Core 4 Investment Risk Management

Investment
management
Written by
Know your trainer
Pranav Chudgar
Director, EY
https://www.linkedin.com/in/pra
navchudgar/
Know your trainer
Treasury
Manager
Pranav Chudgar
Director, EY
navchudgar/
Banker Consultant
Know your trainer
Treasury
Manager
Pranav Chudgar
Director, EY
navchudgar/
Banker Consultant
What we covered - Session 1
Section Coverage
Warm Up Introduction and Case Study
Section 1: Investment
Treasury investments, Objectives, Financial Risks and Key Risk Metrics
Management – Basic
products for an Indian Different investment products in Indian and Global market
Treasury
Investment philosophy and regulations applicable on Corporates,
Functions in Various
Insurance, Banks, Mutual Funds and Pension Funds
Industries
Section 4: In House
Practical insight into managing the investment function
Investments Management
Section 5: Technology Use of Technology in investment function

0
Warm-up
Investment products
Plotting risk and return
Risk-Return profile of Major Asset Classes
Commodities
Real Estate
Equity
Return
Gold
Corporate
Debt CP
Sovereign
Debt
Money
market
Risk
Mayhem in equity markets across the world: Nifty had a free fall in March
16,000
15,000
14,000
13,000
12,000
11,000
10,000
9,000
8,000
7,000
6,000
What were my thoughts
First hand experience of couple of crisis to identify signs early on
16000
Pandemic
14000
12000
US Fed’s taper
tantrum
10000
2012: ??
Bankrupt ILFS crisis
8000 2008-2009 GFC twice
Bankrupt once
6000
4000
2011-2012
Eurozone
2000 PIGS crisis
16000
Pandemic
14000
12000
US Fed’s taper
tantrum
10000
2012: ??
8000 2008-2009 GFC twice
Bankrupt once
6000
4000
2011-2012
Eurozone
2000 PIGS crisis
16000 Over the years, I have found creative ways

of losing money in the financial markets
Pandemic
14000
12000
US Fed’s taper
tantrum
10000
2012: ??
8000 2008-2009 GFC twice
Bankrupt once
6000
4000
2011-2012
Eurozone
2000 PIGS crisis
Is there any other way that markets move?
Its a bull, Its a bear.... Its a K-A-N-G-A-R-O-O!!!
“Kharedo
maat
Becho”
It doesn't matter for a trader whether stock market is going up or down, as long
as its going somewhere.
1
Investment Management – Basics

Overview: Types of risk
1
Market risk
Credit risk
Foreign Interest rate Commodity
exchange risk risk risk
2 Market risk
Credit risk
3 Liquidity risk
Counterparty Sectoral
credit risk credit risk
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 must be

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

cash surplus
minimal element of
payments
Risk attributes
like credit,
backing over
investment

cash surplus
minimal element of
payments
Risk attributes Exit load,

like credit, Prepayment
backing over penalty, Lock in
investment period, Close
ended product

cash surplus
minimal element of
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

cash surplus
minimal element of
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 :

- A few large corporates, promoter driven groups , MFs, Insurance Companies
Investment function: You could be in any of these industries
Investment function: Evaluating various investment products

Investment function: Keeping in mind multiple factors before investing
Factors affecting choice of investment
Return Risk Liquidity Time Internal External

Objective tolerance needs horizon policies regulation
Investment management policy
The policy aims at providing:

✓ An overall governing
Investment framework
principles
✓ Execution principles for
Governance managing liquidity
framework
Accounting ✓ Surplus cash deployment under
and
valuations
organisation the overall philosophy of capital
structure preservation
Key components
of investment Different policy for different industries
policy
Performance
Risk
management
management
and
benchmarks
benchmarking
Authorized
activities and
Dealing
activities
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 Analyse the capacity of the company to meet
borrower failing to make required payments. its financial obligations. How ?
Risk includes loss of principal and interest, Credit Rating, Current Ration, Free ccsh
disruption to cash flows, and increased
fllow, Debt servicing ratio, Interest
collection costs.
coverage ratio
Risk that changes in interest rates may reduce
Interest rate risk (or increase) the market value of a bond. How I do measure interest rate risk ?
Interest rate risk is also referred to as market Duration
risk
Risk that a company may be unable to meet its

Listed security, generates enough
Liquidity risk short term/ long term financial demands.
volume, lock in periods, exit loads etc.
Occurs due to the inability to convert a
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 26
Sovereign Debt
2.1 Investment products in India: Money market
Overnight Money
Market in India
NDS-Call CROMS
Market
Call TREPS
Bilaterally Repo Bilaterally
Daily Average Trading Volume (%) Daily Average Trading Volume (INR crore)
100%
3,50,000
90%
3,00,000
80%
INR. Crore
70% 2,50,000
60% 2,00,000
50% 1,50,000
40% 1,00,000
30%
50,000
20%
-
10%
0%
2015-16 2016-17 2017-18 2018-19 2019-20 2020-21*
Call Market Repo TREPS Call Market Repo TREPS
Source: RBI Feasibility report, CCIL website

2.1 Investment products in India: Money market
Call lending Market Repo Lending TREPS Lending
Source: RBI Feasibility report

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

If 2008 GFC was gloomy, 2021-22 is scary
Govt / RBI will have to Leave us with after effects of

choose the lesser evil "Crowding out" or "Debt monetization".
Challenges
The lender to GOI /
For Market For RBI
State Govt for all these RBI is that debt monetization
Banks / NBFCs reeling under brings its own evils - inflation,
Debt monetization brings its
borrowings will be bad debts. They will prefer currency
own depreciation and other
evils - inflation,
(i) Market or (ii) RBI to lend to GOI/SDL or to currency depreciation
macro-economic .
imbalancesand
only top rated companies, other macro-economic
crowding out all other imbalances
borrowers.
Stock market is oblivious to

the macro problems. It's
living in a parallel universe,
with its global liquidity
bazooka.
If 2008 GFC was gloomy, 2020-21 is scary
RBI’s Auction calendar (1/3)
Question
Structural reform: Direct access to retail investors
RBI wants you and me to be a part of the INR 71 lakh crore GSec market
Business Standard
Business Standard
• Opening a Retail Direct Gilt Account (just like a demat account) with RBI
• Invest in RBI's primary auction (just like equity IPO)
• Trade in debt secondary market (just like equity trading)
Business Standard
• Opening a Retail Direct Gilt Account (just like a demat account) with RBI
• Invest in RBI's primary auction (just like equity IPO)
• Trade in debt secondary market (just like equity trading)
1. Broaden investor base
2. Help absorb ~12 lakh of borrowing plan for FY 21-22, reduces crowding out effect
Need for this 3. Alternate and safe investment for retail investors in times of low bank deposits
structural 4. Removes different intermediaries such as exchanges, MFs, brokers
reform brought 5. Benefit Corporate Bonds by reducing the Credit Spread between G-Secs and
Corporate Bonds.
Primary market for Gsec: Understanding different participants
Bidding process to purchase G-secs in the primary market
Central Government
Place non-competitive
Place competitive bids bids through the NSE
RBI in G-sec auction goBid App.
Type of
Institutions Investor Retail Investor
NSE goBid App

Primary Banks / MF/ Insurance
Dealers Cos / PF
Demat Account
SGL Account Gilt Account Holder
CSGL Account
Auctions are conducted on the electronic

platform called the E-Kuber
*SGL: Subsidiary General Ledger; CSGL: Constituent Subsidiary General Ledger

As a trader
As an investor
Risks: Market risk Reinvestment Risk

Kink in the 10 year curve
Corporate bonds
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 products in India:
Corporate bonds
COVID: Trend alert
✓ Corporate bonds credit spreads skyrocketed
✓ Issuers rated BBB and below: Double whammy - Lower availability & higher rates.
10
6 ILFS Crisis
5 COVID Crisis
4
5 year AAA 3 Year AAA
3
Source: Bloomberg
Investment products in India – Corporate and FI debt
Issuance of CP, by issuer institutions
Source: RBI annual report

Relationship between price and interest rates and risks in bond investment
Eg: INR-1,000 bond paying an annual coupon rate of 7% and having a

maturity of 3 years.
Inverse relationship between price and interest rates Calculation of Duration
YTM falls: 7% to 6%
▪ Price increased
▪ Decrease of 1% in YTM
changed price by 2.67%.
Duration: 2.67
YTM rises: 7% to 8%
▪ Price decreased
▪ Decrease of 1% in YTM
changed price by 2.57%
Duration: 2.57
▪ PV01: Change in price of a bond if the yield changes by 1 basis point

▪ Higher the PV01, higher would be the volatility (sensitivity) of price to change in yield
Yes Bank AT1 bonds
Year 2020 : What happened?
5th March 15th March Situation- March end
▪ Yes Bank under a moratorium ▪ Exchanges informed that AT1 bonds Total AT-1 bonds-
worth INR 8,415 Cr will be written
▪ PSU banks: Rs. 54,000 Cr
down completely in compliance with
globally accepted Basel-III ▪ Private banks: Rs.39,000 Cr.
RBI’s take
According to RBI’s circular July 2015,
▪ Superior to investors of equity shares
▪ Subordinated to claims of tier 2 regulatory capital instruments, depositors and all other creditors
▪ Neither secured nor covered under guarantee of issuer
Yes Bank AT1 bonds
What happened?
5th March 15th March Situation- March end
▪ Yes Bank under a moratorium ▪ Exchanges informed that AT1 bonds Total AT-1 bonds-
worth INR 8,415 Cr will be written
▪ PSU banks: Rs. 54,000 Cr
down completely in compliance with
globally accepted Basel-III ▪ Private banks: Rs.39,000 Cr.
RBI’s take
According to RBI’s circular July 2015,
▪ Superior to investors of equity shares
▪ Subordinated to claims of tier 2 regulatory capital instruments, depositors and all other creditors
▪ Neither secured nor covered under guarantee of issuer
Impact of Yes Bank’s AT1 bond
Fund House Amount For week ended March 06: 14 debt funds’
Nippon India 1,806 NAVs had negative weekly returns
Franklin Templeton 475 Fall in
MF Scheme
NAV • Some fund houses side-pocketed
UTI 336
Nippon India Strategic Debt -25.0% the portfolio
Kotak 93 Nippon India Credit Risk -12.0% • Makes it difficult for other banks to
Others 109 Baroda Treasury Advantage -9.0% raise capital for issuing such bonds
IDBI Credit Risk Fund -3.5%
Total 2819
Equities
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/

Equities
Jan-Dec 2020 Jan-Dec 2019

Rank Exchange Vol Vol Vol % Change
1 NSE 8,85,04,73,823 5,97,72,19,777 48.07%
2 B3 6,30,75,62,139 3,88,06,24,283 62.54%
3 CME Group 4,82,05,89,858 4,83,00,45,369 -0.20%
4 ICE 2,78,89,44,012 2,25,67,62,531 23.58%
5 Nasdaq 2,66,05,95,514 1,78,53,41,204 49.02%
Listed companies on stock exchanges
Source: World Federation Exchange , https://www.theglobaleconomy.com/rankings/Listed_companies/

Equities
Top exchanges by No. of single stock futures
contracts
Top exchanges by No. of stock index options

contracts
Top stock index options contracts traded
Source: World Federation of Exchanges IOMA 2019 Derivatives Report

Investment products in India – Equities
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

AIF
AIF
▪ Not covered under the

usual SEBI regulatory
framework
▪ Privately pooled
investment fund – a
trust, a company, a
corporate or an LLP
(Limited Liability
Partnership
*Amounts in INR Million
Category Details
01 Invests in start-up, early stage ventures, social ventures, infrastructure or other sectors
Closed end funds. Minimum tenure of 3 years. Can be listed on stock exchanges with a minimum
tradable lot of 1 crore rupees. They cannot invest more than 25% in one company
02 Invest in unlisted companies
03 Funds such as hedge funds or funds which trade with a view to make short term returns. No specific
incentives or concessions are given by the government or any other regulator.
Source: Citi Mutual Funds report

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 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
Negative returns in Liquid Funds
COVID: Trend alert
✓ INR 3.58 lakh cr outflow from MF industry. February AUM: INR 28.29 lakh cr vs March 2020 AUM: INR 24.71 lakh cr
✓ Liquid MF had –ve returns between 17th March and 24th March. Franklin Templeton closed 6 schemes on 24th April
Fund Name 8- day annualised return Month AUM (INR Crs)

HDFC Liquid Fund -8.32% February 2020 4,94,144
ICICI Prudential Liquid Fund -7.37% March 2020 3,82,240
Axis Liquid Fund -6.87% Total Outflow -111,904
SBI Liquid Fund -5.58%
Aditya Birla Sun Life Liquid Fund -7.28%
UTI Liquid Cash Plan -11.20%
Kotak Liquid Fund -11.67%
Period: 17th March-24th March
COVID: Trend alert

COVID: Trend alert

Fund Name 8- day annualised return

HDFC Liquid Fund -8.32%

Credit Quality
Fund Name AAA / Below Cash &
AA Sovereign
A1+ AA Others
HDFC Liquid Fund 72.89% 0.30% -- 31.86% (5.05%)
Kotak Liquid Fund


Credit Quality
Fund Name AAA / Below Cash &
AA Sovereign 1. Yields spiked up due to
A1+ AA Others
deteriorating credit quality
HDFC Liquid Fund 72.89% 0.30% -- 31.86% (5.05%) denting the mark-to-market
valuations of debt instruments
Kotak Liquid Fund
2. To meet the huge redemption
pressure, fund managers
borrowed money by pledging their
scheme instruments, turning
schemes cash negative.
Borrowing is permissible upto 20%
of scheme AUM
Side pocketing of mutual funds
Global markets
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
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)

Topics covered:
Investment function in
various industries
Practical insight into
managing investment
function in these industries
Investment products – Summary
Commodities
Real Estate
Equity
Return
Gold
Corporate
Debt CP
Sovereign
Debt
Money
market
Risk
Lets start with some questions
Are investments desks/ investments functions

1. Profit center and regulated
2. Cost center and regulated
3. Profit center and unregulated
4. Cost center and unregulated
Lets start with some questions
Are investments desks/ investments functions

1. Profit center and regulated
2. Cost center and regulated
3. Profit center and unregulated
4. Cost center and unregulated
✓ Corporates (Software, Pharma, Auto, Oil& Gas, Telecom etc.)

✓ Insurance companies
✓ Banks
✓ Mutual Funds
✓ Pension Funds / Provident Funds
Overview
Industry Investment Regulating body

Corporates
Banks RBI
NBFC RBI
Insurance IRDA
AMC/MF SEBI
Fintech
Management Consulting
Cost centre / Business enabler Profit centre / Business function
Business function
Assignment before you move ahead
1. Read about different categories of Mutual Funds
2. Pick one company from these sectors

- Corporate
- Bank
- Insurance
Look at their annual reports → Investments section from the notes to accounts
- Asset Management Company – Look at their Fact sheet for different products. Read
SID for 1 Equity MF and 1 Debt MF
3. Read basics about SLR / CRR for banks
4. Read the Red Hearing prospectus of either Embassy parks or Mindspace Business
Park
Investment management function in different industries
Corporates
Corporates Insurance Banking Mutual Funds Pension funds
Maruti Annual
Report :
2020-2021
Corporates
Maruti Annual
Report :
2020-2021
Corporates
RIL Annual
Report :
2020-2021
Corporates
RIL Annual
Report :
2020-2021
Insurance
HDFC Life
Insurance Co.
Ltd. Annual
Report :
2019-2020
Insurance
HDFC Life
Insurance Co.
Ltd. Annual
Report :
2019-2020
Insurance
HDFC Life
Insurance Co.
Ltd. Annual
Report :
2019-2020
Insurance
HDFC Life
Insurance Co.
Ltd. Annual
Report :
2019-2020
Insurance
HDFC Life
Insurance Co.
Ltd. Annual
Report :
2019-2020
Insurance
HDFC Life
Insurance Co.
Ltd. Annual
Report :
2019-2020
Insurance
HDFC Life
Insurance Co.
Ltd. Annual
Report :
2019-2020
Banking
HDFC Bank
Annual Report
: 2020-2021
Banking
HDFC Bank
Annual Report
: 2020-2021
Banking
HDFC Bank
Annual Report
: 2020-2021
Banking
HDFC Bank
Annual Report
: 2020-2021
Assignment before you move ahead
1. Read about different categories of Mutual Funds
2. Pick one company from these sectors

- Corporate
- Bank
- Insurance
Look at their annual reports → Investments section from the notes to accounts
- Asset Management Company – Look at their Fact sheet for different products. Read
SID for 1 Equity MF and 1 Debt MF
3. Read basics about SLR / CRR for banks
4. Read the Red Hearing prospectus of either Embassy parks or Mindspace Business
Park
Investment management policy
Investment
principles
Governance
framework
Accounting The policy aims at providing:
and
valuations
organisation
✓ An overall governing
structure
framework
Key components
of investment ✓ Execution principles for
policy managing liquidity
✓ Surplus cash deployment under
Performance
Risk the overall philosophy of capital
management
management preservation
and
benchmarks
benchmarking
Authorized
activities and
Dealing
activities
Corporates
Investment philosophy and regulations
Key decision
Return objective Risk Tolerance Liquidity needs Time Horizon Regulation
makers
High to moderate:
Generate stable Short to Internal regulation:
Average risk Depending on
Chief Finance periodic returns intermediate: Regulated by the
tolerance: Can vary operational
Officer/ Head of while aiming for a Depending investment policy
from one corporate expense and
Treasury long-term income on expansion mandated by board
to another capital investment
from investments plans of directors
plans
Investment management function in different industries:
Corporates
Investible surplus Key aspects for each tier of cash
Objective: Earn accruals

Core cash Strategies: Longer duration with high return yielding strategies
D
R u
Objective: Boost returns with sufficient liquidity
e Strategic r
t cash a Strategies: Short to moderate duration and high quality
u t
r i
n o
Operat n
ing Objective: Liquidity and principal preservation
Cash
Strategies: Bank deposits, money market funds
Corporates

Product level limits Sub Product level

FDs Bank Deposits
Bonds / NCDs : 5 year
Corporate Debt Maturity
CP
T Bill
Sovereign Debt Gsec / SDL / Muncipal
Bonds
Overnight
Mutual Fund - Debt Liquid
Credit Risk Fund
Mutual Fund – Equity / ETF
ETF Large Cap MF
Direct Equity
Principal protected schemes
REITs
AIFs
Use case:
Returns Benchmarking

Use case: One of the largest Indian PSU
Assigning FD limits
Eligibility criteria
Criteria Minimum Threshold Individual bank limit Weights
Net Worth INR 2,500 cr Not more than 20% of the overall limits Criteria %
Deposit base INR 20,000 cr Not more than 15% of the bank CRAR 25%
CRAR 10% Not more than 10% of the total deposits of the bank Net NPA 30%
PSU: AA NIM 15%
Credit Rating CD Return 10%
Pvt: AA+
NPA 9% Credit rating 20%
Limit setting
Weights 25% 30% 15% 10% 20%
Limit Final
CRAR CD Credit Ranking
Bank Name NET NPA NIM (INR crores)
Basel III Return Rating
SBI 12.38% 7.57% 3.07% 6.47% AAA 2 750
Bank of Baroda 12.24% 4.72% 2.19% 6.29% AAA 2 750
Bank of India 12.14% 6.90% 2.60% 6.45% AA+ 1 1000
Canara Bank 12.86% 6.33% 2.23% 6.29% AAA 3 300
Corporation Bank 11.32% 8.33% 2.12% 6.48% AA 1 1000
Indian Bank 13.64% 4.39% 2.59% 6.29% AAA 3 300
Use case:
Selecting optimum instrument
Quantitative selection criteria – Equity Mutual Funds

Particulars Eligibility Criteria
Scheme Asset Under Management >= 3,000 Crs
AMC Asset Under Management >= 50,000 Crs
5 Year CAGR >= 9.0%
10 Year CAGR >= 12.0%
Aditya Birla Nippon India SBI ICICI Pru

HDFC Top 100
Particulars SL Frontline Large Cap BlueChip Blue-chip
Fund
Equity Fund Fund Fund Fund
Scheme Asset Under
20,539 17,176 12,246 21,819 21,694
Management
AMC Asset Under Management 2,53,828 3,76,598 2,02,649 3,20,663 3,48,068
5 Year CAGR 8.34 7.88 8.96 9.88 9.27
10 Year CAGR 11.43 10.81 11.86 11.53 12.58
Review Policy or Exit Policy (Equity Mutual Fund)

Particular Minimum Maximum
6 Month return Nifty return – 5% Nifty return + 10%
Use case:
Companies diversifying their investment portfolio
• In Jan 21, Tesla

reported that it had
invested $1.5 billion in
Bitcoin in last 1 year.
• It made more profit in

Jan 21 by investing in
bitcoin that in 17 years
by selling car
Use case:
Companies diversifying their investment portfolio
➢ In its annual report, Tesla revealed that it had invested around $1.5 billion
in bitcoin and intended to start accepting the #cryptocurrency as payment
➢ Taken strategic treasury decision to diversify its investment and had

updated its investment policy to be more flexible.
➢ It stated that the move aims to diversify and maximize returns

on its idle cash which is not required for operating liquidity.
➢ However, for shareholders, this comes with an accounting risk

because digital assets are considered long term intangible
assets.
➢ Any decrease in value below the purchase price needs to be

adjusted against the profits
Insurance

Market share by first year life insurance premium
Life
Insurance
Premiums
(USD bn)
Market share by first year non life insurance premium
Non-life
insurance
premiums
(USD bn)
Source: IBEF report on Insurance sector in India

Insurance
Key decision
makers
In any year,
For fixed income
Maximize returns payouts are usually IDRAI regulates all
payments: Average
for meeting met by policy aspects of
risk-taking
insurance claims premium inflow. insurance sector
capabilities
Chief investment and guaranteed For unexpected Medium to including
officer payouts to policy liability claims, long term investments
For growing size of
holders while some percentage undertaken by
surplus: Above
ensuring safety of of investments insurance
average level of risk
capital need to be highly companies
is acceptable
liquid
Insurance
Insurance companies operating in India are required to follow the investment guidelines and
restrictions established as per IRDAI (Investment) Regulations, 2016
Parameter Life insurance General insurance
✓ Central government securities Not less than 25% Not less than 20%
✓ Central Government Securities, State
Not less than 50% (including Not less than 30% (including
Government Securities or Other
above) above)
Approved Securities
✓ Approved investments, other
Not exceeding 50% Not exceeding 70%
investments
✓ Investment in housing & infrastructure Not less than 15% of the fund Not less than 15% of the fund
Approved Investments, as per IRDAI guidelines, are:
✓ Bonds & debentures (not less than AA ✓ FDs

or equivalent) ✓ Deposits with PDs
✓ Equity shares, preference shares and ✓ CPs (not less than A1 or equivalent)
debt instruments ✓ Liquid MFs
✓ Short term bonds, debentures, CDs ✓ Reverse repo, Treasury bill, call notice
Insurance

Insurance

Banking
Key decision
makers
Based on the cost Short to an

of funds intermediate
Liquidity needs are RBI regulates all
Earn a positive time horizon
Below-average risk bifurcated for aspects of banking
gross interest depending
tolerance due to different buckets sector including
Treasury Head income (Interest upon nature
need to preserve of tenor to meet investments
earned from loans of liabilities
the assets liabilities for the undertaken by the
is greater than (deposits)
specific tenor banks
interest paid on and assets
deposits) (loans
Banking

Banking Asset Portfolio
Loans & Non-SLR

CRR SLR
Advances Investments
Customer 3% CRR 18% SLR Bank lends Surplus

deposits INR 3 kept INR 70 @ INR 9
INR 100 with RBI as INR 18
9% to a invested in
in bank cash. No invested in
corporate Non-SLR
as FD @ interest SLR
securities
7% earned securities
@ 6.5%
@ 6%
Gross Expense: Income: Income: Income: Income:
Income INR 7 INR 0 INR 1.08 INR 6.3 INR 0.6
Margin
Total Income: 7.98
Net Gross Income Margin Less operating expenses

Income (such as Depreciation of property, Rent, Salary,
Margin IT, Advertisement etc
Banking
SLR Investments Non-SLR Investments

➢ Permissible investment instruments for ➢ Shall not exceed 10% of the bank’s total deposits
maintaining the SLR: (as on 31st March of the preceding financial year)
✓ Cash
✓ Gold ➢ Permissible Non-SLR investment instruments:
✓ Gsec, T-bills SDLs ▪ CP, debentures and bonds – Rating: Atleast “A”
✓ Deposit or balance maintained with the ▪ Debt & Money Market Mutual Funds
RBI ▪ Shares of Market Infrastructure Companies (e.g.
✓ Securities offered as collateral to the RBI CCIL, NPCI)
for availing liquidity assistance from MSF ➢ Subjected to certain restrictions:
▪ Investment in deep discount and zero-coupon
bonds (Minimum rating of “A”)
▪ CPs (Original maturity > 1 year)
➢ Not permitted:
▪ Perpetual debt instruments
Banking
Banking Asset Portfolio
Non-SLR Loans &

CRR SLR
Investments Advances
Bank’s ownership of G-sec: 39% G-Sec trading volume

Mutual Others, 4%
50%
Funds, 6%
39.10% Insurance
40% Cos., 3% Banks and
30% 26.20% PDs together
Primary hold 87% of
20% Dealers, 14%
12.40% the market
10.30% 9.90% Banks, 73%
10% share in the
2.10% trading of G-
0% Secs
Banks Insurance Provident RBI FPI Others
Cos. Funds
Source: RBI Feasibility report, RBI annual report

Use case: Selecting optimum instrument
Quantitative selection criteria – Corporate bonds

Rational - Weighted index method for investment selection
Criteria Rank 1 Rank 2 Rank 3 Rank 4
Weightage 25% 25% 25% 25%
Yield As observed on day of investments
Credit Risk Sovereign AAA AA+ AA
Government Backing Yes No - -
Liquidity Very high High Low Very low
Policy Credit Govt Total

Parameters Criteria YTM YTM Liquidity
limits Risk Backing Score
Net worth >750 Crs
Profitability +ve: 3 Years Weights 25% 25% 25% 25%
Reserves +ve: 3 Years 8.08% Axis Finance 8.57% 1 2 2 2 1.75
Interest
>1 8.30% 3 2 1 2 2.00
Coverage 8.97% REC
Banks/NBFC: <8 7.83% NABARD 7.78% 4 2 1 1 2.00
D:E Ratio
Others: <3
8.70% HDFC 8.59% 1 2 2 4 2.25
Credit
Min AA 8.75% SBI Perpetual 8.57% 1 3 1 4 2.25
Rating
AMC & Mutual Funds
AUM at March 2019, by investor type
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 of Indian
mutual funds
across asset
classes
Source: Citi mutual fund report

AMC & Mutual Funds
Key decision Time

Return objective Risk Tolerance Liquidity needs Regulation
makers Horizon
Money
Maximize Money market Money market market
investment funds: Low funds: High funds: Short SEBI regulates all
Fund Manager
returns relative to term aspects of Mutual
of each indiviual
an agreed upon Equity and Debt Equity and Debt funds including
scheme
benchmark while funds: Moderate to funds: Moderate Equity and investments
preserving capital high to Low Debt funds:
Long term
AMC & 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
Diversified Income
Fund Fund Multi-asset
Fund
ELSS Duration
Fund Fund
Arbitrage Gilt Fund

Funds / Corp
Bond
AMC & Mutual Funds

AMC & Mutual Funds
Organisation structure in a AMC/mutual fund

AMC & Mutual Funds
Scheme Information Document

Use case:
Monitoring of portfolio: Credit Quality
AUM (On AUM (On Credit Quality

Fund Name 31st Oct 22nd April Below Soverei Cash &
2019) 2020) AAA AA Unrated
AA gn Others
Franklin India Credit Risk Fund 5,704 3,559 12.0% 23.2% 60.5% -- 2.6% --
Franklin India Dynamic Accrual Fund 4,030 2,564 12.9% 21.6% 61.7% -- 2.6% --
Franklin India Income Opportunities 3,410 1,880 11.9% 24.8% 57.7% -- 3.9% --
Franklin India Low Duration 5,704 2,399 23.1% 15.6% 54.8% -- 2.0%
Franklin India Short term Income 12,551 5,726 12.0% 21.4% 61.2% -- 2.5% --
Franklin India Ultra Short Bond 19,950 9,728 9.4% 27.8% 46.3% -- 16.3%
Total AUM of 6 Funds 51,349 25,856
Use case:

Use case:

AMC & Mutual Funds
Investment
Philosophy
DSP Small
Cap and Mid
Cap Fund
AMC & Mutual Funds
Investment Credit Quality

Category Type Fund name AUM (in Cr) Amt (In INR Cash &
% AAA AA(2) Below AA(3) Sovereign Unrated
cr) Others
Aditya Birla Sun Life Liquid 50,512 184 16% 73.41% 0.37% -- 11.85% 10.01% 4.36%
HDFC Liquid Fund 90,795 176 15% 70.88% -- -- 21.19% 7.92% --
Liquid Fund
Tata Liquid Fund 21,439 144 12% 76.00% -- -- 20.47% 3.53% --
Axis Liquid Fund 30,068 138 12% 86.24% -- -- 13.18% 0.58% --
Franklin India Credit Risk Fund 6,624 61 5% 12.04% 23.23% 60.59% -- 2.61% --
Credit Risk Fund
HDFC Credit Risk Debt Fund 14,625 92 8% 28.26% 30.04% 36.85% 1.03% 3.81% --
Banking & PSU IDFC Banking & PSU Debt Fund 11,210 107 9% 96.64% -- -- 0.03% 3.34% --
Debt Fund Axis Banking & PSU Debt Fund 9,832 154 13% 87.65% -- -- 1.19% 4.10% --
Gilt Fund SBI Magnum Gilt Fund 1,944 112 10% -- -- -- 85.87% 14.13% --
Total 1,168 65% 4% 6% 18% 6% 1%
Investment Instrument
Bond /
Category Type Fund name AUM (in Cr) Amt (In INR
% Cash CD CP Debentur FD Gilt T Bill Others
cr)
es
Aditya Birla Sun Life Liquid 50,512 184 16% -- 15.63% 49.26% 8.33% 4.36% 1.02% 8.94% 12.46%
HDFC Liquid Fund 90,795 176 15% -- 8.15% 59.57% 2.61% -- 2.36% 18.83% 8.47%
Liquid Fund
Tata Liquid Fund 21,439 144 12% -- 16.96% 57.98% 1.05% -- -- 20.47% 3.53%
Axis Liquid Fund 30,068 138 12% -- 16.17% 67.20% 2.52% -- -- 13.18% 0.93%
Franklin India Credit Risk Fund 6,624 61 5% 2.61% -- -- 80.21% -- -- -- 17.18%
Credit Risk Fund
HDFC Credit Risk Debt Fund 14,625 92 8% -- 1.48% 1.19% 65.69% -- 0.68% -- 30.96%
Banking & PSU IDFC Banking & PSU Debt Fund 11,210 107 9% -- 3.47% -- 88.65% -- -- -- 7.88%
Debt Fund Axis Banking & PSU Debt Fund 9,832 154 13% -- 2.21% 4.79% 86.32% -- -- -- 6.68%
Gilt Fund SBI Magnum Gilt Fund 1,944 112 10% -- -- -- -- -- 61.91% 22.93% 15.16%
Total 1,168 0% 8% 33% 31% 1% 7% 11% 10%
Mutual
fund broker
report
Mutual Funds:
AAUM- Pre and post Covid trends
AAUM in INR ‘1000 crore (Sep 19 - June 20)
Overnight Fund Liquid Fund Credit Risk Fund Arbitrage Fund

Liquid funds: Liquid funds:
Exit load Impact of COVID
₹600
514.81 519.83 516.04 506.92

504.90 495.04 494.14
₹500 469.01
413.09
₹400 382.24
₹300
Overnight ₹200
funds:
Growth 58.36 49.13 31.99 29.83
₹100
₹-
Sep-19 Oct-19 Nov-19 Dec-19 Jan-20 Feb-20 Mar-20 Apr-20 May-20 Jun-20
Pre COVID-19 Post COVID 19
Arbitrage funds: Credit risk fund impacted:

Credit risk funds and Arbitrage funds - Fall by 32% in April 1. Yes Bank AT1
stopped taking fresh inflows followed by 15% growth in
May 2. Franklin
Pension Funds
Key decision Time

Return objective Risk Tolerance Liquidity needs Regulation
makers Horizon
Low.
Generate return
It will be high Ministry of
Treasurer prescribed by Low Long term
when net attrition Finance
EPFO
is higher
Pension Funds
Pension fund assets to GDP (%)

USA
140%
135.7% 136.8% 131.9% 135.8%
120%
119.8% 116.7% 123.4% Largest provident and pension funds in
100% India
80%
60%
40%
20%
0%
2010 2011 2012 2013 2014 2015 2016
2.0% India
1.5%
1.0%
1.1%
0.8%
0.5%
0.6%
0.2% 0.2% 0.3% 0.4%
0.0%
2010 2011 2012 2013 2014 2015 2016
Source: World Bank, Citi mutual fund report

Pension Funds
Asset Allocation among Pension Funds globally (2016)
➢ Equity investment is used as a

tool to enhance fund returns,
globally
➢ On an average, pension funds in

Australia, USA and UK have
higher allocation towards equity
and equity-related instruments
➢ India currently permits

investment in equity instruments
in the range of 5% - 15% for
pension funds
Source: SBI Funds report on global pension funds

Pension Funds

Investment asset class Policy Details
• G-Sec, State Development loan
Min - 45%
G-Sec and related investments • Mutual funds set up as dedicated funds for
Max - 50%
investment in G-Sec - Max 5% of total portfolio
• Listed bonds with residual maturity of 3 years
• Basel III Tier I bond
Debt instruments and related Min - 35%
• Rupee bond issued by IFC & ADB
investments Max - 45%
• Term deposit greater than 1 year
• Debt Mutual fund (Max 5% of total portfolio)
• Money market instruments
Short term debt instruments and • CP with minimum rating of A1+
Upto 5%
related investments • Liquid Mutual fund
• Term deposits up to 1 year
• Direct equity in companies with market cap of INR
Min - 5% 5,000
Equities and related instruments
Max - 15%
• Mutual fund , with minimum 65% allocated to equity
• Commercial / residential mortgage backed securities
Asset backed, Trust Structured and • Units of REITs
Upto 5%
miscellaneous investments • ABS
• Units of Infrastructure Investment Trust
Pension Funds
Investment asset
Portfolio weight Yield
class
G-Sec and related

Q. What is the rate of interest
investments
45% 5.80% which EPFO has declared ?
Q. What is the W.Avg Yield ?
Debt instruments
and related 35% 6.00%
investments
Short term debt

Nil Not Applicable
Pensions funds: A ticking time bomb
instruments
• Statutory pay out rate of 8.50% in falling yield
scenario.
Equities and related
15% 11.00%
instruments
• Higher yielding papers maturing and replaced
by lower yielding paper
Asset backed,
10%
• How to manage Credit risk in portfolio- Punjab
miscellaneous 5%
investments state paper defaulting, 476 defaults by CRISIL
in H2FY20,AT 1 bonds concern
Use Case: Funding the yield deficit
Maturity Profile
(YTM on the portfolio – 8.52%)
140 12%
120 11%
100 10%
80 9%
43.27
111.32
60 8%
113.11
104.98
99.50
88.69
40 7%
24.85 24.82
52.56
20 39.33 6%
30.28
15.48 19.48
13.49
0 3.38 5%
2018 2019 2020 2021 2022 2023 2024 2025 2026 2027 2028 2029 2030
New investments Old Investments Overall YTM New Investments YTM Old Investments YTM
Use case: Client had invested INR 20 cr in NFO of ETF
Absence of post deal monitoring

Performance of NIFTY vs ETF NFO : Equal Nifty ETF
Nifty Index DSP Blackrock Equal Nifty 50 Underperformane of scheme
Returns Returns compared to Benchmark
Date Nifty
Absolute NAV
Index
In % Returns In % Absolute Returns In % Absolute Returns
23-Oct-17 10,185 10.00
30-Nov-17 10,227 0.4% 8,59,810 9.88 -1.2% -2,51,7900 -1.6% -3,37,7710
29-Dec-17 10,531 3.4% 7,,31,030 10.20 2.0% 4,13,2800 -1.4% -2,99,8230
31-Jan-18 11,028 8.3% 1,73,78,610 10.39 3.9% 8,12,9100 -4.4% -9,24,9510
28-Feb-18 10,493 3.0% 63,50,610 9.95 -0.5% -1,14,8700 -3.6% -7,49,9310
28-Mar-18 10,114 -0.7% -14,67,030 9.56 -4.4% -9,20,8500 -3.7% -7,74,1470
30-Apr-18 10,739 5.4% 1,14,33,160 10.02 0.2% 51,4500 -5.2% -10,91,8660
31-May-18 10,736 5.4% 113,67,180 9.89 -1.1% -2,30,1600 -6.5% -13,66,8780
29-Jun-18 10,714 5.2% 1,09,16,660 9.77 -2.3% -4,73,1300 -7.5% -15,64,7960
31-Jul-18 11,357 11.5% 2,41,58,090 10.19 1.9% 4,03,2000 -9.6% -20,12,6090
Fund’s
composition is Top
very different Top holdings
compared to holdings of Nifty
50 Index
Nifty’s
composition
Summary: Investment Life Cycle
Deal Reconciliati
Pre Deal Deal Deal Deal Risk
approval and on and
Analysis capture confirmation settlement monitoring
execution accounting
Identity surplus for Create deal in TMS Time stamp Counterparty Verify deal details Monitor
investment Fund transfer
confirmation in TMS basis underlying
confirmation letter portfolio
Obtaining quotes Capture final performance
Workflow for deal
deal in TMS Cross verify deal Reconcile
approval in TMS Communicate
attributes settlement
Assessing credit discrepancies to Monitor
quality counterparty counterparty risk
Signature by Send signed Receive
relevant transaction slip counterparty
authorities Reconcile holdings
Decision making to counterparty confirmation
letter
Deal accounting
Assess the
counterparty limits
Policy compliance
Investment management:
Draft: For discussion purposes only
134 Coronavirus impact on PE
Investment function: Keeping in mind multiple factors before investing
Factors affecting choice of investment
Return Risk Liquidity Time Internal External

Objective tolerance needs horizon policies regulation
Topics covered:
Recent trends in Investment

Management
Industry trend: Rise of electronic platforms and Algo trading in Financial
market
Trade flow of electronic platforms

1. Clients have started using auto-
hedging methods to remove biases
2. Individuals trade based on
statistical trading models
Use Case: Algo trading
Closing Prices of Axis Bank and ICICI Bank

500.00
450.00
400.00
350.00
300.00
250.00
Axis_Closing Price ICICI _ Closing Price

Use Case: Algo trading
Ratio - Daily Change in Prices
1.300
Entry point: Sell Axis, Buy ICICI
1.280
1.260
1.240
1.220
1.200
1.180
1.160 Entry point: Buy

1.140
Axis, Sell ICICI
1.120
1.100
01-Apr-20 11-Apr-20 21-Apr-20 01-May-20 11-May-20 21-May-20 31-May-20 10-Jun-20 20-Jun-20
Ratio Ratio - Average

Gamestop (GME)
The David vs. Goliath Story
A stock that rose an astronomical 2,500%+ in

a span of 20 trading days
Sophisticated hedge funds were beaten at

their own game by amateur stock traders
ROBO ADVISORY
Page 141
Understanding Robo Advisory
► Pre-programmed personal financial advice

Robo ► Automated service that gives you advice on managing investments &
Advisory even helps in buying some financial products
► Algorithm-based solutions after analysing a user’s financial

position, goals, aspirations, time horizons, risk appetite and capital
Use of market expectations.
technology
► Rule based logic condition, Machine Learning and Artificial
Intelligence to determine investments
▸ First introduced in 2008 in the US.

▸ Became popular due to minimum investment, low cost and operational
ease
▸ Normal financial advisory firms need high investment amount and
Evolution charge high fees
▸ More trust on algos that human decision, 24X7 access
▸ India: Growing per capita income, Millennials, increasing smartphone
and internet penetration, adoption of tech in every day life
Classification of Robo Advisory
Comprehensive Wealth
Fund-Based Robo Advisory Multi asset Robo Advisory
Advisory
• Investments products • Focus on different asset • Aggregating customers’
offered are in single asset classes: Equity, debt, gold financial net worth
class funds, typically etc • Understand their risk
mutual funds. appetite and then offer
• Users with moderate-to- comprehensive wealth
• Revenues: As advisory fee aggressive risk profiles management services.
from user or as
commissions from AMC • Thematic portfolios, which • Pricing is usually fee-based
are designed around for a package of combined
• In US, ETF is a large market specific sectors or services. They also get
where Robo Advisory is investment philosophies. commissions from fund
very active houses.
• Pricing: Usually fixed,
either as an annual fee or a
transaction fee per
investment.
Different platforms in India
Broking MF Distribution / Advisory

The Three Musketeers
Art collectors
Art collectors
Understanding the basics
► Fungible Asset: Standardized asset , not unique and exchanged for

Fungible / money. Eg : Gold, Bitcoin
Non Fungible ► Non fungible Asset: Unique in identify and value. No two non-fungible
Asset assets have same features or are of same value. Eg: Real estate, Painting,
songs
Tokens ► Backed by blockchain technology. Digital certificate of ownership
► Bitcoin: Emerging as the answer to the future digital currency

► NFTs: Answer for the future digital collectables space
► Unique, traceable and indivisible assets in the digital world
► Example of NFT: Digital artwork, logos, photos, animation, 3D work, music,
video clips, Video games avatars / accessories etc
What is NFT
► Buying an NFT means purchasing the digital asset with a Certificate of
authenticity and ownership plus legal rights
► Digital alternative to collectibles
► Backed by blockchain with additional specific information (owner,
description of asset etc)
What is NFT
► Bitcoin: Same price at a given point in time.

NFTs are ► NFT: Each digital asset backed by NFT is unique. And the price can be
different from arbitrarily set higher or lower, depending on its demand.
Crypto
► Backed by blockchain, providing security to owners of digital assets.
► Majority of NFT is sold on the

Ethereum network through the
ERC721 Token standard.
Digital
and
Identity Real
Art Most hyped space:
Real Unique NBA Top Shot: A
Assets Collecti place to collect
- Land bles tokenized NBA
Crypto moments in a digital
Video card form
Real
Gaming
Estate
Source: niftygateway.com
Types of Assets available as NFTs
Use cases
Ernst & Young Associates LLP
EY | Assurance | Tax | Transactions | Advisory
About EY
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transaction and advisory services. The
insights and quality services we deliver help
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We develop outstanding leaders who team
to deliver on our promises to all of our
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EY refers to the global organization, and
may refer to one or more, of the member
firms of Ernst & Young Global Limited, each
of which is a separate legal entity. Ernst &
Young Global Limited, a UK company limited
by guarantee, does not provide services to
clients. For more information about our
organization, please visit ey.com.
Ernst & Young Associates LLP is one of the Indian client
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about our organization, please visit www.ey.com/in.
Ernst & Young Associates LLP. is a Limited Liability

Partnership, registered under the Limited Liability Partnership
Act, 2008 in India, having its registered office at 22 Camac
Street, 3rd Floor, Block C, Kolkata – 700016
© 2019 Ernst & Young Associates LLP. Published in India.

All Rights Reserved.
This publication contains information in summary form and is

therefore intended for general guidance only. It is not intended
to be a substitute for detailed research or the exercise of
professional judgment. Neither EYGM Limited nor any other
member of the global Ernst & Young organization can accept
any responsibility for loss occasioned to any person acting or
refraining from action as a result of any material in this
publication. On any specific matter, reference should be made
to the appropriate advisor.
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.
Page 152
Scenario 1
MF Corporate Bond
Both asset classes have done equally well. The Treasurer shall be indifferent
Page 153
Scenario 1
MF Corporate Bond
Scenario 2
MF Corporate Bond
Standard deviation of returns .80 Standard deviation of returns is .50
Page 154
Scenario 1
MF Corporate Bond
Scenario 2
MF Corporate Bond
Standard deviation of returns 0.80 Standard deviation of returns is 0.40
Corporate Bond is better, because it has better risk adjusted return

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
Page 155
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
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

Core 4 Investment Risk Management

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Investment

Section 5: Technology Use of Technology in investment function

Risk-Return profile of Major Asset Classes

16000 Over the years, I have found creative ways

Investment Management – Basics

Protection of capital Chosen instruments must be

Protection of capital Chosen instruments must be

Protection of capital Chosen instruments must be

Risk attributes Exit load,

Protection of capital Chosen instruments must be

Risk attributes Exit load, By what Basis

Protection of capital Chosen instruments must be

Risk attributes Exit load, By what Basis

Exceptions to above criteria’s :

Risk-Return profile of Major Asset Classes

Risk-Return profile of Major Asset Classes

Factors affecting choice of investment

Return Risk Liquidity Time Internal External

The policy aims at providing:

Type of risk Description How to mitigate risk ?

Risk that a company may be unable to meet its

Call Market Repo TREPS Call Market Repo TREPS

Source: RBI Feasibility report, CCIL website

Call lending Market Repo Lending TREPS Lending

Source: RBI Feasibility report

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

Trading Volume - Instruments Trading Volume - Platform

Source: RBI Feasibility report, RBI annual report

Govt / RBI will have to Leave us with after effects of

Stock market is oblivious to

Bidding process to purchase G-secs in the primary market

NSE goBid App

Auctions are conducted on the electronic

*SGL: Subsidiary General Ledger; CSGL: Constituent Subsidiary General Ledger

Risks: Market risk Reinvestment Risk

Category-wise Corporate Bonds Issuers

- ₹366 billion raised 10% 7%

worth ₹6 trillion 35%

Source: RBI Financial Sector: Regulations and Development report

Issuance of CP, by issuer institutions

Source: RBI annual report

Eg: INR-1,000 bond paying an annual coupon rate of 7% and having a

Inverse relationship between price and interest rates Calculation of Duration

▪ PV01: Change in price of a bond if the yield changes by 1 basis point

Impact of Yes Bank’s AT1 bond

60% 55.2% 55.3%

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

Jan-Dec 2020 Jan-Dec 2019

Listed companies on stock exchanges

Source: World Federation Exchange , https://www.theglobaleconomy.com/rankings/Listed_companies/

Top exchanges by No. of stock index options

Top stock index options contracts traded

Source: World Federation of Exchanges IOMA 2019 Derivatives Report

Figure in INR Million

Source: Citi Mutual Funds report

▪ Not covered under the

*Amounts in INR Million

Source: Citi Mutual Funds report

Types of Mutual Funds

Based on Based on Based on Based on

Open Equity Debt Hybrid Growth Tax

Investor split by AUM as on March 2019

Corporate 136.37 40.12%

HNWI 107.38 31.59%