CFP- Level-1-IP (Global) Chapter 1-6 (India Specific)

Bond market ecosystem in India and Participants • Some of the participants have dual roles as Issuer of debt instruments and investor and some have a single role as either Issuer or investor. • The Central Government is the largest Issuer of bonds in India and has a singular role. • The State Governments also have a singular role as Issuer. • Banks are the largest investor in Government Securities (G-Secs), and also invest in instruments issued by the private sector. • Insurance sector is a large investor, led by LIC. • Mutual Funds are significant investors in instruments issued by private sector and banks and to a limited extent in G-Secs. • Corporate treasuries play a dual role as both Issuer and investors. • When in need of resources, corporate issue instruments: long term (bonds / debentures) or short term (commercial papers). • Foreign Institutional Investors (FIIs) or Foreign Portfolio Investors (FPIs) have a limited role in our market than would be perceived, due to limits on investment put by regulators as well as their perception about India. Friday, 15 July 2022 Investment Planning & Asset Management

• Role of the debt market • The role of the debt market is channelizing the resources from the savers to the borrowers mentioned above. • The savers are ultimately individuals or households with surplus to be saved / invested. However, the drops have to be added to make the ocean • Intermediation Banks Insurance companies Mutual Funds PFs Corporate treasuries Friday, 15 July 2022 Investment Planning & Asset Management

Government Debt Market Types of Instruments • Government Security (G-Sec) • Treasury Bills (T-bills) • Cash Management Bills (CMBs)  In 2010, Government of India, in consultation with RBI introduced a new short-term instrument, known as Cash Management Bills (CMBs), to meet the temporary mismatches in the cash flow.  The CMBs have the generic character of T-bills but are issued for maturities less than 91 days • Sub-types of G-Secs • i) Fixed Rate Bonds • ii) Floating Rate Bonds • iii) Special Securities:  Under the market borrowing program, the Government of India also issues, from time to time, special securities to entities like Oil Marketing Companies, Fertilizer Companies, the Food Corporation of India, etc. (popularly called oil bonds, fertiliser bonds and food bonds respectively) as compensation to these companies in lieu of cash subsidies.  These securities are usually long dated securities and carry a marginally higher coupon over the yield of the dated securities of comparable maturity. Friday, 15 July 2022 Investment Planning & Asset Management

Government Debt Market Types of Instruments • v) STRIPS: • Separate Trading of Registered Interest and Principal of Securities. • STRIPS are the securities created by way of separating the cash flows associated with a regular G-Sec i.e. each semi-annual coupon payment and the final principal payment to be received from the issuer, into separate securities. • They are essentially Zero Coupon Bonds (ZCBs). However, they are created out of existing securities only and unlike other securities, are not issued through auctions. • Stripped securities represent future cash flows (periodic interest and principal repayment) of an underlying coupon bearing bond. • Being G-Secs, STRIPS are eligible for SLR. All fixed coupon securities issued by Government of India, irrespective of the year of maturity, are eligible for Stripping/Reconstitution, provided that the securities are reckoned as eligible investment for the purpose of Statutory Liquidity Ratio (SLR) and the securities are transferable. Friday, 15 July 2022 Investment Planning & Asset Management

State Development Loans (SDLs) • State Governments also raise loans from the market which are called SDLs. • SDLs are dated securities issued through normal auction similar to the auctions conducted for dated securities issued by the Central Government. • Interest is serviced at half-yearly intervals and the principal is repaid on the maturity date. • Like dated securities issued by the Central Government, SDLs issued by the State Governments also qualify for SLR. • They are also eligible as collaterals for borrowing through market repo Friday, 15 July 2022 Investment Planning & Asset Management

Corporate Debt Market Key demand and supply side players • Company deposits • Bonds and debentures • Infrastructure Bonds • Inflation indexed bond • Zero-Coupon Bonds & Deep Discount Bonds • Tax-Free bonds • Masala Bonds and FCCBs (Foreign Currency Convertible Bonds Masala Bonds are rupee-denominated debt instrument issued by an Indian entity in foreign markets to raise money, in Indian currency, instead of dollars or local denomination. These are the bonds issued outside India, by an Indian entity, in Indian currency. The major objectives of Masala Bonds are to fund infrastructure projects, ignite internal growth (via borrowings) and internationalize the Indian rupee. In case of any risk, the investor must bear the loss and not the borrower. The first Masala Bonds were issued by World Bank in 2014 to fund an infrastructure project in India. Friday, 15 July 2022 Investment Planning & Asset Management

Corporate Debt Market Key demand and supply side players FCCBs are issued as a bond by an Indian company are expressed in foreign currency and the principal and interest to are payable in foreign currency. The maximum tenure of the bond is 5 years. FCCB is a quasi-debt investment, which can be converted into equity shares at the choice of investors either immediately after issue, or upon maturity or during a set period, at a predetermined strike rate or a conversion price. • Convertible Bonds Friday, 15 July 2022 Investment Planning & Asset Management

Pass through Certificates (PTCs) and Security Receipts • A Pass-Through Certificate (PTC) is a certificate that is given to an investor against certain mortgage-backed securities that lie with the issuer. • The certificate can be compared to securities (like bonds and debentures) that may be issued by banks and other companies to investors. • Investors in such instruments are usually financial institutions like banks, mutual funds, and insurance companies. • All the PTCs in the market are rated by agencies like CRISIL or Fitch ratings. • Security Receipt means a receipt or other security issued by a securitization company or reconstruction company. • The trusts shall issue Security Receipts only to QIBs and hold and administer the financial assets for the benefit of the QIBs. • They cannot be strictly characterized as debt instruments since they combine the features of both equity and debt. Friday, 15 July 2022 Investment Planning & Asset Management

Friday, 15 July 2022 Investment Planning & Asset Management

Friday, 15 July 2022 Investment Planning & Asset Management

Friday, 15 July 2022 Investment Planning & Asset Management

Evaluation • We have discussed the pros and cons of the various deployment avenues. In light of the discussion, you as a financial planner have to weigh the pros and cons, while doing the allocation for investors. • Some pointers for evaluation: • • If your objective is diversification, then debt mutual funds are better than debt instruments. If your objective is HTM to eliminate market risk and laddering, then debt instruments are better than debt funds. • • If you prefer liquidity, Bank deposits are better than FMPs. If you prefer tax efficiency, FMPs are better than Bank deposits. • • If you prefer certainty of returns, FMPs are better than open-ended debt funds. If you prefer liquidity, open-ended funds are better. • • Company deposits are recommended only if it is from a leading industrial house, as these are not on the same plane as Bank deposits. Otherwise, a debt fund of company debentures is better as it offers diversification and liquidity Friday, 15 July 2022 Investment Planning & Asset Management

• Chapter-5 Ends here Friday, 15 July 2022 Investment Planning & Asset Management

Chapter-6 Evaluation of Ecosystem and Client Sensitivity in Managing Situations • Learning Objectives • Understand some practical aspects of client sensitivities to risk and their peculiar behaviour to be so addressed for decision-making • Know about the benchmarking of portfolios and their analysis • Evaluate various parameters relevant to portfolio construction to address market risk and other risks • Understand aspects of stock analysis and various valuation methods and uses, nuances of research Friday, 15 July 2022 Investment Planning & Asset Management

Introduction • Advisors and Financial Planners face challenges to understand client sensitivities especially related to some biases. • It is important to identify them and address while dictating right behaviour toward investing and decisions in portfolio construction. • How the portfolios are administered with respect to the appropriate benchmarks and their performance evaluation are critical factors in client engagement and retention. • There are many aspects of managing portfolio beginning from analysis of economic scenario, sector and industry level evaluation of risk and return, and ultimately narrowing down to company level analysis and selection of stocks Friday, 15 July 2022 Investment Planning & Asset Management

Client Sensitivities - Some Practical Aspects Understanding Clients - Risk Averse and Risk Seeking • Risk Profiling of clients • Risk Tolerance Questionnaires - Impact of Framing • Dilution in Risk Management due to Overconfidence (Adviser/Client) • Goal setting and emotions Retail Therapy - Emotional Spending to Escape Stress • Understanding and Addressing Home Country Bias in Investing • Optimizing Diversification and Portfolio Turnover • Tendency of Chasing Past Performance • Decision-making by Clients • Benchmarking and Peer Group Analysis • Assets and Sector Allocation • Address few critical risks to Investing in Equities Friday, 15 July 2022 Investment Planning & Asset Management

Stock Analysis process • There are four different sectors in the economy • (i) Primary (raw materials), e.g., mining, and agricultural • (ii) Secondary (finished products from the primary market), e.g., manufacturing and construction • (iii) Tertiary sector (companies that provide a service to the consumer) e.g., retail and financial services • (iv) Quaternary sector (these are companies that provide intertextual and/or knowledge service). e.g., education and consulting. Friday, 15 July 2022 Investment Planning & Asset Management

Buy-side Research versus Sell-side Research • Both the buy side and sell side will, among other criteria, look at the following: • • Valuation - company valuation vs company stock price • • Growth and stability - is the earnings growing or stable? • • Financial health - the company’s balance sheet, debt obligations. • • Operations - Management’s ability to effectively manage operations to drive profit and earnings. • Each criterion on its own is not sufficient to effectively analyse the company, to determine if it is a good investment to buy, to hold or an investment that potentially may go south in which case selling will have to be considered. Friday, 15 July 2022 Investment Planning & Asset Management

Advantages of Technical Analysis • The advantages of applying technical analysis are: • Technical analysis can be used for any market or instrument that has historical price and volume data. All indicators are treated the same across these markets and instruments and therefore no new knowledge is required to do technical analysis across different markets. • • Because technical analysts believe that all information that impacts or potentially impacts market is already reflected in the price there is no need to gather information such as fundamentals to apply technical analysis. • • A clear picture of the market’s volatility and behaviour can be seen with charts, this will further enhance the investors understanding of the markets risk and behaviour than just numerical numbers. • • Exact time and entry and exit prices are provided through technical analysis. • • Being able to see clear and obvious price triggers market participants are more likely to react the same which helps create a more reliable trade. • Friday, 15 July 2022 Investment Planning & Asset Management

Fixed-income Securities and Technical Analysis • Technical analysis can be used to forecast the price movement of any tradable instrument that is affected by supply and demand and has historical data on price and volume. • This includes fixed income securities for which the most common instrument is Bonds. Because the market interest rate which is a significant factor in the value of a bond, is effectively set by governing bodies, it is therefore not subject to the behaviour of the market that Technical analysis attempts to predict. • Therefore, it would seem that technical analysis cannot be used for Bonds. However, technical analysis can be used to measure market influence directly where more than one factor can affect demand or supply in opposite directions. • For example, if rates go up, demand decreases which mean prices of bonds should decrease. If at the same time market participants choose to move into bonds because of the increase in rates this will increase demand. Friday, 15 July 2022 Investment Planning & Asset Management

Fusion Investing • The Efficient Market Theory (EMH), developed by economist Eugene Fama in 1960s, stated that prices of all securities are completely fair and reflect an asset’s intrinsic value at any given time. • A fund manager who uses passive strategies cannot be outperformed by another fund manager who uses active strategies minus the transaction costs and fund management costs. • All active management therefore would utilize to the fullest the pricing anomalies found, which the EMH negates. • “Fusion investing is a relatively new approach that attempts to integrate traditional and behavioral paradigms to create more robust investment models”. The term, fusion investing, was first presented by Lee (2003). • Bird and Casavecchia, in 2007, expanded the idea of fusion investing. They suggested three approaches to exploit price anomalies – • The ‘value approach’, • The ‘fundamental approach’ • The ‘momentum approach’. Friday, 15 July 2022 Investment Planning & Asset Management

Qualitative Evaluation of Stocks - Corporate Governance Aspect • The Indian corporates are governed by The Companies Act, 2013. • The four basic objectives of corporate governance are – disclosure, transparency, and accountability. Timely and accurate information should be disclosed on the matters like the financial position, performance. • The factors which analysts look at include: • 1. Economic Ownership and Voting Control • 2. Board of Director Representation • 3. Remuneration and Company Performance • 4. The Effect of Investors in the Company • 5. The Strength of Shareholder's Rights • 6. The Management of Long-Term Risk Friday, 15 July 2022 Investment Planning & Asset Management

• Chapter-6 Ends here Friday, 15 July 2022 Investment Planning & Asset Management

Friday, 15 July 2022 Investment Planning & Asset Management

Friday, 15 July 2022 Investment Planning & Asset Management