Investment

management

CAFTA Webinar

15 May 2020

Written by
What we will cover: Session 01

Section Time Coverage

Warm Up Introduction and Case Study

Section 1: Investment Treasury investments, Objectives, Financial Risks and Key Risk
Management – Basic Metrics for Debt and Equity
Section 2: Investment
products for an Indian Different investment products in Indian and Global market
Treasury

Master Class Behaviour Finance and Human Psychology in Investment

Q &A

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What we will cover: Session 02

Section Time Coverage

Section 3: Investment
Functions in Various
Industries
Section 4: In House
Investments Risk
Management
Investment philosophy and regulations applicable on
1 hour Corporates, Insurance, Banks, Mutual Funds and Pension
Funds
Implications of ILFS default on investment industry, including
credit rating agencies
1 hour
Recent regulatory changes and its impact
Use of analytics and Quant models in investment

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Let me gauge my audience

Which asset class has performed better?

Scenario 1
MF Corporate Bond

Annualized ROI of 8% p.a. The benchmark has given Annualized ROI of 7% p.a. The benchmark has given
a return of 7% p.a. a return of 6% p.a.

Both asset classes have done equally well. The Treasurer shall be indifferent

Scenario 2
MF Corporate Bond
Annualized ROI of 8% p.a. The benchmark has given Annualized ROI of 7% p.a. The benchmark has given
a return of 7% p.a. a return of 6% p.a.
Standard deviation of returns .80 Standard deviation of returns is .50

Corporate Bond is better

Sharpe Ratio – A true measure of risk versus return trade off;
Measures the performance of an investment compared to a benchmark returns / risk-free asset, after
adjusting for its risk
Higher the Sharpe ratio better the performance

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 1

Investment Management – Basics

Investment management:
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1.1 Treasury Investments – What does this mean ?

► Which line items of the balance sheet

indicate that the company is cash rich ?

Non current investments, Other non current

assets, current investments, cash and bank
balances, other current assets

► Which line items from above are relevant

for further discussion ?

All line items are relevant. The principle is to

identify investments related to Treasury

Investment management:
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 1.2 Treasury Investments – What does this mean ?

Identify whether the below investment are strategic investments (No) or treasury investments (Yes)

• Made out of surplus cash generated by a business – Yes

• Used to acquire companies/ investment in subsidiaries – No

• Used to manage day to day operating expenses – Yes

• Used to manage liquidity for foreseen expenditure – Yes

• Borrow and invest – Yes

• Is current investment Treasury investment – Depends

• Is non current investment Treasury investment – Depends

Investment management:
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 1.3 Investment Objectives

Corporate investment Treasury follows the following criteria's while evaluating an investment option

Criteria I: Safety Criteria II: Liquidity Criteria III: Return

Protection of capital Chosen instruments

Maximize return on
into an investment must be easily
investible surplus
avenue is the prime transformable into cash
subject to the
objective with minimal to meet working capital
respective exposure
element of speculation requirements and
limits
on yield milestone payments

Risk attributes Exit load, By what Basis

like credit, Prepayment Points the
backing over penalty, Lock in portfolio is
investment period, Close beating the
ended product benchmark

Exceptions to above criteria’s would be:

- A few large corporates like Reliance Industries, MFs, Insurance Companies etc.
- Promoter driven groups
Investment management:
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1.4 Major types of financial risks

Type of risk Description How to mitigate risk ?

Credit risk Risk of default on a debt that may arise from a
borrower failing to make required payments.
Risk includes loss of principal and interest,
disruption to cash flows, and increased
collection costs.
Risk that changes in interest rates may reduce
Interest rate risk (or increase) the market value of a bond.
Interest rate risk is also referred to as market
risk
Analyse the capacity of the company to meet
its financial obligations. How ?
Credit Rating, Current Ration, Free ccsh
fllow, Debt servicing ratio, Interest
coverage ratio
How I do measure interest rate risk ?
Duration

Risk that a company may be unable to meet its

Listed security, generates enough
Liquidity risk short term/ long term financial demands.
Occurs due to the inability to convert a
volume, lock in periods, exit loads etc.
security or hard asset to cash without a loss of
capital and/or income in the process

Risk associated with the early return of Refer to the prospectus before
principal on a fixed-income security. For investing
Prepayment risk example embedded call options that may be
exercised by the issuer (A callable Bond). This
risk may lead to reinvestment risk.

Page 9
1.5 Most Important Risk Metrics – Macaulay Duration

Investment amount / Current

price 101.79
FV 100 Tenor is 2 years
Coupon 10% p.a. payable 6 monthly
Yield 9% p.a.
Weighted avg
Flows Period Inflows inflows PV @ 9% PV

6m 1 5 5.00 0.9569 4.78

12m 2 5 10.00 0.8762 8.76

18m 3 5 15.00 0.7678 11.52

24m 4 105 420.00 0.6439 270.45

Total of PV 295.52
Duration (Half years) 2.90
Duration (Years) 1.45

The greater duration of the bond, the greater its percentage price volatility
In other words, duration is the elasticity of the bond's price with respect to interest rates
Higher the coupon rate, shorter the duration provided term of the bond is constant
Since the Macaulay duration measures the weighted average time an investor must hold a bond until
the present value of the bond’s cash flows is equal to the amount paid for the bond, it is often used by
bond managers looking to manage bond portfolio risk with immunization strategies

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 2
Investment products for an Indian
Treasury
Time: 30 mins

Investment management:
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2.1 Investment products in India – Highly Liquid

Overnight Money
Market in India
NDS-Call CROMS

Market
Call TREPS
Bilaterally Repo Bilaterally

Daily Average Trading Volume (%) Daily Average Trading Volume (INR crore)

Source: RBI Feasibility report

Investment management:
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2.2 Investment products in India – G-Sec

Ownership of G-sec by investor types Market share by trading volume: GSec

50%
39.10%
40%

30% 26.20%

20%
10.30% 12.40%
9.90%
10%
2.10%
0%
Banks Insurance Provident RBI FPI Others
Cos. Funds

Trading Volume - Instruments Trading Volume - Platform

Source: RBI Feasibility report, RBI annual report

Investment management:
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 2.2 Investment products in India – Corporate and FI debt

Category-wise Corporate Bonds Issuers

35% 33%
29% 30%
30%
25%
20% 20%
20% 16%
14%
In 2018-19 15% 13% 13%

- ₹366 billion raised 10% 7%

4%
through 25 public 5% 1%
issues in the bond 0%
market (Highest in PSU NBFC HFC FI Finance
Companies
Body
Corporates
the last five years)
Category-wise Corporate Bonds Subscribers
45%
- Corporate bonds 40%
39%

worth ₹6 trillion 35%

issued through 30% 25%
23%
private placement 25% 22%
20%
and listed on stock 15% 11% 12% 11%
14%

exchanges 10% 8% 7% 8% 9%
7%
5% 1% 1% 1%
0%
Banks Body FI FPI MF Residents Trusts Others
Corporates Others include AIF, CM, FII,
Private Placement Public Issue NRI, residents, HUF and QIB

Source: RBI Financial Sector: Regulations and Development report

Investment management:
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2.2 Investment products in India – Corporate and FI debt

Issuance of CP, by issuer institutions

Source: RBI annual report

Investment management:
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2.2 Investment products in India – Equities

25
Global Stock Listed companies on stock exchanges
Total Market Capitalisation

20 22.9 Exchanges, by
market
(USD trillion)

15
capitalization
10
10.8
5
5.7
4.0 3.9 3.9 3.8 2.0
0

60% 55.2% 55.3%

50%

40%
Market
participants 30%
22.4% 21.6%
turnover : 20% 15.1%
2018-19 12.4%
7.9% 7.5%
10%
2.1% 2.8%
0%
Proprietary Domestic FPI MF Others
trades Institutions Others include retail investors, partnership
firms, HUF, NRI and QII
BSE NSE

Source: SEBI annual report, https://www.theglobaleconomy.com/rankings/Listed_companies/

Investment management:
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2.2 Investment products in India – Equities

Investment management:
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2.2 Investment products in India – Equities ETF

Retirement funds have started to invest in ETFs and this has led to a
significant rise in ETF assets. The government has also used ETFs as a
tool for divestment of its holdings (CPSE ETF and Bharat 22 ETF)

Figure in INR Million

Source: Citi Mutual Funds report

Investment management:
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2.2 Investment products in India – Mutual Funds

Types of Mutual Funds

Based on Based on Based on Based on

Maturity Asset Class Investment Themes
Period Objective

Open Equity Debt Hybrid Growth Tax

ended Funds Funds Funds Funds Savings
Funds Fund
Large- Liquid
Close cap Fund Fund Balanced Index /
ended Fund ETF
Funds
Mid & Short
Interval SmallCap term bond Dynamic Sectoral
Funds Fund Fund

Diversi- Income
fied Fund Fund Multi-asset
Fund
ELSS Duration
Fund Fund Arbitrage
Fund
Arbitrage Gilt Fund
Funds / Corp
Bond

Investment management:
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2.2 Investment products in India – Mutual Funds

Investor split by AUM as on March 2019

Investor type AUM (USD bn) AUM (%)

Corporate 136.37 40.12%

HNWI 107.38 31.59%

Retail 89.98 26.47%

Banks/Financial Institutions 4.31 1.27%

FII 1.90 0.56%

AUM break-up by
asset class: INR 25
lakh crore market

Share of equity has increased because of increasing participation

from retail investors
Source: SEBI annual report, Citi Mutual Funds report

Investment management:
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2.2 Investment products in India – Summary

Risk-Return profile of Major Asset Classes

Commodities
Real Estate

Equity
Return

Gold
Corporate
Debt CP
Sovereign
Debt
Money
market

Risk

Investment management:
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2.3 Investment products in global markets

Partial principal at Risk Dual currency deposits

EUR $121.2
100

Initial Return at
Investment Maturity
when when
EUR/USD = EUR/USD = 1.175
1.212 or
EUR/USD = 1.233
➢ Return of Investment @ ➢ Return of Investment @
Maturity Maturity
▪ Receive a min of 90% of ▪ Entire investment in
initial investment, subject another currency, as
to issuer’s credit risk specified at the time of
investment
➢ Hedging
▪ Allows hedging

Investment management:
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 2.3 Investment products in global markets

Management of the real estate 4.

Management
3. Money 1. Ownership of services
real estate Sponsor’s
Sponsor
3. REIT units SPV 4. Lease
payments
Real Estate 5. Lease
2. REIT units payments after
Investment deductions
6. Dividend to unit
holders Trust (REIT)

Global REITs market

Who can invest in REIT in India
➢ Mutual funds (within defined limit)

➢ Insurance cos (with some restrictions)

➢ Banks (with some restrictions)

Investment management:
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 Masterclass
Behaviour Finance and Human
Psychology in Investment

Investment management:
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Why Behaviour Finance

For professional clients / qualified investors only

25
Confirmation Bias

For professional clients / qualified investors only

26
Framing Bias

For professional clients / qualified investors only

27
Framing Bias FM and RBI

For professional clients / qualified investors only

28
Loss Aversion

For professional clients / qualified investors only

29
Problem with Averages

For professional clients / qualified investors only

30
Problem with Averages

For professional clients / qualified investors only

31
Information Bias

For professional clients / qualified investors only

32
Action Bias

For professional clients / qualified investors only

33
Overconfidence Bias

For professional clients / qualified investors only

34
Availability Bias
Exponential Bias

For professional clients / qualified investors only

36
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