Investment Environment – I

Investment Avenues

Prof. Mohinder Singh

 Products Available
A. Savings Related products

(Bank deposits, Post small saving etc. Money Market or Liquid Funds )

A. Investment Related Products

(FD of Co., equity, debt, hybrid instruments and various mutual fund schemes etc. Each of this
investment class carries different risk-return profile and is covered separately under ‘products
available in capital markets’.)

A. Protection Related Products

(Life Insurance, Term insurance, Endowment policies, ULIP, Health Insurance etc.
www.irda.org.in)

A. Pension Products (New Pension System (NPS) Active Choice

Auto Choice Class E,G,C -www.pfrda.org.in , or Annuity / Pension Policies / Funds)

B. Borrowing Related Products (Personal Loans , Housing Loan , Reverse Mortgage , Loan
against Securities, Credit Card Debt etc.)
Financial instruments
• Financial assets, often called financial instruments, are intangible assets,
which are expected to provide future benefits in the form of a claim to
future cash. Some financial instruments are called securities and generally
include stocks and bonds. Any transaction related to financial instrument
includes at least two parties:
1. The party that has agreed to make future cash payments and is called the
issuer;

2. The party that owns the financial instrument, and therefore the right to
receive the payments made by the issuer, is called the investor.
Properties of Financial Assets
• Claims on cash Flow – Fixed (debt, Preference) or Residual (equity)

• Value of Financial Assets = PV of FCF

• FCF

• Discount rate – (RF+RP) Risk i.e Default, inflation risk and FX risk

• Key economic functions

– they allow the transfer of funds

– redistribute the unavoidable risk
Properties of Financial Assets
• Moneyness- currency or Money Market
• Divisibility and Denomination (minimum size at which it can be liquidated, smaller the size
more is the divisibility and liquidity, infinite (deposit)or finite (share or Bond etc.)
• Reversibility
• Term to Maturity
• Liquidity
• Convertibility
• Currency
• Cash Flow and Return Predictability
• Complexity
• Tax Status

Note : (Differs in terms of Marketability, Liquidity, Risk, Return, Transaction Costs, Tax )
Money Market Instruments : Treasury Bills
– Treasury Bills are Government short security issued at discount, no Interest, default free, deep
market, Competitive bidding or Non, book entry security, 91 days to 365 days, bearer security,
– The Reserve Bank of India (RBI) also issues such treasury bills under its open market operations
(OMO) strategy to regulate its inflation level (issue during inflationtory conditions or purchase
during recessionary period)
– Types of Treasury Bill (14, 91, 182, 364 days)

– Minimum investment : ₹25,0000 or multiples of ₹ 25,000

– Zero-coupon securities : (Yield is Capital gain)

– Trading : RBI on behalf of CG, (Wednesday through major stock exchanges) or Commercial banks,
Prime Dealers, T+1 Settlement, or through open-ended mutual fund
– Y = (100-P)/P x 365/D x 100

– Liquidity : maximum maturity 365 days and can be sold in SE

– Lower return : 3 to 4 % return,

– Taxation : STCG (as per income tax bracket)

Money Market Instruments : CDs
– Certificate of Deposit or CD (kind of TD)is a fixed-income financial instrument governed under
the Reserve Bank and India (RBI) issued in a dematerialized form by banks and FIs.
– They are issued at a discount provided on face value

– freely negotiable, Flexibility (Monthly, Annual or lump sum)

– Minimum deposit of ₹1 lakh and in subsequent multiples of it.

– Maturity : SCBs – (3 months to a year) and FIs (from 1–3 years)

– There is no lock-in required for a CD.

– One cannot issue a loan against a CD

– Higher Return (7-8%) and fully taxable (STCG)

– A CD cannot be publicly traded.

– Banks are not permitted to buy back a CD before its maturity

– When Do Banks Issue a CD in India?

• (In case of both low deposit growth and high demand for credit.

• When there are stiff or tight liquidity conditions in the market signifying that cash is tied up in non-liquid assets.
Money Market Instruments : CPs
– Commercial paper, also called CP, is a short-term debt instrument issued by companies (who enjoys high rating) to raise funds
generally for a time period up to one year. It is an unsecured money market instrument issued in the form of a promissory
note and was introduced in India for the first time in 1990 (on the recommendations of Vaghul Working Group).
– Maturity : 7 days to One year
– Minimum deposit of ₹5 lakh and in subsequent multiples of it.
– are not backed by collateral
– Sold at Discount and have higher interest rates than bonds

– freely transferable but not backed by any secuirty

– highly secure (as issued by highly rated co.)

– The tangible net worth of the issuing company is minimum 50 million, as per their audited balance sheet, listed Co. only,
issue not less than Rs. 5 Cr, current ratio should be 1.33:1

–
Money Market Instruments : Bankers Acceptance
– A bankers acceptance (BA, aka bill of exchange) is a commercial bank draft or debt instrument issued by a firm guaranteed
by a bank that promise to pay the holder of the instrument a specified amount on a specified date, which is typically 90 days
from the date of issue, but can range from 1 to 180 days.

– Promised future payment or draft or LoC which is accepted and Guaranteed by a bank and drawn on a deposit in the bank

– The bankers acceptance is issued at a discount, and paid in full when it becomes due — the difference between the value at
maturity and the value when issued is the interest. If the bankers acceptance is presented for payment before the due date,
then the amount paid is less by the amount of the interest that would have been earned if held to maturity.

– Used in international trade to eliminate the payment risk, in the case; the supplier and buyer do not know each other and
belong to different countries.

https://www.youtube.com/watch?v=CLzbFk8NCaA

–
Money Market Instruments : Repo and Reverse Repo
– Repurchase agreement or Repurchasing Option (sale of the security with the agreement to buy) and RBI buyer and
Banks and Fis are seller for overnight repo or Term Repo
– The Repo rate is the rate of interest charged by the buyer of the securities to the seller of securities. (Selling price
< Buying Price) or epo rate is the rate at which the Reserve Bank of India (RBI) lends money to commercial banks.
– A Repo transaction has two legs. The first leg is the sale of securities by the Repo borrower to the Repo lender. The
second leg is the purchase of securities by the Repo borrower from the Repo lender.
– Secured as backed by Govt. securities

– Reverse Repo Rate : It is the rate at which RBI borrows money from banks is less than the repo rate and used to
manage cash-flow and It involves the transfer of money from one account to another to encourages the banks to
park more funds with the RBI to earn higher returns on excess funds. Banks are left with lesser funds to extend
loans and borrowings to consumers.

–
Money Market Instruments : Call, Notice & Term Money
– The call money market (CMM) : overnight (one day) loans by SCBs (excluding RRBs), co-operative banks (other than Land
Development Banks) and Primary Dealers (PDs) to meet liquidity (interbank overnight loan) or o meet their reserve
requirements (CRR and SLR) or to cover a sudden shortfall in cash on any particular day.
– Notice market (NMM) : two days to fourteen days.

– Term Money (TMM) : between 15 days and one year.

– Loans are availed through auction/negotiation. The auction is made on interest rate through a Negotiated Trading System
(NDS) which is a regulated electronic trading platform during weekdays from 9:00 am to 5:00 pm.
– The average interest rate offered in the CMM is called a call rate.

– Call rate tell the financial situation of the economy (if the call rate is high then it indicates liquidity stress and vice versa.)

– FIMMDA’s (Fixed Income Money Market and Derivatives Association of India)

https://www.rbi.org.in/commonman/English/scripts/notification.aspx?id=566

–
Money Market Instruments : EURO Dollar or Currency

– Eurodollars refer to dollar-denominated accounts at foreign banks or overseas branches of American banks but
not subject to U.S. banking regulations.
– The eurodollar market is one of the world's biggest international money markets and consists of sophisticated
financial instruments. Free, unregulated and competitive
– British bankers began referring to the lending rates in this market as the London Inter-Bank Offer Rate, also
known as ICE LIBOR. (URIBOR/MIBOR (June 1998)/MIBID)
– Eurocurrency is borrowing and lending of foreign currency such as US dollars outside their countries of origin,
 as a means of financing trade and investment transactions
– unregulated, efficient better return, L,T,S H, overnight

https://www.yourarticlelibrary.com/foreign-trade/market-of-euro-dollar-meaning-benefits-effects-and-short-
comings/26278

–
 Capital market Instruments : Derivative
Pure, Hybrid or

• Equity Shares • Mortgage or Assets Backed Securities (M/ABS)

• Shares with DVR • Global Depository Receipts/ American Depository

• Preference shares Receipts( GDR and ADR)

• Foreign Currency Convertible Bonds (FCCBs)
• Equity shares with detachable warrants
• Futures
• Debentures
• Option, Warrants or Long-Term Equity Anticipation
• Sweat Equity Shares or ESOP
Securities(LEAPS) or Baskets
• Tracking Stocks
• Swaptions
• Secured Premium Notes (SPN) • Swaps (Interest or currency)
(Ex-TISCO issued warrants for the first time in India in the year 1992 to • Participatory Notes
raise 1212 crore)
• Hedge Fund
• Deep Discount Bonds
(Ex-IDBI deep discount bonds for Rs 1 lac repayable after 25 years were sold at a
• Fund of Funds
discount price of Rs. 2,700.)
• Exchange Traded Funds
• EQUIPREF • Gold ETF
• REITs
• Disaster Bonds or Catastrophe or CAT Bonds
Capital Market Instruments : Equity Shares
– Commonly called as Common Stock or Ordinary Shares

– Share Certificate : prima facia evidence of title of the members and

is tradable (Physical or Demat)
– Following Rights (Voting, share profits, control Management,
residual claim on income and assets, pre-emptive, apply to court in
case of any discrepancies, EOM), maturity
– Sweat Equity, Non- Voting or Differential Voting Rights (maximum
25% of the shares), Right Shares, Bonus Shares, ESOPs
– Return : Very High (Dividend plus Capital gain) but highly risky,
capital Appreciation, Limited Liability, free tradability, Liquidity,
Hedge against inflation.
Why to invest in stock market
Capital Market Instruments : Equity Shares
Best stocks are ones, which represent a “good business”, and are also available at “undervalued price” levels
for investing.
– Investment Classification : Large (>2K Cr) or Mid (.5 to 2K Cr) or Small (<.5k Cr),
– Blue Chip (consistent track record and doing extraordinary, Sensex & Nifty),
– Growth Shares (Higher growth than the others or industry), vs Value Shares,
– Income shares,
– defensive stocks (unaffected by market, Pharma),
– Cyclical Shares (affected by business cycle),
– Speculative shares,
– Penny Stock,
– Multibagger (Grow More than double)
– Moat Shares
– Direct or Mutual Funds or ETFs or F&O)
–
Financial instrument categories…
Investors Orientation
Securities
 They are instruments which represent a claim over
an asset or any future cash flows.
 Securities are classified on the basis of return and
source of issue.
Fixed income securities
 Return
Variable income securities
 Issuers
 Government
 Quasi-Government
 Public Sector Enterprises
 Corporates