Subject – construct a conservative debt portfolio of rs 10 lacs
and using the laddering frequency every 3 to 5 years
1) Introduction about the debt market - The
bond market—often called the debt market,
fixed-income market, or credit market—is the
collective name given to all trades and issues
of debt securities. Governments typically
issue bonds in order to raise capital to pay
down debts or fund infrastructural
improvements. Publicly-traded companies
issue bonds when they need to finance
business expansion projects or maintain
ongoing operations.
The bond market is broadly segmented into two different
silos: the primary market and the secondary market. The
primary market is frequently referred to as the "new
issues" market in which transactions strictly occur
directly between the bond issuers and the bond buyers. In
essence, the primary market yields the creation of brand
new debt securities that have not previously been offered
to the public.
In the secondary market, securities that have already
been sold in the primary market are then bought and sold
at later dates. Investors can purchase these bonds from a
broker, who acts as an intermediary between the buying
and selling parties. These secondary market issues may
be packaged in the form of pension funds, mutual funds,
and life insurance polices—among many other product
structures.
2) Types of bond market - The general bond
market can be segmented into the following
bond classifications, each with its own set of
attributes.
a) Corporate Bonds -
Companies issue corporate bonds to raise money for a
sundry of reasons, such as financing current operations,
expanding product lines, or opening up new
manufacturing facilities. Corporate bonds usually
describe longer-term debt instruments that provide a
maturity of at least one year.
b)government bond -National-issued government bonds
(or Treasuries) entice buyers by paying out the face value
listed on the bond certificate, on the agreed maturity
date, while also issuing periodic interest payments along
the way. This characteristic makes government bonds
attractive to conservative investors.
c) Municipal Bonds -
Municipal bonds—commonly abbreviated as "muni"
bonds—are locally issued by states, cities, special-
purpose districts, public utility districts, school districts,
publicly-owned airports and seaports, and other
government-owned entities who seek to raise cash to
fund various projects.
d) Mortgage-Backed Bonds -
These issues, which consist of pooled mortgages on real
estate properties, are locked in by the pledge of particular
collateralized assets. They pay monthly, quarterly, or
semi-annual interest.
e) Emerging Market Bonds -
Issued by governments and companies located in
emerging market economies, these bonds provide much
greater growth opportunities, but also greater risk, than
domestic or developed bond markets
Key points – 1) debt are catogorised by bond as well as
debenture
2)bond are issued by govt such as PSU central and state
govt
3)corporate organization issued the corporate bond for
raising funds
4)debt market catogrised by wholesale debt market and
retail debt market
3) valuation of bonds –
Example – government issued the bond for 1 year
Par value is 100000
Coupon rate is 10 %
Redemption date after 1 years at par
Required rate of return = 12%
Answer – a investor want to earn 12 %.at present ,the
market value of the bond is 95000. Are we find the
overvalued or undervalued ?.
Int = 10000
Redemption amt = 100000
IV0 = cash flow / (1+r)n
IVO = 110000/ (1+0.12)1
IVO = 98214
When IVO > MVO it means that the bond are
undervalued in the market and it should be purchased.
YTM = 110000 – 95000/95000 *100
Ytm = 15.79 %
RRR < YTM.
4) advantage of band market in india -The biggest advantage
of investing in Indian debt market is its assured returns. The
returns that the market offer is almost risk-free (though there
is always certain amount of risks, however the trend says that
return is almost assured). Safer are the government securities.
On the other hand, there are certain amounts of risks in the
corporate, FI and PSU debt instruments. However, investors
can take help from the credit rating agencies which rate those
debt instruments. The interest in the instruments may vary
depending upon the ratings.
Another advantage of investing in India debt market is its high
liquidity. Banks offer easy loans to the investors against
government securities.
5) disadvantage of bond market in india - As there are several
advantages of investing in India debt market, there are certain
disadvantages as well. As the returns here are risk free, those
are not as high as the equities market at the same time. So, at
one hand you are getting assured returns, but on the other
hand, you are getting less return at the same time.
Retail participation is also very less here, though increased
recently. There are also some issues of liquidity and price
discovery as the retail debt market is not yet quite well
developed.
There are various bond investment strategy –
1) laddering -A bond ladder is an investment strategy that
involves constructing a portfolio in which bonds or other
fixed income securities mature continuously at equally spaced
intervals. As the bonds closest to maturity expire, the
investments are rolled over to the end. This keeps the
investor’s position of holding bonds with equally spaced
maturities. This strategy is used to attain higher average yields
while reducing liquidity and interest rate risk. The bond ladder
strategy can be constructed with various fixed income
instruments. For example, they can be created using corporate
bonds, certificates of deposits, treasury notes, etc. A single
bond ladder may use various securities at a time to meet its
purpose.To create this portfolio strategy an investor must
decide how much they can invest, how far into the future they
will invest, and how far apart to space the maturities. The
more liquidity an investor wants the closer the maturities
should be to each other. This will ensure steady streams of
cash from the maturing bonds but also means the investor may
not take advantage of higher yields from longer
maturities.Once the investor has made this decision, they will
split their investable money into equal portions and buy fixed
income securities that mature at equally spaced intervals. For
example, let us take an investor who has $40,000 to invest and
wants the maturities to be one year apart over a 4 year period.
They will buy $10,000 worth of fixed income securities one
year apart from each other.When the 1-year bonds mature,
they will roll the investment over into bonds with a 4-year
maturity. This will keep the investor’s ladder position. At year
two, the bonds with a 2-year maturity will expire. These again
will be rolled over into bonds with a 4-year maturity. This is
repeated each year until the investor is holding a portfolio of
all 4-year maturity bonds that expire regularly one year apart.
To better visualize this strategy the below graphic illustrates
this process.
Above you can see that the bonds being held with maturities
one year apart make up the rungs of the ladder. At any point
in time, the investor will be holding a portfolio of 4 x $10,000
= $40,000 in bonds that will mature equally one year apart. As
time goes on and the bonds mature, the investments will be
rolled over. After four years, the investor will be holding all
4-year maturity bonds that will expire one year apart. This
process can be repeated indefinitely.
Advantage of bond laddering -This strategy is used for a
number of reasons - The main advantage of laddering is that
an investor will take advantage of fixed income securities
with longer maturities and in most cases higher yields.
However, instead of locking into a long-term fixed income
instrument and losing liquidity, the bond ladder ensures some
liquidity since bonds will always be reaching maturity no later
than the spaced intervals of the ladder.Another advantage of
using bond laddering is the reduction of interest rate risk.
Longer-term bonds are more susceptible to a changing interest
rate. With a ladder strategy, you constantly have bonds
maturing, so if interest rates were to rise these bonds can be
rolled over and reinvested at the new market rate.This strategy
is also good because it adds diversity to the investor’s
portfolio. Not only does this strategy involve staggering
maturities, but it can also incorporate different types of fixed
incomes with different ratings. For example, some of the
bonds may be highly rated, while some can be lower rated
with higher yields.
Disadvantage of bond laddering -lthough there are many
advantages of using a bond ladder, there are also potential
downsides. One being that you may be forced to invest in
lower interest rates depending on how interest rates move at
the time of your bonds expiring.This strategy is meant to
retain a reasonable amount of liquidity however some
liquidity is lost and if immediate funds are necessary, parts of
an investor’s portfolio may need to be sold off. If interest rates
are rising, this would mean a loss for the investor.Bond
laddering also involves multiple transactions. If these
transactions are set up through a broker, the fees of entering
into all these contracts can add up.
2) barbell strategy -he barbell strategy involves investors
purchasing short-term and long-term bonds, but not
intermediate-term bonds. The particular distribution on the
two extreme ends of the maturity timeline creates a barbell
shape. The strategy offers investors exposure to high yielding
bonds with limited risk.
3)Bullet stategy -If an investor knows that he or she will need
a certain amount of capital at a given point in time in the
future, then a bullet investment strategy might be the best way
to go. This strategy suggests that an investor stagger purchase
dates on bonds that all mature at the same time.By staggering
the purchase of bonds, investors can more efficiently seek out
securities that have more attractive interest rates. And since all
of the bonds have the same maturity date, investors are able to
receive a potentially more attractive inflow. However,
because the investor is staggering the purchase of the bonds, it
can lead to a risk that interest rates will fall over the bond
purchasing period. Keeping a close eye on the interest rate
environment is key to successfully following this strategy.
6) debt market management strategy -
a)conservative approach -: It is mostly used by the people
who don’t want to take more risk they are conservative
towards their investment. Such investors are satisfied with
low risk low return scheme. It is mostly used by Old age
group investors.Conservative investing is an investing
strategy that prioritizes the preservation of capital over market
returns. Conservative investing seeks to protect an investment
portfolio’s value by investing in lower-risk securities such as
fixed income and moneymarket securities.Conservative
investors have risk tolerance ranging from low to moderate.
As such, aconservative investment portfolio will have a large
amount of low risk, fixed incomeinvestment. Although a
conservative investing strategy may protect against inflation,it
may not earn significant returns over time when compared to
more aggressive .we are using this strategy as follow.
b)balanced approach
c)growth approach
d)aggressive growth approach
7) I explain the various concept in debt market –
a) YTM - Yield to maturity (YTM) is the total return
anticipated on a bond if the bond is held until it matures.
b)coupon rate -A coupon rate is the yield paid by a fixed-
income security; a fixed-income security's coupon rate is
simply just the annual coupon payments paid by the issuer
relative to the bond's face or par value.
I will show my portfolio as follow -:
1)long duration govt bond
Bond name Credit rating maturity returns
7.26 GOI Sovereign 9 years 7.26%
2029
9.15 GOI Sovereign 4 years 9.15%
2024
6.79 GOI Sovereign 7 years 6.79%
2027
9.15 GOI Sovereign 4 years 9.15%
2024
7.59 GOI Sovereign 6 years 7.59%
2026
7.57 GOI Sovereign 13 years 7.57%
2033
Total investment RS
300000
2)short duration bond
Bond name Credit maturity returns
rating
HOUSING CRISI 2021 7.06%
DEVELOPMENT L
FINANCE AAA
CORPORATION LTD
RELIANCE CRISI 2023 7.05%
INDUSTRIES L
LIMITED AAA
RURAL CRISI 2022 8.83%
ELECTRIFICATION L
CORPORATION AAA
LIMITED
STATE BANK OF CRISI 2022 8.15%
INDIA L
AAA
BAJAJ FINANCE CRISI 2023 7.10%
LIMITED L
AAA
Total
investment RS 600000
3)ultra short term bond
Bond name Credit rating maturity returns
HDFC CRISIL AAA 6 months 5.5%
JSW steel CRISIL AAA 5 months 6%
limited
Total investment RS 100000
conservative approach
10%
60%
long term fund short term fund ultra short term f
I am 300000 invested in long term government debt fund as
well as 600000 in short term fund and 100000 in ultra short
term fund.conservation approach all about the less risk and
small risk.
Laddering
I am investing 20 lacs in bond portfolio for 10 years.in this
portfolio , I am using laddering concept.this technique give
regular interval returns as well as reducing the interest
risk.firstly, I invested rs 1000000 in different types of g_sec
bonds.remaining rs 1000000 invested in different types of
corporate bonds again this reinvested .i will show the portfolio
as follow -:
Bond name Maturity Returns %
date
6.30 % GOI BOND 2023 2023 6.30%
8.30 % FERTILIZER BOND 2023 8.30%
2023
8.01 % GOI BOND 2023 2023 8.01%
(SPL OIL CO'S BOND)
6.65 % GOI BOND 2023 2023 6.65%
U.P. POWER 2025 9.75%
CORPORATION LIMITED
ONGC PETRO ADDITIONS 2025 8.83%
LIMITED
CREDILA FINANCIAL 2025 9.30%
SERVICES PRIVATE
LIMITED
6.13 % GOI BOND 2028 2028 6.13%
6.01 % GOI BOND 2028 2028 6.01%
8.60 % GOI BOND 2028 2028 8.60%
7.17 GOI BOND 2028 2028 7.17%
AHMEDABAD MALIYA 2030 8.60%
TOLLWAY LIMITED
REC LIMITED 2030 7.79%
INDIAN RAILWAY 2030 7.08%
FINANCE CORPORATION
LTD
NDIAN RENEWABLE 2030 7.74%
ENERGY DEVELOPMENT
AGENCY LIMITED
NHPC LIMITED 2030 7.13%
In the above diagram,I am invested rs 1000000 in G-sec such
as 6.30 % GOI BOND 2023 ,8.30 % FERTILIZER BOND
2023 ,8.01 % GOI BOND 2023 (SPL OIL CO'S BOND), and
6.65 % GOI BOND 2023 in 2020 as well as another rs
1000000 invested in corporate bond such as U.P. POWER
CORPORATION LIMITED,ONGC PETRO ADDITIONS
LIMITED and
CREDILA FINANCIAL SERVICES PRIVATE LIMITED in
2020.i will complete Rs 2000000 invested in G-sec and
corporate bond. The G -sec bond will be matured in 2023 after
the maturity principal amt again reinvested in various G-sec
such as 6.13 % GOI BOND 2028,6.01 % GOI BOND
2028,8.60 % GOI BOND 2028,7.17 GOI BOND 2028 for the
maturity 2028. the yield from previous G-sec kept aside.other
rs 1000000 corporate bond will matured in 2025 after that the
principal amt again reinvested in various bond such as
AHMEDABAD MALIYA TOLLWAY LIMITED,REC
LIMITED,INDIAN RAILWAY FINANCE CORPORATION
LTD,NDIAN RENEWABLE ENERGY DEVELOPMENT
AGENCY LIMITED,NHPC LIMITED etc for the maturity
2030. The yield getting from the previous corporate bond kept
aside.this create continuous regular interval liquidity in
2023,2025,2028,2030.this laderring approach reducing the int
risk and make the diversified portfolio .what I do in
laddering ? in simple you buying the bond after the maturity
you reinvest in another bond it create continuous liquidity as
wll as continuous yield.
THANK YOU
