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Investment FAQs

Investment FAQs

  • Who are investors in the Indian Debt Market?

    The institutional investors who invest in the Indian Debt Market are:

    • Banks
    • Insurance Companies
    • Provident Funds
    • Mutual Funds
    • Trusts
    • Corporate Treasuries
    • Fixed Deposits
    • Foreign Investors
    • Primary Dealers (Retail participation allowed, though currently muted)

    Retail investors are allowed to invest in select issuances though their participation is in evolving phase.

  • Who Regulates Indian G-secs and Debt Market?

    Money Market and Government Securities markets are regulated by the Reserve Bank of India (RBI). Whereas, other fixed income instruments (PSU bonds, Non-Convertible Debentures, etc.) are regulated by both, RBI and SEBI (Securities and Exchange Board of India).

  • What is yield to maturity (YTM)?

    Yield to Maturity

    The Yield to maturity (YTM) is the internal rate of return earned by an investor assuming that the bond will be held until maturity, and that all coupon and principal payments will be made on schedule. It basically measures the total income earned by the investor over the entire life of the security.

    This total income consists of three components:

    • Coupon income: The fixed rate of return that accrues from the instrument.
    • Interest-on-interest at the coupon rate: Compound interest earned on the coupon income.
    • Capital gains/losses: The profit or loss arising at redemption/maturity of the security. (Difference between the purchase price and the proceeds received on redemption/maturity).
  • What are the Open Market Operations (OMOs)?

    OMOs is a tool used by the Reserve Bank of India to adjust the rupee liquidity conditions in the market. When the RBI feels there is excess liquidity in the market, it resorts to sale of securities thereby sucking out the rupee liquidity. Similarly, when the liquidity conditions are tight, the RBI will buy securities from the market, thereby releasing liquidity into the market.

  • What does the credit rating for bonds mean?

    Various credit rating agencies evaluate the credit worthiness of entities issuing debt instruments. This rating helps investors to make an informed decision before investing in any debt instrument.

    The rating is given as an alphanumeric code that represents a graded structure or creditworthiness. Private independent rating services such as CRISIL, ICRA, CARE, and FITCH provide these evaluations.
    Few ratings and their implications:

    AAA Rating Highest credit rating Implies a high credit quality and a small chance of default
    D (for default) Lowest credit rating Implies a very risky investment
  • What are the different types of instruments in fixed income?

    Few of the common fixed income instruments are:

    • Government Securities (G-secs)
    • State Development Loans (SDLs)
    • Corporate Bonds
    • Treasury Bills
    • Commercial Paper
    • Certificate of Deposits
    • Fixed Deposits
    • Inflation Indexed Bonds
  • What are fixed income securities?

    A fixed income security is issued by Government, corporates or other entities. The security represents a loan that is offered by an investor to an entity. As the name suggests, a fixed income security offers fixed periodic interest (known as coupon payment) to the investor.

  • How does the trading in Government securities (G-secs) take place?

    There is an active secondary market (for purchasing securities from other investors) in G-secs. The securities can be bought / sold by investors in the secondary market either:

    1. Over the Counter (OTC) or
    2. Through the Negotiated Dealing System-Order Matching (NDS-OM).
  • What factors determine interest rates?

    Few of the factors which govern interest rates are:

    • Monetary Stance of RBI
    • Inflation Rate
    • Liquidity in the Banking system
    • Government Borrowings
    • Corporate Borrowing Requirements
    • Global Interest Rates
    • Stability of Currency Markets
  • What is a yield curve?

    A yield curve is a line that plots the interest rates on Y-axis and maturity dates on X-axis. The shape of the yield curve gives an idea of future interest rate change and economic activity.

    Type of Yield CurveFeatureImplication
    Normal Longer maturity bonds have a higher yield compared to shorter-term bonds Risks associated with time
    Inverted Shorter-term yields are higher than the longer-term yields A sign of upcoming recession
    Flat (or humped) Shorter- and longer-term yields are very close to each other A predictor of an economic transition
  • What is accrued interest on a bond?

    The accrued interest on a bond is the amount of interest accumulated on a bond since the last coupon payment (interest payment). The interest has been earned, but because coupons are paid only on coupon dates, the investor has not gained the money yet. In India, day count convention for G-secs is 30/360.

  • What is Duration?

    Duration is the payback period of a bond to break even, i.e., the time taken for a bond to repay its own purchase price. Duration is expressed in number of years. Duration is useful primarily as a measure of the sensitivity of a bond's market price to interest rate (i.e., yield) movements. It is approximately equal to the percentage change in price for a given change in yield.

  • What is Liquidity Adjustment Facility (LAF)?

    LAF is offered by RBI to scheduled commercial banks and primary dealers for liquidity management on a day to day basis. Under LAF, these banks and dealers can approach RBI:

    • For funds in case of requirement, or
    • Park excess funds when not required

    This facility is available on an overnight basis, against the collateral of Government securities including State Government securities.

  • Why invest in fixed income securities?

    Fixed income investments are a secure and low-risk way to generate a steady flow of income. Investment in fixed income securities should be an important part of a well-diversified portfolio.

  • How is yield related to price?

    If interest rates or market yields decline, the price of a bond rises. Conversely, if interest rates or market yields rise, the price of the bond falls. In other words, the yield of a bond is inversely related to its price.