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ITC Project Report
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1
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