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    Module 4 Investment Planning Cerna ure a DCC a) This session will help you understand * The importance of investment planning in the financial planning process. * The types of investment products and their risk return characteristics. + How to evaluate investment choices in the light of the client's financial needs. * Understand what client portfolios- how they are created, monitored and rebalanced based on needs. * How to recommend a investment portfolio Dees ere a Sea a) Purpose of Investments Investment is nothing but using money to make more money. It involves:sacrifice of something now for the prospects of getting something in future. To part with money, investors need compensation for: — Time period for which the money Is parted with. — The expected rate of price rise- Inflation — The uncertainty of payments in future. Investment planning is an important part of overall financial planning. eMart i LCR ea) The Financial Planning process involves 6 steps Establishing and Defining the client- Planner relationship Monitoring the Gathering Client Data & recommendations Goals Implementing the Analysing and Financial plan recommendations Evaluating Financial Status Developing and Presenting Financial Planning Recommendations/ Alternatives Deeg ere aaa ay Financial Planning Steps * Establishing the relationship: — The Financial Planner will describe the services that he is offering. The client and planner to mutually decide on their respective responsibilities. The remuneration is also to be decided upon. © Gathering (hedata and goals of.the-cient Se Mit=suiltre le ertc| We) =Ialgretmee os =lUgietaminy olga Lice] momma see (Cinta) financial situation.Both mutually define personal and financial goals, set time frames for results with the planner: evaluating the clients appetite for risks. PEATE pet eto tee] WE: (ropa doy pret Ce Ypbec oe late a test -IMecae= LAS Lote = The financial planner will then evaluate the clients financial status, assess the current situation and then decide on what needs to be done to achieve the set goals. This could include analysis of assets, liabilities and cash flows, insurance coverage, investment or tax strategies. eR LCR Ua) Financial Planning Steps * Developing plan and making recommendations: — The financial planner will then make recommendation to the client based on the goals and objectives of the client. The financial planner should go over the plans with you to help the client Gents Tee Uae Unters coat nN Ze =o — The financial planner should revise the recommendations when possible, based on your concerns. * linplementation: — The Financial Planner will then implement the pian on the basis of the consensus arrived at with the:client.In some cases, the planner may act-as a ceach, co-ordinating the whole process with you and other professionals. » Monitoring the financial recommendations: = The Financial planner and the client should agree on who will actually monitor the progress that is being made towards the goal. In case the Financial planner is in charge, he/ she should periodically report to you and make recommendations. eR ee LCR ea) Teena lg CCM an ae Introduction to Risk & Return * Return and risk are two important characteristics of any investment product, ¢ Generally return and risk go hand in hand. + A rational investor likes return and dislike risk, so most of the investment is a tradeoff between risk and return. To part with money, investors require compensation for + The time period for which the resources are committed + The expected rate of price-rise + The uncertainty of the payments in future eMart LTR Ce Ua) Type of returns + Total return or Holding period return: The period during which the investment is held by the investor is known as holding period and the return generated on that investments called as holding period return during that period. + Annualized return (CAGR): It is also known as compounded annual growth rate. The year-over-year growth rate of an investment over a specified period of time. The compound annual growth rate is calculated by taking the nth root of the total percentage growth rate, where n is the number of years in the period being considered. LUM LCR ea) Measurement of return + Return is reward for undertaking investment. ‘A) Total return: The total amount of earnings on an investment is "total return". And this is generally broken down into two main components. Current Income — Income received regularly over the course of the investment (dividends, interest’or rent) Capital Gains — the increase in the market value of the specific investment vehicle. This return is generally not received or recognized until the asset is sold. B) Average return: It is a measure of return that gives summary of a ei relic tsi eel elect M Wun LUMO Male un leliaam lace ealo) | annual return is divided by the number of years it shows now much on an average investment has grown over a period of time. It is also called as arithmetic mean. PUR ee LCR eu Ua) Gircroancercne omer Mtnty Ne orl all possible returns multiplied Portfolio return DUA aU aL) How much risk can an investor take? This would depend on the following factors: How much are you prepared to lose over one year Younger investors can usually afford to be more aggressive if you are saving to buy a house or starting to invest for retirement, you will need to The longer you can afford to wait, the less risk is involved. Do not invest in risky assets if without giving up on investment? invest in growth stocks. This you may need means taking on funds in the short ‘term. more risk Deere ere aa a) Systane Marnet Non Market Risks i ial The element of The variability return variability in a security's from an asset total returns which results not related to from overall market fluctuations in the aggregate market variability eMart pes of Investment Ris Non Systematic/ | US Interest Rate Risks Re-investment Risks oO iE The risk that The possibility interest income | | of a reduction in or principal the value of a repayments will | | security, have to be especially a reinvested at lower rates ina declining rate environment. bond, resulting from a rise in interest rates. Such changes generally affect security prices inversely LCR eu CU) Types of Investment Risks oars Wy Exch Purchasing Interest Rate Political ee Power Risks Risks. Risks Risks stb au The risk of The risk that || The possibility |) The risk of The risk that loss in the interest of a reduction || loss when a business’ value of income or in the value of || investing ina || operations cash due to | | principal a security, given country || or an inflation. repayments || especially a caused by investment's This is also will have to || bond, changes ina || value will be known as be resulting from || country's affected by inflation risk | | reinvested at || a rise in political changes in lower rates |] interest rates. |) structure or exchange ina policies rates declining rate environment Cee a aren Caen) Managing risk Avoiding Risks: Simply avoid the risk altogether..Don't invest in the financial market to avoid financial loss. However; some risks are unavoidable. Controlling Risks: Putin place some control measures for the risks. For example; you can install sprinkler systems in your office ta control the risk: of Bloysoe VIB yom toe Pete Tite ee ne Meee oli mene Me eset utect falls under this. For example, An employer can self insure a medical expense benefits plan for his employees by setting aside a-sum of money for this. Transferring Risks: Shifting the financial responsibility for that risk to the other party, generally in exchange for a fee. Purchasing Insurance is the most common method of transferring risk from the individual to the insurance elu eR LTR eu UL) Measurement of risk + Being able to measure and determine the past volatility of a security is important in that it provides some insight into the riskiness of that Rete vate LM eluate DE ieli te ies Variance: Variance is the standard measure of total risk. It measures the dispersion of returns around the expected return. The larger the dispersion, the more risk involved with an individual security. Variance is an absolute number and can be difficult to interpret. The square root of variance is standard deviation. Standard Deviation: Standard Deviation is a measure of variability of returns of an asset as compared with its mean or expected value. It measures total risk. There is a direct relationship between standard deviation and risk. The larger the dispersion around a mean value, Me lecNclm ULM Ut aU Eko Im UL emi eclaler-TeeK elon lite lam ome m-irelt nN The standard deviation of a portfolio is the not the average of the standard deviations of individual assets. The standard deviation of a portfolio is usually less than the average standard deviation of the stock in the portfolio. eR LCR UL) Steps to calculate historical standard deviation * For each observation, take the difference between the individual observation and the average return. ¢ Square the difference. * Sum the squared differences. * Forsample SD, divide this sum by one less than the number of observations. For population SD, divide this sum by the total number of observations * Take the square root. CeCe ere ea a) Beta: Beta is a measure of the systematic risk of a security that cannot be avoided through diversification. Beta is a relative measure of risk-the risk of an individual stock relative to the market portfolio of all stocks. If the stock has a beta of 1, the implication is that the stock moves exactly with the market. A beta of 1.2 is 20 percent riskier than the market and 0.8 is 20 percent less risky than the market. Expected Risk: The variance of a probability distribution is the sum of the squares of the deviation .the variance of a probability distribution is the sum of the squares of the deviations of actual returns from the ‘expected return, weighted by the associated probabilities. 2 o2= PiRi-E(r)2 Anticon E(r) = expected return from the stock Ri = return from stock under state Pi = probability that the event i occurs n = number of possible events eRe LCR Ua) Portfolio risk Portfolio risk is computed by risk attached with each of the securities in the portfolio i.e. standard deviation or variance as'well as the interactive risk between the securities ie. covariance. Covariance is a measure of the degree to which two variables move together over time: A positive covariance indicates that variables move in the same direction, and a negative covariance indicates that they move in opposite directions. Covariance is an absolute number and can be difficult to interpret. Correlation coefficient (r) is 2 measure of the relationship of returns. between two stocks. Correlation coefficient of (+1) means that returns always move together in the same direction. They are perfectly positively correlated. Correlation coefficient of (-1) means that returns always move in exactly the opposite directions. They are perfectly negatively correlated. A correlation coefficient of zero means that there is no relationship between two stocks’ returns. They are uncorrelated. LeU Rat LCR Cu Ue) Measuring Risks + Coefficient of determination (R2) gives the variation in one variable explained by another and is an important étatistic in investments. * R2is calculated by squaring the correlation coefficient (r). Itis a measure of systematic risk; + |-R2is defined as unsystematic risk. The beta coefficient Reem Moment eMie mee Nien Oh tmnre Tere + The strength of the relationship is indicated by R2. lf R2 equals 0.15, an investor can assume that beta has little meaning because the variation in the return is caused by something other than the movement in the market (unsystematic risk). If R2 equals 0.95, the variation in the market explains 95 percent of the variation in the return (systematic risk-where beta is a'good measure of risk). LeU Rg ie LCR aL) Managing Risks + Diversification Never Put all your eqys in one basket « Diversification means spreading your money over a number of investments in order to reduce unique risks associated with individual investments + When you invest in the stock market you face both market risk-and unique risk. You can mitigate unique risk by taking a diversified approach to investing. + The more stocks you add to your portfolio (your collection of individual investments) the more ‘unique risk you tala Coe-Lae MUNI Teco el MOTEL Lino -[eol Lam LUM LCR eu aL) Diversification + There are three main practices that can help you ensure the best diversification: — Spread your portfolio among multiple investment vehicles such as cash, stocks, bonds, mutual funds, and perhaps even some real estate. — Vary the risk in your securities. You're not restricted to choosing only blue chip stocks. In fact, it would be wise to pick investments with varied risk levels; this will ensure that large losses are offset by other areas. San ae AVA eL Lm oLe0 nici on Valn eee CNA aNd COs impact of specific risks of certain industries. PUR LCR Ua) Company Diversification Types of Diversification Balancing potential risk of negative returns from one country by investing in other countries that don't face the same risk. Geographical Spreading your risks by investing in different Diversification countries or in different regions in a particular Wouee:—SC Country. Manager Using different fund managers with different Diversification investment styles and philosophies to reduce risks. Putting some of your money in more risky funds and putting some in less risky, fixed income yielding instruments is called asset allocation. eR gra e LC eu Ua) Managing Risks * Hedging: + Hedging is a strategy to protect oneself from losing by a counterbalancing transaction. It can be used to protect one financially--to buy or sell commodity futures as a protection against loss due fo price fluctuation or to minimize the risk of a bet. * Hedging against investment risk means strategically using instruments in the market to offset the risk of any adverse price movements. In other words, investors hedge one investment by making another. Technically, to hedge you would invest in two securities with negative correlations eMart i LCR eu Ua) How do investors hedge? * Hedging techniques involve using complicated financial instruments known as derivatives, the two most common of which are options and futures. * Keep in mind that because there are so many different types of options and futures contracts an investor can. hedge against nearly anything, whether a stock, commodity price, interest rate, or currency. * Every hedge has a cost, so before you decide to use hedging, you must-ask yourself if the benefits received from it justify the expense. Remember, the goal of hedging isn't to make money but to protect from losses. PUR i LCR eu Ua) Relationship between risk and return GO sale ise ts dd ncl tlhe = sie SEE) possible return. Other factors you will need to consider for Te Se Mat Nira M Nel Rt tm (ell) need quick access to it at any time during the investment period. Cae urer aCe Module 4: Investment Planning Compounding Compounding is the money that money makes, added to the money that money has already made. PN MTom uC MUN Me LCM CNM Mee lii etomerc]ereLe] (3d of making even more money than it could before! Dees ere a ea Compounded Annual Growth Rate (CAGR) + CAGR measurés a market's annual growth over a period of time (usually ENO) Mer cone Meds eT Mel Leese Reale} market would grow or contract year on year to reach its current value. * CAGR is a formula used to express the rate of growth in sales, earnings, units or some other measure over a number of years. + The CAGR is a more representative measure of annual growth over a rate Tegiek-lm olan =i 1kos * CAGR = ((¥/X) 4 (4 N))-4 — Where: (“*") denotes "to the power of” — Where: Y is the value in the final year Semen Vales CoH @in Uo Me=| LUC m AUNTS cr — Where: N isthe number of years included in the calculation + CAGR-based forecasts do not show the effects of inflation that would flan ere @ ile Mey =1e-1 | Mele) clan cm Um Um UI telecy PUR Ce LCR eu UL) Real Returns + The earnings from an investment above the prevailing inflation rate is called the real return on that investment. + The real returns are determined with the help of the aol fe Tate Ince) unl eleB Soa EA Glas nOon Lar e=] (31 Gibeal init 2elonn m=) (<9) ot ha 0) + Where the nominal rate is the:absolute return and the inflation rate is the rate of inflation for the period. eMart LCR Ue) Risk Adjusted Returns In determining the various returns earned by a portfolio,-a higher return by itself is not necessarily indicative of superior performance. Alternately, a lower return is not indicative of inferior performance. In order to determine the risk-adjusted returns of investment portfolios, several eminent authors have worked since 1960s to develop composite performance indices to evaluate a portfolio by comparing alternative portfolios within a particular risk class. The most important and widely used measures of performance are: Semi a-MN cS Uae (crcKciU lc} Semi ateMedny=leslea ere (sie as) Some larsre an Vole — Fama Model UR ee LTR eu Ua) Measures of Performance Treynor Measure: Developed by Jack Treynor, this performance measure evaluates funds on the basis of Treynor's Index. This Index is a ratio of return generated by the fund over and above risk free rate of return during a given period and systematic risk associated with it (beta). ‘Symbolically, it can be represented as: — Treynor's Index (Ti) = (Ri = RAVBi. Nite Met represents return on fund, Rf is risk free rate of return and ETP Wemtet atl n Sharpe Measure: According to Sharpe, it is the total risk of the fund that the investors are concerned about. So, the mode! evaluates funds on the basis of reward per unit of total risk. Symbolically, it can be written as: — Sharpe Index (Si) = (Ri - RA/Si Where, Si is standard deviation of the fund. eMart Ce LCR eu UL) Measures of Performance + Jenson Model: developed by Michael Jenson (sometimes referred to as the Differential Return Method) involves evaluation of the returns that the fund has generated vs. the returns actually expected out of the fund given the level of its systematic risk. The surplus between the two returns is called Alpha, which measures the performance of a find compared with the actual returns over the period. + Required return of a fund at a given level of risk (Bi) can be calculated cI Se ea ieals Suess) + Where, Rmis average market return during the given period. After calculating it, alpha can be obtained by subtracting required return from the actual return of the fund. Higher alpha represents superior performance of the fund and vice versa. LeU Mgt ie LCR aL) Measures of Performance The Fama Model: The Eugene Fama model is an extension of Jenson mode and compares the performance, measured in terms of returns, of a fund with the required return commensurate with the total Lif) ore Eserolel|s-ten 1g MMareme ficial a esl csc oess- MOM ESM LCC IBIe Se HLLceo AU Moa UAT performance of the fund and is called net selectivity. The net selectivity represents the stock selection skill of the fund manager, as itis the excess return over and above the return required to compensate for the total risk taken by the fund manager. Higher value of which indicates that fund manager has eared returns well above the return commensurate with the level of risk taken by him. — Required return can be calculated as: Ri = Rf + Si/Sm*(Rm- Rf) Where, Sm is standard deviation of market retums. The net selectivity is then calculated by subtracting this required return from the actual iis (PT ua elm UNTILL LeU Mgt i LCR Ua) Post- Tax Returns + The amount of taxes paid will affect an investor's total return. Therefore it is important for an investor to understand the impact of taxes on the performance of Taieeiiteiaie * There are many different assumptions to use in calculating the impact of taxes on investment retums. The post-tax return is calculated by multiplying the pretax rate by the quantity one minus the marginal tax bracket of the investor. eRe LTC eu aL) Holding Period Returns * The-amount of taxes paid will affect an investor's total return. Therefore it is important for an investor to understand the impact of taxes on the performance of investment. * There are many different assumptions to use in calculating the impact of taxes on investment returns. The post-tax return is calculated by multiplying the pretax rate by the quantity one minus the marginal tax bracket of the investor. + The holding period returm (HPR) is the total return and is determined: by taking the fotal return divided by the initial cost of the investment: = HPR= (PI- Po + D)/ Po + Where, Pl is the sale price, Po is the purchase price, and D is the dividend paid. + There is a major weakness in using the holding period. It does not consider how long it took to earn the return. eR LCR Ua) Yield to Maturity (YTM) + The yield to maturity is the internal rate of return of a bond if held to maturity + Internal rate of return is the discounted rate that makes the present value of the cash outflows equal to ‘initial cash inflows such that the net present value is equal to zero. + TM considers the current interest return and all price appreciation or depreciation. It is also a measure of risk and is the discount rate that equals the present value ofall cash flows. From-a firm perspective, it is the cost of borrowing by issuing Tat \i Lo) 1(6 Hi von ale- La Mian (-o-\Co lm Ofte] often -ei| MC aM Uae Cy Chesil nla Me -elo I ole Mato oLp eM MATL e ROM) OLN * The yield to maturity can easily be solved using a financial calculator, in the same way as finding the internal rate of return. LeU Rg LCR eu UL) Investment Portfolio * A portfolio is a combination of different investment assets mixed and matched for the purpose of achieving an investor's goal(s). * Items that are considered a part of your portfolio can Carel Uleeec TaN arc is3\- 14h ol MON ae AERA MeL BE He-Ina-Lp] real estate, to equities, fixed-income instruments, and cash and equivalents. * The Following are the various types of portfolio strategies: — Aggressive Investment Strategy: Search for maximum ‘réturns from an investment. Suitable for risk takers and for a longer time horizon. Higher investment in Equities. = Conservative Investment Strategy: Safety of investment isa high priority. Suitable for those who havea low risk appetite and a shorter time horizon. High investments in cash and cash equivalents, and high quality fixed income yielding assets. eMart LCR eu UL) Investment Portfolios * Moderately Aggressive investment strategies: These are suitable for people who havea large an average appetite for risk and a longer time horizon, The objective is to balance the amount of risk and return contained within the fund. The portfolio would consist of approximately 50-55% equities, 35-40% bonds, 5-10% cash and equivalents. * You can further break down the above asset classes into subclasses, which also have different risks and potential returns. More advanced investors might also have some of the alternative assets such as options and futures in the mix. As you can see, the number of possible asset allocations is practically unlimited. PUR i LCR ea) Why is important to maintain a portfolio? + Diversification which works on the principle of “Not putting all your eggs in one basket”. * Different securities perform differently at any point in time, so with a mix of asset types, your entire portfolio does not suffer the impact of a decline of any one security. + When your stocks go down, you may still have the stability of the bonds in your portfolio. + If you spread your investments across various types of assets and markets, you'll reduce the risk of catastrophic financial losses. eMart ie LCR Ce aL) Investment Vehicles Small Savings + Small savings continue to be a favorite investment alternative for a large section of investing population despite the emergence of a number of alternative avenues such as mutual funds and unit-linked insurance plans. (ULIPs). * Small savings scheme in India generally include National Savings Scheme (NSC), Public Provident Fund (PPF) and Kisan Vikas Patra (KVP). * All small savings schemes tend ito be characterized as the same despite the fact that they vary on parameters including tenure, returns and liquidity. There is much more to these schemes than just the safety and returns. PUR ie LCR ea) Small Savings Public Provident Fund: It presently offers a return of 8% per annum and has a maturity period of 15 years. Contributions can vary from Rs 500.to Rs 70,000 per annum. Investment under PPF is not very liquid. Withdrawals are permitted only after the expiry of 5 years from the end of the financial year of the first deposit. Also only a small portion can be withdrawn Investors are entitled to claim tax-benefits under Section 80 C for deposits made up to Rs 70,000 pa in the PPF account and interest exemptions under Section 10 of the Income Tax Act. Suitable investment option for investors who have age on their side and for whom liquidity is not a concern, LeU Mgt ee LCR ea) Small Savings National Savings Certificate: NSC is another attractive instrument offering a return of 8% pa. Investors are required to make a single deposit and the interest component is retumed along with the principal amount on maturity, NSC has an-:edge over its peers on account of a relatively lower tenure i.e. 6 years. Premature encashment of certificate is allowed under specific circumstances only, such as death of the holder(s), forfeiture by the pledgee or under court's order. Investments in NSC enjoy tax-benefits under Section 80 C of the Income Tax Act. The interest is entitled for exemption under section 80L of the Income Tax Act. An added incentive is that the accrued interest is automatically reinvested, and qualifies for benefit under boi feii(e)pits| On Investors who offer more weightage to tax benefits vis-a-vis other factors like liquidity should consider investing in the NSC LeRoi LTR eu Ue) Small Savings UREA) ia Or] KVP falls under the category of small saving schemes which don't ‘offer any benefits under the Income Tax Act. The scheme runs over a tenure of 8 years and 7 months (which is a fairly longish horizon) and doubles the amount invested. This makes the return one of the most attractive one amongst its peers. Investors are permitted to liquidate their investments in KVP any time after 2:5 years from the investment date. However a loss of interest has to be borne. In terms of tenure for withdrawal (2.5 years) it scores far better than the NSC and ede eel al eM 8-1 ucla Investors whose priority is earning attractive returns while maintaining a reasonable degree of liquidity should consider investing in the KVP. Also KVP will hold appeal for investors in cases where tax benefits are not a priority. Mgt ee LCR UCL) Small Savings ess eet MU UNM Ue Cus This scheme provides monthly income (at 8% pa) to investors. On competition of 6 years,-a 10% bonus on the principal sum is provided. POMIS offers investors an ‘exit-option after 1 year from the investment date. An exit after 1 year would also entail a loss of 5% of the amount invested. As a result, while the investor would not suffer any loss in interest earnings, but the loss of principal can be a significant one (especially for investors with high investments). Investors have to wait for a 3.year period if they:wish to liquidate their holdings without any loss of principal. The interest on investments as well as bonus received on maturity qualifies for tax benefits under Section 80L of the Income Tax Act. POMIS is best suited for investors like retirees who are looking for regular returns. The combination of assured returns with tax benefits makes POMIS an attractive proposition. LeU Mgt ie LCR eu UL) Small Savings Post office Time Deposits: Fixed deposits of varying tenures offered under the domain of small saving schemes. These deposits are available for periods ranging from 1 year to 5 years with the interest rates varying correspondingly. Interest payments are made annually. POTD have emerged as one of the most favoured instruments in recent times. Investors can exercise the exit option within 6 months without receiving any interest (1-Yr lock-in for exit with interest receipt). However the penalty clause is applicable depending on the interest rates offered by the time deposit. A flat penalty of 2% is deducted from the relevant rate in case of premature withdrawals. Interest on POTD is éligible for tax benefits under Section 80L of the Income Tax Act. POTD fit into most portfolios across investor classes. PUR ie LCR eu UL) Small Savings * Senior Citizens Savings Schemes: + The scheme has been reserved for citizens above 60 years of age, albeit citizens above 55 years can invest in the same subject to certain conditions being fulfilled. SCSS ‘offers a return of 9% pa, making it a must have proposition for the target audience. The SCSS in tandem with the POMIS can prove to be a very lucrative option for senior citizens who need regular income without taking on any tisk. LUM t e LCR UL) Fixed Income Instruments Samet oe lal =. Government Securities (G-Secs): Government Securities (G-Secs) market comprises almost 95% of the debt market. Government Security is a Sovereign debt issued by the Reserve Bank of India (RBI) oh behalf of Government of India. These securities are issued to cover the Central Government's annual market borrowing programme to fund the fiscal deficit. The term "Government Security” includes: * Central Government Dated Securities * State Government Securities * Treasury Bills (TBs). The market borrowing of the Central Government is raised through the issue of dated securities and 364 days TBs either by auction or by floatation of fixed coupon loans. In addition, TBs of 91 days are issued for managing the temporary cash mismatches of the Government. These do not form part of the borrowing programme of the Central Government. LeU Mgt ie LCR eu UL) Fixed Income Instruments Cm loN 7-1 unl-iales-leie gL =o] APY 9-H (a)_Dated Securities are generally of fixed maturity and fixed coupon securities usually carrying semi- annual coupon. These are called dated securities because these are identified by their date of maturity and the coupon * They are issuéd at face value. * Coupon or interest rate is fixed at the time of issuance and remains constant till redemption of the security. * The tenor of the security is also fixed. * Interest ‘Coupon payment is made ona half yearly basis on its face value. * The security is redeemed at par on its maturity date. Dees ere aaa an) Fixed Income Instruments (b).Zero Coupon Bonds are bonds issued at discount to face value and redeemed at par. The key features of these bonds are: + They are issued at a discount to the face value. * The tenor of the security is fixed. * The securities do no Carry any coupon or interest rate. The difference between the issue price and face value is the return on this security. * The security is redeemed at par on its maturity date. — Though the benchmark does not change, the rate of interest may vary according to the change in the benchmark rate till redemption of the security. The tenor of the’security is also fixed. * Interest /Coupon payment is made on a half yearly basis on its face value. * The security is redeemed at par on its maturity lca eM t e LCR eu Ua) Fixed Income Instruments (c) Floating Rate Bonds are bonds with variable interest rate with a fixed percentage over a’benchmark rate. There may be a cap and a floor rate attached, thereby fixing a maximum and minimum interest rate payable ‘oniit. The key’ features of these securities are: + They are issued at face value. * Coupon or interest rate is fixed as a percentage over a predefined bok-Tael Yar ee} aT ALM) ie [aera Ma benchmark rate may be TB rate, Bank rate, etc (d) Treasury Bills: There are different types of TBs based on the maturity period:and utility of the issuance like, ad-hoc TBs, 3 months, 12 months TBs etc. At present, the TBs in vogue are the 91-days and 364-days TBs. ee Mgt ee LCR eu Cua) Fixed Income Instruments + State Government Securities: * State Government Securities are securities/loans issued by the RBI on behalf of various State Governments for financing their developmental needs. + The RBI atictions these securities from time fo time. These auctions are of fixed coupon, with pre-announced notified amounts for different States. + The coupon rate and year of maturity identifies the government security. * For Central Government securities and State Government securities the day count is taken as 360 days for a year and 30 days for every completed month. However, for TBs. itis 365 days fora year. PUR LCR eu Ua) Fixed Income Instruments * Yield to maturity (YTM).is the discount rate that equates present value of all the future cash inflows to the cost price of the security and is also called the Internal Rate of Return (IRR). The concept of Yield to Maturity assumes that the future cash flows are reinvested at the same rate at which the original investment was made. The price of a security/bond is inversely related to its yield, As the yield increases, the price decreases and if the yield falls there is an increase in the price. Seer tera) sMacrofCcie Le aM DLel tem IL Cm et= 101 corel [atela (ete Institutions, Primary Dealers, Companies, Corporate Bodies, Partnership Firms, Institutions, Mutual Funds, Foreign Institutional Investors, State Governments, Provident Funds, Trusts, Nepal Rashtra Bank and even individuals are eligible to purchase Government Securities. Mgt ee LCR eu Ua) Fixed Income Instruments + Advantages of State Government Securities: « No TDS - Interest income up to Rs.12000/- is exempt under section 80L of Income Tax Act. The additional benefit of Rs.3000/- is also available for interest earned on CeCe NTMI es-1e alt oy + Zero default tisk, being asovereign paper * Regular income in the form of half yearly interest payments * Highly liquid due to active secondary market + Simplified and transparent transactions * Hassle free settlement through Demat'/ SGL accounts + Easy loans available from Banks * Holding possible in dematerialized form PUR i LCR eu Ua) Fixed Income Instruments Comune) coma) = iar) (

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