fixed income instruments in india

Fixed Income Instruments in India

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SUMMER INTERNSHIP

Report

On

“Fixed incomeInstruments in India”

SUBMITTED TO: SUBMITTED BY:Executive Director Deepak Singh (06-j1-121)Jagjit Singh PGDBM (2006-08)

INSTITUTE OF MARKETING AND MANAGEMENTMarketing Tower, B-11, Qutub Institutional Area,

New Delhi-110016


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“Fixed Income Instrument in India” is my attempt to gather maximum possible

information about fixed income securities at one place. This report is based on

secondary research from websites and newspapers. I have tried to cover most of

the well known fixed income instruments available in Indian financial market.

This report is based on the information latest by July 2007. Motive of preparing

this report is collect brief information on various fixed income instruments as

most of the people don’t have any information about these instruments.

It is a wide topic and it is not easy to touch all the aspects of fixed income

instrument in detail as well as the secondary market for government securities

and corporate bonds is not fully developed in India.

Thank you,

Deepak [email protected]@gmail.com


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TABLE OF CONTENTS

1. Executive Summary2. Objective3. Methodology4. Fixed Income Instruments

4.1) Introduction4.2) Why Invest in Fixed Income Instruments?4.3) Risk in Fixed Income Instruments4.4) Returns

5. Debt Market6. Structure of Indian Debt Market7. Regulators (RBI & SEBI)8. Government Securities9. Essential terms10. Features of Government Securities11. Auction of Securities12. Central Government Securities

12.1) Treasury Bills12.2) Dated Securities12.3) Zero coupon Bonds12.4) Partly Paid Stock12.5) Floating Rate Bonds12.6) Capital Indexed Bonds12.7) Coupon Bearing Bonds12.8) Govt. with call and put option12.9) Strips

13. Zero Coupon Yield Curve14. State Government Securities

14.1) State Development Loan14.2) Coupon Bearing Bonds

15. Mandated Investments in Govt. Securities16. Benefits of Investing in Govt. Securities17. Public Sector Bonds

17.1) Govt. Guaranteed Bonds17.2) PSU Bonds17.3) Commercial Papers


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17.4) Debentures18. Private Sector Bonds

18.1) Corporate Bonds18.2) Corporate Debentures18.3) Inter-Corporate Deposits18.4) Certificate of Deposits18.5) SPN18.6) Commercial Papers18.7) Floating Interest Rate18.8) Zero Coupon Bond

19. Other Fixed Income Instruments19.1) Company fixed Deposits19.2) Employee’s Provident Fund19.3) Mutual Funds19.4) Guilt Funds19.5) Bank Fixed Deposits19.6) Other Prominent Govt. Schemes

a) Public Provident Fundb) National Savings Schemes Account, 1992 (Discont.)c) National savings Certificates (viii) Issued) Post Office Monthly Income Schemee) Post Office Recurring Deposits Schemef) Post Office Savings Accountg) Post Office Time Deposit Schemesh) Kisan Vikas Patrai) RBI Relief Bondsj) Deposit Scheme for Retiring Employees of PSUsk) Deposit Scheme for Retiring Govt. Employees-89l) Indira Vikas Patra (Discontinued)

20. Other important information21. Liquidity Vs Return22. Risk Vs Return23. Suggestions for investors24. Limitations of study25. References/Bibliography


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1. EXECUTIVE SUMMARY

Savings are essential requirements for any individual. There are lots ofoptions available to invest in variety of securities based on individual’sprofile in terms of age, income, liquidity requirement and risk tolerancelevel. At every age investment portfolio should comprise of both fixed andvariable income instruments.This report addresses ‘Fixed Income Instruments’ which are one of theimportant parts of every investors saving portfolio.

Fixed income instruments are basically obligations undertaken by the issuerof the instrument as regards to the repayment of interest and principal (Atpredetermined intervals of time), which the issuer would pay to the legalowner of the instrument. . The time of maturity and amount to be receivedon maturity are known in advance. Bonds, debentures, fixed deposits, andsmall savings schemes (National Savings Certificate and Kisan Vikas Patraamong others) are some of the variants.

Fixed income instruments can be arranged into 4 sections namely –1. Government Securities2. Public Sector Bonds3. Private Sector Bonds4. Others (like PPF, Kisan Vikas patra, post office etc.)

The bond market in India is dominated by government bonds. Nearly 90% oftotal domestic bonds outstanding are government issuances (i.e. Treasurybills, notes and bonds), squeezing out corporate and other marketable debtsecuritiesPSU bonds have been consistently performing better than corporate bonds.Government bonds constitute almost 35% of GDP where as Corporate bondsconstitute nearly 2% of the total GDP of India.As far as risk is concerned fixed income bonds like government Securitiesare considered risk free investments where as corporate bonds, debenturesetc varies from a range of low to moderate risk.The very basic considerations of an investor while investing his money arehow to maximize one's returns? What will he get? and what are the risksinvolved in investing in a particular investment?


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Attribute wise summary of financial instruments:PRODUCTS RETURN LIQUIDITY RISKEQUITY HIGH HIGH HIGHCo. DEBENTURES MODERATE LOW MODERATECo. FDs MODERATE LOW HIGHBANK DEPOSITS LOW HIGH LOWPPF MODERATE MODERATE LOWLIFE INSURANCE LOW LOW LOWMUTUAL FUNDS HIGH HIGH LOWRBI BONDS MODERATE LOW LOWGOVT. SECURITIES MODERATE MODERATE LOWGUILT FUNDS MODERATE HIGH MODERATERBI REFLIEF BOND HIGH LOW LOW

Risk Vs Return:

LOW MODERATE HIGH

The desirability of any investment depends not only on its promising orexpected return but also on the risk exposure of the investment constitutes animportant element of investment decisions of the investors.For different investors this market has different investment options withvariable liquidity and returns. Now investor can opt for best optionaccording to his/her preferences.

Co. Fixed deposits Equity, RBIrelief bonds,

Co. debentures,Guilt funds

Real estate

Bank deposits,Life insurance

PPF, RBI bonds,Govt. Securities

Mutual funds(fixed income

part)

HIGH

MODERATE

LOW


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2. OBJECTIVE

To collect information of various fixed income instruments.

In India most of the people don’t have sufficient information about various fixed

income instruments those are available for investment.

Objective of study is divided into two parts these are –

a) To collect information about various fixed income instruments

available in India.

b) Study of liquidity, Risk and Return in each instrument.


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3. RESEARCH METHODOLOGY

This project report is wholly based on personal discussion and research fromwebsites. Objective of report was fully executed with the help of secondarydata available on net.

The data collection and data analysis is done with the help of followingmethods1. Data collection:

Secondary Methods: - Journals, Corporate reports, News papers and related

websites.

2. Data analysis:

Data classification and analysis is being done with the help of variousstatistical tools such as charts, tables and graphical methods such as piecharts, bar charts, area charts etc.


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4.) 'Fixed Income' Instruments’

4.1) Indian market

Indian Capital Markets comprise of the Equities Market and the Debt Markets.Debt Markets are markets for the issuance, trading and settlement in fixed incomesecurities of various types and features. Fixed income securities can be issued byalmost any legal entity like Central and State Governments, Public Bodies,Statutory corporations, Banks and Institutions and Corporate Bodies.

Introduction to Fixed Income Instruments

Fixed Income securities are one of the most innovative and dynamic instrumentsevolved in the financial system ever since the inception of money. Based as theyare on the concept of interest and time-value of money, Fixed Income securitiespersonify the essence of innovation and transformation, which have fueled theexplosive growth of the financial markets over the past few centuries.

Fixed Income securities offer one of the most attractive investment opportunitieswith regard to safety of investments, adequate liquidity, flexibility in structuring aportfolio, easier monitoring, long term reliability and decent returns. They are anessential component of any portfolio of financial and real assets, whether in formof pure interest bearing bonds, innovative and varied type of debt instruments orasset-backed mortgages and securitized instruments.

Fixed income instruments are basically obligations undertaken by the issuer of theinstrument as regards to repayment of interest and principal (At predeterminedintervals of time), which the issuer would pay to the legal owner of the instrument.

Fixed Income instruments are essentially of two types.

Tradable. E.g. A debenture Non-Tradable. E.g. A bank deposit

4.2) Why Invest in Fixed Income?

Fixed-income instruments in India typically include company bonds, fixeddeposits and government schemes. The reasons for investing in fixed incomeoption are mentioned below.


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Low risk toleranceOne of the key benefits of fixed-income instruments is low risk i.e. the relativesafety of principal and a predictable rate of return (yield). If your risk tolerancelevel is low, fixed-income investments might suit your investment needs better.But remember that these still have risks associated and are explained later.

Need for returns in the short-termInvestment in equity shares is recommended only for that portion of your wealthfor which you are unlikely to have a need in the short-term, at least five-years.Consequently, the money that you are likely to need in the short-term (for capitalor other expenses), should be invested in fixed-income instruments.

Predictable versus Uncertain ReturnsReturns from fixed-income instruments are predictable i.e. they offer a fixed rateof return. In comparison, returns from shares are uncertain. If you need a certainpredictable stream of income, fixed-income instruments are recommended.

Before you decide to invest in fixed-income instruments, evaluate your needs fromthree key perspectives - risk, returns and liquidity. Match the investment optionswith your financial needs.

4.3) Risk

There are two types of risks associated with investments in Fixed Income Options.

a) Interest Rate RiskThe price of the fixed income options are effected inversely by the interest rates.So, if the interest rates go up then the price of the existing bonds goes down andvice versa. The risk becomes important if you are interested in trading in thebonds and are not likely to hold till maturity.

b) Credit RiskCredit risk refers to the possibility that the issuer fails to pay what is owed(principal and/or interest). Evaluate the credit ratings assigned by rating agencieslike Moody’s, Standard & Poor, CRISIL, ICRA and CARE to find corporatebonds/ fixed deposits that match your risk tolerance level.

Please note that it is not mandatory for non-finance companies to get a creditrating for their fixed deposit schemes. Hence, it is advisable to see if the companyhas a credit rating for any other debt instrument while evaluating fixed depositschemes.


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Also, one should understand the relation between credit rating of a company andthe coupon (interest rate) which it promises. A low credit rating company wouldpromise higher coupon than a company which has high credit rating as the riskinvolved in lending to low credit rated company is higher and the investor has tobe compensated for the same.So, in case of fixed income option, investor should not get allured by the returnsalone and should look into the underlying risks as well.Generally the government bonds are considered the safest as there is sovereignguarantee attached. But at the same time some countries are considered morereliable than others hence, in such a case the credit ratings of the country comes into play. Hence, an emerging market government bonds would pay higher couponthan those issued by developed countries.

4.4) ReturnsReturn calculations should consider effective yield, interest rate expectations andtaxes.

a) Calculate effective yieldCalculate the post-tax effective yield for each instrument for comparison.Effective yield is the IRR (Internal Rate of Return) of the fixed-incomeinstrument.

For e.g. for an instrument that pays 14% monthly interest, the effective annualyield works out to 14.93%. This is definitely more attractive than an instrumentthat pays 14% annually.

b) Consider interest rate (and inflation) expectationsOnce you invest in a fixed-income instrument, your investment is committed,more often than not, for the specified period of time.During this period, if interest rates increase, you will not benefit from this rise.Hence, your effective return from this investment will be lower than if you had theflexibility to invest at a higher interest rate.So, if you expect interest rates to increase, invest only in short-term instruments,and vice versa.

c) Don’t forget taxesWhile calculating your interest yield remember to include post-tax interestreceipts. For investors in high-tax brackets, tax-free government bonds/ schemesmight be more attractive.


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Mutual funds present an alternative avenue to invest in fixed income instrumentsat zero tax liability on the income received.

Tenure & LiquidityThe tenure of the fixed income instrument is important as the returns getinfluenced by the tenure. For example, the interest rate risk we discussed above, ifthe interest rate rises then the existing bond with longer tenure will witness higherfall in price than one with shorter tenure.Fixed-income instruments are normally illiquid as the secondary market for theseinstruments is not yet developed in India. Make sure you carefully evaluate thepotential liquidity, exit route and penalties of the instrument before you invest.

How to Buy?Worldwide the secondary market for fixed income instruments is more developedthan in India. There are no open exchanges in India to trade debt and in case youwish to trade in bonds then your broker will have to find buyer and sellers foryou.

- Company bonds/ debenturesCompanies issue bonds and debentures through public issues that are open onlyfor a limited period of time. Application forms for these issues are available withprimary market brokers.

- Company fixed depositsFixed deposit schemes from companies are typically open round the year, unlessthey have exceeded their collection limits. Even in such cases, companies acceptrenewal from existing fixed deposit holders.

- Government schemesYou can invest in RBI bonds directly through the Reserve Bank of India orthrough a broker. Bit this option is not open for Non Resident Indians. Investmentsin other government schemes can normally be made through nationalized banksand post offices.

- Fixed income mutual fundsFixed-income and money market mutual funds offer investors an exposure tofixed-income instruments. Open-ended mutual funds are available round the yearand can be easily purchased/ sold on any business day.


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5.) DEBT MARKET:

Debt market as the name suggests is where debt instruments or bonds are traded.The most distinguishing feature of these instruments is that the return is fixed i.e.they are as close to being risk free as possible, if not totally risk free. The fixedreturn on the bond is known as the interest rate or the coupon rate. Thus, the buyerof a bond gives the seller a loan at a fixed rate, which is equal to the coupon rate.

Debt Markets are therefore, markets for fixed income securities issued by: Central and State Governments Municipal Corporations Entities like Financial Institutions, Banks, Public Sector Units, and Public

Ltd. companies.

The money market also deals in fixed income instruments. However, differencebetween money and bond markets is that the instruments in the bond markets havea larger time to maturity (more than one year). The money market on the otherhand deals with instruments that have a lifetime of less than one year.

6.) MARKET MICRO STRUCTURE:

It is necessary to understand microstructure of any market to identify processes,products and issues governing its structure and development. In this section aschematic presentation is attempted on the micro-structure of Indian corporatedebt market so that the issues are placed in a proper perspective. Figure gives abird’s eye view of the Indian debt market structure.

Figure - The Structure of the Indian Debt Market


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REGULATORS

MARKET SEGMENT ISSUERS INSTRUMENTS INVESTORS

SEBI, RBI, DCA

THESOVERIGN

ISSUER

Central Govt

State Govt

THEPUBLICSECTOR

Govt. Agencies& Stat. Bodies

PSUs

Comm. Banks/DFIs

GOI datedsecurities,

Treasury Bills,State Govt.securities

Index bonds, zerocoupon bonds

Govt. GuaranteedBonds/Debentures

PSU Bonds,Debentures, CP

CD, Debentures,Bonds

THEPRIVATESECTOR

Corporates

Pvt. Sect. Banks

Bonds, Debentures,Commercial Paper(CP) SPNs,FloatingRate Notes FCDs,PCDs, ZCBs

Bonds, Debentures,CPsand CDs

RBI

DFIs

BANKS

PENSIONFUND

FIIs

CORPORATES

INDIVIDUALS

PROVIDENTFUNDS

INSURANCECOS.,

TRUSTS,MUTUAL

FUNDS


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The instruments traded can be classified into the following segmentsbased on the characteristics of the identity of the issuer of thesesecurities:

Segment Issuer Instruments

GovernmentCentralGovernment

Treasury Bills, Dated Securities, ZeroCoupon Bonds, Coupon Bearing bonds,Partly paid Stocks, Capital IndexBonds, Floating Rate Bonds, InflationIndex Bonds, STRIPS

PublicSector

GovernmentAgencies /Statutory Bodies

Govt. Guaranteed Bonds, Debentures

Public SectorUnits

PSU Bonds, Debenture, CommercialPaper

Private CorporateDebentures, Bonds, Commercial Paper,Floating Rate Bonds, Zero CouponBonds, Inter-Corporate Deposits

Banks Certificate of Deposits, Bonds

FinancialInstitutions Certificate of Deposits, Bonds

The Government Securities are referred to as Statutory Liquid Ratio (SLR)securities, as they are eligible securities for the maintenance of the SLR by theBanks.


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7.) REGULATORS

RBI:The Reserve Bank of India is the main regulator for the Money Market. ReserveBank of India also controls and regulates the G-Secs Market. Apart from its role asa regulator, it has to simultaneously fulfill several other important objectives viz.managing the borrowing program of the Government of India, controllinginflation, ensuring adequate credit at reasonable costs to various sectors of theeconomy, managing the foreign exchange reserves of the country and ensuring astable currency environment.RBI controls the issuance of new banking licenses to banks. It controls the mannerin which various scheduled banks raise money from depositors. Further, it controlsthe deployment of money through its policies on CRR, SLR, priority sectorlending, export refinancing, guidelines on investment assets etc.Another major area under the control of the RBI is the interest rate policy. Earlier,it used to strictly control interest rates through a directed system of interest rates.Each type of lending activity was supposed to be carried out at a pre-specifiedinterest rate. Over the years RBI has moved slowly towards a regime of marketdetermined controls.

SEBI:Regulator for the Indian Corporate Debt Market is the Securities and ExchangeBoard of India (SEBI). SEBI controls bond market and corporate debt market incases where entities raise money from public through public issues.It regulates the manner in which such moneys are raised and tries to ensure a fairplay for the retail investor. It forces the issuer to make the retail investor aware, ofthe risks inherent in the investment, by way and its disclosure norms. SEBI is alsoa regulator for the Mutual Funds, SEBI regulates the entry of new mutual funds inthe industry. It also regulates the instruments in which these mutual funds caninvest. SEBI also regulates the investments of debt FIIs.

Apart from the two main regulators, the RBI and SEBI, there are several otherregulators specific for different classes of investors, eg the Central Provision FundCommissioner and the Ministry of Labour regulate the Provident Funds.Religious and Charitable trusts are regulated by some of the State governments ofthe states, in which these trusts are located.


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8.) GOVERNMENT SECURITIES

Government securities (G-secs) or gilts are sovereign securities, which are issuedby the Reserve Bank of India (RBI) on behalf of the Government of India (GOI).The GOI uses these funds to meet its expenditure commitments.

Definition of Government securitiesThe Government securities are included in the definition of securities in theSecurities Contracts (Regulation) Act, 1956 (SCRA) and mean a security createdand issued by the Central Government or a State Government for the purpose ofraising a public loan in a form specified in the Public Debt Act 1944.

Permitted Exchanges:NSE, BSE and OTCEI.

9.) Essential terms one should be aware of before investing inGovernment Securities --

An individual must be aware about the following terms associated withGovernment Securities:

Coupon: The 'Coupon' denotes the rate of interest payable on the security.E.g. a security with a coupon of 7.40% would draw an interest of 7.40% onthe face value.

Interest Payment Dates (IP dates): The dates on which the coupon(interest) payments are made are called as the IP dates.

Last Interest Payment Date (LIP Date): LIP date refers to the date onwhich the interest was last paid.

Accrued Interest: Accrued interest is the interest charged at the couponrate from the Last Interest Payment to the date of settlement. AccruedInterest for a security depends upon its coupon rate and the number of daysfrom its LIP date to the settlement date.

Day count conventionThe market uses quite a few conventions for calculation of the number ofdays that has elapsed between two dates. The ultimate aim of anyconvention is to calculate (days in a month)/(days in a year). The


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conventions used are as below. We take the example of a bond with FaceValue 100, coupon 12.50%, last coupon paid on 15th June, 2000 and tradedfor value 5th October, 2000.

A/360(Actual by 360)In this method, the actual number of days elapsed between the two dates isdivided by 360, i.e. the year is assumed to have 360 days.

A/365 (Actual by 365)In this method, the actual number of days elapsed between the two dates isdivided by 365, i.e. the year is assumed to have 365 days.

A/A (Actual by Actual)In this method, the actual number of days elapsed between the two dates isdivided by the actual days in the year.

30/360-Day Count: A 30/360-day count says that all months consist of 30days. i.e. the month of February as well as the month of March is assumedto have thirty days.

Yield: Yield is the effective rate of interest received on a security. It takesinto consideration the price of the security and hence differs as the pricechanges, since the coupon rate is paid on the face value and not the price ofpurchase.The concept can be best understood by the following example:

A security with a coupon of 7.40%: If purchased at Rs. 100 the yield will be 7.40% If purchased at Rs. 200 the yield becomes 3.70%. If purchased at Rs. 50 the yield becomes 14.80% Thus it is seen that higher the price lesser will be the yield and vice-

a-versa. The yield will be equal to the coupon rate if and only if the security

is purchased at the face value (Par).

Yield to Maturity (YTM): YTM implies the effective rate of interestreceived if one holds the security till its maturity. This is a better parameterto see the effective rate of return as YTM also takes into consideration thetime factor.

Holding Period Yield (HPY): HPY comes into the picture when aninvestor does not hold the security till maturity. HPY denotes the effective


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yield for the period from the date of purchase to the date of sale.

Clean Price: Clean Price denotes the actual price of the security asdetermined by the market.

Dirty Price: Dirty Price is the price that is obtained when the accruedinterest is added to the Clean Price.

Shut Period: The government security pays interest twice a year. Thisinterest is paid on the IP dates. One working day prior to the IP date, thesecurity is not traded in the market. This period is referred to as the 'ShutPeriod'.

Face Value: The Face Value of the securities in a transaction is the numberof Government Security multiplied by Rs.100 (face Value of eachGovernment Security). Say, a transaction of 5000 Government Securitywill imply a face value of Rs. 5,00,000 (i.e. 5000 * 100)

"Cum-Interest" and "Ex-Interest"Cum-interest means the price of security is inclusive of the interest accruedfor the interim period between last interest payment date and purchase date.Security with ex-interest means the accrued interest has to be paidseparately

Trade Value: The Trade Value is the number of Government Securitymultiplied by the price of each security.

Primary Dealers & Satellite DealersPrimary Dealers can be referred to as Merchant Bankers to Government ofIndia, comprising the first tier of the government securities market. Satellitework in tandem with the Primary Dealers forming the second tier of themarket to cater to the retail requirements of the market.These were formed during the year 1994-96 to strengthen the marketinfrastructure and put in place an improvised and an efficient secondarygovernment securities market trading system and encourage retailing ofGovernment Securities on large scale.


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10.) FEATURES OF A GOVERNMENT SECURITY -

A Government Security has the following features: The face value of all the securities is Rs.100. Interest is paid on a semi-annual basis i.e. every 6 months. i.e. A security

with a coupon of 7.40% will draw an interest payment of Rs 3.70 every sixmonths.

Accrued Interest is always calculated on a 30/360-day count.

Thus a Government of India (GOI) security 8.07% 2017 would imply a securitycarrying a coupon rate of 8.07%, payable semi-annually on the face value ofRs.100, and maturing in the year 2017.

Demat account for trading in Government Securities –Government Securities can be held in the same demat a/c used for equities.

The market lot and the tick size in the retail G-Sec market –The market lot is 10 (i.e. minimum face value of Rs.1000). The tick size isone paisa.

The settlement cycle on the exchanges -The settlement in G-Sec would take place either on a T+0, T+1 or T+2basis. Where 'T' stands for the trade date, and '0', '1', '2' implies the numberof business days. i.e. On a given week having no holidays (As per the Stockexchange list) a trade taking place on Monday with T+0 cycle will besettled on Monday, a trade taking place on Saturday with T+1 cycle will besettled the next Monday and so on.

Effect of shut period on trading in stock exchangesIn case of a security going into the shut period on the WDM, it would besuspended on the exchanges 1 working day prior to the IP date.For e.g. say a security's IP date is 28th Jan 2005, the security would in gothe shut period on 27th Jan 2005 in the Wholesale Debt market.

Intra-day short selling permittedAn individual can do intra-day short sales.

Quoting of Government Securities on the stock exchangesThe prices will be quoted on a dirty price (clean price + accrued interest)basis.


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Interest Rate risk : Interest rate risk, market risk or price risk areessentially one and the same. Theses are typical of any fixed couponsecurity with a fixed period-to-maturity. This is on account of an inverserelation between price and interest. As interest rates rise, the price of asecurity will fall. However, this risk can be completely eliminated incase aninvestor's investment horizon identically matches the term of the security.

(Re-investment risk) : This risk is again akin to all those securities, whichgenerate intermittent cash flows in the form of periodic coupons. The mostprevalent tool deployed to measure returns over a period of time is theyield-to-maturity (YTM) method. The YTM calculation assumes that thecash flows generated during the life of a security is re-invested at the rate ofthe YTM. The risk here is that the rate at which the interim cash flows arere-invested may fall thereby affecting the returns.

Default risk : This kind of risk in the context of a Government security isalways zero. However, these securities suffer from a small variant ofdefault risk i.e., maturity risk. Maturity risk is the risk associated with thelikelihood of the government issuing a new security in place of redeemingthe existing security. In case of Corporate Securities it is referred to asCredit Risk.

What factors determine interest rates?When we talk of interest rates, there are different types of interest rates - rates thatbanks offer to their depositors, rates that they lend to their borrowers, the rate atwhich the Government borrows in the bond/G-Sec, market, rates offered to smallinvestors in small savings schemes like NSC rates at which companies issue fixeddeposits etc.The factors which govern the interest rates are mostly economy related and arecommonly referred to as macroeconomic. Some of these factors are:1) Demand for money2) Government borrowings3) Supply of money4) Inflation rate5) The Reserve Bank of India and the Government policies which determine someof the variables mentioned above.

What is a Repo trade and how is it different from a normal buy or selltransaction?


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An outright Buy or sell transaction is a one where there is no intended reversal ofthe trade at the point of execution of the trade. The Buy or sell transaction is anindependent trade and is in no way connected with any other trade at the same or alater point of time. A Ready Forward Trade (which is normally referred to as aRepo trade or a Repurchase Agreement) is a transaction where the said trade isintended to be reversed at a later point of time at a rate which will include theinterest component for the period between the two opposite legs of thetransactions.So in such a transaction, one participant sells securities to other with an agreementto purchase them back at a later date. The trade is called a Repo transaction fromthe point of view of the seller and it is called a Reverse Repo transaction frompoint of view of the buyer. Repos therefore facilitate creation of liquidity bypermitting the seller to avail of a specific sum of money (the value of the repotrade) for a certain period in lieu of payment of interest by way of the differencebetween the two prices of the two trades. Repos and reverse repos are commonlyused in the money markets as instruments of short-term liquidity management andcan also be termed as a collateralized lending and borrowing mechanism. Banksand Financial Institutions usually enter into reverse repo transactions to managetheir reserve requirements or to manage liquidity.

What are the type of transactions which take place in the market?The following two types of transactions take place in the Indian markets:

Direct transactions between banks and other wholesale market participantswhich account for around 25% of the Wholesale Market volumes: Here theBanks and the Institutions trade directly between themselves either throughthe telephone or the NDS system of the RBI.

Broker intermediated transactions, which account for around 70-75% of thetrades in the market. These brokers need to be members of a RecognizedStock Exchange for RBI to allow the Banks, Primary Dealers andInstitutions to undertake dealings through them.

What are the three modules in the GILT system?GILT permits trading in the Wholesale Debt Market through the three followingavenues:

Order Grabbing System - which provides for active interaction between themarket participants in keeping with the negotiated deal structure of themarket.

Negotiated Deal Module - This permits the reporting of trades undertakenby the market participants through the members of the Exchange.

Cross Deal Module - permitting reporting of trades undertaken by twodifferent market participants through a single member of the Exchange.


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11.) AUCTION OF SECURITIES:

Auction is a process of calling of bids with an objective of arriving at the marketprice. It is basically a price discovery mechanism. There are several variants ofauction. Auction can be price based or yield based. In securities market we comeacross below mentioned auction methods.

(a) French Auction System: After receiving bids at various levels of yieldexpectations, a particular yield level is decided as the coupon rate. Auctionparticipants who bid at yield levels lower than the yield determined as cut-off getfull allotment at a premium. The premium amount is equivalent to price equateddifferential of the bid yield and the cut-off yield. Applications of bidders who bidat levels higher than the cut-off levels are out-right rejected. This is primarily aYield based auction.

(b) Dutch Auction Price: This is identical to the French auction system asdefined above. The only difference being that the concept of premium does notexist. This means that all successful bidders get a cut-off price of Rs. 100.00 anddo not need to pay any premium irrespective of the yield level bid for.

(c) Private Placement: After having discovered the coupon through the auctionmechanism, if on account of some circumstances the Government / Reserve Bankof India decides to further issue the same security to expand the outstandingquantum, the government usually privately places the security with Reserve Bankof India. The Reserve Bank of India in turn may sell these securities at a later datethrough their open market windiow albeit at a different yield.

(d) On-tap issue: Under this scheme of arrangements after the initial primaryplacement of a security, the issue remains open to yet further subscriptions. Theperiod for which the issue remains open may be sometimes time specific orvolume specific.


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THE TERM GOVERNMENT SECURITIES INCLUIDES:-

Central Government Securities

State Government Securities

Treasury Bills

Issuer Instruments

Central Government Treasury Bills, Dated Securities, Zero CouponBonds, Coupon Bearing bonds, Partly paidStocks, Capital Index Bonds, Floating RateBonds, Inflation Index Bonds, STRIPS

State Governments State Government loans, Coupon bearingbonds,


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12.) SECURITIES ISSUED BY CENTRAL GOVERNMENT -

Issuer Instruments

Central Government Treasury Bills, Dated Securities, Zero CouponBonds, Coupon Bearing bonds, Partly paid Stocks,Capital Index Bonds, Floating Rate Bonds,Inflation Index Bonds, STRIPS

12.1) TREASURY BILLS:

In the short term, the lowest risk category instruments are the Treasury Bills (TBs)issued by Central government. RBI on behalf of central government issues them ata prefixed day and for a fixed amount. The TBs are issued with varying maturityusually not exceeding more than one year.They are issued for different maturities viz. 14-day, 28 days (announced in Creditpolicy but yet to be introduced), 91 days, 182 days and 364 days. 14 days T-Billshad been discontinued recently. 182 days T-Bills were not re-introduced.

TREASURYBILLS

91-Day T-Bill 182-Day T-Bill 364- Day T Bill


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91-Day T-Bill-- (Tenor is of 91 days) Its auction is on every Wednesday ofthe week and issued on following Friday. The notified amount for this auctionis Rs. 500 crore.

182-Day T- Bill-- (Tenor is of 182 days) Its auction is on every alternateWednesday (which is not a reporting week) and issued on Friday. The notifiedamount for this auction is Rs. 500 crore.

364-Day T- Bill-- (Tenor is of 364 days) Its auction is on every alternateWednesday (which is a reporting week) and issued on Friday. The notifiedamount for this auction is Rs. 1000 crore.

These Bills are now issued for only two tenures, namely 91 days and 364 days.A considerable part of the central government's borrowing happens throughTreasury Bills of various maturities. Based on the bids received at the auctions,RBI decides the cut off yield and accepts all bids below this yield.

Banks are the major investors in these instruments as they can park theirshort-term surpluses and also since it forms part of their SLR investments. Besidesbanks other investors in TBs are insurance companies, primary dealers, mutualfunds, FIs and FIIs.

These TBs, which are issued at a discount, can be traded in the market.Most of the time, unless the investor requests specifically, they are issued not assecurities but as entries in the Subsidiary General Ledger (SGL), which ismaintained by RBI. The transactions cost on TBs are non-existent and trading isconsiderably high in each bill, immediately after its issue and immediately beforeits redemption.

The yield on TBs is mainly dependent on the rates prevalent in Call/Noticemarket. Low yield on TBs, generally a result of high liquidity in banking systemas indicated by low call rates, would divert the funds from this market to othermarkets. This would be particularly so, if banks already hold the minimumstipulated amount (SLR) in government paper.

12.2) DATED SECURITIES

Government paper with tenor beyond one year is known as dated security. Atpresent, there are Central Government dated securities with a tenor up to 30 yearsin the market. These securities generally carry a fixed coupon (interest) rate andhave a fixed maturity period. e.g. an 11.40% GOI 2008 G-sec. In this case 11.40%


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is the coupon rate and it is maturing in the year 2008. The salient features of DatedSecurities are:

These are issued at the face value. The rate of interest and tenure of the security is fixed at the time of issuance

and does not change till maturity. The interest payment is made on half yearly rest. On maturity the security is redeemed at face value.

Auction/Sale: - Dated securities are sold through auctions. Fixed couponsecurities are sometimes also sold on tap that is kept open for a few days.

Announcement: - A half yearly calendar is issued in case of Central Governmentdated securities, indicating the amounts, the period within which the auction willbe held and the tenor of the security, which is made available on Reserve Bank’swebsite. The Government of India and the Reserve Bank also issue a press releaseto announce the sale, a few days (normally a week) before the auction.

Amount: - Subscriptions can be for a minimum amount of Rs.10,000 and inmultiples of Rs.10,000.

Where are the sales held?Auctions are conducted electronically on PDO-NDS system. The bids aresubmitted by the members on PDO-NDS system both on their own behalf as wellas on behalf of their clients.

Payment: - The payment by successful bidders is made on the issue date, asspecified in the auction notification, usually the working day following the auctionday.

12.3) ZERO COUPON BONDS

Zero Coupon Bonds (ZCBs) were introduced on January 17, 1994. ZCBs, whichdo not have regular interest(coupon) payments like traditional bonds, are sold at adiscount and redeemed at par on final maturity. The ZCBs were beneficial, both tothe Government because of the deferred payment of interest and to the investorsbecause of the lucrative yield and absence of reinvestment risk. These securitiesare issued at a discount to the face value and redeemed at par. i.e. they are issuedat below face value and redeemed at face value.

The salient features of Zero Coupon Bonds are:


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The tenure of these securities is fixed. No interest is paid on these securities. The return on these securities is a function of time and the discount to face

value.

12.4) PARTLY PAID STOCK

Par tly paid stock was introduced on November 14, 1994 whereby payment for theGovernment stock was made in four equal monthly instalments. Designed forinstitutions with regular flow of investible resources requiring regular investmentavenues, this instrument attracted good market response and was actively traded.There was, however, only one more issue of partly paid stock on June 24, 1996In these securities the payment of principal is made in installments over a givenperiod of time.The salient features of Partly Paid Stock are:

These types of securities are issued at face value and the principal amountis paid in installments over a period of time.

The rate of interest and tenure of the security is fixed at the time of issuanceand does not change till maturity.

The interest payment is made on half yearly rest. These are redeemed at par on maturity.

12.5) FLOATING RATE BONDS

Floating Rate Bonds (FRBs) were first issued on September 29, 1995 but werediscontinued after the first issuance due to lack of market enthusiasm. They werereintroduced on November 21, 2001 on demand from market participants, withsome modification in the structure. Although there was initially an overwhelmingmarket response to these issuances, FRBs were discontinued due to the waningmarket interest reflected in the partial devolvement in the last two auctions on theReserve Bank and PDs. Erosion in the market interest for FRBs at that time was,inter alia, due to strong credit pick-up and low secondary market liquidity inFRBs.

These types of securities have a variable interest rate, which is calculated as afixed percentage over a benchmark rate. The interest rate on these securitieschanges in sync with the benchmark rate.The salient features of Floating Rate Bonds are:

These are issued at the face value.


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The interest rate is fixed as a percentage over a predefined benchmark rate.The benchmark rate may be a bank rate, Treasury bill rate etc.

The interest payment is made on half yearly rests. The security is redeemed at par on maturity, which is fixed.

12.6) CAPITAL INDEXED BONDS

A capital indexed bond (CIB) was issued on December 29, 1997 with a maturityof 5 years. The bond provided for inflation hedging for the principal, while thecoupons of the bond were not protected against inflation. The issue of this bondmet with lackluster response, both in the primary and the secondary markets due tothe limited hedging against inflation. Therefore, there were no subsequentissuances. An attempt is being made to reintroduce these bonds and towards thisend, a discussion paper was also widely circulated in May 2004. The proposedmodified structure of the CIB would be in line with the internationally popularstructure, which offers inflation linked returns on both the coupons and principalrepayments at maturity. The inflation protection for the coupons and the principalrepayment on the bond would be provided with respect to the Wholesale PriceIndex (WPI) for all commodities (1993-94=100).

These securities carry an interest rate, which is calculated as a fixed percentageover the wholesale price index. The salient features of Capital Indexed Bonds are:

These securities are issued at face value. The interest rate changes according to the change in the Wholesale price

index, as the interest rate is fixed as a percentage over the wholesale priceindex.

The maturity of these securities is fixed and the interest is payable on halfyearly rests.

The principal redemption is linked to the Wholesale price index.

Inflation linked bonds:A bond is considered indexed for inflation if the payment of coupons is indexed byreference to the change in the value of a general price or wage index over the termof the instrument. The options are that either the interest payments are adjusted forinflation or the principal repayment or both.

Out of the existing measures of inflation in India, viz., Consumer PriceIndex (CPI), GDP deflator and the Wholesale Price Index (WPI), the WPI emergesas the best index for the CIB. Thus, the WPI for All commodities (1993-94=100)released by the Office of the Economic Adviser, Ministry of Commerce andIndustries, Government of India would be taken as the index for measuring the


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inflation rate for the proposed bonds. However, for the purpose of inflationprotection the monthly average of WPI (average of weeks) as worked out by theReserve Bank of India, instead of WPI at the last week of the month, would beused as it smoothens the weekly variability in WPI and its effect on the marketprice of the bonds.

12.7) COUPON BEARING BOND

“Coupon bearing bond”- A bond that pays fixed cash flow every year, until itmatures at date T when it also pays the face value of the bond.Eg: B1 with face value of Rs.100, maturity T = 5and annual cash flow of Rs.10 looks like:(10, 1), (10, 2), (10, 3), (10, 4), (110, 5)

12.8) Government securities with embedded call and put optionswere introduced in July 2002 for a 10-year maturity using uniform price basedauction method. On these securities, the Government has the discretion to exercisethe ‘call option’, after giving a notice of two months, whereby the securities maybe prematurely redeemed at par on or after completion of five years tenure fromthe date of issuance of securities on any coupon payment date falling thereafter.The holders of the Government stock also have the discretion to exercise ‘putoption’ whereby premature redemption may be made under the same conditions asthe call option. There was only one issuance of this instrument.

12.9) STRIPS

STRIPS is the acronym for Separate Trading of Registered Interest and PrincipalSecurities. Stripping is the process of separating a standard coupon-bearing bondinto its individual coupon and principal components. In an official STRIPS marketfor the Government securities, these stripped securities i.e., the newly created zerocoupon bonds remain the direct obligations of the Government and are registeredin the books of the agent meant for this purpose. Thus the mechanics of strippingneither impacts the direct cost of borrowing nor change the timing or quantum ofthe underlying cash flows; stripping only facilitates transferring the right toownership of individual cash flows


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Advantages:STRIPS would facilitate the availability of zero coupon bonds (ZCBs) to theinvestors and traders. They provide the most basic cash flow structure thusoffering the advantage of more accurate matching of liabilities withoutreinvestment risk and a precise management of cash flows. Thus to some investorswho set the incoming inflows against an actuarial book (eg. Insurance companies),STRIPS offer excellent investment choices. Apart from the advantages they offerto low risk investors like pension funds and insurance companies, STRIPS offermuch greater leverage to hedge funds, since the zero coupon bonds are morevolatile than the underlying coupon bearing bonds. Last but not the least, STRIPSoffer an excellent scope to construct a zero yield curve for the sovereign bondmarket.

FungibilityAn important feature of the STRIPS market is that the coupon STRIPS of the samedate from different stocks are fungible - meaning that they are just not identicalbut exchangeable. Thus when a few coupon bearing bonds sharing the samecoupon payment dates are stripped, it may not be possible to distinguish thecoupon STRIPS created out of all these bonds. All STRIPS will have a uniquecode number to identify. Going by the same logic, these coupon STRIPS could beused to complete the reconstitution of any of those original coupon bearing bondswhose coupon payment dates fall on the same date (provided the purchaser holdsall the other coupon and principal STRIPS).

Minimum Reconstitutable and Strippable amountFor operational convenience the size of coupon STRIPS and principal STRIPSshould be in whole paise so as to allow reconstitution. For example, for a 11.99per cent Government stock, 2009, it will not be possible to reconstitute to, say, anamount of Rs.500, since the necessary coupon STRIPS would be Rs.29.975.Across the Stocks, it would be possible to reconstitute if the standard minimumcoupon strip is Rs.1,000. Accordingly, the minimum strippable amount could beeither kept at Rs.1,000 or Rs.10,000 and be increased in similar multiples.

Trading and pricingThere are two things that determine the prices of STRIPS viz., (i) the marketmechanism of supply and demand and (ii) the prices of the underlying strippableand similar non-strippable stocks. Since STRIPS are the component parts of theunderlying stock from which they are created, theoretically, the price of anystrippable stock should be exactly equal to the sum of the prices of all itscomponent parts.


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13.) ZERO COUPON YIELD CURVE

The yield to maturity for coupon bonds is capable of several algebraicallyequivalent definitions A straight forward definition of yield to maturity is thesingle discount rate that equates the bond’s cash flows to the market price of thebond. But a coupon paying bonds can be viewed as a combination of separatebonds of varying maturities (of the coupons and the principal). From this point ofview , it is reasonable to ask what the rate of interest on each of these loans are. Ingeneral any bond can be represented by an equation of the form:P= C1/(1+0F1) + C1/{(1+0F1)(1+1F2)} +C1/{(1+0F1)(1+1F2)(1+2F3)} + …….Where iFr = Discount rate for cash flows at the end of r period ( i.e. the cash flowr-i periods from i th period. ). The rates represented by F’s are also known asforward rates and they are related to the zero coupon rates (i.e. the rate at which asingle cash flow at any point of time in the future is discounted) by the followingequation:(1+ rk )k = (1+ri)

i x (1+ iFk)(k-i) where rk is the k period discount rate and r1=

0F1

The point that is to be emphasized about the zero coupon rates are that they areunique for a given period . To illustrate , if we say that the 6 monthly zero couponrate is 9.63%, then all cash flows for any bonds 6 months from now have to bediscounted by 9.63% i.e. zero coupon discount rates are period specific and notbond specific. A zero coupon curve is the great invisible reality of the of the fixedincome markets and it solves the bulk of the pricing problems in fixed incomemarkets (ignoring default risk).The pricing of securities based on Yield to Maturity (YTM) suffers from thedefect that although a security represents a series of cash flows occurring atdifferent points of time, they are discounted at the same rate. Hence the YTM canbe regarded as a weighted average discount rate for forward rates where theweights are the corresponding cash flows . Since the cash flows of a bond isunique, so is its YTM. In fact, if the forward curve is sharply upward sloping, theYTM of a low coupon security should be more than a high coupon security ofidentical tenor. This coupon effect, as it is known, is totally missed if the decisionsare based on YTM. With the introduction of STRIPS, the pricing of the primarymarket offerings have also to be oriented towards zero coupon valuation methodso as to address the problems of valuation arising out of YTM methodology.

Who can strip and reconstituteStripping/reconstitution may be allowed to be performed by only a limited numberof intermediaries along with the debt manager on the specific requisition from theholders.


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Role of Government Securities Yield Curve as a Public Good-

Yield curve, also known as term structure of interest rates, is the representation ofzero coupon yields of a series of maturities at a point of time. It is constructed byplotting the yields against the respective maturity periods of benchmark fixed-income securities. The yield curve is a measure of market’s expectations of futureinterest rates, given the current market conditions. Securities issued by theGovernment are considered risk-free, and as such, their yields are often used as thebenchmarks for fixed-income securities with the same maturities.

Graphic Representation of a Normal Yield Curve

The difference between short and long ends of the yield curve (spread) determinesthe shape of the curve which is an important indicator of the expected performanceof the economy and inflation. Since the government securities yield curverepresents the risk-free interest rates, it is used for pricing other instruments ofvarious maturities. The yield

The difference between short and long ends of the yield curve (spread) determinesthe shape of the curve which is an important indicator of the expected performanceof the economy and inflation. Since the government securities yield curverepresents the risk-free interest rates, it is used for pricing other instruments ofvarious maturities. The yield curve has informational value to bond issuers forpricing as well as timing of their issue depending on the expected performance ofthe economy. Investors can also use the curve in choosing the right tenor ofinvestment. For overseas investors, expected performance of different countriescould be compared by looking at the respective yield curves to make investmentdecisions.

Most other interest rates are measured on the basis of the government securitiesyield curve, viz., credit curve and swap curve. Similarly pricing of other financial


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instrument uses the government securities yield curve in some form or the other.Thus, the yield curve acts as a kind of public good that is used constantly byparticipants in the financial system.

The efficiency of the yield curve as a public good is enhanced under the followingtwo conditions. First, macroeconomic volatility, especially inflation volatility,must be low so that a nominal yield curve is informative about the real cost ofborrowing. Second, the government must issue a sufficient volume of debt. Yieldis described as an apparatus which allows abstraction of irrelevant factors andfocuses on factors relevant for interest rate risk on portfolios (Krstic andMarinkovic,1997).

The fact that the yield curve acts as a public good enjoins upon all participants, inparticular the regulators, the responsibility of ensuring that it is free from anyundesirable and manipulative influence, as this would lead to a loss in itsinformational value and result in market inefficiency brought about by incorrectpricing of other financial instruments.

One of the key features of development of the government securities marketis the evolution of yield curve over a reasonably long period. The upward slopingyield curve, which is considered to be the usual term structure, may reflect eitherthe presence of interest rate risk premium or the so called Hicksian liquiditypremiums, or it may simply reflect the market’s anticipation about the upwardtrend in the general level of interest rates over the period. Theoretical analysisconfirms that in an efficient market, yield curve will solely depend upon themarket’s response to collective beliefs about future interest rate movements, i.e.,interest rates derived from the prevailing term structure of interest rates are correctforecast of future interest rates. Thus, development of the government securitiesmarket is essential for establishing the risk-free benchmarks in financial marketsand ensuring their functioning in an efficient manner.


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14.) SECURITIES ISSUED BY STATE GOVERNMENT -

Issuer Instruments

State Governments State Government loans/StateDevelopment loan, coupon bearingbond

14.1) State Government Securities/State Development loans

These are securities issued by the state governments and are also known as StateDevelopment Loans (SDLs). The issues are also managed and serviced by theReserve Bank of India.The tenor of state government securities is normally ten years. State governmentsecurities are available for a minimum amount of Rs.10,000 and in multiples ofRs.10,000. These are available at a fixed coupon rate. The auctions for StateGovernment securities are held electronically on PDO-NDS module.

Nine State Governments announce auctions ofState Development Loans 2017 for Rs.3482.129 crore on June 19 2007

State government debt issuances are largely long-term and in the local currency, asstates are not permitted to issue debt in foreign currencies directly. The typicallong-term debt is a 25-year fixed-rate loan with a five-year grace period. Two ofthe main debt types are loans against small savings, which are subscribed by thepublic, and market loans, which are bought by banks.

14.2) Coupon bearing bond

“Coupon bearing bond” A bond that pays fixed cash flow every year, until itmatures at date T when it also pays the face value of the bond.Eg: B1 with face value of Rs.100, maturity T = 5and annual cashflow of Rs.10 looks like:(10, 1), (10, 2), (10, 3), (10, 4), (110, 5)


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15.) MANDATED INVESTMENTS IN GOVERNMENTSECURITIES:

Banks are the largest investors in government securities. In terms of the SLRprovisions of the Banking Regulation Act, 1949, banks are required to maintain aminimum of 25 per cent of their net demand and time liabilities (NDTL) in liquidassets such as cash, gold and unencumbered government securities or otherapproved securities as Statutory Liquidity Ratio (SLR). The minimum SLRstipulation for scheduled urban co-operative banks (UCBs) is the same as forscheduled commercial banks (SCBs) from April 1, 2003. However, for non-scheduled UCBs, the minimum SLR requirement is 15 per cent for banks withNDTL of over Rs.25 crore and 10 per cent for the remaining non-scheduledUCBs. The minimum SLR stipulation for regional rural banks (RRBs) is the sameas for SCBs. From April 1, 2003, the coverage under the SLR has also been madeakin to SCBs. All deposits with sponsor banks, which were earlier considered aspart of the SLR, were to be converted into approved securities on maturity in orderto be reckoned for the SLR purpose. Recently, the Banking RegulationAmendment Act, 2007 has removed the floor limit of 25 per cent for SLR forscheduled banks.

The second largest category of investors in the government securities market is theinsurance companies. According to the stipulations of the Insurance Regulationand Development Authority of India (IRDA), all companies carrying out thebusiness of life insurance should invest a minimum of 25 per cent of theircontrolled funds in government securities. Similarly, companies carrying ongeneral insurance business are required to invest 30 per cent of their total assets ingovernment securities and other guaranteed securities, of which not less than 20per cent should be in Central Government securities. For pension and generalannuity business, the IRDA stipulates that 20 per cent of their assets should beinvested in government securities.

The non-Government provident funds, superannuation funds and gratuity fundsare required by the Central Government from January 24, 2005 to invest 40 percent of their incremental accretions in Central and State government securitiesand/or units of gilt funds regulated by the Securities and Exchange Board of India(SEBI) and any other negotiable securities fully and unconditionally guaranteed bythe Central/State Governments. The exposure of a trust to any inpidual gilt fund,however, should not exceed five per cent of its total portfolio at any point of time.


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Non-banking financial companies (NBFCs) accepting public deposits are requiredto maintain 15 per cent of such outstanding deposits in liquid assets, of which notless than 10 per cent should be maintained in approved securities, includinggovernment securities and government guaranteed bonds. Investment ingovernment securities should be in dematerialised form, which can be maintainedin Constituents’ Subsidiary General Ledger (CSGL) Account of a SCB/StockHolding Corporation of India Limited (SHCIL). In order to increase the securityand liquidity of their deposits, residuary non-banking companies (RNBCs), arerequired to invest not less than 95 per cent of their aggregate liability to depositors(ALD) as outstanding on December 31, 2005 and entire incremental deposits overthis level in directed investments, which include government securities, rated andlisted securities and debt oriented mutual funds. From April 1, 2007, the entireALD is required to be invested in directed investments only.

Measures were taken to promote voluntary holding of government securitiesamong other investor categories. For this purpose, specialised institutions weredeveloped. The Discount and Finance House of India (DFHI), set up in April1988, primarily for developing the money market, was also allowed to participatein the government securities market. In order to develop an efficient institutionalinfrastructure for an active secondary market in government securities and publicsector bonds, the Securities Trading Corporation of India (STCI) commenced itsoperations in June 1994. With the introduction of the PD system, both DFHI andSTCI later transformed themselves into PDs.


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16.) BENEFITS OF INVESTING IN A GOVERNMENTSECURITY-

The Benefits of investing in a Government Security are:1. Safety: The Zero Default Risk is the greatest attraction for investments inGovernment Securities. It enjoys the greatest amount of security possible, as theGovernment of India issues it. Hence they are also known as Gilt-Edged Securitiesor 'Gilts'.

2. Fixed Income: During the term of the security there is likely to be fluctuationsin the Government Security prices and thus there exists a price risk associated withinvestment in Government Security. However, the return on the holding ofinvestment is fixed if the security is held till maturity and the effective yield at thetime of purchase is known and certain. In other words the investment becomes afixed income investment if the buyer holds the security till maturity.

3. Convenience: Government Securities do not attract deduction of tax at source(TDS) and hence the investor having a non-taxable gross income need not file areturn only to obtain a TDS refund.

4. Simplicity: To buy and sell Government Securities all an individual has to dois call his / her Equity Broker and place an order. If an individual does not trade inthe Equity markets, he / she has to open a demat account and then can commencetrading through any Equity broker.

5. Liquidity: Government Security when actively traded on exchanges will behighly liquid, since a national trading platform is available to the investors.

6. Diversification Government Securities are available with a tenor of a fewmonths up to 30 years. An investor then has a wide time horizon, thus providinggreater diversification opportunities.

Factors that affect the price of a Government Security –These are the factors which affect the price of the securities –

Demand and supply Economic conditions. General money market conditions including the position of money

supply, in the economy. Interest rates prevalent in the market and the rates of new issues. Credit quality of the issuer.


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17.) PUBLIC SECTOR BONDS -


Public Sector Government Agencies /Statutory Bodies

Govt. Guaranteed Bonds,Debentures

Public Sector Units PSU Bonds, Debenture,Commercial Paper

17.1) GOVT. GUARANTEED BONDS:IntroductionState Governments have been issuing a large amount of guarantees and letters ofcomfort on behalf of public sector undertakings (PSUs) at the State level, co-operative societies and State Cooperative Banks (StCBs) for the purpose of publicinvestment, particularly in resource-intensive infrastructure sector and forpromotion of rural development, to enable the PSUs to mobilise resources.

Lenders/investors in State guaranteed papers:

A. Banking Entitiesa) Commercial Banksb) Rural Co-operative Banksc) Urban Co-operative Banks

B. Financial Institutionsa) National Bank for Agriculture and Rural Development (NABARD)b) National Housing Bank (NHB)c) Small Industries Development Bank of India (SIDBI)d) Life Insurance Corporation of India (LIC)e) Housing and Urban Development Corporation (HUDCO)f) Rural Electrification Corporation (REC)g) Power Finance Corporation (PFC)h) Other Public Financial Institutions (PFIs)

C. Others


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a) Public and Private Sector Provident Funds (PFs);b) Charitable Trustsc) National Co-operatives Development Corporation (NCDC)d) Non-Banking Financial Corporations (NBFCs)

GUARANTEE FEE

Table 2: Structure of Guarantee Fee/Commission in Some Indian States:March 2001

(per cent of guaranteed amount)

Sl.No States Structure of Guarantee Fee

1 AndhraPradesh

0.5% to 2%

2 Karnataka A floor fee of 1 per cent

3 Rajasthan 0.1 to 1 per cent

4. Orissa 0.02% - 0.5% for Cooperative institutions,housing, local bodies and state PSEs 1% for other guarantees and bonds; NABARD and other agriculture relatedguarantees are exempted

5 Gujarat 1%, some state PSEs are exempt while 0.25% ischarged for open market borrowing that forms partof the state annual plan.

6 WestBengal

A floor of 1 % is kept, but rises with greaterdefault perception of the project

7 Kerala 0.75 per cent


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8 Mizoram No Guarantee fee is charged

9 Punjab 2 % for term loans, 1/8% for procurementagencies

The Reserve Bank has also organized a workshop on 'Risk Evaluation on StateGuarantees' to help State Government officials to analyse the risk of defaults onState Government guarantees.

17.2) PSU BONDS

Public Sector Undertaking Bonds (PSU Bonds): These are Medium or longterm debt instruments issued by Public Sector Undertakings (PSUs). The termusually denotes bonds issued by the central PSUs (i.e. PSUs funded by and underthe administrative control of the Government of India). Most of the PSU Bondsare sold on Private Placement Basis to the targeted investors at Market DeterminedInterest Rates. Often investment bankers are roped in as arrangers to this issue.Most of the PSU Bonds are transferable and endorsement at delivery and areissued in the form of Usance Promissory Note.In case of tax free bonds, normally such bonds accompany post dated interestcheque / warrants.

17.3) COMMERCIAL PAPERS

It was introduced in India in 1990 with a view to enabling highly rated corporateborrowers/ to diversify their sources of short-term borrowings and to provide anadditional instrument to investors. Subsequently, primary dealers and satellitedealers were also permitted to issue CP to enable them to meet their short-termfunding requirements for their operations.CPs are negotiable short-term unsecured promissory notes with fixed maturities,issued by well rated companies generally sold at a discount basis. These arebasically instruments evidencing the liability of the issuer to pay the holder in duecourse a fixed amount (face value of the instrument) on the specified due date.

ISSUER: Corporates and primary dealers (PDs), and the all-India financialinstitutions (FIs) that have been permitted to raise short-term resources under the


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umbrella limit fixed by Reserve Bank of India are eligible to issue CP.

Rating RequirementThe minimum credit rating shall be P-2 of Credit Rating Information Services ofIndia Ltd (CRISIL) or such equivalent rating by other agencies. Like- Investment Information and Credit Rating Agency of India Ltd. (ICRA) or- Credit Analysis and Research Ltd. (CARE) or- FITCH Ratings India Pvt. Ltd. or such other credit rating agencies as may bespecified by the Reserve Bank of India from time to time, for the purpose.

MaturityCP can be issued for maturities between a minimum of 7 days and a maximum upto one year from the date of issue.

DenominationsCP can be issued in denominations of Rs.5 lakh or multiples thereof. Amountinvested by a single investor should not be less than Rs.5 lakh (face value).

Limits and the Amount of Issue of CPCP can be issued as a "stand alone" product. The aggregate amount of CP from anissuer shall be within the limit as approved by its Board of Directors or thequantum indicated by the Credit Rating Agency for the specified rating, whicheveris lower. Banks and FIs will, however, have the flexibility to fix working capitallimits duly taking into account the resource pattern of companies' financingincluding CPs.

Issuing and Paying Agent (IPA)Only a scheduled bank can act as an IPA for issuance of CP.

Investment in CPCP may be issued to and held by individuals, banking companies, other corporatebodies registered or incorporated in India and unincorporated bodies, Non-Resident Indians (NRIs) and Foreign Institutional Investors (FIIs)..

Mode of IssuanceCP can be issued either in the form of a promissory note or in a dematerialisedform through any of the depositories approved by and registered with SEBI. CPwill be issued at a discount to face value as may be determined by the issuer. Noissuer shall have the issue of CP underwritten or co-accepted.

17.4) Debenture (please refer to private sector)


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18.) PRIVATE SECTOR -


Private Corporate Debentures, Bonds, CommercialPaper, SPN, Floating Rate Bonds,Zero Coupon Bonds, Inter-Corporate Deposits

Banks Certificate of Deposits, Bonds

FinancialInstitutions

Certificate of Deposits, Bonds

The Indian Corporate Bond Market

18.1)) CORPORATE BONDSCorporate bonds are debt securities issued by private and public corporations.Companies issue corporate bonds to raise money for a variety of purposes, such asbuilding a new plant, purchasing equipment, or growing the business. When onebuys a corporate bond, one lends money to the "issuer," the company that issuedthe bond. In exchange, the company promises to return the money, also known as"principal," on a specified maturity date. Until that date, the company usually paysyou a stated rate of interest, generally semiannually. While a corporate bond givesan IOU from the company, it does not have an ownership interest in the issuingcompany, unlike when one purchases the company's equity stock.

YieldsYield is a critical concept in bond investing, because it is the tool used to measurethe return of one bond against another. It enables one to make informed decisionsabout which bond to buy. In essence, yield is the rate of return on bondinvestment. However, it is not fixed, like a bond’s stated interest rate. It changes toreflect the price movements in a bond caused by fluctuating interest rates. Thefollowing example illustrates how yield works.

You buy a bond, hold it for a year while interest rates are rising and thensell it.


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You receive a lower price for the bond than you paid for it because, no onewould otherwise accept your bond’s now lower-than-market interest rate.

Although the buyer will receive the same amount of interest as you did andwill also have the same amount of principal returned at maturity, thebuyer’s yield, or rate of return, will be higher than yours, because the buyerpaid less for the bond.

Yield is commonly measured in two ways, current yield and yield tomaturity.

Current yield The current yield is the annual return on the amount paid for a bond,

regardless of its maturity. If you buy a bond at par, the current yield equalsits stated interest rate. Thus, the current yield on a par-value bond paying6% is 6%.

However, if the market price of the bond is more or less than par, thecurrent yield will be different. For example, if you buy a Rs. 1,000 bondwith a 6% stated interest rate at Rs. 900, your current yield would be 6.67%(Rs. 1,000 x .06/Rs.900).

Yield to maturityIt tells the total return you will receive if you hold a bond until maturity. It alsoenables you to compare bonds with different maturities and coupons. Yield tomaturity includes all your interest plus any capital gain you will realize (if youpurchase the bond below par) or minus any capital loss you will suffer (if youpurchase the bond above par).

Valuation of Corporate BondsCorporate bonds tend to rise in value when interest rates fall, and they fall in valuewhen interest rates rise. The inverse relationship between bonds and interestrates—that is, the fact that bonds are worth less when interest rates rise and viceversa can be explained as follows :-

When interest rates rise, new issues come to market with higher yields thanolder securities, making those older ones worth less. Hence, their prices godown.

When interest rates decline, new bond issues come to market with loweryields than older securities, making those older, higher-yielding ones worthmore. Hence, their prices go up.

As a result, if one sells a bond before maturity, it may be worth more or lessthan it was paid for.


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Market preference for high rated bonds:Investors in corporate debt instruments are excessively safety conscious as couldbe noted form the fact that there is hardly any demand for paper which is ratedbelow AA or its equivalent by the rating companies. World over any paper ratedBBB (or its equivalent) and above is considered as investment grade, except thatthe interest rate to be paid on BBB has to be high enough to compensate for therisk attached to it in relation to the highest rated paper. Basically it is a question ofrisk-reward matrix with higher risk being compensated by higher return. Globallythere is considerable demand for debt paper which is rated below AA. In fact thematurity of the market is often judged by the skill of the investors to factorriskreward matrix in their investment decision so that they do not miss the highreturn opportunities that may exist in the case of BBB rated paper. Judged fromthis matrix it is clear that Indian debt market is yet to mature. This is indicated bythe analysis of the outstanding bond issues with reference to their rating valuesassigned to them by the recognized rating agencies. Over 82percent of the debtpaper is AA and above, as demand for other investment grade paper is not largeenough. The majority of institutional investors by amount in the corporate debtpaper are banks which are all the while in favour of highly rated paper while at thesame extending loans to not so well rated corporate clients. Thus most of thebanks adopt an asymmetric credit evaluation methodology when they are willingto provide loan to a client but unwilling to invest in the debt paper issued by theborrower if the debt paper is not rated very highly by the rating agencies. It ishoped that as the corporate debt market grows in size and becomes deep, liquid,and broad-based investors will start understanding the risk-reward matrix muchmore intelligently. Institutional investors will start to appreciate increasingly therisk-adjusted returns and the arbitrage that the market provides. Table III-4A andIII-4B give the outstanding corporate debt in the market in terms of rating class,issue sizes and no. of issues.

Corporate Bonds- Outstanding Issues (Aug 25, 2005)

Rating Class No. ofIssues

MarketShare

(%)

IssueSize

(Rs.Cr)

MarketShare (%)

MarketCap (Rs.

Cr)

MarketShare (%)

AAA/MAAA 955 61.61 92609 69.81 93872 69.68

AA+/LAA+/MAA+ 320 20.65 19605 14.78 19821 14.71

AA/LAA/MAA 175 11.29 13248 9.99 13692 10.16

AA-/LA- 31 2 1272 0.96 1322 0.98

A+/LA+ 16 1.03 1545 1.16 1559 1.16


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A/LAMA 16 1.03 1512 1.14 1529 1.13

A- 12 0.77 1063 0.8 1065 0.79

BBB+ 11 0.71 833 0.63 877 0.65

BBB/LBBB 8 0.52 722 0.54 25 0.54

B 6 0.39 257 0.19 257 0.19

Grand 1550 100 132666 100 134719 100

Rating Not Available 82 9906 9916

Source: NSE WDM segment

Table-III-4B: Corporate Bonds (Structured Obligations) -Outstanding Issues (Aug 25, 2005)

RatingClass

No. ofIssues

MarketShare(%)

Issue Size(Rs. Cr)

MarketShare(%)

MarketCap (Rs.Cr)

MarketShare(%)

AAA 19 8.6 3116 12.83 3144 12.75

AA+ 6 2.71 175 0.72 175 0.71

AA 5 2.26 263 1.08 267 1.08

AA- 15 6.79 1700 7 1777 7.2

A+/LA+ 24 10.86 3042 12.53 3197 12.96

A/LA 136 61.54 12328 50.77 12671 51.37

A- 10 4.52 1900 7.82 2017 8.18

BBB+ 3 1.36 200 0.82 204 0.83

BBB 2 0.9 840 3.46 495 2.01

BB 1 0.45 718 2.96 718 2.91

Total 221 100 24282 100 24665 100


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18.2) CORPORATE DEBENTURESA Debenture is a debt security issued by a company (called the Issuer), whichoffers to pay interest in lieu of the money borrowed for a certain period. In essenceit represents a loan taken by the issuer who pays an agreed rate of interest duringthe lifetime of the instrument and repays the principal normally, unless otherwiseagreed, on maturity.

These are long-term debt instruments issued by private sector companies. Theseare issued in denomination as low as Rs. 1000 and have maturity ranging betweenone and ten years. Long maturity debentures are rarely issued, as investors are notcomfortable with such maturities.

Debentures enable investors to reap the dual benefits of adequate security andgood returns. Unlike Fixed and Bank Deposit they can be transferred from oneparty to another by using transfer form. Debentures are normally issued inphysical form. However, corporates/PSUs have started issuing debentures inDemat form. Generally, debentures are less liquid as compared to PSU bonds andtheir liquidity is inversely proportional to the residual maturity. Debentures can besecured or unsecured.

Debentures are divided into different categories on the basis of:1. Convertibility of the instrument2. Security

1. Debentures can be classified on the basis of convertibility into:

a) Non-Convertible Debentures (NCD): This type of security retains all thecharacteristic of a debt instruments and it cannot be converted into any other formof security (mainly equity).b) Partly Convertible Debentures (PCD): A part of this instrument can beconverted into Equity share in the future at the instance of issuer. The issuerdecides the ratio of the conversion at the time of subscription.c) Fully convertible Debentures (FCD): These instruments are fully convertibleinto Equity shares at the issuer's notice. The issuer decides the ratio of conversion.Upon conversion the investors enjoy the same status as ordinary shareholders ofthe company.e) Optionally Convertible Debentures (OCD): The investor has the option toeither convert these debentures into shares at price decided by the issuer/agreedupon at the time of issue.

2. On basis of Security, debentures are classified into:


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a) Secured Debentures: These instruments are secured by a charge on the fixedassets of the issuing company. So if the issuer fails on payment of either theprincipal or interest amount, his assets can be sold to repay the liability to theinvestors. This is usually in the form of a first mortgage or charge on the fixedassets of the company on a pari passu basis with other first charge holders likefinancial institutions etc. Sometimes, the charge can also be a second chargeinstead of a first charge. Most of the times the charge is created on behalf of theentire pool of debenture holders by a trustee specifically appointed for thepurpose.

b) Unsecured Debentures: These instruments are unsecured in the sense that ifthe issuer defaults on payment of the interest or principal amount, the investor hasto be along with other unsecured creditors of the company.

(18.3) INTER-CORPORATE DEPOSITS

Apart from CPs, corporates also have access to another market called the InterCorporate Deposits (ICD) market. An ICD is an unsecured loan extended by onecorporate to another. Existing mainly as a refuge for low rated corporates, thismarket allows funds surplus corporates to lend to other corporates. Also the better-rated corporates can borrow from the banking system and lend in this market. Asthe cost of funds for a corporate in much higher than a bank, the rates in thismarket are higher than those in the other markets. ICDs are unsecured, and hencethe risk inherent in high. The ICD market is not well organised with very littleinformation available publicly about transaction details.

(18.4) CERTIFICATE OF DEPOSITS

After treasury bills, the next lowest risk category investment option is thecertificate of deposit (CD) issued by banks and FIs.Allowed in 1989, CDs were one of RBI's measures to deregulate the cost of fundsfor banks and FIs.The rates on these deposits are determined by various factors. Low call rateswould mean higher liquidity in the market. Also the interest rate on one-year bankdeposits acts as a lower barrier for the rates in the market.

Guidelines for Issue of Certificates of Deposit (CDs)as Amended up to June 30, 2006


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IntroductionCertificates of Deposit (CDs) is a negotiable money market instrument and issuedin dematerialised form or as a Usance Promissory Note, for funds deposited at abank or other eligible financial institution for a specified time period.

EligibilityCDs can be issued by (i) scheduled commercial banks excluding Regional RuralBanks (RRBs) and Local Area Banks (LABs); and (ii) select all-India FinancialInstitutions that have been permitted by RBI to raise short-term resources withinthe umbrella limit fixed by RBI.

Aggregate Amount Banks have the freedom to issue CDs depending on their requirements. An FI may issue CDs within the overall umbrella limit fixed by RBI, i.e., issue

of CD together with other instruments, viz., term money, term deposits,commercial papers and inter-corporate deposits should not exceed 100 per centof its net owned funds, as per the latest audited balance sheet.

Minimum Size of Issue and DenominationsMinimum amount of a CD should be Rs.1 lakh, and in the multiples of Rs. 1 lakhthereafter.

Who can SubscribeCDs can be issued to individuals, corporations, companies, trusts, funds,associations, etc. Non-Resident Indians (NRIs) may also subscribe to CDs, butonly on non-repatriable basis which should be clearly stated on the Certificate.Such CDs cannot be endorsed to another NRI in the secondary market.

Maturity The maturity period of CDs issued by banks should be not less than 7 days

and not more than one year. The FIs can issue CDs for a period not less than 1 year and not exceeding 3

years from the date of issue.

Discount/Coupon RateCDs may be issued at a discount on face value. Banks/FIs are also allowed to issueCDs on floating rate basis provided the methodology of compiling the floating rateis objective, transparent and market-based. The issuing bank/FI is free todetermine the discount/coupon rate.

Reserve Requirements


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Banks have to maintain the appropriate reserve requirements, i.e., cash reserveratio (CRR) and statutory liquidity ratio (SLR), on the issue price of the CDs.

TransferabilityPhysical CDs are freely transferable by endorsement and delivery. Dematted CDscan be transferred as per the procedure applicable to other demat securities. Thereis no lock-in period for the CDs.

Loans/Buy-backsBanks/FIs cannot grant loans against CDs. Furthermore, they cannot buyback theirown CDs before maturity.

Format of CDsBanks/FIs should issue CDs only in the dematerialized form. However, accordingto the Depositories Act, 1996, investors have the option to seek certificate inphysical form. Accordingly, if investor insists on physical certificate, the bank/FImay inform Financial Markets Department, Reserve Bank of India, Central Office,Fort, Mumbai - 400001 about such instances separately.

(18.5) SPN

Secured Premium Notes (SPN) with Detachable Warrants: SPN which is issuedalong with a detachable warrant, is redeemable after a notice period, say four toseven years. The warrants attached to it ensure the holder the right to apply and getallotted equity shares; provided the SPN is fully paid.There is a lock-in period for SPN during which no interest will be paid for aninvested amount. The SPN holder has an option to sell back the SPN to thecompany at par value after the lock in period. If the holder exercises this option,no interest/ premium will be paid on redemption. In case the SPN holder holds itsfurther, the holder will be repaid the principal amount along with the additionalamount of interest/ premium on redemption in installments as decided by thecompany. The conversion of detachable warrants into equity shares will have to bedone within the time limit notified by the company.

(18.6) Commercial Papers (Please refer to Public Sector Bond)

(18.7) Floating Interest rate (Please refer to Government securities part)

(18.8) Zero Coupon Bond (Please refer to Government securities part)


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19.) OTHER FIXED INCOME INSTRUMENTS:

1. Company Fixed Deposits2. Employee’s Provident Fund3. Mutual Funds4. Guilt Funds5. Bank Fixed Deposits6. Other prominent government schemes

19.1) COMPANY FIXED DEPOSITS

Fixed Deposits in companies that earn a fixed rate of return over a period of timeare called Company Fixed Deposits. Financial institutions and Non-BankingFinance Companies (NBFCs) also accept such deposits. Deposits thus mobilisedare governed by the Companies Act under Section 58A. These deposits areunsecured, i.e., if the company defaults, the investor cannot sell the documents torecover his capital, thus making them a risky investment option.

Benefits of investing in Company Fixed Deposits

High interest. Short-term deposits. Lock-in period is only 6 months. No Income Tax is deducted at source if the interest income is up to Rs

5,000 in one financial year Investment can be spread in more than one company, so that interest from

one company does not exceed Rs. 5,000

Company Fixed Deposits have always offered interest which is 2-3% higher thanBank Deposit rate, becaue they have to pay higher interest to banks for borrowingmoney.

interest paymentsInterest is paid on monthly/quarterly/half yearly/yearly basis or on maturity,and is sent either through cheque or through Electronic Clearing Systembasis.

TDS is deducted if the interest on fixed deposit exceeds Rs.5000/- in afinancial year.


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Which companies can accept a deposits ?Companies registered under the Companies Act 1956, such as:

Manufacturing Companies. Non-Banking Finance Companies. Housing Finance Companies. Financial Institutions. Government Companies.

Upto what limits can a company accept deposit?

A Non-Banking Non-Finance Company(Manufacturing Company) can acceptdeposits subject to following limits.

Upto 10% of the aggregate of paid-up share capital and free reserves if thedeposits are from shareholders or guaranteed by the directors.

Otherwise upto 25% of the aggregate of paid-up share capital and freereserves.

A Non-Banking Finance Company can accept deposits upto following limits: An Equipment Leasing Company can accept four times of its net owned

fund. A Loan or Investment Company can accept deposit upto one and half time

of its net owned funds.

Period of the depositCompany Fixed Deposits can be accepted by a Manufacturing Company havingduration from 6 months to 3 years. Non-Banking Finance Companies can acceptdeposit from 1 year to 5 years period. A Housing Finance Company can acceptdeposit from 1 year to 7 years.

19.2) EMPLOYEE’S PROVIDENT FUNDS (EPF)

Employee’s Provident funds Act, 1952The Employees Provident Funds and Miscellaneous Provisions Act, provides forcompulsory contributory fund for the future of an employee after his retirement orfor his dependents in case of his early death.It extends to the whole of India except the State of Jammu and Kashmir and isapplicable to:

a. every factory engaged in any industry specified in Schedule 1 inwhich 20 or more persons are employed;

b. every other establishment employing 20 or more persons or class ofsuch establishments which the Central Govt. may notify;


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c. any other establishment so notified by the Central Government evenif employing less than 20 persons.

EMPLOYEES ENTITLEDEvery employee, including the one employed through a contractor (but excludingan apprentice engaged under the Apprentices Act or under the standing orders ofthe establishment and casual laborers), who is in receipt of wages upto Rs. 6,500p.m., shall be eligible for becoming a member of the funds.The condition of three months? continuous service or 60 days of actual work, formembership of the scheme, has been done away with, w.e.f. 1.11.1990. Workersare now eligible for joining the scheme from the date of joining the service.

TERM OF SCHEMEEvery member of the Employees? Pension Fund Scheme shall continue to remainthe member till the earliest happening of any of the following events:

i. he attains the age of 58 years; orii. he avails the withdrawal benefit to which he is entitled vide para 14 of the

scheme; oriii. he dies; oriv. the pension is vested in him.

Every employer shall send to the Commissioner, within three months of thecommencement of the scheme, a consolidated return of the employees entitled tobecome members of the new scheme.

EMPLOYER/S CONTRIBUTIONThe employer is required to contribute the following amounts towards Employees?Provident Fund and Pension Fund

a. In case of establishments? employing less than 20 persons or a sickindustrial (BIFR) company or ?sick establishments? or any establishment inthe jute, beedi, brick, coir or gaur gum industry. ?10% of the basic wages,dearness allowance and retaining allowance, if any.

b. In case of all other establishments? employing 20 or more person-12% ofthe wages, D.A., etc.

A part of the contribution is remitted to the Pension Fund and the remainingbalance continues to remain in Provident Fund account.Where, the pay of an employee exceeds RS. 6500 p.m., the contribution payable toPension Fund shall be limited to the amount payable on his pay of RS. 6500 only,however, the employees may voluntarily opt for the employer?s share ofcontributions on wages beyond the limit of RS. 6500 to be credited to the PensionFund.

INTEREST


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The employer shall be liable to pay simple interest @ 12% p.a. on any amount duefrom him under the Act, from the date on which it becomes due till the date of itsactual payment.

19.3) MUTUAL FUND

A Mutual Fund is a trust that pools the savings of a number of investors who sharea common financial goal. The money thus collected is then invested in capitalmarket instruments such as shares, debentures and other securities. The incomeearned through these investments and the capital appreciation realised are sharedby its unit holders in proportion to the number of units owned by them. Thus aMutual Fund is the most suitable investment for the common man as it offers anopportunity to invest in a diversified, professionally managed basket of securitiesat a relatively low cost. The flow chart below describes broadly the working of amutual fund:

Mutual Fund Operation Flow Chart

Concept of Mutual Fund

Many investors with common financialobjectives pool their money

Investors, on a proportionate basis, get mutualfund units for the sum contributed to the pool

The money collected from investors is investedinto shares, debentures and other securities bythe fund manger


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TYPES OF MUTUAL FUND SCHEMES By Structure

o Open - Ended Schemeso Close - Ended Schemeso Interval Schemes

By Investment Objectiveo Growth Schemeso Income Schemes (√)o Balanced Schemeso Money Market Schemes (√)

Other Schemeso Tax Saving Schemeso Special Schemes

Index Schemes Sector Specfic Schemes

Association of Mutual Funds in India (AMFI)With the increase in mutual fund players in India, a need for mutual fundassociation in India was generated to function as a non-profit organisation.Association of Mutual Funds in India (AMFI) was incorporated on 22nd August,1995.

AMFI is an apex body of all Asset Management Companies (AMC) which hasbeen registered with SEBI. Till date all the AMCs are that have launched mutualfund schemes are its members. It functions under the supervision and guidelinesof its Board of Directors.

Association of Mutual Funds India has brought down the Indian Mutual Fund

The fund manager realizes gains or losses, andcollects dividend or interest income

Any capital gains or losses from suchinvestments are passed on to the investors inpromotion of the number of units held by them


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Industry to a professional and healthy market with ethical lines enhancing andmaintaining standards. It follows the principle of both protecting and promotingthe interests of mutual funds as well as their unit holders.

Income/Debt-oriented schemes (√)These schemes are for investors who are in need of regular and a steady flow ofincome stream. Investors get a fixed sum of money on a monthly, bi-annually oron an annual basis depending on the options chosen by them while filling theapplication form.A good chunk of such scheme is invested in fixed income securities like corporatedebentures (debt instruments issued by companies like say Bajaj Auto that have ahigh safety rating (lower risk of default) and are very much like fixed depositschemes of banks) and bonds issued by the Indian government as well as corporatebonds (again like fixed deposits; a bond has a fixed tenure and a fixed rate ofinterest known as coupon rate).Though risks in these schemes is much lower than growth schemes the chances ofcapital appreciation are also lesser. It is a moderate-risk, moderate-returns kind ofscheme.Investors whose risk appetite is not very high can avail of these schemes. Thoughnot affected by wild fluctuations in the equity market the NAVs of incomeschemes are sensitive to interest rates.If interest rates go up the value of NAVs of income schemes go down. TheirNAVs and interest rates share an inverse relation. The current situation is the casein point as interest rates are on an upward journey.Again good for long-term investors as interest rate changes even out over a periodof 3-5 years.Franklin Templeton Mutual Fund's FT India Monthly Income Plan and CanbankMutual fund's CANINCOME are examples of two such schemes.

Money market schemes (√)This scheme is for those investors who want to earn steady but assured income ontheir surplus funds in the short-term.This scheme basically aims to provide easy liquidity (investors can sell the units ofthese schemes and get cash in lieu). Apart from that investors can rest assured thatthe money they put in will not reduce in value, that is, it offers capital protection.The assured income generated from such schemes is the icing on the cake.Mutual funds offering this scheme invest their corpus in treasury bills (short-termdebt instrument offered by the government; say a 30-day fixed deposit offered bya bank), certificates of deposit (same as fixed deposit schemes offered bycompanies like say ACC), apart from a host of other short-term debt schemes ofthe government.


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This scheme offers highest security and least volatility. However, the returns arelower along with high safety of your principal amount.Fidelity Mutual Fund's Fidelity Short Term Income Fund and Franklin TempletonMutual Fund's Templeton India Liquid Plus are the examples of such moneymarket schemes.

19.4) GILT FUNDS

Gilt funds, as they are conveniently called, are mutual fund schemes floated byasset management companies with exclusive investments in governmentsecurities. The schemes are also referred to as mutual funds dedicated exclusivelyto investments in government securities. Government securities mean and includecentral government dated securities, state government securities and treasury bills.The gilt funds provide to the investors the safety of investments made ingovernment securities and better returns than direct investments in these securitiesthrough investing in a variety of government securities yielding varying rate ofreturns gilt funds, however, do run the risk.. The first gilt fund in India was set upin December 1998.

Liquidity Support

EligibilityAll gilt funds - public and private sector, open-ended or close- ended - are eligibleto avail liquidity support and other facilities from the Reserve Bank of India. Thegilt funds schemes should, however, have the approval of the Securities andExchange Board of India. It would be prudent for the gilt funds to submit anadvance copy of the draft offer document to the Reserve Bank of India forpreliminary scrutiny at the time of submitting the draft offer document to theSecurities and Exchange Board of India. This is to enable the Reserve Bank tosatisfy itself that the scheme proposed to be floated by the gilt funds is inconformity with the Reserve Bank's guidelines for availing liquidity support fromthe Reserve Bank of India.

ConditionsThe Reserve Bank of India provides liquidity support by way of reverse repossubject to the following terms and conditions:

i. Re-purchase agreements (reverse repos) with the Reserve Bank arein eligible central government dated securities and treasury bills ofall maturities.


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ii. The prices of the securities for reverse repo transactions aredetermined by the Reserve Bank of India, at its discretion.

iii. The securities tendered by the gilt funds for reverse repos by theReserve Bank are in multiples of Rs. 10 lakh (face value).

iv. Gilt funds can avail the reverse repo facility for a maximum periodof 14 days at a time.

v. The repo rate is the Bank Rate.vi. Liquidity support is made available at Mumbai only. The gilt funds,

however, are free to transmit the funds to other centers of theReserve Bank under its Remittance Facility Scheme.

vii. The gilt funds cannot use the funds raised through the reverse reposfacility for on-lending in the call/notice money market.

viii. The Reserve Bank reserves the right to partially accept or reject anyapplication for liquidity support without assigning any reason.

ix. The Reserve Bank can call for all relevant information from giltfunds in regard to their operations and the gilt funds are required toprovide it.

19.5) BANK FIXED DEPOSIT

A fixed deposit is meant for those investors who want to deposit a lump sum ofmoney for a fixed period; say for a minimum period of 15 days to five years andabove, thereby earning a higher rate of interest in return. Investor gets a lump sum(principal + interest) at the maturity of the deposit.Bank fixed deposits are one of the most common savings scheme open to anaverage investor. Fixed deposits also give a higher rate of interest than a savingsbank account. The facilities vary from bank to bank. Some of the facilities offeredby banks are overdraft (loan) facility on the amount deposited, prematurewithdrawal before maturity period (which involves a loss of interest) etc. Bankdeposits are fairly safer because banks are subject to control of the Reserve Bankof India.

ReturnsThe rate of interest for Bank Fixed Deposits varies between 4 and 11 per cent,depending on the maturity period (duration) of the FD and the amount invested.Interest rate also varies between each bank. A Bank FD does not provide regularinterest income, but a lump-sum amount on its maturity. Some banks have facilityto pay interest every quarter or every month, but the interest paid may be at adiscounted rate in case of monthly interest. The Interest payable on Fixed Deposit


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can also be transferred to Savings Bank or Current Account of the customer. Thedeposit period can vary from 15, 30 or 45 days to 3, 6 months, 1 year, 1.5 years to10 years.

Duration Interest rate (%) per annum

15-30 days 4 -5 %

30-45 days 4.25-5 %

46-90 days 4.75--5.5 %

91-180 days 5.5-6.5 %

181-365 days 5.75-6.5 %

1-2 years 6-8 %

2-3 years 6.25-8 %

3-5 years 6.75-8

AdvantagesBank deposits are the safest investment after Post office savings because all bankdeposits are insured under the Deposit Insurance & Credit Guarantee Scheme ofIndia. It is possible to get a loans up to75- 90% of the deposit amount from banksagainst fixed deposit receipts. The interest charged will be 2% more than the rateof interest earned by the deposit. With effect from A.Y. 1998-99, investment onbank deposits, along with other specified incomes, is exempt from income tax upto a limit of Rs.12, 000/- under Section 80L. Also, from A.Y. 1993-94, bankdeposits are totally exempt from wealth tax. The 1995 Finance Bill Proposalsintroduced tax deduction at source (TDS) on fixed deposits on interest incomes ofRs.5000/- and above per annum.

How to apply?One can get a bank FD at any bank, be it nationalised, private, or foreign. Youhave to open a FD account with the bank, and make the deposit. However, somebanks insist that you maintain a savings account with them to operate a FD. Whena depositor opens an FD account with a bank, a deposit receipt or an accountstatement is issued to him, which can be updated from time to time, depending onthe duration of the FD and the frequency of the interest calculation. Check depositreceipts carefully to see that all particulars have been properly and accuratelyfilled in.Fixed Deposits: Documentation (UTI Bank)


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The following documents are required when applying for a Fixed Deposit

An Individual, HinduUndivided Family, SoleProprietorship Concern

A valid passport or a valid drivinglicense

An introduction by any other bank oran introduction by an UTI BankSavings Account holder for the last sixmonths

A photograph

Trusts Copy of the Trust Deed Copy of the registration certificate Copy of the Resolution of The

Trustees Authorising the members concerned to

open and operate the account Photographs of the members operating

the account

Associations / Clubs Bye-laws of the Association Copy of the Resolution by the board

authorising the members concerned toopen and operate the account

Photographs of the members operatingthe account

Partnership Firm Partnership Deed Letter from partners approving the

persons concerned to open and operatethe account

Photographs of the persons operatingthe account


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19.6) OTHER PROMINENET GOVERNMENT SCHEMES

The list of prominent government schemes available forinvestors is given below.

Public Provident Fund

National savings Certificates (viii) Issue

Post Office Monthly Income Scheme

Post Office Recurring Deposits Scheme

Post Office Savings Account

Post Office Time Deposit Schemes

Kisan Vikas Patra

RBI Relief Bonds

Depost Scheme for Retiring Employees of PSUs

Deposit Scheme for Retiring Govt. Employees-89

National Savings Schemes Account, 1992 (Discontinued)

Indira Vikas Patra (Discontinued)


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a) PUBLIC PROVIDENT FUND

Terms of Investment

Tax-free interest, highest post-tax fixed-income yield for individuals in hightax bracket.

Annual rate of Interest 9.50%

Periodicity of interest payment Compounded annually

Effective annual yield 9.50% tax-free

Maturity period 15 years

Minimum Investment Amount Rs100 per annum

Maximum Investment Amount Rs60,000 per annum

Investment in multiples of Rs100


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Eligibility Individuals or on behalf of minors, HUF, AOP, NRIs

Available at Selected post offices and banks

I.T. sectionapplicable

Sec. 88 for tax rebate

On sum invested 20% tax rebate, subject to a maximum investment ofRs60,000

On interest received Interest receipts totally tax-free

PrematureWithdrawal

Available every year from 7th financial year

Loan againstinvestment

Available from 3rd financial year

Transferability Not transferable to other persons. Transferable fromBank to post office account

Availability

Tax Benefits

Liquidity


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b) NATIONAL SAVING CERTIFICATES (VIII) ISSUE

Investment amount as well as interest-accrued and reinvested qualifyfor tax rebates


Periodicity of interestpayment Compounded semi-annually

Effective annual yield 9.73%


Minimum Investment AmountRs100

Maximum InvestmentAmount No limit

Investment in multiples of Rs100/ Rs500/ Rs1,000/ Rs5,000/Rs10,000

Terms of Investment


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Eligibility Individuals or on behalf of minors, trusts

Available at All head post offices and selected sub-post offices

I.T. sectionapplicable

Sec. 88 for investment amount, eligible under Sec. 80Lfor interest earned

On sum invested Eligible for rebate upto a maximum of Rs60,000 underSec. 88

On interestreceived

Upto Rs12,000 under Sec. 80L. Interest accruedqualifies for rebate under Sec.88

Premature Withdrawal After end of 4 years

Loan against investment Can be pledged with banks for loan

Transferability Not allowed

Availability

Tax Benefits

Liquidity


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c) POST OFFICE MONTHLY INVESTMENT SCHEMES

Interest payable monthly, 10% bonus on maturity


Periodicity of interestpayment

Monthly



Minimum InvestmentAmount

Rs6,000

Maximum InvestmentAmount

Rs3,00,000 (single account), Rs6,00,000 (jointaccount)

Investment in multiples of Rs6,000

Terms of Investments


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Eligibility Individuals


I.T. section applicable Eligible under Sec. 80L for interest earned

On sum invested No benefits

On interest received Upto Rs12,000 under Sec. 80L

PrematureWithdrawal

After 1 year at 5% discount, after 3 years nodiscount for withdrawal


Not available


Availability

Tax Benefits

Liquidity


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d) POST OFFICE RECURRING DEPOSITS SCHEME

Recurring Deposit Scheme


Periodicity of interest payment Compounded quarterly



Minimum Investment Amount Rs10 per month

Maximum Investment Amount No limit

Investment in multiples of Rs5

Terms of Investment


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Eligibility Individuals, trusts, welfare andregiment funds

Available at All head post offices and selectedsub-post offices

I.T. section applicable Eligible under Sec. 80L for interestearned


On interest received Upto Rs12,000 under Sec. 80L.

Premature Withdrawal 50% of the outstanding amount canbe withdrawn after 1 year.

Loan against investment Not available

TransferabilityNot allowed, extension of scheme foranother 5 years on a year-to-yearbasis

Availability

Tax Benefits

Liquidity


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e) POST OFFICE SAVINGS SCHEME

Similar to a Bank Account, cheque facility available



Compounded annually

Effective annual yield 4.5% tax-free

Maturity period Not applicable


Rs20


Rs50,000 for individuals, no limit for otherinvestors

Investment in multiples of Not applicable

Terms of Investment


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Eligibility All categories of investors


I.T. section applicable None


On interest received Interest is totally tax-free

Premature Withdrawal Cheque facility available, cheques are acceptedby scheduled banks


Not available


Availability

Tax Benefits

Liquidity


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f) POST OFFICE TIME DEPOSITS SCHEME

Similar to a Fixed Deposit Scheme

Annual rate ofInterest

9%, 10%, 11% 11.5% for maturity periods of1,2,3 and 5 years respectively


Compounded quarterly

Effective annual yield 9.3%, 10.4%, 11.5% 12% for maturity periods of1,2,3 and 5 years respectively

Maturity period Depends on option (see annual rate ofinterest).Can vary between 1,2,3 and 5 years


Rs50


No limit

Investment inmultiples of

Rs50

Terms of Investment


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Eligibility Individuals, trusts, welfare and regiment funds


I.T. section applicable Eligible under Sec. 80L for interest earned


On interest received Upto Rs12,000 under Sec.80L

PrematureWithdrawal

After 6 months, not eligible for interest foraccounts closed within 1 year

Loan againstinvestment After 1 year


Availability

Tax Benefits

Liquidity


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g) KISAN VIKAS PATRA

Money doubles in 6 & 1/2 years.



Compounded annually


Maturity period 6 & 1/2 years

Minimum Investment Amount Rs100

Maximum InvestmentAmount No limit

Investment in multiples of Rs100/ Rs500/ Rs1,000/ Rs5,000/Rs50,000

Terms of Investment


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Eligibility Individuals, and on behalf of minors, trusts

Available at Post offices


On sum invested None

On interest received None

Premature Withdrawal Not Available

Loan against investment Not available

Transferability Not available

Availability

Tax Benefits

Liquidity


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h) RBI RELIEF BOND

Tax-free interest. Issued as promissory notes.Regular and cumulativeschemes

Annual rate ofInterest

8.50%


Compounded semi-annually for cumulativeschemes, otherwise interest paid annually

Effective annual yield 8.50% for cumulative schemes



Rs10,000


No limit

Investment inmultiples of

Rs1,000

Terms of Investment


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Eligibility Individuals, and on behalf of minors, HUF, NRIs

Available at Agents/ brokers affiliated to government/ RBI



On interest received Totally exempt from tax

PrematureWithdrawal

After 2 1/2 years, lower interest on prematurewithdrawal

Loan againstinvestment Not available

Transferability For promissory notes - by endorsement andtransfer; for stock certificate - by transferinstrument with registration

Availability

Tax Benefits

Liquidity


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i) DEPOSIT SCHEME FOR RETIRING EMPLOYEES OF PSUs

Interest on amounts invested within three months of retirement is totallyexempt from tax. Similar in nature to fixed deposit schemes


Periodicity of interest payment Compounded semi-annually



Minimum Investment Amount Rs1,000

Maximum Investment Amount Total retirement benefit


Terms of Investment


79/90

Eligibility Individuals retiring from service with PSUs

Availableat

SBI branches & subsidiaries, selected nationalised branches,selected sub-post offices




PrematureWithdrawal

After 1 year but before 3 years with only onewithdrawal per year. Interest rate will be lower at 4%p.a. against 9% from date of deposit to withdrawal.


Not available


Availability

Tax Benefits

Liquidity


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j) DEPOSIT SCHEME FOR RETIRING GOVERNMENTEMPLOYEES -89

Interest on amounts invested within three months of retirement is totallyexempt from tax.


Periodicity of interest payment Compounded semi-annually



Minimum Investment Amount Rs1,000

Maximum Investment Amount Total retirement benefit


Terms of Investment


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Eligibility Individuals retiring from service with central/ stategovernment offices

Availableat

SBI branches & subsidiaries, selected nationalised branches,selected sub-post offices




PrematureWithdrawal

After 1 year but before 3 years with only onewithdrawal per year. Interest rate will be lower at 4%p.a. against 9% from date of deposit to withdrawal.

Loan againstinvestment Not available


Availability

Tax Benefits

Liquidity


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20) OTHER IMPORTANT INFORMATION:

The bond market is dominated by government bonds. Government bondissuances, resulting from persistently high fiscal deficits, as well as specificregulatory requirements, have underpinned the supply and demand conditionsin India’s debt capital markets. Nearly 90% of total domestic bondsoutstanding are government issuances (i.e. Treasury bills, notes and bonds),squeezing out corporate and other marketable debt securities (see chart).

Government issuance leads the local bond marketDomestic bonds outstanding, % of total

68%

4%15%6%3%

4%

Government bondsTreasury billsState loansPSU bondsCorporate bondsOthers

As of March 2006.PSU = Public Sector UndertakingSource: National Stock Exchange

PSU bonds by far outweigh the size of private corporate bonds (see chartbelow), reflecting a number of factors, foremost of which are the lists ofregulatory requirements for private issues. Regulatory oversight of thesegment falls under the purview of the Securities and Exchange Board of India(SEBI).


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Private corporate bonds outweighed by PSU bondsDistribution of issuance, %

0

20

40

60

80

100

120

2004 2005 2006

Private corporate bondsPSU bonds

As of end- March of the year.Source: National Stock Exchange

Government bond issuances rule the roostThe government bond segment is the oldest and largest component of the debtmarket. Its size has taken off exponentially over the past decades, with the totalstock of debt outstanding at roughly USD 280 bn as of June 2006 4, increasingthree and a half times since 1995. This translates to roughly 35% of GDP, in linewith several large Asian economies and is not significantly lower than that of theUnited States (see chart below).


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A sizeable government bond market % of GDP

05

101520253035404550

Thailand China SouthKore a

India M alays ia USA

20012005

Source: BIS

Corporate bond market: A huge potential awaitsIn contrast to the government bond market, the size of the corporate bond market(i.e. corporate issuers plus financial institutions) remains very shallow (see chartbelow), amounting to just USD 16.8 bn10, or less than 2% of GDP at the end ofJune 2006. A well-developed corporate bond market would give companiesgreater flexibility to define their optimum capital structure. By the same token,investors would benefit from having a wider range of asset classes to diversifytheir fixed income investments.

C o rp o ra te b o n d m a rk e t h a s ye t to d e ve lo p% o f G D P

05

1 01 52 02 53 03 54 04 55 0

In d ia C h in a T h a ila n d US A S o u t hKo r e a

M a la y s ia

2 0 0 12 0 0 5

Source: BIS


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21.) REVIEW OF INVESTMENT OPTIONS:

PRODUCTS RETURN LIQUIDITY RISKEQUITY HIGH HIGH HIGHCo. DEBENTURES MODERATE LOW MODERATECo. FDs MODERATE LOW HIGHBANK DEPOSITS LOW HIGH LOWPPF MODERATE MODERATE LOWLIFE INSURANCE LOW LOW LOWMUTUAL FUNDS HIGH HIGH LOWRBI BONDS MODERATE LOW LOWGOVT. SECURITIES MODERATE MODERATE LOWGUILT FUNDS MODERATE HIGH MODERATERBI REFLIEF BOND HIGH LOW LOW

22.) LIQUIDITY Vs RETURNS: -

LOW MODERATE HIGH

Bankdeposits

Guilt funds Equity,mutual fund

PPF, Govt. Securities

LifeInsurance

RBI bond, Co. FDs,Co. debentures

SSI, RBI reliefbond

HIGH

MODERATE

LOW


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LIQUIDITY AND RETURNS: (suggestions)

Low liquidity, Low returnsThis investment option is suitable for those who do not want to take risk andare satisfied with low returns and bank deposits are the good example of suchtype of funds.

Low liquidity, Moderate returnsAn investor with this objective can invest in RBI Bonds, Co. FDs or Co.debentures where he could expect moderate returns and low liquidity. HereRBI bonds are low risky as compared to Company fixed deposits and Co.debentures.

Moderate liquidity, Moderate returnsThose investors who want moderate liquidity and moderate returns PPF andGovernment securities are the good options. These investments are withminimum locking period with impressive returns.

High liquidity, High returns – (equity, mutual fund)Growth equity and mutual funds schemes are the best options for the investorswith a high liquidity appetite along with a high return. These investmentoptions are highly attractive and fast money making machines.

23.) RISK AND RETURNS: -

Risk and return are two inseparable parts of an investment strategy. They have adirect relation with each other. Higher the risks higher are the returns and viceversa. The very basic considerations of an investor while investing his money arehow to maximize one's returns? What will he get? and what are the risks involvedin investing in a particular investment.

RISK VS RETURNS: -


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LOW MODERATE HIGH

Graphical representation of risk and return of different investmentoptions:

Source: wealth creation guide

Co. Fixed deposits Equity, RBIrelief bonds

Co. debentures,Guilt funds

Real estate

Bank deposits,Life insurance

PPF, RBI bonds,Govt. Securities

Mutual funds

HIGH

MODERATE

LOW


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RISK AND RETURNS (suggestions):

Low risk, Low returns (Short investment horizon)With this investment objective the investor has the option of short-term Bankdeposits for 1-6 months where he could expect returns of 6%-8% p.a.depending on the tenure.

Low risk, Moderate returns (Investment horizon of at least 1 year)An investor with this objective can invest in Company/NBFC deposits, whichare `AAA' rated. This will fetch him returns of around 9% p.a. with moderateliquidity e.g. HDFC Ltd. Kotak Mahindra Ltd. and ICICI Home Finance.However, after factoring in tax implications, the actual return on thesedeposits comes down to less than 8% p.a.The other option is government securities i.e. guilts returns of over 8-9% p.a.

along with high safety and liquidity. However these have limited tax benefits,as the interest is taxable subject to Rs 3,000 tax benefit u/s 80L.The other option is Relief Bonds which gives 8.5% p.a. tax-free returns withmaximum safety (it is backed by the Government of India). However theliquidity is very low as the investment is locked for 5 years.

Moderate risk, Moderate Returns (Investment horizon of 1 year)An investor with this objective can opt for Company deposits with moderatesafety i.e. `AA' rated that will fetch him over 10% p.a. returns e.g. DewanHousing and Berger Paints. However these investments are not liquid.The other option is the Income and gilt funds, which can give returns of over10% p.a. and also offer tax benefits, as the dividends from mutual funds are taxfree in the hands of the investor. Both income and gilt funds have very highliquidity. However these funds can be very volatile in short term.

High risk, High returns (Long term investment)Growth (equity)

Before you actually make a call on where to put your money, it is imperativethat you define your objectives in terms of risk appetite, tenure and expectedreturns. A good investment plan would tend to be diversified in all theseaspects.


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LIMITAIONS OF STUDY

‘Fixed income instruments’ is a very wide topic in itself and time period

was not sufficient to understand terms and conditions of such a wide verity

of instruments available in India. This report is based on the limited

information gathered on fixed income instruments.

Risk factor is crucial part of any investment decision of the investor but this

report doesn’t speak in terms of value of risk in different instruments that

are available.

Charts of risk, returns and liquidity are made on the basis of the outcomes

of the information gathered.

Lack of availability of resources (Books, journals, etc.) about present

Indian market scenario in library.


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References: -The data was collected from the following sources:1. College library (IMM)2. Ankit Jain finance manager (G-Cube solutions)3. Economic Times4. Business Standards5. Business World6. Financial Economics (journal)7. Wealth creation guide8. Websites & Links

a) www.nse-india.comb) www.bseindia.comc) www.moneycotrol.comd) www.valueresearchonline.come) www.rbi.org.inf) www.helplinelaw.comg) www.amfiindia.comh) www.webindia123.com/financei) www.personalfn.comj) www.thehindubusinessline.comk) www.economictimes.coml) www.crisil.com

fixed income instruments in india

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