A PROJECT

ON
A STUDY ON FIXED INCOME SECURITIES AND THEIR
AWARENESS AMONG INDIAN INVESTORS
BACHELOR OF COMMERCE
FINANCIAL MARKETS
SEMESTER-VI
ACADEMIC YEAR 2018-19
SUBMITTED
IN PARTIAL FULFILLMENT OF THE
REQUIREMENTS FOR THE AWARD OF DEGREE
OF BACHELOR OF COMMERCE- FINANCIAL MARKETS

BY
MR. SOURAV LODHA
UNDER THE GUIDANCE OF
PROF. DHRITI RATHOD JAIN
SEAT NO: 43

JAI HIND COLLEGE

‘A’ ROAD, CHURCHGATE, MUMBAI 400020

1
 DECLARATION

I MR. SOURAV LODHA Student of BCOM FINANCIAL MARKETS hereby declare that the

project for the A STUDY ON FIXED INCOME SECURITIES AND THEIR AWARENESS

AMONG INDIAN INVESTORS titled. Submitted by me for Semester-VI during the academic

year 2018-2019, is based on actual work carried out by me under the supervision of Prof. Dhriti

Rathod Jain

I further state that this work is original and not submitted anywhere else for any examination.

Signature of student

2
3
 JAI HIND COLLEGE
‘A’ ROAD, CHURCHGATE, MUMBAI 400020

EVALUATION CERTIFICATE
This is to certify that the undersigned have assessed and evaluated the project on,

“A STUDY ON FIXED INCOME SECURITIES AND THEIR

AWARENESS AMONG INDIAN INVESTORS”

Submitted by MR. SOURAV LODHA student of BCOM FINANCIAL MARKETS

This project is original to the best of our knowledge and has been accepted for
Assessment

________________ ______________________

Course Coordinator Principal

________________ ______________________

Internal Examiner: External Examiner

______________________

College seal

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 ACKNOWLEDGEMENT

The successful completion of project involved the contribution of time and efforts. The

project would never have been completed without the valuable help extended to us by the

subject teacher and project guide Prof. Dhriti Rathod Jain

I would also like to thank all my friends to help me in this project work and giving

their precious time to me.

Last but not the least I would like to thank our parents for making us capable in

doing this project and giving their continuous support and guidance.

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 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.

Fixed income instruments are basically obligations undertaken by the issuer of the
instrument as regards to the repayment of interest and principal (At predetermined
intervals of time), which the issuer would pay to the legal owner of the instrument. The
time of maturity and amount to be received on maturity are known in advance. Bonds,
debentures, fixed deposits, and small savings schemes (National Savings Certificate and
Kisan Vikas Patra among others) are some of the variants.

Fixed income instruments can be arranged into 4 sections namely –

1. Government Securities
2. Public Sector Bonds
3. Private Sector Bonds
4. Others (like PPF, Kisan Vikas Patra, Post Office etc.)

The bond market in India is dominated by government bonds. Nearly 90% of total
domestic bonds outstanding are government issuances (i.e. Treasury bills, notes and
bonds), squeezing out corporate and other marketable debt securities

PSU bonds have been consistently performing better than Corporate Bonds. Government
bonds constitute almost 35% of GDP where as Corporate bonds constitute nearly 2% of
the total GDP of India.

As far as risk is concerned fixed income bonds like Government Securities are considered
risk free investments where as corporate bonds, debentures etc. varies from a range of
low to moderate risk.

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 CONTENTS
Sr No. Particulars Page No.

1 Introduction 8

2 Conceptual framework 50

3 Research Methodology 53

4 Literature Review 59

5 Data Analysis & findings 62

6 Recommendations 75

7 Conclusion 77

8 Bibliography 78

Annexure

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 1. INTRODUCTION

1.1) Indian market

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.

Introduction to Fixed Income Instruments

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 fuelled 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.

Fixed Income instruments are essentially of two types.

• Tradable. E.g. A debenture

• Non-Tradable. E.g. A bank deposit

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1.2) Why Invest in Fixed Income?

Fixed-income instruments in India typically include company bonds, fixed deposits and
government schemes. The reasons for investing in fixed income option are mentioned below.

a) 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.

b) Need for returns in the short-term

Investment in equity shares is recommended only for that portion of your wealth for which you
are unlikely to have a need in the short-term, at least five-years. Consequently, the money that
you are likely to need in the short-term (for capital or other expenses), should be invested in
fixed-income instruments.

c) Predictable versus Uncertain Returns

Returns from fixed-income instruments are predictable i.e. they offer a fixed rate of return. In
comparison, returns from shares are uncertain. If you need a certain predictable stream of
income, fixed-income instruments are recommended.

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.

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1.3) Risk

There are two types of risks associated with investments in Fixed Income Options.

a) Interest Rate Risk

The price of the fixed income options is affected inversely by the interest rates. So, if the interest
rates go up then the price of the existing bonds goes down and vice versa. The risk becomes
important if you are interested in trading in the bonds and are not likely to hold till maturity.

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.

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 come in to play. Hence, an
emerging market government bonds would pay higher coupon than those issued by developed
countries.

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1.4) Returns

Return calculations should consider effective yield, interest rate expectations and taxes.

a) Calculate effective yield

Calculate the post-tax effective yield for each instrument for comparison. Effective yield is the
IRR (Internal Rate of Return) of the fixed-income instrument.

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.

b) Consider interest rate (and inflation) expectations

Once you invest in a fixed-income instrument, your investment is committed, more often than
not, for the specified period of time.
During this period, if interest rates increase, you will not
benefit from this rise. Hence, your effective return from this investment will be lower than if you
had the flexibility to invest at a higher interest rate.

So, if you expect interest rates to increase, invest only in short-term instruments, and vice versa.

c) Don’t forget taxes


While calculating your interest yield remember to include post-tax interest receipts. For investors
in high-tax brackets, tax-free government bonds/ schemes might be more attractive.

Mutual funds present an alternative avenue to invest in fixed income instruments at zero tax
liability on the income received.

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Tenure & Liquidity

The tenure of the fixed income instrument is important as the returns get influenced by the
tenure. For example, the interest rate risk we discussed above, if the interest rate rises then the
existing bond with longer tenure will witness higher fall in price than one with shorter tenure.

Fixed-income instruments are normally illiquid as the secondary market for these instruments is
not yet developed in India. Make sure you carefully evaluate the potential liquidity, exit route
and penalties of the instrument before you invest.

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.

- Company bonds/ debentures: Companies issue bonds and debentures through public issues
that are open only for a limited period of time. Application forms for these issues are available
with primary market brokers.

- Company fixed deposits: Fixed deposit schemes from companies are typically open round the
year, unless they have exceeded their collection limits. Even in such cases, companies accept
renewal from existing fixed deposit holders.

- 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.

- Fixed income mutual funds: Fixed-income and money market mutual funds offer investors an
exposure to fixed-income instruments. Open-ended mutual funds are available round the year
and can be easily purchased/ sold on any business day.

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2.) DEBT MARKET:

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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3.) 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 fulfil 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.

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4.) 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.

Definition of Government securities

The Government securities are included in the definition of securities in the Securities Contracts
(Regulation) Act, 1956 (SCRA) and mean a security created and issued by the Central
Government or a State Government for the purpose of raising a public loan in a form specified in
the Public Debt Act 1944.

Permitted Exchanges:
NSE, BSE and OTCEI.

5.) FEATURES OF A GOVERNMENT SECURITY –

A Government Security has the following features:

Ø The face value of all the securities is Rs.100. 

Ø Interest is paid on a semi-annual basis i.e. every 6 months. i.e. A security with a coupon
of 7.40% will draw an interest payment of Rs 3.70 every six months. 

Ø Accrued Interest is always calculated on a 30/360-day count. 


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.

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v Demat account for trading in Government Securities –
Government Securities can be
held in the same demat a/c used for equities. 


v 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.

v The settlement cycle on the exchanges -
The settlement in G-Sec would take place
either on a T+0, T+1 or T+2 basis. Where 'T' stands for the trade date, and '0', '1', '2'
implies the number of business days. i.e. On a given week having no holidays (As per the
Stock exchange list) a trade taking place on Monday with T+0 cycle will be settled on
Monday, a trade taking place on Saturday with T+1 cycle will be settled the next Monday
and so on. 


v Effect of shut period on trading in stock exchanges
In case of a security going into the
shut period on the WDM, it would be suspended on the exchanges 1 working day prior to
the IP date. For e.g. say a security's IP date is 28th Jan 2005, the security would in go the
shut period on 27th Jan 2005 in the Wholesale Debt market.


v Intra-day short selling permitted
An individual can do intra-day short sales.


v Quoting of Government Securities on the stock exchanges
The prices will be quoted
on a dirty price (clean price + accrued interest) basis. 


v 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 in case
an investor's investment horizon identically matches the term of the security. 


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 v 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.

v Default risk: This kind of risk in the context of a Government security is always zero.
However, these securities suffer from a small variant of default risk i.e., maturity risk.
Maturity risk is the risk associated with the likelihood of the government issuing a new
security in place of redeeming the existing security. In case of Corporate Securities, it is
referred to as Credit Risk.

6.) AUCTION OF SECURITIES:

Auction is a process of calling of bids with an objective of arriving at the market price. It is
basically a price discovery mechanism. There are several variants of auction. Auction can be
price based or yield based. In securities market we come across below mentioned auction
methods.

(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.

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 (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 window 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.

THE TERM GOVERNMENT SECURITIES INCLUIDES: -

v Central Government Securities 

v State Government Securities 

v Treasury Bills 


ISSUER INSTRUMENTS

Treasury Bills, Dated Securities, Zero Coupon Bonds,

Coupon Bearing bonds, partly paid Stocks, Capital Index
CENTRAL GOVERNMENT
Bonds, Floating Rate Bonds, Inflation Index Bonds, STRIPS

STATE GOVERNMENT State Government Loans, Coupon bearing bonds

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7.) SECURITIES ISSUED BY CENTRAL GOVERNMENT -

7.1) TREASURY BILLS

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.

v 91-Day T-Bill- (Tenor is of 91days) Its auction is on every Wednesday of the week and
issued on following Friday. The notified amount for this auction is Rs. 500 crores.

v 182-Day T-Bill- (Tenor is of 182 days) Its auction is on every alternate Wednesday
(which is not a reporting week) and issued on Friday. The notified amount for this
auction is Rs. 500 crores.

v 364-Day T-Bill- (Tenor is of 364 days) Its auction is on every alternate Wednesday
(which is a reporting week) and issued on Friday. The notified amount for this auction is
Rs. 1000 crore.

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

19
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.

The yield on TBs is mainly dependent on the rates prevalent in Call/Notice market. Low yield on
TBs, generally a result of high liquidity in banking system as indicated by low call rates, would
divert the funds from this market to other markets. This would be particularly so, if banks
already hold the minimum stipulated amount (SLR) in government paper.

7.2) DATED SECURITIES

Government paper with tenor beyond one year is known as dated security. At present, there are
Central Government dated securities with a tenor up to 30 years in the market. These securities
generally carry a fixed coupon (interest) rate and have a fixed maturity period. e.g. an 11.40%
GOI 2008 G-sec. In this case 11.40% is the coupon rate and it is maturing in the year 2008. The
salient features of Dated Securities are:

• These are issued at the face value. 


• 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. 

• On maturity the security is redeemed at face value. 


Auction/Sale: - Dated securities are sold through auctions. Fixed coupon securities are
sometimes also sold on tap that is kept open for a few days. 


Announcement: - A half yearly calendar is issued in case of Central Government dated

securities, indicating the amounts, the period within which the auction will be held and the tenor
of the security, which is made available on Reserve Bank’s website. The Government of India

20
and the Reserve Bank also issue a press release to announce the sale, a few days (normally a
week) before the auction. 


Amount: - Subscriptions can be for a minimum amount of Rs. 10,000 and in multiples of Rs.
10,000. 


Where are the sales held? 
Auctions are conducted electronically on PDO-NDS system. The
bids are submitted by the members on PDO-NDS system both on their own behalf as well as on
behalf of their clients. 


Payment: - The payment by successful bidders is made on the issue date, as specified in the
auction notification, usually the working day following the auction day. 



7.3) ZERO COUPOUN BONDS

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. 


The salient features of Zero Coupon Bonds are:

v The tenure of these securities is fixed. 

v No interest is paid on these securities. 

v The return on these securities is a function of time and the discount to face value. 


7.4) PARTLY PAID STOCK

Partly 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

21
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 instalments over a
given period of time.

The salient features of Partly Paid Stock are: 

Ø These types of securities are issued at face value and the principal amount is paid in
instalments over a period of time. 

Ø The rate of interest and tenure of the security is fixed at the time of issuance and does not
change till maturity. 

Ø The interest payment is made on half yearly rest. 

Ø These are redeemed at par on maturity. 


7.5) FLOATING RATE BONDS

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. 


These types of securities have a variable interest rate, which is calculated as a fixed percentage
over a benchmark rate. The interest rate on these securities changes in sync with the benchmark
rate.
The salient features of Floating Rate Bonds are: 

v These are issued at the face value.
v 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. 

v The interest payment is made on half yearly rests. 

v The security is redeemed at par on maturity, which is fixed.

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7.6) CAPITAL INDEXED BONDS 

A capital indexed bond (CIB) was issued on December 29, 1997 with a maturity of 5 years. The
bond provided for inflation hedging for the principal, while the coupons of the bond were not
protected against inflation. The issue of this bond met with lacklustre response, both in the
primary and the secondary markets due to the limited hedging against inflation. Therefore, there
were no subsequent issuances. An attempt is being made to reintroduce these bonds and towards
this end, a discussion paper was also widely circulated in May 2004. The proposed modified
structure of the CIB would be in line with the internationally popular structure, which offers
inflation linked returns on both the coupons and principal repayments at maturity. The inflation
protection for the coupons and the principal repayment on the bond would be provided with
respect to the Wholesale Price Index (WPI) for all commodities (1993-94=100). 


These securities carry an interest rate, which is calculated as a fixed percentage over the
wholesale price index. The salient features of Capital Indexed Bonds are: 

§ These securities are issued at face value. 

§ The interest rate changes according to the change in the Wholesale price 
index, as the
interest rate is fixed as a percentage over the wholesale price 
index. 

§ The maturity of these securities is fixed and the interest is payable on half 
yearly rests. 

§ The principal redemption is linked to the Wholesale price index. 



Inflation Linked Bonds

A bond is considered indexed for inflation if the payment of coupons is indexed by reference to
the change in the value of a general price or wage index over the term of the instrument. The
options are that either the interest payments are adjusted for inflation or the principal repayment
or both. 

Out of the existing measures of inflation in India, viz., Consumer Price Index (CPI), GDP
deflator and the Wholesale Price Index (WPI), the WPI emerges as the best index for the CIB.
Thus, the WPI for All commodities (1993-94=100) released by the Office of the Economic
Adviser, Ministry of Commerce and Industries, Government of India would be taken as the index
for measuring the inflation rate for the proposed bonds. However, for the purpose of inflation

23
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.

7.7) COUPON BEARING BOND

“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.
E.g.: B1 with face value of Rs.100, maturity T =
5
and annual cash flow of Rs.10 looks like:
(10, 1), (10, 2), (10, 3), (10, 4), (110, 5)
Government securities with embedded call and put options
were introduced in July 2002 for a 10-year maturity using uniform price based auction method.
On these securities, the Government has the discretion to exercise the ‘call option’, after giving a
notice of two months, whereby the securities may be prematurely redeemed at par on or after
completion of five years tenure from the date of issuance of securities on any coupon payment
date falling thereafter. The holders of the Government stock also have the discretion to exercise
‘put option’ whereby premature redemption may be made under the same conditions as the call
option. There was only one issuance of this instrument.

7.8) 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
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

24
management of cash flows. Thus to some investors who set the incoming inflows against an
actuarial book (e.g. 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.

8.) ZERO COUPON YIELD CURVE

The yield to maturity for coupon bonds is capable of several algebraically equivalent definitions
A straight forward definition of yield to maturity is the single discount rate that equates the
bond’s cash flows to the market price of the bond. But coupon paying bonds can be viewed as a
combination of separate bonds of varying maturities (of the coupons and the principal).
A zero coupon curve is the great invisible reality of the of the fixed income markets and it solves
the bulk of the pricing problems in fixed income markets (ignoring default risk).
The pricing of
securities based on Yield to Maturity (YTM) suffers from the defect that although a security
represents a series of cash flows occurring at different points of time, they are discounted at the
same rate. Hence the YTM can be regarded as a weighted average discount rate for forward rates
where the weights are the corresponding cash flows. Since the cash flows of a bond is unique, so
is its YTM. In fact, if the forward curve is sharply upward sloping, the YTM of a low coupon
security should be more than a high coupon security of identical tenor. This coupon effect, as it
is known, is totally missed if the decisions are based on YTM. With the introduction of STRIPS,
the pricing of the primary market offerings have also to be oriented towards zero coupon
valuation method so as to address the problems of valuation arising out of YTM methodology.

Who can strip and reconstitute

Stripping/reconstitution may be allowed to be performed by only a limited number of
intermediaries along with the debt manager on the specific requisition from the holders.

Role of Government Securities Yield Curve as a Public Good-

Yield curve, also known as term structure of interest rates, is the representation of zero coupon
yields of a series of maturities at a point of time. It is constructed by plotting the yields against

25
the respective maturity periods of benchmark fixed- income securities. The yield curve is a
measure of market’s expectations of future interest rates, given the current market conditions.
Securities issued by the Government are considered risk-free, and as such, their yields are often
used as the benchmarks for fixed-income securities with the same maturities.

Graphic Representation of a Normal Yield Curve

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 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 instrument uses the government

26
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.

One of the key features of development of the government securities market is the evolution of
yield curve over a reasonably long period. The upward sloping yield curve, which is considered
to be the usual term structure, may reflect either the presence of interest rate risk premium or the
so called Hicksian liquidity premiums, or it may simply reflect the market’s anticipation about
the upward trend in the general level of interest rates over the period. Theoretical analysis
confirms that in an efficient market, yield curve will solely depend upon the market’s response to
collective beliefs about future interest rate movements, i.e., interest rates derived from the
prevailing term structure of interest rates are correct forecast of future interest rates. Thus,
development of the government securities market is essential for establishing the risk-free
benchmarks in financial markets and ensuring their functioning in an efficient manner.

27
9.) SECURITIES ISSUED BY STATE GOVERNMENT -

ISSUER INSTRUMENTS

State Government loans/ State

Development Loan, coupon bearing
STATE GOVERNMENTS
bond

9.1) STATE GOVERNMENT SECURITIES/STATE DEVELOPMENT LOANS

These are securities issued by the state governments and are also known as State Development
Loans (SDLs). The issues are also managed and serviced by the Reserve Bank of India.
The
tenor of state government securities is normally ten years. State government securities are
available for a minimum amount of Rs. 10,000 and in multiples of Rs.10,000. These are
available at a fixed coupon rate. The auctions for State Government securities are held
electronically on PDO-NDS module.

Nine State Governments announce auctions of
State Development Loans 2017 for
Rs.3482.129 crore on June 19 2007

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.

28
9.2) COUPON BEARING BOND
“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.
E.g.: B1 with face value of Rs.100, maturity T =
5
and annual cash flow of Rs.10 looks like:
(10, 1), (10, 2), (10, 3), (10, 4), (110, 5)

10.) BENEFITS OF INVESTING IN A GOVERNMENT SECURITY-

The Benefits of investing in a Government Security are:

1. Safety: The Zero Default Risk is the greatest attraction for investments in Government
Securities. It enjoys the greatest amount of security possible, as the Government of India issues
it. Hence they are also known as Gilt-Edged Securities or 'Gilts'.

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.

3. Convenience: Government Securities do not attract deduction of tax at source (TDS) and
hence the investor having a non-taxable gross income need not file a return only to obtain a TDS
refund.

4. Simplicity: To buy and sell Government Securities all an individual has to do is call his / her
Equity Broker and place an order. If an individual does not trade in the Equity markets, he / she
has to open a demat account and then can commence trading through any Equity broker.

5. Liquidity: Government Security when actively traded on exchanges will be highly liquid,
since a national trading platform is available to the investors.

29
6. Diversification Government Securities are available with a tenor of a few months up to 30
years. An investor then has a wide time horizon, thus providing greater diversification
opportunities.
Factors that affect the price of a Government Security –
These are the factors which affect the price of the securities –
v Demand and supply 

v Economic conditions. 

v General money market conditions including the position of money
supply, in the
economy. 

v Interest rates prevalent in the market and the rates of new issues. 

v Credit quality of the issuer. 


11.) PUBLIC SECTOR BONDS –

SEGMENT ISSUER INSTRUMENTS

Government Agencies/ Government Guaranteed Bonds,

Statutory Bodies Debentures
PUBLIC SECTOR

Public Sector Units PSU Bonds, Debenture,

Commercial Paper

30
11.1) GOVT. GUARANTEED BONDS:
Introduction
State Governments have been issuing a large amount of guarantees and letters of comfort on
behalf of public sector undertakings (PSUs) at the State level, co- operative societies and State
Cooperative Banks (STCBs) for the purpose of public investment, particularly in resource-
intensive infrastructure sector and for promotion of rural development, to enable the PSUs to
mobilise resources.

Lenders/investors in State guaranteed papers:

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
a) Public and Private Sector Provident Funds (PFs);
b) Charitable Trusts

c) National Co-operatives Development Corporation (NCDC)
d) Non-Banking Financial Corporations (NBFCs)

31
11.2) PSU BONDS
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.

11.3) COMMERCIAL PAPERS

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 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.

32
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 lakhs (face value).

Limits and the Amount of Issue of CP

CP can be issued as a "stand alone" product. The aggregate amount of CP from an issuer shall be
within the limit as approved by its Board of Directors or the quantum indicated by the Credit
Rating Agency for the specified rating, whichever is lower. Banks and FIs will, however, have
the flexibility to fix working capital limits duly taking into account the resource pattern of
companies' financing including CPs.

Issuing and Paying Agent (IPA)

Only a scheduled bank can act as an IPA for issuance of CP.

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.
11.4) Debentures (please refer to private sector)

33
12.) PRIVATE SECTOR –

SEGMENT ISSUER INSTRUMENTS

Corporate Debentures, Bonds, Commercial Paper,

SPN, Floating Rate Bonds, Zero
PRIVATE
Coupon Bonds, Inter-Corporate
Deposits
Banks Certificate of Deposits, Bonds

Financial Institutions Certificate of Deposits, Bonds

The Indian Corporate Bond Market

12.1) CORPORATE BONDS

Corporate bonds are debt securities issued by private and public corporations. Companies issue
corporate bonds to raise money for a variety of purposes, such as building a new plant,
purchasing equipment, or growing the business. When one buys a corporate bond, one lends
money to the "issuer," the company that issued the bond. In exchange, the company promises to
return the money, also known as "principal," on a specified maturity date. Until that date, the
company usually pays you a stated rate of interest, generally semi-annually. While a corporate
bond gives an IOU from the company, it does not have an ownership interest in the issuing
company, unlike when one purchases the company's equity stock.

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

34
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.
• 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). 


Valuation of Corporate Bonds 


Corporate bonds tend to rise in value when interest rates fall, and they fall in value when interest
rates rise. The inverse relationship between bonds and interest rates—that is, the fact that bonds
are worth less when interest rates rise and vice versa can be explained as follows: -

35
 • When interest rates rise, new issues come to market with higher yields than older
securities, making those older ones worth less. Hence, their prices go down. 

• When interest rates decline, new bond issues come to market with lower yields than older
securities, making those older, higher-yielding ones worth more. Hence, their prices go
up. 

• As a result, if one sells a bond before maturity, it may be worth more or less than it was
paid for. 


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 risk reward 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

36
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.
Corporate Bonds- Outstanding Issues (Aug 25, 2005)

Rating Class No. of Market Issue Market Market Market

Issues Share Size (Rs. Share Cap (Rs. Share
(%) Cr) Cr) (%)

AAA/MAAA 955 61.61 92609 69.81 93872 69.68

AA+/LAA+/MAA+ 320 20.65 19605 14.78 19821 14.71

AA/LAA/MAA 175 11.29 13248 9.99 13692 10.16

AA-/LA- 31 2 1272 0.96 1322 0.98

A+/LA+ 16 1.03 1545 1.16 1559 1.16

A/LAMA 16 1.03 1512 1.14 1529 1.13

A- 12 0.77 1063 0.8 1065 0.79

BBB+ 11 0.71 833 0.63 877 0.65

BBB/LBBB 8 0.52 722 0.54 25 0.54

B 6 0.39 257 0.19 257 0.19

GRAND 1550 100 132666 100 134719 100

Rating Not Available 82 9906 9916

37
 12.2) 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.

Debentures are divided into different categories on the basis of:

1. Convertibility of the instrument

2. Security

1. Debentures can be classified on the basis of convertibility into:

a) Non-Convertible Debentures (NCD): This type of security retains all the characteristic of a
debt instruments and it cannot be converted into any other form of security (mainly equity).

b) Partly Convertible Debentures (PCD): A part of this instrument can be converted into
Equity share in the future at the instance of issuer. The issuer decides the ratio of the conversion
at the time of subscription.

38
c) Fully convertible Debentures (FCD): These instruments are fully convertible into Equity
shares at the issuer's notice. The issuer decides the ratio of conversion. Upon conversion the
investors enjoy the same status as ordinary shareholders of the company.
e) Optionally Convertible Debentures (OCD): The investor has the option to either convert
these debentures into shares at price decided by the issuer/agreed upon at the time of issue.

2. On basis of Security, debentures are classified into:


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.
b) Unsecured Debentures: These instruments are unsecured in the sense that if the issuer
defaults on payment of the interest or principal amount, the investor has to be along with other
unsecured creditors of the company.

12.3) INTER-CORPORATE DEPOSITS

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.

39
12.4) CERTIFICATE OF DEPOSITS
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.

12.5) 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 instalments 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.

12.6) Commercial Papers (Please refer to Public Sector Bond)

12.7) Floating Interest rate (Please refer to Government securities part)

12.8) Zero Coupon Bond (Please refer to Government securities part)

40
13.) OTHER FIXED INCOME INSTRUMENTS:

1. Company Fixed Deposits


2. Employee’s Provident Fund

3. Mutual Funds

4. Guilt Funds

5. Bank Fixed Deposits


13.1) COMPANY FIXED DEPOSITS

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.

Benefits of investing in Company Fixed Deposits

• 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, because they have to pay higher interest to banks for borrowing money.
v 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.

41
 v TDS is deducted if the interest on fixed deposit exceeds Rs.5000/- in a financial year.

Which companies can accept a deposits?

Companies registered under the Companies Act 1956, such as:

v Manufacturing Companies.

v Non-Banking Finance Companies.
v Housing Finance Companies.

v Financial Institutions.

v Government Companies.

Up to what limits can a company accept deposit?

A Non-Banking Non-Finance Company (Manufacturing Company) can accept deposits

subject to following limits.
• Up to 10% of the aggregate of paid-up share capital and free reserves if the deposits are
from shareholders or guaranteed by the directors. 

• Otherwise up to 25% of the aggregate of paid-up share capital and free reserves. 


A Non-Banking Finance Company can accept deposits up to following limits: 


• An Equipment Leasing Company can accept four times of its net owned fund. 

• A Loan or Investment Company can accept deposit up to one and half time of its net
owned funds. 


Period of the deposit 
Company Fixed Deposits can be accepted by a Manufacturing Company
having duration from 6 months to 3 years. Non-Banking Finance Companies can accept deposit
from 1 year to 5 years’ period. A Housing Finance Company can accept deposit from 1 year to 7
years. 


42
13.2) EMPLOYEE’S PROVIDENT FUNDS (EPF) 

Employee’s Provident Funds Act, 1952

The Employees Provident Funds and Miscellaneous Provisions Act, provides for compulsory
contributory fund for the future of an employee after his retirement or for his dependents in case
of his early death.

It extends to the whole of India except the State of Jammu and Kashmir and is applicable to:

a) every factory engaged in any industry specified in Schedule 1 in which 20 or more

persons are employed; 

b) every other establishment employing 20 or more persons or class of such establishments
which the Central Govt. may notify; 

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
labourers), who is in receipt of wages up to 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. 


43
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
• 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. 

• 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
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.

44
13.3) MUTUAL FUND
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:

Mutual Fund Operation Flow Chart

45
TYPES OF MUTUAL FUND SCHEMES
• By Structure
o Open - Ended Schemes
o Close - Ended Schemes
o Interval Schemes

• By Investment Objective
o Growth Schemes
o Income Schemes
o Balanced Schemes
o Money Market Schemes

• Other Schemes
o Tax Saving Schemes
o Special Schemes
• Index Schemes 

• Sector Specific Schemes 


Association of Mutual Funds in India (AMFI)


With the increase in mutual fund players in India, a need for mutual fund association in India
was generated to function as a non-profit organisation. Association of Mutual Funds in India
(AMFI) was incorporated on 22nd August, 1995.

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 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.

46
13.4) GILT FUNDS
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.

13.5) BANK FIXED DEPOSIT

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

47
Deposit 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.

Duration Interest rate (%) per annum

15-30 days 4 -5 %

30-45 days 4.25-5 %

46-90 days 4.75-5.5 %

91-180 days 5.5-6.5 %

181-365 days 5.75-6.5 %

1-2 years 6-8 %

2-3 years 6.25-8 %

3-5 years 6.75-8

48
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.


49
2. CONCEPTUAL FRAMEWORK

1. 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. 


2. Interest Payment Dates (IP dates): The dates on which the coupon (interest) payments
are made are called as the IP dates. 


3. Last Interest Payment Date (LIP Date): LIP date refers to the date on which the
interest was last paid. 


4. Accrued Interest: Accrued interest is the interest charged at the coupon rate from the
Last Interest Payment to the date of settlement. Accrued Interest for a security depends
upon its coupon rate and the number of days from its LIP date to the settlement date. 


5. Day count convention
The market uses quite a few conventions for calculation of the
number of days that has elapsed between two dates. The ultimate aim of any convention
is to calculate (days in a month)/ (days in a year). The 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.

6. 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. 


7. A/365 (Actual by 365)
In this method, the actual number of days elapsed between the
two dates is divided by 365, i.e. the year is assumed to have 365 days. 


8. A/A (Actual by Actual)
In this method, the actual number of days elapsed between the
two dates is divided by the actual days in the year. 


9. 30/360-Day Count: A 30/360-day count says that all months consist of 30 days. i.e. the
month of February as well as the month of March is assumed to have thirty days. 


50
10. Yield: Yield is the effective rate of interest received on a security. It takes into
consideration the price of the security and hence differs as the price changes, since the
coupon rate is paid on the face value and not the price of purchase. The concept can be
best understood by the following example:

• A security with a coupon of 7.40%:

• If purchased at Rs. 100 the yield will be 7.40%
• If purchased at Rs. 200 the yield becomes 3.70%.
• Thus it is seen that higher the price lesser will be the yield and vice-a-versa.
• The yield will be equal to the coupon rate if and only if the security is purchased
at the face value (Par). 


11. Yield to Maturity (YTM): YTM implies the effective rate of interest received if one
holds the security till its maturity. This is a better parameter to see the effective rate of
return as YTM also takes into consideration the time factor. 


12. Holding Period Yield (HPY): HPY comes into the picture when an investor does not
hold the security till maturity. HPY denotes the effective yield for the period from the
date of purchase to the date of sale.

13. Clean Price: Clean Price denotes the actual price of the security as determined by the
market. 


14. Dirty Price: Dirty Price is the price that is obtained when the accrued interest is added to
the Clean Price. 


15. 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'. 


16. 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

51
 (i.e. 5000 * 100) 


17. "Cum-Interest" and "Ex-Interest"
Cum-interest means the price of security is

inclusive of the interest accrued for the interim period between last interest payment date
and purchase date. Security with ex-interest means the accrued interest has to be paid
separately 


18. Primary Dealers & Satellite Dealers
Primary Dealers can be referred to as Merchant
Bankers to Government of India, comprising the first tier of the government securities
market. Satellite work in tandem with the Primary Dealers forming the second tier of the
market to cater to the retail requirements of the market.
These were formed during the
year 1994-96 to strengthen the market infrastructure and put in place an improvised and
an efficient secondary government securities market trading system and encourage
retailing of Government Securities on large scale.

52
 3. RESEARCH METHODOLOGY

INTRODUCTION:

Research Methodology is a way to systematically solve the research problem. The Research
Methodology includes the various methods and techniques for conducting a research.
Research is an art of scientific investigation. In other words research is scientific and
systematic search for pertinent information on a specific topic. The logic behind taking
research methodology into consideration is that one can have knowledge about the method
and procedure adopted for achievement of objective of the project.

STATEMENT OF PROBLEM

I am conducting this research because development of the Domestic debt market in India is
thwarted by a number of factors, the prominent ones being low primary issuance of corporate
bonds leading to illiquidity in the secondary market, narrow investor base, high costs of issuance,
lack of debt market accessibility to small and medium enterprises, dearth of a well-functioning
derivatives market that could have absorbed risks emanating from interest rate fluctuations and
default possibilities, excessive regulatory restrictions on the investment mandate of financial
institutions, large fiscal deficit, high interest rates and the dominance of issuances through
private placements and AAA rated bonds which in turn also prevent retail participation and
aggravate the dependence on bank financing.

While it is true that the Indian corporate debt market has transformed itself into a much more
vibrant trading field for debt instruments from the elementary market about a decade ago, yet
there is still along way to go.

53
SCOPE OF STUDY

GEOGRAPHICAL SCOPE

The geographical scope of this study is within the boundaries of our country, India. The financial
market of India, currently, is the most advanced in the world with completely online trading
facility available in almost all the markets. BSE [Bombay stock exchange] and NSE [National
Stock Exchange] are the major exchanges in India on which trading of Debt Securities takes
place.
However, with a country as big as India, there are many non-regulating markets existing in it.
Mumbai, the financial capital of this country is also the go-to hub for all the investors looking for
non-regulated transactions.
Hence, my geographical scope of this study is within Mumbai.

SUBJECT SCOPE

Non-regulated markets are one of the risky ventures and those who have sheer knowledge about
the market looks to invest in it. People who do not have personal burdens pulling them down and
can afford to lose money at initial stages are the ones perfect for investing in such markets.

As, age group of 50+ cannot afford to take risk, anymore with FD’s and insurance being perfect
for them to invest their money in, they are not considered as perfect investors in non-regulated
markets.

Also, age group below 20 have less idea about the functioning of such markets, they are also not
considered as healthy investors in such markets.

So, my subject scope of study is investors in south Mumbai between approximate age of 20-50
about their role they play in non-regulated markets in India.

54
OBJECTIVE OF THE PROJECT

• To study and understand fixed income securities and learn about various types of fixed
income securities.
• To study and understand terminologies related to fixed income securities.
• To study risks and return associated with Fixed Income Securities.
• To study various factors that affect the investment in fixed income securities.
• To study the awareness level of Indian investors in fixed income securities.

LIMITATIONS OF STUDY

The study is confined to city of Mumbai only. Hence the findings may not be generalized for
other parts of the country. Stock markets which constitute the major portion of capital market
have been significantly studied. However, the other institutions involved in the market have been
given relatively lesser attention and coverage. Absence of the control over the fair disclosure of
financial information. The rural economy is not well connected with the capital market. Foreign
investment in Indian capital market may create substantial instability in financial markets. Out of
the total population only 0.01% population investors are considered therefore the data collected
will not be accurate

55
COLLECTION OF DATA

Primary Data - Primary data is information that you collect specifically for the purpose of
your research project. An advantage of primary data is that it is specifically tailored to your
research needs. A disadvantage is that it is expensive to obtain.

Characteristics of Primary Data-

Primary sources can either be first-hand observation/analysis, or accounts contemporary with the
events described. Primary sources document events, people, viewpoints of the time. When
research is more era, rather than event driven, scope of possible primary sources broadens
considerably. Primary sources represent one person's perspective; frequently will be used
with secondary/tertiary sources to broaden the lens through which a researcher is looking at an
event, era, or phenomenon. It is important when using anything as a primary source that the
researcher be cognizant of and sensitive to the bias of the observer/analyser that created the
primary source, and also to the broader cultural biases of the era in which the primary source was
created. The researcher's perspective, or the arguments or points for which a researcher plans to
use a primary source as evidence, is significant in determining what sources will be primary.
Reproductions of primary sources remain primary for many research purposes. Some attributes
are based more on the perspective represented in the source and context in which the source is
being used by researcher.

Method used for collecting Primary Data:

Survey (Questionnaire).

These are basically questionnaires with a set of carefully designed questions posed to your target
population. A questionnaire is a research instrument consisting of a series of questions (or other
types of prompts) for the purpose of gathering information from respondents.

56
Secondary Data - Secondary data is research data that has previously been gathered and can
be accessed by researchers. The term contrasts with primary data, which is data collected directly
from its source.

Advantages of Secondary Data:

It is economical. It saves efforts and expenses. It is time saving. It helps to make primary data
collection more specific since with the help of secondary data, we are able to make out what are
the gaps and deficiencies and what additional information needs to be collected. It helps to
improve the understanding of the problem. It provides a basis for comparison for the data that is
collected by the researcher.

Disadvantages of Secondary Data:

Accuracy of secondary data is not known. Data may be outdated. Data can be biased and not in
the favor of the researcher

57
SAMPLING SIZE

To get a rough overview I will need minimum of 100 responses on my source of primary data i.e.
Questionnaire. Therefore, my sample size to conduct the study will be of minimum 100 people.
Basically population having knowledge of debt market.

SAMPLE DESIGN

Although technically, everyone in the universe should be considered in the study for the perfect
response however that is highly wayward and hence I have decided a target population of 0.1
percentages.

SAMPLING FRAME

Now the size is bought to 100, it will be classified on the basis of age, occupation, education
background etc. the reason behind it is to get the accuracy of the data and also it is easy for
interpretation of the responses

58
4. LITERATURE REVIEW

1. “Bond Market – An Overall View” written by Ms. Snigdha in New Delhi in the year
2015. According to her the Macroeconomic factors which affect whole financial system
of a country have a significant impact on determination of type of bond market that
prevail in any country. Equally important are the specific factors concerning bond
markets in general and firms.

India's bond markets are at crossroads today. Drastic changes are required for making
bond markets healthy component of financial system. This will go a long way in easing
pressure from banking system of the country. Efficient bankruptcy laws, tougher laws for
opportunists, easing norms for long term foreign investors especially institutional
investors, consolidation of government securities will propel the bond markets to newer
heights same as equity markets.

2. “Domestic Debt Market in India
–Its Resilience in Funding Infrastructure” written by

Vighneswara Swamy PhD in New Delhi in the year 2014. According to him as India is
projected to be the world’s most populous country by 2025, the growing needs of the
economy, with expanding population, in the recent years have placed intense stress on
physical infrastructure.

Though there has been a progressive involvement of the private sector in infrastructure
investments, the government has to play a proactive role in developing a well-structured
platform for raising the required investments in Indian infrastructure. Given the huge
demand of US$ 1 trillion for infrastructure investments during the 12th plan period, there
is a greater emphasis on creating a domestic debt market with special focus on bond
market as an alternate source of funding for bank finance, which is faced with myriad
problems of stress assets, asset restructuring, etc.

59
3. “The role of Fixed Income as a part of a diversified investment strategy” written by
Roger McIntosh and Vijay A. Murik in Australia in the year 2012. In this paper, they
highlighted the benefits of holding fixed income securities as part of a balanced portfolio
that are timeless. When held in a diversified form across many tenors and investment
grade issuers, fixed income asset class returns provide a narrower, less volatile range of
investment outcomes than equities. Fixed income securities as an asset class principally
provides coupon income liquidity and high levels of capital stability. By including a fixed
income allocation in a balanced portfolio, these features also provide portfolio efficiency
gains from reducing the variability of returns below the levels of the weighted average of
the combined asset classes.

4. “The Indian Bond Market” written by Suchismita Bose, Dipankar Coondoo and Sumon
Kumar Bhaumik in New Delhi in the year 1999 in which they quoted that ‘It would
perhaps be an understatement to say that the Indian bond market is underdeveloped.’ The
major problem is not even that the pricing algorithms and instruments are not
sophisticated; sustained competitive trading itself is at a premium. Indeed, market
insiders agree that once a bond is introduced in the market, the process of price-search
continues for a few months, and thereafter the lion’s share of the bonds disappear from
the secondary market. Typically, they are held to maturity by banks, insurance companies
and mutual funds. As a consequence, trading is thin in the secondary market, especially
for bonds with longer maturities, and the situation is aggravated by the fact that bulk of
the trading takes place among a handful of large traders.

This indicates that the pricing process is divorced from interest rate expectations which,
at least in principle, should be the only determinant of bond prices.

60
5. “Indian Debt Market - A Current Paradigm” written by Amtul Majid Fazeelath in
Hyderabad, in the year 2013. According to him the development of long term debt market
is critical for the mobilization of the huge magnitude of funding required to finance
potential businesses. India has ill-defined long term corporate debt market. Traditionally,
bank finances along with equity market and external borrowings have been preferred
funding sources. Large fiscal deficit, high interest rates, inadequate market infrastructure,
lack of transparency, excessive regulatory restrictions on the investment of financial
institution may have hamper the development of well- functioning corporate debt market.

61
 5. DATA ANALYSIS & FINDING

In this survey it was found out that 52% of the sample were Males and the rest 48% of the
population were Females.

62
In this survey we found out that 59% of the sample were of people aged 18-25, 18% of the
sample were aged 25-30, 11% of the sample were aged 30-35, and 12% of the sample were aged
above 35.

63
In this survey we found out that 44% of the sample’s annual income was above 6,00,000, 19% of
the sample’s income was between 4,00,000-6,00,000, 18% of sample’s income was between
2,00,000-4,00,000, and 19% of sample’s annual income was below 2,00,000.

64
In this survey we found out that 48% of the sample invests in Fixed Deposits, 21% invests in
Debentures, 15% invests in National Savings Certificates (NSC), and rest 16% invests in G-secs.

65
In this survey we found out that 45% of the sample have very little knowledge of debt
instruments, 44% of the sample have a moderate level of knowledge of debt instruments, and
11% of the sample have extensive knowledge of debt instruments.

66
In this survey we found out that 52% of the people invest less than 25% of their savings in Debt
Markets, 28% of the people invest 25-50% of their savings, 16% people invest in between 51%-
75% of their savings and the rest 4% of the people invest more than 75% of their savings in Debt
Markets.

67
In this survey we found out that 44% of the sample expects to withdraw their money in 1-3 years
after investing, 34% of the sample expects to withdraw the money in 4-6 years, 8% of the sample
expects to withdraw in 7-9 years, and the rest 14% of the sample expects to withdraw in 10 years
or more.

68
In this survey we found out that the primary goal of investors is that 33% of the sample wants to
keep the money they have invested safe and readily available for short term needs, 30% wants to
generate a steady stream of income from their investments, 19% wants to generate some income
with some opportunity for the investments to grow in value, and the rest 18% wants to generate
long term growth from their investments.

69
In this survey we found out that 29% of the survey considers Credit Risk, 30% of the survey
considers Interest Rate Risk, 24% of the survey considers Liquidity, and the rest 17% considers
Tax Saving as a factor while investing in Debt Markets.

70
In this survey we found out that 57% of the sample make investments in Debt Market through
exchange regulated transactions, 19% use over the counter transactions, and the rest 24% of the
sample uses both as a medium of transactions.

71
In this survey we found out that when sample is faced with a major financial decision around
36% of the sample is always concerned about the possible losses, 20% of the sample is usually
concerned about the possible losses, 31% of the sample is usually concerned about the possible
gains, and the rest 13% of the sample is always concerned about the possible gains.

72
In this survey we found out that while making major financial decision around 26% of the
sample are very conservative and try to minimize risk and avoid the possibility of any loss, 32%
of the sample is conservative but willing to accept a small amount of risk, 33% of sample is
willing to accept a moderate level of risk and tolerate losses to achieve potentially higher returns,
rest 9% of the sample is aggressive and typically take on significant risk for the potential of
achieving higher returns.

73
In this survey we found out that 39% of the sample rate Savings Bank Deposits as the best
investment instrument, 34% of the sample rate Equity as the best investment instrument, 20% of
the sample rate Debt Instruments as the best and the rest 7% of the sample rate others as an
option.

74
 6. RECOMMENDATION

Low risk, Low returns (Short investment horizon)

With this investment objective the investor has the option of short-term Bank
deposits for 1-6 months where he could expect returns of 6%-7% p.a. depending on
the tenure.

Low risk, Low returns (Investment horizon of at least 1 year)

An investor with this objective can invest in Company/NBFC deposits, which are
`AAA' rated. This will fetch him returns of around 9% p.a. with moderate liquidity
e.g. HDFC Ltd. Kotak Mahindra Ltd. and ICICI Home Finance. However, after
factoring in tax implications, the actual return on these deposits comes down to less
than 8% p.a.

The other option is government securities i.e. guilts returns of over 8-9% p.a. along
with high safety and liquidity. However, these have limited tax benefits, as the interest
is taxable subject to Rs 3,000 tax benefit u/s 80L.

The other option is Relief Bonds which gives 8.5% p.a. tax-free returns with
maximum safety (it is backed by the Government of India). However, the liquidity is
very low as the investment is locked for 5 years.

75
Moderate risk, Moderate Returns (Investment horizon of 1 year)
An investor with this objective can opt for Company deposits with moderate safety
i.e. `AA' rated that will fetch him over 10% p.a. returns e.g. Dewan Housing and
Berger Paints. However, these investments are not liquid.

The other option is the Income and gilt funds, which can give returns of over 10% p.a.
and also offer tax benefits, as the dividends from mutual funds are tax free in the
hands of the investor. Both income and gilt funds have very high liquidity. However,
these funds can be very volatile in short term.

High risk, High returns (Long term investment)

Growth (equity)

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.

76
 7. CONCLUSION

Development of long-term debt markets is critical for the mobilization of the huge magnitude of
funding required to finance potential businesses as well as infrastructure expansion. Despite a
plethora of measures adopted by the authorities over the last few years, India has been distinctly
lagging behind other developed as well as emerging economies in developing its corporate debt
market. The domestic corporate debt market suffers from deficiencies in products, participants
and institutional framework.

For India to have a well-developed, vibrant, and internationally comparable corporate debt
market that is able to meet the growing financing requirements of the country’s dynamic private
sector, there needs to be effective co-ordination and co-operation between the market
participants that include investors and corporates issuing bonds as well as the regulators. Issues
such as crowding of debt markets by government securities cannot be addressed by market
participants and regulators alone. Better management of public debt and cash could result in a
reduction in the debt requirements of the government, which in turn would provide more market
space and create greater demand for corporate debt securities.

Clearly, the market development for corporate bonds in India is likely to be a gradual process as
experienced in other countries. It is important to understand whether the regulators have
sufficient willingness to shift away from a loan-driven bank-dependent economy and also
whether the corporations themselves have strong incentives to help develop a deep bond market.
Only a conjunction of the two can pave the way for the systematic development of a well-
functioning corporate debt market.

A vibrant debt market provides an alternative to conventional bank finances and also mitigates
the vulnerability of foreign currency sources of funds. From the perspective of financial stability,
there is a need to strengthen the debt market. Limited Investor base, limited number of issuers
and preference for bank finance over bond finance are some of the other obstacles faced in
development of a deep and liquid debt market.

77
 8. BIBLIOGRAPHY

The data was collected from the following sources:

1. Jai Hind College Library
2. Economic Times
3. Business Standards
4. Financial Economics (journal)
5. Business World
6. Wealth Creation Guide
7. Websites & Links
a) https://www.nseindia.com/products/content/debt/wdm/ndm.htm
b) https://www.moneycontrol.com/news/tags/indian-bond-market.html
c) https://www.valueresearchonline.com/story/h2_storyview.asp?str=22001&utm_m
edium=vro.in
d) https://www.amfiindia.com/know-about-amfi
e) https://www.crisil.com/en/home/events/bond-market-seminar.html
f) https://www.rbi.org.in
g) https://www.webindia123.com/finance
h) https://www.personalfn.com
i) https://www.thehindubusinessline.com

78
ANNEXURE

Name *
Your answer

Gender *

o Male
o Female

Age *

o 18-25
o 25-30
o 30-35
o Above 35

How much is your annual income? *

o Below 2,00,000
o 2,00,000-4,00,000
o 4,00,000-6,00,000
o Above 6,00,000

Which debt market instruments do you invest in? *

o Fixed Deposits
o Debentures

79
 o National Savings Certificate. (NSC)
o G-Secs

Which statement best describes your knowledge of debt instruments? *

o I have very little knowledge of debt instruments.

o I have a moderate level of knowledge of debt instruments.
o I have extensive knowledge of debt instruments.

Investments in debt markets represents approximately what percentage of your total savings and
investments. *

o Less than 25%

o 25% - 50%
o 51% - 75%
o More than 75%

How soon do you expect to need the money you are investing? *

o 1-3 years
o 4-6 years
o 7-9 years
o 10 years or more

What is your primary goal for this investment: *

o I want to keep the money I have invested safe and readily available for short-term needs.
o I want to generate a steady stream of income from my investments.
o I want to generate some income with some opportunity for the investments to grow in
value.
o I want to generate long-term growth from my investments.

80
What are the factors which you consider while investing in debt markets? *

o Credit Risk
o Interest Rate Risk
o Liquidity
o Tax Saving

How do you make investments in debt markets? *

o Exchange regulated transactions

o Over the counter transactions
o Both

When you are faced with a major financial decision, are you more concerned about the possible
losses or the possible gains? *

o Always the possible losses

o Usually the possible losses
o Usually the possible gains
o Always the possible gains

In making financial and investment decisions you are: *

o Very conservative and try to minimize risk and avoid the possibility of any loss
o Conservative but willing to accept a small amount of risk
o Willing to accept a moderate level of risk and tolerate losses to achieve potentially higher
returns
o Aggressive and typically take on significant risk for the potential of achieving higher
returns

81
According to you, which one do you rate as the best investment instrument? *

o Debt Instruments
o Equity
o Savings Bank Deposits
o Others

82