Debt, FDs, Bonds, Debt Mutual

Funds, MLDs, REITs, InvITs

Presented By: Group 9
22P137 Astha Tripathi
22P142 Esha Gupta
22P149 Lagan Poddar
22P174 Sruti Singhania
22P178 Utkarsh Agarwal
Debt investments in India
Company
What is Debt Investment Types of Investments Pros & Cons

Debt investments are investments Size of the Indian debt market: Pros:
in which an investor lends money $1.8 trillion ● Less risky than equity
to a borrower with the expectation Split of the Indian debt market: ● Offer steady income
of being repaid, usually with Government securities: $1.2 ● Used to diversify
interest.
trillion ● Can be relatively liquid
Corporate bonds: $0.6 trillion Cons:
Debt investments are generally
considered to be less risky than ● Lower returns
equity investments, such as Top 3 types of debt ● Interest rates can
stocks, but they also offer lower investments in India: fluctuate,
returns. ● Government securities ● There is always the risk
● Corporate bonds of default
● Debt mutual funds

Source: Democratising the Bond Market to fuel the next step in India’s growth journey. Financial Express.
Comparison
Debt Mutual Funds
What are debt funds?

Debt funds are mutual funds that invest in fixed-income securities, such as government bonds, corporate bonds, and
money market instruments. They offer relatively stable returns and low volatility, making them a good option for
risk-averse investors.

Advantages of investing in debt funds:

● Low cost structure & relatively stable returns

● Relatively high liquidity

Who should invest in debt funds?

● Aim for regular income, are risk averse

● Have been saving in traditional fixed income products, such as bank deposits, and are looking for steady returns
with low volatility

An investor who is saving up for their retirement may want to invest in debt funds. Debt funds can provide a steady
stream of income during retirement, while also preserving the investor's capital.
Source: What are Debt Funds?, www.mutualfundssahihai.com
Source: ICICI Direct, https://www.icicidirect.com/ilearn/mutual-fund/courses/types-of-debt-mutual-funds
Bonds
What are bonds?
Bonds are debt securities. Purchasing a bond means lending money to the borrower in exchange for a fixed interest rate
and a promise to repay the principal amount on a specific date, known as the maturity date.

Features of bonds
● Yield to maturity(YTM) is the required market interest rate on the bond
● Bond value is determined by the present value of the coupon payments and par value, discounted at the YTM
● Relation between bond prices and market interest rates
○ When coupon rate = YTM, price = par value
○ When coupon rate > YTM, price > par value (premium bond)
○ When coupon rate < YTM, price < par value (discount bond)
● Credit Ratings: Each bond holds the rating, provided by credit rating agencies. A higher rating suggests a lower
amount of risk and lower yields. If the rating is lower, the risk involved in the bond is higher along with higher
returns.
● Taxation:
○ The interest earned on bonds is taxable as per the income tax slab rate of the individual. The interest
income is added to the individual's total income and is taxed accordingly.
○ Capital Gains: If the bond is held for over three years, it is considered a long-term capital asset. LTCG from
the sale of bonds is taxed at a flat rate of 20 per cent after the indexation benefit.
Source: What are Bonds? https://www.bondsindia.com/what-are-bonds.html
Bonds
Types of Bonds
● Government Securities Bond: Issued by the central or the state govt. Mainly offer long term investment between
5-40 years. They are the safest as backed by govt, hence lower returns. Good for risk-averse investors.
● Corporate Bonds: Issued by the companies for expanding their business for future growth through raising new
capital or for starting a new project.
● Tax-Free Bonds: Certain bonds issued by the government and public sector companies are tax-free. The interest
income from such bonds is exempt from income tax. However, the capital gains from the sale of tax-free bonds
are still taxable. Have a 10-year or longer maturity and have very low default risk.
● Convertible Bonds: These offer both the features of debt and equity but not at the same time. This can be
converted into a predetermined number of stocks and the bondholders can become shareholders of the company.
● Zero-Coupon Bonds: This type of bond does not give any interest. They are issued at a discount to their fair
value but are redeemed at par.
● RBI Bonds: The floating rate saving bonds 2020 (FRSB) issued by the RBI with a tenure of 7 years. The interest
rate is reset every six months, the first being on January 1, 2021, this means that the interest rate is paid every six
months rather than receiving it at maturity.
● Sovereign Gold Bonds: This type of bond is issued by the central government for those investors who want to
invest in gold but do not want to keep gold in physical form with them.The interest earned from this bond is
exempted from tax. It is also considered a highly secured bond as it is offered by the government.

Source: Elearnmarkets, & Elearnmarkets. (2023b). Bonds in India – 7 types of bonds and how to invest.
https://blog.elearnmarkets.com/7-types-of-bonds-that-you-can-invest-in/
Bonds
Benefits of investing in Bonds
● Steady Income Source in the form of interest payments
● Better diversification of investment portfolio: Less volatile than stocks
● Way to preserve capital while investing
● Bonds have higher seniority than stocks

Risks of investing in Bonds

● Lower returns: Bonds offer lower returns than stocks because they are considered to be a safer investment
● Default Risk: The issuer may fail to timely make interest or principal payments and thus default on its bonds,
especially with lower-quality or high-yield bonds
● Interest Rate Risk: When interest rate rises, bond prices fall and vice-versa. The longer the time to maturity, the
greater is the interest rate risk
● Liquidity Risk: This refers to the risk that investors won’t find a market for the bond, potentially preventing them
from buying or selling when they want.
● Call Risk: The bond issuer may pay you the bond’s face value before the bond’s maturity date. This means that
you would stop receiving the interest payments. This is something an issuer might do if interest rates decline.

Source: Bonds | Investor.gov. (n.d.).

https://www.investor.gov/introduction-investing/investing-basics/investment-products/bonds-or-fixed-income-products/bonds
 Fixed Deposits
● Fixed Deposit is a financial instrument offered by banks or financial institutions where you deposit a lump sum
for a fixed tenure at a predetermined interest rate.

● The interest rate remains constant throughout the tenure of the deposit.

● FDs are considered a safe investment option because the Deposit Insurance and Credit Guarantee
Corporation (DICGC) offers insurance cover on deposits up to a maximum amount of ₹5 lakh

● Tenure: FDs come with various tenure options, ranging from as short as a few days to several years.

● Interest Rate: The interest rates may vary from bank to bank and depend on the tenure and prevailing market
conditions. Current rates range from 3% - 7.5% for a tenure of 7 days to 10 years.

● Interest Payment Frequency: Interest on FDs can be paid out at different intervals, such as monthly, quarterly,
semi-annually, or annually.

● Compounding: You can choose to receive the interest payouts periodically, or you can opt for cumulative FDs
where the interest is reinvested, leading to compounding returns. Cumulative FDs usually offer a slightly higher
interest rate.

● Liquidity: FDs offer relatively less liquidity compared to other investments like savings accounts or mutual funds.
If you withdraw your FD before the maturity date, you may incur penalties and receive a lower interest rate.
Source: https://www.idfcfirstbank.com/finfirst-blogs/fixed-deposit/what-is-fixed-deposit-meaning-feature
https://groww.in/fixed-deposits/fd-interest-rates
https://www.bajajfinservmarkets.in/fixed-deposit/fd-insurance.html
What
happens
when you
open or
break a
deposit?
 Managing Fixed Deposits Effectively
FD Laddering
● FD laddering is a strategy where an
investor spreads their investment across
multiple FDs with different tenures and
interest rates, creating a ladder of
maturity dates.
● It provides a balanced approach to
optimize returns, maintain liquidity, and
manage interest rate risk by spreading
investments across fixed deposits with
different maturities.

Tax Implications on FDs :

● Interest earned on FDs is taxable as per your income tax slab. Banks deduct Tax Deducted at Source (TDS) if the
interest income exceeds a certain threshold, which is currently Rs 40,000 for individuals below 60 years of age
and Rs 50,000 for senior citizens per financial year.
● Senior citizens can claim a deduction of up to Rs 50,000 on interest income from FDs
● Tax Saver FDs have a mandatory lock-in period of five years, during which the invested amount cannot be
withdrawn.
Source: https://economictimes.indiatimes.com/wealth/invest/how-laddering-your-fixed-deposit-investments-can-help-optimie-returns/how-do-you-create-a-ladder/
https://www.livemint.com/money/personal-finance/how-to-maximize-returns-from-fixed-deposit-fd-laddering-strategy-after-repo-rate-pause-11681830296421.html
https://www.hdfcbank.com/personal/resources/learning-centre/save/what-is-a-tax-saving-fd
Risks and benefits Articles
Groww
Risks of investing in FDs:
● Lower returns than other available options
● Fixed interest rates
● Taxable interest income
● Missed higher returns
● Inflation erodes returns
● Premature withdrawal penalties

Benefits of investing in FDs:

ValueResearch
● Safety and security
● Guaranteed returns
● Principal preservation
● Flexible tenures
● Regular income option
● Portfolio stability
● Tax deductions (in some cases)
● Simplicity for beginners
Market Linked Debentures (MLDs)
Company
What are MLDs
Market Linked Debenture (MLD) is
a type of debenture wherein the
returns are not fixed but linked to
the performance of a certain
market index. These are
structured fixed-income products
with typically no periodic payouts
except at maturity (similar to
zero-coupon bond).
The tenure for MLDs typically
ranges from 12 to 60 months.
MLDs are issued by corporate
with a minimum net worth of Rs.
100 crore.
Source: https://www.wintwealth.com/blog/market-linked-debentures/#Taxation-Interpretation-of-MLDs (Wint Wealth)
Example of MLD
XYZ limited issues an MLD for a
tenure of 20 months. The return iis
10%, subject to the condition that the
value of NSE Nifty at the end of 20
months does not fall below 75% of its
value at the time of issue of the MLD.
But in an adverse scenario where
the value of NSE Nifty at the
maturity date is less than 1/4th of
its value, XYZ Limited will pay the
bondholder the principal amount
without any interest.
Types of MLD:
● Principal Protected
● Non-principal Protected
Taxation
Previously, if an investor held an
MLD for more than one year, the
returns were classified as
long-term capital gains and were
taxed at a lower rate of 10%. This
was seen as an arbitrage
opportunity as investors could
enjoy lower tax rates.
However, this has recently changed
in financial budget of 2023, and
gains from MLDs will now be taxed
as short-term capital gains. This
means that the returns will be taxed
at the investor’s applicable tax slab,
which could be higher than the
previous 10% rate.
Difference between Bonds and Debentures
Bonds Debentures

Definition Bonds are debt financial instruments issued by Debentures are debt financial instruments
financial institutions, big corporations, and issued by private companies but are not
government agencies having the backing of backed by any collaterals or physical assets.
collaterals and physical assets.

Tenure The tenure is longer The tenure is comparatively shorter

Risk The risk level is lower The risk level is higher

Collateral Bonds get generally secured by the collateral Debentures are unsecured and are not
or physical assets of the issuing company backed by any collateral. The
creditworthiness and reputation of the issuer
play a key role in backing.

Source: https://www.bajajfinservsecurities.in/difference-between-bonds-and-debentures (Bajaj Finserv)

 What are REITs?
● REITs, or real estate investment trusts, are companies that own and operate real estate in order to create income.
● REITs, which are similar to mutual funds, aggregate the capital of multiple investors. Individual investors can now earn
dividends from real estate investments without having to own, manage, or finance any properties themselves
● Real estate investment trusts are businesses that manage portfolios of high-value real estate and mortgages. For example,
they lease properties and collect rent on them. The collected rent is then transferred to shareholders as income and
dividends.
● Unlike traditional real estate investments, most REITs are openly traded like stocks, making them very liquid.

How do REITs work?

Investment in Ownership of
REIT Assets Buy/Sell
Properties
Unitholders REIT Properties Sponsor

Net Property
Distributions
Income
 How Does a Company Qualify as a REIT?
To be classified as REIT, the company must satisfy the following criteria:
1. It must be a trust formed under the Indian Trust Act 1882 and also required to be registered under the SEBI REITs
Regulations.
2. 80% of the investment must be made in the income-generating property, and the remaining 20% can be invested in any
other instruments.
3. Only 10% of the total investment can be made in the under-construction properties.
4. Investment can only be made in commercial real estate and office premises
5. 90% of the total income should be given to the shareholders as dividends.
6. Must have an asset base of at least INR 500 crore.
7. Must declare NAV twice in every financial year.
8. Stock market listing of REIT is mandatory.

Taxation of REITs in India?

1. If held for less than a year, capital gains on the sale of Indian REIT units are subject to a 15% short-term capital gains tax.
2. Units held for more than three years (36 months) are liable to 10% LTCG tax if the income exceeds Rs.1 lakh.
3. REIT interest income is taxable.
4. Dividend income from REITs is taxed based on the REIT's specific tax treatment.
5. Dividend income is taxable in the hands of the investor unless a particular tax concession has been acquired. Otherwise,
dividend income is not taxable.
6. Income from SPV debt amortisation is not taxable in the investor's hands
7. If Capital Gains are obtained from the sale of units of International REITs, STCG is applicable if the holding period is 3 years
or shorter. STCG in this case is as per the applicable slab rate of the investor for the FY. LTCG tax is applicable on units held
for over 3 years calculated from the date of unit allocation and is 20% of indexed Capital Gains.
 Types of REITS

Based on Payoffs Based on how they are bought and held

Equity REITs Mortgage REITs Publicly Traded REITs Publicly Non-Traded REITs

Hybrid REITs Private REITs

Pros of REITs Cons of REITS How to Invest in REITs in India?

Liquidity Lack of Tax Benefits Stocks & ETFs Mutual Funds IPOs

Open to Diversity Market Risk REITs, like ETFs, are In India, very few Investors can keep an
listed and traded on domestic mutual funds eye out for REIT IPOs
stock markets. In India, engage in REITs, and and invest in them
Transparent Low growth
there are currently three real estate exposure is when they become
prospects
REIT options: Embassy very low. Investors available. This
Office Parks REIT, seeking exposure to necessitates extensive
Risk adjusted High maintenance Mindspace Business overseas real estate investigation and
returns fees Park REIT, and can participate in the comprehension of all
Brookfield India Real Kotak overseas REIT REIT risk elements.
Steady dividend Other Additional Estate Trust. Fund of Fund.
income Charges
 What are InvITs?
● Infrastructure Investment Trusts (InvITs) are Trusts sponsored by infrastructure developers that own, run, and invest in
finished and under-construction infrastructure projects.
● Roads and highways, power distribution networks, telecom towers, fibre optic networks, and other infrastructure assets fall
under this category.
● The primary goal of InvITs is to facilitate investment in India's infrastructure sector for general economic growth.
● It also intends to deliver a major percentage of its earnings as dividends to unit holders, providing investors with a
continuous income stream.
● InvITs are comparable to mutual funds. They, like mutual funds, combine small sums from diverse individuals and
institutions and invest in infrastructure projects. In addition, much as fund managers manage mutual funds, designated
managers handle InvITs.

InvIT Rules in India

InvITs and Real Estate Investment Trusts (REITs) were initially introduced as alternative investment funds by SEBI (Securities
Exchange Bureau of India) in 2014. There are 22 SEBI-registered InvITs in India as of September 8, 2023. Some of the SEBI
InvITs regulations for Infrastructure Investment Trusts in India are as follows:

● An InvIT must invest at least 80% of its total assets in completed revenue-generating infrastructure projects.
● The remaining assets held by the InvIT, up to a maximum of 20%, can be invested in under-construction infrastructure
projects and various SEBI-approved Equity, Debt, and Money Market instruments.
● On a biannual basis, invITs must distribute at least 90% of their income to unitholders as dividends .
 How are InvITs formed and it’s Structure
Appointment of Appointment of
Sponsor Setting up an InvIT Listing
Trustee Managers

1. Sponsor
An InvIT can have up to three sponsors. A sponsor is typically an
infrastructure development company that created, owned, and/or operated
the trust's infrastructure assets. According to existing legislation, InvIT
Sponsors must hold a minimum 15% share in the Trust for at least three
years after the trust's inception.
2. Manger
An InvIT typically has two managers: an investment manager and a project
manager.
The investment manager is in charge of ensuring that the InvIT's existing
investments are producing the expected returns and for making new
investment decisions on behalf of the Trust in order to ensure the
continued growth of InvIT assets.A project manager's primary tasks
include ensuring smooth operations in the case of completed Trust
projects as well as timely delivery of under-construction projects.
3. Trustee
A SEBI-approved Trustee is a business with a track record of providing
Trusteeship services. A trustee's primary tasks include holding an InvIT's
assets in trust to protect the unitholders' interests. An InvIT trustee's other
responsibilities include guaranteeing the timely distribution of dividends to
unitholders and overseeing the activity of the InvIT manager(s).
 Types of InvITs

Pros of InvITs Cons of InvITS

Diversification Unpredictable Cash On the basis of

As per SEBI
Flows Source of Funds

Regular Income Taxable Dividend &

Interest Income
1. Energy such as power
Professional Low liquidity generation and distribution
Management 2. Transport & Logistics e.g. 1. Privately Held
operating highways and other InvITs
Capital Gains Limited Investment toll roads 2. Public Listed
Choices 3. Communications e.g. optical InvITs
fibre networks and telecom
towers
4. Social and Commercial
Infrastructure e.g. parks
5. Water and Sanitation e.g.
irrigation networks
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