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FINAL PRESENTATIONPresented By-Ankit Dhanuka

Roll No:109Faculty Guide:Prof. Subir SrimaniCompany Guide:Mr.JagdishSingh

(Head, Corporate Treasury, ITC Ltd)

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OBJECTIVE

• “To find out the methodology of ranking Debt Mutual Fund Schemes that can be adopted by ITC Limited to invest its surplus cash”.

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TREASURY OPERATIONS AT ITC LTD

Head Corporate Finance

Head Strategic Planning

Head Corporate Treasury

Forex Domestic

Manager Front Office

Assistant Manager

Manager Back Office

Assistant Manager

Head Corporate Planning

Structure Of Corporate Finance

TREASURY OPERATIONS AT ITC LTD

To always remain state of art,

VALUE PROPOSITION

Business Friendly Solutions

reliable & optimal MISSION

VISION

To become the smartest Corporate 4 Treasury in the country

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Responsibilities of

Corporate Treasury

Forex Management

Cash Management

Working Capital

Management

Investment of Surplus

Cash

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INVESTMENT OF SURPLUS CASH

Pattern followed around the world by theCorporates to allocate surplus cash-

1. 58% use Bank Deposits.

2. 51% use money market mutual funds.

3. 24% use direct investments .

(Source: Survey conducted by gtnews.com)Condt..

INVESTMENT OF SURPLUS CASH

(Source: Survey conducted by Ernst & Young)

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OBJECTIVETo understand the Mutual Fund Industry and the factors affecting it.

•To understand the Ranking Methodology of debt Mutual Fund schemes used in the Industry.

•To critically examine the Ranking Methodology used by the Industry.This is to identify the pros and cons of the ranking methodology that would help in developing a new methodology of ranking mutual fund schemes.

•To suggest a ranking methodology to ITC Limited that would also meet its twin objective of Capital Protection & Return Optimization.

METHODOLOGY

Referring Discussing Presentations with

& text books Managers

Meeting Fund Managers

Interacting with Analyst from Credit

Rating Agency

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Limitations

Comparison with

competitors

Meeting all Fund

Managers

Study restricted to Liquid & Ultra

Short Term schemes

LIMITATIONS

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Real Estate/ Bullion

Bonds

Equity

Bank Fixed Deposits

Bank Fixed DepositsMutual Funds

ALTERNATIVES FOR SURPLUS DEPLOYMENT

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WHY RANKING IS NOT DONE FOR OTHER AVENUES

Fixed Deposits

• Requires regular quotations from all banks.

• Investments are made with the most suitable/available rates.

Fixed Maturity Plans

• Current statuatoryrequirement does not show the either the expected yield or the portfolio

Bonds/ Income Funds

• It requires analysis of interest rate movements.

• Fund Managers experience also plays a vital role

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Mutual Funds• A mutual Fund is a pool of money collected

from investors and is invested according to stated investment objective.

Investors

Fund

Securities

Returns

Pool their money in

Which Is invested In

Which Is given Back to

That generates

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Organization

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Structure

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Main Characteristics

Funds are invested in a portfolio of marketable securities, reflecting the

investment objective

Investors own the Mutual Fund

Managed by professional

Managers, who charge a hefty fee

Value of the portfolio & investors holdings, alters

with change in market value of investments

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PROS & CONS

Portfolio Diversification Professional Management. Risk Reduction. Reduction in transaction cost. Liquidity. Tax benefits.

No control over costsNo tailor-made portfoliosNo say on the management

Pros

Cons

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Risk & Return

Debt/Income Schemes

Gilt Scheme

Bond Scheme

Junk Bond

Scheme

Money Market Scheme

Balanced Scheme

Debt/Income Schemes

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RISKS OF INVESTING IN DEBT SECURITIES

Risk Involved

Interest Rate Risk

Re-Investment

risk

Call RiskLiquidity Risk

Inflation Risk

Default Risk

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WHY ONLY LIQUID & ULTRA SHORT TERM SCHEMES?

1. Based on liquidity available.2. Very sensitive to the interest rate

movements.3. Difficult to invest based on a pre

defined ranking methodology.

1. Used for daily cash management.2. A ranking methodology can be assigned as it shows less volatility with interest rates.

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Basis Liquid Funds Ultra Short Term Funds

Investment Tenure Debt Instruments held by this funds have shorter tenure

Debt Instruments held by this funds have Longer tenure

Average Maturity Portfolios of this funds have lower average maturity

Portfolios of this funds have higher average maturity

Exit Load

No Exit Load (Generally)

There can be an exit load if funds are redeemed within a specified time (Generally)

Tax Implications Less Tax Efficient (Dividend Distribution Tax of 28.325%)

More Tax Efficient (Dividend Distribution Tax of 22.66%)

Risk Factor

Less Risky

More Risky - This funds hold investments that have a higher maturity. - There is no limit on the mark to-market (MTM) component of liquid plus funds as opposed to the 10% MTM limit on liquid funds.

Ceiling on Maximum maturity

From May 1, 2009 this funds can only have investments in debt instruments of three months tenure

No such ceiling

Holiday NAV Available Not Available

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RANKING METHODOLOGY

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FILTERING

Corpus Size of the Scheme =≥500 Crores

Portfolio diversification.

Investors confidence.

Supports high value redemptions.

Helps preventing selling of securities at throwaway prices.

Control on Statutory Limit of 20%.

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FILTERING

Investment in AAA or Equivalent rated papers = ≥90% Highest degree of Safety & hence ensures “Capital Protection”. Highly Liquid Takes pressure of high value redemptions. (Investment in papers rated less than AAA = ≤10%)

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FILTERING

Investment in GOI Securities = ≤5%

Volatility is very high in this class of securities.

Investment is done by Fund Managers most to enhance yields.

If GOI component is higher in the portfolio, NAV might fall due to volatility, when corporate needs funds.

Investment in GOI Securities also requires MTM on a regular basis, thus impacting the NAV.

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FILTERING Average Maturity:This refers to the weighted average maturity period of all the

instruments under the corpus of the schemes as a whole.

The longer the average maturity, the greater the risk of rising interest rates.

When interest rates move down, bond prices move up, thus boosting debt funds' return and vice versa when rates move up.

The price of long-term debt securities generally fluctuates more than that of short-term securities when the interest rate changes. Consequently, mutual funds with several long-maturity papers in its portfolio are more sensitive to NAV fluctuations.

Liquid Schemes–180 days (90 days from May, 09)

Ultra Short Term Schemes–60-365 days.

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CRITERIA APPLICATION

7 Days 15 Days

Days Since Inception

7 Days, 15 Days

1 Month, 3 Month, 6

Month

• Point To Point Returns

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REASONS FOR ACCEPTINGIt would not give the true picture

Difficult to compare with a newly launched fund Since

Inception

The underlying assumption is that the funds recent performances are most likely to continue in the next fortnight as well

7 Day & 15 Day

Since investment is for a very short duration, this period becomes too large

1 Month,

3 Month

& 6 Month

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RATIOS FOR PERFORMANCE EVALUATION

Alpha Ratio

Ratio

Sharpe Ratio

SortinoRatio

TreynorRatio

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PARTICULARS ALPHA RAT IO

Definition Jensen's Alpha=Portfolio Return-(Risk Free Rate+Port folio Beta*(Mkt Return-Risk Free Rate))

What it m easures

Excess return over the desired return obtained vrom CAPM

Calculatio n Jensen's Alpha=Portfolio Re turn-(Risk Free Rate+Portfolio Beta*(Mkt Return-Risk Free Rate) )

Positive Ratio In dicates

MF did better than then exp ectat ion

Higher the Better TRUE

Advantag e

Good indicator of the past

Disadvan tag e

Does not tell about the future. Too many parameters required

Dep ende nt F actors

Realized Return, Mkt Return, Risk Free Rate, Beta of portfolio

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PART IC ULAR S SHARPE RAT IO

Defini tion It is calculated by subtracting the risk-free rate of return from the rate of return for an investment and dividing the result by the standard deviation of its re turn

What it m easu res

Whether the investments are result of smart investment moves or result of excessive ris k.

Calculatio n

(Return-Risk Fre e Ra te) / Standa rd Deviation of Return

Positive Ratio In dicates

MF did better than comparable T-B ill

Higher the Better TRU E

Advantag e

-Good indicator of the past, directly com putable . -Not relative to a benchmark Index so can be used to analyse other asset classes, absolute retu rns etc.

D isadvan tag e

-Does n ot tell about the futu re . -Does n ot include those risks that do not affect the volat ility. -Penalizes both upside and d ownside volatility . -Not suitab le for Index-sensitive portfo lios.

Dep ende nt F actors

Excess Return & Vola tility

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PART IC ULAR S TREYNOR R ATIO

Defini tion Measures the return earned in excess of riskless inves tm en t per un it of market risk

What it m easu res

The return in excess of riskless investment p er unit of systematic risk

Calculatio n

(Portfolio Return-Risk Fre e Ra te) /B eta

Positive Ratio In dicates

Did better than Risk Free Rate.

Higher the Better TRU E

Advantag e

-Good indicator of the past . -Can be used for comparing different portfolios with a sim ilar benchmark.

D isadvan tag e

-Does n ot tell about the futu re . -It is just a ran king criterion. -Does n ot Quantify the value added. -Not useful for comparing portfolios in d ifferent asset class s ince Beta is required in the calcu la tion.

Dep endent F actors

Return, Risk Free Rate, Systematic Risk

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27 Schemes

8 Failed Corpus Filter

3 Failed AA Filter

1 Failed Average Maturity

One Scheme that failed Average Maturity Filter also failed the AA Filter. Hence there are only 16 (27-8-3) Schemes left for analysis

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For calculation of Final rankings, the ratios calculated are given a weightage of 5% only

This is because Funds having lower volatility, give relatively higher returns due to base

effect of volatility.

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Ranking Analysis

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The analysis shows that Various Ratios calculated are not working in favour of the investor investing for relatively shorter period for cash managemet,like ITC.

The portfolio return calculated based on 7 days and 15 days is the most suited for investors investing for shorter period.

This is also based on the premise that though Past returns do not guarantee future returns ,they are indication of the same.

This also calls for sure that the Fund Manager who has been able to generate better returns from the market is most likely to achieve the same (at least in the shorter time horizon).

FINDINGS

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Corporates like ITC Limited should use the portfolio return calculated based on 7 days and 15 days.

They should always avoid the Jargons that are used to create unnecessary confusions.

They should also put restriction on the maximum investible amount per Scheme.This should ideally be kept at a maximum of 10% of the Schemes Corpus.However,it can never go beyond 20% as explained earlier.

They should also put restriction on the maximum investible amount per Asset Management Company. This is ideally decided by every corporate based on its Treasury size ,its relationship with the AMC,the credentials of the AMC,etc.This Is to avoid any counter party risk.

CONCLUSION

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Thank You