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ABSTRACT

XYZ Ltd is a one of a kind services company that offers a platform; a web-based
portal that seamlessly integrates the sellers and buyers of electricity. The company,
like any other, invests the funds and surpluses in Bank FDs and Debt Mutual Funds as
laid out in their investment policy. Treasury management efficiency and profitability
to maximize returns with minimum risk is fructified by carrying out an analysis of
existing investment portfolio and by recommendation of suitable alternative
investment options available. The analysis of sources of funds and based on their
liquidity characterstics and safety and growth of capital requirements lend themselves
to suitable alternative investment options so as to maximize returns with minimum
risk.

KEYWORDS

Investment Policy, Stated Investment Horizon, Maturity Profile, Credit Risk and
Credit Rating Profile, Average maturity of the portfolio, Duration of portfolio,
Yield.

INTRODUCTION

Treasury administration assumes an extremely important part in all companies, as a

wrong choice in treasury can crumple the whole company/organization. All such
decisions need to be taken with utmost care as appropriate returns on investment are
vital. Analysis of various investment options and identifying ways/options which can
be instrumental in any organization to create a balance between risk and return with
an objective to maximize return with minimum risk, assume vital significance. Akin
to many companies, XYZ Ltd is facing a specific management problem To
ascertain suitable alternate investment options within the strict ambit of the
XYZ Ltds Investment Policy, for which answers/solutions were sought.

The process of finding an answer to the management problem, envisaged undertaking

a Qualitative study, primarily with the help of secondary data and primary data by
way of interaction with Subject Matter Experts to understand and analyze the
investment alternatives for XYZ Ltd.

OVERVIEW/ANALYSIS

Sources of Funds for Treasury: Shareholders Funds which includes paid up

share capital of the Company and all other reserves & surplus of the Company.
Mostly these funds are considered as funds available for long term. Security Deposits
& Margin are those funds where all the Members of the XYZ Ltd are required to pay
security deposits as prescribed by the Exchange for taking membership & margin
money for trading at the web platform provided by XYZ Ltd. The security deposit
paid for the taking membership is considered as long term as the same is refundable
on surrender of membership only & margin money for trading is refundable on
demand subject to availability of surplus. Investment horizon for these funds needed
to be planned accordingly. Trading Float are those funds wherein all the financial
settlement of XYZ Ltd are managed as per the settlement cycle of the trade and there
may be some time gap when funds are collected from the buyers & paid to the sellers,
for optimal utilization of funds these funds can also be used for investment, however
the same necessitated, investment in highly liquid investments.

The Investment Policy on Investment as approved by the Investment Committee of

the Board of Directors of XYZ Ltd considered the security of the funds and risk
management perspective and undertook the decision to invest only in Fixed Deposits
of Banks and Debt based Mutual funds schemes.

Safety, Income and Growth of Capital being the guiding factors for the objective of
investment, various debt mutual funds were analyzed by way of interview with
subject matter experts and a host of secondary sources including magazines, journals,
articles and the internet.

The factors that emerged as the deciding tool are; Stated Investment Horizon which
is an important facet for long term investors to balance risk and returns. Maturity
Profile which is a graphical representation of the maturity of all holdings of the fund
portfolio. It displayed the investment of funds in percentage against the maturity
period of debt instrument. Credit Risk and Credit Rating Profile viz AA and
AAA are assigned by different rating agencies and indicate the credit worthiness of
the borrower. AAA indicates high creditworthiness of the borrower in comparison to
AA. Average maturity of the portfolio gives the average maturity of all the
instruments in day or years, held in the portfolio. Duration of portfolio is a measure
of the price sensitivity of the portfolio to a change in interest rates. Funds with a
longer duration would be more sensitive to a given change in interest rates. Yield is a
measure of the generation of interest income by the bonds in the portfolio.

The annualized return of investments made by XYZ Ltd for the FYs 2015-16 & 2016-
17 are as tabulated below

FY 2015-16 FY 2016-17
Investment Weightage of Pre Tax Weightage of Pre Tax
Options Investment Return % Investment Return %
Options % Options %
Tax Free Bonds 0.17 10.77 1.02 10.78
Arbitrage Funds - - 0.20 19.27
Liquid Fund 18.07 8.32 10.44 8.00
Liquid Plus Fund 54.26 8.50 66.10 8.58
Fixed Deposits 27.49 9.74 22.24 8.60
Total 100.00 8.81 100.00 8.57
 25
20
15
10
5 2015-16
0 2016-17

A list of debt investments with their annualized returns as analyzed for the last two
FYs is as tabulated below. Debt Mutual Funds, both the short term and medium to
long term along with Banking and PSU categories give good returns and therefore
have been included.

Average Return % Average Return %

Investment Options FY 2015-16 FY 2016-17

Arbitrage Funds 6.80 6.90

Liquid Fund 8.24 7.05
Liquid Plus Fund 8.22 8.54
Debt Short Term 7.73 9.25
Debt Medium to Long Term 6.51 11.92
Debt Banking & PSU 8.45 9.17
Bank FD(1 Year) 8.50 7.50
Source: valueresearchonline.com & moneycontrol.com

14
12
10
8
6
4
2 2015-16
0
2016-17
 STATUS REPORT

XYZ ltd has already leveraged their investment by making inroads into Arbitrage
category of debt funds with a miniscule 0.2% of the total investment portfolio.
Treasury Manager of XYZ Ltd is also planning to include a modest share of equity
based funds into the investment portfolio.

CASE PROBLEM

Holistic review of the case leads to the following queries:-

- What are your recommendations to the Board of Directors of XYZ Ltd to

maximize their returns on investment with minimum risk?
- Do you concur with the Treasury Manager of XYZ Ltd? If yes, Why?
- Do you have any additional recommendation for the company?