Fixed Income Securities for Retail Investors 280710

8/8/2019 Fixed Income Securities for Retail Investors 280710

1/44

FIXED INCOME SECURITIES


2/44


3/44

BANK FIXED DEPOSITS

Subject to control by RBI

Banks free to offer varying interests

Consider the inflation rate & the Interest rate

before investing in a Fixed Deposit

Advantages of having an FD

How to Apply

Tax on Bank Fixed Deposits


4/44

INTEREST RATES FOR

FIXED DEPOSITSDuration Interest Rate (% p.a.)

15-30 days 4-5%

30-45 days 4.25-5%

46-90 days 4.75-5.5%

91-180 days 5.5-6.5%

181-365 days 5.75-6.5%

1-2 years 6-8 %

2-3 years 6.25-8 %

3-5 years 6.75-8%


5/44

GOVERNMENT BONDS

Issued by RBI on behalf ofGovernment

Purpose Government spending

Foreign currencies are called Euro bonds

Bonds are almost risk free


6/44

GOVERNMENT BONDS

Categorized on basis of maturity: -

a) Government Bills/Treasury Bills less

than 1 year

b) Short Term Bonds 1 year to 10 year

c) Long Term Bonds more than 10 year


7/44

PLAYERS IN THE

BOND MARKET

Issuers banks as well as government

Underwriters Investment banks and institution

that are leaders in investing business.

Investors Banks, Corporations and individual

investors


8/44

FACTORS AFFECTING

BOND PRICES

Interest rate

Inflation

Financial health of the issuer


9/44

DURATION

Macaulay Duration

Modified Duration

Effective Duration

Portfolio Duration


10/44

HOW DO GOVERNMENT

BONDS WORK

Minimum Investment Rs. 10,000 and in

multiples of Rs. 10,000

Maturity 1 to 30 years

Acquired at par, premium or discount value

redeemed at face value

Auction carried out by RBI

Interest paid biannually or annually


11/44

HOW DO GOVERNMENT

BONDS WORK

Investments made through primary dealers

and banks

Entire principal amount is received on

maturity date

Traded in secondary markets and thus are

liquid

Can realize profit if prevailing interest rates

falls below coupon rate after bond is issued


12/44

RISK AND RETURNS

Returns:

CapitalG

ains when bought at discount

Capital Loss when bought at premium

Risks:

Interest Rate Risks Bonds and Interest

rates share inverse relationship


13/44

Benefits ofGovt Bonds

a) Regulated

b) Safer than investing in stock market

c) Negligible credit risk

Dangers ofGovt Bonds

a) Fluctuation in foreign currency market (EuroBonds)

b) Inflation

c) Yield lower returns than corporate bonds or

equities

BENEFITS AND DANGERS


14/44

TAX-FREE

INFRASTRUCTUREB

ONDS

Issued by NBFCs

Classified as Infrastructure Finance Companies byRBI and 3 Financial Institutions - IFCI, LIC &

IDFC

Tax incentive over 1 lakh available under sec 80C

However, Tax Deduction only up to Rs. 20,000

Minimum Tenure 10 years and Lock-in Period of

5 years


15/44

MONEY MARKETS

Short and Ultra Short term instruments

Highly liquid

Safe place

Usually Large Institutions trade


16/44

MONEY MARKET

INSTRUMENTS

Treasury Bills

ommercial aper

erti icate o eposit


17/44

TREASURY BILLS

Short Term requirements of the Govt

Issued at a discount

No TDS

Approved for SLR

Tenure 91 days, 182 days & 364 days

Minimum Investment Rs. 25,000


18/44

COMMERCIAL PAPER

Issued by Corporates and Financial Institutions

Unsecured

Maturity 15 days to 365 days

Issued at discount

Low cost alternative to Bank Loans

Minimum Investment Rs. 5 lacs


19/44

CERTIFICATE OF DEPOSITS

Introduced in 1989

Issued by Scheduled Financial Banks

Unsecured

Issued at a discount

Maturity 7 days to 365 days

Minimum Investment 1 lac


20/44

FIXED MATURITY

PLANS Close ended funds

Comes with various Maturities

Exchange Traded

No redemption before maturity

Liquidity & credit risk

Taxation


21/44

NON CONVERTIBLE

DEB

ENTURES (NCD)

A debt instrument, like a fixed deposit (FD),

usually issued by a company

After the period gets over, you get back your

principal amount

NCDs are issued by a corporate (including

NB

FCs) with original or initial maturity up to 1year

Issued by way of private placement

NCDs cannot be converted to shares


22/44

EMPLOYEE PROVIDENT

FUND

Both the employees and employer contribute

to the fund

The rate is 12% of the basic wages, dearness

allowance and retaining allowance, if any,

payable to employees per month.

8% Interest

Withdrawal of the amount


23/44

POSTAL SCHEMES

5 Year Post Office Recurring Deposits

Post Office Time Deposits

Post Office Monthly Income Account

15 Year PPF Account

Kisan Vikas Patra (KVP)

National Savings Certificate (NSC)

Senior Citizen Savings Scheme


24/44

5 YEAR POST OFFICE

RECURRING

DEPOSITS

Interest 7.5% compounded quarterly

Minimum Investment Rs. 10 per month

One withdrawal up to 50% of balance after 1

year

Investment of Rs. 10 every month Rs. 729 atthe end of 5 years

Pre-mature closure allowed after 3 years

Interest Income Taxable


25/44

POST OFFICE TIME

DEPOSITS

Minimum Investment of Rs. 200

Investments in this Scheme qualify for the

benefit of Section 80C of the IT Act

Tenure Interest

1 Year 6.25%

2 Years 6.50%

3 Years 7.25%

5 Years 7.50%


26/44

MONTHLY INCOME

ACCOUNT Interest 8% per annum

Rs. 80 paid every month on an investment of Rs.

12,000 Maturity 6 years

5% bonus on Maturity

Minimum Invest Rs. 1500

Maximum Investment Rs. 3 lacs for Singleaccount and 6 lacs for Joint account

Premature Encashment allowed at a discount


27/44

15 YEARS PUBLIC

PROVIDENT FUND Interest 8% compounded annually

Minimum Investment Rs. 500 per year

Maximum Investment Rs. 70,000 per year

Deposits Qualify for deduction under section

80C

Deposits exempted from Wealth Tax

Interest earned in completely Tax Free

Loan Facility available

Withdrawal is permissible after 7th financial year


28/44

KISAN VIKAS PATRA

(KVP)

Rate of Interest 8.4% compounded yearly

No Limit on Investments

Money Doubles in 8 Years and 7 Months

Interest Earned is taxable

Minimum Investments Rs. 100


29/44


30/44

SENIOR CITIZENS

SAVINGS SCHEME

Interest 9% per annum

Interest paid quarterly

Minimum Investment Rs. 1000

Maturity Period 5 years

Premature closure

Account can be extended for further 3 years


31/44

NEW PENSION SCHEME

Methodology

Authorities involved

Eligible persons

Fund deposit option

Fees & Charges Fund investment options

Risk profile investments


32/44

DEBT FUNDS

An Investment pool

Short term as well as long term funds

Investments in debt securities

Capital preservation

Lower costs as compared to equity mutual funds


33/44

FIXED RATE FUNDS

Investments in fixed rate securities

Fixed income & fixed maturity

Higher risk when interest rates are

volatile


34/44

FLOATING RATE FUNDS

Investments in floating rate debt securities

Reference rate + spread

Short term as well as long term

funds/investments

Reduced risk


35/44

Why should one look at these funds

Less volatility

When to opt for floating rate funds

Interest rates are set to rise

How to select floating rate funds

Long term floating rate funds are better

Performance

highest credit rating

low expense ratio

FLOATING RATE FUNDS


36/44

DIVERSIFIED DEBT

FUNDS

Investments in all kinds of Debt Securities

Bonds

Corporate Debentures

Treasury Bills

Diversification results in risk reduction


37/44

SHORT TERM DEBT

FUNDS

Three basic attributes: Liquidity, Capital

Preservation & Income

Small Allocation to Gilt

Higher to Corporate Bonds & Money Market

Instruments

Maturity of 3 - 6 months


38/44

GILT FUNDS

Stick to high quality, low risk debt

Highly liquid

No credit risk

Vulnerable to interest rate risks


39/44

MONEY MARKET

FUNDS

Open ended Mutual funds & short term debt

securities, relatively risk free

Objectives

High Liquidity & high quality

Types of money market funds


40/44

INCOME FUNDS

Emphasis on regular income rather than

capital appreciation

Investments in government, corporate bonds,

money market instruments & T-Bills

Investment in medium & long term debt

instruments


41/44

HIGH YIELD DEBT

FUNDS

Meaning

High risk, high return

Low credit rating debt instruments

Also known as JunkBond Funds


42/44

CREDIT RATING

Criterion:

Risk Return Analysis

Mean Return and Volatility

Asset Quality

Average Maturity

Portfolio Concentration


43/44

GROUP MEMBERS

Akshaya Gupta 4

Dhruv Almaula 5

Divesh Mehta 75

Deepa Pillai - 97

Preethi Shetty - 109


44/44

THANK YOU!!!

Documents

Fixed Income Securities for Retail Investors 280710