INTERNSHIP PROJECT– WEALTH MANAGEMENT

SERVICES

Submitted By:
Aastha Mertia (ISME)

Amith Kumar (Christ University)

Arun Jacob (Christ University)

Ashwin James (TAPMI)

Deviprasad G N (TAPMI)

Sikha T C (Christ University)

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 Table of Contents

1. COMPANY PROFILE ............................................................................................................ 1

1.1 Our Mission - “Partnering with clients to build, manage, and grow their wealth” ............................ 4

1.2 Our Vision - “To be a financial supermarket” ................................................................................... 4

1.3 Organisational Structure .................................................................................................................. 5

1.4 Products & Services: ......................................................................................................................... 6

1.5 Functional Departments ................................................................................................................... 7

1.6 SOCIAL RESPONSIBILITY ................................................................................................................... 9

1.7 Advantage of hedge ......................................................................................................................... 9

2. INDUSTRY ANALYSIS ........................................................................................................ 10

2.1Financial Services Industry ..................................................................................................................... 10

2.1.1 Market Size........................................................................................................................................10
2.1.2 Investments/Developments ..............................................................................................................10
2.1.3 Importance of Financial Services ......................................................................................................11
2.1.4 Promoting investment ......................................................................................................................11
2.1.5 Financial Intermediaries ....................................................................................................................13
2.1.6 Financial Institution ...........................................................................................................................14

2.2 Financial Market ............................................................................................................................ 14

2.2.1 Based on market transactions:..........................................................................................................14
2.2.2 Based on security types ....................................................................................................................14
2.2.3 Functions and importance of Capital Market ...................................................................................15

2.3 STOCK EXCHANGE .......................................................................................................................... 16

2.3.1 Securities and Exchange Board of India ............................................................................................17
2.3.2 Index..................................................................................................................................................18
2.3.3 NSE & BSE ..........................................................................................................................................19

2.4 Corporate Actions .......................................................................................................................... 20

2.4.1 The Stock Split ...................................................................................................................................20
2.4.2 The Reverse Split ...............................................................................................................................20
2.4.3 Dividends ...........................................................................................................................................20
2.4.4 Rights Issues ......................................................................................................................................21
2.4.5 Mergers and Acquisitions ..................................................................................................................21
2.4.6 The Spin-Off ......................................................................................................................................22

2.5 Major Financial Providers in Kerala ................................................................................................ 22

3. ASSET CLASSES................................................................................................................. 23

3.1 Direct Equity .................................................................................................................................. 23

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 3.1.1 SWOT ANALYSIS ................................................................................................................................23
3.1.2 STOCK ANALYSIS OF THE RECOMMENDED STOCKS ..........................................................................24

3.2 Debt Funds ..................................................................................................................................... 29

3.2.1 LONG TERM DEBT FUNDS .................................................................................................................29
3.2.2 FIXED DEPOSIT...................................................................................................................................30
3.2.3 NCD – Non-Convertible Debentures .................................................................................................33

3.3 Mutual Funds ................................................................................................................................. 40

3.3.1 Equity Mutual Funds .........................................................................................................................40
3.3.2 Debt Mutual Fund .............................................................................................................................50

3.4 Real Estate Investment Trust.......................................................................................................... 79

3.4.1 SWOT Analysis ...................................................................................................................................79

3.5 Infrastructure Investment Trusts .................................................................................................... 81

3.5.1 SWOT Analysis ...................................................................................................................................81

3.6 Preference Shares .......................................................................................................................... 83

3.6.1 SWOT Analysis of Preference Shares ................................................................................................83

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1. COMPANY PROFILE
Hedge Finance Limited (HFL) is a Kochi-based non-deposit taking NBFC, registered with the Reserve
Bank of India. The company was founded by Mr Alex K Babu in 2011. Over the years, HFL has
established itself as a prime lender in Kerala with a wide client base and advanced infrastructure. Its
focus is on finance against shares and mutual funds, complementing the business of its parent
company, Hedge Equities Ltd. HFL has diversified into loans against property, business loans, and
personal loans. The company is a part of the Hedge group of companies, which includes Hedge
Equities Ltd (engaged in equity broking) and Hedge Commodities Ltd (commodity broking). The group
started its operations in 2008. It provides services in capital markets, wealth management, and other
investment products. The Company incorporated on 15th February 2011 vide Certificate of
Incorporation No. U65923KL2011PLC027672 issued by the Registrar of Companies, Kerala to carry
on the business of lending money either with or without security, carry on the business of hire
purchase finance, leasing, gold loan, carry on the business of financiers, but the company shall not
do the business of banking within the meaning of Banking Regulation Act, 1949 and subject to the
Rules and Regulations issued by the Reserve Bank of India from time to time. The company has
obtained Certificate of Commencement of Business on 18th June 2012.
1.1 Our Mission - “Partnering with clients to build, manage, and grow their wealth”.

We understand that each client is unique, so we deliver individualized wealth management and
investment solutions – aligning financial resources with values and goals

1.2 Our Vision - “To be a financial supermarket”

We believe in our vision and values as strongly today as we did the first time we put them on paper.
Staying true to them has served us well and continues to guide us as we cross milestones on growth
and success.

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1.3 Organisational Structure

DIRECTOR Hedge School

Alex K Babu Benil Alexander

Hedge
Hedge Finance
Equities

Hedge
Commodities

Corporate Research &

CEO COO Marketing dept.
Communication Advisory
Bhuvanendran Vinay Sasidharan Swaroop Anusree Krishnan Thampi

Human WMS -
Resources Operations
Bobby Michael Shajan K S

Branches BDO
Branch Managers Justin Varkey

IT Accounts
SandeepKumar O S Sajin Francis

Depository /
Administration
KYC
Reeja George Kesavadas

Risk
Management
Krishnan Chandran

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 1.4 Products & Services:

1.4.1 Equity:

It is nothing but investment in the Shares of a Company for the capital appreciation purpose.
Secondary Market is the market in which securities are traded after they are initially offered in the
Primary Market. Most trades are occurring in secondary market. The stock exchange facilitates
platform for secondary market.

1.4.2 Currency:

Currency derivatives serve the purpose of financial risk management encompassing various market
risks. An upfront premium is payable for buying a derivative.

1.4.3 Commodity:

Investing in Commodities like Gold, Silver, Platinum etc., In the form of ETF, SGB.

1.4.4 Mutual fund:

A mutual fund is a professionally managed investment scheme, usually run by asset Management
Company that Pools money from a group of people and invest their money in stocks, bonds and other
securities. The combined holdings the mutual fund owns are known as its portfolio. There are around
6000 MF schemes as of now.

For meeting the expenses anyone can give their Mutual Funds/Equities/NCD/Warehouse Receipts as
collateral and he gets the Money based on the collateral value. The Margin is based on the type and
nature of the collateral.

1.4.5 NCD:

Non-convertible debentures are used as tools to raise long-term funds by companies through a public
issue. Hedge Finance being the NBFC issues Secured debentures in order to raise funds for its loan
segment.

1.4.6 Portfolio Management Services (PMS):

PMS is a SEBI licensed investment platform for investing in stocks, fixed income, cash, structured
products and other individual securities, managed by a professional money manager, which can
potentially be tailored to meet specific investment objectives. Every account may be unique though
portfolio managers may run several portfolios simultaneously. Hedge Equities developed six
products- “Fortune Bull, Fortune Falcon, Fortune Dolphin, Fortune Canine, Fortune Puma, Fortune
Owl Both the products are custom designed for the clients.

1.4.7 Insurance:

Insurance is safety for future unseen Circumstances. Hedge provides two types of insurance Life
Insurance, Health Insurance.

1.4.8 Online Trading:

Hedge equities has a large network of branches with online terminals of NSE and BSE in the capital
market and Derivative segments. The clients are assured of prompt order execution through
dedicated phones and expert dealers at our offices.

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 1.5 Functional Departments

1.5.1 Client Relation Department

The client relation department assists the client or customer to open an account in Hedge
Equities. This department is also known as the front office. A client must open two types of
accounts to trade and own securities in the NSE & BSE.

1.5.2 Finance Department:

Thus a department, to organize financial activities may be created under the direct control of the
board of directors. Finance manager will decide the major financial policy methods. Lower levels
can delegate the other routine activities.

1.5.3 Marketing Department

The major functions of marketing department are:
a) Business associate development: the company takes up the marketing activities of the
various branches. It ensures an efficient marketing arena at its various branches. The
company encourages better relations in its branches and promotes for the development of
various marketing strategies.
b) Brand promotion: An important function of marketing department is to promote the name
of the company. Hedge equities do it through the different promotional activities. The name
of Hedge equities as a stock broking firm is made known to the outside world.
c) Investment promotion: The main clients of Hedge equities were its investors. Hence the
marketing department tries to capture as many as possible to encourage them to invest.
d) Delivery promotion: Intraday trading is not always profitable and might involve a lot of risk
hence Hedge equities promotes for delivery where the shares are kept to be sold for a later
date after analysing the profitability factors.

1.5.4 Systems Department

The systems department is playing a vital role in the day to day operations of the company. It is
through the systems department that the clients can avail the facilities of Internet trading. Optic
Fibber cables and high bandwidth connections from the Hedge equities office to the ISP, a
dedicated server and back-up ISDN connections were maintained directly by the systems
department. For trading they have made use of two software namely ODIN (Open Dealers
Integrated Network)

1.5.5 Human resource Department

Human resource is often considered as the back of an organization even in this age of advanced
automation & mechanization. Since virtual organizations are not very much popular in our part of
the world, it is very important to any organization to have a HR department. The presence of an
excellent HR department increases the efficiency of an organization considerably. Human resource
management is defined as asset of practices, policies and programs designed to maximize both
personal and organizational goals.

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 a) Training & Induction The selected employees will undergo three days continuous induction.
During this period, he will undergo training with all the department of Hedge equities. There
will also be classroom induction also within three months.
b) Wages and Salary Administration. The wages and salaries of the employees were fixed and
granted by the HR department with consent of the finance department
c) Performance appraisal was human resources department which gives the promotions to all
employees, making transfers and taking disciplinary actions if needed
d) Grievance Handling the grievances of the employees were received only through proper
channels i.e., through the department heads. The HR department will make as per the rules
and regulations of the company.

1.5.6 Trading Department

The department deals with the trading related activities of the company. The trading refers to the
buying & selling of shares. This department is the most important part of the Organization. There are
two types of trading. They are:

a) Online Trading These are the trading terminal of the organization. Each computer of the
department is termed as trading terminal. Each terminal is assigned with NCFM certified
dealers, who oversees each portal will do the trade according to the client request. The
terminal is managed by either NEAT (National Exchange for automated trading) software or
ODIN (Open Dealers Integrated Network) software. The client can also place his through
written request or through the telephone, in this the order will be placed by the dealer.

b) Internet Trading The internet trading is a facility provides by the company to trade the
securities from his convenient place like his office, home etc, the order will be placed by the
client itself, and he can make changes before the trade is done for changing the price,
cancellation of the order.

1.5.7 Delivery & Depository Department

Delivery refers to the shares that bought on a day are not sold on that day itself and holding of
the shares for an appreciation in the value of the security and to trade it on a future date. Deliver
instruction slip: it is a slip the client should fill and gave to the dealer regarding the purchase of
the share. There are two procedures to move the shares namely,

a) Power of attorney: This is which the client signs at the time of opening a trading account and
depository participant account. If the client has given the power of attorney, HEDGE
EQUITIES (P) LTD will have the power to transact the client’s stocks without pay-in slips.
b) Easiest It is secured internet enabled service which means ‘Electronic Access to Securities
information and Execution of Secured Transaction’. This is facility where in the clients can
give delivery instructions via internet. Easiest is a facility provided by CDSL. The activities
related with the depository department.  Depository function  Dematerialization 
Pledging

1.5.8 Equity Research Department

The function of the department is to study the details regarding the share or security and to
make predictions regarding the future performance of the company. The types of approaches
done in the department

a) Fundamental analysis

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 b) Technical Analysis

1.6 SOCIAL RESPONSIBILITY

Being a Responsible Corporate Citizen, Hedge Equities has initiated a Non Profit movement Hedge
Yuva which focuses on educating the masses about Stock Market. The movement has also
formulated various scholarship programs for young and dynamic youth.

1.6.1 Promise of Hedge

 To Customers: To exist to serve and meet the customer’s needs. Hedge focus is to create an
ethical and sustainable financial services platform that places customer’s unique needs over
above everything else.

 To Employees: Hedge will provide our employees with a meaningful and rewarding career
with emphasis on self-development and career progression.

 To Shareholders: Hedge will spare no efforts to achieve a consistent and competitive growth
in earnings and profitability.

1.7 Advantage of hedge

 At Hedge Equities, the needs of the Customers stand before everything else
 SEBI Registered Portfolio Manager with a dedicated Wealth Management Services desk that
aims to provide objective guidance tailored to meet each customer’s individual needs
 Strong Research Team backed with best of breed data mining and analysis
 Industry leading technology solutions that make portfolio administration simpler and cost
effective
 A Global Outlook blended with a Local Flavor and backed with a growing network of over
120 service outlets. 450 qualified employees and over 200 support associates
 The Trust and Goodwill of over 20,000 satisfied customers
 Member of BSE, NSE, MCX, MCX-SX, NMCE, NCDEX and Depository Participant in CDSL
 Rated as the top brand by the investor community of Asianet channel
 Growing overseas presence with operations in Middle East and an expanding presence in the
European region and North America

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2. INDUSTRY ANALYSIS

2.1Financial Services Industry

India has a diversified financial sector undergoing rapid expansion, both in terms of strong growth of
existing financial services firms and new entities entering the market. The sector comprises
commercial banks, insurance companies, non-banking financial companies, co-operatives, pension
funds, mutual funds and other smaller financial entities. The financial sector in India is predominantly
a banking sector with commercial banks accounting for more than 64 per cent of the total assets
held by the financial system.

The Government of India has introduced several reforms to liberalise, regulate and enhance this
industry. The Government and Reserve Bank of India (RBI) have taken various measures to facilitate
easy access to finance for Micro, Small and Medium Enterprises (MSMEs). These measures include
launching Credit Guarantee Fund Scheme for Micro and Small Enterprises, issuing guideline to banks
regarding collateral requirements and setting up a Micro Units Development and Refinance Agency
(MUDRA). With a combined push by both government and private sector, India is undoubtedly one
of the world's most vibrant capital markets. In 2017, a new portal named 'Udyami Mitra' has been
launched by the Small Industries Development Bank of India (SIDBI) with the aim of improving credit
availability to Micro, Small and Medium Enterprises' (MSMEs) in the country. India has scored a
perfect 10 in protecting shareholders' rights on the back of reforms implemented by Securities and
Exchange Board of India (SEBI)

2.1.1 Market Size

The Mutual Fund (MF) industry in India has seen rapid growth in Assets Under Management (AUM).
Total AUM of the industry stood at Rs 23.16 trillion (US$ 321.00 billion) as of February 2019. At the
same time the number of Mutual fund (MF) equity portfolios reached a high of 74.6 million as of
June 2018.

Another crucial component of India’s financial industry is the insurance industry. The insurance
industry has been expanding at a fast pace. The total first year premium of life insurance companies
reached Rs 159,004 crore (US$ 22.04 billion) as of Jan 2019. Along with the secondary market, the
market for Initial Public Offers (IPOs) has also witnessed rapid expansion. The total amount of Initial
Public Offerings (IPO) stood at Rs 14,032 crore (US$ 1.94 billion) as of Feb 2019.

Furthermore, India’s leading bourse Bombay Stock Exchange (BSE) will set up a joint venture with
Ebix Inc. to build a robust insurance distribution network in the country through a new distribution
exchange platform.

2.1.2 Investments/Developments

 Investments by Foreign Portfolio Investors (FPIs) in Indian capital markets have reached Rs
5,400 crore (US$ 748.44 million) up to December 30, 2018.
 As of October 2018, the Financial Inclusion Lab has selected 11 fintech innovators with an
investment of US$ 9.5 million promoted by the IIM-Ahmedabad's Bharat Inclusion Initiative
(BII) along with JP Morgan, Michael and Susan Dell Foundation, and the Bill and Melinda
Gates Foundation.
 The private equity and venture capital (PE/VC) investments reached US$ 33.1 billion in 2018.

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 2.1.3 Importance of Financial Services

 Vibrant Capital Market.

 Expands activities of financial markets.
 Benefits of Government.
 Economic Development.
 Economic Growth.
 Ensures Greater Yield.
 Maximizes Returns.
 Minimizes Risks.
 Promotes Savings.
 Promotes Investments

2.1.4 Promoting investment

The presence of financial services creates more demand for products and the producer, in order to
meet the demand from the consumer goes for more investment. At this stage, the financial services
comes to the rescue of the investor such as merchant banker through the new issue market, enabling
the producer to raise capital.

The stock market helps in mobilizing more funds by the investor. Investments from abroad is
attracted. Factoring and leasing companies, both domestic and foreign enable the producer not only
to sell the products but also to acquire modern machinery/technology for further production.

2.1.4.1 Promoting savings

Financial services such as mutual funds provide ample opportunity for different types of saving. In
fact, different types of investment options are made available for the convenience of pensioners as
well as aged people so that they can be assured of a reasonable return on investment without much
risks.

For people interested in the growth of their savings, various reinvestment opportunities are
provided. The laws enacted by the government regulate the working of various financial services in
such a way that the interests of the public who save through these financial institutions are highly
protected.

Financial Services offered by various financial institutions

 Factoring.
 Leasing.
 Forfaiting.
 Hire Purchase Finance.
 Credit card.
 Merchant Banking.
 Book Building.
 Asset Liability Management.
 Housing Finance.
 Portfolio Finance.
 Underwriting.

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  Credit Rating.
 Interest & Credit Swap.
 Mutual Fund.

2.1.4.2 Minimizing the risks

The risks of both financial services as well as producers are minimized by the presence of insurance
companies. Various types of risks are covered which not only offer protection from the fluctuating
business conditions but also from risks caused by natural calamities.

Insurance is not only a source of finance but also a source of savings, besides minimizing the risks.
Taking this aspect into account, the government has not only privatized the life insurance but also
set up a regulatory authority for the insurance companies known as IRDA, 1999 (Insurance
Regulatory and Development Authority) .

2.1.4.3 Maximizing the Returns

The presence of financial services enables businessmen to maximize their returns. This is possible
due to the availability of credit at a reasonable rate. Producers can avail various types of credit
facilities for acquiring assets. In certain cases, they can even go for leasing of certain assets of very
high value.

Factoring companies enable the seller as well as producer to increase their turnover which also
increases the profit. Even under stiff competition, the producers will be able to sell their products at
a low margin. With a higher turnover of stocks, they can maximize their return.

2.1.4.4 Ensures greater Yield

As seen already, there is a subtle difference between return and yield. It is the yield which attracts
more producers to enter the market and increase their production to meet the demands of the
consumer. The financial services enable the producer to not only earn more profits but also maximize
their wealth.

Financial services enhance their goodwill and induce them to go in for diversification. The stock
market and the different types of derivative market provide ample opportunities to get a higher yield
for the investor.

2.1.4.5 Economic growth

The development of all the sectors is essential for the development of the economy. The financial
services ensure equal distribution of funds to all the three sectors namely, primary, secondary and
tertiary so that activities are spread over in a balanced manner in all the three sectors. This brings in
a balanced growth of the economy as a result of which employment opportunities are improved.

The tertiary or service sector not only grows, and this growth is an important sign of development of
any economy. In a well-developed country, service sector plays a major role and it contributes more
to the economy than the other two sectors.

2.1.4.6 Economic development

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Financial services enable the consumers to obtain different types of products and services by which
they can improve their standard of living. Purchase of car, house and other essential as well as
luxurious items is made possible through hire purchase, leasing and housing finance companies.
Thus, the consumer is compelled to save while he enjoys the benefits of the assets which he has
acquired with the help of financial services.

2.1.4.7 Benefit to Government

The presence of financial services enables the government to raise both short-term and long-term
funds to meet both revenue and capital expenditure. Through the money market, government raises
short term funds by the issue of Treasury Bills. These are purchased by commercial banks from out
of their depositors’ money.

In addition to this, the government can raise long-term funds by the sale of government securities in
the securities market which forms apart of financial market. Even foreign exchange requirements of
the government can be met in the foreign exchange market.

The most important benefit for any government is the raising of finance without offering any
security. In this way, the financial services are a big boon to the government.

2.1.4.8 Expands activities of Financial Institutions

The presence of financial services enables financial institutions to not only raise finance but also get
an opportunity to disburse their funds in the most profitable manner. Mutual funds, factoring, credit
cards, hire purchase finance are some of the services which get financed by financial institutions.

The financial institutions can expand their activities and thus diversify the use of their funds for
various activities. This ensures economic dynamism.

2.1.4.9 Capital Market

One of the barometers of any economy is the presence of a vibrant capital market. If there is hectic
activity in the capital market, then it is an indication of the presence of a positive economic condition.
The financial services ensure that all the companies can acquire adequate funds to boost production
and to reap more profits eventually.

In the absence of financial services, there will be paucity of funds which will adversely affect the
working of companies and will only result in a negative growth of the capital market. When the
capital market is more active, funds from foreign countries also flow in. Hence, the changes in capital
market is mainly due to the availability of financial services.

2.1.5 Financial Intermediaries

A financial intermediary is an entity that acts as the middleman between two parties in a financial
transaction, such as a commercial bank, investment banks, mutual funds and pension funds. Financial
intermediaries offer a number of benefits to the average consumer, including safety, liquidity, and
economies of scale involved in commercial banking, investment banking and asset management. A
financial intermediary move funds from parties with excess capital to parties needing funds. The
process creates efficient markets and lowers the cost of conducting business. For example, a financial
advisor connects with clients through purchasing insurance, stocks, bonds, real estate and other
assets. Banks connect borrowers and lenders by providing capital from other financial institutions

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and from the Federal Reserve. Insurance companies collect premiums for policies and provide policy
benefits. A pension fund collects funds on behalf of members and distributes payments to
pensioners. Through a financial intermediary, savers can pool their funds, enabling them to make
large investments, which in turn benefits the entity in which they are investing. At the same time,
financial intermediaries pool risk by spreading funds across a diverse range of investments and loans.
Loans benefit households and countries by enabling them to spend more money than they have at
the current time.

Financial intermediaries also provide the benefit of reducing costs on several fronts. For instance,
they have access to economies of scale to expertly evaluate the credit profile of potential borrowers
and keep records and profiles cost-effectively. Last, they reduce the costs of the many financial
transactions an individual investor would otherwise have to make if the financial intermediary did
not exist.

2.1.6 Financial Institution

A financial institution (FI) is a company engaged in the business of dealing with financial and
monetary transactions such as deposits, loans, investments, and currency exchange. Financial
institutions encompass a broad range of business operations within the financial services sector
including banks, trust companies, insurance companies, brokerage firms, and investment dealers.

Financial institutions can vary by size, scope, and geography.

2.2 Financial Market

A financial market is a broad term describing any marketplace where trading of securities including
equities, bonds, currencies, and derivatives occur.

Components of financial market

2.2.1 Based on market transactions:

 Primary market: Primary market is a market for new issues or new financial claims. Hence
it’s also called new issue market. The primary market deals with those securities which are
issued to the public for the first time.
 Secondary market: A market for secondary sale of securities. In other words, securities
which have already passed through the new issue market are traded in this market.
Generally, such securities are quoted in the stock exchange and it provides a continuous and
regular market for buying and selling of securities.

Simply put, primary market is the market where the newly started company issued shares to the
public for the first time through IPO (initial public offering). Secondary market is the market where
the second-hand securities are sold (Security Commodity Markets).

2.2.2 Based on security types

 Money market: Money market is a market for dealing with the financial assets and securities
which have a maturity period of up to one year. In other words, it’s a market for purely short-
term funds.
 Capital market: A capital market is a market for financial assets which have a long or
indefinite maturity. Generally, it deals with long-term securities which have a maturity

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 period of above one year. The capital market may be further divided into (a) industrial
securities market (b) Govt. securities market and (c) long-term loans market.
 Equity markets: A market where ownership of securities are issued and subscribed is known
as equity market. An example of a secondary equity market for shares is the New York (NYSE)
stock exchange.
 Debt market: The market where funds are borrowed and lent is known as debt market.
Arrangements are made in such a way that the borrowers agree to pay the lender the original
amount of the loan plus some specified amount of interest.
 Derivative markets: A market where financial instruments are derived and traded based on
an underlying asset such as commodities or stocks.
 Financial service market: A market that comprises participants such as commercial banks
that provide various financial services like ATM. Credit cards. Credit rating, stock broking etc.
is known as financial service market. Individuals and firms use financial services markets, to
purchase services that enhance the workings of debt and equity markets.
 Depository markets: A depository market consists of depository institutions (such as banks)
that accept deposits from individuals and firms and uses these funds to participate in the
debt market, by giving loans or purchasing other debt instruments such as treasury bills.
 Non-depository market: Non-depository market carry out various functions in financial
markets ranging from financial intermediary to selling, insurance etc. The various
constituencies in non-depositary markets are mutual funds, insurance companies, pension
funds, brokerage firms etc.

2.2.3 Functions and importance of Capital Market

Capital market plays an important role in mobilising resources, and diverting them in productive
channels. In this way, it facilitates and promotes the process of economic growth in the country.

Various functions and significance of capital market are discussed below:

2.2.1.1 Link between Savers and Investors:

The capital market functions as a link between savers and investors. It plays an important role in
mobilising the savings and diverting them in productive investment. In this way, capital market plays
a vital role in transferring the financial resources from surplus and wasteful areas to deficit and
productive areas, thus increasing the productivity and prosperity of the country.

2.2.1.2 Encouragement to Saving:

With the development of capital, market, the banking and non-banking institutions provide facilities,
which encourage people to save more. In the less- developed countries, in the absence of a capital
market, there are very little savings and those who save often invest their savings in unproductive
and wasteful directions, i.e., in real estate (like land, gold, and jewellery) and conspicuous
consumption.

2.2.1.3 Encouragement to Investment:

The capital market facilitates lending to the businessmen and the government and thus encourages
investment. It provides facilities through banks and nonbank financial institutions. Various financial
assets, e.g., shares, securities, bonds, etc., induce savers to lend to the government or invest in
industry. With the development of financial institutions, capital becomes more mobile, interest rate
falls and investment increases.

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2.2.1.4 Promotes Economic Growth:

The capital market not only reflects the general condition of the economy, but also smoothens and
accelerates the process of economic growth. Various institutions of the capital market, like nonbank
financial intermediaries, allocate the resources rationally in accordance with the development needs
of the country. The proper allocation of resources results in the expansion of trade and industry in
both public and private sectors, thus promoting balanced economic growth in the country.

2.2.1.5 Stability in Security Prices:

The capital market tends to stabilise the values of stocks and securities and reduce the fluctuations
in the prices to the minimum. The process of stabilisation is facilitated by providing capital to the
borrowers at a lower interest rate and reducing the speculative and unproductive activities.

2.2.1.6 Benefits to Investors:

The credit market helps the investors, i.e., those who have funds to invest in long-term financial
assets, in many ways:

a) It brings together the buyers and sellers of securities and thus ensure the marketability of
investments
b) By advertising security prices, the Stock Exchange enables the investors to keep track of their
investments and channelize them into most profitable lines
c) It safeguards the interests of the investors by compensating them from the Stock Exchange
Compensating Fund in the event of fraud and default

2.3 STOCK EXCHANGE

A stock exchange, securities exchange or bourse,[note 1] is a facility where stock brokers and traders
can buy and sell securities, such as shares of stock and bonds and other financial instruments. Stock
exchanges may also provide for facilities the issue and redemption of such securities and instruments
and capital events including the payment of income and dividends.[citation needed] Securities
traded on a stock exchange include stock issued by listed companies, unit trusts, derivatives, pooled
investment products and bonds.

Initial public offerings of stocks and bonds to investors is done in the primary market and subsequent
trading is done in the secondary market. A stock exchange is often the most important component
of a stock market. Supply and demand in stock markets are driven by various factors that, as in all
free markets, affect the price of stocks (see stock valuation).

Role of Stock Exchange

a) Raising capital for businesses

Besides the borrowing capacity provided to an individual or firm by the banking system, in the form
of credit or a loan, a stock exchange provides companies with the facility to raise capital for expansion
through selling shares to the investing public

16
 b) Facilitating acquisitions

Companies view acquisitions as an opportunity to expand product lines, increase distribution

channels, hedge against volatility, increase their market share, or acquire other necessary business
assets. A takeover bid or mergers and acquisitions through the stock market is one of the simplest
and most common ways for a company to grow by acquisition or fusion.

c) Profit sharing

Both casual and professional stock investors, as large as institutional investors or as small as an
ordinary middle-class family, through dividends and stock price increases that may result in capital
gains, share in the wealth of profitable businesses. Unprofitable and troubled businesses may result
in capital losses for shareholders.

d) Mobilizing savings for investment

When people draw their savings and invest in shares (through an initial public offering or the
seasoned equity offering of an already listed company), it usually leads to rational allocation of
resources because funds, which could have been consumed, or kept in idle deposits with banks, are
mobilized and redirected to help companies' management boards finance their organizations. This
may promote business activity with benefits for several economic sectors such as agriculture,
commerce and industry, resulting in stronger economic growth and higher productivity levels of firm.

e) Creating investment opportunities for small investors

As opposed to other businesses that require huge capital outlay, investing in shares is open to both
the large and small stock investors as minimum investment amounts are minimal. Therefore, the
stock exchange provides the opportunity for small investors to own shares of the same companies
as large investors

f) Government capital-raising for development projects

Governments at various levels may decide to borrow money to finance infrastructure projects such
as sewage and water treatment works or housing estates by selling another category of securities
known as bonds. These bonds can be raised through the stock exchange whereby members of the
public buy them, thus loaning money to the government. The issuance of such bonds can obviate, in
the short term, direct taxation of citizens to finance development—though by securing such bonds
with the full faith and credit of the government instead of with collateral, the government must
eventually tax citizens or otherwise raise additional funds to make any regular coupon payments and
refund the principal when the bonds mature.

g) Barometer of the economy

At the stock exchange, share prices rise and fall depending, largely, on economic forces. Share prices
tend to rise or remain stable when companies and the economy in general show signs of stability
and growth. A recession, depression, or financial crisis could eventually lead to a stock market crash.
Therefore, the movement of share prices and in general of the stock indexes can be an indicator of
the general trend in the economy.

2.3.1 Securities and Exchange Board of India

17
The Securities and Exchange Board of India (SEBI) is the most important regulatory body of the
securities market in the Republic of India. It was established in 1988 and given statutory powers on
30 January 1992 through the SEBI Act, 1992.

Functions and Responsibilities

The Preamble of the Securities and Exchange Board of India describes the basic functions of the
Securities and Exchange Board of India as "...to protect the interests of investors in securities and to
promote the development of, and to regulate the securities market and for matters connected there
with or incidental there to".

SEBI must be responsive to the needs of three groups, which constitute the market:

 issuers of securities
 investors
 market intermediaries

SEBI has three functions rolled into one body: quasi-legislative, quasi-judicial and quasi-executive. It
drafts regulations in its legislative capacity, it conducts investigation and enforcement action in its
executive function and it passes rulings and orders in its judicial capacity. Though this makes it very
powerful, there is an appeal process to create accountability. There is a Securities Appellate Tribunal
which is a three-member tribunal and is currently headed by Justice Tarun Agarwala, former Chief
Justice of the Meghalaya High Court.[6] A second appeal lies directly to the Supreme Court. SEBI has
taken a very proactive role in streamlining disclosure requirements to international standards.[7]

2.3.2 Index

A stock index or stock market index is a measurement of a section of the stock market. It is computed
from the prices of selected stocks (typically a weighted average). It is a tool used by investors and
financial managers to describe the market, and to compare the return on specific investments. Some
of the notable indices in India are as follows:

a. Benchmark indices like NSE Nifty and BSE Sensex

b. Broad-based indices like Nifty 50 and BSE 100
c. Indices based on market capitalization like the BSE Small cap and BSE Midcap
d. Sectoral indices like Nifty FMCG Index and CNX IT.

The stock market index also acts like a barometer which shows the overall conditions of the market.
They facilitate the investors in identifying the general pattern of the market. Investors take the stock
market as a reference to decide about which stocks to go for investing.

The following lists the importance of stock market indices:

a. Aids in Stock-Picking

In a share market, you would thousands of companies listed on the exchange. Broadly, picking the
appropriate stock for investment may seem like a nightmare. Without a benchmark, you may not be
able to differentiate between the stocks. Simultaneously sorting the stocks becomes a challenge. In

18
this situation, a stock market acts like an instant differentiator. It classifies the companies and their
shares based on key characteristics like the size of company, sector, industry type and so on.

b. Acts as a Representative

Investing in equities involves risk and you need to take an informed decision. Studying about stocks
individually may seem very impractical. Indices help to fill the knowledge gaps that exist among the
investors. They represent the trend of the whole market or a certain sector of the market. In India,
the NSE Nifty the BSE Sensex act as the benchmark indices. They are believed to indicate the
performance of the entire stock market. In the same manner, an index which is made up of pharma
stocks is assumed to portray the average price of stocks of companies operating in the
pharmaceutical industry.

c. The Parameter for Peer Comparison

Before including a stock in your portfolio, you have to assess whether it’s worth the money. By
comparing with the underlying index, you can easily judge the performance of a stock. If the stock
gives higher returns than the index, it’s said to have outperformed the index. If it gives lower returns
than the index, it’s said to have underperformed the index.
You would want to invest in a multi-bagger so as to justify the risk assumed. Else you can be better
off investing in low-cost professionally managed index funds. You may also compare the index with
a set of stocks like the Information technology sector. As an investor, you can know market trends
easily.

d. Reflects Investor Sentiment

When you are participating in equity markets, amongst other things, knowing investor sentiment
becomes an important aspect. It is because the sentiment affects the demand for a stock which in
turn impacts the overall price. In order to invest in the right stock, you should know the reason
behind the rise/fall in its prices. At this juncture, indices help to gauge the mood of investors. You
may even recognize investor sentiment for a particular sector and across market capitalizations.

e. Helps in Passive Investment

Passive investment refers to investing in a portfolio of securities which replicates the stocks of an
index. Investors who want to cut down on the cost of research and stock selection prefer to invest in
index portfolio. Consequently, the returns of the portfolio will resemble that of the index. If an
investor’s portfolio resembles the Sensex, then his portfolio is going to deliver returns of around 8%
when the Sensex earns 8% returns

2.3.3 NSE & BSE

Started in 1994, the National Stock Exchange (NSE) is the largest stock exchange in India in terms of
total and average daily turnover for equity shares. Being a pioneer in technology, NSE has a fully-
integrated business model to provide high-quality data and services to market participants and
clients. It includes trading services, exchange listings, indices, market data feeds, clearing and
settlement services, financial education offerings and technology solutions. NSE ensures that trading
and clearing members and listed companies follow the rules and regulations of the exchange.

Founded in 1875, Bombay Stock Exchange Ltd. (BSE), is the fastest stock exchange in the world which

19
has the speed of 6 microseconds. It provides an efficient, integrated, transparent and secure market
for trading in equity, currencies, debt instruments, derivatives, mutual funds. It provides an array of
services like clearing, settlement, risk management, education and market data services. It has a
global reach with overseas customers and a nation-wide presence. It provides depository services
through its Central Depository Services Ltd. (CDSL) arm. The S&P BSE SENSEX is India’s most widely
tracked stock market benchmark index. It is traded internationally on the EUREX as well as leading
exchanges of the BRICS nations (Brazil, Russia, China and South Africa).

2.4 Corporate Actions

When a publicly-traded company issues a corporate action, it is doing something that will affect its
stock price. If you're a shareholder or considering buying shares of a company, you need to
understand how an action will affect the company's stock. A corporate action can also tell you a great
deal about a company's financial health and its short-term future.

Eg. Corporate actions include stock splits, dividends, mergers and acquisitions, rights issues and spin-
offs. All of these are major decisions that typically need to be approved by the company's board of
directors and authorized by its shareholders.

2.4.1 The Stock Split

A stock split, sometimes called a bonus share, divides the value of each of the outstanding shares of
a company. A two-for-one stock split is most common. An investor who holds one share will
automatically own two shares, each worth exactly half the price of the original share.

So, the company has just cut its own stock price in half. Inevitably, the market will adjust the price
upwards the day the split is implemented.

The effects: Current shareholders are rewarded, and potential buyers are more interested.

Notably, there are twice as many common stock shares out there than there were before the split.
Nevertheless, a stock split is a non-event, because it does not affect a company's equity or its market
capitalization. Only the number of shares outstanding changes.

Stock splits are gratifying to shareholders, both immediately and in the longer term. Even after that
initial pop, they often drive the price of the stock higher. Cautious investors may worry that repeated
stock splits will result in too many shares being created.

2.4.2 The Reverse Split

A reverse split would be implemented by a company that wants to force up the price of its shares. A
reverse split can be a sign that the company's stock has sunk so low that its executives want to shore
up the price, or at least make it appear that the stock is stronger. The company may even need to
avoid getting categorized as a penny stock.

In other cases, a company may be using a reverse split to drive out small investors.

2.4.3 Dividends

20
A company can issue dividends in either cash or stock. Typically, they are paid out at specific periods,
usually quarterly or annually. Essentially, these are a share of the company profits that are being paid
to owners of the stock.

Dividend payments affect the equity of a company. The distributable equity (retained earnings
and/or paid-in capital) is reduced.

A cash dividend is straightforward. Each shareholder is paid a certain amount of money for each
share. If an investor owns 100 shares and the cash dividend is $0.50 per share, the owner will be paid
$50.

A stock dividend also comes from distributable equity but in the form of stock instead of cash. If the
stock dividend is 10%, for example, the shareholder will receive one additional share for every 10
owned.

If the company has a million shares outstanding, the stock dividend would increase its outstanding
shares to a total of 1.1 million. Notably, the increase in shares dilutes the earnings per share, so the
stock price would decrease.

The distribution of a cash dividend signals to an investor that the company has substantial retained
earnings from which shareholders can directly benefit. By using its retained capital or paid-in capital
account, a company is indicating that it expects to have little trouble replacing those funds in the
future.

However, when a growth stock starts to issue dividends, many investors conclude that a company
that was rapidly growing is settling down for a stable but unspectacular rate of growth.

2.4.4 Rights Issues

A company implementing a rights issue is offering additional or new shares only to current
shareholders. The existing shareholders are given the right to purchase or receive these shares
before they are offered to the public.

A right issue regularly takes place in the form of a stock split, and in any case can indicate that existing
shareholders are being offered a chance to take advantage of a promising new development.

2.4.5 Mergers and Acquisitions

A merger occurs when two or more companies combine into one with all parties involved agreeing
to the terms. Usually, one company surrenders its stock to the other.

When a company undertakes a merger, shareholders may welcome it as an expansion. On the other
hand, they could conclude that the industry is shrinking, forcing the company to gobble up the
competition to keep growing.

In an acquisition, a company buys a majority stake of a target company's shares. The shares are not
swapped or merged. Acquisitions can be friendly or hostile.

A reverse merger is also possible. In this scenario, a private company acquires a public company,
usually one that is not thriving. The private company has just transformed itself into a publicly-traded

21
company without going through the tedious process of an initial public offering. It may change its
name and issue new shares.

2.4.6 The Spin-Off

A spin-off occurs when an existing public company sells a part of its assets or distributes new shares
in order to create a new independent company.

Often the new shares will be offered through a rights issue to existing shareholders before they are
offered to new investors. A spin-off could indicate a company ready to take on a new challenge or
one that is refocusing the activities of the main business.

2.5 Major Financial Providers in Kerala

Name Price Change Year High Year Low

Quotes as of Tuesday, 30-April-2019 3:46 PM

The Federal Bank Limited more 92.85 ▼ -2.98% 105 67.05

COCHIN MINERALS & RUTILE LTD more 166.00 ▼ -2.67% 243.6 104.05

Kitex Garments Limited more 98.75 ▼ -1.50% 243.85 87.65

Manappuram Finance Limited more 117.60 ▼ -1.38% 130.45 66.25

V-Guard Industries Limited more 217.10 ▼ -0.64% 246 159.4

AVT Natural Products Limited more 23.80 ▼ -1.45% 40 20.15

KERALA AYURVEDA LTD more 63.00 ▼ -3.23% 105 55.15

Fertilizers and Chemicals Travancore Limited more 33.60 ▼ -5.08% 55.1 29.7

Geojit Financial Services Limited more 38.40 ▼ -4.12% 108.9 32.5

Muthoot Finance Limited more 597.10 ▲ 0.85% 631.9 356

22
3. ASSET CLASSES
3.1 Direct Equity

Why Direct equity Investment ?

The choice should be based on 3 factors – Risk taking capacity, time available to research on the
company and the type of fees, expenses and taxes that which will be incurred.

a) Risk

Stocks are riskier than mutual funds. By pooling a lot of stocks in a stock fund or bonds in a bond
fund, mutual funds reduce the risk of investing. That reduces risk because, if one company in the
fund has a poor manager, a losing strategy, or even just bad luck, its loss is balanced by other
businesses that perform well. This lowers the risk, thanks to diversification. For that reason, many
investors feel that mutual funds provide the benefits of stock investing without the risks.

The trade-off is that most mutual funds won’t increase as much as the best stock performers. For
example, Amazon’s stock price has risen 61,600 percent since 1997. The best-performing mutual
fund was Vanguard Health Care. It only rose 2,247 percent over the last 20 years. Even so, it’s better
than super-performer Whole Foods stock, which rose 1,000 percent since 1998. So, even though
there is a trade-off, the best mutual funds do very well when compared to many stocks.

b) Time Available

The second factor is how much time you want to spend on research. To learn about investing in
stocks, you need to research each individual company. You must learn how to read financial reports.
They tell you how much money the company is making and what strategies it is using to grow
earnings. You also must stay on top of how the economy is doing and how that will affect the
company and its industry. Unless you do this, you won't be able to pick successful companies. You'll
miss the industries or sectors that are on the upswing.

As you can imagine, you'll need to do a lot of research to build your own diversified portfolio. You'll
need to pick companies with different sizes, strategies, and industries. You might investigate dozens
of companies to find a few good ones. This takes too much time for most people with full-time jobs
and families.

c) Costs and Fees

Brokers charge you when you buy or sell the stock. But those fees can vary depending on the services
you receive. If you are savvy enough to select your own stocks, you will pay less. If you want advice
so you can outperform the market, you will need a full-service broker. That costs more. If you're a
buy-and-hold investor, this might work best for you. Once you own the stock, the broker won't
charge you until you sell it.

3.1.1 SWOT ANALYSIS

a) Strength
o Provides Capital Appreciation
o High Rate of Return possible
o An equity investor can own part of the company
o Good for people with higher risk-taking capacity

23
 o You can pledge shares for loans

b) Opportunity
o Provides Capital Appreciation
o High Rate of Return possible
o An equity investor can own part of the company
o Good for people with higher risk-taking capacity
o You can pledge shares for loans
o Considered to be the best investment option for highest returns in the long run.
o You can vote in certain decisions of the company.
o Long Term Capital Gains and Dividends are tax free.

c) Weakness
o High risk investment option
o Costs like brokerage, transaction related taxes to be incurred
o No security or guarantee of returns

d) Threat
o Initial capital may get wiped out
o Volatility can impact returns
o Many local and global factors affect share prices and if they are negative, there may be
a big impact.

3.1.2 STOCK ANALYSIS OF THE RECOMMENDED STOCKS

3.1.2.1 M&M

Mahindra & Mahindra Ltd (M&M) is an India-based company, operating in nine segments:
automotive, farm equipment, IT services, financial services, steel trading & processing,
infrastructure, hospitality, Systech (comprising automotive components and other related products
& services), and Others (comprising logistics, after-market, two wheelers and investment). IMD has
predicted a near normal monsoon for FY19 for the third consecutive year which should be a strong
trigger for tractor sales growth. The strong growth in tractor industry would benefit M&M the most
due to strong brand recall and leadership position in farm tractor. It is expected that Mahindra &
Mahindra (M&M) to report net revenue CAGR of ~12% to ~`60,634cr over FY2018-20E mainly due to
healthy growth in automobile segment like Utility Vehicles (on the back of new launches and facelift
of some models) and strong growth in Tractors segment driven by strong brand recall and
improvement in rural sentiment. Further on the bottom-line front, it is expected that CAGR of ~16%
to `5,429cr over the same period on the back of margin improvement.

CMP: 645.45 | Target price (FY 20): 1014 | % growth : 57% | Sector : Automobile

3.1.2.2 LARSEN&TURBO

Larsen & Toubro Limited is a technology, engineering, construction, manufacturing and financial
services company. The Company's segments include Infrastructure, which is engaged in engineering
and construction of building and factories; Power, which offers solutions for thermal power plants;
Metallurgical & Material Handling, which consists of solutions for ferrous and non-ferrous metal

24
industries; Heavy Engineering, which manufactures and supplies custom designed, engineered
critical equipment and systems; Electrical & Automation, which manufactures and sells control and
automation products; Hydrocarbon, which is engaged in engineering, procurement and construction
solutions for the oil and gas industry; IT & Technology Services, which includes information
technology; Financial Services, which includes retail and corporate finance; Developmental projects,
which develops, operates and maintains basic infrastructure projects, and Others, which include
realty and shipbuilding.

Reduction in subsidiaries losses, majorly provided transportation project overruns, order pick up in
Domestic/International markets and strong cash flow make L&T an anchor play on infra investment
and capex recovery. Higher services share in the mix will improve RoEs further. Working capital is at
optimal levels. FY19 was a good year for L&T, barring the moderation in Infra margins. FY20E is
expected to be a better year, with (1) A new Government in place, (2) Reduction in subsidiaries’
losses, (3) Mix change towards high margins services business, (4) A much awaited pickup in private
capex, and (5) Strong cash generation.

CMP : 1347.75 | Target price (FY 20): 1886 | % growth : 40% | Sector : Capital goods

3.1.2.3 AXIS BANK

Axis is the third-largest private sector bank in India in terms of asset size, with a balance sheet of ~7.1
lakh cr and advances of 4.48 lakh cr (of which retail contributes 48.6%). It has a network of over 3,882
branches with CASA of 47.7%. The appointment of Amitabh Chaoudhary as MD & CEO for three years
beginning from January 01, 2019, shrinking stressed asset and incremental lending to high rated
corporates would aid Axis Bank to restore investor confidence.

Axis Bank’s GNPA was lower at 1.67% in FY2016, however it peaked at 6.77% in FY2018, largely owing
to legacy corporate loans (Watchlist). Consequently, slippages jumped from 2.6% in FY2016 to 8% in
FY2018. However, slippages for Q2FY2019 were lowest in past nine quarters. As on Q2FY2019, 60%
of the bank’s stressed asset pool has been recognised as NPAs, hence it is expected the pace of
incremental slippages to decline. Shift towards high rated corporates (FY2016 - 62% to Q2FY2019 -
79%), reduction in slippages and healthy coverage of 58% (if we include technical write-off, 73%) on
NPLs would keep credit cost under control.

Axis Bank currently trades at 2.1x its FY2020E price to book value (after adjusting value of
subsidiaries). It is expected that the stock to get re-rated owing to (1) new leadership, (2) limited
stressed loan pool, (3) improvement in return ratios (ROA/ROE – 1.1%/12.2% by FY2020E).

CMP : 766.9 | Target price (FY20) : 855 | % growth : 11% | Sector : Financial

3.1.2.4 ASHOK LEYLAND

Ashok Leyland Limited is a holding company. The Company is engaged in Commercial vehicles and
related components. Through its subsidiaries, it is engaged in manufacturing and trading in Medium
and Heavy Commercial Vehicle, Light Commercial Vehicles, Passenger vehicles, automotive
aggregates, vehicle financing and engineering design services. It offers a range of 18 to 80-seater
buses under categories, such as city application and electric buses. It offers a range of trucks, which
include long haul trucks, mining and construction trucks, and distribution trucks. It designs, develops
and manufactures defence vehicles for armed forces. It offers Light Vehicles, which include DOST,
PARTNER, STiLE and MiTR. It offers power solutions for electric power generation, agricultural
harvester combines, earth moving and construction equipment, and marine and other non-

25
automotive applications. It has operations in India, Sri Lanka, Bangladesh, Mauritius, the Middle East
and Africa.

During FY19, Ashok Leyland has gained market share in domestic market from other players. Further,
the company has reported ~46.4% yoy growth (against ~45% industry growth) during the same
period due to strong pick up in construction and industrial activities. BS-VI emission norms and the
vehicle scrappage policy are among the major triggers that can provide a fillip to the commercial
vehicle industry over the next couple of years. Further, the change in axle load norms will not impact
the CV demand scenario; hence the company will not witness any disruption in performance. In the
recent past, the stock has corrected ~30% after the announcement of axle load norms (which will
not have a significant impact on the industry).

CMP : 86.7 | Target price(FY20) : 156 | % growth : 80% | Sector : Automobile

3.1.2.5 HINDALCO

Hindalco Industries Limited is engaged in the production of aluminium and aluminium products, and
copper and copper products. The Company's segments include Aluminium, which includes hydrate
and alumina, aluminium and aluminium product, and Copper, which includes continuous cast copper
rods, copper cathode, sulfuric acid, di-ammonium phosphate (DAP) and complexes, and gold and
silver products. The Company's geographic segments include India and Rest of the world. The
Company's products include Aluminium Ingots/Rolled Products, Copper Cathodes and Concast
Copper Rods. The Company's aluminium downstream offerings include extrusions, flat-rolled
products, foils, wire rods and billets. The Company offers its services to various industries, such as
automotive and transport, building and construction, industrial applications, pharmaceuticals and
packaging, and white goods. The Company's brands include Hindalco extrusions, Maxloader, Eternia,
Everlast, Freshwrapp, Superwrap and Birla Balwan.

Where all other global and local aluminium companies are facing severe cost pressures, Hindalco is
holding up with excellent cost management. Management has guided for modest 2-3% cost increase
in Q4 over Q3. With plants running at full capacity, operational efficiencies are also helping. Utkal
Alumina (100% subsidiary) is benefitting from higher alumina prices. Novelis’ performance continues
to improve along with recovery in global economy, with volumes up 6% in Q3 (highest since 2015).
We remain bullish on Hindalco.

Novelis recently announced plans to expand US automotive finishing capacity with ~USD 300 mn
investment. It also agreed to acquire operating facilities and manufacturing assets at its plant at
Sierre, Switzerland, for Euro 200 mn, which have historically been leased

CMP : 205.85 | Target price : 313 | % growth : 52% | Sector : Commodity

26
 3.1.2.6 Comparative analysis

Larsen & Ashok

M&M Hindalco Axis bank
Turbo Leyland
Average daily -0.024% -0.001%
0.166% 0.302% 0.291%
Return
Variance 0.022% 0.016% 0.062% 0.028% 0.02%
Risk 1.497% 1.264% 2.496% 1.686% 1.428%
Share ratio -0.027 0.118 0.114 -0.011 0.192
Absolute return
11.28% -3.47% -27.46% 2.8% -35.81%
FY 2018-19
CMP (30TH April
645.45 1347.75 86.7 205.85 766.9
2019)
Target price 1014 1886 156 313 855
Potential upside 57% 40% 80% 52% 11%
52 weeks high 993 1462.05 152 259.75 791.8
52 weeks low 597.2 1182.5 77.6 182.2 498.75

Larsen & Ashok

M&M Hindalco Axis bank
Turbo Leyland
Sharpe ratio -0.03 0.12 0.11 -0.01 0.19
Coefficient of
-62.65 7.63 8.26 -1384.85 4.91
Variance
stock beta -0.0730 -0.0359 -0.0044 -0.0196 -0.0312
Market Return -0.12%
Treynor's Ratio -0.0137 -0.0808 -0.9623 -0.0628 -0.1331
CAPM 0.027% 0.022% 0.018% 0.020% 0.021%
Jensen's Alpha -0.0512% 0.1436% 0.2847% -0.0210% 0.2693%

3.1.2.7 Risk vs return

0.350%
0.300%
0.250%
0.200%
0.150%
0.100%
0.050%
0.000%
0.000%
-0.050% 0.010% 0.020% 0.030% 0.040% 0.050% 0.060% 0.070%

m&m larsen and turbo ashok leyland hindalco axis

27
 3.1.2.8 Interpretations

 The Sharpe ratio uses standard deviation to measure a fund's risk-adjusted returns.
The higher a fund's Sharpe ratio, the better a fund's returns have been relative to the risk it
has taken on. From the historical data it is found that axis bank has the highest alpha followed
by Larsen & Turbo and Ashok Leyland.
 The Treynor ratio is a risk-adjusted measurement of return based on systematic risk. A higher
ratio result is more desirable and means that a given portfolio is likely a more suitable
investment. For negative values of Beta, the Ratio does not give meaningful values.
 Jensen’s Alpha, also known as the Jensen’s Performance Index, is a measure of the excess
returns earned by the portfolio compared to returns suggested by the CAPM model. A higher
Alpha is always desirable by portfolio managers. Axis bank has the highest alpha followed by
Ashok Leyland and then Larsen & Turbo.
 By simply looking at the historical returns it is found that Axis bank is the best stock to invest
but its expected future growth is limited to 11%.
 Taking into the forecasted figures by the analyst the best investment would be Ashok Leyland
with a decent Sharpe ration and Jensen’s alpha and is expected to provide a return of 80%
in 1 year.
 The final decision however should be taken on the risk profile of the investor.

The following recommendations are derived from the above interpretation:

A) M&M – accumulate for aggressive investors and hold for conservative and moderate
investors
B) Larsen & Turbo – Accumulate for aggressive, moderate and conservative investors
C) Ashok Leyland - Accumulate for aggressive, moderate and conservative investors
D) Hindalco - accumulate for aggressive investors and hold for conservative and moderate
investors
E) Axis bank – Accumulate for aggressive, moderate and conservative investors

28
 3.2 Debt Funds

Buying a debt instrument is similar to giving a loan to the issuing entity. A debt fund invests in fixed-
interest generating securities like corporate bonds, government securities, treasury bills, commercial
paper and other money market instruments. The basic reason behind investing in debt fund is to
earn interest income and capital appreciation. The issuer pre-decides the interest rate you will earn
as well as maturity period. That’s why they are called ‘fixed-income’ securities because you know
what you’re going to get out of them.

Why Invest in Debt Funds?

Debt funds try to optimize returns by diversifying across different types of securities. This allows debt
funds to earn decent returns, but there is no guarantee of returns. However, debt fund returns often
falls in a predictable range. This makes them safer avenues for conservative investors. They are also
suitable for people with both short-term and medium-term investment horizons. Short-term ranges
from 3 months to 1 years, while medium term ranges from 3 years to 5 years.

3.2.1 LONG TERM DEBT FUNDS

For a medium- and long-term investor, debt funds like dynamic bond funds can be ideal to ride the
interest rate volatility. Compared to 5-year bank FD, these bond funds offer higher returns. If you
want to earn regular income from your investments, then Monthly Income Plans may be a good
option.

a) Characteristics of Long-Term Debt

Long-term debt has a number of characteristics that make it distinct from short-term debt financing.
Some of these traits are advantageous for you as a borrower, while others pose potential challenges.
Taking on too much long-term debt is risky, but it does offer advantages over paying cash for major
purchases. Mortgages, equity loans, car loans, boat loans, major appliance financing, student loans
and personal loans are among common long-term consumer loans.

 Higher Principal Balance

Long-term debt typically has a higher principal balance than other debt obligations. This is because
people don't usually get long-term loans for smaller purchases.

 Lower Interest Rates

Long-term debt usually comes with lower interest rates than short-term financing. This is because
mortgages, car loans and boat loans are generally secured with the property as collateral to reduce
the lender's risk.

 Impact on Monthly Cash Flow

Taking on long-term debt has a more lasting impact on your monthly cash flow.

b) RISK INVOLVED IN DEBT FUNDS

 Market risk

A change in the prices of the debt fund occurs very frequently as market interest rates change based
on changes in the macro environment. Longer tenor bonds are more sensitive to interest rate

29
changes and bond funds which invest in those securities carry higher market risks.

 Credit risks:

Deteriorating financial/governance profile of the company in which the fund is purchased from,
results in credit rating downgrades and leading to higher bond yields and lower bond prices. If this
results in a contagion, then bond prices of good companies also get impacted.

 Default risks:

Fall in NAV due to non-payment of interest and/or principal by the corporate

 Liquidity risks:

Inability of the fund to sell its investments and meet redemptions of investors due to poor market
conditions.

3.2.2 FIXED DEPOSIT

Fixed deposits are the instruments provided by banks and some NBFCs. They give predetermined
interest, which is paid at the end of the term along with the principal. FDs give more interest than a
savings bank account, it is very easily accessible investment plan hence it is most common among
people. FDs are considered as the safest investment option. Senior citizens even earn a higher
interest rate, which is not available in other investment products.

Each depositor is insured by the DICGC (Deposit Insurance and Credit Guarantee Corporation) up to
Rs.1 lakh. It includes all deposits and interest on them, held across all branches of a single bank. All
cooperative and commercial banks are covered under this insurance. Banks pay the expense of this
insurance.

3.2.2.1 Features of FD

a. Secure investment
A fixed deposit offers guaranteed returns. Unlike market-led investments where returns fluctuate
over time depending on the market, the returns on an FD are fixed and decided when we open the
account. Even if interest rates fall after the opening a fixed deposit, the depositor will continue to
receive the interest decided at the start. FDs are considered much safer than other investments like
equities and equity mutual funds.
Each depositor is insured up to Rs.1 lakh by the DICGC. It includes all deposits and interest on them,
held across branches of a given bank.

b. Return on investment
Return on an FD will depend on the interest rate and the type of deposit chosen (time duration).
The depositor can opt for a monthly or quarterly pay-out of interest or the reinvestment option,
which will give you the benefit of compounding.

c. Flexible Tenures
Banks offer Fixed Deposit in flexible tenures ranging from 7 days to 10 years.

d. Loan against FD

30
While FDs are fixed for an agreed tenure, the depositor can take a loan against it. Banks offer loans
against FD in the form of an overdraft, and depositor can get loan up to 90% of the FD amount. The
benefit is that the FD continues to earn interest, and don’t have to prematurely withdraw your FD,
which attracts a penalty.

e. Taxability
Tax is deducted by the banks on FDs in the form of TDS. If the interest paid on FDs to a customer at
any bank exceeds Rs. 10,000 in a financial year TDS is deducted. This is also applicable to interest
reinvested per customer. This TDS (Tax Deducted at Source) is presently fixed at 10% of the interest
earned. This is applied if total interest earned by him any bank exceeds Rs. 10,000 since CBS banks
can tally FD holding of a customer across various branches. After deducting tax Banks issue Form 16A
every quarter to the customer, as a receipt for Tax Deducted at Source.

However, actual tax on interest from fixed deposits is not 10% only TDS is deducted for an excess of
interest more than 10,000. Actual tax is applicable at the marginal rate of tax slab of the customer
or deposit holder. The FD holder is expected to declare the interest income in Income Tax returns
and if any tax is due he is expected to pay it by himself.

If the total income for a year does not fall within the overall taxable limits, customers can submit a
Form 15 G (for a person below 60 years of age) or Form 15 H (for a person above 60 years of age)
depending on his age group, to the bank when opening of the FD account and at the start of every
financial year to avoid TDS.

3.2.2.2 Tax Saving Fixed Deposit

Tax saver fixed deposit (FD) is a type of fixed deposit, by investing in which, you can get tax deduction
under section 80C of the Indian Income Tax Act, 1961. A maximum deduction of Rs.1. 5 lakhs can be
deducted by investing in tax saver fixed deposits, features of Tax saver FDs are
• Lock-in period of 5 years
• Interest earned is taxable
• Rate of Interest ranges from 5.5% – 7.75%, varies among the banks and tenure

Benefits of Tax Saving Fixed Deposits

a. It is a risk-free investment and gives guaranteed returns. It is not affected by market
fluctuations.
b. FD has a higher interest-earning potential than a savings account.
c. FD allows only a one-time lump-sum deposit
d. TDS from the interest on FDs is applied
e. Flexibility in the amount and tenure for investors, ranging from 7 days to 10 years
f. Get tax deduction up to Rs.1, 50,000 under Sec 80C if invested for a tenure of more than 5
years
g. It is easy to get the loan on the FD amount for a lesser interest
h. Premature withdrawal is available, with some penalty charges

3.2.2.3 Flexi FD

These combine the features of Fixed deposit and SB/Current account. An investor can enjoy the best
facilities of both type of schemes, they can enjoy the high liquidity of savings account and higher
interest rate of Fixed deposits.

31
They come with two features Auto sweep and Reverse sweep. When an amount in a savings account
is more than the pre-stipulated amount the excess amount is moved to Fixed deposit account with
a default term of 1 year or for a pre-stated tenure, this feature is called Auto Sweep. When the
amount in the savings/current is insufficient to carry out any transaction or lower than minimum
balance amount is transferred to the savings/ current account from the FD account, this feature is
called Reverse sweep. Banks also provide auto renewal facility for the FDs.

3.2.2.4 FD Interest rates

Interest rates on FDs are fixed when we open the deposit and the rate depends on the term that we
wish to hold it for. FD rates of different Banks and Post office schemes (as on 18 th May 2019) are
listed below.

Regular FD Interest Rates (per annum)

Bank \
1 year of 3 year of 5 year of More than 5 years/ 10
Investment
Investment Investment Investment Years of investment
duration
SBI 6.80% 6.80% 6.85% 6.85%
ICICI 6.90% 7.50% 7.25% 7.00%
Axis Bank 7.30% 7.25% 7% 7.00%
Yes Bank 7.25% 7.25% 7.25% 7.25%
Citibank 5.50% 6.50% 6.00% 6.00%
HDFC Bank 7.30% 7.40% 7.25% 6.50%
IDFC Bank 7.00% 7.50% 7.75% 7.25%
IndusInd Bank 7.25% 7.75% 7.50% 7.25%
Kotak Mahindra
Bank 7.30% 7.00% 6.50% 6.50%
Deutsche Bank 6.50 % 7.50% 8.25% NA
India Post 7.00% 7.00% 7.80% NA

Recommendations:

 If looking for an investment for a period of 1-year investor can consider options of investing
in the FD schemes of Axis Bank, HDFC Bank and Kotak Mahindra Bank which provides the
highest return for an investment horizon of 1 year.
 For the investment period of 3 years, Indus Ind Bank provides the highest annual interest
rate of 7.75 %. But a lesser number of branches of this bank might not make this as the choice
for all regions. The investor can consider other options like Axis Bank and HDFC Bank which
are available in Tier II and Tier III cities.
 When investing in Tax saver FDs, where the investment is deductible under 80C investor can
get a return up to 8.25 % by investing in the FD of Deutsche Bank. Lack of availability of the
branches of this bank might be a negative point for this bank. India Post which is available
throughout the country can be the best option for the Tax saving FDs in small cities and
towns.
 For an investment period of more than 5 years investor can avail interest up to 7.25 % from
the FD schemes of Yes Bank, IDFC Bank and IndusInd Bank.

32
There are NBFC which also provide FD facilities. But this investment faces default risk and are not as
safe as Bank FD and these also don’t enjoy Tax benefits under 80C as enjoyed by Bank FDs. These
also have a minimum investment amount which ranges from ₹5000 to ₹25000 across different
companies. Premature withdrawal also imposes higher interest penalty on the investor than the
Banks.

3.2.2.5 NBFC/Company FD interest rates:

Maximum FD rate for 5 years

Company CRISIL/ICRA Rating
(per annum)
ICICI Home Finance Ltd. CRISIL FAAA 9.33%
Mahindra Finance Ltd. CRISIL FAAA 9.00%
Shriram Transport Finance
CRISIL FAAA 8.88%
Ltd
Shriram City Union Finance
ICRA MAA+ 8.88%
Ltd
Bajaj Finserv Ltd. CRISIL FAAA 8.75%
PNB Housing Finance Ltd. CRISIL FAAA 8.45%
LIC Housing Finance Ltd CRISIL FAAA 8.35%
HDFC LTD ICRA MAAA 7.98%
HUDCO ICRA MAAA 7.50%
Sundaram Home Finance ICRA MAAA 8.00%
Gruh Finance Ltd. CRISIL FAAA 8.25%

The investments in these NBFCs are subjected to default risk. They are subjected to more risk than
bank FDs. The investor who is willing to take an extra risk can consider these FDs. These are not
deductible under 80C even though they invest for a period of more than 5 years. The investor who
has availed all benefits of 80C (₹1.5L), can consider investing surplus money in these corporate
deposits of a better rating. An investor can consider ICICI Home Finance Ltd which provide interest
rate up to 9.33 % for an FD of 5 years tenure.

3.2.3 NCD – Non-Convertible Debentures

When a company wants to raise money from the public without diluting ownership, it issues a
Debenture. It is for a specified tenure, for which it pays a fixed interest on the investment. There are
two classes of debentures convertible and non-convertible debentures (NCDs). Convertible
debentures can be converted into equity share on maturity. A Non - Convertible debenture or NCD
do not have the option of conversion into shares and on maturity. The principal amount along with
accumulated interest is paid to the holder of the instrument at the end of the tenure.

Public issue of debt securities like NCDs is possible by a public limited company under the Companies
Act, 2013. The debentures issued under a public offer as per the regulation must mandatorily be
listed on a stock exchange. The company must obtain a credit rating from at least one credit rating
agencies such as CRISIL, ICRA, CARE and Fitch Ratings. The rating information must be disclosed in
the offer document. If the rating has been obtained from more than one rating agency, all the ratings
need to be disclosed in the offer document. A higher rating (e.g. CRISIL AAA or AA-Stable or A1 for

33
short term) means the issuer can service its debt on time and carries lower default risk. A lower rating
signifies a higher credit risk which needs to be compensated by a higher interest rate.

There are two types of NCDs, secured and unsecured. A secured NCD is backed by the assets of the
company. If the company fails to pay the obligation, the investor holding the debenture can claim it
through liquidation of these assets. Whereas in case of unsecured NCDs there is no backing of assets
if company defaults.

3.2.3.1 Features of NCDs

a. Issuance: Companies provide NCDs through open issues, which the potential investors can buy
within specific periods. Since the public issue of NCDs has to be listed in stock exchanges they
are also available for investment through stock markets.
b. Credit rating: Only companies with good credit rating can have the authorization to issue NCDs.
The debentures should be rated by at least one Credit rating agencies. Ratings are subject to
revisions regularly based on the company’s growth and debt servicing potential.
c. Interest rate: The higher credit rating an NCD has, the lesser interest it offers. The unsecured
NCDs pay a higher interest rate than secured NCDs. Almost every NCD promises dual earning
potential – growth-based and interest-based or cumulative opportunities.
d. Return rates: Usually, NCDs give you higher returns, compared to corporate FDs, bank FDs and
Government bonds, due to the higher risk involved.
e. Liquidity: Since every public issue of NCDs is listed in stock exchange it provides higher liquidity.
The investor doesn’t have to wait until maturity to liquidate his investments.
f. Taxation: Returns on NCDs are taxed like other income. TDS is not deducted if the investment is
done through the DEMAT mode. Income tax on the interest income will have to be paid at the
time of income tax filing based on the marginal rate of tax.
g. Maturity: There are different types of debentures with different maturities. According to the
RBI’s mandate, the maturity must not be less than 90 days. Maturity ranges from 90 days to as
long as 10 years, sometimes even 30 years.

3.2.3.2 Difference between Corporate FDs and NCDs:

Fixed Deposits NCDs

Unsecured against the assets of the bank or
corporate
Interest earned (if more than Rs. 10,000) on FDs has
TDS
Investment If held for a tenure of more than 5 years
they get a tax deduction as per 80C.
Interest earned is taxable as per the marginal tax
rate of the investor.
Deposit Insurance and Credit Guarantee Corporation NCDs are not insured but are secured
insures bank FDs (up to Rs. 1 lakh).
We cannot sell FD in the market, FDs enjoy more
liquidity than NCDs. Since they can liquidate the
investment by paying a penalty interest
There is no risk of default. Even though there is some depending on the credit rating. The
default the investment insured as per the
NCDs is either secured or not secured
against the company assets
No TDS for registered NCDs
Investment amount doesn’t enjoy tax
exemption.
If held for more than 3 years the gain is
considered as LTCG. LTCG is taxed at 20%
with the benefit of indexation.
against the company assets
We can sell NCDs in the secondary market,
but can’t withdraw it prematurely
There is default risk involved in NCDs
Investor must diversify his investment
across companies of different sectors.

34
 No interest risk. Interest rate is fixed when the
The interest rate varies as per market.
investment is made.

3.2.3.3 Things an investor should consider while investing in NCDs:

NCDs are vulnerable to risks related to handling business and funding. If the turnover is negatively
impacted, the credit rating might go down as the company borrows more and more from banks or
NBFCs. So, do consider the below factors before choosing a company or NCD.

 Credit Rating of the issuer: Select the company with an AA rating and above. Credit rating
calculates the firm’s potential to raise cash from its internal and external operations and its
sustainability. This is the best parameter that can reveal the financial position of the company.
 Level of Debts: Some background check on the asset quality of the company can go a long way
for NCD investors. Do not invest in the company which allocates more than 50% of its total assets
towards unsecured loans.
 Capital Adequacy Ratio (CAR): CAR gauges the company capital and sees if the company has
enough funds to survive potential losses. Check if the firm you plan to invest in has at least 15%
CAR and have historically maintained the same.
 Provisions for NPAs: The company must keep aside at least 50% of their assets towards NPAs as
this is a positive indicator of their asset quality. If the asset quality drops due to bad debts, take
it as a red flag.
 Interest Coverage Ratio: The Interest Coverage Ratio or ICR determines if the firm can
comfortably settle the interest on its loans at any given time. This ensures that the company can
handle possible evasions.

Issue Issue
Company Issue Minimum Effective
Open Close Comments Rating
Name Price Application Yield
Date Date
*To be listed in
10.00% p.a
Muthoot 10- 10- BSE AA/Stable
Rs. Rs. 10,000 (5Yrs,
Finance Ltd May- Jun- * Secured ICRA and
1,000 (10 NCDs) Annual
– NCD 2019 2019 Redeemable CRISIl
payout)
debenture
*To be listed in AA/Stable
10.42% p.a
ECL 10- 07- BSE & NSE ICRA and
Rs. Rs. 10,000 (5 Years,
Finance Ltd May- Jun- * Secured AA
1,000 (10 NCDs) Monthly
– NCD 2019 2019 Redeemable POSITIVE
payout)
debenture CARE

Both are rated AA with a stable outlook by ICRA. ECL Finance is providing a higher return than the
Muthoot Finance Ltd’s NCDs. Since both funds involve a similar level of risk, Investor can consider
buying the NCD from ECL Finance.

3.2.3.4 Secondary Market NCDs:

NCDs are also traded in the secondary market. But the liquidity is less in the secondary market, due
to a limited number of buyers and sellers for the retailer. It is traded in wholesale in the lots of 10L
for institutional investors. The indicated Yield can be availed by investor only if he holds the NCD till
the maturity date. If he wants to sell the security before the maturity, the realised return may differ

35
depending on the market price of the NCDs which is affected by the prevailing interest rate in the
market.

Company NCD Title Current Maturity Interest Coupon Effective Rating

Name Market date Frequency Rate Yield at
Price LTP
Mahindra MMFSL- 1082.00 06-06- Annual 9.00 9.07 CARE
& 9%-6-6-26- 2026, FV AAA
Mahindra NCD 1000
Financial
Services
Ltd
L&T LTFL-9.1%- 1003.01 13-04- Annual 9.10 9.16 IND AAA
Finance 13-4- 2022,
Ltd 22_NCD FV1000
Shriram STFCL- 1035.20 12-07- Annual 9.10 11.35 CRISIL
Transport 9.10%-12- 2021, AA+
Finance Co 7-21-NCD FV1000
Ltd,
L & T LTFIN- 1012.02 17-09- Half yearly 10.24 11.20 CARE
Finance NCDIV- 2019, AA+
Ltd 10.24% FV1000
SEMI-
ANNUAL
Shriram- SCUF- 1002.00 30-04- Annual 9.75 9.85 CARE
City Union 9.75%-30- 2024, AA+
Finance 4-24-NCD FV1000
Ltd
*Yield calculated from 20th May 2019

Recommendations:

 In AAA rated funds, L&T Finance NCD which gives a return of 9.16% if we hold the NCD till
June 2022. We also have Mahindra & Mahindra Financial Services Ltd which gives a yield of
9.07%, maturing in June 2026.AAA rated securities are considered as safest NCDs, an investor
willing to invest in NCDs without willing to take a risk can go for these funds depending on
his investing horizon
 In AA+ rated fund, Shriram Transport Finance Co Ltd, which provides a yield of 11.35 %
maturing in July 2021 is the one providing highest returns. The investor who is willing to take
a moderate risk can invest in this fund. AA+ NCDs are more prone to default risk than AAA-
rated NCDs.

3.2.4 FMP – Fixed Maturity Plans

FMPs are closed-ended debt mutual funds with a maturity period that can range from one month to
five years. These funds invest in debt instruments which mature in line with the tenure of the
scheme. These are not always open to subscription in the market, available only when the fund
house comes with new fund offering (NFO) for a specific period. Since these are closed-end funds
they are not liquid as open-ended funds.

36
 The return of an FMP is directly linked to the returns it earns on the underlying securities. The scheme
invests in securities from different issuers whose tenure matches with the maturity of the plan. The
main advantage of FMP scheme is that it eliminates the interest rate risk or price risk for investors
since the fund is held passively until maturity. Therefore, even if the price of bonds held in the
portfolio moves up or down, as the fund receives the interest pay-outs in the form of coupon
payments and the original investment on maturity. Therefore, FMP does not suffer interest rate risk.
Since there is buying and selling of securities in the middle of the tenure they incur less cost or lower
expense ratio.

The returns from FMPs are taxed based on the tenure of the scheme. If they are held for more than
36 months they are considered as long-term investments, they enjoy long term capital gain. They are
taxed at 20 % along with cess with the benefit of indexation. The person who is in the higher tax
bracket (more than 20%) can enjoy lower tax on his returns with indexation benefit. The investments
which are held for less than 3 years called short term investments attract tax based on investors tax
slab without indexation benefit.

An investor can select a fund based on risk potential and tenure. Higher the risk involved, higher will
be the returns. There are different funds for different tenures, investing In different kind of debt
instruments which are exposed to a different type of risk. But if the investor wants to withdraw
money before the tenure he can sell at the secondary market price of which depend on the number
of buyers and sellers. So, only if the investor is willing to invest for the whole tenure he should go for
the fund.

3.2.4.1 Currently available NFOs in FMP:

Fund Tenure, Open Close Benchmark Riskometer Indicative Indicative Portfolio

Maturity Date Date returns
SBI Fixed 365 23 30 CRISIL Moderately 7.4% Debt Instruments (0-
Maturity Plan Apr Apr Short Term Low 100%), 100% AAA
(FMP) - Series 4 Bond Fund
(365 Days) Index

HDFC Fixed 1100 30 7 CRISIL Moderate 7.6%- Debt Instruments (80-

Maturity Plan - May 11, Apr May Composite 7.8% 100%), Money Market
1100 Days - April 2022 Bond Instruments (0-20%), 90-
2019 (1) 95% AAA, 0-5% CD, 0-5%
CP, 0-5% CBLO, 5-10%
Gsec
ICICI Prudential 1113 2 9 CRISIL Moderate 7.65% Debt Instruments (70-
Fixed Maturity May May Composite 100%), Money Market
Plan - Series 86 Bond Instruments (0-30%), 60-
1113 Days Plan C 65% AAA, 35-40% GSec
UTI - Fixed Term 1148 2 Apr 16 CRISIL Moderate 8% Debt Instruments (80-
Income Fund Jun 7, Apr Composite 100%), Money Market
Series XXXI-XII 2022 Bond Instruments (0-20%),
(1148 Days) 100% AA

37
  An investor who wants to earn more than FD can invest in these FMPs based on his risk
tolerance. For a period less than year user can invest in SBI Fixed Maturity Plan (FMP) - Series
4 which is indicated to give a return of 7.4%.
 If the investor wants to invest for more than 3 years, he can consider the other funds of
higher duration to gain the benefit of indexation. UTI - Fixed Term Income Fund Series XXXI-
XII (1148 Days) gives an indicative return of 8%, an investor can consider investing in this
fund.

3.2.4.2 Difference between FDs & FMPs

Fixed Deposits FMPs

There is credit risk involved since the fund house invests
Unsecured against the assets of the
the money in bonds or debentures. Credit ratings are used
bank or corporate
to measure the risk
Returns are fixed, and investor
Returns are just indicative, they are not assured
knows when he invests his money
Exit route (especially early
withdrawal) is available with some Trade/transactions on stock exchanges are allowed, which
penalty for premature withdrawal can be used for the exit option
of money
Interest earned don’t enjoy
Interest earned enjoys indexation benefit if invested for
indexation benefit and are taxed as
more than 3 years, with a tax rate of 20%
per the marginal rate of tax
Interest earned (if more than Rs.
10,000) on corporate deposits has No TDS deduction for FMPs since they are in Demat form
TDS
Investment If held for a tenure of
more than 5 years they get a tax Investment amount doesn’t enjoy tax exemption.
deduction as per 80C.
Deposit Insurance and Credit FMPs are not insured but are secured against the company
Guarantee Corporation insures bank assets for debentures and guarantee from the government
FDs (up to Rs. 1 lakh). in case of bonds which are underlying instruments
There is no risk of default. Even There is some amount of default risk involved since the
though there is some default the fund manager invests in NCDs and bonds. But the risk is
investment insured as per the minimized by diversifying the investment across companies
DICGC. of different sectors.
We cannot sell FD in the market. FDs
enjoy more liquidity than NCDs All FMPs are listed in the market. Liquidity depends on the
since it can liquidate by paying a demand in the market
penalty interest
No interest risks. Interest rate is Interest rates are just indicative. It may be lesser than the
fixed when the investment is made. indicated returns because of default risk involved

3.2.4.3 SWOT Analysis of FDs, FMPs & NCDs

FD FMP NCD
Strength *Guaranteed returns *Returns are taxed at * Higher returns
*Easy exit options with 20% if held for more *Returns are taxed at 20% if
some penalty than 3 years and they held for more than 3 years

38
 *Investment can be
deducted under 80C for Tax
benefit if held for more
than 5 years
Weakness *Returns are taxed at
marginal Tax slab rate of the
investor
Opportunity *Senior citizens can earn .5
% higher returns by
investing in FD.
*Interest rate protection &
no default risk. An Investor
will get the interest
whatever is promised
during the investment.
Threat *If the interest rate in the
market goes higher investor
won’t able to enjoy that.
Interest rate is fixed
enjoy indexation and they enjoy indexation
benefit benefit
*Returns are just *Investment cannot be
indicative, it can be deducted under 80C for Tax
lesser than that benefit
*Investment cannot be * High risk involved due to the
deducted under 80C for exposure to a single company.
Tax benefit Needs to be diversified from
* Investment is locked the investor
for the tenure, even
though funds are listed
they have less liquidity
*If the interest rate in the
market goes higher they can
get higher returns by
investing in new NCD
*If the interest rate in *If the interest rate goes up,
the market goes higher the bond price comes down. If
investor won’t able to the investor wants to sell his
enjoy that investment he will get fewer
returns
39
 3.3 Mutual Funds

3.3.1 Equity Mutual Funds

 Investing in the shares of Company of different Market Capitalisation

 Aim to generate high returns, higher returns from Debt fund and Fixed Deposits
 Equity Mutual Fund are managed by Asset Management Company (AMC)
How do Equity Funds work?
An equity fund invests 60% or more of its assets in equity shares of companies in varying proportions.
It might be a purely large-cap, mid-cap or small-cap fund or a mixture of market capitalization. The
investing style may be value-oriented or growth-oriented.
After allocating a major portion of equity shares, the remaining amount will go to debt and money
market instruments. This is to take care of sudden redemption requests as well as bring down the
risk level to some extent. The fund manager makes buying or selling decisions to take advantage of
the changing market movements and reap maximum returns.

Who should Invest in Equity Funds?

The decision to invest in equity funds is according to individuals, risk tolerance, investment
horizon and goal. If individual have a long-term goal (say, 5 years or more), it is better to go for equity
funds. It will also give the fund ample time to ride out the market fluctuations.

a. For budding investors

The budding investors are who wants to have exposure to the stock market, then large-cap Equity
funds may be the right choice. These funds invest in equity shares of the top 100 companies of the
stock market.

b. For market savvy investors

These investors are well-versed with the market pulse but want to take calculated risks, they may
think of investing in diversified equity funds. These invest in shares of companies across market
capitalisation. These give optimum combination of high return and lesser risk as compared to equity
funds that only invest in small-cap/mid-caps.

3.3.1.1 Types of Equity Funds

Equity funds based on the investment mandate and the kind of stocks and sectors they invest in.

a. Based on Sector and Themes

Equity funds that focuses the investments on a sector or theme fall under this category. Sector
funds invest in one industry, like FMCG or Pharma or Technology. Thematic funds follow a theme,
like emerging consumer companies or international stocks.
Since sector funds and thematic funds focuses on a sector or theme, they tend to be riskier. This is
because their performance face Sectoral as well as market risks. Sector and Thematic funds can be
diversified in terms of market capitalisation.

40
 b. Based on Market Capitalisation

o Large-cap equity funds: Large-cap companies are well-established companies, making

them large-cap funds stable and reliable investments
o Mid-cap equity funds: They invest in medium sized companies
o Mid-and-small-cap funds: There are even funds that invest in both mid-cap as well as
small-cap funds
o Small-cap funds: Since: Smaller companies are prone to volatility, small-cap funds deliver
fluctuating returns
o Multi-cap funds: Equity funds that invest across market capitalisation, which is in large-
cap, mid-cap and small-cap stocks, are called multi-cap funds

c. Based on Investment Style

Equity funds that follow a particular index are called index funds. These are passively-managed funds
that invest in the same companies, in the exact same proportions, making up the index the fund
follows.

3.3.1.2 Benefits of Investing in Equity Funds

The benefits of investing in mutual funds are many:

o Expert money management
o Low Cost
o Convenience
o Diversification
o Systematic investments
o Flexibility
o Liquidity
The major benefit of investing in equity funds is that there’s no need to worry about choosing stocks
and sectors to invest in. Successful equity investing requires a lot of research and knowledge.
Investors need to dig deep into the financials of a company before investing in it.
One should understand how a particular sector is expected to perform in the future. As, all of this
requires a lot of time and effort, which most common investors don’t have. Therefore, the solution
is to leave the stock picking to an expert fund manager by investing in an equity fund.

3.3.1.3 Taxation of Equity Funds

Capital gains earned on the holding period of up to one year are called short-term capital gains
(STCG). STCG are taxed at the rate of 15%.
Conversely, capital gains made on holding period of more than 1 year are called long-term capital
gains (LTCG). Owing to changes in budget 2018, LTCG in excess of Rs 1 lakh will be taxed at 10%
without the benefit of indexation.
3.3.1.4 SIP or Lump-sum, which is better?

a. Lump-sum
If one can afford to invest a lump-sum in one go per annum, this method too can work over time.
Whereas, not everyone funds it feasible to arrange for a large sum and opts for SIPs instead.

41
 b. Systematic Investment Plan (SIP)
An SIP is usually a monthly investment that happens automatically on a pre-decided date. The
investors can give a mandate to the fund company to deduct the investment from your bank account.
SIP gives the benefit of rupee-cost averaging, is that when the markets are high, investors will be
allotted fewer units. And when the markets are low, investors will get more units for the same
amount. That’s how, one can invest at different levels of the market. SIPs also inculcate financial
discipline and make mutual funds affordable for all.

3.3.1.5 SWOT Analysis of Equity Mutual Funds

a) Strength
oMFs are governed by SEBI, therefore customer interests are taken care of
oEquity Mutual Funds are managed by professionals in the field.
oLong Term Capital Gains are tax free for the investor up to ₹ 1 Lakhs.
oInvestors can use Systematic Investment Planning (SIP) for small investments on a regular
basis. They need not to invest a big amount at a time.
b) Weakness
o Exit load expenses and management fees to be incurred by investor
o Some of the Mutual funds are illiquid in nature
c) Opportunities
o There are different types of funds for different types of investors according to their needs.
o Investors can invest in the market with a small amount and match market performance

d) Threat
o Rate of Return may vary, as it’s not fixed.

3.3.1.6 PERFORMANCE EVOLUTION OF Large cap Fund

ABSL HSBC Large Franklin India

KOTAK Blue
Basis Frontline Cap Equity Blue chip
chip Fund
Equity Fund Fund Fund
7.39%
Risk-free rate of return (Rf) 7.39% 7.39% 7.39%
Absolute Return in last 1 year -2.038% -2.100% -2.814% -1.346%
CAGR in last 5 years for Fund 14.813% 12.359% 12.655% 14.017%
CAGR in last 5 years for
13.646% 13.646% 13.655% 13.646%
Market
Correlation co-efficient 0.722142 0.724136 0.962363 0.729886585
R Squared 0.52149 0.524373 0.926143 0.532734427
SD of Fund 0.040325 0.043287 0.038473 0.040488563
SD of Benchmark 0.055238 0.055238 0.040837 0.055238062
Beta (β) of the Fund 0.52718 0.567460 0.906657 0.534994493
Alpha (α)of the Fund 1.166% -1.288% -1.000% 0.371%
Treynor's Ratio 0.14 0.087558 0.058070 0.12
Sharpe Ratio 1.840717 1.147830 1.368491 1.636742553

42
 Jensen Ratio 0.041245 0.014183 -0.004155 0.032798302

c) CAGR returns

Based on CAGR returns we can see that ABSL Frontline Equity Fund has outperformed its peers,
it has given highest returns among all funds. It has given CAGR returns of 14.813 % over last 5
years. Next best is KOTAK blue chip Fund which has provided a return of 14.017% over the past
5 years for its investors. In the next 2 positions we can see that Franklin India blue chip Fund,
HSBC Large cap blue chip Fund rightly there, who provided a return of 12.655% and 12.359%
respectively.

d) Sharpe ratio

Sharpe ratio is the measure of the risk adjusted return of the portfolio. As we all know that when
there is an extra risk involved in an investment, investor needs to be compensated with extra returns.
But if we can get higher returns for the same amount of risk taken, everybody would go for that.
Sharpe ratio measures the extra returns earned for a unit of risk taken by the investor.

Fund ABSL Frontline KOTAK blue Franklin India HSBC Large cap blue
Equity Fund chip fund blue chip fund chip Fund

Sharpe 1.840717
Ratio 1.636742553 1.368491 1.147830
Rank 1 2 3 4

ABSL Frontline Equity fund is having highest Sharpe ratio among all these, and is awarded the top
rank based on Sharpe ratio. It has been provided more return for a unit of extra risk is taken over the
past 3 years. 2nd rank goes to KOTAK blue chip fund which is having a Sharpe ratio of 1.636. The 3 rd
and 4th rank goes to Franklin India blue chip fund, HSBC large cap blue chip fund.

e) Treynor’s Ratio

This measures the additional return provided by the fund for every unit of Systematic Risk taken. It
uses Beta as a measure to measure volatility, whereas Sharpe’s ratio uses Standard deviation. Since
mutual funds portfolio is considered to be diversified portfolio we use Treynor’s ratio to compare
the performance of the portfolios or different mutual fund schemes. The person who is following the
market, not specifically the scheme can opt for the scheme which shows best performance as per
this ratio.

ABSL Frontline KOTAK blue chip HSBC large cap Franklin India
Fund
Equity Fund fund fund blue chip fund
Treynor’s Ratio 0.14 0.12 0.087 0.058
Rank 1 2 3 4

43
ABSL Frontline Equity fund having highest Treynor’s ratio among all these funds, and it holds the top
rank based on Treynor’s ratio. It has been provided more return for a unit of extra systematic risk is
taken over the past 3 years. The 2nd, 3rd and 4th rank goes to KOTAK blue chip fund, HSBC large cap
fund and Franklin India blue chip fund.

f) Alpha

It is the active return obtained on an investment. It is the excess of return generated by the fund
over the benchmark. Higher the value of alpha better the fund. We can see that only one fund was
able to beat the benchmark over the past 3 years. ABSL Frontline Equity fund is the clear winner in
terms of beating the benchmark.

ABSL Frontline Equity KOTAK blue chip Franklin India HSBC Large cap
Fund
Fund fund blue chip fund blue chip Fund

Alpha 1.166% -0.371 -1.000% 1.28%

Rank 1 2 3 4

g) Jensen’s ratio

It is the measure of the return obtained over the benchmark after adjusted for systematic risk. It is
like alpha, but the expected return is calculated using the formula from CAPM.

ABSL Frontline Equity KOTAK blue chip HSBC large cap Franklin India
Fund
Fund fund fund blue chip fund
Jensen’s 0.041%
0.0327% 0.014% 0.0041%
Ratio
Rank 1 2 3 4
h) Overall Ranking

We can see that in all performance indicators ABSL Frontline Equity Fund fund has been clearly
outperformed its peers in the CAGR, Sharpe Ratio, Treynor’s Ratio, Alpha, Jensen’s Ratio.

Fund ABSL Frontline Equity KOTAK blue chip Franklin India HSBC Large cap
Fund fund blue chip fund blue chip Fund
Rank 1 2 3 4

i) Limitations

Even though we gave ranks to these funds, we cannot say that which fund will give higher return or
higher risk adjusted return. These calculations are based on past data. If the market is bullish in
upcoming years KOTAK blue chip fund, which is having highest beta may outperform its peers in the
category.

44
 3.3.1.7 Performance Evaluation of Mid cap Fund

HDFC Midcap
KOTAK Midcap Axis Mid cap
Basis opportunities L&T midcap fund
fund fund
fund
Risk-free rate of return
7.39% 7.39% 7.39% 7.39%
(Rf)
Absolute Return in last
-10.081% -11.804% -11.471% 3.609%
1 year
CAGR in last 3 years for
12.814% 13.335% 11.453% 12.340%
Fund
CAGR in last 3 years for
12.365% 12.365% 12.365% 12.365%
Market/Benchmark

Correlation co-efficient 0.971946 0.944741 0.959811 0.921447

R Squared 0.944679 0.892536 0.921237 0.849065
SD of Fund 0.046255 0.047214 0.045637 0.042126
SD of Benchmark 0.048382 0.048382 0.048382 0.048382
Beta (β) of the Fund 0.929226 0.921936 0.905366 0.802296
Alpha (α)of the Fund 0.449% 0.969% -0.912% -0.025%
Treynor's Ratio 0.06 0.06 0.04 0.06
Sharpe Ratio 1.17272 1.259061 0.890364 1.17506
Jensen Ratio 0.008013 0.013577 -0.00441 0.009584

a) CAGR returns

Based on CAGR returns we can see that L&T Mid cap Fund has outperformed its peers, it has
given highest returns among all funds. It has given CAGR returns of 13.335% over last 3 years.
Next best is HDFC midcap opportunities fund which has provided a return of 12.814% over the
past 3 years for its investors. In the next 2 positions we can see that Axis midcap Fund, KOTAK
mid cap Fund rightly there, who provided a return of 12.365% and 11.453% respectively.

b) Sharpe ratio

Sharpe ratio is the measure of the risk adjusted return of the portfolio. As we all know that when
there is an extra risk involved in an investment, investor needs to be compensated with extra returns.
But if we can get higher returns for the same amount of risk taken, everybody would go for that.
Sharpe ratio measures the extra returns earned for a unit of risk taken by the investor.

Fund L&T Midcap Axis Midcap HDFC Midcap

KOTAK Midcap fund
fund fund opportunities fund

45
 Sharpe Ratio 1.2590 1.17506 1.17272 0.890
Rank 1 2 3 4

L&T Midcap fund is having highest Sharpe ratio among all these, and is awarded the top rank based
on Sharpe ratio. It has been provided more return for a unit of extra risk is taken over the past 3
years. 2nd rank goes to Axis Midcap fund which is having a Sharpe ratio of 1.17506. The 3rd and 4th
rank goes to HDFC midcap opportunities fund, KOTAK Midcap fund.

c) Treynor’s Ratio

This measures the additional return provided by the fund for every unit of Systematic Risk taken. It
uses Beta as a measure to measure volatility, whereas Sharpe’s ratio uses Standard deviation. Since
mutual funds portfolio is considered to be diversified portfolio we use Treynor’s ratio to compare
the performance of the portfolios or different mutual fund schemes. The person who is following the
market, not specifically the scheme can opt for the scheme which shows best performance as per
this ratio.

L&T Midcap HDFC Midcap KOTAK Midcap

Fund Axis Midcap fund
fund opportunities fund fund

Treynor’s Ratio 0.06 0.06 0.06 0.04

Rank 1 1 1 2

Here, three funds having highest Treynor’s ratio among all these funds, i.e. L&T Midcap fund, Axis
Midcap fund and HDFC Midcap opportunities fund and these funds holds the top rank based on
Treynor’s ratio. It has been provided more return for a unit of extra systematic risk is taken over the
past 3 years. The 2nd rank goes to KOTAK midcap fund.

d) Alpha

It is the active return obtained on an investment. It is the excess of return generated by the fund
over the benchmark. Higher the value of alpha better the fund. We can see that only one fund
was able to beat the benchmark over the past 3 years. ABSL Frontline Equity fund is the clear
winner in terms of beating the benchmark.

L&T Midcap Fund KOTAK Midcap HDFC Midcap

Fund Axis Midcap Fund
fund opportunities fund

Alpha 0.969% 0.912% 0.449% -0.025%

Rank 1 2 3 4

e) Jensen’s ratio

46
It is the measure of the return obtained over the benchmark after adjusted for systematic risk. It is
like alpha, but the expected return is calculated using the formula from CAPM.

Axis Midcap HDFC Midcap KOTAK Midcap

Fund L&T Midcap Fund
fund opportunities fund fund

Jensen’s Ratio 0.0135% 0.0095% 0.0080% -0.00441%

Rank 1 2 3 4

f) Overall Ranking

We can see that in all performance indicators L&T Midcap fund has been clearly outperformed its
peers in the CAGR, Sharpe Ratio, Treynor’s Ratio, Alpha, Jensen’s Ratio.

Axis Midcap HDFC Midcap KOTAK Midcap

Fund L&T Midcap fund
fund opportunities fund fund

Rank 1 2 3 4

g) Limitations

Even though we gave ranks to those funds, we cannot say that which fund will give higher return or
higher risk adjusted return. These calculations are based on past data. If the market is bullish in
upcoming years Axis Midcap fund, which is having highest beta may outperform its peers in the
category.

3.3.1.8 Performance Evaluation of Small cap funds

Franklin India
L&T Emerging HDFC Small Axis Small Cap
Basis smaller cap
Business Fund Cap Fund Fund
Fund
Risk-free rate of return (Rf) 7.39% 7.39% 7.39% 7.39%
Absolute Return in last 1
-16.983% -13.597% -8.123% -8.430%
year
CAGR in last 3 years for Fund 9.199% 16.285% 15.775% 9.445%
CAGR in last 3 years for
7.145% 8.200% 8.200% 8.200%
Market/Benchmark
Correlation co-efficient 0.941 0.970 0.956 0.957
R Squared 0.885 0.941 0.914 0.916
SD of Fund 0.0423 0.0535 0.046 0.039
SD of Benchmark 0.0606 0.0574 0.0574 0.057
Beta (β) of the Fund 0.657 0.904 0.776 0.651
Alpha (α)of the Fund 2.054% 8.085% 7.575% 1.245%
Treynor's Ratio 0.03 0.10 0.11 0.03

47
 Sharpe Ratio 0.427 1.66 1.79 0.5259
Jensen Ratio 1.970% 8.162% 7.756% 1.527%

a) CAGR returns

Based on CAGR returns we can see that L&T Emerging Business Fund has outperformed its peers, it
has given highest returns among all funds. It has given CAGR returns of 16.28 % over last 3 years.
Next best is HDFC Small Cap Fund which has provided a return of 15.775% over the past 3 years for
its investors. In the next positions we can see that, Axis Small Cap Fund, Franklin India Smaller Cap
Fund rightly there, who provided a return of 9.445% and 9.199% respectively.

b) Sharpe ratio

Sharpe ratio is the measure of the risk adjusted return of the portfolio. As we all know that when
there is an extra risk involved in an investment, investor needs to be compensated with extra returns.
But if we can get higher returns for the same amount of risk taken, everybody would go for that.
Sharpe ratio measures the extra returns earned for a unit of risk taken by the investor.

Fund Franklin India Axis small cap HDFC L&T Emerging

smaller cap fund fund Small cap fund Business Fund
Sharpe Ratio -0.298 -0.357 -1.46 -1.54
Rank 1 2 3 4

Franklin India smaller cap fund is having highest Sharpe ratio among all these, and is awarded the
top rank based on Sharpe ratio. It has been provided more return for a unit of extra risk is taken over
the past 3 years. 2nd rank goes to Axis small cap which is having a Sharpe ratio. The 3rd, 4th and rank
goes to HDFC small cap fund, L&T emerging Business fund.

c) Treynor’s Ratio

This measures the additional return provided by the fund for every unit of Systematic Risk taken. It
uses Beta as a measure to measure volatility, whereas Sharpe’s ratio uses Standard deviation. Since
mutual funds portfolio is considered to be diversified portfolio we use Treynor’s ratio to compare
the performance of the portfolios or different mutual fund schemes. The person who is following the
market, not specifically the scheme can opt for the scheme which shows best performance as per
this ratio.

Franklin India Axis small cap L&T Emerging HDFC Small -cap
Fund
Smaller Cap Fund fund Business fund Fund
Treynor’s Ratio -0.03 -0.03 -0.10 -0.11
Rank 1 1 2 3

48
Franklin India smaller cap fund and Axis small cap fund having highest Treynor’s ratio among all these
funds, and it holds the top rank based on Treynor’s ratio. It has been provided more return for a unit
of extra systematic risk is taken over the past 3 years. The 2nd, 3rd rank goes to L&T Emerging business
fund and HDFC small cap fund.

d) Alpha

It is the active return obtained on an investment. It is the excess of return generated by the fund
over the benchmark. Higher the value of alpha better the fund. We can see that only one fund was
able to beat the benchmark over the past 3 years. L&T Emerging business fund is the clear winner in
terms of beating the benchmark.

L&T Emerging Business HDFC small cap Franklin India Axis small cap
Fund
Fund Fund smaller cap fund Fund
Alpha 8.085% 7.575% 2.054% 1.245%
Rank 1 2 3 4

e) Jensen’s ratio

It is the measure of the return obtained over the benchmark after adjusted for systematic risk.
It is like alpha, but the expected return is calculated using the formula from CAPM.

Fund L&T Emerging Axis small cap Franklin India HDFC small cap
Business Fund fund smaller cap fund fund
Jensen’s Ratio 8.162% 1.527% 1.970% 7.756%
Rank 1 4 3 2
f) Overall Ranking

We can see that in all performance indicators L&T Emerging business fund has been clearly
outperformed its peers in the CAGR, Alpha, Jensen’s Ratio.

Fund L&T Emerging business HDFC small cap Axis small cap Franklin India
fund fund fund smaller cap fund
Rank 1 2 3 4

g) Limitations

Even though we gave ranks to those funds, we cannot say that which fund will give higher return or
higher risk adjusted return. These calculations are based on past data. If the market is bullish in
upcoming years Axis small cap fund, which is having highest beta may outperform its peers in the
category.

49
 3.3.2 Debt Mutual Fund

Debt fund instrument is providing loans to the instrument issuing agency. A debt fund invests in
fixed-interest generating securities like corporate bonds, government securities, treasury bills,
commercial paper and other money market instruments based on their credit rating. The basic
reason of investing in debt fund instruments is to earn an interest income and capital appreciation
associated with the market’s growth. The issuing company pre-decides the interest/coupon rate as
well as the maturity period. The main reason they are called ‘fixed-income’ securities is because the
investor knows what he/she is going to get out of them.

The fund manager of a debt fund ensures that he/she invests only in high credit quality instruments.
Debt fund which invest in higher-rated securities will be less volatile, compared to low-rated
securities. This assures the investors of a high likelihood towards earning regular fixed income in the
form of interest on the debt security as well as pay back on the principal amount upon
maturity. Additionally, the total maturity or the residual maturity term also depends on the
investment strategy of the debt fund manager and the overall interest rate rates in the economy.

Residual maturity determines the risk and return level of a bond. The less time left for a bond to
mature, the more predictable, less risky and possibly less profitable it will be. Longer maturity bonds
are the opposite. This then becomes one important way to classify bonds, both from the point of
view of fund companies operating them.

A falling interest rate regime encourages the manager to invest in long-term securities, while a rising
interest rate regime encourages the manager to invest in short-term securities.

3.3.2.1 Classification of Debt Funds

Based on their maturity, debt funds are classified into the following categories:

 Overnight Fund: Investment in overnight securities having maturity of 1 day

 Liquid Fund: Investment in Debt and money market securities with maturity of up to 91 days only
 Ultra-Short Duration Fund: Investment in Debt & Money Market instruments such that the
Macaulay duration of the portfolio is between 3 to 6 months
 Low Duration Fund: Investment in Debt & Money Market instruments such that the Macaulay
duration of the portfolio is between 6 to 12 months
 Money Market Fund: Investment in Money Market instruments having maturity up-to 1 year
 Short Duration Fund: Investment in Debt & Money Market instruments such that the Macaulay
duration of the portfolio is between 1 to 3 years
 Medium Duration Fund: Investment in Debt & Money Market instruments such that the Macaulay
duration of the portfolio is between 3 to 4 years

50
 Medium to Long Duration Fund: Investment in Debt & Money Market instruments such that the
Macaulay duration of the portfolio is between 4 to 7 years
 Long Duration Fund: Investment in Debt & Money Market Instruments such that the Macaulay
duration of the portfolio is greater than 7 years
 Dynamic Fund: Investment across duration.

Besides this maturity-based classification, there are a few other types of debt funds where the kind
of securities invested in are specified.

 Gilt funds: These funds invest a minimum of 80% of total assets in government securities. These
securities, which are also called gilts, are bonds issued by the Government of India. Unlike bonds
issued by companies, the chance of the government defaulting on its loan obligation is significantly
lower.
 Gilt Fund with 10-year Constant Duration: A minimum of 80% of total assets in invested in G-secs
such that the Macaulay duration of the portfolio is equal to 10 years
 Corporate Bond Funds: A minimum of 80% is invested in corporate bonds (only in highest-rated
instruments)
 Credit Risk Fund: A minimum of 65% is invested in corporate bonds (investment in below highest
rated instruments).
 Banking and PSU Funds: These funds have a minimum 80% investment in debt instruments of
banks, Public Sector Undertakings, and Public Financial Institutions
 Floater Fund: Floating rate instruments comprise a minimum of 65% of total assets.

3.3.2.2 Returns on Various Types of Debt Funds

51
 Source: https://www.valueresearchonline.com/income_investing/

3.3.2.3 GENERAL SWOT ANALYSIS

a) Strength

o best option for an investor with low risk appetite.

o No impact of equity market volatility- Debt funds invest in interest bearing instruments like
corporate bonds, money market instruments, etc. Therefore, the volatility in the equity
market does not affect your investment.
o Systematic Investments- investments in fixed deposits are made in lump sum amounts
whereas investments in debt mutual funds can be made in the form of SIP thus helping in
creating long term wealth accumulation over a period of time.
o Debts fund are highly liquid which can be easily converted in to cash that too within a day
time
o No deduction of taxes or TDS on the earning from debt funds. Taxes to be paid only when an
investor sell or withdraw fund units and depending on period of the investment.
o Provide better returns on investment as compared to bank FDs and parking surplus money
in savings account.
o Debt fund has low transaction cost as compared to the other mutual fund

b) Weakness

o Return on investment is very low as compared to equity mutual funds

52
 o But they are not risk free like the way bank fixed deposits (FDs) are. The risk in debt funds
comes from different sources and three most important risks are change in interest rate risk,
credit risk and lack of liquidity.
o Debt funds are associated with extra costs like salary for fund manager, marketing cost etc

c) Opportunities

o A change in the government regulatory environment not only affects different industries,
but the funds that concentrate in those sectors as well.
o If the interest rate in the market goes higher they can get higher returns

d) Threat

o Some types of funds do better in a recession while others track well in boom times those
funds are particularly threatened by a sudden change in the unemployment rate that
undermines consumer confidence or a stimulus plan that gets people spending again

3.3.2.4 TAXATION BENEFITS

Gains on debt mutual funds held for 36 months or more are treated as long-term capital gains and
taxed at the rate of 20% after indexation.

Dividends from debt mutual funds are tax free in the hands of investors but they are liable for a
dividend distribution tax of 25%

3.3.2.5 COMPARISON BETWEEN THREE LONG TERM DEBT FUNDS

3.3.2.5.1 ICICI PRUDENTIAL ALL SEASON BOND FUND

The scheme seeks to generate income through investments in a range of debt instruments and
money market instruments and the plan aims to maintain the optimum balance of yield , safety and
liquidity.

OPEN ENDED/CLOSED ENDED- open ended and debt dynamic bond

RISK GRADE- below average
RETURN GRADE- high
NAV-23.25(17th may 2019)
LAUNCH- MAY 2009
Min SIP inv -100

 TOP HOLDINGS

%
Company Sector Assets
REC Financial 5.68
GOI 7.37% 2023-04-16 sovereign 3.99

53
HUDCO Financial 3.78
GOI 7.32% 2024-01-28 Sovereign 3.77
Aspire home finance Corp. Financial 3.77
Nayara Energy Energy 3.77
Reliance Industries Energy 3.76
National Highway Authority Services 3.75
Promont hill side construction 3.72
Vedanta Metals 3.70
Shriram Transport finance Financial 3.62
National bank Agr. Rur. Devp. Financial 3.42
Indiabulls housing finance Financial 2.82
Great eastern shipping comp. Services 2.66
KKR Indian financial services Financial 2.07
HDFC Financial 1.90
Coastal Gujarat power Engineering 1.88
Bharti Airtel communication 1.87
Axis bank Financial 1.83
Magma Fincorp Financial 1.59
Others others 1.90

 Quarterly Returns
Q1 Q2 Q3 Q4 YEAR
2019 2.29 - - -
2018 1.94 0.02 1.39 2.75 6.19
2017 0.72 3.91 1.03 -0.60 5.10
2016 3.63 2.96 5.88 3.44 16.86
2015 2.77 -1.16 4.83 -0.70 5.74

 Credit Rating Break-Up

Credit Rating % to Assets
SOV 16.897
AAA 37.119
A1+ 2.816
AA 32.504
A and Below 0.00
Term Deposit 0.00
Bill Rediscounting 0.00
Cash Equivalent 10.661
Unrated/ Others 0.00

 Risk Analysis
Volatility Measurements
Standard Deviation 4.11
Sharpe Ratio 0.50

3.3.2.5.2 AXIS CORPORATE DEBT FUND

54
 The Scheme seeks to provide steady income and capital appreciation by investing in
corporate debt.

OPEN ENDED/CLOSED ENDED- open ended and debt- corporate bond

RISK GRADE- low
RETURN GRADE- high
NAV-11.49 (17th may 2019)
LAUNCH- July 2017
Min SIP inv -1000

 Quarterly Returns
Q1 Q2 Q3 Q4 YEAR
2019 3.42 - - -
2018 - - - 3.35 -
2017 - - - - -
2016 - - - - -
2015 - - - - -
 Credit Rating Break-Up
Credit Rating % to Assets
SOV 8.38
AAA 65.82
A1+ 14.74
AA 0.00
A and Below 5.62
Term Deposit 0.00
Bill Rediscounting 0.00
Cash Equivalent 5.44
Unrated/ Others 0.00
 Risk Analysis

55
 Volatility Measurements
Standard Deviation -
Sharpe Ratio -

3.3.2.5.3 DSP CORPORATE BOND FUND

OPEN ENDED/CLOSED ENDED- open ended and debt- corporate bond

NAV-10.81 (17th may 2019)
LAUNCH- Sept 2018
Min SIP inv -500

 Quarterly Returns
Q1 Q2 Q3 Q4 YEAR
2019 2.70 - - -
2018 1.78 1.42 1.66 2.78 7.82
2017 - - - 1.34 -
2016 - - - - -
2015 - - - - -
 Credit Rating Break-Up
Credit Rating % to Assets
SOV 0.00
AAA 97.84
A1+ 0.00
AA 0.00
A and Below 0.00
Term Deposit 0.00
Bill Rediscounting 0.00
Cash Equivalent 2.16
Unrated/ Others 0.00

56
  Risk Analysis
Volatility Measurements
Standard Deviation -
Sharpe Ratio -

3.3.2.5.4 COMPARISON ON VARIOUS FACTORS

ICICI PRUDENTIAL AXIS CORPORATE DSP CORPORATE

SCHEME NAME ALL SEASONS BOND DEBT FUND BOND FUND
FUND
Asset allocation(%) Debt Others Debt Others Debt Others
89.34 10.66 94.57 5.43 97.84 2.16
NAV(17th may) 23.25 11.49 10.79
52 week High 23.23 11.47 10.80
(16-05-2019) (14-5-19) (10-4-19)
52 week Low 21.51 10.52 9.99
(7-6-2018) (17-5-18) (25-9-18)
Fund Family ICICI Prudential Axis Mutual Fund DSP BlackRock Mutual
Mutual Fund Fund
Fund Manager Mr. Manish Banthia, Mr. Devang Shah Mr. Vikram Chopra,
Mr. Anuj Tagra Mr. Saurabh Bhatia
Scheme AUM (in cr , 2647.29 261.33 391.30
30th April 2019)
Benchmark Crisil 1 Yr
T-Bill Crisil 1 Yr T-Bill Crisil Composite Bond
Indexnull IndexNifty Free Float Fund Index
Smallcap 100
Risk Type Moderate Moderate Moderate
Min Investment 5000 5000 500
Min SIP investment 100 1000 500
Exit Load 0.25% for redemption Nil Nil
within 30 days
Top Securities 48 30 26
Avg Maturity(yrs) 4.74 3.3 2.88
AMC ICICI Prudential Asset Axis Asset DSP Investment
Management Management Managers Private Ltd
Company Ltd Company Ltd
Registrar Computer Age Karvy Fintech Private Computer Age
Management Services Ltd Management Services
Ltd Ltd
Avg Maturity 52 Week 5.50 3.40 3.03
High (Yr)
Avg Maturity 52 week 1.42 0.91 2.82
low
Avg Credit Rating AAA AAA AAA
Best Performance( Yr) 21.50 (Jan 31, 2014 - 9.20 (May 17, 2018 - -
Feb 02, 2015) May 17, 2019)

57
 Worst 0.98 (Feb 25, 2015 - 6.08 (Sep 25, 2017 - -
Performance(Yr) Feb 25, 2016) Sep 25, 2018)
Rank 1 2 3

a. FUND PERFORMANCE ALL(2010- 2019)

b. 1 YEAR(2018-2019)

TOTAL RETURNS(%)

SCHEME 2011 2012 2013 2014 2015 2016 2017 2018 2019
ICICI 8.9 9.94 9.63 19.39 5.74 16.86 5.10 6.19 2.86

AXIS 7.82 3.45

DSP 3.94

ICICI
Prudential All Axis Corporate DSP Corporate Bond
Season Bond Fund Fund
Risk-free rate of return (Rf) 7.39% 7.39% 7.39%
Absolute Return in last 1 year6.841% 8.043%
Average Return in last 1 month
for Fund 0.806% -3.943% 0.797%

58
 Average Return in last 1 month
for Market / Benchmark 0.551% 0.387% 0.387%
Average Return in last 3
months for Fund 2.437% 0.647% 2.165%
Average Return in last 3
months for Market /
Benchmark 1.663% 0.534% 0.534%
Average Return in last 6
months for Fund 4.934% 1.696% 4.377%

Average Return in last 6

months for Market /
Benchmark 3.354% 1.165% 1.165
Average Return in last 1 year
for Fund 10.112% 3.420% 8.946%
Average Return in last 1 year
for Market / Benchmark 6.820% 2.344% 2.344%
Correlation co-efficient 0.918 0.825 0.957
Expense Ratio 1.30 1.05 0.48
Average maturity (yrs) 4.74 3.3 2.88
Yield to maturity 8.68 8.36 8.16
Average credit rating AAA AAA AAA

c. Yield to Maturity

A higher yield to maturity is always associated with higher coupon rates or higher fixed income in
case of Debt funds, with risk in default depending on the credit rating of the underlying assets. The
above funds have majority of their underlying assets with a minimum rating of AA or higher, which
reduces the risk of default in payments considerably.

Based on the YTM, ICICI Prudential All Season Bond Fund provides the highest YTM of 8.68, followed
by Axis Corporate Debt Fund with YTM of 8.36, then DSP Corpoarte Bond Fund with YTM 8.16

d. Average Maturity (Yrs)

Residual maturity determines the risk and return level of a bond. The less time left for a bond to
mature, the more predictable, less risky and possibly less profitable it will be. Therefore, funds with
lower average maturity will have lower risk.

Based on the Average Maturity, DSP Corpoarte Bond Fund has the lower period of about 2.88
years, followed by Axis Corporate Debt Fund at 3.3 years, then ICICI Prudential ALL Season
Bond Fund with at 4.74 yrs

e. Average Return in last 1 month, 3 months & 6 months

Based on the returns over the three different durations, ICICI Prudential All Season Bond Fund
was providing the highest returns as per above the table, followed by DSP Corporate Bond Fund
and lastly Axis Corporate Debt fund.

f. Expense Ratio

59
Higher the expense ratio for any fund, higher will be deductions/expenses incurred by the AMC to
manage the fund, in turn lower the invested amount gets allocated for purchase of the scheme
units.Based on this,DSP Corporate Bond Fund has low expense ratio followed by Axis Corporate Debt
Fund and then ICICI Prudential All Season Corporate Bond Fund.

g. Average Credit Rating

One of the major criteria considered before the selection of any scheme is the Average Credit Rating
of the underlying assets of any fund. Higher the ratings, higher with the safety factor against credit
risk and interest rate risk. From the information available from various credit rating companies, it
was found that other than all the schemes have AAA rating for its underlying securities. DSP
Corporate Bond Fund has 97.84% of its securities were ranked AAA, while lower weightages were
provided in the portfolio of Axis Corporate Debt fund and ICICI Prudential All season Bond Fund.

ICICI Prudential Axis DSP

All Season Bond Corporate corporate
Fund Debt Fund Bond Fund
Rank 3 2 1
Yield to Maturity (YTM) 8.68 8.36 8.16
Average Maturity (Years) 4.74 3.3 2.88
Expense Ratio 1.30 1.05 0.48
Absolute Return in last 1 year 6.841 8.043% -
Average Return in last 1 month
0.806 -3.943% 0.797%
for Fund
Average Return in last 3
2.437% 0.647% 2.165%
months for Fund
Average Return in last 6
4.934% 1.696% 4.377%
months for Fund
Average Return in last 1 year
10.112% 3.42% 8.946%
for Fund
Average Credit Rating AAA AAA AAA
Percentage of Portfolio
Allocated to AAA rated funds 37.119% 65.82% 97.84%

% of portfolio allocated to A1 +
2.816% 14.75% 0.00
rated funds
% of portfolio allocated to AA
32.504 0.00 0.00
rated funds

Based on the various parameters considered like, YTM, Average Maturity, Expense Ratio, Average
Credit Rating & Average Returns over 1, 3 & 6 months, the four funds having a maturity period of
more than 1 year was ranked. The scheme selected by an investor may vary from the recommended
scheme based on their risk and return expectations.

3.3.2.6 COMPARISON BETWEEN FOUR ULTRA SHORT-TERM DEBT FUNDS

3.3.2.6.1 Franklin India Ultra Short Bond Fund – Super Institutional Plan

60
 An open ended ultra-short-term debt scheme investing in instruments such that the Macaulay
duration of the portfolio is between 3 months to 6 months

 Objective: To provide a combination of regular income and high liquidity by investing

primarily in a mix of short-term debt and money market instruments.

 Open ended / closed ended – Open ended & Debt

 Fund style (Growth / Blend / Value) - Growth
 Risk grade – Low
 Return grade – High
 NAV - Rs. 26.47 as on May 6, 2019
 Expense ratio - 0.42% (As on Mar 31, 2019)
 AUM - Rs. 16724.2 crore as on Mar 31, 2019

 Historical Fund performance (v/s Benchmark)

 History (NAV, Total Annual Returns, 52 Week High, 52 Week Low, Net Assets, Expense Ratio)

2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019
NAV(Rs) 11.71 12.40 13.56 14.95 16.45 18.10 19.86 21.78 23.57 25.63 26.47
Total Return
6.09 5.89 9.35 10.26 10.04 10.00 9.74 9.68 8.21 8.68 3.28
(%)
+/- CCIL T Bill
Liquidity 3.48 3.11 4.55 4.69 4.54 4.29 4.36 4.95 4.17 4.62 1.76
Weight (%)
Rank (Fund 18/10 11/14 40/1 15/16
5/145 12/204 3/127 11/122 1/19 1/17 1/24
Category) 9 8 76 3
52 Week High
11.71 12.40 13.56 14.95 16.45 18.10 19.86 21.78 23.57 25.63 -
(Rs)
52 Week Low
11.04 11.71 12.41 13.57 14.56 16.46 18.10 19.87 21.80 23.60 -
(Rs)

61
Net Assets (Rs 3537. 3893. 2393. 4480. 3622. 6769.0 5283. 6748.4 11873 14764 16352
Cr) 95 77 61 97 76 4 03 3 .35 .97 .34
Expense Ratio
0.36 0.36 0.35 0.39 0.30 0.30 0.29 0.30 0.32 0.41 -
(%)

 Asset allocation
Asset type % of Assets
Debenture 71.79
Commercial Paper 8.70
Bonds/Debentures 5.31
Structured Obligation 4.95
Bonds/NCDs 2.68
Cash/Net Current Assets 2.55

 Portfolio characteristics
Portfolio characteristics
Total Securities 132
Avg Maturity (Yrs.) 0.55
Avg Maturity 52 W High (Yrs.) 0.82
Avg Maturity 52 W Low (Yrs.) 0.48
Avg Credit Rating AA

 Sector allocation (fund allocation towards various sectors as on May 31, 2018)
Sector % to NAV
Financial Services 48.71
Energy 16.27
Construction 9.06
Services 5.30
Telecom 4.08
Metals 4.05
Automobile 3.12
Pharma 1.17
Consumer Durables 0.96
Media & Entertainment 0.80
Textiles 0.07
Call, cash & other current asset 6.39

 Portfolio Allocation (Top holdings) –

62
 Credit Rating Break-Up
Credit Rating % to Assets
SOV 0.00
AAA 8.09
A1+ 10.99
AA 40.06
A and Below 38.61
Term Deposit 0.00
Bill Rediscounting 0.00
Cash Equivalent 2.55
Unrated/ Others 0.00

 Quarterly Returns
Q1 Q2 Q3 Q4
2019 2.49 - - -
2018 2.04 1.76 1.92 2.75
2017 2.21 2.10 2.04 1.62

63
 2016 2.35 2.26 2.55 2.18
2015 2.46 2.31 2.39 2.24

 Risk Analysis
Volatility Measurements
Standard Deviation 0.58
Sharpe Ratio 4.16

 Best & worst performance

Best (Period) Worst (Period)
Year 10.87% (Jul 26, 2013 – Jul 28, 2014) 4.92% (Jul 30, 2009 - Jul 30, 2010)
Quarter 3.04% (Jul 24, 2013 - Oct 23, 2013) 1.15% (Oct 07, 2009 - Jan 06, 2010)
Month 1.27% (Aug 30, 2013 - Oct 01, 2013) 0.20% (Apr 17, 2018 - May 17, 2018)
 Portfolio manager
a) Fund Manager – Pallab Roy . since June 2018.
b) Co-Fund Manager – Santhosh Kamath, since October 2018
 Investment information
a) AMC - Franklin Templeton Asset Management India Pvt Ltd
b) Registrar – Franklin Templeton International Services (India) Pvt Ltd
c) Launch date – December 2007
d) Benchmark – VR Bond
e) Min Investment (Rs.) – 10,000
f) SIP Min Investment (Rs.) - 500
g) Exit load or entry load – Nil

3.3.2.6.2 HDFC Ultra Short-Term Fund

 Objective: The scheme seeks to generate income / capital appreciation through investment
in debt securities and money market instruments.

 Open ended / closed ended – Open ended & Debt

 Fund style (Growth / Blend / Value) - Growth
 Risk grade – Not Rated
 Return grade – Not Rated
 NAV - Rs. 10.58 as on May 17, 2019
 Expense ratio - 0.30% (As on Apr 30, 2019)
 AUM - Rs. 5811.7 crore as on April 30, 2019

 Historical Fund performance (v/s Benchmark)

64
 History (NAV, Total Annual Returns, 52 Week High, 52 Week Low, Net Assets, Expense Ratio)
2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019
NAV(Rs) - - - - - - - - - 10.25 10.58
Total - - - - - - - - - -
Return 3.22
(%)
+/- CCIL T - - - - - - - - - -
Bill
Liquidity 1.48
Weight
(%)
Rank - - - - - - - - - -
(Fund 6/24
Category)
52 Week - - - - - - - - - -
-
High (Rs)
52 Week - - - - - - - - - -
-
Low (Rs)
Net - - - - - - - - -
Assets 1811.93 2917.90
(Rs Cr)
Expense - - - - - - - - -
0.25 -
Ratio (%)

 Asset allocation
Asset type % of Assets
Commercial Paper 33.51
Debenture 21.11
Certificate of Deposit 20.94
Non-Convertible 6.82
Bonds 4.93
CBLO 4.12
 Portfolio characteristics

65
 Portfolio characteristics
Total Securities 75
Avg Maturity (Yrs.) 0.44
Avg Maturity 52 W High (Yrs.) 0.47
Avg Maturity 52 W Low (Yrs.) 0.28
Avg Credit Rating AAA
 Portfolio Allocation (Top holdings) –

 Credit Rating Break-Up

Credit Rating % to Assets
SOV 0.00
AAA 35.28
A1+ 56.89
AA 2.32
A and Below 0.00
Term Deposit 0.00
Bill Rediscounting 0.00
Cash Equivalent 5.51
Unrated/ Others 0.00

 Quarterly Returns
Q1 Q2 Q3 Q4
2019 2.49 - - -
2018 - - 2.35 -
2017 - - - -
2016 - - - -
2015 - - - -
 Risk Analysis

66
 Volatility Measurements
Standard Deviation -
Sharpe Ratio -

 Best & worst performance

Best (Period) Worst (Period)
Year - - - -
Quarter 2.38% (Jan 04, 2019 - Apr 05,2019) 2.04% (Feb 08, 2019 - May 10, 2019)
Month 1.09% (Mar 01, 2019 - Apr 02, 2019) 0.38% (Apr 03, 2019 - May 03, 2019)
 Portfolio manager
a) Fund Manager – Anil Bamboli, since September 2018
b) Co-Fund Manager – Amar Kalkundrikar, since January 2019
 Investment information
a) AMC – HDFC Asset Management Company Ltd
b) Registrar – Computer Age Management Services Ltd
c) Launch date – September 2018
d) Benchmark – CCIL T Bill Liquidity Weight
e) Min Investment (Rs.) – 5,000
f) SIP Min Investment (Rs.) - 500
g) Exit load or entry load – Nil

3.3.2.6.3 Franklin India Savings Fund – Retail Plan

 Objective: The Scheme seeks to provide income and liquidity consistent with the prudent
risk from a portfolio comprising of money market instruments.

 Open ended / closed ended – Open ended & Debt

 Fund style (Growth / Blend / Value) - Growth
 Risk grade – Not Rated
 Return grade – Average
 NAV - Rs. 34.67 as on May 17, 2019
 Expense ratio - 0.31% (As on Apr 30, 2019)
 AUM - Rs. 1251.5 crore as on April 30, 2019

 Historical Fund performance (v/s Benchmark)

67
 History (NAV, Total Annual Returns, 52 Week High, 52 Week Low, Net Assets, Expense Ratio)
2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019
34.6
NAV(Rs) 16.66 17.57 19.09 20.96 22.86 24.90 26.96 29.14 31.23 33.57
7
Total
Return 6.87 5.45 8.70 9.75 9.10 8.90 8.29 8.08 7.17 7.46 3.27
(%)
+/- CCIL T
Bill
Liquidity 4.26 2.67 3.90 4.18 3.60 3.19 2.91 3.35 3.13 3.40 1.53
Weight
(%)
Rank
69/1 121/1 64/16 57/14 131/2 96/12 93/12
(Fund 11/109 2/13 7/13 2/16
48 76 3 5 04 7 2
Category)
52 Week
16.66 17.57 19.09 20.96 22.86 24.90 26.96 29.14 31.23 33.57 -
High (Rs)
52 Week
15.59 16.66 17.58 19.11 20.96 22.87 24.91 26.97 29.17 31.25 -
Low (Rs)
Net
3067.8 1458. 895.8 752.3 435.3 341.8 314.5 371.6 511.3 701.
Assets 417.63
6 46 5 0 2 6 1 2 3 40
(Rs Cr)
Expense
1.01 1.00 1.00 1.01 1.12 0.85 0.86 0.43 0.26 0.37 -
Ratio (%)

 Asset allocation
Asset type % of Assets
Commercial Paper 70.34
Certificate of Deposit 22.98
Securitised Debt 5.59
Cash/Net Current Assets 1.10

 Portfolio characteristics
Portfolio characteristics
Total Securities 24
Avg Maturity (Yrs.) 0.67
Avg Maturity 52 W High (Yrs.) 0.83
Avg Maturity 52 W Low (Yrs.) 0.33
Avg Credit Rating AAA

68
 Portfolio Allocation (Top holdings) –

 Credit Rating Break-Up

Credit Rating % to Assets
SOV 0.00
AAA 0.00
A1+ 98.904
AA 0.00
A and Below 0.00
Term Deposit 0.00
Bill Rediscounting 0.00
Cash Equivalent 1.1
Unrated/ Others 0.00

 Quarterly Returns
Q1 Q2 Q3 Q4
2019 2.28 - - -
2018 1.81 1.55 1.71 2.24
2017 1.95 1.81 1.81 1.41
2016 2.06 1.91 2.10 1.78
2015 2.24 1.73 2.33 1.75

 Risk Analysis
Volatility Measurements
Standard Deviation 0.52
Sharpe Ratio 2.37

69
  Best & worst performance
Best (Period) Worst (Period)
Year 10.105 (Aug 20, 2013 - Aug 20,2014) 4.76% (Oct 27, 2003 - Oct 26,2004)
Quarter 3.24% (Aug 20, 2013 - Nov 13,2013) 0.84% (May 21, 2013 - Aug 20, 2013)
Month 1.46% (Aug 30, 2013 - Oct 01, 2013) -0.23% (Jun 24, 2013 - Jul 24, 2013)

 Portfolio manager
a) Fund Manager – Pallab Roy, since June 2008
b) Co-Fund Manager – Umesh Sharma, since October 2018
 Investment information
a) AMC – Franklin Templeton Asset Management India Pvt Ltd
b) Registrar – Franklin Templeton International Services (India) Pvt Ltd
c) Launch date – February 2002
d) Benchmark – CCIL T Bill Liquidity Weight
e) Min Investment (Rs.) – 10,000
f) SIP Min Investment (Rs.) - 500
g) Exit load or entry load – Nil

3.3.2.6.4 Mahindra Liquid Fund – Direct Plan

 Objective: The scheme seeks to deliver reasonable market related returns with lower risk
and higher liquidity through a portfolio of money market and debt instruments.

 Open ended / closed ended – Open ended & Debt

 Fund style (Growth / Blend / Value) - Growth
 Risk grade – Not Rated
 Return grade – High
 NAV - Rs. 1220.261 as on May 7, 2019
 Expense ratio - 0.12% (As on Mar 31, 2019)
 AUM - Rs. 3050.3 crore as on Mar 31, 2019

 Historical Fund performance (v/s Benchmark)

70
  History (NAV, Total Annual Returns, 52 Week High, 52 Week Low, Net Assets, Expense Ratio)
2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019
NAV(Rs) - - - - - - - 1035.01 1105.88 1189.14 1220.26
Total Return
- - - - - - - - 6.85 7.53 2.62
(%)
+/- CCIL T Bill
Liquidity - - - - - - - - 2.81 3.47 1.09
Weight (%)
Rank (Fund
- - - - - - - - 2/35 8/35 3/41
Category)
52 Week High
- - - - - - - - 1105.88 1189.14 -
(Rs)
52 Week Low
- - - - - - - - 1035.40 1106.09 -
(Rs)
Net Assets (Rs
- - - - - - - 1350.42 1944.26 2167.97 2980.43
Cr)
Expense Ratio
- - - - - - - - - - -
(%)

 Asset allocation

Asset type % of Assets

Commercial Paper 81.83
Certificate of Deposit 16.30
Repo 1.32
Debenture 0.33
Treasury Bills 0.16
Net Receivables 0.06

 Portfolio characteristics
Portfolio characteristics
Total Securities 0
Avg Maturity (Yrs.) 0.16
Avg Maturity 52 W High (Yrs.) 0.16
Avg Maturity 52 W Low (Yrs.) 0.06
3Y Earnings Growth (%) AAA

71
 Portfolio Allocation (Top holdings) –

 Credit Rating Break-Up

Credit Rating % to Assets
SOV 0.16
AAA 0.33
A1+ 98.13
AA 0.00
A and Below 0.00
Term Deposit 0.00
Bill Rediscounting 0.00
Cash Equivalent 1.38
Unrated/ Others 0.00

 Risk Analysis
Volatility Measurements
Standard Deviation -
Sharpe Ratio -

 Quarterly Returns
Q1 Q2 Q3 Q4
2019 1.87 - - -
2018 1.67 1.87 1.86 1.93
2017 1.70 1.66 1.65 1.66

72
 2016 - - -
2015 - - - -

 Best & worst performance

Best (Period) Worst (Period)
Year 7.74% (Apr 27, 2018 – Apr 29, 2019) 6.81% (Mar 01, 2017 - Mar 01, 2018)
Quarter 1.92% (Seb 26, 2018 - Dec 26, 2018) 1.62% (Sep 20, 2017 - Dec 20, 2017)
Month 0.67% (Mar 01, 2018 - Apr 02, 2018) 0.52% (Nov 20, 2017 - Dec 20, 2017)

 Portfolio manager
a) Fund Manager – Rahul Pal, since Jan 2016

 Investment information
a) AMC – Mahindra Asset Management Company Private Ltd
b) Registrar – Computer Age Management Services Ltd
c) Launch date – July 2016
d) Benchmark – CCIL T-Bill Liquidity Weight
e) Min Investment (Rs.) – 1000
f) SIP Min Investment (Rs.) - Nil
g) Exit load or entry load – Nil

3.3.2.6.5 Performance comparison of different funds

Franklin India Ultra HDFC Ultra Franklin India Mahindra

Short Bond Fund - Super Short-Term Saving Fund - Liquid Fund -
Institutional Plan Fund Retail Plan Direct Plan
Yield to Maturity (YTM) 9.55 7.60 7.87 7.29
Average Maturity (Days) 200 161 245 58
Expense Ratio 0.42 0.30 0.31 0.12
Risk-free rate of return (Rf) 7.39% 7.39% 7.39% 7.39%
Absolute Return in last 1 year 8.686% - 7.520% 7.576%
Average Return in last 1 month for
0.694% 0.611% 0.597% 0.541%
Fund
Average Return in last 1 month for
0.340% 0.340% 0.340% 0.340%
Market / Benchmark
Average Return in last 3 months for
2.095% 1.706% 1.801% 1.630%
Fund
Average Return in last 3 months for
1.023% 1.023% 1.023% 1.023%
Market / Benchmark
Average Return in last 6 months for
4.234% 3.441% 3.635% 3.287%
Fund
Average Return in last 6 months for
2.056% 2.056% 2.056% 2.056%
Market / Benchmark
Average Return in last 1 year for Fund 8.647% 7.001% 7.403% 6.682%
Average Return in last 1 year for
4.154% 4.154% 4.154% 4.154%
Market / Benchmark
Average Credit Rating AA AAA AAA AAA

73
 a. Yield to Maturity
A higher yield to maturity is always associated with higher coupon rates or higher fixed income
in case of Debt funds, with risk in default depending on the credit rating of the underlying assets.
The above funds have majority of their underlying assets with a minimum rating of AA or higher,
which reduces the risk of default in payments considerably.

Based on the YTM, Franklin Ultra Short-Term Bond Fund – Super Institutional Plan provides the
highest YTM of 9.55, followed by Franklin India Saving Fund – Retail Plan with YTM of 7.87, HDFC
Ultra Short-Term Fund at 7.60 & Mahindra Liquid Fund at 7.29.

b. Average Maturity (Days)

Residual maturity determines the risk and return level of a bond. The less time left for a bond to
mature, the more predictable, less risky and possibly less profitable it will be. Therefore, funds
with lower average maturity will have lower risk.

Franklin India Ultra HDFC Ultra Franklin India Mahindra

Short Bond Fund - Short-Term Saving Fund - Liquid Fund -
Super Institutional Fund Retail Plan Direct Plan
Plan
Average Maturity
200 161 245 58
(Days)
Rank 3 2 4 1

Based on the Average Maturity, Mahindra Liquid Funds has the lower period of about 58 days,
followed by HDFC Ultra Short-Term Fund at 161 days, Franklin India Ultra Short Bond Fund at 200
days and Franklin India Savings Fund – Retail Plan at 245 days.

c. Average Return in last 1 month, 3 months & 6 months

Since all the fund schemes considered are for high liquidity solutions to its investors, short term
average returns of 1, 3 & 6 months were considered for analysis. As per the analysis of each scheme
against the benchmark – CCIL T Bill Liquidity Weight, all the funds were found to provide higher
returns that the benchmark over all the three considered durations.

Franklin India Ultra HDFC Ultra Franklin India Mahindra

Short Bond Fund - Short-Term Saving Fund - Liquid Fund -
Super Institutional Fund Retail Plan Direct Plan
Plan
Average Return
0.694% 0.611% 0.597% 0.541%
in last 1 month
Average Return
2.095% 1.706% 1.801% 1.630%
in last 3 months
Average Return
4.234% 3.441% 3.635% 3.287%
in last 6 months
Rank 1 3 2 4

Based on the returns over the three different durations, Franklin India Ultra Short Bond Fund was
providing the highest returns as per above the table, followed by Franklin India Saving Fund – Retail
Plan, HDFC Ultra Short-Term Fund and lastly Mahindra Liquid Fund.

74
 d. Expense Ratio

Franklin India Ultra HDFC Ultra Franklin India Mahindra

Short Bond Fund - Short-Term Saving Fund - Liquid Fund -
Super Institutional Fund Retail Plan Direct Plan
Plan
Expense Ratio 0.42 0.30 0.31 0.12
Rank 4 3 3 1
Higher the expense ratio for any fund, higher will be deductions/expenses incurred by the AMC to
manage the fund, in turn lower the invested amount gets allocated for purchase of the scheme units.

e. Average Credit Rating

Franklin India Ultra HDFC Ultra Franklin India Mahindra
Short Bond Fund - Short-Term Saving Fund - Liquid Fund -
Super Institutional Fund Retail Plan Direct Plan
Plan
Average Credit
AA AAA AAA AAA
Rating
Rank 4 3 1 2
One of the major criteria considered before the selection of any scheme is the Average Credit Rating
of the underlying assets of any fund. Higher the ratings, higher with the safety factor against credit
risk and interest rate risk. From the information available from various credit rating companies, it
was found that other than Franklin India Ultra Short Bond Fund, all other schemes have AAA rating
for its underlying securities. Franklin India Saving Fund was ranked 1st since 98.9% of its securities
were ranked A1+, while lower weightages were provided in the portfolio of Mahindra Liquid Fund
and HDFC Ultra Short-Term Fund.

f. Overall Ranking

Franklin India Ultra HDFC Ultra Franklin India Mahindra

Short Bond Fund - Short-Term Saving Fund - Liquid Fund -
Super Institutional Fund Retail Plan Direct Plan
Plan
Rank 4 3 1 2
Yield to Maturity (YTM) 9.55 7.60 7.87 7.29
Average Maturity (Days) 200 161 245 58
Expense Ratio 0.42 0.30 0.31 0.12
Absolute Return in last 1 year 8.686% - 7.520% 7.576%
Average Return in last 1 month for
0.694% 0.611% 0.597% 0.541%
Fund
Average Return in last 3 months for
2.095% 1.706% 1.801% 1.630%
Fund
Average Return in last 6 months for
4.234% 3.441% 3.635% 3.287%
Fund
Average Return in last 1 year for Fund 8.647% 7.001% 7.403% 6.682%
Average Credit Rating
AA AAA AAA AAA

% of portfolio allocated to AAA/A1

19.08 92.17% 98.904% 98.46%
rated funds

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 Based on the various parameters considered like, YTM, Average Maturity, Expense Ratio,
Average Credit Rating & Average Returns over 1, 3 & 6 months, the four funds having a maturity
period of less than 1 year was ranked. The scheme selected by an investor may vary from the
recommended scheme based on their risk and return expectations.

3.3.3 INTERVAL FUNDS

An Interval Fund by design is a mix of both an open-ended and closed-ended fund. Such funds allow
you to subscribe or sell the units only during pre-decided time periods, during other periods they act
like closed-ended funds. The transaction period is open for a minimum period of 2 days and there
should be a minimum gap of 15 days between two successive open periods. In order to provide an
easy exit option to investors, Interval funds are listed in stock exchanges similar to closed-ended
funds. Most of the interval funds are debt-oriented funds, making it suitable for the person with a
low-risk appetite who will be compensated with low returns.

Since most of the interval funds are income funds they are taxed like debt funds if it is equity-based
(investing 65% or more in equity) fund they will be taxed as the equity fund. If the investor continues
to hold and carry on the complete investment for three years, it will be treated as a long-term capital
gain for taxation and taxed at 20% with indexation benefit. Upon withdraw of investments any time
before three years, it will be treated as short-term capital gain and the gains would be added to your
income and are taxed at the marginal rate of tax.

3.3.3.1 SWOT Analysis

a. Strengths
o Higher returns
o Returns are taxed at 20% if held for more than 3 years and they enjoy indexation benefit
o It is maintained by the professional fund manager, well diversified and are less riskier than
NCDs directly
b. Weakness
o Investment cannot be deducted under 80C for Tax benefit
o Open for transaction only for a specific period. Even though funds are listed they have
less liquidity due to less market participation.
c. Opportunity
o If the interest rate in the market goes higher they can get higher returns

3.3.3.2 Basic Differences Between Interval Funds & FDs

Fixed Deposits Interval Funds

There is credit risk involved since the fund house invests the
Unsecured against the assets of
money in bonds or debentures. Credit ratings are used to
the bank or corporate
measure the risk
Returns are fixed, and investor
knows when he invests his Returns depend on the returns of the underlying instruments
money
Exit route (especially early
They are open for the transaction for a certain period where
withdrawal) is available with
user can enter or exit from the scheme. Funds are also listed
some penalty for premature
in stock exchanges, which will help the investor to enter or exit
withdrawal of money

76
 from his investment when the fund is not open for
transactions
Interest earned don’t enjoy
Interest earned enjoys indexation benefit if invested for more
indexation benefit and are taxed
than 3 years, with a tax rate of 20%
as per the marginal rate of tax
Interest earned (if more than Rs.
10,000) on corporate deposits No TDS deduction for FMPs since they are in Demat form
has TDS
Investment If held for a tenure of
more than 5 years they get a tax Investment amount doesn’t enjoy tax exemption.
deduction as per 80C.
Deposit Insurance and Credit These are not insured. But are secured against the company
Guarantee Corporation insures assets for debentures and guarantee from the government in
bank FDs (up to Rs. 1 lakh). case of bonds which are underlying assets.
There is some amount of default risk involved since the fund
There is no risk of default. Even
manager invests in NCDs and bonds. But the risk is minimized
though there is some default the
by diversifying the investment across companies of different
investment insured as per the
sectors.
We cannot sell FD in the market.
FDs enjoy more liquidity than All Interval funds are listed in the market. Liquidity depends
NCDs Since it can be liquidated by on the demand in the market. They can also be sold during the
paying a penalty interest to the open period
bank
No interest risks. Interest rate is Interest rates depend on the returns of the underlying assets.
fixed when the investment is It may be lesser than the indicated returns because of default
made. risk involved in the investments

3.3.3.3 Performance analysis of different Interval funds:

Reliance UTI Fixed

Yearly IDFC Yearly Interval Aditya Birla UTI Fixed
Interval Fund Series Income Fund - Sun Life Income
– Series 1 Interval Fund Annual Interval Interval Fund
– Series II Interval Fund Income Fund - - Annual
– IV Quarterly Interval Plan -
Fund Name -> Plan - Series 1 Series1
Absolute Return
in last 1 year 8.370% 8.330% 6.600% 7.380% 7.920%
Annualized
Returns over
last 3 years 7.350% 7.350% 7.180% 6.940% 7.610%
Annualized
Returns over
last 5 years 12.733% 7.950% 7.830% 7.280% 8.060%
SD of Fund 0.590 0.590 0.370 0.510 0.490
Beta (β) of the
Fund 0.330 0.320 0.130 0.530 0.270
Treynor's Ratio 0.030 0.030 0.060 0.010 0.040
Sharpe Ratio 1.450 1.490 2.180 1.020 2.270
Jensen Ratio 0.53 0.56 0.69 0.12 0.84

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Recommendations:

 We can see that Reliance Yearly Interval Fund - Series 1 provided the highest returns in the
past 1,3 and 5 years. But it is having the highest volatility among all the funds. It has provided
average risk-adjusted returns measured by Sharpe ratio and Treynor’s ratio. The investor
who is aggressive but wants to invest in debt products can invest in this fund since it has a
higher beta and provided higher returns.
 UTI Fixed Income Interval Fund - Annual Interval Plan - Series1 has provided average returns
in this category over past 1,3 and 5 years. But it is having moderate volatility and beta. It is
having the highest Sharpe ratio and second-best Jensen ratio indicating a higher risk-
adjusted return. It also scores the second rank in terms of lower volatility. An investor who
doesn’t want to take much risk but want to get a higher return than FD instruments can opt
for the UTI Fixed Income Interval Fund - Annual Interval Plan - Series1 scheme.

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 3.4 Real Estate Investment Trust

REITs, or real estate investment trusts, are companies that own or finance income-producing real
estate in a range of property sectors. These companies have to meet a number of requirements to
qualify as REITs. Most REITs trade on major stock exchanges, and they offer a number of benefits to
investors. Most REITs have a straightforward business model: The REIT leases space and collects rents
on the properties, then distributes that income as dividends to shareholders.

The first REIT initial public offering (IPO) by Embassy Office Parks, a Bangalore-based real estate
developer backed by Blackstone Group LP, a global private equity firm, was open for investment
between March 18 and March 20th 2019.

a. The IPO was was from March 18-20 2019 with a price of Rupees 300 per unit.
b. An Investor had to Invest a minimum of 2.4 lakhs in this product
c. The REIT was oversubscribed by 180 crores which is a good sign for any growing company.
d. The projected return on investments are anywhere between 8% and 14% in the short to medium
term (post adjustment of the fund management fee), with minimum risks.
e. The Embassy Office Parks REIT planned to raise ₹4,570 crore through the IPO but managed to
raise 4750 crores.
f. THE REIT produced a Yield of 9 % on April 23,2019.

3.4.1 - Reasons why REITS can be suggested to Investors

a. Liquidity – Easy to Buy and Sell unlike traditional Real estate which takes a very long time
b. Diversification
c. Steady Dividends
d. Costs less than a buying a single property
e. Professionally Managed -A carefully selected management team handles marketing, rent
collection, tenant management, and facilities maintenance. All REIT investors must do is
collect their dividends
f. Low Volatality- REIT share prices enjoy lower volatility than equity stocks. This is because
rental income and management expenses are predictable over the short and long term.
Analysts can predict the performance of REITs more easily than they can that of equity stocks
because rental income is usually very predictable.
g. Transparency – The SEBI registered REITs are required to make regular disclosures. This
makes REIT operations more transparent to investors.

3.4.2 SWOT Analysis

a) Strengths

o Located in India, a leading services hub for global corporates

o Best-in-class office properties with high-quality infrastructure
o Highly occupied by a diversified, high quality, ‘sticky’ multinational tenant bas
o Simple business with embedded growth
o Strategically located in the top-performing markets with high barriers to entry
o Highly experienced management team
o Renowned Sponsors with global expertise and local knowledge

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b) Weakness
o Grow at a slower pace - REITs can only reinvest a maximum of 10% of their annual
profits back into their core business lines each year. This may cause some of the
REITs to grow at a slower pace than a normal company.
o Real estate is a cyclical business- Although REITs have to pay at least 90% of their
income as a dividend, their income stream isn’t guaranteed. Cyclical downturns in
the real estate market could make REITs business unstable.
o Property taxes may rise - State and municipal authorities have the right to increase
property taxes to increase their budget revenue. This reduces REITs’ earnings.

c) Opportunities
o Social Media: there has been an increase in the number of social media users
worldwide. The three social media platforms; Facebook, Twitter and Instagram,
have shown the greatest number of increase in monthly active users. Real Estate
Investment Trust Inc can use social media to promote its products, interact with
customers and collect feedback from them
o Population: the population has been growing and is expected to grow at a positive
rate for the upcoming years. This is beneficial for Real Estate Investment Trust Inc
as there will be an increase in the number of potential customers that it can target.

d) Threats
o Sensitive to Demand for Other High-Yield Assets - Generally, rising interest rates
could make Treasury securities more attractive, drawing funds away from REITs and
lowering their share prices.
o Non-Traded REIT - They are not publicly traded which means you will be unable to
do research on your investment. This, in turn, will disallow you to determine the
REIT's value. Some non-traded REITs will reveal all assets and value after 18 months
of its offering, but that’s still not comforting.
o Management Fee is very high in case of Non- traded REIT- Another con for non-
traded REITs is upfront fees. Most charge an upfront fee between 9% and 10%
(sometimes as high as 15%)
o Lesser returns because of High Management fee - If a non-traded REIT is paying an
external manager, that eats into returns. If you choose to invest in a non-traded
REIT, it’s imperative to ask management all necessary questions related to the
above risks. The more transparency the better.
o Choosing a Wrong REIT - This might sound simplistic, but it’s about logic. For
instance, suburban malls are in decline. You wouldn’t want to invest in a REIT with
exposure to a suburban mall. Trends change, so be sure to do your research on
what’s current

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 3.5 Infrastructure Investment Trusts

Infrastructure Investment Trust (InvITs) is like a mutual fund, which enables direct investment of
small amounts of money from possible individual/institutional investors in infrastructure to earn a
small portion of the income as return. InvITs work like mutual funds or real estate investment trusts
(REITs) in features. InvITs can be treated as the modified version of REITs designed to suit the
specific circumstances of the infrastructure sector. Interest Income is not taxable. InvITS are like
mutual funds in structure. InvITs can be established as a trust and registered with Sebi. An InvIT
consists of four elements: 1) Trustee, 2) Sponsor(s), 3) Investment Manager and 4) Project Manager.

The trustee, who inspects the performance of an InvIT is certified by Sebi and he cannot be an
associate of the sponsor or manager.

Sponsors’ are people who promote and refer to any organisation or a corporate entity with a capital
of Rs 100 crore, which establishes the InvIT and is designated as such at the time of the application
made to Sebi, and in case of PPP projects, base developer. . The sponsor(s) should collectively hold
25% in REIT for atleast 3 years.

Investment manager is an entity or limited liability partnership (LLP) or organisation that supervises
assets and investments of the InvIT and guarantees activities of the InvIT.

Project manager refers to the person who acts as the project manager and whose duty is to attain
the execution of the project and in case of PPP projects. It indicates that the entity is responsible
for such execution and accomplishment of project landmark with respect to the agreement or other
relevant project document

3.5.1 SWOT Analysis

a) Strengths

o InvITs may help in attracting international finance into Indian infrastructure sector.
o InvITs will enable the investors to hold a diversified portfolio of infrastructure assets
o InvITs are also proposed to bring higher standards of governance into infrastructure
development and management and distribution of income from assets so as to attract
investor interest.
o Investor first of all will be getting the fixed yields and also he will get an appreciation on the
units for which he invests.
o Investors will be entitled to receive 90% of the profits which the company makes as
dividends.
o Transparency - The SEBI registered Ivt Trusts are required to make regular disclosures. This
makes REIT operations more transparent to investors.
o Professionally Managed

b) Weakness
o Not suitable for small Investors as the Minimum subscription amount is 10,00,00

81
 o Investment Trusts can only reinvest a maximum of 10% of their annual profits back into their
core business lines each year. This may cause some of the REITs to grow at a slower pace
than a normal company
o Not suitable for Investors who wish to earn very high returns as it fetches anywhere between
11-12%.
c) Opportunities
o India’s real estate sector is the second largest employer in the country after agriculture and
is slated to grow at a steady pace over the next decade. At the same time, the infrastructure
sector, which includes segments such as energy, transport, water and sanitation,
communication, and social and commercial infrastructure, is the focus area for key
policymakers, banks and corporates to formulate and implement regulations. This is
expected to ensure the time-bound creation of world-class infrastructure in the country
o Global investors are looking to gain a greater a share of India’s impressive economic growth
story
d) Threats
o Economy slowdown, Earth Quake or any natural Disaster
o Other high yielding Debt instruments
o Terrorism, crime or environmental disasters pose obvious threats to such important
infrastructure

3.5.2 Comparison between various InvITs

India Grid
L&T IndInfravit Trust IRB Investment Trust
Investment Trust
No Dividend as of
Dividend No Dividend as of date No Dividend as of date
date
Interest 2.99 per share 2.2 per share 2.2 per share
Return on
1.74 per share 0.8 per share 0.8 per share
Capital
IPO Price 100 per share 102 per share 100 per share
Current share
105.65 per share 64 per share 86.3 per share
price
Mode of
Dsitribution Private Placement Public Public
of shares
Foreign Canada Pension Plan Investment Board
Investors has subscribed 30% of the units. It
invested 1014 crores in the company. It
was the first Canadian Pension fund to
invest in an Indian Infrastructure No Foreign
No Foreign subscriptions
company. subscriptions as of
as of yet
Alianz Capital Partners --- 25% of the yet
units worth $128 million. L&T IDPL ----
15% of the units.
Omera Infrastructure Management ----
22.4% of the units for 870 crores.
Has got better growth prospects with a Heavily dependent on It's performing better
Interpretation lot more foreign investments coming in Tolls. As toll collection is than IRB but not as
future unpredictable no wonder goodas L&T.

82
 the company is currently
suffering from a decline in
share price.
Ranking 1 3 2

3.6 Preference Shares

3.6.1 SWOT Analysis of Preference Shares

a) Strengths:

o Helpful in raising long term capital for a company.

o Rate of return is guaranteed
o If company doesn’t want their Investors to interfere in their management decisions and
appointment of BOD then issuing Preference shares would be advantageous.
o Shareholders get their Dividend prior to Equity Shareholders
o In addition, in the event of bankruptcy and liquidation, preferred shareholders have a higher
claim on company assets than common shareholders do. The company guarantees a
dividend each year, but if it fails to turn a profit and must shut down, preference
shareholders are compensated for their investments sooner.
o Right to repurchase shares
o Companies can also issue callable preference shares, which afford them the right to
repurchase shares at their discretion. This means that if callable shares are issued with a 6%
dividend but interest rates fall to 4%, the company can purchase any outstanding shares at
the market price and then reissue shares with a lower dividend rate, thereby reducing the
cost of capital. Of course, this same flexibility is a disadvantage to shareholders.

b) Weakness

o Investors don’t have any voting rights

o No Ownership rights
o Fixed Obligation: Dividend on preference shares has to be paid at a fixed rate and before
any dividend is paid on equity shares. The burden is greater in case of cumulative preference
shares on which accumulated arrears of dividend have to be paid.
o Low Return: When the earnings of the company are high, fixed dividend on preference
shares becomes unattractive
o Limited Appeal: Bold investors do not like preference shares. Cautious and conservative
investors prefer debentures and government securities. In order to attract sufficient
investors, a company may have to offer a higher rate of dividend on preference shares.

c) Opportunities

o Convertible Preference shareholders have got the opportunity to convert their Preference
Shares into Equity Shares
o Participating Preference Shareholders can participate in the profits of the company
o Buy backing Power provides an opportunity for the company to buy back shares when the
interest rates in market go down.
d) Threats

83
 o Major competition is from Bonds.
o From Equity also because of higher returns for a risk loving investor
o Debt is a much safer instrument to invest making it a tough competitor
o Fluctuating Interest rates in the market especially when the interest rate goes down.

L&T Finance Holdings Limited Rajvir Industries Limited Nirma Limited

Non convertible non
Cumulative Compulsary cumulative redeemable
redeemable Non convertible Cumulative fully redeemable Preference share preference shares
Preference share
AAA by Care CRISIL D CRISIL AA-
100 100 1
8% 12% 6.00%
12-Oct-18 17-10-2011 31-03-2013
12-Oct-21 16-10-2016 30-03-2018

CRISIL has been consistently following up with

Has L&T one of the best
Infrastructure development
company
is the parent company. Has got
great prospects for
future growth and has been given
AAA rating by Care
which is an exceptional degree of
creditworthiness
because the issue can easily meet
its financial commitments
Rajvir Industries Limited (RIL) for obtaining
information through emails and letters dated
June 30, 2017 and August 10, 2017 among others,
apart from telephonic communication. However,
the issuer has remained non cooperative. The
The company is offering
investors, lenders and all other market
a 6% dividend which is
participants should exercise due caution while
really less. A person can
using the rating assigned/reviewed with the
rather go and invest in
suffix 'ISSUER NOT COOPERATING'. These ratings
an F.D and earn a higher
lack a forward looking component as it is arrived
interest. It's credit rating
at without any management interaction and is
is also not as good as
based on best available or limited or dated
L&T.
information on the company.'
CRISIL reaffirms the rating at 'CRISIL D/CRISIL D'
due to delays in servicing debt. The delays are
due to weakening
of the liquidity with its depressed cash accrual
not being sufficient to meet its debt obligation.

84