Professional Documents
Culture Documents
SUMMER INTERNSHIP
Report
On
“Fixed income
Instruments in India”
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Fixed Income Instruments in India
This report is based on the information latest by July 2007. Motive of preparing
this report is collect brief information on various fixed income instruments as
most of the people don’t have any information about these instruments.
It is a wide topic and it is not easy to touch all the aspects of fixed income
instrument in detail as well as the secondary market for government securities
and corporate bonds is not fully developed in India.
Thank you,
Deepak Singh
deepaksjyala@hotmail.com
deepaksjyala@gmail.com
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Fixed Income Instruments in India
TABLE OF CONTENTS
1. Executive Summary
2. Objective
3. Methodology
4. Fixed Income Instruments
4.1) Introduction
4.2) Why Invest in Fixed Income Instruments?
4.3) Risk in Fixed Income Instruments
4.4) Returns
5. Debt Market
6. Structure of Indian Debt Market
7. Regulators (RBI & SEBI)
8. Government Securities
9. Essential terms
10. Features of Government Securities
11. Auction of Securities
12. Central Government Securities
12.1) Treasury Bills
12.2) Dated Securities
12.3) Zero coupon Bonds
12.4) Partly Paid Stock
12.5) Floating Rate Bonds
12.6) Capital Indexed Bonds
12.7) Coupon Bearing Bonds
12.8) Govt. with call and put option
12.9) Strips
13. Zero Coupon Yield Curve
14. State Government Securities
14.1) State Development Loan
14.2) Coupon Bearing Bonds
15. Mandated Investments in Govt. Securities
16. Benefits of Investing in Govt. Securities
17. Public Sector Bonds
17.1) Govt. Guaranteed Bonds
17.2) PSU Bonds
17.3) Commercial Papers
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17.4) Debentures
18. Private Sector Bonds
18.1) Corporate Bonds
18.2) Corporate Debentures
18.3) Inter-Corporate Deposits
18.4) Certificate of Deposits
18.5) SPN
18.6) Commercial Papers
18.7) Floating Interest Rate
18.8) Zero Coupon Bond
19. Other Fixed Income Instruments
19.1) Company fixed Deposits
19.2) Employee’s Provident Fund
19.3) Mutual Funds
19.4) Guilt Funds
19.5) Bank Fixed Deposits
19.6) Other Prominent Govt. Schemes
a) Public Provident Fund
b) National Savings Schemes Account, 1992 (Discont.)
c) National savings Certificates (viii) Issue
d) Post Office Monthly Income Scheme
e) Post Office Recurring Deposits Scheme
f) Post Office Savings Account
g) Post Office Time Deposit Schemes
h) Kisan Vikas Patra
i) RBI Relief Bonds
j) Deposit Scheme for Retiring Employees of PSUs
k) Deposit Scheme for Retiring Govt. Employees-89
l) Indira Vikas Patra (Discontinued)
20. Other important information
21. Liquidity Vs Return
22. Risk Vs Return
23. Suggestions for investors
24. Limitations of study
25. References/Bibliography
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1. EXECUTIVE SUMMARY
Savings are essential requirements for any individual. There are lots of
options available to invest in variety of securities based on individual’s
profile in terms of age, income, liquidity requirement and risk tolerance
level. At every age investment portfolio should comprise of both fixed and
variable income instruments.
This report addresses ‘Fixed Income Instruments’ which are one of the
important parts of every investors saving portfolio.
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Attribute wise summary of financial instruments:
PRODUCTS RETURN LIQUIDITY RISK
EQUITY HIGH HIGH HIGH
Co. DEBENTURES MODERATE LOW MODERATE
Co. FDs MODERATE LOW HIGH
BANK DEPOSITS LOW HIGH LOW
PPF MODERATE MODERATE LOW
LIFE INSURANCE LOW LOW LOW
MUTUAL FUNDS HIGH HIGH LOW
RBI BONDS MODERATE LOW LOW
GOVT. SECURITIES MODERATE MODERATE LOW
GUILT FUNDS MODERATE HIGH MODERATE
RBI REFLIEF BOND HIGH LOW LOW
Risk Vs Return:
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2. OBJECTIVE
To collect information of various fixed income instruments.
In India most of the people don’t have sufficient information about various fixed
income instruments those are available for investment.
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3. RESEARCH METHODOLOGY
This project report is wholly based on personal discussion and research from
websites. Objective of report was fully executed with the help of secondary
data available on net.
The data collection and data analysis is done with the help of following
methods
1. Data collection:
Secondary Methods: - Journals, Corporate reports, News papers and related
websites.
2. Data analysis:
Data classification and analysis is being done with the help of various
statistical tools such as charts, tables and graphical methods such as pie
charts, bar charts, area charts etc.
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Fixed Income Instruments in India
Indian Capital Markets comprise of the Equities Market and the Debt Markets.
Debt Markets are markets for the issuance, trading and settlement in fixed income
securities of various types and features. Fixed income securities can be issued by
almost any legal entity like Central and State Governments, Public Bodies,
Statutory corporations, Banks and Institutions and Corporate Bodies.
Fixed Income securities are one of the most innovative and dynamic instruments
evolved in the financial system ever since the inception of money. Based as they
are on the concept of interest and time-value of money, Fixed Income securities
personify the essence of innovation and transformation, which have fueled the
explosive growth of the financial markets over the past few centuries.
Fixed Income securities offer one of the most attractive investment opportunities
with regard to safety of investments, adequate liquidity, flexibility in structuring a
portfolio, easier monitoring, long term reliability and decent returns. They are an
essential component of any portfolio of financial and real assets, whether in form
of pure interest bearing bonds, innovative and varied type of debt instruments or
asset-backed mortgages and securitized instruments.
Fixed income instruments are basically obligations undertaken by the issuer of the
instrument as regards to repayment of interest and principal (At predetermined
intervals of time), which the issuer would pay to the legal owner of the instrument.
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Low risk tolerance
One of the key benefits of fixed-income instruments is low risk i.e. the relative
safety of principal and a predictable rate of return (yield). If your risk tolerance
level is low, fixed-income investments might suit your investment needs better.
But remember that these still have risks associated and are explained later.
Before you decide to invest in fixed-income instruments, evaluate your needs from
three key perspectives - risk, returns and liquidity. Match the investment options
with your financial needs.
4.3) Risk
There are two types of risks associated with investments in Fixed Income Options.
b) Credit Risk
Credit risk refers to the possibility that the issuer fails to pay what is owed
(principal and/or interest). Evaluate the credit ratings assigned by rating agencies
like Moody’s, Standard & Poor, CRISIL, ICRA and CARE to find corporate
bonds/ fixed deposits that match your risk tolerance level.
Please note that it is not mandatory for non-finance companies to get a credit
rating for their fixed deposit schemes. Hence, it is advisable to see if the company
has a credit rating for any other debt instrument while evaluating fixed deposit
schemes.
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Also, one should understand the relation between credit rating of a company and
the coupon (interest rate) which it promises. A low credit rating company would
promise higher coupon than a company which has high credit rating as the risk
involved in lending to low credit rated company is higher and the investor has to
be compensated for the same.
So, in case of fixed income option, investor should not get allured by the returns
alone and should look into the underlying risks as well.
Generally the government bonds are considered the safest as there is sovereign
guarantee attached. But at the same time some countries are considered more
reliable than others hence, in such a case the credit ratings of the country comes in
to play. Hence, an emerging market government bonds would pay higher coupon
than those issued by developed countries.
4.4) Returns
Return calculations should consider effective yield, interest rate expectations and
taxes.
For e.g. for an instrument that pays 14% monthly interest, the effective annual
yield works out to 14.93%. This is definitely more attractive than an instrument
that pays 14% annually.
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Mutual funds present an alternative avenue to invest in fixed income instruments
at zero tax liability on the income received.
How to Buy?
Worldwide the secondary market for fixed income instruments is more developed
than in India. There are no open exchanges in India to trade debt and in case you
wish to trade in bonds then your broker will have to find buyer and sellers for
you.
- Government schemes
You can invest in RBI bonds directly through the Reserve Bank of India or
through a broker. Bit this option is not open for Non Resident Indians. Investments
in other government schemes can normally be made through nationalized banks
and post offices.
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Debt market as the name suggests is where debt instruments or bonds are traded.
The most distinguishing feature of these instruments is that the return is fixed i.e.
they are as close to being risk free as possible, if not totally risk free. The fixed
return on the bond is known as the interest rate or the coupon rate. Thus, the buyer
of a bond gives the seller a loan at a fixed rate, which is equal to the coupon rate.
Debt Markets are therefore, markets for fixed income securities issued by:
Central and State Governments
Municipal Corporations
Entities like Financial Institutions, Banks, Public Sector Units, and Public
Ltd. companies.
The money market also deals in fixed income instruments. However, difference
between money and bond markets is that the instruments in the bond markets have
a larger time to maturity (more than one year). The money market on the other
hand deals with instruments that have a lifetime of less than one year.
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REGULATORS
INDIVIDUALS
Bonds, Debentures,
Corporates Commercial Paper
(CP) SPNs,
Floating PROVIDENT
THE Rate Notes FCDs, FUNDS
PRIVATE PCDs, ZCBs
SECTOR INSURANCE
COS.,
Pvt. Sect. Banks Bonds, Debentures, TRUSTS,
CPs MUTUAL
and CDs FUNDS
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Government
Public
Agencies / Govt. Guaranteed Bonds, Debentures
Sector
Statutory Bodies
Financial
Certificate of Deposits, Bonds
Institutions
The Government Securities are referred to as Statutory Liquid Ratio (SLR)
securities, as they are eligible securities for the maintenance of the SLR by the
Banks.
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7.) REGULATORS
RBI:
The Reserve Bank of India is the main regulator for the Money Market. Reserve
Bank of India also controls and regulates the G-Secs Market. Apart from its role as
a regulator, it has to simultaneously fulfill several other important objectives viz.
managing the borrowing program of the Government of India, controlling
inflation, ensuring adequate credit at reasonable costs to various sectors of the
economy, managing the foreign exchange reserves of the country and ensuring a
stable currency environment.
RBI controls the issuance of new banking licenses to banks. It controls the manner
in which various scheduled banks raise money from depositors. Further, it controls
the deployment of money through its policies on CRR, SLR, priority sector
lending, export refinancing, guidelines on investment assets etc.
Another major area under the control of the RBI is the interest rate policy. Earlier,
it used to strictly control interest rates through a directed system of interest rates.
Each type of lending activity was supposed to be carried out at a pre-specified
interest rate. Over the years RBI has moved slowly towards a regime of market
determined controls.
SEBI:
Regulator for the Indian Corporate Debt Market is the Securities and Exchange
Board of India (SEBI). SEBI controls bond market and corporate debt market in
cases where entities raise money from public through public issues.
It regulates the manner in which such moneys are raised and tries to ensure a fair
play for the retail investor. It forces the issuer to make the retail investor aware, of
the risks inherent in the investment, by way and its disclosure norms. SEBI is also
a regulator for the Mutual Funds, SEBI regulates the entry of new mutual funds in
the industry. It also regulates the instruments in which these mutual funds can
invest. SEBI also regulates the investments of debt FIIs.
Apart from the two main regulators, the RBI and SEBI, there are several other
regulators specific for different classes of investors, eg the Central Provision Fund
Commissioner and the Ministry of Labour regulate the Provident Funds.
Religious and Charitable trusts are regulated by some of the State governments of
the states, in which these trusts are located.
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8.) GOVERNMENT SECURITIES
Government securities (G-secs) or gilts are sovereign securities, which are issued
by the Reserve Bank of India (RBI) on behalf of the Government of India (GOI).
The GOI uses these funds to meet its expenditure commitments.
Permitted Exchanges:
NSE, BSE and OTCEI.
Coupon: The 'Coupon' denotes the rate of interest payable on the security.
E.g. a security with a coupon of 7.40% would draw an interest of 7.40% on
the face value.
Interest Payment Dates (IP dates): The dates on which the coupon
(interest) payments are made are called as the IP dates.
Last Interest Payment Date (LIP Date): LIP date refers to the date on
which the interest was last paid.
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conventions used are as below. We take the example of a bond with Face
Value 100, coupon 12.50%, last coupon paid on 15th June, 2000 and traded
for value 5th October, 2000.
A/360(Actual by 360)
In this method, the actual number of days elapsed between the two dates is
divided by 360, i.e. the year is assumed to have 360 days.
Holding Period Yield (HPY): HPY comes into the picture when an
investor does not hold the security till maturity. HPY denotes the effective
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yield for the period from the date of purchase to the date of sale.
Clean Price: Clean Price denotes the actual price of the security as
determined by the market.
Dirty Price: Dirty Price is the price that is obtained when the accrued
interest is added to the Clean Price.
Shut Period: The government security pays interest twice a year. This
interest is paid on the IP dates. One working day prior to the IP date, the
security is not traded in the market. This period is referred to as the 'Shut
Period'.
Face Value: The Face Value of the securities in a transaction is the number
of Government Security multiplied by Rs.100 (face Value of each
Government Security). Say, a transaction of 5000 Government Security
will imply a face value of Rs. 5,00,000 (i.e. 5000 * 100)
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10.) FEATURES OF A GOVERNMENT SECURITY -
Thus a Government of India (GOI) security 8.07% 2017 would imply a security
carrying a coupon rate of 8.07%, payable semi-annually on the face value of
Rs.100, and maturing in the year 2017.
The market lot and the tick size in the retail G-Sec market –
The market lot is 10 (i.e. minimum face value of Rs.1000). The tick size is
one paisa.
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Interest Rate risk : Interest rate risk, market risk or price risk are
essentially one and the same. Theses are typical of any fixed coupon
security with a fixed period-to-maturity. This is on account of an inverse
relation between price and interest. As interest rates rise, the price of a
security will fall. However, this risk can be completely eliminated incase an
investor's investment horizon identically matches the term of the security.
(Re-investment risk) : This risk is again akin to all those securities, which
generate intermittent cash flows in the form of periodic coupons. The most
prevalent tool deployed to measure returns over a period of time is the
yield-to-maturity (YTM) method. The YTM calculation assumes that the
cash flows generated during the life of a security is re-invested at the rate of
the YTM. The risk here is that the rate at which the interim cash flows are
re-invested may fall thereby affecting the returns.
What is a Repo trade and how is it different from a normal buy or sell
transaction?
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An outright Buy or sell transaction is a one where there is no intended reversal of
the trade at the point of execution of the trade. The Buy or sell transaction is an
independent trade and is in no way connected with any other trade at the same or a
later point of time. A Ready Forward Trade (which is normally referred to as a
Repo trade or a Repurchase Agreement) is a transaction where the said trade is
intended to be reversed at a later point of time at a rate which will include the
interest component for the period between the two opposite legs of the
transactions.
So in such a transaction, one participant sells securities to other with an agreement
to purchase them back at a later date. The trade is called a Repo transaction from
the point of view of the seller and it is called a Reverse Repo transaction from
point of view of the buyer. Repos therefore facilitate creation of liquidity by
permitting the seller to avail of a specific sum of money (the value of the repo
trade) for a certain period in lieu of payment of interest by way of the difference
between the two prices of the two trades. Repos and reverse repos are commonly
used in the money markets as instruments of short-term liquidity management and
can also be termed as a collateralized lending and borrowing mechanism. Banks
and Financial Institutions usually enter into reverse repo transactions to manage
their reserve requirements or to manage liquidity.
What are the type of transactions which take place in the market?
The following two types of transactions take place in the Indian markets:
Direct transactions between banks and other wholesale market participants
which account for around 25% of the Wholesale Market volumes: Here the
Banks and the Institutions trade directly between themselves either through
the telephone or the NDS system of the RBI.
Broker intermediated transactions, which account for around 70-75% of the
trades in the market. These brokers need to be members of a Recognized
Stock Exchange for RBI to allow the Banks, Primary Dealers and
Institutions to undertake dealings through them.
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(a) French Auction System: After receiving bids at various levels of yield
expectations, a particular yield level is decided as the coupon rate. Auction
participants who bid at yield levels lower than the yield determined as cut-off get
full allotment at a premium. The premium amount is equivalent to price equated
differential of the bid yield and the cut-off yield. Applications of bidders who bid
at levels higher than the cut-off levels are out-right rejected. This is primarily a
Yield based auction.
(b) Dutch Auction Price: This is identical to the French auction system as
defined above. The only difference being that the concept of premium does not
exist. This means that all successful bidders get a cut-off price of Rs. 100.00 and
do not need to pay any premium irrespective of the yield level bid for.
(c) Private Placement: After having discovered the coupon through the auction
mechanism, if on account of some circumstances the Government / Reserve Bank
of India decides to further issue the same security to expand the outstanding
quantum, the government usually privately places the security with Reserve Bank
of India. The Reserve Bank of India in turn may sell these securities at a later date
through their open market windiow albeit at a different yield.
(d) On-tap issue: Under this scheme of arrangements after the initial primary
placement of a security, the issue remains open to yet further subscriptions. The
period for which the issue remains open may be sometimes time specific or
volume specific.
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Issuer Instruments
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Issuer Instruments
In the short term, the lowest risk category instruments are the Treasury Bills (TBs)
issued by Central government. RBI on behalf of central government issues them at
a prefixed day and for a fixed amount. The TBs are issued with varying maturity
usually not exceeding more than one year.
They are issued for different maturities viz. 14-day, 28 days (announced in Credit
policy but yet to be introduced), 91 days, 182 days and 364 days. 14 days T-Bills
had been discontinued recently. 182 days T-Bills were not re-introduced.
TREASURY
BILLS
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These Bills are now issued for only two tenures, namely 91 days and 364 days.
A considerable part of the central government's borrowing happens through
Treasury Bills of various maturities. Based on the bids received at the auctions,
RBI decides the cut off yield and accepts all bids below this yield.
Banks are the major investors in these instruments as they can park their
short-term surpluses and also since it forms part of their SLR investments. Besides
banks other investors in TBs are insurance companies, primary dealers, mutual
funds, FIs and FIIs.
These TBs, which are issued at a discount, can be traded in the market.
Most of the time, unless the investor requests specifically, they are issued not as
securities but as entries in the Subsidiary General Ledger (SGL), which is
maintained by RBI. The transactions cost on TBs are non-existent and trading is
considerably high in each bill, immediately after its issue and immediately before
its redemption.
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is the coupon rate and it is maturing in the year 2008. The salient features of Dated
Securities are:
Zero Coupon Bonds (ZCBs) were introduced on January 17, 1994. ZCBs, which
do not have regular interest(coupon) payments like traditional bonds, are sold at a
discount and redeemed at par on final maturity. The ZCBs were beneficial, both to
the Government because of the deferred payment of interest and to the investors
because of the lucrative yield and absence of reinvestment risk. These securities
are issued at a discount to the face value and redeemed at par. i.e. they are issued
at below face value and redeemed at face value.
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The tenure of these securities is fixed.
No interest is paid on these securities.
The return on these securities is a function of time and the discount to face
value.
Par tly paid stock was introduced on November 14, 1994 whereby payment for the
Government stock was made in four equal monthly instalments. Designed for
institutions with regular flow of investible resources requiring regular investment
avenues, this instrument attracted good market response and was actively traded.
There was, however, only one more issue of partly paid stock on June 24, 1996
In these securities the payment of principal is made in installments over a given
period of time.
The salient features of Partly Paid Stock are:
These types of securities are issued at face value and the principal amount
is paid in installments over a period of time.
The rate of interest and tenure of the security is fixed at the time of issuance
and does not change till maturity.
The interest payment is made on half yearly rest.
These are redeemed at par on maturity.
Floating Rate Bonds (FRBs) were first issued on September 29, 1995 but were
discontinued after the first issuance due to lack of market enthusiasm. They were
reintroduced on November 21, 2001 on demand from market participants, with
some modification in the structure. Although there was initially an overwhelming
market response to these issuances, FRBs were discontinued due to the waning
market interest reflected in the partial devolvement in the last two auctions on the
Reserve Bank and PDs. Erosion in the market interest for FRBs at that time was,
inter alia, due to strong credit pick-up and low secondary market liquidity in
FRBs.
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The interest rate is fixed as a percentage over a predefined benchmark rate.
The benchmark rate may be a bank rate, Treasury bill rate etc.
The interest payment is made on half yearly rests.
The security is redeemed at par on maturity, which is fixed.
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inflation rate for the proposed bonds. However, for the purpose of inflation
protection the monthly average of WPI (average of weeks) as worked out by the
Reserve Bank of India, instead of WPI at the last week of the month, would be
used as it smoothens the weekly variability in WPI and its effect on the market
price of the bonds.
12.9) STRIPS
STRIPS is the acronym for Separate Trading of Registered Interest and Principal
Securities. Stripping is the process of separating a standard coupon-bearing bond
into its individual coupon and principal components. In an official STRIPS market
for the Government securities, these stripped securities i.e., the newly created zero
coupon bonds remain the direct obligations of the Government and are registered
in the books of the agent meant for this purpose. Thus the mechanics of stripping
neither impacts the direct cost of borrowing nor change the timing or quantum of
the underlying cash flows; stripping only facilitates transferring the right to
ownership of individual cash flows
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Advantages:
STRIPS would facilitate the availability of zero coupon bonds (ZCBs) to the
investors and traders. They provide the most basic cash flow structure thus
offering the advantage of more accurate matching of liabilities without
reinvestment risk and a precise management of cash flows. Thus to some investors
who set the incoming inflows against an actuarial book (eg. Insurance companies),
STRIPS offer excellent investment choices. Apart from the advantages they offer
to low risk investors like pension funds and insurance companies, STRIPS offer
much greater leverage to hedge funds, since the zero coupon bonds are more
volatile than the underlying coupon bearing bonds. Last but not the least, STRIPS
offer an excellent scope to construct a zero yield curve for the sovereign bond
market.
Fungibility
An important feature of the STRIPS market is that the coupon STRIPS of the same
date from different stocks are fungible - meaning that they are just not identical
but exchangeable. Thus when a few coupon bearing bonds sharing the same
coupon payment dates are stripped, it may not be possible to distinguish the
coupon STRIPS created out of all these bonds. All STRIPS will have a unique
code number to identify. Going by the same logic, these coupon STRIPS could be
used to complete the reconstitution of any of those original coupon bearing bonds
whose coupon payment dates fall on the same date (provided the purchaser holds
all the other coupon and principal STRIPS).
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The difference between short and long ends of the yield curve (spread) determines
the shape of the curve which is an important indicator of the expected performance
of the economy and inflation. Since the government securities yield curve
represents the risk-free interest rates, it is used for pricing other instruments of
various maturities. The yield
The difference between short and long ends of the yield curve (spread) determines
the shape of the curve which is an important indicator of the expected performance
of the economy and inflation. Since the government securities yield curve
represents the risk-free interest rates, it is used for pricing other instruments of
various maturities. The yield curve has informational value to bond issuers for
pricing as well as timing of their issue depending on the expected performance of
the economy. Investors can also use the curve in choosing the right tenor of
investment. For overseas investors, expected performance of different countries
could be compared by looking at the respective yield curves to make investment
decisions.
Most other interest rates are measured on the basis of the government securities
yield curve, viz., credit curve and swap curve. Similarly pricing of other financial
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instrument uses the government securities yield curve in some form or the other.
Thus, the yield curve acts as a kind of public good that is used constantly by
participants in the financial system.
The efficiency of the yield curve as a public good is enhanced under the following
two conditions. First, macroeconomic volatility, especially inflation volatility,
must be low so that a nominal yield curve is informative about the real cost of
borrowing. Second, the government must issue a sufficient volume of debt. Yield
is described as an apparatus which allows abstraction of irrelevant factors and
focuses on factors relevant for interest rate risk on portfolios (Krstic and
Marinkovic,1997).
The fact that the yield curve acts as a public good enjoins upon all participants, in
particular the regulators, the responsibility of ensuring that it is free from any
undesirable and manipulative influence, as this would lead to a loss in its
informational value and result in market inefficiency brought about by incorrect
pricing of other financial instruments.
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Issuer Instruments
State government debt issuances are largely long-term and in the local currency, as
states are not permitted to issue debt in foreign currencies directly. The typical
long-term debt is a 25-year fixed-rate loan with a five-year grace period. Two of
the main debt types are loans against small savings, which are subscribed by the
public, and market loans, which are bought by banks.
“Coupon bearing bond” A bond that pays fixed cash flow every year, until it
matures at date T when it also pays the face value of the bond.
Eg: B1 with face value of Rs.100, maturity T = 5
and annual cashflow of Rs.10 looks like:
(10, 1), (10, 2), (10, 3), (10, 4), (110, 5)
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The second largest category of investors in the government securities market is the
insurance companies. According to the stipulations of the Insurance Regulation
and Development Authority of India (IRDA), all companies carrying out the
business of life insurance should invest a minimum of 25 per cent of their
controlled funds in government securities. Similarly, companies carrying on
general insurance business are required to invest 30 per cent of their total assets in
government securities and other guaranteed securities, of which not less than 20
per cent should be in Central Government securities. For pension and general
annuity business, the IRDA stipulates that 20 per cent of their assets should be
invested in government securities.
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Non-banking financial companies (NBFCs) accepting public deposits are required
to maintain 15 per cent of such outstanding deposits in liquid assets, of which not
less than 10 per cent should be maintained in approved securities, including
government securities and government guaranteed bonds. Investment in
government securities should be in dematerialised form, which can be maintained
in Constituents’ Subsidiary General Ledger (CSGL) Account of a SCB/Stock
Holding Corporation of India Limited (SHCIL). In order to increase the security
and liquidity of their deposits, residuary non-banking companies (RNBCs), are
required to invest not less than 95 per cent of their aggregate liability to depositors
(ALD) as outstanding on December 31, 2005 and entire incremental deposits over
this level in directed investments, which include government securities, rated and
listed securities and debt oriented mutual funds. From April 1, 2007, the entire
ALD is required to be invested in directed investments only.
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2. Fixed Income: During the term of the security there is likely to be fluctuations
in the Government Security prices and thus there exists a price risk associated with
investment in Government Security. However, the return on the holding of
investment is fixed if the security is held till maturity and the effective yield at the
time of purchase is known and certain. In other words the investment becomes a
fixed income investment if the buyer holds the security till maturity.
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Fixed Income Instruments in India
A. Banking Entities
a) Commercial Banks
b) Rural Co-operative Banks
c) Urban Co-operative Banks
B. Financial Institutions
a) National Bank for Agriculture and Rural Development (NABARD)
b) National Housing Bank (NHB)
c) Small Industries Development Bank of India (SIDBI)
d) Life Insurance Corporation of India (LIC)
e) Housing and Urban Development Corporation (HUDCO)
f) Rural Electrification Corporation (REC)
g) Power Finance Corporation (PFC)
h) Other Public Financial Institutions (PFIs)
C. Others
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Fixed Income Instruments in India
a) Public and Private Sector Provident Funds (PFs);
b) Charitable Trusts
c) National Co-operatives Development Corporation (NCDC)
d) Non-Banking Financial Corporations (NBFCs)
GUARANTEE FEE
1 Andhra 0.5% to 2%
Pradesh
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Fixed Income Instruments in India
The Reserve Bank has also organized a workshop on 'Risk Evaluation on State
Guarantees' to help State Government officials to analyse the risk of defaults on
State Government guarantees.
Public Sector Undertaking Bonds (PSU Bonds): These are Medium or long
term debt instruments issued by Public Sector Undertakings (PSUs). The term
usually denotes bonds issued by the central PSUs (i.e. PSUs funded by and under
the administrative control of the Government of India). Most of the PSU Bonds
are sold on Private Placement Basis to the targeted investors at Market Determined
Interest Rates. Often investment bankers are roped in as arrangers to this issue.
Most of the PSU Bonds are transferable and endorsement at delivery and are
issued in the form of Usance Promissory Note.
In case of tax free bonds, normally such bonds accompany post dated interest
cheque / warrants.
It was introduced in India in 1990 with a view to enabling highly rated corporate
borrowers/ to diversify their sources of short-term borrowings and to provide an
additional instrument to investors. Subsequently, primary dealers and satellite
dealers were also permitted to issue CP to enable them to meet their short-term
funding requirements for their operations.
CPs are negotiable short-term unsecured promissory notes with fixed maturities,
issued by well rated companies generally sold at a discount basis. These are
basically instruments evidencing the liability of the issuer to pay the holder in due
course a fixed amount (face value of the instrument) on the specified due date.
ISSUER: Corporates and primary dealers (PDs), and the all-India financial
institutions (FIs) that have been permitted to raise short-term resources under the
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Fixed Income Instruments in India
umbrella limit fixed by Reserve Bank of India are eligible to issue CP.
Rating Requirement
The minimum credit rating shall be P-2 of Credit Rating Information Services of
India Ltd (CRISIL) or such equivalent rating by other agencies. Like
- Investment Information and Credit Rating Agency of India Ltd. (ICRA) or
- Credit Analysis and Research Ltd. (CARE) or
- FITCH Ratings India Pvt. Ltd. or such other credit rating agencies as may be
specified by the Reserve Bank of India from time to time, for the purpose.
Maturity
CP can be issued for maturities between a minimum of 7 days and a maximum up
to one year from the date of issue.
Denominations
CP can be issued in denominations of Rs.5 lakh or multiples thereof. Amount
invested by a single investor should not be less than Rs.5 lakh (face value).
Investment in CP
CP may be issued to and held by individuals, banking companies, other corporate
bodies registered or incorporated in India and unincorporated bodies, Non-
Resident Indians (NRIs) and Foreign Institutional Investors (FIIs)..
Mode of Issuance
CP can be issued either in the form of a promissory note or in a dematerialised
form through any of the depositories approved by and registered with SEBI. CP
will be issued at a discount to face value as may be determined by the issuer. No
issuer shall have the issue of CP underwritten or co-accepted.
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Fixed Income Instruments in India
Yields
Yield is a critical concept in bond investing, because it is the tool used to measure
the return of one bond against another. It enables one to make informed decisions
about which bond to buy. In essence, yield is the rate of return on bond
investment. However, it is not fixed, like a bond’s stated interest rate. It changes to
reflect the price movements in a bond caused by fluctuating interest rates. The
following example illustrates how yield works.
You buy a bond, hold it for a year while interest rates are rising and then
sell it.
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You receive a lower price for the bond than you paid for it because, no one
would otherwise accept your bond’s now lower-than-market interest rate.
Although the buyer will receive the same amount of interest as you did and
will also have the same amount of principal returned at maturity, the
buyer’s yield, or rate of return, will be higher than yours, because the buyer
paid less for the bond.
Yield is commonly measured in two ways, current yield and yield to
maturity.
Current yield
The current yield is the annual return on the amount paid for a bond,
regardless of its maturity. If you buy a bond at par, the current yield equals
its stated interest rate. Thus, the current yield on a par-value bond paying
6% is 6%.
However, if the market price of the bond is more or less than par, the
current yield will be different. For example, if you buy a Rs. 1,000 bond
with a 6% stated interest rate at Rs. 900, your current yield would be 6.67%
(Rs. 1,000 x .06/Rs.900).
Yield to maturity
It tells the total return you will receive if you hold a bond until maturity. It also
enables you to compare bonds with different maturities and coupons. Yield to
maturity includes all your interest plus any capital gain you will realize (if you
purchase the bond below par) or minus any capital loss you will suffer (if you
purchase the bond above par).
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Market preference for high rated bonds:
Investors in corporate debt instruments are excessively safety conscious as could
be noted form the fact that there is hardly any demand for paper which is rated
below AA or its equivalent by the rating companies. World over any paper rated
BBB (or its equivalent) and above is considered as investment grade, except that
the interest rate to be paid on BBB has to be high enough to compensate for the
risk attached to it in relation to the highest rated paper. Basically it is a question of
risk-reward matrix with higher risk being compensated by higher return. Globally
there is considerable demand for debt paper which is rated below AA. In fact the
maturity of the market is often judged by the skill of the investors to factor
riskreward matrix in their investment decision so that they do not miss the high
return opportunities that may exist in the case of BBB rated paper. Judged from
this matrix it is clear that Indian debt market is yet to mature. This is indicated by
the analysis of the outstanding bond issues with reference to their rating values
assigned to them by the recognized rating agencies. Over 82percent of the debt
paper is AA and above, as demand for other investment grade paper is not large
enough. The majority of institutional investors by amount in the corporate debt
paper are banks which are all the while in favour of highly rated paper while at the
same extending loans to not so well rated corporate clients. Thus most of the
banks adopt an asymmetric credit evaluation methodology when they are willing
to provide loan to a client but unwilling to invest in the debt paper issued by the
borrower if the debt paper is not rated very highly by the rating agencies. It is
hoped that as the corporate debt market grows in size and becomes deep, liquid,
and broad-based investors will start understanding the risk-reward matrix much
more intelligently. Institutional investors will start to appreciate increasingly the
risk-adjusted returns and the arbitrage that the market provides. Table III-4A and
III-4B give the outstanding corporate debt in the market in terms of rating class,
issue sizes and no. of issues.
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A/LAMA 16 1.03 1512 1.14 1529 1.13
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Fixed Income Instruments in India
18.2) CORPORATE DEBENTURES
A Debenture is a debt security issued by a company (called the Issuer), which
offers to pay interest in lieu of the money borrowed for a certain period. In essence
it represents a loan taken by the issuer who pays an agreed rate of interest during
the lifetime of the instrument and repays the principal normally, unless otherwise
agreed, on maturity.
These are long-term debt instruments issued by private sector companies. These
are issued in denomination as low as Rs. 1000 and have maturity ranging between
one and ten years. Long maturity debentures are rarely issued, as investors are not
comfortable with such maturities.
Debentures enable investors to reap the dual benefits of adequate security and
good returns. Unlike Fixed and Bank Deposit they can be transferred from one
party to another by using transfer form. Debentures are normally issued in
physical form. However, corporates/PSUs have started issuing debentures in
Demat form. Generally, debentures are less liquid as compared to PSU bonds and
their liquidity is inversely proportional to the residual maturity. Debentures can be
secured or unsecured.
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a) Secured Debentures: These instruments are secured by a charge on the fixed
assets of the issuing company. So if the issuer fails on payment of either the
principal or interest amount, his assets can be sold to repay the liability to the
investors. This is usually in the form of a first mortgage or charge on the fixed
assets of the company on a pari passu basis with other first charge holders like
financial institutions etc. Sometimes, the charge can also be a second charge
instead of a first charge. Most of the times the charge is created on behalf of the
entire pool of debenture holders by a trustee specifically appointed for the
purpose.
Apart from CPs, corporates also have access to another market called the Inter
Corporate Deposits (ICD) market. An ICD is an unsecured loan extended by one
corporate to another. Existing mainly as a refuge for low rated corporates, this
market allows funds surplus corporates to lend to other corporates. Also the better-
rated corporates can borrow from the banking system and lend in this market. As
the cost of funds for a corporate in much higher than a bank, the rates in this
market are higher than those in the other markets. ICDs are unsecured, and hence
the risk inherent in high. The ICD market is not well organised with very little
information available publicly about transaction details.
After treasury bills, the next lowest risk category investment option is the
certificate of deposit (CD) issued by banks and FIs.
Allowed in 1989, CDs were one of RBI's measures to deregulate the cost of funds
for banks and FIs.
The rates on these deposits are determined by various factors. Low call rates
would mean higher liquidity in the market. Also the interest rate on one-year bank
deposits acts as a lower barrier for the rates in the market.
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Fixed Income Instruments in India
Introduction
Certificates of Deposit (CDs) is a negotiable money market instrument and issued
in dematerialised form or as a Usance Promissory Note, for funds deposited at a
bank or other eligible financial institution for a specified time period.
Eligibility
CDs can be issued by (i) scheduled commercial banks excluding Regional Rural
Banks (RRBs) and Local Area Banks (LABs); and (ii) select all-India Financial
Institutions that have been permitted by RBI to raise short-term resources within
the umbrella limit fixed by RBI.
Aggregate Amount
Banks have the freedom to issue CDs depending on their requirements.
An FI may issue CDs within the overall umbrella limit fixed by RBI, i.e., issue
of CD together with other instruments, viz., term money, term deposits,
commercial papers and inter-corporate deposits should not exceed 100 per cent
of its net owned funds, as per the latest audited balance sheet.
Maturity
The maturity period of CDs issued by banks should be not less than 7 days
and not more than one year.
The FIs can issue CDs for a period not less than 1 year and not exceeding 3
years from the date of issue.
Discount/Coupon Rate
CDs may be issued at a discount on face value. Banks/FIs are also allowed to issue
CDs on floating rate basis provided the methodology of compiling the floating rate
is objective, transparent and market-based. The issuing bank/FI is free to
determine the discount/coupon rate.
Reserve Requirements
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Banks have to maintain the appropriate reserve requirements, i.e., cash reserve
ratio (CRR) and statutory liquidity ratio (SLR), on the issue price of the CDs.
Transferability
Physical CDs are freely transferable by endorsement and delivery. Dematted CDs
can be transferred as per the procedure applicable to other demat securities. There
is no lock-in period for the CDs.
Loans/Buy-backs
Banks/FIs cannot grant loans against CDs. Furthermore, they cannot buyback their
own CDs before maturity.
Format of CDs
Banks/FIs should issue CDs only in the dematerialized form. However, according
to the Depositories Act, 1996, investors have the option to seek certificate in
physical form. Accordingly, if investor insists on physical certificate, the bank/FI
may inform Financial Markets Department, Reserve Bank of India, Central Office,
Fort, Mumbai - 400001 about such instances separately.
(18.5) SPN
Secured Premium Notes (SPN) with Detachable Warrants: SPN which is issued
along with a detachable warrant, is redeemable after a notice period, say four to
seven years. The warrants attached to it ensure the holder the right to apply and get
allotted equity shares; provided the SPN is fully paid.
There is a lock-in period for SPN during which no interest will be paid for an
invested amount. The SPN holder has an option to sell back the SPN to the
company at par value after the lock in period. If the holder exercises this option,
no interest/ premium will be paid on redemption. In case the SPN holder holds its
further, the holder will be repaid the principal amount along with the additional
amount of interest/ premium on redemption in installments as decided by the
company. The conversion of detachable warrants into equity shares will have to be
done within the time limit notified by the company.
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Fixed Income Instruments in India
Fixed Deposits in companies that earn a fixed rate of return over a period of time
are called Company Fixed Deposits. Financial institutions and Non-Banking
Finance Companies (NBFCs) also accept such deposits. Deposits thus mobilised
are governed by the Companies Act under Section 58A. These deposits are
unsecured, i.e., if the company defaults, the investor cannot sell the documents to
recover his capital, thus making them a risky investment option.
High interest.
Short-term deposits.
Lock-in period is only 6 months.
No Income Tax is deducted at source if the interest income is up to Rs
5,000 in one financial year
Investment can be spread in more than one company, so that interest from
one company does not exceed Rs. 5,000
Company Fixed Deposits have always offered interest which is 2-3% higher than
Bank Deposit rate, becaue they have to pay higher interest to banks for borrowing
money.
interest payments
Interest is paid on monthly/quarterly/half yearly/yearly basis or on maturity,
and is sent either through cheque or through Electronic Clearing System
basis.
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Which companies can accept a deposits ?
Companies registered under the Companies Act 1956, such as:
Manufacturing Companies.
Non-Banking Finance Companies.
Housing Finance Companies.
Financial Institutions.
Government Companies.
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Fixed Income Instruments in India
c. any other establishment so notified by the Central Government even
if employing less than 20 persons.
EMPLOYEES ENTITLED
Every employee, including the one employed through a contractor (but excluding
an apprentice engaged under the Apprentices Act or under the standing orders of
the establishment and casual laborers), who is in receipt of wages upto Rs. 6,500
p.m., shall be eligible for becoming a member of the funds.
The condition of three months? continuous service or 60 days of actual work, for
membership of the scheme, has been done away with, w.e.f. 1.11.1990. Workers
are now eligible for joining the scheme from the date of joining the service.
TERM OF SCHEME
Every member of the Employees? Pension Fund Scheme shall continue to remain
the member till the earliest happening of any of the following events:
i. he attains the age of 58 years; or
ii. he avails the withdrawal benefit to which he is entitled vide para 14 of the
scheme; or
iii. he dies; or
iv. the pension is vested in him.
Every employer shall send to the Commissioner, within three months of the
commencement of the scheme, a consolidated return of the employees entitled to
become members of the new scheme.
EMPLOYER/S CONTRIBUTION
The employer is required to contribute the following amounts towards Employees?
Provident Fund and Pension Fund
a. In case of establishments? employing less than 20 persons or a sick
industrial (BIFR) company or ?sick establishments? or any establishment in
the jute, beedi, brick, coir or gaur gum industry. ?10% of the basic wages,
dearness allowance and retaining allowance, if any.
b. In case of all other establishments? employing 20 or more person-12% of
the wages, D.A., etc.
A part of the contribution is remitted to the Pension Fund and the remaining
balance continues to remain in Provident Fund account.
Where, the pay of an employee exceeds RS. 6500 p.m., the contribution payable to
Pension Fund shall be limited to the amount payable on his pay of RS. 6500 only,
however, the employees may voluntarily opt for the employer?s share of
contributions on wages beyond the limit of RS. 6500 to be credited to the Pension
Fund.
INTEREST
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The employer shall be liable to pay simple interest @ 12% p.a. on any amount due
from him under the Act, from the date on which it becomes due till the date of its
actual payment.
A Mutual Fund is a trust that pools the savings of a number of investors who share
a common financial goal. The money thus collected is then invested in capital
market instruments such as shares, debentures and other securities. The income
earned through these investments and the capital appreciation realised are shared
by its unit holders in proportion to the number of units owned by them. Thus a
Mutual Fund is the most suitable investment for the common man as it offers an
opportunity to invest in a diversified, professionally managed basket of securities
at a relatively low cost. The flow chart below describes broadly the working of a
mutual fund:
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Fixed Income Instruments in India
AMFI is an apex body of all Asset Management Companies (AMC) which has
been registered with SEBI. Till date all the AMCs are that have launched mutual
fund schemes are its members. It functions under the supervision and guidelines
of its Board of Directors.
Association of Mutual Funds India has brought down the Indian Mutual Fund
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Fixed Income Instruments in India
Industry to a professional and healthy market with ethical lines enhancing and
maintaining standards. It follows the principle of both protecting and promoting
the interests of mutual funds as well as their unit holders.
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Fixed Income Instruments in India
This scheme offers highest security and least volatility. However, the returns are
lower along with high safety of your principal amount.
Fidelity Mutual Fund's Fidelity Short Term Income Fund and Franklin Templeton
Mutual Fund's Templeton India Liquid Plus are the examples of such money
market schemes.
Gilt funds, as they are conveniently called, are mutual fund schemes floated by
asset management companies with exclusive investments in government
securities. The schemes are also referred to as mutual funds dedicated exclusively
to investments in government securities. Government securities mean and include
central government dated securities, state government securities and treasury bills.
The gilt funds provide to the investors the safety of investments made in
government securities and better returns than direct investments in these securities
through investing in a variety of government securities yielding varying rate of
returns gilt funds, however, do run the risk.. The first gilt fund in India was set up
in December 1998.
Liquidity Support
Eligibility
All gilt funds - public and private sector, open-ended or close- ended - are eligible
to avail liquidity support and other facilities from the Reserve Bank of India. The
gilt funds schemes should, however, have the approval of the Securities and
Exchange Board of India. It would be prudent for the gilt funds to submit an
advance copy of the draft offer document to the Reserve Bank of India for
preliminary scrutiny at the time of submitting the draft offer document to the
Securities and Exchange Board of India. This is to enable the Reserve Bank to
satisfy itself that the scheme proposed to be floated by the gilt funds is in
conformity with the Reserve Bank's guidelines for availing liquidity support from
the Reserve Bank of India.
Conditions
The Reserve Bank of India provides liquidity support by way of reverse repos
subject to the following terms and conditions:
i. Re-purchase agreements (reverse repos) with the Reserve Bank are
in eligible central government dated securities and treasury bills of
all maturities.
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Fixed Income Instruments in India
ii. The prices of the securities for reverse repo transactions are
determined by the Reserve Bank of India, at its discretion.
iii. The securities tendered by the gilt funds for reverse repos by the
Reserve Bank are in multiples of Rs. 10 lakh (face value).
iv. Gilt funds can avail the reverse repo facility for a maximum period
of 14 days at a time.
v. The repo rate is the Bank Rate.
vi. Liquidity support is made available at Mumbai only. The gilt funds,
however, are free to transmit the funds to other centers of the
Reserve Bank under its Remittance Facility Scheme.
vii. The gilt funds cannot use the funds raised through the reverse repos
facility for on-lending in the call/notice money market.
viii. The Reserve Bank reserves the right to partially accept or reject any
application for liquidity support without assigning any reason.
ix. The Reserve Bank can call for all relevant information from gilt
funds in regard to their operations and the gilt funds are required to
provide it.
A fixed deposit is meant for those investors who want to deposit a lump sum of
money for a fixed period; say for a minimum period of 15 days to five years and
above, thereby earning a higher rate of interest in return. Investor gets a lump sum
(principal + interest) at the maturity of the deposit.
Bank fixed deposits are one of the most common savings scheme open to an
average investor. Fixed deposits also give a higher rate of interest than a savings
bank account. The facilities vary from bank to bank. Some of the facilities offered
by banks are overdraft (loan) facility on the amount deposited, premature
withdrawal before maturity period (which involves a loss of interest) etc. Bank
deposits are fairly safer because banks are subject to control of the Reserve Bank
of India.
Returns
The rate of interest for Bank Fixed Deposits varies between 4 and 11 per cent,
depending on the maturity period (duration) of the FD and the amount invested.
Interest rate also varies between each bank. A Bank FD does not provide regular
interest income, but a lump-sum amount on its maturity. Some banks have facility
to pay interest every quarter or every month, but the interest paid may be at a
discounted rate in case of monthly interest. The Interest payable on Fixed Deposit
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Fixed Income Instruments in India
can also be transferred to Savings Bank or Current Account of the customer. The
deposit period can vary from 15, 30 or 45 days to 3, 6 months, 1 year, 1.5 years to
10 years.
Advantages
Bank deposits are the safest investment after Post office savings because all bank
deposits are insured under the Deposit Insurance & Credit Guarantee Scheme of
India. It is possible to get a loans up to75- 90% of the deposit amount from banks
against fixed deposit receipts. The interest charged will be 2% more than the rate
of interest earned by the deposit. With effect from A.Y. 1998-99, investment on
bank deposits, along with other specified incomes, is exempt from income tax up
to a limit of Rs.12, 000/- under Section 80L. Also, from A.Y. 1993-94, bank
deposits are totally exempt from wealth tax. The 1995 Finance Bill Proposals
introduced tax deduction at source (TDS) on fixed deposits on interest incomes of
Rs.5000/- and above per annum.
How to apply?
One can get a bank FD at any bank, be it nationalised, private, or foreign. You
have to open a FD account with the bank, and make the deposit. However, some
banks insist that you maintain a savings account with them to operate a FD. When
a depositor opens an FD account with a bank, a deposit receipt or an account
statement is issued to him, which can be updated from time to time, depending on
the duration of the FD and the frequency of the interest calculation. Check deposit
receipts carefully to see that all particulars have been properly and accurately
filled in.
Fixed Deposits: Documentation (UTI Bank)
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Fixed Income Instruments in India
The following documents are required when applying for a Fixed Deposit
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Fixed Income Instruments in India
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Fixed Income Instruments in India
Terms of Investment
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Fixed Income Instruments in India
Availability
Tax Benefits
I.T. section
Sec. 88 for tax rebate
applicable
Liquidity
Premature
Available every year from 7th financial year
Withdrawal
Loan against
Available from 3rd financial year
investment
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Fixed Income Instruments in India
Terms of Investment
Periodicity of interest
Compounded semi-annually
payment
Maximum Investment
No limit
Amount
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Fixed Income Instruments in India
Availability
Tax Benefits
I.T. section Sec. 88 for investment amount, eligible under Sec. 80L
applicable for interest earned
Liquidity
Premature Withdrawal After end of 4 years
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Fixed Income Instruments in India
Terms of Investments
Periodicity of interest
Monthly
payment
Minimum Investment
Rs6,000
Amount
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Fixed Income Instruments in India
Availability
Eligibility Individuals
Tax Benefits
I.T. section applicable Eligible under Sec. 80L for interest earned
Liquidity
Loan against
Not available
investment
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Fixed Income Instruments in India
Terms of Investment
Recurring Deposit Scheme
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Fixed Income Instruments in India
Availability
Tax Benefits
Liquidity
50% of the outstanding amount can
Premature Withdrawal
be withdrawn after 1 year.
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Fixed Income Instruments in India
Terms of Investment
Similar to a Bank Account, cheque facility available
Periodicity of interest
Compounded annually
payment
Minimum Investment
Rs20
Amount
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Fixed Income Instruments in India
Availability
Tax Benefits
I.T. section applicable None
Liquidity
Loan against
Not available
investment
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Fixed Income Instruments in India
Terms of Investment
Similar to a Fixed Deposit Scheme
Periodicity of interest
Compounded quarterly
payment
Effective annual yield 9.3%, 10.4%, 11.5% 12% for maturity periods of
1,2,3 and 5 years respectively
Minimum Investment
Rs50
Amount
Maximum Investment
No limit
Amount
Investment in
Rs50
multiples of
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Fixed Income Instruments in India
Availability
Eligibility Individuals, trusts, welfare and regiment funds
Tax Benefits
I.T. section applicable Eligible under Sec. 80L for interest earned
Liquidity
Premature After 6 months, not eligible for interest for
Withdrawal accounts closed within 1 year
Loan against
After 1 year
investment
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Fixed Income Instruments in India
Terms of Investment
Money doubles in 6 & 1/2 years.
Periodicity of interest
Compounded annually
payment
Maximum Investment
No limit
Amount
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Fixed Income Instruments in India
Availability
Tax Benefits
I.T. section applicable None
Liquidity
Premature Withdrawal Not Available
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Fixed Income Instruments in India
Terms of Investment
Tax-free interest. Issued as promissory notes.Regular and cumulative
schemes
Annual rate of
8.50%
Interest
Minimum Investment
Rs10,000
Amount
Maximum Investment
No limit
Amount
Investment in
Rs1,000
multiples of
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Fixed Income Instruments in India
Availability
Eligibility Individuals, and on behalf of minors, HUF, NRIs
Tax Benefits
I.T. section applicable None
Liquidity
Premature After 2 1/2 years, lower interest on premature
Withdrawal withdrawal
Loan against
Not available
investment
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Fixed Income Instruments in India
Terms of Investment
Interest on amounts invested within three months of retirement is totally
exempt from tax. Similar in nature to fixed deposit schemes
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Fixed Income Instruments in India
Availability
Eligibility Individuals retiring from service with PSUs
Tax Benefits
I.T. section applicable None
Liquidity
Loan against
Not available
investment
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Fixed Income Instruments in India
j) DEPOSIT SCHEME FOR RETIRING GOVERNMENT
EMPLOYEES -89
Terms of Investment
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Fixed Income Instruments in India
Availability
Tax Benefits
I.T. section applicable None
Liquidity
Premature After 1 year but before 3 years with only one
Withdrawal withdrawal per year. Interest rate will be lower at 4%
p.a. against 9% from date of deposit to withdrawal.
Loan against
Not available
investment
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Fixed Income Instruments in India
20) OTHER IMPORTANT INFORMATION:
68%
Government bonds
Treasury bills
State loans
PSU bonds
Corporate bonds
4% 4%
3% Others
6% 15%
As of March 2006.
PSU = Public Sector Undertaking
Source: National Stock Exchange
PSU bonds by far outweigh the size of private corporate bonds (see chart
below), reflecting a number of factors, foremost of which are the lists of
regulatory requirements for private issues. Regulatory oversight of the
segment falls under the purview of the Securities and Exchange Board of India
(SEBI).
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Fixed Income Instruments in India
100
80
20
0
2004 2005 2006
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Fixed Income Instruments in India
A siz eable governm ent bond m arket % of GD P
50
45
40
35
30
2001
25
20 2005
15
10
5
0
T h ailan d C h in a So u th In d ia M alays ia USA
Ko r e a
Source: BIS
C o r p o r a te b o n d m a r k e t h a s y e t to d e v e lo p
% of G DP
50
45
40
35
30 2001
25
20 2005
15
10
5
0
In d ia C h in a T h a ila n d US A So u th M a la y s ia
Ko r e a
Source: BIS
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Fixed Income Instruments in India
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Fixed Income Instruments in India
Risk and return are two inseparable parts of an investment strategy. They have a
direct relation with each other. Higher the risks higher are the returns and vice
versa. The very basic considerations of an investor while investing his money are
how to maximize one's returns? What will he get? and what are the risks involved
in investing in a particular investment.
RISK VS RETURNS: -
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Fixed Income Instruments in India
LOW MODERATE HIGH
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Fixed Income Instruments in India
Before you actually make a call on where to put your money, it is imperative
that you define your objectives in terms of risk appetite, tenure and expected
returns. A good investment plan would tend to be diversified in all these
aspects.
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Fixed Income Instruments in India
LIMITAIONS OF STUDY
‘Fixed income instruments’ is a very wide topic in itself and time period
was not sufficient to understand terms and conditions of such a wide verity
of instruments available in India. This report is based on the limited
information gathered on fixed income instruments.
Risk factor is crucial part of any investment decision of the investor but this
report doesn’t speak in terms of value of risk in different instruments that
are available.
Charts of risk, returns and liquidity are made on the basis of the outcomes
of the information gathered.
Lack of availability of resources (Books, journals, etc.) about present
Indian market scenario in library.
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Fixed Income Instruments in India
References: -
The data was collected from the following sources:
1. College library (IMM)
2. Ankit Jain finance manager (G-Cube solutions)
3. Economic Times
4. Business Standards
5. Business World
6. Financial Economics (journal)
7. Wealth creation guide
8. Websites & Links
a) www.nse-india.com
b) www.bseindia.com
c) www.moneycotrol.com
d) www.valueresearchonline.com
e) www.rbi.org.in
f) www.helplinelaw.com
g) www.amfiindia.com
h) www.webindia123.com/finance
i) www.personalfn.com
j) www.thehindubusinessline.com
k) www.economictimes.com
l) www.crisil.com
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