,578,729                        (49,036,836)


 Unrealised Appreciation in value of Investments                                                                                          56,678,914                                  -

 Total                                                                                                                                   154,195,730                         (3,621,665)


 SCHEDULE 3 - CURRENT LIABILITIES AND
 PROVISIONS                                                                                                                           March 31, 2010                     March 31, 2009
                                                                                                                                             Rupees                             Rupees
 Contracts for Purchase of Investments                                                                                                             -                          9,026,741
 Unit Repurchase Amount Payable                                                                                                            2,406,774                            781,581
 Registrar's Fees and Expenses                                                                                                                55,657                             96,772
 Custodian's Fees and Expenses                                                                                                                 7,081                              7,010
 Management Fees                                                                                                                             520,001                                  -
 Trusteeship Fees                                                                                                                              2,635                              2,969
 Audit Fees                                                                                                                                    9,952                             13,661
 Agent's Commission Payable                                                                                                                  539,324                            547,401
 Publicity and Marketing Expenses                                                                                                          1,244,727                              7,987
 Dividend and Dividend Tax Payable                                                                                                         3,029,594                          3,801,987
 Other Current Liabilities                                                                                                                   318,311                            370,323
 Unit Capital Pending Allotment                                                                                                                    -                              1,000

                                                                                                                                           8,134,056                         14,657,432




                                                                                                         203
ANNUAL REPORT




  SCHEDULE 4 - INVESTMENTS                                                 March 31, 2010   March 31, 2009
  (Refer to attached statement of Portfolio holding as at
  March 31, 2010)                                                                 Rupees           Rupees
  Debentures and Bonds Listed / Awaiting Listing                                        -       40,741,545
  Debentures and Bonds Unlisted / Privately Placed                                      -       30,036,264
  Government Securities/Treasury bills                                         49,589,100       24,146,000
  Commercial Paper / Certificate of Deposit                                    59,441,952        9,342,780
  Equity Shares                                                               243,358,680      245,462,343

                                                                              352,389,732      349,728,932



  SCHEDULE 5 - DEPOSITS                                                    March 31, 2010   March 31, 2009
                                                                                  Rupees           Rupees
  Collateralised Lending                                                        2,147,016       21,795,197

                                                                                2,147,016       21,795,197



  SCHEDULE 6 - OTHER CURRENT ASSETS                                        March 31, 2010   March 31, 2009
                                                                                  Rupees           Rupees
  Balances with Banks and Reserve Bank of India in Current Account              4,178,214        4,236,191
  Unit Subscription Receivable                                                    310,000           35,210
  Contract for Sale of Investment                                               4,136,407        6,073,487
  Outstanding and Accrued Income                                                   16,024        1,306,458
  Inter-Scheme Dues                                                                48,702                -
  Receivable from the Asset Management Company                                      2,100                -
  Other Current Assets                                                                  -          133,502

                                                                                8,691,447       11,784,848




  SCHEDULE 7 - INTEREST & DISCOUNT INCOME                                  March 31, 2010   March 31, 2009
                                                                                 Rupees           Rupees
  Debentures/Bonds                                                             2,407,414        2,477,461
  Government Securites / Treasury Bills                                        3,369,621        1,146,957
  Commercial Paper / Certificate of Deposits / Usance Bills                       71,674       11,992,727
  Collateralised Lending & Reverse Repo                                        1,017,299        1,936,302
                                                                               6,866,008       17,553,447




                                                                     204
ANNUAL REPORT

                                                   PRINCIPAL MUTUAL FUND
                                                 PRINCIPAL BALANCED FUND
                                      Cash Flow Statement For The Year Ended March 31, 2010

                                                                                                            March 31, 2010            March 31, 2009
                                                                                                                Amount                    Amount
                                                                                                                     (Rs.)                     (Rs.)
 A. Cash flow from Operating Activities
    Surplus / (Deficit) for the year                                                                             41,548,134             (417,039,486)
    Adjustments for:-
    (Increase)/Decrease in Investments (at cost)                                                               177,730,690              1,305,943,883
    (Increase)/Decrease in Other Current Assets                                                                  3,358,916                148,620,147
    Increase/(Decrease) in Current Liabilities                                                                  (7,375,176)               (34,576,859)

    Net cash generated from Operations                                                         (a)             215,262,564              1,002,947,685


 B. Cash flow from Financing Activities
    Decrease in Unit capital                                                                                   (171,374,801)            (602,974,293)
    Decrease in Reserves                                                                                        (64,122,229)            (137,353,540)
    Adjustments for:-
    Increase/(Decrease) in Sundry Creditors for redeemed units and dividend                                         852,800             (289,161,741)
    (Increase)/Decrease in Sundry Debtors for units issued                                                         (324,492)                 770,260

    Net cash used in Financing Activities                                                      (b)             (234,968,722)          (1,028,719,314)

    Net Decrease in Cash and Cash Equivalents                                                (a + b)            (19,706,158)              (25,771,629)

    Cash and Cash Equivalents as at the :-
    Beginning of the year                                                                                        26,031,388               51,803,017
    End of the year                                                                                               6,325,230               26,031,388




    Note : Cash and Cash Equivalents includes the following :
            (1) Balances with Banks                                                                               4,178,214                4,236,191
            (2) Collateralised Lending                                                                            2,147,016               21,795,197




    The above cash flow statement has been prepared under the indirect method setout in Accounting Standard (AS-3) issued by the Institute of
    Chartered Accountants of India.

    As per our report of even date attached.




    For N. M. Raiji & Co.                       For and on behalf of Principal Pnb                     For and on behalf of Principal
    Chartered Accountants                    Asset Management Company Pvt. Ltd                          Trustee Company Pvt. Ltd

    Sd/-                                           Sd/-                                                 Sd/-                                 Sd/-
    Vinay D. Balse                                 M. M. Chitale                                       B.G. Deshmukh                     H. M. Singh
    Partner                                        Chairman                                            Chairman                              Director


                                              Sd/-                           Sd/-              Sd/-
    Place : Mumbai                            Rajan Ghotgalkar            P.V.K. Mohan        Shobit Gupta
    Date : July 09, 2010                      Managing Director         Fund Manager         Fund Manager




                                                                           205
ANNUAL REPORT




                                 PRINCIPAL MUTUAL FUND

                               PRINCIPAL BALANCED FUND

                                             SCHEDULE - 8

     SIGNIFICANT ACCOUNTING POLICIES AND NOTES TO ACCOUNTS FORMING PART OF
                                   ACCOUNTS

     I. BACKGROUND INFORMATION

        A. Organisation

        Principal Mutual Fund (formerly known as IDBI-PRINCIPAL Mutual Fund) has been constituted as a
        Trust in accordance with the provisions of the Indian Trusts Act, 1882 (2 of 1882). The Mutual Fund
        is registered with the Securities and Exchange Board of India (SEBI) under registration no.
        MF/019/94/0 dated December 13, 1994.

        The Fund was initially set up by Industrial Development Bank of India (IDBI) in 1994 by execution of
        a Trust Deed dated November 25, 1994, under which IDBI was the sole Settlor, Sponsor and Principal
        Trustee. Subsequently, on March 31, 2000, Principal Financial Services Inc. USA became the deemed
        sponsor along with IDBI by acquiring 50% stake in IDBI-PRINCIPAL Asset Management Company
        Limited. Pursuant to SEBI Letter dated October 18, 2002, the IDBI-PRINCIPAL Trustee Company
        Limited took over the trusteeship and the associated responsibilities and obligations of the IDBI-
        PRINCIPAL Mutual Fund. The Name of the Trustee Company was changed to Principal Trustee
        Company Limited w.e.f. June 27, 2003. The Name of the Trustee Company was changed to Principal
        Trustee Company Private Limited w.e.f. October 20, 2003.

        On June 23, 2003, Principal Financial Services Inc. USA, acquired a 100% stake in IDBI-PRINCIPAL
        Asset Management Company Limited, through its wholly owned subsidiary, Principal Financial
        Group (Mauritius) Limited. Accordingly, Principal Financial Services Inc. USA, became the Sole
        Sponsor of the Fund and Principal Financial Group (Mauritius) Limited has became the Sole Settlor
        of the Fund. The name of the Asset Management Company was changed to Principal Asset
        Management Company Limited w.e.f. June 27, 2003, and on October 20, 2003 was again changed to
        Principal Asset Management Company Private Limited (PAMC).

        On May 5, 2004, Punjab National Bank and Vijaya Bank acquired 30% stake and 5% stake
        respectively in Principal Asset Management Company Private Limited, as well as in Principal Trustee
        Company Private Limited and became the co-settlers to the Fund. The name of the Asset
        Management Company changed to Principal Pnb Asset Management Company Private Limited w.e.f
        January 24, 2005.

        B. Scheme

        Principal Balanced Fund (formerly known as SUN F&C Mutual Fund - Sun F&C Balanced Fund) is
        an open-ended balanced scheme of Principal Mutual Fund which was taken over from SUN F&C
        Mutual Fund (SUN F&C MF) vide agreement dated June 30, 2003 between the Board of Trustees /
        Directors, as applicable of SUN F&C MF, SUN F&C Asset Management (India) Private Limited
        (SUN F&C AMC), the Investment Manager of SUN F&C MF, Principal Trustee Company Private



                                                    206
ANNUAL REPORT




       Limited and Principal Asset Management Company Private Limited. The Scheme was originally
       launched on December 9, 1999 as SUN F&C Balanced Fund under the aegis of SUN F&C MF. As
       per the agreement, the erstwhile Principal Balanced Fund has been merged into SUN F&C Balanced
       Fund on May 14, 2004 and the merged scheme so formed has been taken over and managed by
       Principal Mutual Fund and renamed as Principal Balanced Fund with effect from May 14, 2004.

       On April 30, 2004, PNB Mutual Fund (PNB MF) - PNB Balanced Growth Fund merged into the
       erstwhile Principal Balanced Fund vide agreement dated August 25, 2003 between the Board of
       Trustees / Directors, as applicable of PNB MF, PNB Asset Management Company Limited (PNB
       AMC), the Investment Manager of PNB MF, Principal Trustee Company Private Limited and
       Principal Asset Management Company Private Limited.

       SEBI has vide its letter dated March 18, 2004 addressed to PNB AMC and PMF AMC and vide its
       letter dated March 5, 2004 addressed to SUN F&C AMC and PMF AMC has given its no objection
       for the above mergers and for handing over the trusteeship, management and administration business
       of the scheme to PMF AMC (Also refer to Note VI)

       The duration of the scheme is perpetual. 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.


     II. SIGNIFICANT ACCOUNTING POLICIES

          1. Basis of Accounting

                     The scheme maintains books of account on an accrual basis.

          2. Investments

              2.1     Investment transactions are accounted on trade dates.

              2.2     The cost of investment includes brokerage, premium paid on acquisition, transaction
                      charges and other costs associated with purchase of investments.

              2.3     Bonus entitlements are recognized on ex-bonus dates.


          3. Portfolio Valuation

              3.1     Investments are valued on the Balance Sheet date as per the recommendations of
                      SEBI.

              3.2     Traded securities (excluding government securities and Treasury bills) are valued at
                      the last quoted closing price on the principal stock exchange on which the security is
                      traded.

              3.3     A security (other than debt securities), which is not traded on any stock exchange on
                      a particular valuation day, is valued at the price at which it was traded on the selected
                      stock exchange, as the case may be, on the earliest previous day, such day not being
                      more than thirty days prior to the valuation date.



                                                    207
ANNUAL REPORT




           3.4    A debt security (other than government securities), which is not traded on any stock
                  exchange on any particular valuation day, is considered as ‘Non-Traded Security’.
                  A debt Security (other than government securities) is considered as ‘Thinly-Traded
                  Security’, if on the valuation date, there are no individual trades in that security in
                  marketable lots (presently Rs 5 Crore) on the principal stock exchange.

                  Investment in non-traded / thinly traded debt securities including securitised debt
                  (other than government securities) with a residual maturity greater than 182 days are
                  valued using CRISIL Bond Valuer, which is based on the concept of using spread
                  over Government Securities to arrive at yields for pricing.

           3.5    Investments in traded/non-traded/thinly traded government securities are valued at the
                  prices released by CRISIL, which is an approved agency recommended by the
                  Association of Mutual Funds of India (AMFI).

           3.6    Treasury bills are valued at cost plus the difference between the redemption value and
                  the cost, spread uniformly over the remaining maturity period of the instrument.
                  Treasury Bills listed on a recognised stock exchange are valued at the last quoted
                  weighted average yield, on the principal exchange on which the security is traded. If
                  no sale is reported at that date, Treasury Bills are valued at fair value, as determined
                  in good faith by Principal Pnb Asset Management Company Private Limited, under
                  procedures approved by the Trustees of Principal Mutual Fund, in accordance with
                  the guidelines for valuation of securities for mutual funds issued by SEBI.

           3.7    Money Market securities and non-traded debt securities, with residual maturity of
                  upto 182 days, are valued at cost (including accrued interest), plus the difference
                  between the redemption value (inclusive of interest) and the cost, spread uniformly
                  over the remaining maturity period of the instrument.

           3.8    Thinly traded Equity shares /Equity related securities/non-traded securities (other
                  than Government Securities) are valued in good faith by the investment manager, on
                  the basis of valuation principles laid down by SEBI.

           3.9    Investment in non-traded debt securities, including securitised debt (other than
                  government securities) with a residual maturity greater than 182 days, are valued
                  using CRISIL Bond Valuer, which is based on the concept of using spread to maturity
                  to arrive at the yields for pricing.

           3.10   Securities in the nature of Floating Rate Notes (FRN) are valued at cost plus the
                  difference between the redemption value and the cost, spread uniformly over the
                  remaining maturity period of the instrument. FRNs listed on a recognised stock
                  exchange are valued at the last quoted closing price on the principal exchange, on
                  which the security is traded. If no sale is reported at that date FRNs are valued at fair
                  value, as determined in good faith by Principal Pnb Asset Management Company
                  Private Limited, under procedures approved by the Trustees of Principal Mutual
                  Fund, in accordance with the guidelines for valuation of securities for mutual funds
                  issued by SEBI.

           3.11   Securitised Debt are valued at fair value, as determined in good faith by Principal Pnb
                  Asset Management Company Private Limited, under procedures approved by the



                                                208
ANNUAL REPORT




                   Trustees of Principal Mutual Fund, in accordance with the guidelines for valuation of
                   securities for mutual funds issued by SEBI.

            3.12   Interest Rate Swaps with a maturity period of more than 182 days are marked to
                   market by recording the net present values of the difference in outflows and inflows
                   as unrealised appreciation / depreciation. Interest Rate Swaps with a maturity of 182
                   days and less are amortised over the balance contracted period.

            3.13   Investments in Call money, bills purchased under re-discounting scheme and term
                   deposits with banks are valued at cost plus accruals.

            3.14   An investment is regarded as non-performing if the interest and /or principal amount
                   has not been received or remains outstanding for one quarter from the day such
                   income or installment has fallen due.

            3.15   Appreciation/Depreciation, as the case may be, in the value of securities at the year-
                   end is computed for the scheme, whereby the aggregate market value of all securities
                   taken together is compared with the aggregate cost of acquisition. Such net balance is
                   charged to Revenue Account.

            3.16   The above policies are followed as and when applicable.

         4. Income Recognition

            4.1    Dividend income is accrued on ex-dividend date.

            4.2    Profit or loss on sale of investments is arrived at by applying weighted average cost
                   on trade date.

            4.3    Interest on debentures and other fixed income investments is recognized on accrual
                   basis.

            4.4    In respect of Interest Rate Swaps, interest expense and income are accrued on a net
                   basis daily.

            4.5    Income on non-performing assets (NPA) is recognized on cash basis.




         5. Management Fees

            Investment Management fees payable to Principal Pnb Asset Management Co. Pvt. Ltd. is
            computed on the basis of Average Daily Net Assets Value.

         6. Income Equalisation Reserve and Unit Premium Reserve

            a.       Upto March 14, 2010, upon purchase/sale of units by the Scheme, an appropriate part
            of the purchase / sale price was credited / debited to the Income Equalisation Reserve
            Account. The balance amount of the purchase/sale price after reducing the face value was
            transferred to Unit Premium Reserve Account.



                                                 209
ANNUAL REPORT




            b.      With effect from March 15, 2010, pursuant to the issue of SEBI circular no.
            SEBI/IMD/CIR no 18/198647/2010 dated March 15, 2010, upon purchase/sale of units by the
            Scheme, where the purchase/sale price is higher than the face value per unit, the amount
            representing unrealized gain and balance in the Unit Premium Reserve Account is
            credited/debited to Unit Premium Reserve Account. The balance amount of the purchase/sale
            price after reducing the face value is transferred to Income Equalization Reserve Account.
            Upon purchase/sale of units by the Scheme, where the purchase/sale price is lower than the
            face value per unit, the difference between the sale price and face value is debited to Income
            Equalization Reserve Account. Distributable surplus is arrived at after excluding unrealized
            gains. Balance lying to the credit of Unit Premium Reserve Account is not considered for the
            purpose of dividend distribution. Where the Unit Premium Reserve has a debit balance, the
            excess thereof over the unrealized gain is also deducted in arriving at the distributable surplus.

            c.     The balance in Income Equalization Reserve Account is transferred to the Revenue
            Account at the end of the year.

         7. Provisions

            (i) In the case of interest accrued on investments, provision is made in respect of amounts
            which have not been received for a period of 3 months beyond the due date. No further
            accrual of income is made in respect of such investments.

            (ii) Provision is made in respect of the principal amount of securities, in accordance with
            valuation principles laid down by SEBI.

            (iii) Provision is made in respect of accrued dividend, which has not been received for a
            period of twelve months beyond the due date.

         8. Entry and Exit Load

            a) Upto July 31, 2009 load charged at the time of purchase/sale of units was utilized for
               incurring distribution and marketing expenses. Out of the residual amount, amounts
               considered to be in excess of future requirements by the Trustees were recognized as
               income, and the residual amount was carried forward into the next year.



            b) With effect from August 1, 2009 In accordance with the SEBI circular dated June 30, 2009:

               i) No entry load is charged on fresh purchase applications received after August 1, 2009
               (except on SIPs registered prior to August 1, 2009 which is utilised for incurring
               distribution and marketing expenses. Out of the residual amount, amounts considered to be
               in excess of future requirements by the Trustees are recognized as income, and the residual
               amount carried forward into the next year Load Charges).
               ii) Exit load charged in excess of 1% is recognized as income of the scheme immediately.
               iii) Exit load charged upto 1% is parked in a Liability Account, which is utilized for
               incurring distribution and marketing expenses. Out of the residual amount, amounts
               considered to be in excess of future requirements by the Trustees are recognized as
               income, and the residual amount carried forward into the next year.




                                                   210
ANNUAL REPORT
        III   NOTES TO ACCOUNTS

        1     The scheme has growth and dividend options. A combined Balance sheet, Revenue Account and Cash Flow are prepared for the scheme.

        2     The Cost and Market Value / Fair Value of investments are given below:

                                                                                                                                                                                                          (Rs. In Lacs)
                                                                                                                                                                          Net Appreciation / (Depreciation) in value
                                                                                     Cost / Amortised cost                        Market Value / Fair Value
                                                                                                                                                                                       of investments
               Investments                                                   March 31, 2010         March 31, 2009          March 31, 2010          March 31, 2009          March 31, 2010          March 31, 2009
 PBF6          Equity Shares                                                          1,867.60               3,718.88                2,433.59                2,454.62                  565.99              (1,264.26)
 PBF3          Government Securities/Treasury bills                                     495.09                 247.61                  495.89                  241.46                    0.80                   (6.15)
 PBF1          Commercial Paper/Certificate of Deposit                                  594.42                  93.43                  594.42                   93.43                       -                        -
 PBF7
               Debentures and Bonds Unlisted / Privately Placed                                 -                275.46                        -                 300.36                         -                24.90
 PBF2          Debentures / Bonds Listed / Awaiting listing on
                                                                                                -                399.04                        -                 407.42                         -                 8.37
               recognized stock exchanges
               TOTAL                                                                   2,957.11                4,734.42                3,523.90                3,497.29                    566.79           (1,237.13)

              Net Change in unrealised appreciation in the value of investment for the year ended March 31, 2010 is Rs. 1,803.91 Lacs

        3     The industry-wise 'Statement of Portfolio Holding' as on March 31, 2010 (Referred to in Schedule 4 to the Balance Sheet) is given in Annexure I.


        4     The aggregate book value and fair value of non traded / thinly traded investments, which have been valued in good faith in accordance with the guidelines for valuation of
              securities for Mutual Funds issued by SEBI, are given below:

                                                                                                         (Rs. In Lacs)
                                                                             March 31, 2010         March 31, 2009
                                     Particulars                               Amount                 Amount
               Book Value                                                                       -              674.50
               Market / Fair Value                                                              -              707.78

        5     Net Asset Value per unit of various options are as under:


               Name of the Option                                            March 31, 2010         March 31, 2009
               Growth                                                                    29.88                  17.77
               Dividend                                                                  15.09                   8.97


        6     Aggregate value of Purchases and Sales made during the year, expressed as a percentage of Average Daily Net Asset Value, are as under:

                                                                                             Purchases                                      Sales *

                                                                          Amount (Rs. In lacs) % of Avg. Net Assets Amount (Rs. In lacs) % of Avg. Net Assets
                                   March 31, 2010                                 107,497.79               2,661.07         109,923.28               2,721.12
                                   March 31, 2009                                  33,560.44                 536.87          42,697.05                 683.03
              * Sales includes redemptions / maturities

        7     Contracts for sale pending deliveries as on March 31, 2010, amounting to Rs. 41.36 lacs (Previous Year : Rs. 60.73 Lacs) have been excluded from the
              Investments, whereas purchases of securities by the scheme, the deliveries of which were pending as on March 31, 2010, amounting to Rs. Nil (Previous
              Year: Rs. 106.09 Lacs) have been included in investments.


        8     Details of Management Fees paid to Principal Pnb Asset Management Co. Pvt. Ltd. and its computation thereof:
                                                                                                                           (Rs. In Lacs)
                                                                                                                  % of Management
                                                                          Average Daily Net                       Fees to Average Net
                                                                          Asset Value          Management Fees    Asset Value
                                  March 31, 2010                                      4,039.64              48.72                   1.21
                                  March 31, 2009                                      6,251.13              50.35                   0.81

        9     As per the requirement of Regulation 25(11) of SEBI (Mutual Fund) Regulations, 1996, details of Investments made by the Fund in companies, where
              the companies' investments in any of Principal Mutual Fund schemes exceeds 5% of the scheme's Net Asset Value, is given in Annexure II.



        10    Total Income and Recurring Expenditure for the year expressed as a percentage of Average Daily Net Asset Value:

                                                                       (As a % of Average Daily Net Asset Value)
                                                                                            Recurring
                                                                      Income                Expenditure
                                 March 31, 2010                                       12.78                 2.50
                                 March 31, 2009                                        3.89                 2.50
              Income / Expenditure excludes appreciation/depreciation on investment.

        11    Particulars of Unclaimed Dividends and Unclaimed Redemptions are as under:

                                                                                     Unclaimed Dividends                           Unclaimed Redemptions

                                                                          No. of Investors       Amount (Rs. In lacs) No. of Investors           Amount (Rs. In lacs)
                                   March 31, 2010                                           451                  30.30                        27                 11.44
                                   March 31, 2009                                           471                  38.02                        16                  2.72
              Note : For want of relevant information from banks, in respect of dividends and redemptions effected through DDs, the liability for unencashed and
              expired DDs (if any) and the corresponding bank balance for the same may not have been accounted in the books.




                                                                                                         211
ANNUAL REPORT
   12     Disclosure as per SEBI circular MFD/CIR No. 3/211/2001 dated April 30, 2001 :
          The Scheme does not have a single unitholder holding more than 25% of the NAV as on March 31, 2010.

   13     The Scheme has entered into transactions with certain related parties. The information required in this regard in accordance with Accounting Standard 18
          on 'Related Party Disclosures' issued by The Institute of Chartered Accountants of India (ICAI) and Regulation 25(8) of the SEBI (Mutual Funds)
          Regulations, 1996, are as under :



   (i)    Related Party relationships

          Name                                                      Description of relationship
          Principal Financial Services Inc., USA                    Sponsor of the Fund
          Principal Trustee Company Private Ltd.                    Trustee of the Fund

          Principal Pnb Asset Management Company Private Ltd.       Subsidiary of the Sponsor and the Scheme's asset manager

          Pnb Principal Insurance Broking Private Limited           Subsidiary of the Sponsor
          Principal Consulting (India) Private Limited              Subsidiary of the Sponsor

          Pnb Principal Financial Planners Private Limited          Subsidiary of the Sponsor
          Principal Pnb Life Insurance Company Limited              Subsidiary of the Sponsor
          Principal Financial Group (Mauritius) Limited             A Company holding substantial interest in the share capital of the
                                                                    Scheme's asset manager
          Punjab National Bank                                      A Company holding substantial interest in the share capital of the
                                                                    Scheme's asset manager
          PNB Gilts Limited                                         Subsidiary of Punjab National Bank
          PNB Housing Finance Limited                               Subsidiary of Punjab National Bank

          Schemes of the Fund under common control of the
          Sponsor

          Principal Child Benefit Fund                              Principal Long Term Equity Fund 3 Year Plan Series II
          Principal Pnb FMP 385 Days Series XI                      Principal Monthly Income Plan
          Principal Pnb FMP 540 Days Series IV                      Principal Monthly Income Plan - MIP Plus
          Principal Floating Rate Fund - Flexible Maturity Plan     Principal Balanced Fund
          Principal Floating Rate Fund - Short Maturity Plan        Principal Dividend Yield Fund
          Principal Govt. Securities Fund - Investment Plan         Principal Emerging Bluechip Fund
          Principal Global Opportunities Fund                       Principal Money Manager Fund
          Principal Growth Fund                                     Principal Personal Tax Saver Fund
          Principal Income Fund                                     Principal Resurgent India Equity Fund
          Principal Index Fund                                      Principal Income Fund - Short Term Plan
          Principal Services Industries Fund                        Principal Tax Savings Fund
          Principal Large Cap Fund                                  Principal Junior Cap Fund
          Principal Ultra Short Term Fund                           Principal Govt. Securities Fund - Saving Plan
          Principal Cash Management Fund - Liquid Option            Principal Pnb Fixed Duration Fund 3 Year Plan Series I
          Principal Long Term Equity Fund                           Principal Pnb FMP 460 Days Series IV
          Principal Pnb FMP 540 Days Series II                      Principal Pnb FMP 385 Days Series VIII
          Principal Pnb FMP 385 Days Series VII                     Principal Pnb FMP 385 Days Series IX



   (ii)   Transactions, if any, with the above mentioned related parties, as defined under Accounting Standard 18 and Regulation 25(8) of the SEBI Regulations
          are given below:


                                                                                                                                                                            (Rs. In Lacs)
          Name of the Related Party                                 Nature of                For the year ended Outstanding as at                For the year ended Outstanding as at
                                                                    Transactions              March 31, 2010    March 31, 2010                    March 31, 2009    March 31, 2009

                                                                    Fees for Trusteeship
          Principal Trustee Company Private Ltd.                                                               0.40                       0.03                  0.63                 0.03
                                                                    Services



          Principal Pnb Asset Management Company Private Ltd.       Fees for Management                      48.72                        5.20                 50.35                    -
                                                                    Services

                                                                    Investor
          Principal Consulting (India) Private Limited.             Communication                              4.43                          -                  8.75                 0.42
                                                                    Service Fees



          Punjab National Bank                                      Bank Charges                                  -                          -                  0.04                    -




          Investments in Schemes of Mutual Fund by related
          parties


          Principal Pnb Asset Management Company Private Ltd.       Purchase                                      -                                                -
                                                                    Sale                                          -                                          114.74
                                                                    Holding as at March
                                                                                                                                             -                                          -
                                                                    31

          Investment in Associates by the Scheme
          Larsen & Toubro Limited                                   Purchase                                     -                                           214.05
                                                                    Sale/Redemption                          47.89                                           126.59
                                                                    Holding as at March
                                                                                                                                         35.88                                      38.94
                                                                    31




                                                                                                  212
ANNUAL REPORT




    (iii)      Commission Paid to Associates / Related Parties / Group Companies of Sponsor AMC



                                                                                                                          % of Commission                                   % of Business Given
                                                                                                   Commission Paid                               Business Given (Rs.
               Name of the Associates                                          Period covered                             paid to total                                     to total Business
                                                                                                   (Rs)                                          In Crores)
                                                                                                                          Commission paid                                   Received



               Punjab National Bank                                            FY 2009-10                     49,027.23                  2.91%                       0.38                 5.37%
                                                                               FY 2008-09                     10,057.21                  0.23%                          -                      -

               Pnb Principal Financial Planners Pvt Ltd                        FY 2009-10                      7,159.09                  0.43%                          -                      -
                                                                               FY 2008-09                      7,072.55                  0.16%                       0.20                 0.98%

               Note: Commission paid to associates has been disclosed on payment basis and business given indicates Gross Mobilisation (net of rejections, if any)
                      during the corresponding period for which the commission paid has been disclosed.

    14         Commission to Agents and Publicity expenses amounting to Rs 12.21 Lacs (Previous Year : 135.80 lacs) are utilised from load collected.

    15         As per the disclosure requirement under Accounting Standard 17 on 'Segment Reporting' issued by ICAI, the Scheme operates only in one segment, viz,
               primarily generate returns, based on the Scheme's Investment Objectives.


    16         The historical per unit statistics are given in Annexure III.

    17         Previous Year's figures have been regrouped and reclassified, wherever necessary, to make them comparable.

    18         'Rs. 0.00' indicates amount less than a lac and 'Rs. -' indicates Nil amount.



     As per our report of even date attached.

     For N. M. Raiji & Co.                                                     For and on behalf of Principal Pnb                                For and on behalf of Principal
     Chartered Accountants                                                     Asset Management Company Pvt. Ltd                                  Trustee Company Pvt. Ltd

     Sd/-                                                                       Sd/-                                                              Sd/-                                             Sd/-
     Vinay D. Balse                                                            M. M. Chitale                                                     B.G. Deshmukh                                     H. M. Singh
     Partner                                                                   Chairman                                                          Chairman                                          Director


                                                                               Sd/-                 Sd/-              Sd/-
     Place : Mumbai                                                            Rajan Ghotgalkar     P.V.K. Mohan       Shobit Gupta
     Date: July 09, 2010                                                       Managing Director    Fund Manager      Fund Manager




                                                                                                      213
ANNUAL REPORT




        PRINCIPAL CHILD BENEFIT FUND




                     214
ANNUAL REPORT


                                              AUDITORS’ REPORT


     TO THE TRUSTEE OF
     PRINCIPAL MUTUAL FUND

     We have audited the attached Balance Sheet as at March 31, 2010, the Revenue Account and the Cash
     Flow Statement for the year ended on that date, annexed thereto of Principal Child Benefit Fund (the
     scheme) of the Principal Mutual Fund. These financial statements are the responsibility of the
     Management. Our responsibility is to express an opinion on these financial statements based on our audit.
     We report that:

     1.      Our audit was conducted in accordance with generally accepted Standards on Auditing in India.
             These Standards require that we plan and perform the audit to obtain reasonable assurance about
             whether the financial statements are free of material misstatements. An audit includes examining
             on a test basis, evidence supporting the amounts and disclosures in the financial statements. An
             audit also includes assessing the accounting principles used and significant estimates made by the
             Management, as well as evaluating the overall financial statement presentation. We believe that
             our audit provides a reasonable basis for our opinion.

     2.      We have obtained all information and explanations, which, to the best of our knowledge and belief
             were necessary for the purpose of our audit.

     3.      The Balance Sheet, the Revenue Account and the Cash Flow Statement are in agreement with the
             books of account of the Scheme.

     4.      In our opinion, valuation methods for Non Traded Securities, adopted by the scheme are fair and
             reasonable and are in accordance with the guidelines for valuation issued by SEBI and approved
             by the Trustees.

     5.      The accounts have been prepared in accordance with the accounting policies adopted by the
             trustees of the Fund and as specified in the Ninth Schedule to the SEBI (Mutual Funds)
             Regulations, 1996.

     6.      In our opinion and to the best of our information and according to the explanations given to us, the
             said accounts give the information required by the SEBI (Mutual Funds) Regulations, 1996 and
             give a true and fair view in accordance with the generally accepted accounting principles in India:

             a.   in the case of Balance Sheet, of the state of affairs of the scheme as at March 31, 2010;

             b.   in the case of Revenue Account, of the surplus of the scheme for the year ended on that date;
                  and

             c.   in the case of Cash Flow Statement, of the cash flows for the year ended on that date.

                                                                                         For N. M. Raiji & Co.
                                                                                        Chartered Accountants
                                                                                Firm Registration No. 108296W


                                                                                                          Sd/-
                                                                                               Vinay D. Balse
                                                                                                      Partner
                                                                                         Membership No. 39434
     Place : Mumbai
     Date : July 09, 2010




                                                         215
ANNUAL REPORT

                                                         PRINCIPAL MUTUAL FUND
                                                      PRINCIPAL CHILD BENEFIT FUND
                                                       Balance Sheet as at March 31, 2010


                                                                    Schedule                 March 31, 2010                 March 31, 2009
                                                                                                    Rupees                         Rupees
 LIABILITIES
 Unit Capital                                                          1                         35,739,901                    37,375,776
 Reserves & Surplus                                                    2                        266,904,735                   142,024,702
 Current Liabilities and Provisions                                    3                          2,939,013                     1,104,237
 Total                                                                                          305,583,649                   180,504,715

 ASSETS
 Investments                                                           4                        282,112,686                   144,234,695
 Deposits                                                              5                         21,208,203                    31,543,051
 Other Current Assets                                                  6                          2,262,760                     4,726,969
 Total                                                                                          305,583,649                   180,504,715

 Significant Accounting Policies and Notes to Accounts                 8
 The Schedules form an integral part of the Financial Statements



 As per our report of even date attached.




 For N. M. Raiji & Co.                For and on behalf of Principal Pnb             For and on behalf of Principal
 Chartered Accountants                Asset Management Company Pvt. Ltd               Trustee Company Pvt. Ltd

 Sd/-                                 Sd/-                                           Sd/-                             Sd/-
 Vinay D. Balse                       M. M. Chitale                                  B.G. Deshmukh                     H. M. Singh
 Partner                              Chairman                                       Chairman                         Director


                                      Sd/-                   Sd/-           Sd/-
 Place : Mumbai                       Rajan Ghotgalkar      P.V.K. Mohan   Shobit Gupta
 Date : July 09, 2010                 Managing Director     Fund Manager Fund Manager




                                                                           216
ANNUAL REPORT

                                                              PRINCIPAL MUTUAL FUND
                                                          PRINCIPAL CHILD BENEFIT FUND
                                                     Revenue Account for the year ended March 31, 2010
                                                                             Schedule                      March 31, 2010                                March 31, 2009
                                                                                                                  Rupees                                        Rupees

 INCOME

 Dividend                                                                                                          2,069,618                                   2,432,793
 Interest and Discount Income                                                    7                                 3,839,735                                   6,214,496
 Profit on Sale / Redemption of Investments (other than inter-scheme
 transfer / sale)                                                                                                 11,069,015                                           -
 Other Income (Refer Note III(15) to Schedule 8)                                                                      80,707                                           -

 Total                                                                                                            17,059,075                                   8,647,289



 EXPENSES AND LOSSES


 Loss on Sale / Redemption of Investments (Other than inter-scheme
 transfer / sales)                                                                                                         -                                 16,213,224
 Loss on inter-scheme transfer / sale of investments                                                                       -                                  3,306,242
 Management Fees                                                                                                   2,627,124                                  2,598,548
 Trusteeship Fees                                                                                                     27,284                                     20,823
 Agent's Commission                                                                                                  960,621                                    937,816
 Publicity & Marketing Expenses                                                                                    1,781,301                                    208,116
 Audit Fees                                                                                                           12,938                                     15,787
 Custodian's Fees and Expenses                                                                                        47,939                                     44,888
 Registrar's Fees and Expenses                                                                                       471,353                                    298,587
 Other Operating Expenses                                                                                            890,216                                  1,080,765

 Total                                                                                                             6,818,776                                  24,724,796
 Surplus / (Deficit) for the year                                                                                 10,240,299                                 (16,077,507)

 Net change in Unrealised gain / (loss) in the Value of Investments (Refer
 Note III(2) to Schedule 8)                                                                                   125,625,409                                    (72,432,114)

 Net Surplus / (Deficit) including Net change in Unrealised Appreciation /
 (Depreciation) for the year                                                                                  135,865,708                                    (88,509,621)


 Appropriation

 Opening Balance                                                                                              123,043,299                                   170,407,335
 Add: Net Surplus including Net change in Unrealised Appreciation /
 (Depreciation) for the year                                                                                  135,865,708                                    (88,509,621)
 Unrealised Appreciation in value of Investments as at the beginning of
 the year                                                                                                                  -                                   5,827,917

 Unrealised Appreciation in value of Investments as at the end of year                                        (59,021,212)                                            -
 Add/(Less) : Income Equalisation                                                                              (8,278,908)                                   35,317,668
 Net Surplus Transferred to Balance Sheet                                                                     191,608,887                                   123,043,299

 Significant Accounting Policies and Notes to Accounts                           8

 The Schedules form an integral part of the Financial Statements

 As per our report of even date attached.

 For N. M. Raiji & Co.                                                       For and on behalf of Principal Pnb                     For and on behalf of Principal
 Chartered Accountants                                                       Asset Management Company Pvt. Ltd                       Trustee Company Pvt. Ltd

 Sd/-
 Vinay D. Balse                                                              Sd/-                                              Sd/-                   Sd/-
 Partner                                                                     M. M. Chitale                                     B.G. Deshmukh          H. M. Singh
                                                                             Chairman                                          Chairman               Director

                                                                             Sd/-                 Sd/-                Sd/-
 Place : Mumbai                                                              Rajan Ghotgalkar     P.V.K. Mohan       Shobit Gupta
 Date : July 09, 2010                                                        Managing Director    Fund Manager      Fund Manager




                                                                                        217
ANNUAL REPORT



                                                                              PRINCIPAL MUTUAL FUND
                                                                          PRINCIPAL CHILD BENEFIT FUND
                                                           Schedules forming part of the Financial Statements as at March 31, 2010
 SCHEDULE 1 - UNIT CAPITAL                                                                 March 31, 2010                                             March 31, 2009
                                                                                   Units                       Rupees                         Units                          Rupees
 (A)        Future Guard Plan
 Initial Capital Issued and Subscribed :
 Units of Rs. 10 each fully paid up                                         109,800.000                      1,098,000                 109,800.000                         1,098,000

 Outstanding :
 At the beginning of the year                                               546,265.934                      5,462,660                 537,169.227                         5,371,692
 Issued during the year                                                       2,721.700                         27,217                  49,912.456                           499,125
                                                                            548,987.634                      5,489,877                 587,081.683                         5,870,817
 Repurchased during the year                                                548,987.634                      5,489,877                  40,815.749                           408,157
 At the end of the year (A)                                                        -                                 -                 546,265.934                         5,462,660


 (B)       Career Builder Plan
 Initial Capital Issued and Subscribed :
 Units of Rs. 10 each fully paid up                                         940,800.000                      9,408,000                 940,800.000                         9,408,000

 Outstanding :
 At the beginning of the year                                              3,191,311.703                    31,913,117                2,497,121.619                       24,971,216
 Issued during the year                                                      903,472.500                     9,034,725                  901,388.703                        9,013,887
                                                                           4,094,784.203                    40,947,842                3,398,510.322                       33,985,103
 Repurchased during the year                                                 520,794.100                     5,207,941                  207,198.619                        2,071,986
 At the end of the year (B)                                                3,573,990.103                    35,739,901                3,191,311.703                       31,913,117

 TOTAL (A+B)                                                               3,573,990.103                    35,739,901                3,737,577.637                       37,375,777




 SCHEDULE 2 - RESERVES AND SURPLUS                                                                                                   March 31, 2010                    March 31, 2009
 UPR                                                                                                                                       Rupees                            Rupees

 Unit Premium Reserve
 At the beginning of the year                                                                                                           18,981,403                        14,953,642
 Net addition / (deduction) during the year                                                                                             (2,706,767)                        4,027,761
 At the end of the year                                                                                                                 16,274,636                        18,981,403


 Balance in Revenue Account                                                                                                            191,608,887                       123,043,299


 Unrealised Appreciation in value of Investments                                                                                        59,021,212                                 -


 Total                                                                                                                                 266,904,735                       142,024,702


 SCHEDULE 3 - CURRENT LIABILITIES AND
 PROVISIONS                                                                                                                          March 31, 2010                    March 31, 2009
                                                                                                                                           Rupees                            Rupees
 Unit Repurchase Amount Payable                                                                                                          1,825,554                            76,292
 Registrar's Fees and Expenses                                                                                                              56,011                            55,433
 Custodian's Fees and Expenses                                                                                                               6,588                             2,598
 Management Fees                                                                                                                           279,218                           178,614
 Trusteeship Fees                                                                                                                            2,232                             1,429
 Audit Fees                                                                                                                                 12,938                            15,787
 Agent's Commission Payable                                                                                                                488,563                           228,673
 Publicity and Marketing Expenses                                                                                                           36,547                            35,789
 Other Current Liabilities                                                                                                                 231,362                           508,623
 Unit Capital Pending Allotment                                                                                                                   -                            1,000

                                                                                                                                         2,939,013                         1,104,237


 SCHEDULE 4 - INVESTMENTS                                                                                                            March 31, 2010                    March 31, 2009
 (Refer to attached statement of Portfolio holding as at
 March 31, 2010)                                                                                                                           Rupees                            Rupees
 Asset Backed Securities                                                                                                                         -                         9,935,000
 Government Securities/Treasury bills                                                                                                   49,610,381                        19,505,756
 Commercial Paper / Certificate of Deposit                                                                                              19,933,152                         9,342,780
 Equity Shares                                                                                                                         212,569,153                       105,451,159


                                                                                                                                       282,112,686                       144,234,695




 SCHEDULE 5 - DEPOSITS                                                                                                               March 31, 2010                    March 31, 2009
                                                                                                                                           Rupees                            Rupees

 Collateralised Lending                                                                                                                 21,208,203                        31,543,051

                                                                                                                                        21,208,203                        31,543,051




                                                                                                   218
ANNUAL REPORT




  SCHEDULE 6 - OTHER CURRENT ASSETS                                        March 31, 2010   March 31, 2009
                                                                                 Rupees           Rupees
  Balances with Banks and Reserve Bank of India in Current Account               469,077          234,284
  Unit Subscription Receivable                                                   162,750          287,408
  Contract for Sale of Investment                                              1,575,270        3,910,139
  Outstanding and Accrued Income                                                  45,479          295,138
  Inter-Scheme Dues                                                                9,330                 -
  Receivable from the Asset Management Company                                       854                 -

                                                                               2,262,760        4,726,969




  SCHEDULE 7 - INTEREST AND DISCOUNT INCOME                                March 31, 2010   March 31, 2009
                                                                                 Rupees           Rupees
  Debentures/Bonds                                                               833,650        1,083,242
  Government Securites / Treasury Bills                                        1,640,068        1,209,245
  Commercial Paper / Certificate of Deposits / Usance Bills                       46,360        2,160,322
  Collateralised Lending & Reverse Repo                                        1,319,657        1,761,687
                                                                               3,839,735        6,214,496




                                                                     219
ANNUAL REPORT

                                                    PRINCIPAL MUTUAL FUND
                                                PRINCIPAL CHILD BENEFIT FUND
                                       Cash Flow Statement For The Year Ended March 31, 2010

                                                                                                        March 31, 2010                 March 31, 2009
                                                                                                            Amount                         Amount
                                                                                                                 (Rs.)                          (Rs.)
 A. Cash flow from Operating Activities
    Surplus / (Deficit) for the year                                                                         10,240,299                    (16,077,507)
    Adjustments for:-
    (Increase)/Decrease in Investments (at cost)                                                            (12,252,581)                   (60,201,949)
    (Increase)/Decrease in Other Current Assets                                                               2,583,674                     (3,085,177)
    Increase/(Decrease) in Current Liabilities                                                                   86,513                       (432,973)

    Net cash generated from / (used in) Operations                                        (a)                   657,905                    (79,797,606)


 B. Cash flow from Financing Activities
    Increase/(Decrease) in Unit Capital                                                                      (1,635,875)                     7,032,868
    Increase/(Decrease) in Reserves                                                                         (10,985,675)                    39,345,429
    Adjustments for:-
    Increase/(Decrease) in Sundry Creditors for redeemed units and dividend                                   1,749,262                        (12,275)
    Decrease in Sundry Debtors for units issued                                                                 114,328                        470,190

    Net cash (used in) / generated from Financing Activities                              (b)               (10,757,960)                    46,836,212

    Net Decrease in Cash and Cash Equivalents                                           (a + b)             (10,100,055)                   (32,961,394)

    Cash and Cash Equivalents as at the :-
    Beginning of the year                                                                                    31,777,335                     64,738,729
    End of the year                                                                                          21,677,280                     31,777,335




    Note : Cash and Cash Equivalents includes the following :
            (1) Balances with Banks                                                                             469,077                        234,284
            (2) Collateralised Lending                                                                       21,208,203                     31,543,051




    The above cash flow statement has been prepared under the indirect method setout in Accounting Standard (AS-3) issued by the Institute of Chartered
    Accountants of India.

    As per our report of even date attached.




    For N. M. Raiji & Co.                       For and on behalf of Principal Pnb                For and on behalf of Principal
    Chartered Accountants                    Asset Management Company Pvt. Ltd                     Trustee Company Pvt. Ltd

    Sd/-                                        Sd/-                                               Sd/-                                   Sd/-
    Vinay D. Balse                             M. M. Chitale                                      B.G. Deshmukh                           H. M. Singh
    Partner                                    Chairman                                           Chairman                                    Director


                                              Sd/-                        Sd/-           Sd/-
    Place : Mumbai                            Rajan Ghotgalkar           P.V.K. Mohan  Shobit Gupta
    Date : July 09, 2010                      Managing Director        Fund Manager Fund Manager




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                                 PRINCIPAL MUTUAL FUND

                          PRINCIPAL CHILD BENEFIT FUND

                                             SCHEDULE - 8

     SIGNIFICANT ACCOUNTING POLICIES AND NOTES TO ACCOUNTS FORMING PART OF
                                   ACCOUNTS

     I. BACKGROUND INFORMATION

        A. Organisation

        Principal Mutual Fund (formerly known as IDBI-PRINCIPAL Mutual Fund) has been constituted as a
        Trust in accordance with the provisions of the Indian Trusts Act, 1882 (2 of 1882). The Mutual Fund
        is registered with the Securities and Exchange Board of India (SEBI) under registration no.
        MF/019/94/0 dated December 13, 1994.

        The Fund was initially set up by Industrial Development Bank of India (IDBI) in 1994 by execution of
        a Trust Deed dated November 25, 1994, under which IDBI was the sole Settlor, Sponsor and Principal
        Trustee. Subsequently, on March 31, 2000, Principal Financial Services Inc. USA became the deemed
        sponsor along with IDBI by acquiring 50% stake in IDBI-PRINCIPAL Asset Management Company
        Limited. Pursuant to SEBI Letter dated October 18, 2002, the IDBI-PRINCIPAL Trustee Company
        Limited took over the trusteeship and the associated responsibilities and obligations of the IDBI-
        PRINCIPAL Mutual Fund. The Name of the Trustee Company was changed to Principal Trustee
        Company Limited w.e.f. June 27, 2003. The Name of the Trustee Company was changed to Principal
        Trustee Company Private Limited w.e.f. October 20, 2003.

        On June 23, 2003, Principal Financial Services Inc. USA, acquired a 100% stake in IDBI-PRINCIPAL
        Asset Management Company Limited, through its wholly owned subsidiary, Principal Financial
        Group (Mauritius) Limited. Accordingly, Principal Financial Services Inc. USA, became the Sole
        Sponsor of the Fund and Principal Financial Group (Mauritius) Limited has became the Sole Settlor
        of the Fund. The name of the Asset Management Company was changed to Principal Asset
        Management Company Limited w.e.f. June 27, 2003, and on October 20, 2003 was again changed to
        Principal Asset Management Company Private Limited (PAMC).

        On May 5, 2004, Punjab National Bank and Vijaya Bank acquired 30% stake and 5% stake
        respectively in Principal Asset Management Company Private Limited, as well as in Principal Trustee
        Company Private Limited and became the co-settlers to the Fund. The name of the Asset
        Management Company changed to Principal Pnb Asset Management Company Private Limited w.e.f
        January 24, 2005.

        B. Scheme

        Principal Child Benefit Fund is an open-ended scheme of Principal Mutual Fund and was launched on
        October 27, 1997.

        The investment objective of the Scheme is to generate regular returns and /or capital appreciation /
        accretion with the aim of giving lump sum capital growth to the Beneficiary.



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     II. SIGNIFICANT ACCOUNTING POLICIES

          1. Basis of Accounting

                   The scheme maintains books of account on an accrual basis.

          2. Investments

             2.1    Investment transactions are accounted on trade dates.

             2.2    The cost of investment includes brokerage, premium paid on acquisition, transaction
                    charges and other costs associated with purchase of investments.

             2.3    Bonus entitlements are recognized on ex-bonus dates.


          3. Portfolio Valuation

             3.1    Investments are valued on the Balance Sheet date as per the recommendations of
                    SEBI.

             3.2    Traded securities (excluding government securities and Treasury bills) are valued at
                    the last quoted closing price on the principal stock exchange on which the security is
                    traded.

             3.3    A security (other than debt securities), which is not traded on any stock exchange on
                    a particular valuation day, is valued at the price at which it was traded on the selected
                    stock exchange, as the case may be, on the earliest previous day, such day not being
                    more than thirty days prior to the valuation date.

             3.4    A debt security (other than government securities), which is not traded on any stock
                    exchange on any particular valuation day, is considered as ‘Non-Traded Security’.
                    A debt Security (other than government securities) is considered as ‘Thinly-Traded
                    Security’, if on the valuation date, there are no individual trades in that security in
                    marketable lots (presently Rs 5 Crore) on the principal stock exchange.

                    Investment in non-traded / thinly traded debt securities including securitised debt
                    (other than government securities) with a residual maturity greater than 182 days are
                    valued using CRISIL Bond Valuer, which is based on the concept of using spread
                    over Government Securities to arrive at yields for pricing.

             3.5    Investments in traded/non-traded/thinly traded government securities are valued at the
                    prices released by CRISIL, which is an approved agency recommended by the
                    Association of Mutual Funds of India (AMFI).

             3.6    Treasury bills are valued at cost plus the difference between the redemption value and
                    the cost, spread uniformly over the remaining maturity period of the instrument.
                    Treasury Bills listed on a recognised stock exchange are valued at the last quoted
                    weighted average yield, on the principal exchange on which the security is traded. If
                    no sale is reported at that date, Treasury Bills are valued at fair value, as determined



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                  in good faith by Principal Pnb Asset Management Company Private Limited, under
                  procedures approved by the Trustees of Principal Mutual Fund, in accordance with
                  the guidelines for valuation of securities for mutual funds issued by SEBI.

           3.7    Money Market securities and non-traded debt securities, with residual maturity of
                  upto 182 days, are valued at cost (including accrued interest), plus the difference
                  between the redemption value (inclusive of interest) and the cost, spread uniformly
                  over the remaining maturity period of the instrument.

           3.8    Thinly traded Equity shares /Equity related securities/non-traded securities (other
                  than Government Securities) are valued in good faith by the investment manager, on
                  the basis of valuation principles laid down by SEBI.

           3.9    Investment in non-traded debt securities, including securitised debt (other than
                  government securities) with a residual maturity greater than 182 days, are valued
                  using CRISIL Bond Valuer, which is based on the concept of using spread to maturity
                  to arrive at the yields for pricing.

           3.10   Securities in the nature of Floating Rate Notes (FRN) are valued at cost plus the
                  difference between the redemption value and the cost, spread uniformly over the
                  remaining maturity period of the instrument. FRNs listed on a recognised stock
                  exchange are valued at the last quoted closing price on the principal exchange, on
                  which the security is traded. If no sale is reported at that date FRNs are valued at fair
                  value, as determined in good faith by Principal Pnb Asset Management Company
                  Private Limited, under procedures approved by the Trustees of Principal Mutual
                  Fund, in accordance with the guidelines for valuation of securities for mutual funds
                  issued by SEBI.

           3.11   Securitised Debt are valued at fair value, as determined in good faith by Principal Pnb
                  Asset Management Company Private Limited, under procedures approved by the
                  Trustees of Principal Mutual Fund, in accordance with the guidelines for valuation of
                  securities for mutual funds issued by SEBI.

           3.12   Interest Rate Swaps with a maturity period of more than 182 days are marked to
                  market by recording the net present values of the difference in outflows and inflows
                  as unrealised appreciation / depreciation. Interest Rate Swaps with a maturity of 182
                  days and less are amortised over the balance contracted period.

           3.13   Investments in Call money, bills purchased under re-discounting scheme and term
                  deposits with banks are valued at cost plus accruals.

           3.14   An investment is regarded as non-performing if the interest and /or principal amount
                  has not been received or remains outstanding for one quarter from the day such
                  income or installment has fallen due.

           3.15   Appreciation/Depreciation, as the case may be, in the value of securities at the year-
                  end is computed for the scheme, whereby the aggregate market value of all securities
                  taken together is compared with the aggregate cost of acquisition. Such net balance is
                  charged to Revenue Account.

           3.16   The above policies are followed as and when applicable.



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         4. Income Recognition

            4.1     Dividend income is accrued on ex-dividend date.

            4.2     Profit or loss on sale of investments is arrived at by applying weighted average cost
                    on trade date.

            4.3     Interest on debentures and other fixed income investments is recognized on accrual
                    basis.

            4.4     In respect of Interest Rate Swaps, interest expense and income are accrued on a net
                    basis daily.

            4.5     Income on non-performing assets (NPA) is recognized on cash basis.

         5. Management Fees

            Investment Management fees payable to Principal Pnb Asset Management Co. Pvt. Ltd. is
            computed on the basis of Average Daily Net Assets Value.

         6. Income Equalisation Reserve and Unit Premium Reserve

            a.       Upto March 14, 2010, upon purchase/sale of units by the Scheme, an appropriate part
            of the purchase / sale price was credited / debited to the Income Equalisation Reserve
            Account. The balance amount of the purchase/sale price after reducing the face value was
            transferred to Unit Premium Reserve Account.

            b.      With effect from March 15, 2010, pursuant to the issue of SEBI circular no.
            SEBI/IMD/CIR no 18/198647/2010 dated March 15, 2010, upon purchase/sale of units by the
            Scheme, where the purchase/sale price is higher than the face value per unit, the amount
            representing unrealized gain and balance in the Unit Premium Reserve Account is
            credited/debited to Unit Premium Reserve Account. The balance amount of the purchase/sale
            price after reducing the face value is transferred to Income Equalization Reserve Account.
            Upon purchase/sale of units by the Scheme, where the purchase/sale price is lower than the
            face value per unit, the difference between the sale price and face value is debited to Income
            Equalization Reserve Account. Distributable surplus is arrived at after excluding unrealized
            gains. Balance lying to the credit of Unit Premium Reserve Account is not considered for the
            purpose of dividend distribution. Where the Unit Premium Reserve has a debit balance, the
            excess thereof over the unrealized gain is also deducted in arriving at the distributable surplus.

            c.     The balance in Income Equalization Reserve Account is transferred to the Revenue
            Account at the end of the year.


         7. Provisions

            (i) In the case of interest accrued on investments, provision is made in respect of amounts
            which have not been received for a period of 3 months beyond the due date. No further
            accrual of income is made in respect of such investments.




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            (ii) Provision is made in respect of the principal amount of securities, in accordance with
            valuation principles laid down by SEBI.

            (iii) Provision is made in respect of accrued dividend, which has not been received for a
            period of twelve months beyond the due date.

         8. Entry and Exit Load

            a) Upto July 31, 2009 load charged at the time of purchase/sale of units was utilized for
               incurring distribution and marketing expenses. Out of the residual amount, amounts
               considered to be in excess of future requirements by the Trustees were recognized as
               income, and the residual amount was carried forward into the next year.

            b) With effect from August 1, 2009 In accordance with the SEBI circular dated June 30, 2009:

               i) No entry load is charged on fresh purchase applications received after August 1, 2009
               (except on SIPs registered prior to August 1, 2009 which is utilised for incurring
               distribution and marketing expenses. Out of the residual amount, amounts considered to be
               in excess of future requirements by the Trustees are recognized as income, and the residual
               amount carried forward into the next year Load Charges).
               ii) Exit load charged in excess of 1% is recognized as income of the scheme immediately.
               iii) Exit load charged upto 1% is parked in a Liability Account, which is utilized for
               incurring distribution and marketing expenses. Out of the residual amount, amounts
               considered to be in excess of future requirements by the Trustees are recognized as
               income, and the residual amount carried forward into the next year.




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ANNUAL REPORT
      III   NOTES TO ACCOUNTS

       1    The scheme currently has only one plan viz. Career Builder Plan.

            Pursuant to SEBI approval vide its letter dated May 18, 2009, Child Benefit Fund - Future Guard Plan was merged with Child Benefit Fund -Career Builder Plan
            as at the close of July 10, 2009, by virtue of which net assets of Future Guard Plan as at close of July 10, 2009, aggregating Rs 341.27 Lacs, Less tax deducted
            at source, if any, were merged with Career Builder Plan. Accordingly, unit holders of Future Guard Plan were alloted units based on net asset value
            per unit of Career Builder Plan on July 10, 2009.

       2    The Cost and Market Value / Fair Value of investments are given below:
                                                                                                                                                                                                  (Rs. In Lacs)
                                                                                                                                                                    Net Appreciation / (Depreciation) in value
                                                                                 Cost / Amortised cost                       Market Value / Fair Value
                                                                                                                                                                                 of investments
             Investments                                                March 31, 2010          March 31, 2009         March 31, 2010         March 31, 2009          March 31, 2010        March 31, 2009
 CHILD16     Equity Shares                                                       1,536.27                1,741.55               2,125.69               1,054.51                  589.42              (687.04)
 CHILD13     Government Securities/Treasury bills                                  495.31                  198.62                 496.10                 195.06                    0.79                 (3.57)
 CHILD11     Commercial Paper/Certificate of Deposit                               199.33                   93.43                 199.33                  93.43                       -                      -
 CHILD15     Asset Backed Securities                                                    -                   74.78                      -                  99.35                       -                 24.57
             TOTAL                                                               2,230.91                2,108.39               2,821.13               1,442.35                  590.21              (666.04)

            Net Change in unrealised appreciation in the value of investment for the year ended March 31, 2010 is Rs. 1,256.25 Lacs

       3    The industry-wise 'Statement of Portfolio Holding' as on March 31, 2010 (Referred to in Schedule 4 to the Balance Sheet) is given in Annexure I.


       4    The aggregate book value and fair value of non traded / thinly traded investments, which have been valued in good faith in accordance with the guidelines for valuation of
            securities for Mutual Funds issued by SEBI, are given below:

                                                                                                     (Rs. In Lacs)
                                                                        March 31, 2010          March 31, 2009
                                   Particulars                            Amount                  Amount
             Book Value                                                                     -                74.78
             Market / Fair Value                                                            -                99.35

       5    Net Asset Value per unit of various plans are as under:


             Name of the Plan                                           March 31, 2010          March 31, 2009
             Career Builder                                                         84.68                   48.10
             Future Guard                                                               -                   47.40


       6    Aggregate value of Purchases and Sales made during the year, expressed as a percentage of Average Daily Net Asset Value, are as under:

                                                                                         Purchases                                     Sales *

                                                                      Amount (Rs. In lacs) % of Avg. Net Assets Amount (Rs. In lacs) % of Avg. Net Assets
                                March 31, 2010                                140,445.61               5,147.71         140,559.41               5,151.88
                                March 31, 2009                                 19,646.51                 943.55          19,017.64                 913.35
            * Sales includes redemptions / maturities

       7    Contracts for sale pending deliveries as on March 31, 2010, amounting to Rs. 15.75 lacs (Previous Year : Rs. 39.10 Lacs) have been excluded from
            the Investments.

       8    Details of Management Fees paid to Principal Pnb Asset Management Co. Pvt. Ltd. and its computation thereof:
                                                                                                                       (Rs. In Lacs)
                                                                                                              % of Management
                                                                      Average Daily Net                       Fees to Average Net
                                                                      Asset Value          Management Fees    Asset Value
                               March 31, 2010                                     2,728.31              26.27                   0.96
                               March 31, 2009                                     2,082.19              25.99                   1.25

       9    As per the requirement of Regulation 25(11) of SEBI (Mutual Fund) Regulations, 1996, details of Investments made by the Fund in companies, where
            the companies' investments in any of Principal Mutual Fund schemes exceeds 5% of the scheme's Net Asset Value, is given in Annexure II.


      10    Total Income and Recurring Expenditure for the year expressed as a percentage of Average Daily Net Asset Value:

                                                                  (As a % of Average Daily Net Asset Value)
                                                                                        Recurring
                                                                      Income            Expenditure
                              March 31, 2010                                       6.25                2.50
                              March 31, 2009                                       4.15                2.50
            Income / Expenditure excludes appreciation/depreciation on investment.

      11    Particulars of Unclaimed Dividends and Unclaimed Redemptions are as under:

                                                                                 Unclaimed Dividends                          Unclaimed Redemptions

                                                                      No. of Investors      Amount (Rs. In lacs) No. of Investors          Amount (Rs. In lacs)
                               March 31, 2010                                             -                       -                      8                   1.24
                               March 31, 2009                                             -                       -                      7                   0.76
            Note : For want of relevant information from banks, in respect of dividends and redemptions effected through DDs, the liability for unencashed and
            expired DDs (if any) and the corresponding bank balance for the same may not have been accounted in the books.


      12    Disclosure as per SEBI circular MFD/CIR No. 3/211/2001 dated April 30, 2001 :
            The Scheme does not have a single unitholder holding more than 25% of the NAV as on March 31, 2010.

      13    The Scheme has entered into transactions with certain related parties. The information required in this regard in accordance with Accounting Standard
            18 on 'Related Party Disclosures' issued by The Institute of Chartered Accountants of India (ICAI) and Regulation 25(8) of the SEBI (Mutual Funds)
            Regulations, 1996, are as under :




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ANNUAL REPORT

   (i)     Related Party relationships

           Name                                                    Description of relationship
           Principal Financial Services Inc., USA                  Sponsor of the Fund
           Principal Trustee Company Private Ltd.                  Trustee of the Fund
           Principal Pnb Asset Management Company Private
           Ltd.                                                    Subsidiary of the Sponsor and the Scheme's asset manager

           Pnb Principal Insurance Broking Private Limited         Subsidiary of the Sponsor
           Principal Consulting (India) Private Limited            Subsidiary of the Sponsor

           Pnb Principal Financial Planners Private Limited        Subsidiary of the Sponsor
           Principal Pnb Life Insurance Company Limited            Subsidiary of the Sponsor
           Principal Financial Group (Mauritius) Limited           A Company holding substantial interest in the share capital of the
                                                                   Scheme's asset manager
           Punjab National Bank                                    A Company holding substantial interest in the share capital of the
                                                                   Scheme's asset manager
           PNB Gilts Limited                                       Subsidiary of Punjab National Bank
           PNB Housing Finance Limited                             Subsidiary of Punjab National Bank

           Schemes of the Fund under common control of the
           Sponsor

           Principal Child Benefit Fund                            Principal Long Term Equity Fund 3 Year Plan Series II
           Principal Pnb FMP 385 Days Series XI                    Principal Monthly Income Plan
           Principal Pnb FMP 540 Days Series IV                    Principal Monthly Income Plan - MIP Plus
           Principal Floating Rate Fund - Flexible Maturity Plan   Principal Balanced Fund
           Principal Floating Rate Fund - Short Maturity Plan      Principal Dividend Yield Fund
           Principal Govt. Securities Fund - Investment Plan       Principal Emerging Bluechip Fund
           Principal Global Opportunities Fund                     Principal Money Manager Fund
           Principal Growth Fund                                   Principal Personal Tax Saver Fund
           Principal Income Fund                                   Principal Resurgent India Equity Fund
           Principal Index Fund                                    Principal Income Fund - Short Term Plan
           Principal Services Industries Fund                      Principal Tax Savings Fund
           Principal Large Cap Fund                                Principal Junior Cap Fund
           Principal Ultra Short Term Fund                         Principal Govt. Securities Fund - Saving Plan
           Principal Cash Management Fund - Liquid Option          Principal Pnb Fixed Duration Fund 3 Year Plan Series I
           Principal Long Term Equity Fund                         Principal Pnb FMP 460 Days Series IV
           Principal Pnb FMP 540 Days Series II                    Principal Pnb FMP 385 Days Series VIII
           Principal Pnb FMP 385 Days Series VII                   Principal Pnb FMP 385 Days Series IX



   (ii)    Transactions, if any, with the above mentioned related parties, as defined under Accounting Standard 18 and Regulation 25(8) of the SEBI
           Regulations are given below:


                                                                                                                                                                           (Rs. In Lacs)
           Name of the Related Party                               Nature of                For the year ended Outstanding as at                For the year ended Outstanding as at
                                                                   Transactions              March 31, 2010    March 31, 2010                    March 31, 2009    March 31, 2009



                                                                   Fees for Trusteeship
           Principal Trustee Company Private Ltd.                                                            0.27                       0.02                   0.21                     0.01
                                                                   Services


           Principal Pnb Asset Management Company Private
                                                                   Fees for Management                      26.27                       2.79                  25.99                     1.79
           Ltd.
                                                                   Services

                                                                   Investor
           Principal Consulting (India) Private Limited.           Communication                             2.78                          -                   2.92                     0.20
                                                                   Service Fees


           Investment in Associates by the Scheme
           Larsen & Toubro Limited                                 Purchase                                     -                                             50.06
                                                                   Sale/Redemption                         120.88                                                 -
                                                                   Holding as at March
                                                                                                                                           -                                           58.58
                                                                   31




   (iii)   Commission Paid to Associates / Related Parties / Group Companies of Sponsor AMC



                                                                                                                    % of Commission                                      % of Business Given
                                                                                          Commission Paid                                      Business Given (Rs.
           Name of the Associates                                  Period covered                                   paid to total                                        to total Business
                                                                                          (Rs)                                                 In Crores)
                                                                                                                    Commission paid                                      Received


           Punjab National Bank                                    FY 2009-10                         108,870.99                   7.19%                       0.40                    6.29%
                                                                   FY 2008-09                         125,922.50                   5.87%                       0.10                    1.47%

           Pnb Principal Financial Planners Pvt Ltd                FY 2009-10                               18.46                  0.00%                             -                     -
                                                                   FY 2008-09                               15.26                  0.00%                             -                     -

           Note: Commission paid to associates has been disclosed on payment basis and business given indicates Gross Mobilisation (net of rejections, if any)
                  during the corresponding period for which the commission paid has been disclosed.




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ANNUAL REPORT




     14       Commission to Agents and Publicity expenses amounting to Rs 6.48 Lacs (Previous Year : 14.34 lacs) are utilised from load collected.

     15       Other Income includes exit load collected in excess of 1% from the Investors at the time of redemption.

     16       The scheme is bearing insurance premium charges on the life insurance cover provided to the investors, in terms of the offer document. Insurance
              premium amount is amortised over a period of twelve(12) months.

     17       As per the disclosure requirement under Accounting Standard 17 on 'Segment Reporting' issued by ICAI, the Scheme operates only in one segment,
              viz, primarily generate returns, based on the Scheme's Investment Objectives.


     18       The historical per unit statistics are given in Annexure III.

     19       Previous Year's figures have been regrouped and reclassified, wherever necessary, to make them comparable.

     20        'Rs. 0.00' indicates amount less than a lac and 'Rs. -' indicates Nil amount.


     As per our report of even date attached.

     For N. M. Raiji & Co.                                               For and on behalf of Principal Pnb                                 For and on behalf of Principal
     Chartered Accountants                                               Asset Management Company Pvt. Ltd                                   Trustee Company Pvt. Ltd

     Sd/-                                                                Sd/-                                                               Sd/-                             Sd/-
     Vinay D. Balse                                                      M. M. Chitale                                                      B.G. Deshmukh                    H. M. Singh
     Partner                                                             Chairman                                                           Chairman                         Director


                                                                         Sd/-                  Sd/-                Sd/-
     Place : Mumbai                                                      Rajan Ghotgalkar      P.V.K. Mohan         Shobit Gupta
     Date: July 09, 2010                                                 Managing Director     Fund Manager        Fund Manager




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ANNUAL REPORT




   PRINCIPAL CASH MANAGEMENT FUND -
              LIQUID OPTION




                  229
ANNUAL REPORT


                                              AUDITORS’ REPORT

     TO THE TRUSTEE OF
     PRINCIPAL MUTUAL FUND

     We have audited the attached Balance Sheet as at March 31, 2010, the Revenue Account and the Cash
     Flow Statement for the year ended on that date, annexed thereto of Principal Cash Management Fund -
     Liquid Option (the scheme) of the Principal Mutual Fund. These financial statements are the responsibility
     of the Management. Our responsibility is to express an opinion on these financial statements based on our
     audit. We report that:

     1.      Our audit was conducted in accordance with generally accepted Standards on Auditing in India.
             These Standards require that we plan and perform the audit to obtain reasonable assurance about
             whether the financial statements are free of material misstatements. An audit includes examining
             on a test basis, evidence supporting the amounts and disclosures in the financial statements. An
             audit also includes assessing the accounting principles used and significant estimates made by the
             Management, as well as evaluating the overall financial statement presentation. We believe that
             our audit provides a reasonable basis for our opinion.

     2.      We have obtained all information and explanations, which, to the best of our knowledge and belief
             were necessary for the purpose of our audit.

     3.      The Balance Sheet, the Revenue Account and the Cash Flow Statement are in agreement with the
             books of account of the Scheme.

     4.      In our opinion, valuation methods for Non Traded Securities, adopted by the scheme are fair and
             reasonable and are in accordance with the guidelines for valuation issued by SEBI and approved
             by the Trustees.

     5.      The accounts have been prepared in accordance with the accounting policies adopted by the
             trustees of the Fund and as specified in the Ninth Schedule to the SEBI (Mutual Funds)
             Regulations, 1996.

     6.      In our opinion and to the best of our information and according to the explanations given to us, the
             said accounts give the information required by the SEBI (Mutual Funds) Regulations, 1996 and
             give a true and fair view in accordance with the generally accepted accounting principles in India:

             a.   in the case of Balance Sheet, of the state of affairs of the scheme as at March 31, 2010;

             b.   in the case of Revenue Account, of the surplus of the scheme for the year ended on that date;
                  and

             c.   in the case of Cash Flow Statement, of the cash flows for the year ended on that date.

                                                                                         For N. M. Raiji & Co.
                                                                                        Chartered Accountants
                                                                                Firm Registration No. 108296W


                                                                                                          Sd/-
                                                                                               Vinay D. Balse
                                                                                                      Partner
                                                                                         Membership No. 39434
     Place : Mumbai
     Date : July 09, 2010




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ANNUAL REPORT




                                                    PRINCIPAL MUTUAL FUND
                                       PRINCIPAL CASH MANAGEMENT FUND - LIQUID OPTION
                                                  Balance Sheet as at March 31, 2010


                                                                    Schedule                March 31, 2010         March 31, 2009
                                                                                                   Rupees                 Rupees
  LIABILITIES
  Unit Capital                                                         1                      3,725,926,263        11,875,951,465
  Reserves & Surplus                                                   2                      1,517,103,991         2,924,727,019
  Current Liabilities and Provisions                                   3                      1,767,605,547         3,229,056,572
  Total                                                                                       7,010,635,801        18,029,735,056

  ASSETS
  Investments                                                          4                      6,655,475,105        15,625,010,364
  Deposits                                                             5                        302,532,267         2,360,474,834
  Other Current Assets                                                 6                         52,628,429            44,249,858
  Total                                                                                       7,010,635,801        18,029,735,056

  Significant Accounting Policies and Notes to Accounts                8
  The Schedules form an integral part of the Financial Statements


  As per our report of even date attached.




  For N. M. Raiji & Co.                For and on behalf of Principal Pnb         For and on behalf of Principal
  Chartered Accountants                Asset Management Company Pvt. Ltd           Trustee Company Pvt. Ltd

  Sd/-                                 Sd/-                                       Sd/-                              Sd/-
  Vinay D. Balse                       M. M. Chitale                              B.G. Deshmukh                      H. M. Singh
  Partner                              Chairman                                   Chairman                               Director


                                       Sd/-                        Sd/-
  Place : Mumbai                       Rajan Ghotgalkar           Shobit Gupta
  Date : July 09, 2010                 Managing Director         Fund Manager




                                                                            231
ANNUAL REPORT

                                                          PRINCIPAL MUTUAL FUND
                                            PRINCIPAL CASH MANAGEMENT FUND - LIQUID OPTION
                                                 Revenue Account for the year ended March 31, 2010
                                                                          Schedule                             March 31, 2010                             March 31, 2009
                                                                                                                      Rupees                                     Rupees

 INCOME

 Interest and Discount Income                                                 7                                   605,679,503                              1,588,005,573
 Profit on Sale / Redemption of Investments (other than inter-scheme
 transfer / sale)                                                                                                  19,906,197                                197,937,413
 Profit on inter-scheme transfer / sale of investments                                                                  7,487                                  3,293,070
 Other Income (Refer Note III(15) to Schedule 8)                                                                      165,950                                          -

 Total                                                                                                            625,759,137                              1,789,236,056



 EXPENSES AND LOSSES


 Management Fees                                                                                                   22,527,333                                  7,093,241
 Trusteeship Fees                                                                                                   1,327,690                                  2,076,273
 Agent's Commission                                                                                                12,727,876                                 13,755,907
 Publicity & Marketing Expenses                                                                                       369,980                                    448,573
 Audit Fees                                                                                                             3,312                                      3,504
 Custodian's Fees and Expenses                                                                                        666,846                                  1,089,182
 Registrar's Fees and Expenses                                                                                      2,512,588                                  3,292,999
 Other Operating Expenses                                                                                           9,490,860                                 15,967,334

 Total                                                                                                             49,626,485                                 43,727,013
 Surplus for the year                                                                                             576,132,652                              1,745,509,043

 Net change in Unrealised loss in the Value of Investments (Refer Note
 III(2) to Schedule 8)                                                                                              (7,144,463)                              (23,126,247)

 Net Surplus including Net change in Unrealised Appreciation /
 (Depreciation) for the year                                                                                      568,988,189                              1,722,382,796


 Appropriation

 Opening Balance                                                                                               64,668,352,512                             63,838,912,757
 Add: Net Surplus including Net change in Unrealised Appreciation /
 (Depreciation) for the year                                                                                      568,988,189                              1,722,382,796
 Unrealised Appreciation in value of Investments as at the beginning of
 the year                                                                                                          17,404,171                                 40,530,418

 Unrealised Appreciation in value of Investments as at the end of year                                             (10,259,708)                              (17,404,171)
 Add/(Less) : Income Equalisation                                                                              (63,641,727,183)                             (397,020,378)
 Dividend Distribution                                                                                             (77,479,862)                             (404,479,963)
 Dividend Tax                                                                                                      (21,946,168)                             (114,568,947)
 Net Surplus Transferred to Balance Sheet                                                                        1,503,331,951                            64,668,352,512

 Significant Accounting Policies and Notes to Accounts                        8

 The Schedules form an integral part of the Financial Statements

 As per our report of even date attached.

 For N. M. Raiji & Co.                                                    For and on behalf of Principal Pnb                      For and on behalf of Principal
 Chartered Accountants                                                    Asset Management Company Pvt. Ltd                        Trustee Company Pvt. Ltd

 Sd/-
 Vinay D. Balse                                                           Sd/-                                                    Sd/-                          Sd/-
 Partner                                                                  M. M. Chitale                                           B.G. Deshmukh              H. M. Singh
                                                                          Chairman                                                Chairman                       Director

                                                                          Sd/-                               Sd/-
 Place : Mumbai                                                           Rajan Ghotgalkar                 Shobit Gupta
 Date : July 09, 2010                                                     Managing Director                  Fund Manager




                                                                                     232
ANNUAL REPORT
                                                                      PRINCIPAL MUTUAL FUND
                                                     PRINCIPAL CASH MANAGEMENT FUND - LIQUID OPTION
                                                   Schedules forming part of the Financial Statements as at 31 March, 2010
 SCHEDULE 1 - UNIT CAPITAL                                                        March 31, 2010                                                 March 31, 2009
                                                                         Units                              Rupees                      Units                            Rupees
 (A)       Regular Growth Option
 Initial Capital Issued and Subscribed :
 Units of Rs. 10 each fully paid up                              36,846,298.000                        368,462,980             36,846,298.000                       368,462,980

 Outstanding :
 At the beginning of the year                                    53,916,315.618                         539,163,156            74,274,927.044                        742,749,270
 Issued during the year                                         300,795,268.000                       3,007,952,680           247,232,027.670                      2,472,320,277
                                                                354,711,583.618                       3,547,115,836           321,506,954.714                      3,215,069,547
 Repurchased during the year                                    283,287,820.000                       2,832,878,200           267,590,639.096                      2,675,906,391
 At the end of the year (A)                                      71,423,763.618                         714,237,636            53,916,315.618                        539,163,156


 (B)     Regular Daily Dividend Option
 Initial Capital Issued and Subscribed :
 Units of Rs. 10 each fully paid up                               5,050,000.000                         50,500,000              5,050,000.000                        50,500,000

 Outstanding :
 At the beginning of the year                                    14,526,104.099                        145,261,041              5,792,188.405                        57,921,884
 Issued during the year                                          56,850,322.200                        568,503,222             79,697,838.161                       796,978,382
                                                                 71,376,426.299                        713,764,263             85,490,026.566                       854,900,266
 Repurchased during the year                                     59,873,730.100                        598,737,301             70,963,922.467                       709,639,225
 At the end of the year (B)                                      11,502,696.199                        115,026,962             14,526,104.099                       145,261,041


 (C)       Regular Weekly Dividend Option
 Initial Capital Issued and Subscribed :
 Units of Rs. 10 each fully paid up                              21,686,917.000                        216,869,170             21,686,917.000                       216,869,170

 Outstanding :
 At the beginning of the year                                     1,691,728.058                         16,917,280              8,549,583.034                        85,495,830
 Issued during the year                                          10,982,883.800                        109,828,838             15,055,132.880                       150,551,329
                                                                 12,674,611.858                        126,746,118             23,604,715.914                       236,047,159
 Repurchased during the year                                      5,641,524.800                         56,415,248             21,912,987.856                       219,129,879
 At the end of the year (C)                                       7,033,087.058                         70,330,870              1,691,728.058                        16,917,280

 UCIG
 (D)       Regular Monthly Dividend Option
 Initial Capital Issued and Subscribed :
 Units of Rs. 10 each fully paid up                              48,783,293.672                        487,832,937             48,783,293.672                       487,832,937

 Outstanding :
 At the beginning of the year                                     3,283,858.416                         32,838,585              4,424,266.686                        44,242,667
 Issued during the year                                           8,161,912.500                         81,619,125              7,008,062.061                        70,080,621
                                                                 11,445,770.916                        114,457,710             11,432,328.747                       114,323,288
 Repurchased during the year                                     10,079,267.500                        100,792,675              8,148,470.331                        81,484,703
 At the end of the year (D)                                       1,366,503.416                         13,665,035              3,283,858.416                        32,838,585


 (E)       Institutional Growth Option
 Initial Capital Issued and Subscribed :
 Units of Rs. 10 each fully paid up                              88,221,133.973                        882,211,340             88,221,133.973                       882,211,340

 Outstanding :
 At the beginning of the year                                    46,188,570.904                         461,885,708             49,111,570.528                       491,115,705
 Issued during the year                                         319,278,133.300                       3,192,781,333            984,081,963.640                     9,840,819,636
                                                                365,466,704.204                       3,654,667,041          1,033,193,534.168                    10,331,935,341
 Repurchased during the year                                    326,547,658.100                       3,265,476,581            987,004,963.264                     9,870,049,633
 At the end of the year (E)                                      38,919,046.104                         389,190,460             46,188,570.904                       461,885,708


 (F)       Institutional Daily Dividend Option
 Initial Capital Issued and Subscribed :
 Units of Rs. 10 each fully paid up                               3,751,521.290                         37,515,213              3,751,521.290                        37,515,213

 Outstanding :
 At the beginning of the year                                    11,686,711.509                         116,867,115            23,472,040.880                        234,720,409
 Issued during the year                                       1,105,060,881.400                      11,050,608,814           697,890,878.875                      6,978,908,789
                                                              1,116,747,592.909                      11,167,475,929           721,362,919.755                      7,213,629,198
 Repurchased during the year                                  1,108,506,276.100                      11,085,062,761                      -                         7,096,762,083
 At the end of the year (F)                                       8,241,316.809                          82,413,168            11,686,711.509                        116,867,115

 UCIWD
 (G)        Institutional Weekly Dividend Option
 Initial Capital Issued and Subscribed :
 Units of Rs. 10 each fully paid up                               9,001,157.522                         90,011,575              9,001,157.522                        90,011,575

 Outstanding :
 At the beginning of the year                                     1,472,557.211                         14,725,572              3,021,918.171                        30,219,182
 Issued during the year                                           1,730,624.800                         17,306,248             18,309,822.106                       183,098,221
                                                                  3,203,182.011                         32,031,820             21,331,740.277                       213,317,403
 Repurchased during the year                                      2,919,112.700                         29,191,127             19,859,183.066                       198,591,831
 At the end of the year (G)                                         284,069.311                          2,840,693              1,472,557.211                        14,725,572




                                                                                               233
ANNUAL REPORT




  (H)        Institutional Monthly Dividend Option
  Initial Capital Issued and Subscribed :
  Units of Rs. 10 each fully paid up                           10,000,000.000             100,000,000       10,000,000.000        100,000,000

  Outstanding :
  At the beginning of the year                                     304,023.369              3,040,234        2,092,455.407         20,924,554
  Issued during the year                                         7,219,525.100             72,195,251       22,816,651.587        228,166,516
                                                                 7,523,548.469             75,235,485       24,909,106.994        249,091,070
  Repurchased during the year                                    3,882,314.600             38,823,146       24,605,083.625        246,050,836
  At the end of the year (H)                                     3,641,233.869             36,412,339          304,023.369          3,040,234




  (I)       Institutional Premium Growth Option
  Initial Capital Issued and Subscribed :
  Units of Rs. 10 each fully paid up                           95,000,000.000             950,000,000       95,000,000.000        950,000,000

  Outstanding :
  At the beginning of the year                                 621,602,826.071           6,216,028,261      564,716,391.972      5,647,163,920
  Issued during the year                                    52,648,211,023.400         526,482,110,234   72,811,926,889.703    728,119,268,897
                                                            53,269,813,849.471         532,698,138,495   73,376,643,281.675    733,766,432,817
  Repurchased during the year                               53,093,569,143.800         530,935,691,438   72,755,040,455.604    727,550,404,556
  At the end of the year (I)                                   176,244,705.671           1,762,447,057      621,602,826.071      6,216,028,261




  (J)      Institutional Premium Daily Dividend Option
  Initial Capital Issued and Subscribed :
  Units of Rs. 10 each fully paid up                           30,000,000.000             300,000,000       30,000,000.000        300,000,000

  Outstanding :
  At the beginning of the year                                 266,651,980.085           2,666,519,801    1,403,406,277.825     14,034,062,778
  Issued during the year                                    19,757,268,545.000         197,572,685,450   44,591,944,572.577    445,919,445,726
                                                            20,023,920,525.085         200,239,205,251   45,995,350,850.402    459,953,508,504
  Repurchased during the year                               19,969,984,320.800         199,699,843,208   45,728,698,870.317    457,286,988,703
  At the end of the year (J)                                    53,936,204.285             539,362,043      266,651,980.085      2,666,519,801



  (K)        Institutional Premium Weekly Dividend Option
  Initial Capital Issued and Subscribed :
  Units of Rs. 10 each fully paid up                          166,270,471.500            1,662,704,715     166,270,471.500       1,662,704,715

  Outstanding :
  At the beginning of the year                                166,270,471.571            1,662,704,716       34,955,257.271        349,552,573
  Issued during the year                                      162,908,814.200            1,629,088,142    1,695,074,161.026     16,950,741,610
                                                              329,179,285.771            3,291,792,858    1,730,029,418.297     17,300,294,183
  Repurchased during the year                                 329,179,285.800            3,291,792,858    1,563,758,946.726     15,637,589,467
  At the end of the year (K)                                             -                           -      166,270,471.571      1,662,704,716



  (L)       Institutional Premium Monthly Dividend Option
  Initial Capital Issued and Subscribed :
  Units of Rs. 10 each fully paid up                           16,191,366.460             161,913,665       16,191,366.460        161,913,665

  Outstanding :
  At the beginning of the year                                           -                           -        2,927,731.337        29,277,313
  Issued during the year                                                 -                           -                 -                    -
                                                                         -                           -        2,927,731.337        29,277,313
  Repurchased during the year                                            -                           -        2,927,731.337        29,277,313
  At the end of the year (L)                                             -                           -                 -                    -



  TOTAL (A+B+C+D+E+F+G+H+I+J+K+L)                             372,592,626.340            3,725,926,263    1,187,595,146.911     11,875,951,468




  SCHEDULE 2 - RESERVES AND SURPLUS                                                                         March 31, 2010     March 31, 2009
  UPR                                                                                                             Rupees             Rupees

  Unit Premium Reserve
  At the beginning of the year                                                                              (61,761,029,664)   (61,794,346,890)
  Net addition / (deduction) during the year                                                                 61,764,541,996         33,317,226
  At the end of the year                                                                                          3,512,332    (61,761,029,664)


  Balance in Revenue Account                                                                                  1,503,331,951     64,668,352,512


  Unrealised Appreciation in value of Investments                                                               10,259,708         17,404,171

  Total                                                                                                       1,517,103,991      2,924,727,019




                                                                                 234
ANNUAL REPORT




 SCHEDULE 3 - CURRENT LIABILITIES AND
 PROVISIONS                                                               March 31, 2010   March 31, 2009
                                                                                 Rupees           Rupees
 Contracts for Purchase of Investments                                                 -      267,232,500
 Unit Repurchase Amount Payable                                                  344,298    2,943,253,589
 Registrar's Fees and Expenses                                                   151,110          472,553
 Custodian's Fees and Expenses                                                    56,140           65,557
 Inter Scheme Dues                                                         1,761,377,746                -
 Management Fees                                                               1,058,473        2,236,576
 Trusteeship Fees                                                                 54,337          145,153
 Audit Fees                                                                        3,312            3,504
 Agent's Commission Payable                                                    3,894,253        9,756,970
 Publicity and Marketing Expenses                                                  1,871            1,678
 Dividend and Dividend Tax Payable                                               148,859        1,437,379
 Other Current Liabilities                                                       515,148        4,406,112
 Unit Capital Pending Allotment                                                        -           45,001

                                                                           1,767,605,547    3,229,056,572


 SCHEDULE 4 - INVESTMENTS                                                 March 31, 2010   March 31, 2009
 (Refer to attached statement of Portfolio holding as at
 March 31, 2010)                                                                 Rupees           Rupees
 Debentures and Bonds Listed / Awaiting Listing                              388,699,489      883,340,108
 Debentures and Bonds Unlisted / Privately Placed                            450,000,000    1,100,000,000
 Asset Backed Securities                                                     445,800,457      198,067,310
 Government Securities/Treasury bills                                                  -      615,206,025
 Commercial Paper / Certificate of Deposit / Usance Bills                  5,370,975,159   12,828,396,920

                                                                           6,655,475,105   15,625,010,363


 SCHEDULE 5 - DEPOSITS                                                    March 31, 2010   March 31, 2009
                                                                                Rupees            Rupees
 Collateralised Lending                                                     302,532,267     2,360,474,834

                                                                            302,532,267     2,360,474,834




 SCHEDULE 6 - OTHER CURRENT ASSETS                                        March 31, 2010   March 31, 2009
                                                                                Rupees           Rupees
 Balances with Banks and Reserve Bank of India in Current Account             5,921,516        2,385,069
 Outstanding and Accrued Income                                               7,791,405       25,364,789
 Receivable from the Asset Management Company                                 2,415,508                 -
 Margin Money with CCIL                                                      36,500,000       16,500,000

                                                                             52,628,429        44,249,858




 SCHEDULE 7 - INTEREST & DISCOUNT INCOME                                  March 31, 2010   March 31, 2009
                                                                                Rupees            Rupees
 Debentures/Bonds                                                           156,307,526       307,740,053
 Asset Backed Securities                                                               -       23,063,851
 Government Securites / Treasury Bills                                        4,853,384         1,984,986
 Commercial Paper / Certificate of Deposits / Usance Bills                  413,985,202     1,189,278,454
 Collateralised Lending & Reverse Repo                                       44,500,273        77,157,670
 Deposits                                                                     1,284,247                 -
 Others (net) - (Refer Note III(4) to Schedule 8)                           (15,251,129)      (11,219,441)
                                                                            605,679,503     1,588,005,573




                                                                    235
ANNUAL REPORT




                                                    PRINCIPAL MUTUAL FUND
                                     PRINCIPAL CASH MANAGEMENT FUND - LIQUID OPTION
                                        Cash Flow Statement For The Year Ended March 31, 2010

                                                                                                           March 31, 2010                     March 31, 2009
                                                                                                               Amount                             Amount
                                                                                                                    (Rs.)                              (Rs.)
 A. Cash flow from Operating Activities
    Surplus for the year                                                                                      576,132,652                      1,745,509,043
    Adjustments for:-
    Decrease in Investments (at cost)                                                                        8,962,390,796                     8,535,933,133
    (Increase)/Decrease in Other Current Assets                                                                 15,157,876                     1,295,820,503
    Increase/(Decrease) in Current Liabilities                                                                (278,585,959)                       91,408,054

    Net cash generated from Operations                                                   (a)                 9,275,095,365                    11,668,670,733


 B. Cash flow from Financing Activities
    Decrease in Unit Capital                                                                                (8,150,025,202)                   (9,891,494,610)
    Decrease in Reserves                                                                                    (1,877,185,187)                     (363,703,152)
    Adjustments for:-
    Decrease in Sundry Creditors for redeemed units and dividend                                            (1,182,820,065)                    1,263,202,293
    Decrease in Sundry Debtors for units issued                                                                    (45,001)                       (6,574,103)
    Dividend / Distribution Tax paid during the year                                                           (99,426,030)                     (519,048,910)

    Net cash used in Financing Activities                                                (b)               (11,309,501,485)                   (9,517,618,482)

    Net Increase / (Decrease) in Cash and Cash Equivalents                             (a + b)              (2,034,406,120)                    2,151,052,251

    Cash and Cash Equivalents as at the :-
    Beginning of the year                                                                                    2,379,359,903                       228,307,652
    End of the year                                                                                            344,953,783                     2,379,359,903




    Note : Cash and Cash Equivalents includes the following :
            (1) Balances with Banks                                                                             5,921,516                          2,385,069
            (2) Collateralised Lending                                                                        302,532,267                      2,360,474,834
            (3) Margin Money with CCIL                                                                         36,500,000                         16,500,000


    The above cash flow statement has been prepared under the indirect method setout in Accounting Standard (AS-3) issued by the Institute of Chartered
    Accountants of India.

    As per our report of even date attached.




    For N. M. Raiji & Co.                      For and on behalf of Principal Pnb                For and on behalf of Principal
    Chartered Accountants                    Asset Management Company Pvt. Ltd                    Trustee Company Pvt. Ltd

    Sd/-                                     Sd/-                                                Sd/-                                           Sd/-
    Vinay D. Balse                           M. M. Chitale                                       B.G. Deshmukh                                  H. M. Singh
    Partner                                  Chairman                                            Chairman                                            Director


                                             Sd/-                              Sd/-
    Place : Mumbai                           Rajan Ghotgalkar                 Shobit Gupta
    Date : July 09, 2010                     Managing Director               Fund Manager




                                                                               236
ANNUAL REPORT




                                 PRINCIPAL MUTUAL FUND

        PRINCIPAL CASH MANAGEMENT FUND – LIQUID OPTION
                                             SCHEDULE - 8

     SIGNIFICANT ACCOUNTING POLICIES AND NOTES TO ACCOUNTS FORMING PART OF
                                   ACCOUNTS

     I. BACKGROUND INFORMATION

        A. Organisation

        Principal Mutual Fund (formerly known as IDBI-PRINCIPAL Mutual Fund) has been constituted as a
        Trust in accordance with the provisions of the Indian Trusts Act, 1882 (2 of 1882). The Mutual Fund
        is registered with the Securities and Exchange Board of India (SEBI) under registration no.
        MF/019/94/0 dated December 13, 1994.

        The Fund was initially set up by Industrial Development Bank of India (IDBI) in 1994 by execution of
        a Trust Deed dated November 25, 1994, under which IDBI was the sole Settlor, Sponsor and Principal
        Trustee. Subsequently, on March 31, 2000, Principal Financial Services Inc. USA became the deemed
        sponsor along with IDBI by acquiring 50% stake in IDBI-PRINCIPAL Asset Management Company
        Limited. Pursuant to SEBI Letter dated October 18, 2002, the IDBI-PRINCIPAL Trustee Company
        Limited took over the trusteeship and the associated responsibilities and obligations of the IDBI-
        PRINCIPAL Mutual Fund. The Name of the Trustee Company was changed to Principal Trustee
        Company Limited w.e.f. June 27, 2003. The Name of the Trustee Company was changed to Principal
        Trustee Company Private Limited w.e.f. October 20, 2003.

        On June 23, 2003, Principal Financial Services Inc. USA, acquired a 100% stake in IDBI-PRINCIPAL
        Asset Management Company Limited, through its wholly owned subsidiary, Principal Financial
        Group (Mauritius) Limited. Accordingly, Principal Financial Services Inc. USA, became the Sole
        Sponsor of the Fund and Principal Financial Group (Mauritius) Limited has became the Sole Settlor
        of the Fund. The name of the Asset Management Company was changed to Principal Asset
        Management Company Limited w.e.f. June 27, 2003, and on October 20, 2003 was again changed to
        Principal Asset Management Company Private Limited (PAMC).

        On May 5, 2004, Punjab National Bank and Vijaya Bank acquired 30% stake and 5% stake
        respectively in Principal Asset Management Company Private Limited, as well as in Principal Trustee
        Company Private Limited and became the co-settlers to the Fund. The name of the Asset
        Management Company changed to Principal Pnb Asset Management Company Private Limited w.e.f
        January 24, 2005.


        B. Scheme

        Principal Cash Management Fund is an open-ended scheme of Principal Mutual Fund and was
        launched on October 3, 2000. The duration of the scheme is perpetual. The Scheme closed for initial
        subscription on October 21, 2000 and allotment of units was done on October 25, 2000.




                                                    237
ANNUAL REPORT




       The investment objective of the Scheme is to provide investors with as high a level of income
       available from short-term investments, as is considered consistent with preservation of capital and
       maintenance of liquidity by investing in a portfolio of money market and investment grade debt
       instruments.

       On May 14, 2004, SUN F&C Money Value Fund – Liquid Option Normal Plan and Liquid Option
       Daily Dividend Plan which was open ended debt scheme of SUN F&C Mutual Fund (SUN F&C MF)
       launched on October 26, 1998, was merged into Principal Cash Management Fund, vide agreement
       dated June 30, 2003 between the Board of Trustees / Directors, as applicable, of SUN F&C MF, SUN
       F&C Asset Management (India) Private Limited (SUN F&C AMC), the Investment Manager of SUN
       F&C MF, Principal Trustee Company Private Limited and Principal Asset Management Company
       Private Limited.

       Further on May 14, 2004, SUN F&C Fixed Income Securities Fund – Short Term Plan and Medium
       Term Plan which was an open ended debt scheme of SUN F&C Mutual Fund (SUN F&C MF),
       launched on May 23, 2002 has also been merged into Principal Cash Management Fund, vide
       agreement dated June 30, 2003 between the Board of Trustees / Directors, as applicable of SUN F&C
       MF, SUN F&C Asset Management (India) Private Limited (SUN F&C AMC), the Investment
       Manager of SUN F&C MF, Principal Trustee Company Private Limited and Principal Asset
       Management Company Private Limited.


       SEBI has vide its letter dated March 5, 2004, addressed to SUN F&C AMC and PAMC gave its no-
       objection for the above mergers and for handing over the trusteeship, management and administration
       business of the schemes to PAMC.


     II. SIGNIFICANT ACCOUNTING POLICIES

          1. Basis of Accounting

                    The scheme maintains books of account on an accrual basis.

          2. Investments

              2.1     Investment transactions are accounted on trade dates.

              2.2     The cost of investment includes brokerage, premium paid on acquisition, transaction
                      charges and other costs associated with purchase of investments.

              2.3     Bonus entitlements are recognized on ex-bonus dates.

          3. Portfolio Valuation

              3.1     Investments are valued on the Balance Sheet date as per the recommendations of
                      SEBI.

              3.2     Traded securities (excluding government securities and Treasury bills) are valued at
                      the last quoted closing price on the principal stock exchange on which the security is
                      traded.




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           3.3    A security (other than debt securities), which is not traded on any stock exchange on
                  a particular valuation day, is valued at the price at which it was traded on the selected
                  stock exchange, as the case may be, on the earliest previous day, such day not being
                  more than thirty days prior to the valuation date.

           3.4    A debt security (other than government securities), which is not traded on any stock
                  exchange on any particular valuation day, is considered as ‘Non-Traded Security’.
                  A debt Security (other than government securities) is considered as ‘Thinly-Traded
                  Security’, if on the valuation date, there are no individual trades in that security in
                  marketable lots (presently Rs 5 Crore) on the principal stock exchange.

                  Investment in non-traded / thinly traded debt securities including securitised debt
                  (other than government securities) with a residual maturity greater than 182 days are
                  valued using CRISIL Bond Valuer, which is based on the concept of using spread
                  over Government Securities to arrive at yields for pricing.

           3.5    Investments in traded/non-traded/thinly traded government securities are valued at the
                  prices released by CRISIL, which is an approved agency recommended by the
                  Association of Mutual Funds of India (AMFI).

           3.6    Treasury bills are valued at cost plus the difference between the redemption value and
                  the cost, spread uniformly over the remaining maturity period of the instrument.
                  Treasury Bills listed on a recognised stock exchange are valued at the last quoted
                  weighted average yield, on the principal exchange on which the security is traded. If
                  no sale is reported at that date, Treasury Bills are valued at fair value, as determined
                  in good faith by Principal Pnb Asset Management Company Private Limited, under
                  procedures approved by the Trustees of Principal Mutual Fund, in accordance with
                  the guidelines for valuation of securities for mutual funds issued by SEBI.

           3.7    Money Market securities and non-traded debt securities, with residual maturity of
                  upto 182 days, are valued at cost (including accrued interest), plus the difference
                  between the redemption value (inclusive of interest) and the cost, spread uniformly
                  over the remaining maturity period of the instrument.

           3.8    Thinly traded Equity shares /Equity related securities/non-traded securities (other
                  than Government Securities) are valued in good faith by the investment manager, on
                  the basis of valuation principles laid down by SEBI.

           3.9    Investment in non-traded debt securities, including securitised debt (other than
                  government securities) with a residual maturity greater than 182 days, are valued
                  using CRISIL Bond Valuer, which is based on the concept of using spread to maturity
                  to arrive at the yields for pricing.

           3.10   Securities in the nature of Floating Rate Notes (FRN) are valued at cost plus the
                  difference between the redemption value and the cost, spread uniformly over the
                  remaining maturity period of the instrument. FRNs listed on a recognised stock
                  exchange are valued at the last quoted closing price on the principal exchange, on
                  which the security is traded. If no sale is reported at that date FRNs are valued at fair
                  value, as determined in good faith by Principal Pnb Asset Management Company
                  Private Limited, under procedures approved by the Trustees of Principal Mutual




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ANNUAL REPORT




                   Fund, in accordance with the guidelines for valuation of securities for mutual funds
                   issued by SEBI.

            3.11   Securitised Debt are valued at fair value, as determined in good faith by Principal Pnb
                   Asset Management Company Private Limited, under procedures approved by the
                   Trustees of Principal Mutual Fund, in accordance with the guidelines for valuation of
                   securities for mutual funds issued by SEBI.

            3.12   Interest Rate Swaps with a maturity period of more than 182 days are marked to
                   market by recording the net present values of the difference in outflows and inflows
                   as unrealised appreciation / depreciation. Interest Rate Swaps with a maturity of 182
                   days and less are amortised over the balance contracted period.

            3.13   Investments in Call money, bills purchased under re-discounting scheme and term
                   deposits with banks are valued at cost plus accruals.

            3.14   An investment is regarded as non-performing if the interest and /or principal amount
                   has not been received or remains outstanding for one quarter from the day such
                   income or installment has fallen due.

            3.15   Appreciation/Depreciation, as the case may be, in the value of securities at the year-
                   end is computed for the scheme, whereby the aggregate market value of all securities
                   taken together is compared with the aggregate cost of acquisition. Such net balance is
                   charged to Revenue Account.

            3.16   The above policies are followed as and when applicable.

         4. Income Recognition

            4.1    Dividend income is accrued on ex-dividend date.

            4.2    Profit or loss on sale of investments is arrived at by applying weighted average cost
                   on trade date.

            4.3    Interest on debentures and other fixed income investments is recognized on accrual
                   basis.

            4.4    In respect of Interest Rate Swaps, interest expense and income are accrued on a net
                   basis daily.

            4.5    Income on non-performing assets (NPA) is recognized on cash basis.

         5. Management Fees

            Investment Management fees payable to Principal Pnb Asset Management Co. Pvt. Ltd. is
            computed on the basis of Average Daily Net Assets Value.

         6. Income Equalisation Reserve and Unit Premium Reserve

            a.     Upto March 14, 2010, upon purchase/sale of units by the Scheme, an appropriate part
            of the purchase / sale price was credited / debited to the Income Equalisation Reserve



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ANNUAL REPORT




            Account. The balance amount of the purchase/sale price after reducing the face value was
            transferred to Unit Premium Reserve Account.

            b.      With effect from March 15, 2010, pursuant to the issue of SEBI circular no.
            SEBI/IMD/CIR no 18/198647/2010 dated March 15, 2010, upon purchase/sale of units by the
            Scheme, where the purchase/sale price is higher than the face value per unit, the amount
            representing unrealized gain and balance in the Unit Premium Reserve Account is
            credited/debited to Unit Premium Reserve Account. The balance amount of the purchase/sale
            price after reducing the face value is transferred to Income Equalization Reserve Account.
            Upon purchase/sale of units by the Scheme, where the purchase/sale price is lower than the
            face value per unit, the difference between the sale price and face value is debited to Income
            Equalization Reserve Account. Distributable surplus is arrived at after excluding unrealized
            gains. Balance lying to the credit of Unit Premium Reserve Account is not considered for the
            purpose of dividend distribution. Where the Unit Premium Reserve has a debit balance, the
            excess thereof over the unrealized gain is also deducted in arriving at the distributable surplus.

            c.     The balance in Income Equalization Reserve Account is transferred to the Revenue
            Account at the end of the year.

         7. Provisions

            (i) In the case of interest accrued on investments, provision is made in respect of amounts
            which have not been received for a period of 3 months beyond the due date. No further
            accrual of income is made in respect of such investments.

            (ii) Provision is made in respect of the principal amount of securities, in accordance with
            valuation principles laid down by SEBI.

            (iii) Provision is made in respect of accrued dividend, which has not been received for a
            period of twelve months beyond the due date.

         8. Entry and Exit Load

            a) Upto July 31, 2009 load charged at the time of purchase/sale of units was utilized for
               incurring distribution and marketing expenses. Out of the residual amount, amounts
               considered to be in excess of future requirements by the Trustees were recognized as
               income, and the residual amount was carried forward into the next year.

            b) With effect from August 1, 2009 In accordance with the SEBI circular dated June 30, 2009:

               i) No entry load is charged on fresh purchase applications received after August 1, 2009
               (except on SIPs registered prior to August 1, 2009 which is utilised for incurring
               distribution and marketing expenses. Out of the residual amount, amounts considered to be
               in excess of future requirements by the Trustees are recognized as income, and the residual
               amount carried forward into the next year Load Charges).
               ii) Exit load charged in excess of 1% is recognized as income of the scheme immediately.
               iii) Exit load charged upto 1% is parked in a Liability Account, which is utilized for
               incurring distribution and marketing expenses. Out of the residual amount, amounts
               considered to be in excess of future requirements by the Trustees are recognized as
               income, and the residual amount carried forward into the next year.




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ANNUAL REPORT



       III   NOTES TO ACCOUNTS

        1    Principal Cash Management Fund has twelve options viz; Regular Growth, Regular Daily Dividend, Regular Weekly Dividend, Regular Monthly Dividend, Institutional Growth,
             Institutional Daily Dividend, Institutional Weekly Dividend, Institutional Monthly Dividend, Premium Institutional Growth, Premium Institutional Daily Dividend, Premium
             Institutional Weekly Dividend and Premium Institutional Monthly Dividend. A combined Balance sheet, Revenue Account and Cash Flow are prepared for the scheme.



        2    The Cost and Market Value / Fair Value of investments are given below:

                                                                                                                                                                                                        (Rs. In Lacs)
                                                                                                                                                                         Net Appreciation / (Depreciation) in value
                                                                                   Cost / Amortised cost                         Market Value / Fair Value
                                                                                                                                                                                     of investments
              Investments                                                  March 31, 2010          March 31, 2009          March 31, 2010          March 31, 2009          March 31, 2010          March 31, 2009
  LIQUID3     Government Securities/Treasury bills                                            -             6,138.96                          -             6,152.06                           -               13.10
  LIQUID1     Commercial Paper / Certificate of Deposit / Usance
                                                                                     53,709.75             128,283.97               53,709.75              128,283.97                          -                    -
              Bills
  LIQUID5     Asset Backed Securities                                                 4,456.65                1,903.30                4,458.00               1,980.67                       1.35               77.37
  LIQUID7     Debentures and Bonds Unlisted / Privately Placed                        4,500.00               11,000.00                4,500.00              11,000.00                          -                   -
  LIQUID2     Debentures / Bonds Listed / Awaiting listing on
                                                                                      3,785.75                8,749.83                3,886.99                8,833.40                    101.24               83.57
              recognized stock exchanges
              TOTAL                                                                  66,452.15             156,076.06               66,554.75              156,250.10                     102.60              174.04

             Net Change in unrealised depreciation in the value of investment for the year ended March 31, 2010 is Rs. 71.44 Lacs

        3    The industry-wise 'Statement of Portfolio Holding' as on March 31, 2010 (Referred to in Schedule 4 to the Balance Sheet) is given in Annexure I.

        4    Interest and Discount - Others (Net) includes amounts received from and paid to other schemes of the Fund on account of delay in the movement of unit subscription application
             money of one scheme residing in the other scheme, calculated for the period of the delay on the basis of the prevailing CBLO rates.



        5    The aggregate book value and fair value of non traded / thinly traded investments, which have been valued in good faith in accordance with the guidelines for valuation of
             securities for Mutual Funds issued by SEBI, are given below:

                                                                                                        (Rs. In Lacs)
                                                                           March 31, 2010          March 31, 2009
                                    Particulars                              Amount                  Amount
              Book Value                                                          12,742.40                21,653.13
              Market / Fair Value                                                 12,845.00                21,814.07

        6    Net Asset Value per unit of various options are as under:


              Name of the Option                                           March 31, 2010          March 31, 2009
              Regular Growth                                                         17.7866                 17.1319
              Regular Daily Dividend                                                 10.0022                 10.0022
              Regular Weekly Dividend                                                10.1201                 10.1284
              Regular Monthly Dividend                                               10.0070                 10.0067
              Institutional Growth                                                   15.0430                 14.4531
              Institutional Daily Dividend                                           10.0022                 10.0022
              Institutional Weekly Dividend                                          10.0018                 10.0105
              Institutional Monthly Dividend                                         10.0074                 10.0069
              Institutional Premium Growth                                           14.3333                 13.7418
              Institutional Premium Daily Dividend                                   10.0007                 10.0007
              Institutional Premium Weekly Dividend                                        -                 10.0486
              Institutional Premium Monthly Dividend                                       -                 10.0552


        7    Aggregate value of Purchases and Sales made during the year, expressed as a percentage of Average Daily Net Asset Value, are as under:

                                                                                          Purchases                                        Sales *

                                                                         Amount (Rs. In lacs) % of Avg. Net Assets Amount (Rs. In lacs) % of Avg. Net Assets
                                  March 31, 2010                                6,059,717.00              4,564.13        6,173,703.37              4,649.98
                                  March 31, 2009                                1,478,842.62                712.27        1,579,584.09                760.80
             * Sales includes redemptions / maturities

        8    Contract for purchases pending deliveries as on March 31, 2010, amounting to Rs. Nil (Previous Year: Rs 2,672.33 Lacs) have been included in
             investments.

        9    Details of Management Fees paid to Principal Pnb Asset Management Co. Pvt. Ltd. and its computation thereof:
                                                                                                                                                 (Rs. In Lacs)
                                                                                                                                        % of Management
                                                                                               Average Daily Net                        Fees to Average Net
                                                                                 Plan          Asset Value           Management Fees    Asset Value
                                 March 31, 2010                                                            15,061.28              75.58                   0.50
                                                                               Regular
                                 March 31, 2009                                                            14,926.62              52.58                   0.35
                                 March 31, 2010                                                             8,705.34              26.47                   0.30
                                                                             Institutional
                                 March 31, 2009                                                            14,450.27              18.36                   0.13
                                 March 31, 2010                                                          109,001.73              123.22                   0.11
                                                                         Premium Institutional
                                 March 31, 2009                                                          178,245.83                   -                      -

       10    As per the requirement of Regulation 25(11) of SEBI (Mutual Fund) Regulations, 1996, details of Investments made by the Fund in companies, where
             the companies' investments in any of Principal Mutual Fund schemes exceeds 5% of the scheme's Net Asset Value, is given in Annexure II.




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ANNUAL REPORT




      11    Total Income and Recurring Expenditure for the year expressed as a percentage of Average Daily Net Asset Value:

                                                                    (As a % of Average Daily Net Asset Value)
                                                                                         Recurring
                                                                      Income             Expenditure
                               March 31, 2010                                       4.71                 0.37
                               March 31, 2009                                       7.65                 0.21
            Income / Expenditure excludes appreciation/depreciation on investment.

      12    Particulars of Unclaimed Dividends and Unclaimed Redemptions are as under:

                                                                                  Unclaimed Dividends                           Unclaimed Redemptions

                                                                      No. of Investors         Amount (Rs. In lacs) No. of Investors           Amount (Rs. In lacs)
                                 March 31, 2010                                            13                    0.19                     135                  3.41
                                 March 31, 2009                                            11                    0.19                     127                  3.37
            Note : For want of relevant information from banks, in respect of dividends and redemptions effected through DDs, the liability for unencashed and
            expired DDs (if any) and the corresponding bank balance for the same may not have been accounted in the books.


      13    Disclosure as per SEBI circular MFD/CIR No. 3/211/2001 dated April 30, 2001 :
            The Scheme does not have a single unitholder holding more than 25% of the NAV as on March 31, 2010.

      14    The Scheme has entered into transactions with certain related parties. The information required in this regard in accordance with Accounting Standard 18
            on 'Related Party Disclosures' issued by The Institute of Chartered Accountants of India (ICAI) and Regulation 25(8) of the SEBI (Mutual Funds)
            Regulations, 1996, are as under :


      (i)   Related Party relationships

            Name                                                      Description of relationship
            Principal Financial Services Inc., USA                    Sponsor of the Fund
            Principal Trustee Company Private Ltd.                    Trustee of the Fund

            Principal Pnb Asset Management Company Private Ltd.       Subsidiary of the Sponsor and the Scheme's asset manager
            Pnb Principal Insurance Broking Private Limited           Subsidiary of the Sponsor
            Principal Consulting (India) Private Limited              Subsidiary of the Sponsor
            Pnb Principal Financial Planners Private Limited          Subsidiary of the Sponsor
            Principal Pnb Life Insurance Company Limited              Subsidiary of the Sponsor
            Principal Financial Group (Mauritius) Limited             A Company holding substantial interest in the share capital of the
                                                                      Scheme's asset manager
            Punjab National Bank                                      A Company holding substantial interest in the share capital of the
                                                                      Scheme's asset manager
            PNB Gilts Limited                                         Subsidiary of Punjab National Bank

            Schemes of the Fund under common control of the
            Sponsor

            Principal Child Benefit Fund                              Principal Long Term Equity Fund 3 Year Plan Series II
            Principal Pnb FMP 385 Days Series XI                      Principal Monthly Income Plan
            Principal Pnb FMP 540 Days Series IV                      Principal Monthly Income Plan - MIP Plus
            Principal Floating Rate Fund - Flexible Maturity Plan     Principal Balanced Fund
            Principal Floating Rate Fund - Short Maturity Plan        Principal Dividend Yield Fund
            Principal Govt. Securities Fund - Investment Plan         Principal Emerging Bluechip Fund
            Principal Global Opportunities Fund                       Principal Money Manager Fund
            Principal Growth Fund                                     Principal Personal Tax Saver Fund
            Principal Income Fund                                     Principal Resurgent India Equity Fund
            Principal Index Fund                                      Principal Income Fund - Short Term Plan
            Principal Services Industries Fund                        Principal Tax Savings Fund
            Principal Large Cap Fund                                  Principal Junior Cap Fund
            Principal Ultra Short Term Fund                           Principal Govt. Securities Fund - Saving Plan
            Principal Cash Management Fund - Liquid Option            Principal Pnb Fixed Duration Fund 3 Year Plan Series I
            Principal Long Term Equity Fund                           Principal Pnb FMP 460 Days Series IV
            Principal Pnb FMP 540 Days Series II                      Principal Pnb FMP 385 Days Series VIII
            Principal Pnb FMP 385 Days Series VII                     Principal Pnb FMP 385 Days Series IX




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ANNUAL REPORT
   (ii)   Transactions, if any, with the above mentioned related parties, as defined under Accounting Standard 18 and Regulation 25(8) of the SEBI Regulations
          are given below:


                                                                                                                                                                       (Rs. In Lacs)
          Name of the Related Party                                Nature of                For the year ended Outstandin