Monthly Investment Strategy January 2021 - Mahindra Finance
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Monthly Investment Strategy
January 2021
0
Indian Equity Markets
48,224
Indian equities hit record highs in December 80000
16,933
60000
14,537
15,750
13,179
11,356
65,239
55,595
5,493
2,250
40000
2,434
2,490
694
110
• Equity markets rose in the beginning of the 20000
INR Cr
month after the Reserve Bank of India (RBI) 0
-48,339
-825
-65,817
-741
-5,412
-20000
-5,209
-10,008
-11,411
-11,047
decided to maintain the interest rate at 4%,
-12,684
-16,909
-40000
-37,294
retain its accommodative stance and revise its -60000
domestic growth forecast upward to -7.5% -80000
May-20
Apr-20
Aug-20
Nov-20
Feb-20
Jul-20
Sep-20
Dec-19
Mar-20
Jun-20
Oct-20
Dec-20
Jan-20
from -9.5% for fiscal 2021.
• Better-than-expected domestic gross domestic
product (GDP) data and good auto sales FII Net Monthly Investment DII Net Monthly Investment
numbers boosted sentiments. Broad market
31-Dec-20
% Change % Change % Change % Change
indices 1 Month 1 Year 3 years 5 years
• More gains were seen after S&P Global
Ratings raised India's growth projection for the Broad market indices
Nifty 50 13982 7.81 14.90 9.88 11.95
current fiscal. S&P BSE Sensex 47751 8.16 15.75 11.89 12.81
• Strong buying by the foreign institutional S&P BSE MidCap 17941 6.07 19.87 0.22 9.98
investors (FIIs) further supported the S&P BSE SmallCap 18098 7.25 32.11 -2.00 8.85
benchmarks. FIIs were net buyers of equities Sectoral indices
in December. They bought equities worth Rs % Change % Change % Change % Change
Sectoral Indices 31-Dec-20
48,224 crore in December compared with Rs 1 Month 1 Year 3 years 5 years
65,239 crore in November. S&P BSE Metal 11599 13.51 11.23 -8.07 9.40
• Globally, optimism about economic recovery S&P BSE BANKEX 35888 5.92 -2.14 7.52 13.16
S&P BSE Finance 7054 6.33 0.83 6.64 13.13
amid rollout of a Covid-19 vaccine, signing of a
S&P BSE PSU 5781 9.18 -16.88 -14.23 -3.23
$2.3 trillion stimulus package by US President S&P BSE Auto 20811 3.39 12.59 -8.01 2.36
Donald Trump, and a trade deal between the S&P BSE Realty 2478 20.20 8.66 -1.69 13.00
UK and the European Union boosted domestic S&P BSE FMCG 12609 7.53 10.55 5.62 9.87
markets. S&P BSE Healthcare 21681 6.71 61.45 13.53 5.10
S&P BSE IT 24248 12.08 56.68 28.98 16.98
1
Indian Equity Markets
Nifty 50 earnings after a sharp contraction in Mar’20 and Jun’20 quarter witnessed some
• Some gains were capped due to intermittent profit stability in Sep’20 (Q2FY21)
booking and volatility amid the expiry of the 132
December futures and options contract. 106
• Selling by domestic institutional investors (DIIs)
51 AVG: 12%
also acted as a dampener. DIIs sold equities worth 11
26 25
15 17 16 10 9 29 18 19
Rs 37,294 crore in December compared with 6 6
2 0 1
equities worth Rs 48,339 crore sold in November.
-10
-2 -4 -5 -6 -1
• Reports of rise in Covid-19 cases due to a new -29
strain of the virus in the UK and several other -56
-44
countries also dented sentiments.
1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q
• The market was dented further as concerns about
FY16 FY17 FY18 FY19 FY20 FY21 FY22
a sharp increase in Covid-19 cases across the
globe and fears about new lockdown restrictions Estimates – FY21, FY22, ^Average figure mentioned is from FY16 to FY22
Source: Bloomberg, data as of December 31, 2020
rekindled economic growth worries. 35
28.72
All S&P BSE sectoral indices ended higher 30
25
• The realty, metal, consumer durables and
information technology (IT) sectors saw heavy 20
buying. The S&P BSE Realty index was the top Long term
gainer on bullish investor outlook and as the 15 Average 19.43
residential property market began showing signs of
sustainable recovery in December. 10
Dec-09
Dec-10
Dec-11
Dec-12
Dec-13
Dec-14
Dec-15
Dec-16
Dec-17
Dec-18
Dec-19
Dec-20
Jun-10
Jun-11
Jun-12
Jun-13
Jun-14
Jun-15
Jun-16
Jun-17
Jun-18
Jun-19
Jun-20
• The S&P BSE Auto index rose ~3% as investors
expected the sector to gain from normalization of
Nifty50 1 year Forward P/E Nifty 50 Long Term Average P/E
economic growth. Source: Bloomberg, data as of December 31, 2020
2Global Equity Markets
• Indian equities were amongst the top performers for the RTS (Russia)
8.23
-10.42
month of December 2020 generating a return of 8.16%,
0.60
with other being Korea, Brazil and Russia. CAC (France)
-7.14
• The US equity benchmarks ended higher in December Bovespa (Brazil)
9.30
after US President Donald Trump signed a Covid-19 aid 2.92
1.35
bill and as gains were recorded in pharmaceutical stocks Straits times (Singapore)
-11.76
following optimism over early availability of a coronavirus 3.82
vaccine. Nikkei 225 (Japan)
16.01
• The UK’s FTSE rallied 3% on-month, mainly after the DAX (Germany)
3.22
3.55
government granted approval for a coronavirus vaccine. 10.89
Kospi (Korea)
• Japan’s Nikkei climbed in December after the 30.75
government unveiled a fresh $708 billion economic 3.10
FTSE 100 (UK)
stimulus package to speed up the recovery from a -14.34
3.27
coronavirus-driven slump. DJIA (US)
7.25
• Singapore’s Straits Times Index advanced in response to S&P BSE Sensex (India)
8.16
15.75
a positive trend recorded by its global peers, including
7.81
upbeat Chinese data, and stimulus support from the US Nifty 50 (India)
14.90
government. 7.36
TSEC (Taiwan)
• Hong Kong’s Hang Seng Index too tracked the rally in its
3.38
22.80
global peers and rose in December, buoyed by upbeat Hang Seng (Hong Kong)
-3.40
data from China, which indicated that the economy 2.40
Shanghai (China)
continues to recover from the pandemic-induced 13.87
slowdown. -20 0 20 40
% Change 1-month % Change 1-year
3Indian Debt Markets
• Interbank call money rates remained below the RBI’s repo 21000 Movement of 10 Year Gilt Benchmark 5.98%
Semi Annualised Closing Yield
rate in December as liquidity remained in surplus.
18000 5.96%
• Gilts ended little changed in December with the yield on
15000
Turnover INR Cr.
the 10-year benchmark 5.77% 2030 paper settling at 5.94%
12000
5.90% on December 31 compared with 5.91% on 5.92%
November 27. 9000
5.90%
• Sentiment for dated securities remained weak earlier in 6000
the month due to the absence of open market bond 3000 5.88%
purchase announcements from the central bank. 0 5.86%
Comments from Finance Minister Nirmala Sitharaman that
10-Dec-20
11-Dec-20
14-Dec-20
15-Dec-20
16-Dec-20
17-Dec-20
18-Dec-20
21-Dec-20
22-Dec-20
23-Dec-20
24-Dec-20
28-Dec-20
29-Dec-20
30-Dec-20
31-Dec-20
1-Dec-20
2-Dec-20
3-Dec-20
4-Dec-20
7-Dec-20
8-Dec-20
9-Dec-20
India would be looking to step up spending to support
economic growth and that the budget deficit target may be
missed put bonds under pressure. Turnover INR in Cr Semi Annualised Closing Yield
• However, losses were recouped on intermittent value
Net LAF in Rs. Cr.
buying and after the RBI’s Monetary Policy Committee 0
Injection/Absorption in Rs crores
(MPC) kept the repo rate unchanged and decided to
-100000
continue with an accommodative stance.
-200000
• Bond prices also received a boost after domestic retail
inflation for November eased and on expectation that the -300000
central bank would announce open market bond -400000
purchases in January.
-500000
• The rupee rose 1.3% on month to settle at Rs 73.06 at
December end, aided by positive developments -600000
surrounding Covid-19 vaccines, periodic rally in local -700000
Feb-20
Mar-20
Apr-20
Oct-20
Dec-19
Nov-20
Dec-20
Aug-20
Sep-20
Jan-20
Jun-20
Jul-20
May-20
equity indices, and foreign fund inflows into the domestic
financial market.
4Indian Debt Markets
Key developments in December 7.50 Yield Curve
7.00
• The Centre allowed additional borrowing of Rs 16,728 crore 6.50
through open market borrowings to five states. 6.00
Yield (%)
5.50
• The central bank decided to facilitate a more efficient liquidity
5.00
management in regional rural banks, permitting them to
4.50
access the liquidity adjustment facility, marginal standing
4.00
facility, and call or notice money market.
3.50
• The Securities and Exchange Board of India (SEBI) extended 3.00 31-Dec-20 Month ago Year ago
the implementation date for framework for creation of security 2.50
for listed debt securities and due diligence to be carried out 0.25 1 2 3 4 5 7 8 9 10 15 20
by debenture trustees to April 1, 2021. Maturity (years)
Instrument 31-Dec-20 Month ago Year ago
Banking-related developments
Call Rate 2.10% 3.40% 4.90%
91 D T-bill* 3.02% 2.93% 5.06%
• The RBI’s annual publication ‘Report on Trend and Progress
3 M CP 3.70% 3.18% 5.40%
of Banking in India’ said the Indian banking and non-banking
financial sector showed resilience in fiscal 2020, but with 3 M CD 3.36% 2.90% 5.08%
nearly 40% of outstanding loans under moratorium, the 1 Yr CP 4.25% 4.15% 6.75%
system may face sharp deterioration in asset quality going 1 Yr CD 3.68% 3.59% 6.00%
forward. 1 Yr G-Sec* 3.74% 3.33% 5.57%
• According to the RBI report on banking trends, gross non- 3 Yr G-Sec* 4.41% 4.42% 6.35%
performing assets (GNPAs) ratio of scheduled commercial 5 Yr G-Sec* 5.10% 5.08% 6.48%
banks declined from 9.1% at end-March 2019 to 8.2% at end-
10 Yr G-Sec* 5.89% 5.91% 6.56%
March 2020 and further to 7.5% at end-September.
*Weighted Average Yield
5Indian Economy
Global and domestic institutions scale down India’s GDP 12
9 6.2 5.6 5.7
contraction forecasts for current fiscal, expect rebound 5.2 4.4 4.1
6 3.1
3
Domestic GDP Growth %
0
• The Organisation for Economic Co-operation and Development -3
revised its India GDP growth forecast to -9.9% for fiscal 2021 -6
from -10.2% projected in September. It also forecast the -9
-7.5
-12
economy would rebound 8% in the next fiscal and 5% thereafter. -15
-18
-21
Retail inflation retreated in November -24
• India’s retail, or consumer price-index (CPI)-based, inflation -27 -23.9
2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q
decelerated to a three-month low of 6.93% in November 2020 FY19 FY19 FY19 FY20 FY20 FY20 FY20 FY21 FY21
compared with 7.61% in October, as vegetable prices eased
significantly. Indicators Current Previous
• RBI expects CPI inflation at 6.8% for the third quarter of fiscal GDP Growth 4.2% (FY20) 6.1% (FY19)
2021 and 5.8% for the fourth quarter. For the first half of fiscal
2022, it has projected inflation at 5.2-4.6%, with risks broadly Monthly CPI 6.93% (November 7.61% (October
balanced. Inflation 2020) 2020)
Industrial Growth 3.6% (Oct 2020) 0.49% (Sep 2020)
Other major developments - $42.03 bn (April- -$113.42 bn (April-
Trade Balance
November FY21) November FY20)
• Prime Minister Narendra Modi released over Rs 18,000 crore to
INR 10,26,055 cr INR 11,74,143 cr
more than 9 crore farmer families under the Pradhan Mantri Gross Tax
(April-November (April-November
Kisan Samman Nidhi, or PM-KISAN. Collections FY21) FY20)
• The government entered into a $1 billion loan agreement with Manufacturing 56.4 (December 56.3 (November
the New Development Bank to support the Mahatma Gandhi PMI 2020) 2020)
National Rural Employment Guarantee Scheme and the 52.3 (December 53.7 (November
Services PMI
country’s rural infrastructure. 2020) 2020)
6Global Economy
US Fed keeps interest rate near zero
GDP Inflation Industrial Growth
• The US Federal Reserve (Fed), in its December
policy meeting, kept the target range for federal Current Previous Current Previous Current Previous
funds rate at 0-0.25%.
33.4% -31.4% 0.2% 0.0% 0.4% 0.9%
US Q3 GDP growth revised upwards US
Q3 2020 Q2 2020 Nov’20 Oct’20 Nov’20 Oct’20
• The US’ revised upwards its GDP growth in the
-4.3% -14.7% -0.3% -0.3% 2.1% 0.1%
third quarter to 33.4% from 33.1% reported Eurozone
Q3 2020 Q2 2020 Nov’20 Oct’20 Oct’20 Oct’20
earlier.
16.0% -18.8% 0.3% 0.7% -5.5% -6.3%
BoE holds interest rate steady UK
Q3 2020 Q2 2020 Nov’20 Oct’20 Oct’20 Sep’20
• The Bank of England (BoE) kept its main lending
4.9% 3.2% -0.5% 0.5% 7.0% 6.9%
rate at 0.1%, after cutting twice from 0.75% China
Q3 2020 Q2 2020 Nov’20 Oct’20 Nov’20 Oct’20
since the onset of the pandemic in March.
22.9% -29.2% -0.9% -0.7% 0.0% 4.0%
ECB expands bond buying to combat Covid - 19 Japan
Q3 2020 Q2 2020 Nov’20 Oct’20 Nov’20 Oct’20
• The ECB increased Pandemic Emergency
-7.5% -23.9% 6.93% 7.61% 3.6% 0.5%
Purchase Program by 500 billion euros to 1.85 India
Q2 2020 Q1 2020 Nov’20 Oct’20 Oct’20 Sep’20
trillion euros, and extended it by nine months to
at least the end of March 2022. Major Global Central Latest Key Interest IMF GDP projections
China lowers 2019 GDP growth to 6.0% Bank rate (2021)
• China revised down its GDP growth for 2019 to US Federal Reserve 0.00-0.25% 3.1%
6.0% from the previously reported 6.1%.
Bank of England 0.10% 5.9%
Japan unveils $708 billion fresh stimulus
• Japan rolled out a fresh $708 billion economic European Central Bank 0.00% 5.2%
stimulus package to speed up the recovery. The
economy grew by a revised 22.9% annually People’s Bank of China 4.65% 8.2%
during July-September; in April-June, the
Bank of Japan -0.10% 2.3%
economy had contracted 29.2%.
India 4.00% 8.8%
7Indian Mutual Funds - Equity
Category performance Equity Fund Category Performance
• Most equity fund categories, which represent actively managed 5.62
underlying schemes, have managed to recover after falling Arbitrage 5.12
sharply towards the end of the previous fiscal (when the Covid-19 3.80
7.15
pandemic first took root domestically) to generate returns ranging Equity Savings 5.53
from 14-16% in the past one year ended December 2020. 9.43
9.69
• Over the same period, India’s broad equity benchmarks Multi Asset Allocation 8.68
represented by the Nifty 50, Nifty 200, and Nifty 500 have 16.53
8.60
generated returns of ~15-17%.
Balanced Advantage 6.71
• Small cap funds have gained the most at ~31% over the past 11.96
year. 9.77
Aggressive Hybrid 6.08
• Hybrid schemes have provided unit-holders with returns ranging 14.66
from 4% for arbitrage funds to 17% for multi-asset allocation 11.18
ELSS 5.33
funds in the previous 12 months. 16.06
Other news 11.67
Focused 6.64
• Investors continued to pull out of open ended equity funds for the 16.27
10.11
fifth straight month in November, mostly on profit booking, noting Small Cap 0.84
the record highs hit by the equity benchmarks in November. 30.66
11.01
• SEBI decided to relax profitability criteria for becoming a mutual Multi Cap 6.49
fund sponsor; mandated minimum Rs 100 crore net worth 15.74
requirement for entities to become sponsors of mutual funds. 11.32
Large & Mid Cap 4.98
• SEBI also approved proposals including dispensing with the 16.23
11.02
requirement to issue physical unit certificates and reducing Large Cap 7.55
maximum permissible exit load. 13.72
5 year 3 year 1 year
Performance data as on December 31, 2020
Returns are annualized for periods above one year
8Indian Mutual Funds - Debt
Category performance
Debt Fund Category Performance
• Long duration and medium to long duration funds have
provided returns of ~10-12% in the past year due to sharp 4.86
Overnight
3.32
reduction in interest rates by the RBI to help the economy
5.85
recover from the Covid-19 crisis. Liquid
4.04
• At the shorter end of the maturity spectrum, the 3 year 6.92
Money Market
returns of overnight, liquid, money market, and ultra-short 5.60
term funds have been higher compared to the their respective Ultra Short Duration
6.10
returns over a one year holding period, as high liquidity in the 5.10
system brought the short end interest rate to historically low 5.10
Low Duration
6.27
levels.
Medium to Long 7.44
Duration 10.10
Other news 8.00
Floating Rate
• Open-ended debt fund inflows have been firm in November, 9.03
7.94
at ~Rs 44,984 crore at the aggregate level. Low duration Corporate Bond
10.11
funds led the way in terms of inflows, at ~Rs 27108 crore. 8.76
• Overnight funds bore the brunt of outflows at ~Rs 15548 Banking and PSU
9.83
crore, as advance tax money moves out of the system. 6.39
Short Duration
• SEBI extended the date for implementation of framework for 8.36
uniformity in applicability of net asset value (NAV) across Credit Risk
1.52
0.49
various schemes on realisation of funds to February 1, 2021. 9.93
Long Duration
12.23
5.41
Medium Duration
6.29
0.00 5.00 10.00 15.00
Performance data as on December 31, 2020
Returns are annualized for periods above one year 3 year 1 year
9Debt Investment Strategy
Debt markets have benefited significantly in the year 2020 as a result of sharp reduction in key interest rates in
the system. Reverse Repo rate saw a reduction of 150bps (1.55%) during the year and strongly benefited the
open ended debt mutual funds. The credit risk segment continues to remain worst hit with lack of appetite for low
risk papers and financing and business continuity concerns for corporates especially during the lockdown period.
Hence, the credit spectrum remains non attractive at the current juncture. Keys factors that are negatively
affecting the investor sentiments in debt markets are high Government borrowing, high fiscal deficit and high
Inflation amongst the favorable conditions of abundant liquidity and RBI’s super accommodative Monetary Policy
stance. At present, the balance does weight in favor of low rates for prolonged period of time.
Although the intent is to keep the money supply and interest rate appropriate for a pick up in economic growth in
post Covid scenario, the risk may emanate from continued rise in consumer inflation and further expansion of
deficit borrowing, leading to yields gaining some strength. In the wake of the above investor should reassess
their risk appetites and return expectations for the current year.
Investing in fixed deposits at this juncture may lead to negative real yields considering low interest rates and
high inflationary expectations. Investment in open ended active debt funds should be preferred to gain from
higher carry yields at higher durations, credit compressions and further reduction in yields.
Investment in a variety of debt categories is suggested to have exposure to different maturities, market
segments to achieve diversification.
A strategy that works well for investors is bucketing their investment in different tenures and selecting a
suitable debt product accordingly.
Investors having a shorter tenure of below 1 year, may invest in Ultra Short Term, Low Duration, Floating
Rate Funds. Investors with investment horizon up to 3 years may investment in Short Duration Funds,
Banking & PSU Debt Funds, Medium Duration Funds. Long Term money can be invested in Long duration,
Gilt Fund and Dynamic Bond Funds.
Investment in Gold Funds, SGBs may also be considered keeping in view the benefit of diversification.
10Equity Investment Strategy
Strong liquidity flows from foreign investors continue to fuel the rally in equities while the improvement in fundamental
is still in progress. High valuations in equity is one of the foremost area of concern while making the investment
decision at this juncture. Although the green shoots of economic recovery are visible we are still far from reaching the
pre-Covid levels on many macro factors. The Q2FY21 corporate results presented a healthy picture of profitability and
corporate sustenance and further rekindled the hope of the investors. As the earnings improve, the valuations would
also see some easing. Keeping in view the current state of the markets, investors should emphasize on the following
essential points
Existing equity investors should have the right asset mix of debt, equity and gold in the portfolio to wade through
the high asset volatility. Having different asset with negative/low correlation helps in reducing the risk of the
overall portfolio.
Please take a risk profile test to know your risk appetite at regular intervals and reallocate your portfolio
accordingly to meet your long term goals. Kindly connect with your relationship manager for risk profiling
assessment and to ascertain the right asset mix for your investment portfolio
New investors should have a long term approach while investing in equities. Investors should also avoid investing
money in one go and follow systematic ways of investing to avoid any large impact on the portfolio due to sharp
market movement.SIP remains one of the best ways of investing due to its benefit of averaging the cost of buying
equities at various levels.
It is prudent to have a large cap bias at the current juncture as abundant liquidity in this segment will enable the
investors to move swiftly to other investment avenues.
Investors should avoid trading/investing for short term period at this juncture. Surplus Funds can be parked in
Short Term and Medium Term funds to take advantage of favorable debt environment and higher risk in the
equities. Risk of underperformance in such strategy does exist if equities continue to move sharply up, hence
investors need to have a balanced approach to investing and parking in debt.
It is always advisable to entrust the job of stock selection to experts such as fund managers to benefit from
equities at this juncture
11MF Taxation
* For LTCG exceeding 1 lakhs
$ Surcharge to be levied at
• 37% on base tax where specified income exceeds Rs. 5 crore;
• 25% where specified income exceeds Rs. 2 crore but does not exceed Rs. 5 crore;
• 15% where total income exceeds Rs. 1 crore but does not exceed Rs. 2 crore; and
• 10% where total income exceeds Rs. 50 lakhs but does not exceed Rs. 1 crore.
^ as per Slab
^^ If total turnover or gross receipts in the financial year 2018-19 does not exceed Rs. 400 crores
^^^ This lower rate is optional and subject to fulfillment of certain conditions as provided in section 115BAA.
^^^^ This lower rate is optional for companies engaged in manufacturing business (set-up & registered on or after 1 October 2019)
subject to fulfillment of certain conditions as provided in section 115BAB.
12Disclaimer
This document has been prepared on the basis of publicly available information, internally developed data
and other sources believed to be reliable, Mahindra & Mahindra Financial Services Ltd. ("MMFSL") does
not warrant its completeness and accuracy. Whilst we are not soliciting any action based upon this
information, all care has been taken to ensure that the facts are accurate and opinions given fair and
reasonable. This information is not intended as an offer or solicitation for the purchase or sale of any
financial instrument recipients of this information should rely on their own investigations and take their own
professional advice. Neither MMFSL nor any of its employees shall be liable for any direct, indirect, special,
incidental, consequential, punitive or exemplary damages, including lost profits arising in any way from the
information contained in this material.
MMFSL and its affiliates, officers, directors, and employees, including persons involved in the preparation or
issuance of this material may from time to time, have long or short positions in, and buy or sell the securities
thereof, of company(ies) mentioned herein. MMFSL may at any time solicit or provide, credit, advisory or
other services to the issuer of any security referred to herein. Accordingly, information may be available to
MMFSL, which is not reflected in this material, and MMFSL may have acted upon or used the information
prior to, or immediately following its publication
13Glossary
Term Description
The practice of adjusting the purchase price of an asset to account for the change in inflation over a
Indexation
period, thereby reducing overall tax liability.
The phenomenon of an increase in the cost of goods and services at an economy-wide aggregate level,
Inflation
which results in the reduction of purchasing power.
The mathematical effect of compounding is applicable to interest which gets added to accumulated
Compounding interest over prior periods. The longer the holding period, the greater is the accumulation of wealth due
to the effect of compounded interest.
Yields The returns that can be obtained by investing in instruments such as gilts.
Call Money The rate at which banks borrow and lend in the money market for short term periods.
Liquidity Adjustment Facility (LAF) A facility provided by the RBI to help banks manage their daily liquidity requirements.
Duration The sensitivity of a bond’s price to change in market interest rates.
Standard Deviation A metric used to measure the variability in an investment’s returns, which is also referred to as volatility.
This refers to a nation’s economic policy to achieve end objectives such as inflation, consumption, and
economic output (GDP). The Reserve Bank of India is tasked with implementation of India’s monetary
Monetary Policy policy. Some of the tools that the central bank has at its disposal to achieve monetary policy goals are
open market operations, power to change benchmark interest rates, and ability to alter banks’ reserve
requirements.
Gross Domestic Product (GDP) The monetary value of all goods and services produced by a nation.
Basis Points A unit of measure for interest rates. Mathematically, one basis point equals 1/100th of 1%.
Credit Spread The difference in yields of corporate bonds over gilts of similar maturity.
A bank classifies a loan as an NPA if principal or interest payment is not received after a predetermined
Non Performing Asset (NPA)
time period.
Derivatives, as the name implies, are financial contracts that derive their value from an underlying asset
Derivatives or group of assets. The most commonly used assets are stocks, bonds, currencies, commodities and
market indices.
Hedging is the practice of investing in a particular asset class in order to minimize the risk of loss that
Hedging could be sustained in another asset class. Effective hedging involves investment in asset classes that
don’t move in the same direction.
14Glossary
Term Description
They are types of stock derivatives that are traded on an exchange. They represent contracts signed by
Futures and Options two parties to trade a stock at a predetermined price on a later date in a bid to hedge their risks. In the
case of hedging in futures and options, an investor may buy or sell contracts as protection against the
risk of changing prices.
Goods and Services (GST) Tax It is a type of broad indirect tax regime that has been put into effect since 2017 in India to subsume a
number of other indirect taxes.
New Fund Offer (NFO) It is the period of time during which the units of a newly launched mutual fund are available for sale to
investors.
Exit Load A fee that may be levied by the fund house on the investor at the time of exiting a scheme. This is done
to discourage investors from withdrawing from the scheme prematurely.
Sponsor The sponsor is the promoter of a mutual fund. It is the sponsor’s responsibility to set up the mutual
fund’s asset management company by bringing in capital.
The trustees of the mutual fund safe guard the interests of the unit-holders. Apart from appointing a
Trustee custodian for safe-keeping of assets, the trustees also ensure that the fund house is in compliance with
all applicable regulatory requirements.
Custodian This is the entity that is responsible for the safe-keeping of securities held by the fund house.
Net Asset Value (NAV) The value of a unit of a mutual fund.
They are entities incorporated overseas that invest in financial assets such as stocks and bonds of
Foreign Institutional Investors (FIIs) companies domiciled in India. Investment banks, pension funds, and mutual funds are some of the
types of FIIs that invest in Indian assets.
Domestic institutional investors (DIIs) In contrast to FIIs, DIIs are domestically registered institutions that invest in India’s financial market.
These include banks, insurance companies and mutual funds.
Rather than simply investing in the financial securities of Indian companies, FDI is a route through
Foreign Direct Investment (FDI) which foreign entities can more actively invest in Indian corporates. An example of FDI would be if an
overseas company purchases a sizeable stake in an Indian company. Doing so enables the overseas
investor to have a greater say in the management of the Indian firm.
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