National Institute of Securities Markets (NISM)

SIP and EMI: three-letter synonyms, but diametrically opposite

Posted on December 2, 2025December 3, 2025 by Auburn Solutions

SIP and EMI: three-letter synonyms, but diametrically opposite

You are king of your money or slave to your expenses

SIP and EMI are similar in the sense a fixed amount hits your bank account every month on a given day. However, these two are vastly different: it is about your approach to managing your finances. In SIP, you are in control, you are saving and investing your money and will enjoy the fruits later, when you want. In EMI, you have spent the money, and you are bound by it – you do not have a choice but to foot the bill. Not just that, in SIP, you are getting the returns whereas in EMI you are paying the interest, apart from the principal.

Approach to your finances

In this discussion, when we mention EMI, we will keep purchase of house out of purview. This is the accommodation where you stay, not a second real estate for investment purposes. The home where you stay has emotional and other aspects attached to it, and there are a handful of reasons why you should purchase your residential property even on EMI. In this article, we are talking of other expenses on EMI such as purchase of expensive mobile phone, going on holiday, purchase of a better car when you have one, fancy wedding, etc.

It is important to have a balance in your expenses. We are not saying no to any of those purchases on EMI, but your life should not be based on the culture of buy-now-pay later (BNPL). You are earning money and should enjoy your life, but should not end up in a debt trap where you are struggling to manage your EMIs. A classic example of this debate between investment and enjoyment is that if you purchased the equity stock of Enfield thirty years ago, instead of buying a bike, the current value is many-fold higher and you would have earned handsome returns. On the other hand, the enjoyment you would have had from the bike at age thirty, you would not have at age sixty.

Having said that, at age thirty, if you binge on BNPL through EMIs or credit cards or other schemes, you become slave to your expenses. If a bad period befalls your job or business or profession, you will be in a soup. The ballpark guidance is, your EMIs should not exceed 40 percent of your net-of-tax income.

In SIP, you are saving from your monthly income and investing in suitable funds. You are earning market-based returns through the tenure of the SIP. If there is a cash-flow issue, you may not do one-or-two SIPs; the invested amount continues to earn. At the end of the tenure, you decide how you want to enjoy – purchase of a car or bike or foreign holiday. You are not taking any loan and you are king of your own money.

Illustration

You are considering a purchase of Rs 5 lakh, on EMI for five years. We will compare EMI and SIP for five-year tenure. On SIP, there would be inflation as well, as you will purchase that item after five years. Let us assume inflation at 5 percent per year. Post inflation, the cost becomes Rs 6.38 lakh. We are assuming a rate of return (in SIP) and rate of interest (in EMI) of 12 percent per year, for simplicity.

Equated Monthly Instalments
Your cost Rs	5 lakhs
Rate of Interest %	12 /year or 1 /month
Tenure	5 years (60 months)
Time of payment	end of month
EMI Rs / month	11,122

Computation of EMI in Excel
PV	5,00,000
Rate	1.0%
NPER	60
Type	0
FV	0
PMT	?
PMT	₹ -11,122

Explanation of the computation:

PV is present value, which is Rs 5 lakh
Rate of interest we have taken at 1 percent per month
NPER is the number of instalments, which is 5 X 12
Type 0 means payment at the end of the month
FV is future value, which is nil as you have paid back the loan
PMT is the PMT formula in excel, which gives us the final output.

Systematic Investment Plan
Your future cost Rs	6.38 lakh
Rate of return %	12 /year or 1 /month
Tenure	5 years (60 months)
Time of payment	beginning of month
SIP Rs / month	7,736

Computation of SIP in Excel
PV	0
Rate	1.0%
NPER	60
Type	1
FV	6,38,141
PMT	?
PMT	₹ -7,736

Explanation of the computation:

PV is present value, which is nil as you are starting from scratch
Rate of return we have taken at 1 percent per month
NPER is the number of instalments, which is 5 X 12
Type 1 means payment at the beginning of the month
FV is future value, which is Rs 6,38,141 post inflation
PMT is the PMT formula in excel, which gives us the final output.

Observation from the calculations

In EMI, you are satisfying yourself today, by preponing the purchase. However, you are paying interest, apart from the principal, over the next five years. Your monthly outgo is Rs 11,122 and you end up paying Rs 6.67 lakh. In SIP, you are postponing your purchase for five years, hence the cost goes up due to inflation. Even then, you are earning on your instalments, by virtue of which your monthly outgo is Rs 7,736 and your principal amount is Rs 4.64 lakh.

Conclusion

With changing value systems, more and more people, particularly the younger generation, are leaning towards BNPL. There is nothing wrong in enjoying your life, but if you become a slave to it, the enjoyment would be impacted.

Article originally published in the Economics Times.

Author: Mr. Joydeep Sen, Corporate Trainer, Columnist

Value Investing Lessons from India’s ICC Women’s World Cup Triumph

Posted on November 26, 2025 by Auburn Solutions

Watching the finals of the ICC Women’s World Cup Final, where the Indian Women’s Cricket Team defeated the South African Women’s Cricket Team by 52 runs, was no less than watching a masterclass in discipline and patience, and of seizing the right moment. Their performance reminded me of how Warren Buffett described value investing using a baseball analogy. Buffett said that the lesson for investors is that you don’t need to swing at every pitch. He famously said, “The trick in investing is just to sit there and watch pitch after pitch go by and wait for the one right in your sweet spot. And if people are yelling ‘Swing, you bum!’ ignore them.”

For the Women in Blue, every loose ball was a clear opportunity to get on the front foot and turn the chance into runs. Like in value investing, when fear drives valuations down, and quality businesses get offered at a discount, the disciplined investor steps forward and puts her money to work.

Despite losing some early wickets and finding themselves under pressure, the Indian team, with their measured approach, defended their total and waited for the opponents to make mistakes. Similarly, value investors know that in bull-market phases, they might need to get on the back foot – to preserve capital and avoid overpriced froth. But sooner or later, the market will correct. Value investors then shift to the front foot – deploy capital and buy with conviction. Value investing, like cricket, is not about being aggressive all the time, but being patient and opportunistic.

The Indian fielders supported the bowlers and seized chances, especially that outstanding catch in the mid-wicket region, off the bat of the South African captain. This gave the team a significant “margin of safety” – a cushion that helped them seal the final. Value investors always seek a “margin of safety” – buying businesses whose intrinsic value is significantly higher than the price they pay so that they are protected. Just as the smart fielding and disciplined bowling gave the Women in Blue a buffer against the South African tail-enders!

For the Women in Blue, winning the World Cup final wasn’t about 50 overs – it was about planning, adapting, and enduring. Value investing is no different. It isn’t about timing a quick trade—it’s about owning high-quality companies for years, letting compounding work, and ignoring the noise around you.

The Indian team’s journey, from group stage setbacks, knock-out tension, and the final triumph, is a metaphor for enduring market cycles, staying disciplined, and ultimately triumphing with the right strategy. The pitch may be rough, the bowlers aggressive, the crowd roaring – but the value investor stays alert for the loose ball, knows when to defend and when to strike, builds in margins of safety, buys when prices are low, and plays the long innings.

Article Originally published in NISM Newsletter November 2025.

Author: Mr. Sashi Krishnan, Director – NISM

Strengthening India’s Financial Backbone: The Vital Role of CCIL in Money, Forex and Bond Markets

Posted on November 26, 2025November 26, 2025 by Auburn Solutions

In the complex architecture of India’s financial system, very few institutions have had as profound and far-reaching an impact as the Clearing Corporation of India Limited (CCIL). Established in the early 2000s, CCIL has grown to become the country’s central counterparty (CCP) for a wide range of financial transactions. Acting as the invisible but essential backbone of the financial ecosystem, CCIL ensures the smooth functioning of India’s money, foreign exchange and bond markets by providing efficient clearing, settlement and risk management services in an efficient and transparent manner.

The roots of CCIL can be traced back to the need for a more secure and standardized post-trade infrastructure for India’s growing financial markets. Before its establishment, most trades in Government securities and the Forex markets were conducted bilaterally, relying heavily on manual confirmations, individual counterparty risk assessments and inefficient settlement arrangements. This led to systemic inefficiencies and a higher risk of settlement failures, especially in volatile markets.

In response to this gap, CCIL was established in April 2001 as a Market infrastructure institution under the regulatory oversight of the Reserve Bank of India (RBI). It began operations in 2002, initially focusing on the clearing and settlement of Government securities (G-secs). Over the years, its mandate expanded to include a wide array of instruments across the money, forex, and financial derivatives markets.

One of CCIL’s most important contributions is its role as a central counterparty (CCP). In any transaction that goes through CCIL, the Corporation steps in between the buyer and the seller—becoming the buyer to every seller and the seller to every buyer. This process, known as novation, significantly reduces counterparty risk, as participants are no longer exposed to each other’s creditworthiness but only to CCIL, which operates with robust risk management mechanisms, including margining and collateral requirements.

In the money market, CCIL plays a central role by facilitating the settlement of various instruments such as repos, reverse repos, call money, notice and term money transactions. These are essential tools for short-term funding and liquidity management among banks, financial institutions, and the RBI itself. By providing a reliable settlement infrastructure, CCIL has helped create a more efficient and liquid money market, which in turn supports the implementation of monetary policy.

Furthermore, CCIL was instrumental in developing the Collateralised Borrowing and Lending Obligation (CBLO), a money market instrument that enabled non-banking entities like Mutual funds and Insurance companies to participate in short-term borrowing and lending. Though CBLO was phased out in favour of the more modern Tri-party Repo (TREPS) system, CCIL’s role in creating a collateral-backed, transparent framework for money markets remains one of its landmark achievements.

In the foreign exchange market, CCIL has transformed the manner in which trades are settled. Traditionally, Forex transactions carried significant settlement risk, especially when payments were made across time zones involving different currencies. CCIL introduced a centralised settlement mechanism for interbank USD/INR and other forex transactions using Payment-versus-Payment systems. This eliminated the possibility of one party defaulting after receiving the currency it bought, thus enhancing trust and participation in the market.

Moreover, CCIL operates trade reporting and settlement systems for a wide range of Over-the-Counter (OTC) derivative instruments in the forex segment, including forward contracts, swaps, and options. These instruments are critical for hedging currency risk; by ensuring accurate reporting, risk aggregation and timely settlement, CCIL plays a key role in maintaining the stability of the Indian forex market.

The bond market, particularly the Government securities market, has also benefited immensely from CCIL’s infrastructure. India has one of the largest and most active Government securities markets among emerging economies, and CCIL ensures the settlement of these transactions through its centralized clearing platform. It supports both Order Matching and Negotiated Dealing platforms (NDS-OM), enabling a wide variety of participants, including banks, primary dealers, insurance companies, pension funds, and even retail investors, to trade securely.

By offering Delivery-versus-Payment settlement in the Bond market, CCIL ensures that the delivery of securities only happens if the corresponding payment is made. This mitigates principal risk and encourages wider participation, especially from foreign and institutional investors. Additionally, CCIL’s netting capabilities reduce the settlement obligations for each participant, enhancing liquidity efficiency and reducing operational costs.

Another critical area where CCIL has had a profound impact is Risk management and market stability. It employs sophisticated margining systems, stress testing frameworks and default management protocols to shield the financial system from potential disruptions. In times of market volatility, such as during the global financial crisis or currency shocks, CCIL’s robust infrastructure has acted as a strong and stable shock absorber, ensuring that market operations continue without systemic breakdowns.

CCIL also serves as a trade repository for Interest rate and Credit derivatives, in line with the global move toward transparency in derivative markets following the 2008 crisis. It enables regulators to monitor the build-up of risk across counterparties and instruments, aiding macroprudential supervision.

In recent years, CCIL has played an active role in promoting financial inclusion and retail participation, especially in the bond market. Through the RBI Retail Direct platform, which leverages CCIL’s infrastructure, Individual investors can now directly invest in Government securities without intermediaries. This has democratized access to what was once an institutional market and supports broader financial literacy and savings mobilization.

Looking ahead, CCIL’s role will become even more important as India seeks to deepen its financial markets, internationalize the Rupee, and align its systems with global best practices. Initiatives like expanding clearing services to more currency pairs, supporting real-time settlement, integrating with global central counterparties, and embracing new technologies like blockchain and AI-based risk monitoring will be pivotal in this next phase.

Moreover, as India opens its Bond market further to global investors and as domestic financial instruments become more complex and innovative, the need for a trusted, efficient, and resilient clearing and settlement mechanism will only grow. In this evolving environment, CCIL’s core strengths viz. neutrality, risk management, transparency and operational excellence, will continue to be indispensable.

In conclusion, CCIL’s journey from a specialized clearing agency to a systemically important Financial market infrastructure institution has been nothing short of transformative. By underpinning the secure functioning of India’s money, forex, and bond markets, CCIL has enabled broader participation, increased market efficiency, reduced systemic risks and supported the RBI’s monetary policy framework. Its quiet but consistent presence behind every large transaction ensures that the wheels of India’s financial system turn smoothly—and that, in itself, is a mark of success.

Adding to this recognition, in a recent speech, the Honourable Governor of the Reserve Bank of India highlighted CCIL’s pivotal role in safeguarding and modernizing India’s financial markets. He called upon CCIL to broaden its scope, particularly in supporting the internationalization of the rupee by expanding beyond the USD/INR settlement and facilitating multi-currency clearing. The Governor also emphasized the need for CCIL to embrace cutting-edge technologies such as tokenization, AI-based surveillance systems, and real-time retail access. His remarks underline the trust placed in CCIL as a cornerstone Institution and its growing responsibility in shaping the next era of India’s financial market evolution.

Co-authors:

Vivek Sharma – Visiting faculty, NISM
Suresh Narayan – Visiting faculty, NISM

Specialized Investment Funds: taking stock of what new they offer

Posted on November 24, 2025November 24, 2025 by Auburn Solutions

Specialized Investment Funds: taking stock of what new they offer

They came with a promise of differentiation. Now is the stage of baby steps for the concept.

Earlier, the concept of Specialized Investment Funds (SIFs) was allowed by SEBI, in the space between Mutual Funds meant for the masses and PMS / AIFs meant for the classes. SIFs are allowed to have a different risk-return profile than MFs and the target audience, in the mass affluent segment, are expected to have a better understanding of the risk-return profile than the masses.

After the initial stage of boardroom deliberations and specific approvals from SEBI, a few SIF funds have been launched and more are in the offing. We discuss how you should look at it, for your investment portfolio, at this point of time.

Product differentiation with MFs

To understand the differentiation in SIFs, we will compare with MFs as that is something all of us are familiar with. While there are quite a few parameters where SIFs are different from MFs, the most prominent is the allowance for long-short funds in SIFs. In MFs, derivatives can be used only for the purpose of hedging.

As an example, in Arbitrage Funds of MFs, the fund takes short position or sell position in only those stocks that are there in the portfolio, and to the same extent as the exposure. The overall short or sell positions in the portfolio of an Arbitrage Fund is the same as the stocks in the portfolio e.g. if 65 percent is in equity stocks, then the contra or short position is also 65 percent. In Balanced Advantage Funds (BAFs) of MFs, they take short position in certain stocks which are there in the portfolio, as per the valuations in the market. However, the contra or short positions in a BAF is less than the equity component of the portfolio. This is known as hedged exposure i.e. a short position in derivatives against stocks in the portfolio.

In SIFs, they are allowed to have short or sell position in derivatives even in stocks where they do not have exposure. This is known as unhedged or naked position in derivatives. This strategy, allowed in SIFs and not in MFs, is known as long-short strategy. The implication is, the fund manager intends to benefit from prices going up in stocks where s/he is long (i.e. the stock is there in the portfolio) and benefit from prices coming down in stocks / indices where s/he is short (i.e. sell position in derivatives). This unhedged position is allowed up to 25 percent of the portfolio.

As per general understanding in the market and as per SEBI, a long-short strategy is a higher-risk-higher-return strategy as against long-only e.g. a plain vanilla MF portfolio of stocks. As per SIF fund managers coming up with funds with long-short, this is a lower-risk-higher-return strategy. This statement may be a marketing pitch, and may even play out in certain market conditions, provided the fund manager gets the calls correct. In a conventional long-only MF product, when the market is tanking, the fund manager can at most have some cash in the portfolio instead of stocks. In an SIF, the fund manager can benefit from the short position in derivatives, up to 25 percent. However, in a non-trended market, the separate long and short positions can both take a hit if the call goes wrong.

Evaluation parameters

For you as an investor, looking at an SIF, the relevant parameters are:

Returns: there is no track record as of now, as SIFs are just getting launched. Only in the future we will be in a position to compare the performance with MFs.
Liquidity: liquidity of exposures in your portfolio is relevant. Having said that, everything need not be liquid as in certain investments, the fund manager needs time for the strategy to play out. There would be a liquid component in your portfolio e.g. liquid funds or debt funds.
Strategy: when there is a SIF product on offer and you like the strategy, you have to see where it fits into your portfolio. If it suits your objectives, it is good for you.
Product positioning: currently, some SIFs are positioned as ‘Arbitrage Plus’ i.e. on the risk-return scale, slightly higher than Arbitrage Funds of MFs, whereas some are relatively aggressive long-short funds. Look at the extent of open equity in the portfolio.
Taxation: SIFs are offered by MF houses and the tax treatment is the same as MFs. Hence over an adequate holding period, you get the efficient taxation rate of 12.5 percent plus surcharge and cess.
Ticket size: it is minimum Rs 10 lakh in SIFs, but that is across funds from the same house. SEBI allows up to 7 SIF funds per house.

Originally Published in The Mint.

Author: Mr. Joydeep Sen, Corporate Trainer, Columnist

Explainer: How to distinguish speculation from investment in IPO bets

Posted on November 11, 2025 by Auburn Solutions

Explainer: How to distinguish speculation from investment in IPO bets

If most of an IPO is OFS, you’re financing someone’s exit, not the company’s growth.

India’s initial public offer or IPO market is booming. For many retail investors, it’s challenging to decide whether to apply, avoid, or observe. The answer isn’t found in market noise. It’s in asking smart questions—and doing a few simple calculations—before risking your savings, says Venkatachalam Shunmugam.

Where is my money actually going?

Every IPO splits into two buckets.

Fresh Issue: The company receives new money to expand, repay debt, or invest in technology.

Offer for Sale (OFS): Existing shareholders—founders, venture funds, or private investors—are selling their stake. This money doesn’t go to the company; it goes to them.

If most of an IPO is OFS, you’re financing someone’s exit, not the company’s growth. Check the prospectus—available for free on the Securities and Exchange Board of India (Sebi) website or stock exchange portals. If less than 30% of the issue is fresh capital, pause and ask: Why are insiders rushing to cash out now?

Is the price reasonable?

Extract three years of revenue and net profit from the prospectus and compute the Price-to-Earnings (P/E) ratio.
Now compare this with similar listed companies. If the IPO trades at 200x earnings while peers trade at 40–50x, you’re paying five times more for the same rupee of profit. Unless growth is spectacular, that’s overpaying. Remember, when an IPO is priced as if everything will go perfectly, even a small mistake, a new competitor, or a market slowdown can significantly harm investors.

Can this business actually make money?

A company’s margins tell you how much of every rupee earned turns into profit. Gross margins above 60% indicate strong pricing power. Declining margins, even as sales increase, signal rising costs or a decline in competitiveness. A declining net margin—such as a drop from 6% to 2%—indicates that the business isn’t growing profitably. Always chart three years of margin data from the prospectus.

Is the company in debt?

Turn to the balance sheet. A Debt-to-Equity ratio above 2 means the company borrows twice as much as its own capital—dangerous if earnings dip. Below 1 is typically safer. An Interest Coverage ratio below 2–3x means the company struggles to meet interest payments—a significant concern. High debt with weak margins is a double blow; even mild downturns can hurt profitability.

How efficiently does it use money?

Profitability ratios like Return on Equity (ROE) and Return on Capital Employed (ROCE) reveal efficiency:
ROE or ROCE above 15% signals strong capital use; below 5% inefficiency. If ROE lags peers but the IPO demands a premium valuation, think twice.

What about size and scale?

FOR YOUNG OR loss-making firms, use Price-to-Sales (P/S) instead of P/E. If the IPO’s P/S is 10x and peers trade at 2 to 3x, it’s overvalued relative to revenue. Unless growth or margins significantly exceed those of its peers, avoid paying that premium.

Your checklist

Download the prospectus: Read “Business Overview” and “Use of Proceeds.” This helps you understand what the company actually does and whether your money is used for growth or to pay off old investors.

Extract three-year data: Revenue, profits, gross and net margins. This gives you a sense of consistency—whether the business is growing steadily or showing one-time spikes.

Calculate 5 ratios: P/E at upper price band, gross margin, net margin, debt-to-equity, ROE. This allows you to judge if the IPO’s pricing aligns with its financial performance.

Find peers: Compare these ratios to at least two listed companies in the same sector—preferably a well-known one. This allows you to see if the IPO is fairly valued or just overhyped.

Decide: Is the valuation premium justified by stronger performance — or just hype? If the numbers don’t add up, it’s better to stay out than chase a “hot” issue.

Red flags

IPO dominated by offer-for-sale (insiders exiting).
One-time profits from non-operational items (insurance claims, asset sales).
Falling margins despite growing sales.
High debt with weak interest coverage.
ROE/ROCE is significantly below that of peers.
Valuations implying flawless execution forever.

The reality check

With over 90 IPOs hitting Dalal Street this year, the temptation to join the frenzy is strong. But in markets, discipline outweighs excitement. A simple 90-minute self-audit—downloading the DRHP, analysing ratios, and comparing peers—can save you from costly mistakes with your hard-earned money. When you treat every IPO like a business, not a gamble, you stop chasing headlines and start thinking like an investor. Because in an IPO boom, math—not momentum—is your best defence.

Author:

Mr. Venkatachalam Shunmugam, partner, MCQube

This article was originally published in Financial Express.

Tired of stock market rollercoasters? Explore bond investing

Posted on October 24, 2025November 12, 2025 by Auburn Solutions

Riding the stock market rollercoaster can be exciting, but it’s also exhausting. Bond investing on the other hand can build a stable and predictable core for your portfolio. And that’s why bond investing is increasingly becoming a smart strategy for investors seeking balance and peace of mind.

But here’s the catch: to truly understand the power of bonds, you need to go beyond just knowing that they are stable and safe. You must understand how they work, how they are priced, and how to measure their real risk and return. And fixed income mathematics or bond mathematics as popularly known, helps you understand the value and risk of a bond or any other debt instrument. The word “mathematics” may sound intimidating, but don’t worry, there are no complex calculus involved, but simple practical math.

Core concepts in fixed income mathematics
1. Time Value of Money (TVM): A 100 rupees today is worth more than the same amount in future. TVM helps you to calculate exactly how much more. By using the TVM formula you can figure out the present value of all those future interest payments you’ll receive when you invest in a bond.

2. Yield to Maturity (YTM): It is the total annual return of a bond if you held it until it matures. Unlike the coupon rate, it is calculated based on several factors such as the bond’s face value, current price, coupon payments, and time remaining till maturity. Using YTM you can compare bonds of different coupon rate and maturities.

3. Duration and Convexity: Interest rate and bond prices are inversely related. Which means, when interest rate goes up, bond prices come down. But to calculate by how much the bond price goes down, you need to understand the measures of duration and convexity. Because they measure a bond's sensitivity to interest rate changes, helping you manage the risk.

Your simple guide to Indian debt market and how to learn more

Do you want to move beyond fixed deposits and explore other debt market products

Fixed income mathematics course by NISM & FIMMDA

The Introduction to Fixed Income Mathematics course, jointly developed by the NISM and the Fixed Income Money Market and Derivatives Association of India (FIMMDA), is one of the most structured courses available on this topic.

This course is divided into three modules that build on each other perfectly:

1. Pricing of Bonds: The first module builds your foundation by explaining the concept of Time Value of Money (TVM) and systematically takes you through all the concepts needed to price different types of bonds.

2. Calculating the Bond Returns: The second module gets into the nitty-gritty of calculating returns. It will explain the concept of Yield to Maturity YTM) and discuss yield curve theories, required for understanding the impact of broader economic activities on the bond market.

3. Understanding Risks in Bond Investments: In this third and final module you’ll learn to calculate Duration, Modified Duration, and Convexity. These are important to understand and manage the risk of a bond.

The course is entirely online, giving you the flexibility to learn over a period of 30 days. It has around 3 hours of learning content including interactive quizzes. The course fee is ₹2000/- plus taxes. And when you successfully complete the course, you will receive a joint certificate issued by NISM and FIMMDA.

Whether you’re finance student looking to build a serious career in finance, an analyst, a portfolio manager, or an investor looking beyond the stock market, this course will help you learn about fixed income mathematics which is non-negotiable. Explore the course details and feel free to reach out (elearning@nism.ac.in) if you have any questions.

These are some of the other courses jointly offered by NISM and FIMMDA, covering various aspects of the fixed income securities market.

Introduction to Fixed Income Securities
Overview of Indian Debt Markets
Introduction to Interest Rate Derivatives

Happy learning!

Author: Sandeep K. Biswal, Deputy General Manager-CCC, NISM

Why are retail investors voting with their wallets for passive products?

Posted on October 24, 2025December 1, 2025 by Auburn Solutions

The Assets under Management (AuM) of passive equity funds, as of 31 st March, 2025, was about 27% of the overall equity fund AuM of Rs.40 lakh crores. The AuM of passive equity funds have grown at a CAGR of 47% in the last 5 years, significantly outstripping the growth in AuM of actively managed equity funds. In this period the number of passive folios grew at 68% as compared to a meager 21% growth in active folios.

And therein lies a fascinating paradox – this explosive growth in AuM and folios of passive equity funds has happened even though many active equity funds have delivered better returns, with lower volatility, in comparison to their passive counterparts.

An analysis of fund returns over a 25 year period indicate that, over many time periods, large cap equity funds have outperformed the NIFTY 50 ETFs. Their volatility adjusted returns – measured by risk indicators like the Sharpe Ratio – match those of the NIFTY 50 ETFs.

Horizon (years)	CAGR		SD Annualised		Sharpe Ratio
31.3.2025	Large-Cap	Nifty 50 ETF	Large-Cap	Nifty 50 ETF	Large-Cap	Nifty 50 ETF
5	19.29	19.12	15.34	15.5	0.22	0.25
10	13.73	13.8	15.66	16.12	0.1	0.13
15	11.4	11.39	15.73	16.27	0.11	0.13
20	13.67	13.66	18.27	16.47	0.12	0.13
25	13.78	18.27	16.47	15.5	0.12	0.13

Managers of active funds have the ability to avoid index laggards, allocate tactically to outperforming sector and exercise judgement during periods of market stress. In theory, therefore, given their track record and the promise to deliver alpha, should not investors prefer active funds? Yet the fund flows tell a different story.

There are several structural and behavioral factors that explain why retail investor tilt towards ETFs and Index Funds. Firstly, retail investors find it difficult to identify which active fund manager will deliver alpha in the future. While some active large cap funds have outperformed their benchmark over the last 25 years, the consistency of such outperformance is not uniform and they have had periods of underperformance. Passive funds, in contrast, almost guarantee market matching returns without the uncertainty. In times of market volatility, retail investors become wary of “manager risk” – the risk that a chosen fund manager may underperform. Passive investing eliminates this layer of decision making.

Secondly, ETFs and Index Funds have some structural advantages. As ETFs trade like stocks, they offer inter-day liquidity. They offer complete transparency of holdings, as they mirror the underlying index, thus easing portfolio construction for asset allocators. Younger investors are less emotionally attached to the idea of star fund managers and more focused on efficient exposure to asset classes. For investment advisors, recommending ETFs or Index Funds, simplifies client communication and portfolio monitoring.

Thirdly, passive funds have a clear cost advantage. Expense ratios of ETFs and Index Funds are significantly lower than those of actively managed funds. Even if active fund managers outperform their passive counterparts by 200 basis points, their higher fees can erode their net advantage. Over long periods, compounding of this fee difference can tilt the scales in favor of passive funds. For instance, as can be seen the table above, actively managed large cap funds have, on average for a 25-year period, delivered a CAGR of 13.78% compared to the CAGR of 14.23% delivered by the NIFTY 50 ETFs. This would mean that Rs.10,000 invested in a NIFTY 50 ETF in the year 2000 would now be worth Rs.2.78 lakhs whereas Rs.10,000 invested in a large cap fund would be worth only Rs.2.52 lakhs. For a new generation of investors, who prefer predictability, simplicity, transparency and lower costs, investing in passive funds aligns with their financial philosophy.

Author: Mr. Sashi Krishnan, Director – NISM

Urban Infrastructure Financing in India: Challenges and Solutions for a Deeper Municipal Bond Market

Posted on October 16, 2025November 12, 2025 by Auburn Solutions

Urban Infrastructure Financing in India: Challenges and Solutions for a Deeper Municipal Bond Market

A World Bank report on ‘Financing India’s urban infrastructure needs’ estimates that India’s cities will require, till 2036, about USD 840 billion to build out the infrastructure required for the burgeoning urban population.1 This funding will be required mainly for water supply, sewage, solid waste, and mass transit projects. The report estimates that the total capital expenditure in urban infrastructure in the last decade, by all Indian cities, was just 0.6% of GDP as compared to 2.8% of GDP in China. India needs to invest a significant amount in urban infrastructure, and the current dependence of the Urban Local Bodies (ULBs) on their own tax and non-tax revenue, as well as transfers and grants from the government, will not suffice.

The funding gap will necessarily need to be bridged by market borrowings. For this, a vibrant municipal bond market has to develop.

As per the RBI Report on Municipal Finance (Nov 2024),2 the total estimated borrowings by ULBs from financial institutions were just ₹3,364 crores. This is less than 0.05% of GDP and constitutes just 5% of the total municipal receipts. As per SEBI data, the total municipal bond issuance for the period 2017 to 2025 is a mere ₹2,833.90 crores.3 The SEBI municipal bond dashboard indicates that as of 30th April, 2025, there are only 18 Municipal Bonds with outstanding maturity, across 37 ISINs. These 18 bonds have been issued by 13 ULBs. Of them, 4 are from Gujarat and 3 from Uttar Pradesh. Trading data on municipal bond trades, as put out by the National Stock Exchange, indicates very low liquidity in the secondary market.4 In 2024, the total traded volume was ₹281.45 crores, with just 4 bonds traded, and in 2023, the total traded volume was ₹193 crores, with just 4 bonds traded.

This data tells us that (i) ULBs have not resorted to either traditional bank financing or financing from the capital markets, and (ii) both the primary market and secondary market for Municipal Bonds are very shallow. The Municipal Bond market has not developed in India, as there are no real incentives for Urban Local Bodies (ULBs) to access the market at scale. External funding options like municipal bonds are not preferred, as the extent of capex funding from the Central Government and State Governments is very high. ULBs, almost entirely, rely on government-subsidized funding and grants, rather than accessing the capital markets, to meet their funding gaps. This reliance reduces the need for ULBs to build independent creditworthiness or establish robust financial management practices.

The big challenge will be to shift the financial landscape so that reliance on central and state funds does not completely undercut local initiatives. While central funds have been critical in driving infrastructure growth, they inadvertently reduce the pressure on ULBs to diversify their funding sources. This, in turn, does not push the ULBs to build a reputation for fiscal integrity. The broader conversation, therefore, has to be about balancing centralized funding with decentralized fiscal responsibility. It is therefore imperative that we find answers to what needs to be done to develop the municipal bond market.

Some possible initiatives and solutions are discussed below:

1. Push ULBS to reduce their dependence on grants Unless ULBs are pushed to reduce their dependence on grants, they will not feel the need to access the capital markets. The policy direction should be towards gradually shifting from grant funding to performance-linked funding and nudging ULBs towards self-reliance. Unless ULBs feel the need to tap into other sources of finance, they are unlikely to develop the required institutional, technical, and financial capacity. A reduced dependence on grants will incentivize them to improve revenue generation, reduce inefficiencies, and invest in capacity building. The Urban Challenge Fund is a step in this direction.5 The Union Budget (2025-26) has proposed the setting up of an Urban Challenge Fund of ₹1 lakh crores. This fund will meet the funding requirements of urban infrastructure projects to the extent of 25% of the project cost. The ULBs will be required to fund at least 50% of the project cost through municipal bonds, bank borrowings, or public-private partnerships.

2. Robust financial reporting and financial management ULBs must be mandated to develop robust financial reporting systems, follow standard accounting practices, undergo regular audits, and make public disclosures of their financials. In the long run, the avoidance of financial discipline will be detrimental to the health of ULBs. ULBs must also improve their financial management by increasing revenue generation and better control of expenditure. All this will lead to higher transparency and better governance, and improve the credit ratings of ULBs

3. Bankable projects Capacity-building programs through public-private partnerships must be implemented to support ULBs in preparing bankable projects and developing internal expertise in project management. There is a need to set up a dedicated municipal finance advisory body to support ULBs in managing bond issuances and navigating the capital market effectively. Investors and lenders will only put their money into projects that are financially viable, technically sound, socially acceptable, and have manageable risks.

4. Retail investor participation Retail investor participation will be key to the growth of the municipal bond market. Increased retail participation is key to a more liquid secondary market. To increase retail participation, the perceived risk inherent in these bonds needs to be reduced. This can be done through credit enhancement. Central and State governments could offer partial credit guarantee or viability gap funding for ULBs issuing bonds. Giving municipal bonds tax-free status will boost retail participation. Lower ticket sizes also help in higher retail participation. SEBI has reduced the face value of municipal bonds from ₹1 lakh to ₹10,000, which is bound to increase retail participation.

5. Address concerns of Institutional investors The concerns of the institutional investors also need to be addressed. Insurance Funds and Pension Funds, which are long-term investors, are constrained because their investment guidelines restrict their exposure to lower-rated bonds, and most ULBs have lower credit ratings. There is a need to consider whether, for such institutional investors, municipal bonds can be treated as “approved investments” or considered as part of their mandated infrastructure exposure. The small size of these bond issues, given that most ULBs have come out with ₹200 crore bond issuances, is also a dampener. There is a need to aggregate projects across ULBs through pooled financing and increase the issue size to levels acceptable to institutional investors.

6. Innovative financial instruments Financial innovations such as green bonds, pooled funds, and public-private partnership (PPP) bonds can play a transformative role in the municipal bond market by enhancing governance, service delivery, and institutional responsiveness. These instruments do more than finance projects; they embed accountability, transparency, and adaptive learning into the institutional framework. Green bonds are earmarked for environmentally focused projects, requiring compliance with frameworks like SEBI’s Green Debt Guidelines. Issuers must prepare detailed project reports, disclose use-of-proceeds, and conduct environmental impact reporting. Green- labelled bonds attract lower borrowing costs than conventional bonds and also will encourage ULBs to align their financing with environmental and social outcomes. Pooled funds, especially those with multi- stakeholder oversight, promote shared decision- making and resource accountability. Pooled municipal bond funds result in standardization across ULBs, such as adopting uniform financial practices. By aggregating resources, pooled funds allow smaller cities to undertake larger infrastructure or service delivery projects that would otherwise be unaffordable. Public-Private Partnership (PPP) bonds, when structured with clear performance metrics and transparent contracts, reduce corruption risks and strengthen administrative accountability. PPPs leverage private sector expertise, innovation, and cost-efficiency to improve infrastructure and public services in sectors like transport, sanitation, and healthcare.

7. Insolvency framework Specific statutes governing the insolvency of ULBs need to be introduced. Without clear recourse mechanisms in case of default, investors will view Municipal Bonds as high-risk. Statutory insolvency frameworks act as a deterrent against financial mismanagement. To make ULBs creditworthy, accountable, and investment-ready, we need a dedicated legal framework for municipal insolvency.
Half of India will be living in its cities in the next few decades. India will need to build out urban infrastructure in a big way, for which the capital requirements will be huge. Without doubt, India needs a well-developed municipal bond market.

The opinions expressed in this article are solely those of the author and do not reflect the opinions or views of NISM.

Ather S, White R, Goyal H. Financing India’s Urban Infrastructure Need. World Bank Report 2022.
Reserve Bank of India. Report on Municipal Finances. Reserve Bank of India Bulletin 2024 Nov.
Securities and Exchange Board of India. Statistics on Municipal Bonds. SEBI. Available from: https://www.sebi.gov.in/statistics/municipalbonds.
India Municipal Bonds. IndiaMunicipalBonds.com. Available from: https://www.indiamunicipalbonds.com/
Sitharaman N. Budget 2025–2026: Speech of the Minister of Finance. Government of India. Available from: https://www.indiabudget.gov.in/doc/ budget_speech.pdf
Securities and Exchange Board of India. Circular No.: SEBI/HO/DDHS/DDHS-PoD-1/P/CIR/2024/94. SEBI 2024 Jul 03.

Author:
Mr. Sashi Krishnan – Director NISM

Article originally published in the Prime Database.
https://www.primedatabase.com/article/2025/Article-Sashi_Krishnan.pdf

Fixed Income investments: strategic and tactical

Posted on October 16, 2025November 12, 2025 by Auburn Solutions

Fixed Income investments: strategic and tactical

Investments can be bucketed as per your time horizon; sometimes you may do a tactical allocation

The USP of the fixed income allocation of the portfolio is stability in overall portfolio performance, leading to better risk-adjusted returns. Depending on your objectives, risk appetite and investment horizon, you allocate to fixed income. The allocation may be on the lower side, say 20 percent of your portfolio, for young investors with a long horizon or on the higher side, say 80 percent, for retired senior citizens.

That is the strategic allocation to fixed income. Tactical allocation is tweaking the allocation little higher or lower as per the market situation. Sometimes there is a mispricing in the market or there is a certain view on interest rate movement, based on which you can tweak your allocation.

Strategic allocation – bucketing

There is a structure in fixed income investments, with the help of which you can dovetail your investments as per you cash flow timings. Bonds have a defined maturity, which is not the case with equity stocks. On the maturity of a bond, you get the contracted amount, irrespective of market movement at that point of time. When you are investing in a bond of say 2 years or 5 years maturity, and you require the cash flow after 2 or 5 years, it is called laddering. You can construct a portfolio with bonds of various maturities to suit your requirements.

Laddering can be done through Mutual Funds as well. In an open-ended MF scheme, the fund is perpetual, unlike the maturity of bonds. However, there is a portfolio maturity of the fund, which is the weighted average maturity of all the bonds / instruments in the portfolio. The portfolio maturity of the fund gives you a ballpark idea on the appropriate investment horizon. There are 16 debt fund categories as defined by SEBI. All these funds have their portfolio maturity range either as defined by SEBI or as mandated by the AMC itself within the guidelines.

For purposes of understanding this concept of matching your time horizon with the portfolio maturity of the fund, as an illustration, in Liquid Funds, the maturity is less than three months; you can come in for a time horizon of one week to two-three months. Ultra Short Term Funds have portfolio maturity in the range of three to six months; your horizon can be three to six months. At the other end of the spectrum, there are Gilt Funds. The portfolio maturity in Government Security Funds is the longest; your horizon should be at least five years, preferably ten years. The portfolio maturity of the debt fund you are looking at, can be found in the monthly factsheets. The factsheets are published every month, on the website of Mutual Funds.

Tactical allocation

The concept of tactical allocation is, marginally increasing or decreasing the allocation to an asset class e.g. equity or debt, as per the prevailing market conditions. The meaning of market condition is, in case or equity, valuation levels. In case of debt, it means expected movement of interest rates and prevailing yield levels. Prevailing yield level means the yield levels on various bonds or instruments in the market at that point of time.

Bullish view or positive view on interest rates implies interest rates / yield levels coming down; bond yields and prices move inversely. If the call comes correct, you benefit as prices of your existing holdings move up. Bearish view is when interest rates are expected to move up; you may pare your debt exposure at the margin. Sometimes, there are mis-pricings and yield levels on certain instruments may be attractive. That makes a case of increasing your allocation a little bit.

Current situation

Yield level on government bonds have moved up, even after the RBI having reduced repo rate by 1 percentage point. 10-year benchmark G-Sec yield has moved from 6.25 percent in May 2025 to 6.5 percent now. Yield on longer-dated G-Secs, say 20 or 30 year maturity, have moved up much more over the last few months than shorter-dated ones, say one-year maturity.

The salient aspect of the current situation is yield on State Government Securities (SGS) / State Development Loans (SDLs). SGS are sovereign instruments, as defined by the Reserve Bank of India (RBI). Yield level on SDLs are higher than that of Central Government Securities, as the fiscal profile of States are weaker than the Centre. Nonetheless, yield level of SGS are usually lower than AAA rated corporate bonds, as these are sovereign at the end of the day. Currently, due to some technical reason, yields on SDLs have moved up, and are even higher than good quality AAA rated corporate bonds. This is a mispricing you can avail of.

Yields on corporate bonds have inched up recently, again due to technical reasons. Hence if you are entering corporate bonds now, you have a relatively better entry level than a few months ago.

View going forward

The rate cut cycle of the RBI seems to have come to an end; there is a small chance of one last rate cut if inflation gives a positive surprise. From that perspective, not much of rally is expected in bonds. Having said that, on a sudden positive news-flow or some technical reason, yields can potentially trace back. Any which way, if your yield level at the time of entry is relatively higher, you are that much better off.

Methods of entry

There are multiple ways you can take exposure; broadly two means: direct and through an investment vehicle. For direct investment in Government Securities and SGS, there is RBI Retail Direct (RBI RD), which can be accessed at https://rbiretaildirect.org.in/. You can invest in Central Government Securities and State Government Securities. This facility is available only to individuals, not corporates. You just have to open your account there, rest all the process requirements (demat, banking etc.) are taken care of by RBI itself. For direct entry into corporate bonds, there Online Bond Platform Providers (OBPPs), who make their inventory of bonds available on their website.

There are investment vehicles like Mutual Funds (MFs), Portfolio Management Services (PMSs) and Alternative Investment Funds (AIFs). The more popular vehicle is MFs, due to low ticket size, accessibility and liquidity. The particular mis-pricing opportunity mentioned earlier – SGS / SDL – can be availed of either directly through RBI RD or through MFs. If you want liquidity, MFs are better; you have to identify the particular funds that have exposure to SDLs. There are Target Maturity Funds that have exposure to SDLs, and certain other funds with SDL-oriented portfolios.

You can compare the rate offered by leading Banks on fixed deposits with the yields available on Central or State Government Securities, which are a better credit than Banks.

Originally Published in Outlook Money October 2025 Issue.

Author: Mr Joydeep Sen, Corporate Trainer

Numbers Tell a Story: Why Asset Diversification Matters

Posted on October 15, 2025November 12, 2025 by Auburn Solutions

Numbers Tell a Story: Why Asset Diversification Matters

Numbers have a way of bringing perspective to investing. They cut through opinions and reveal what performance truly looks like. In India, most investment conversations still revolve around equities — stock picks, index levels, and daily market momentum dominate the narrative. Bonds, on the other hand, often stay in the background. Yet, when data speaks, it clearly shows why this “quiet” asset class is so critical for balanced investing.

A Look at the Last Year

Over the past 12 months, the contrast between equity and bond returns has been hard to ignore. Based on NSE data, the Nifty 50 delivered a negative return of –3.72%, while a 10% corporate bond (rated AA–/A+) offered a steady +10% return.

Asset Class	Value at Start (Oct ’24)	Value after 1 Year (Oct ’25)	Total Return
Nifty 50	25,796.9	24,836.3	–3.72%
10% Corporate Bond	100	110	+10%

While equities saw short-term volatility and downward corrections, bond investors enjoyed consistent growth. It’s a reminder that stability often wins when markets turn uncertain — and that steady compounding can quietly outperform speculation.

A Longer Lens: The 4-Year Comparison

Zooming out gives a clearer picture of how asset classes behave across cycles. Over the last four years, both equities and bonds have delivered strong returns, but the journey to those returns has been very different.

Asset Class	Value at Start (Oct ’21)	Value after 4 Years (Oct ’25)	Total Return
Nifty 50	17,532.05	24,836.3	+41.6%
10% Corporate Bond	100	146.41	+46.4%

(Bond returns assume reinvested coupons; taxes and costs excluded.)

Even over a four-year period, high-quality corporate bonds have not only kept pace with equities but slightly outperformed them — and with significantly lower volatility with peace of mind. The equity curve shows sharp peaks and dips, while bond returns move upward in a straight, predictable line. This steadiness helps investors stay invested through market cycles instead of reacting to every correction

Putting Returns in Context

Equities remain an important engine for long-term growth, but their journey is rarely smooth. In contrast, high-quality corporate bonds offer predictable income and lower price volatility, allowing investors to stay invested without panic or second-guessing the market.

Consider this:

1-Year Returns: Nifty 50 –3.72% vs. Corporate Bond +10%
4-Year Returns: Nifty 50 +41.6% vs. Corporate Bond +46.4%

These numbers reinforce one fundamental investing truth — diversification matters more than timing and it’s not about choosing one over the other. A blend of growth-oriented equities and income-generating bonds creates resilience through changing market phases.m

Role of Bonds in a Balanced Portfolio

For a long time, investing in bonds in India meant navigating complex paperwork or limited options. That has changed. Today, Online Bond Platform Providers (OBPPs) have made it possible to invest in bonds digitally with transparent pricing, quick settlement & easy access.

This accessibility has brought fixed income into the mainstream, allowing retail investors to enjoy what institutions have known for decades: bonds are essential for wealth preservation and portfolio balance.

Globally, bonds and equities are seen as complementary pillars. When one faces volatility, the other cushions it. That’s how long-term portfolios survive cycles and keep compounding steadily.

In summary: Numbers don’t lie — they remind investors that balance beats extremes. The past year shows how bonds quietly delivered positive returns while equities saw short-term dips. As India’s financial ecosystem matures, investors have more opportunities than ever to diversify intelligently.

A Bond in Every Hand.

Author: Mr. Vishal Goenka – Co-Founder IndiaBonds