DEBT PMS vs MUTUAL FUNDSFeatures PMS Mutual FundsInvestment High degree of customisation to No scope for customisaitonstrategy address clientss needs and risk appetiteOwnership Clients directly owns securities Unitholders own units of the held in an account in their name fund, which in turn owns securities in the portfolioTransparency Daily reporting of portfolio status – NAV reported daily but portfolio 100% transparent, enabling composition reported periodically constant monitoring (monthly)Types ofSecuritiesTreasury Bills: Treasury bills (T-bills) are money market instruments, i.e., short-term debtinstrumentsissued by the Government of India, and are issued in three tenors—91 days, 182 days, and 364days. The T-bills are zero coupon securities and pay no interest. They are issued at a discount andare redeemed at face value on maturity.Cash Management Bills: Cash management bills (CMBs)3 have the generic characteristics of T-billsbut are issued for a maturity period less than 91 days. Like the T-bills, they are also issued at adiscount, and are redeemed at face value on maturity. The tenure, notifi ed amount, and date of issueof the CMBs depend on the temporary cash requirement of the government. The announcement oftheir auction is made by the RBI through a Press Release that would be issued one day prior to thedate of auction. The settlement of the auction is on a T+1 basis.Dated Government Securities: Dated government securities are long-term securities that carry afi xed or fl oating coupon (interest rate), which is paid on the face value, payable at fi xed time periods(usually half-yearly). The tenor of dated securities can be up to 30 years.State Development Loans: State governments also raise loans from the market. State DevelopmentLoans (SDLs) are dated securities issued through an auction similar to the auctions conducted for thedated securities issued by the central government. Interest is serviced at half-yearly intervals, and theprincipal is repaid on the maturity date. Like the dated securities issued by the central government,the SDLs issued by the state governments qualify for SLR. They are also eligible as collaterals forborrowing through market repo as well as borrowing by eligible entities from the RBI under theLiquidity Adjustment Facility (LAF).Types of DatedGovernmentSecuritiesFixed Rate Bonds: These are bonds on which the coupon rate is fi xed for the entire life of the bond.Most government bonds are issued as fi xed rate bonds.Floating Rate Bonds: Floating rate bonds are securities that do not have a fi xed coupon rate. Thecoupon is re-set at pre-announced intervals (say, every 6 months, or 1 year) by adding a spread overa base rate. In the case of most fl oating rate bonds issued by the Government of India so far, thebaserate is the weighted average cut-off yield of the last three 364-day Treasury Bill auctions precedingthe coupon re-set date, and the spread is decided through the auction. Floating rate bonds were fi rstissued in India in September 1995.Zero Coupon Bonds: Zero coupon bonds are bonds with no coupon payments. Like T-Bills, they areissued at a discount to the face value. The Government of India issued such securities in the 90s; ithas not issued zero coupon bonds after that.
Capital Indexed Bonds: These are bonds, the principal of which is linked to an accepted indexof infl ation with a view to protecting the holder from infl ation. Capital indexed bonds, with theprincipal hedged against infl ation, were fi rst issued in December 1997. These bonds matured in2002. The government is currently working on a fresh issuance of Infl ation Indexed Bonds whereinthe payment of both the coupon as well as the principal on the bonds would be linked to anInfl ation Index (Wholesale Price Index). In the proposed structure, the principal will be indexed andthe coupon will be calculated on the indexed principal. In order to provide the holders protectionagainst actual infl ation, the fi nal WPI will be used for indexation.Bonds with Call/Put Options: Bonds can also be issued with features of optionality, wherein theissuer can have the option to buy back (call option) or the investor can have the option to sell thebond (put option) to the issuer during the currency of the bond.The optionality on the bond could be exercised after the completion of fi ve years from the date ofissue on any coupon date falling thereafter. The government has the right to buy-back the bond3The Government of India, in consultation with the RBI, decided to issue a new short-term instrument known as CashManagement Bills (CMBs) tomeet the temporary mismatches in the cash flow of the government.