Page 3 – National Institute of Securities Markets (NISM)

Think in Decades, Not in Years: The Indian Investor’s Edge

Posted on September 4, 2025November 12, 2025 by Auburn Solutions

As investors, we often judge performance on monthly (MoM), Quarterly (QoQ) and year-on-year (YoY) statistics. It feels natural to look back at how our portfolio did in the immediate past including past 3,6,12 months. But wealth is not created in tidy annual snapshots. True compounding only reveals itself over decades.

For Indian investors, this lesson is even more relevant today. With the economy set to double in size over the next 5-7 years, the greatest rewards will accrue to those who can hold on through the noise and let time do the heavy lifting.

The Short-Term Trap

Markets in the short run swing wildly with headlines like elections, global oil prices, central bank commentary, geopolitical events, political instability, quarterly results. These movements often appear significant when viewed in isolation and would look very sudden, negative and often repetitive, but they rarely impact the long-term earnings power of India’s strongest companies.

Relying on YoY returns alone often leads to:

Knee-jerk reactions: Selling in panic during corrections or buying in greed at market peaks.
Over-trading: Constantly shuffling portfolios or portfolio managers in search of quick gains, eroding compounding.
Myopic focus: Missing the broader structural story unfolding over decades.

What the Long-Term Data Tells Us

Nifty 50 – odds improve with time

Over 10-year rolling periods, the Nifty 50 Total Return Index (TRI) has delivered an average CAGR of ~14-15%.
In nearly half of all 10-year windows, returns were above 15% CAGR.
The probability of positive returns approaches 100% once holding periods extend beyond 5 years.

Recoveries from crises

2008 Global Financial Crisis: Nifty 50 TRI fell about -64% from peak to bottom, but patient investors saw the index reclaim highs within a few years.
COVID-19 (2020): Nifty slipped nearly -38% in March 2020 but regained pre-COVID highs by November 2020 – a recovery in just 231 days.

Wealth multiplier over three decades

The Sensex moved from ~3,000 in 1995 to around 80,000 in 2025 – a 25× wealth multiplier even before dividends.
Since its inception (base 100 in 1979), Sensex has compounded at roughly 18.6% per annum, one of the strongest long-term returns globally.

The message is clear: Its Boring, but it works, the longer the horizon, the lesser the role of luck and the greater the power of fundamentals.

Why Decades Matter for India

India’s structural drivers are best understood over 10–20 year lenses:

Demographics: A median age of 28 ensures sustained consumption growth.
Digitalization: GST, UPI and digitalization are expanding the tax base and deepening credit.
Domestic consumption and Capex Cycle: Infrastructure, manufacturing, green energy – these are long-gestation investments and the shift from lower middle class to middle class will boost income and consumption.
Domestic flows: With SIP inflows now above ₹20,000 crore a month, Indian households are committing capital for decades, not years. The MF AUM totals around a third of total bank deposits, a trend worth noticing.

How to Separate Noise from Fundamentals

Follow earnings, not headlines. Like movies are all about Entertainment, Entertainment, and Entertainment. Returns are also all about Earnings, Earnings and Earnings. Quarterly surprises matter only if they alter long-term earnings growth.
Use rolling returns. Look at 10-year rolling outcomes, not one-year snapshots.
Stay disciplined. SIPs and systematic asset allocation reduce the urge to time the market. Keep investing and stay invested.
Think in decades. A bad year or even two is insignificant in a 30-year compounding journey. Think about getting a bad grade in a unit test in college vs. preparing for an ivy league college.

The Power of Compounding

₹10 lakh invested at 12% CAGR grows to:

₹31 lakh in 10 years
₹96 lakh in 20 years
₹3 crore in 30 years

The real magic happens in the second and third decade. That is when compounding turns exponential. The first decade is to test your patience, the second is to test your discipline and the third decade is to reward your patience.

Closing Thought

India’s story is not about quarters or even years – it is about decades. GDP will double, corporate earnings will multiply, and investors who stay the course will witness the true power of compounding. Compounding is no doubt the only lesson worth learning and no less than a wonder in the world of investing.

YoY returns may create headlines. But decadal returns create wealth. The patient investor, who filters noise and stays invested in India’s growth story, will be the real beneficiary.

Author: Mr. Biharilal Deora, Director Abakkus

A Brief Archaic Romance: High Tariffs and Their (Un)intended Consequences

Posted on August 21, 2025November 12, 2025 by Auburn Solutions

Student “Sir, what does constant tinkering of Tariffs lead to?”

Teacher “A Quirky History Lesson in Self-Inflicted Trade Wounds!”

Synopsis: If history has been a great teacher, then, what it shows is repeated meddling with tariff levels – even modest adjustments – has consistently backfired. It has inflicted sharper downturns in global trade and growth than any possible short-term protective benefit might justify.

In June 1930, the United States enacted the Smoot–Hawley Tariff Act, raising average import duties by about 20 percent atop a preexisting 40 percent burden. What followed was not a patriotic bulwark for American farmers, but a 66 percent collapse in world merchandise trade between 1929 and 1934, as 25 nations retaliated in kind and global commerce plunged into a dramatic free-fall.

Global tariff levels have shrunk to roughly 2.6 percent, as reported by the World Trade Organization (WTO), after decades of incremental tinkering and liberalization. That slender remainder of duty seems innocuous – until one recognizes that even these small rates can rock the global economy. Staring at 100+% tariffs, my mind is reminded of the idiom – from Titanic to Tugboat!

So what has been the Empirical Verdict? In short, small tariff hikes, big growth slumps!

Modern macroeconomic studies confirm a chilling causal link. An increase of 3.6 percentage points in applied tariffs—roughly a one-standard-deviation shock—leads to about a 0.4 percent reduction in GDP five years later, with effects compounding year after year. In an era when global GDP growth hovers near 3 percent, shaving off nearly half a percentage point is no trivial matter.

In a recent release, the International Monetary Fund (IMF) shed light that steep tariff volatility—characterized by abrupt hikes and the threat of further retaliation—inflicts an immediate drag on business confidence, stalling investment and dampening world growth projections by 0.8 percentage points.

What seems “strategic” seems sheer folly! The logic behind tariff tinkering is often “targeted protection”: shield this industry, trigger retaliation there, leverage negotiations elsewhere. Yet history shows such maneuvers rarely achieve their narrow goals. Let us be reminded of the Smoot–Hawley Act of 1930. Aimed at aiding agriculture, it ultimately devastated U.S. exports (down two-thirds to Europe by 1932) and plunged banks into insolvency. Recent U.S. moves, which prompted this column, propelled the effective tariff rate from under 3 percent to above 100 percent, the highest since the Great Depression. When it was 20 percent, short-term front-loading spiked trade volumes, but the rebound has proven illusory, sowing recessionary risks worldwide. There is the added danger of piecing out exemptions. These temporary carve-outs for key sectors merely shift uncertainty; once exemptions expire, global supply chains buckle under renewed duty burdens.

At the end of the day, triggered by policy uncertainty, firms delay investment stunting innovation and job creation. Then there is fragility in the global supply chain; forcing costly rerouting, inventory gluts, and idled capacity. From the home country perspective, (i.e. the one imposing tariffs), while some jobs might gain short-lived protection, the net effect erodes efficiency and consumer welfare, as tariffs inflate prices on imported inputs and final goods. Ultimately it will lead to deadweight losses. And what about the world? Well, you just sounded the global retaliation bugle! An eye for an eye, tariff hikes invite symmetrical reprisals. The more the world breaks out the tax wrenches, the more growth stalls.

This leads me to an Ironic Prescription: Stability Over Spikes

If our goal were to nurture sustained global trade and buoyant growth, history and data converge on a single prescription: minimize tariff tinkering. Constant adjustments, even if well-meaning, undermine the very market confidence and integration that generate prosperity. We encourage people to look at longer term horizons when it comes to personal financial planning; like retirement planning. In investment planning, we encourage people to come out of the short term trader mentality and embrace a logical and workable asset allocation that delivers over time. World leaders have to think in similar lines for the whole world! Empirical studies across fifty years and 150 countries
find that lower, predictable tariffs foster higher growth and productivity. The IMF went on record with adequate proof that removing or stabilizing tariff schedules can erase recession risks more effectively than occasional protectionist bursts. We all know that trade liberalization will lead to increased economic efficiency. A Cambridge University paper presented a pertinent point that I gleefully add to my prescription: Equitable Liberalization: This term implies a proactive and balanced approach to globalization. It recognizes that while trade liberalization offers potential economic benefits, some sectors or communities may face job displacement, wage pressure, or other negative
consequences. Equitable liberalization emphasizes the importance of accompanying trade reforms with measures that address these negative impacts and promote fair outcomes for all citizens.

I am THOR! Well, not really! Reinventing the tariff wheel every few years might feel like wielding a mighty policy hammer—but experience shows it’s usually just nailing the global economy’s coffin. A world trading system thrives not on protectionist jolts, but on the steady hum of low, predictable duties. In practice, the secret to winning at global trade is not constantly rewriting the rules, but leaving them alone. That, more than any highfalutin strategic tariff play, is the one change the data—and centuries of commerce – demand.

______________

Rajesh Krishnamoorthy is an Adjunct Faculty at the National Institute of Securities Markets (NISM) and an Independent Director. Views expressed here are personal opinions.

Author: Rajesh Krishnamoorthy, Adjunct Faculty NISM

Understanding the Difference Between Volatility and Risk for Smarter Investments

Posted on August 21, 2025November 12, 2025 by Auburn Solutions

Volatility ≠ Risk.

Investor in the securities market face a perplexing challenge: distinguishing between marketvolatility and investment risk. Mutual funds, for instance, are required to make a disclaimer that “Mutual Fund investments are subject to market risks. The NAV of the scheme may go up and down depending on factors and forces affecting the securities market.”

The terms “risk” and ‘volatility” are frequently used interchangeably, but in reality they represent two fundamentally different concepts. Volatility is the measure of price fluctuations, a statistical measure of how much an assets value deviates from its average. Risk, on the other hand, is the probability of a permanent loss of capital. Understanding the distinction between the two will be the cornerstone of a successful long term investment strategy.

Volatility is a natural and inevitable characteristic of any liquid market. The volatility of an asset is measured by the standard deviation of the asset. A large standard deviation for a stock or a mutual fund scheme NAV means that the price swings wildly, both on the upside and the downside. But that does not necessarily mean that you will lose money on your investment.

Risk, by contrast, is the potential for your investment to fail to meet your financial goal. Staying invested in a company whose fundamentals are deteriorating or a mutual fund scheme that is perpetually underperforming its benchmark could lead to a permanent decline in the value of your investment.

The last 10-years have seen fairly large volatility in the Indian equity markets. There was extreme volatility in the equity markets during the pandemic years between 2019 and 2021 and the average India VIX (which measures volatility in the Indian equity markets) reached levels of 25% in 2019-20. But in spite of volatility, as measured by the India VIX, averaging over 15% in the 2015-2025 period, the 10 year CAGR for the Nifty 50 was close to 11%. Extreme volatility did not lead to permanent losses for those who stayed invested.

Year	NSE Nifty 50 year end value	NSE Nifty 50 year end value
2014-15	8491.00	13.0
2015-16	7738.40	16.8
2016-17	9173.75	11.1
2017-18	10113.70	13.5
2018-19	11623.96	15.3
2019-20	8597.75	24.9
2020-21	14690.70	18.1
2021-22	17464.75	17.2
2022-23	17359.75	13.8
2023-24	22326.90	12.5
2024-25	23519.35	11.9
10 year CAGR/Average VIX	10.73%	15.3

Another often misunderstood measure of volatility is Beta. Beta is the volatility relative to the market. A stock or a mutual fund portfolio with Beta > 1 is more volatile than the market and a stock or mutual fund portfolio with Beta < 1 is less volatile than the market. Often investors have a misconception that high Beta stocks or mutual fund schemes are riskier due to their wider price swings relative to the market. However, in the long run, these stocks or portfolios have the potential to deliver higher returns. A low Beta stock or mutual fund portfolio, while seeming safer, may not participate in market rallies and could underperform over the long run. In fact, low volatility, which
many investors seek, can be a double edged sword as it may indicate the lack of significant drivers. The true risk lies in factors like poor corporate governance, unsustainable debt or the changing competitive landscape and not in the volatility of the stock price.

Confusing volatility with risk often leads investors to make emotional decisions such as selling during market downturns. Investors need to understand that volatility is merely a measure of price movement and that volatility is not the same as risk.

Author: Mr. Sashi Krishnan, Director NISM

Inflation down to 1.55%. Can you rest easy?

Posted on August 19, 2025November 12, 2025 by Auburn Solutions

Inflation is measured in a straight-jacketed manner. But for 144 crore Indians, a single number can have many meanings.

Joydeep Sen

You have heard that inflation reduces the purchasing power of money, which implies you require more money to buy the same amount of goods or services in future. This is an age-old truth and will remain true in future as well. Today, we will provide you with some food for thought on how to view inflation.

How is inflation measured?

To gauge inflation, we examine the data reported by the government. The most widely used gauge is consumer price inflation (CPI). Another metric is wholesale price inflation (WPI). We will discuss CPI, as the Reserve Bank of India uses it for policy formulation. The latest declared data is for July 2025, which is 1.55%. With the inflation rate having eased to only 1.55 %, does it mean you would inflate your expenses by a more benign number than you thought of earlier? Not really.

Let’s examine how inflation is measured and assess the relevance of the data. The rate of price increase is calculated for a defined basket of goods and services. The starting point of the series, which dates back many years to 2012, is set at 100. Over the years, as prices went on increasing, the value of the index increased as well. Currently, the index value is 194.2 in June 2025. Inflation is measured year on year: for example, for June 2025, the index is compared with that of June 2024, which was 190.2 and the outcome is 2.1%. The percentage increase in the index over the course of one year is what is announced, and we react to it.

There is a flaw in this method, followed not just in India but all over the world. In this year-on-year computation, the price level of the previous year has a significant impact on the inflation data. Intuitively, when we think of inflation, we think of an increase in current prices. That is, of course, relevant, but the price level of the previous year is as applicable in determining the outcome, e.g. 2.1 % in June 2025. This is known as the base effect, where the base (denominator in the equation) influences the data. If inflation was higher in the previous year, and consequently the inflation index was higher, inflation this year is that much lower. And vice versa.

The other issue is the composition of the basket. Almost half the CPI measurement basket comprises food or food-related items. This would be true for some people who are just above the subsistence level. People who are in a position to save and invest a chunk of their earnings would not need to spend as much on food. The broad issue is that there is only one basket for measurement nationwide. However, the consumption basket of all the 144 crore people of the country is different. It is not possible to have multiple baskets across the country; there are none anywhere in the world. Hence, the available inflation data is the nearest proxy for gauging and incorporating into your financial plans.

How should you measure?

Theoretically, you look at your consumption basket and measure inflation accordingly. However, it is practically difficult, near-impossible for individuals to do it consistently. One approach could be to consider the goal you are saving and investing for. If the goal is a child’s education abroad, that inflation would be different from the inflation of vegetables in India, a significant variable in the CPI basket. When considering a purchase, such as a house or a car, you can evaluate it accordingly. If you can gather working data on the item you are looking at, you are better off than looking at the generic CPI data of a government-decided basket.

Even with the available data, it is possible to avoid the base-effect flaw by looking at a longer period. As an example, the CPI index was 194.2 in June 2025; the data is available on the website pib.gov.in. Five years ago, in June 2020, it was 151.8 and ten years ago, it was 123.6. The compound annualised growth rate (CAGR) inflation over five years is 5.05% and over ten years is 4.6%.

Professional guidance

When formulating your financial plan, it is advisable to seek professional input. If you are doing it yourself, even if you are savvy, you may miss out on specific nuances. An experienced financial planner can guide you adroitly. You must ask your financial adviser the right questions, not only about the expected returns on your portfolio. In the current context, inflation can be managed in tandem with your planner. You can form a rough estimate of your consumption, e.g., X% on food, Y %on education, or Z% on discretionary consumption. Accordingly, you can discuss with your planner the basis for the assumed rate of inflation for your expenses five or ten years from now.

Inflation is not under your control. You need not fret over it or plan your consumption basket around it. You are earning, saving, and investing for a reason. Your finances should not go haywire due to deficient planning. Inflation is a cog in this wheel; put the best estimate in your Excel spreadsheet.

Published in Economic Times Wealth on 18 August 2025

Author: Joydeep Sen, Corporate Trainer, Author Columnist

Thinking like a Forensic professional to prevent risks from turning into a crisis

Posted on August 14, 2025November 12, 2025 by Auburn Solutions

Today’s business landscape is volatile and riddled with fraud risks emerging from rapid digitalization, lack of adequate control measures, and lax governance. Tech- savvy fraudsters exploit these loopholes to siphon off huge funds. From ﬁnancial crime, employment fraud, oversight errors, fraudulent transactions, asset misappropriation, money laundering, and terrorism ﬁnancing—fraudsters leverage advanced technologies to launch multipronged attacks that can cripple the organization and quickly escalate into full-blown crises. While organizations must ensure they are equipped to deal with fraud on a real-time basis to minimize damage and regain control, building resilience to fraud lies not just in reacting to threats, but proactively anticipating and neutralizing them even before they occur.

Forensic functions play a key role in helping organizations build frameworks that can withstand fraud incidents and prevent them from erupting in the first place. It is imperative for professionals to stay at the top of their game so that they can outsmart fraudsters who harness latest technologies to devise high-level frauds. While brushing up on the basics of compliance and keeping abreast of recent regulatory developments can help, they must develop an acumen for investigative work through rigorous training.

What does it take to be a Forensic professional?
Curiosity is an inherent trait, but it takes more than mere inquisitiveness to become a Forensic professional. The Forensic practice requires professionals that possess a unique blend of analytical acumen, legal insight, and technological fluency. Forensic professionals operate like investigators—decoding financial records to uncover hidden patterns, misconduct, or fraud. Training to develop critical thinking and thoroughness to sniff out a fraud is imperative to make a headway in the Forensic field. Continuous training at regular intervals can help sharpen the analytical bent of
mind to recognize early warning signs, understand the anatomy of risk, and build systems that detect anomalies before they become disasters. Essentially, professionals must learn to toe the line between measured scepticism and unfruitful cynicism to be able to make informed decisions. Over time, this will help them guide companies towards building a proactive fraud risk management practice, establish good governance principles, and automate compliance.

Developing a Forensic mind
Constant upskilling is a must for Forensic professionals. Getting acquainted with the latest technological advancements empowers them to detect red flags more effectively and respond with precision. It provides a competitive edge, enabling professionals to lead investigations with confidence and accuracy. Moreover, the ever-evolving regulatory environment demands ongoing learning to ensure that forensic investigations remain timely, compliant, and legally sound. Whether it’s mastering digital forensics, leveraging AI-driven analytics, or navigating

complex legal environments, training ensures professionals remain sharp and relevant. Regular engagement reviews, hands-on interviews, and structured learning sessions are integral to maintaining an edge. The Forensic practice thrives on adaptability, making lifelong learning the cornerstone of success in the field.

Mitigating risks, preventing crises
Every organization is aware of the sector-specific risks associated with their operations but when threats are underestimated, they can quickly spiral into a crisis—often with devastating consequences. Crisis management is not only costly, but also only a curative measure aimed at controlling the degree of damage incurred. Forensic-oriented thinking encourages organizations to look beyond surface-level indicators and delve into the root causes of threats, so that they can be nipped in the bud. Forensic experts play the multifaceted role as strategic advisors helping organizations anticipate vulnerabilities and respond before risks snowball into crises. This entails developing a framework that automates regulatory compliance at every level and strengthening fraud reporting mechanisms to encourage organization-wide participation in risk management efforts.

Leveraging technology as an ally
Till a few decades ago, Forensic professionals had to rely on manual methods to carry out investigations. These checks had room for error caused by human oversight or bias. With advanced technologies such as AI, GenAI, and Machine Learning, the Forensic practice is now equipped with an arsenal to fight fraud and enhance compliance. Tools like data analytics, digital forensics, document checking, background checks, are at the disposal of Forensic professionals to help identify irregularities, trace transactions, and uncover hidden motives. Learning to leverage these tech tools is a non-negotiable for the modern Forensic professional.

Click here to learn more about the Forensic Investigation Courses offered by NISM:

Forensic Investigation – Level 1 : https://online.nism.ac.in//module/Forensic%20Investigation-%20Level%201.html

Forensic Investigation – Level 2: https://online.nism.ac.in//module/Forensic%20Investigation-%20Level%202.html

Reimagining Urban Finance: Why Municipal Bonds Matter More Than Ever

Posted on August 11, 2025November 12, 2025 by Auburn Solutions

India’s urban transformation is accelerating—with over 600 million people projected to live in cities by 2036 and urban regions already contributing more than 63% of the country’s GDP, which by 2030 is expected to rise to 75%

Yet, the local bodies responsible for delivering this infrastructure—Urban Local Bodies (ULBs)—remain fiscally constrained. Most continue to depend heavily on state or central transfers, limiting their ability to plan long-term, capital-intensive projects. In this context, municipal bonds are no longer a niche innovation—they have emerged as a credible, structured, and scalable instrument to unlock infrastructure financing for Indian cities.

Municipal bonds are not new to India. The first was issued by Bengaluru in 1997, but the market remained dormant for two decades. A revival began post-2015, when SEBI notified its Issue and Listing of Municipal Debt Securities (ILDM) Regulations. Combined with reform-oriented programmes like AMRUT and the Smart Cities Mission, this regulatory foundation began attracting municipalities back to market. Today, SEBI’s sustained efforts are bearing fruit, with a growing number of ULBs discovering bonds as a strategic alternative to grant-dependency.

As of June 2025, 23 municipal bond issuances have been completed under SEBI’s framework, mobilising a cumulative ₹3,358.90 crore. The first quarter of FY2025 alone has seen a record ₹575 crore raised by six ULBs—Agra, Prayagraj, Varanasi, Greater Chennai Corporation, Pimpri-Chinchwad, and Gandhinagar and many more have queued up to tap the bond market this fiscal year.

Adding momentum, Suraj Municipal Corporation is preparing to launch a public issue of ₹200 crore (including a green shoe option)—a major step that will allow direct retail participation in India’s municipal bond market and expand its investor base. While most municipal bond issuances so far have been via private placements—favoured for their quicker execution, simpler compliance, and institutional targeting—there is a clear need to scale up public bond issuances to enable broader participation and deepen the investor base.

To further improve access to the bond market, SEBI has permitted privately placed bonds to carry a face value of ₹10,000, as an option, in line with public issues—subject to the appointment of a merchant banker.

A key reason for growing investor interest is the robust credit structuring seen in recent municipal bonds. Today’s bonds are typically backed by ring-fenced cash flows—such as property tax or user charges—deposited into escrow accounts. These are supported by additional security mechanisms like Debt Service Reserve Accounts (DSRA), Sinking Fund Accounts (SFA), and Interest Payment Accounts (IPA). This structured waterfall ensures prioritised debt servicing and has helped most issuances secure credit ratings in the AA or AA+ category, even when the underlying municipal finances remain modest.

The Ministry of Housing and Urban Affairs (MoHUA) has further strengthened the ecosystem through incentives under AMRUT 2.0. ULBs can receive ₹13 crore per ₹100 crore raised (up to ₹26 crore) as grant support. For those seeking a second round of incentives, the bond must qualify as a green bond under SEBI’s NCS framework—eligible for ₹10 crore per ₹100 crore raised (up to ₹20 crore), provided the funds are used for climate- aligned sectors like water, sanitation, renewable energy, or urban resilience. MoHUA has also extended this incentive to pooled municipal bonds, allowing smaller ULBs to aggregate their borrowing through state-level pooled finance entities.

Green and ESG-linked bonds are fast becoming the next frontier. Cities like Indore, Ghaziabad, and Pimpri-Chinchwad have issued green municipal bonds that were well received in the market—several being oversubscribed. These issuances are aligned with SEBI’s green debt security framework, which mandates use-of-proceeds tracking, external certification, and anti-greenwashing safeguards—bringing Indian muni bonds closer to international ESG standards.

In the early stages of this market’s evolution, the U.S. Treasury Department’s Office of Technical Assistance (OTA) played a catalytic role. Under a 2020 MoU with MoHUA, the OTA supported few Indian municipalities—including Pune and Vadodara—in building bond issuance capacity through financial modelling, structuring guidance, and investor preparation. One of the standout cases was Vadodara Municipal Corporation (VMC), which issued a ₹100 crore bond in 2022. It was oversubscribed ten times, and with AMRUT incentives factored in, brought the effective coupon down to 4.55%, which is an achievement, even much below the AAA rated bond issuers.

Vadodara’s success was rooted in strong governance. It had adopted accrual-based accounting, ensured timely audits, and clearly linked bond proceeds to defined infrastructure outcomes. Its example has become a reference point for other tier-2 cities aspiring to access bond markets effectively.

To help guide others, VMC also recently published a detailed case study booklet titled “The Green Book,” which documents their entire green bond issuance journey—challenges, structuring process, stakeholder coordination, and lessons learned. This resource now serves as a valuable reference for other municipalities exploring similar capital market access besides the SEBI Municipal Debt Securities – Repository web portal.

Despite this momentum, key challenges remain. A majority of ULBs are unrated or fall below investment grade. Revenue autonomy is weak, with most cities depending on transfers rather than generating their own income through property tax or user fees. Financial reporting remains inconsistent, with many cities yet to adopt the National Municipal Accounting Manual (NMAM).

Without a strong project pipeline backed by ring-fenced revenue flows, investor appetite remains cautious. The lack of a dedicated municipal insolvency framework also creates legal uncertainty for long-term bondholders. Moreover, India still lacks a deep secondary market for municipal debt, restricting exit options for investors.

Going forward, policy and institutional innovation will be essential. SEBI, MoHUA, credit rating agencies, and intermediaries should collaborate to develop tailored rating methodologies suited to pooled structures, green bonds, and hybrid guarantees. Tax rebate, if considered, could further broaden the investor base, especially among retail and HNI segments looking for stable, tax-efficient returns.

Multilateral development banks (MDBs), ESG-focused investors, and impact funds should also consider actively participating in India’s municipal bond space—especially where proceeds are earmarked for green and socially sustainable urban infrastructure. Their involvement could deepen market credibility, support capacity-building, and help unlock blended finance models in cities that need both capital and technical handholding.

India’s cities are at the heart of the country’s economic and demographic future. But the infrastructure they require cannot be financed through grants and subsidies alone. Municipal bonds—whether issued through public offerings or private placements—are emerging as a vital bridge between capital markets and urban development. When transparently structured and professionally managed, these instruments can instil fiscal discipline, unlock long-term funding, and enable cities to move from grant-dependency to true creditworthiness. As we reimagine urban finance, municipal bonds are no longer just an option—they are an essential pillar for building resilient, accountable, and investment-ready Indian cities.

Venkatakrishnan Srinivasan
Founder and Managing Partner
Rockfort Fincap LLP

Venkatakrishnan Srinivasan (Venkat) is a veteran of India’s bond market, with over 30 years of expertise in Indian Rupee Bonds and Debt Capital Markets. His career spans guiding debt transactions from origination through execution, consistently delivering successful outcomes.

Before founding Rockfort Fincap LLP in late 2021, Venkat served as Senior Vice President at ICICI Securities Primary Dealership Limited (I-Sec PD) until June 2021.

Author: Venkatakrishnan Srinivasan, Founder and Managing Partner, Rockfort Fincap LLP

Equity-linked Exchange Traded Derivative Contracts – The Retail Rush and Regulatory Measures

Posted on August 8, 2025August 8, 2025 by Auburn Solutions

Background

Derivatives are foundational instruments in modern financial markets, created to manage and transfer risk. By allowing participants to take positions on future price movements, derivatives such as futures and options enable efficient price discovery, portfolio hedging, and liquidity management. Globally, Institutional investors have long used these tools for risk control and asset allocation strategies.

In India, the Equity linked Exchange derivatives market has undergone a rapid transformation in recent years. It is now among the world’s largest by volume, thanks in part to a surge in retail participation and also due to the small size of the contracts (as compared to global counterparts). Aided by user-friendly platforms, low entry costs, and real-time digital access, retail investors are also entering the derivatives segment in record numbers, particularly trading Index options contracts. Weekly contracts on headline and sectoral indices like Nifty 50 / Sensex / Bank Nifty / Bankex had become the most actively traded products, often favoured for their affordability and flexibility as also for the high volatility associated with such underlying indices.

This trend marks a significant shift in the participant profile of India’s F&O market, from a space once dominated by Institutions and hedgers to one increasingly populated by retail traders. Understanding this shift is critical to evaluating how the market is evolving, the role derivative contracts now threaten to play in retail portfolios, and what it means for market structure and regulatory oversight going forward.

Overview of SEBI study on Retail Investors

Recognising this shift and its potential consequences, SEBI initiated a series of data-driven studies to assess the financial outcomes for retail participants in the Exchange traded derivatives segment. The first of these studies, released in January 2023, was a watershed moment. Titled “Analysis of Profit and Loss of Individual Traders Dealing in Equity F&O Segment,” the report revealed that a staggering 9 out of 10 retail traders ended up with net losses. This eye-opening data sparked widespread discussion and concern, leading SEBI to initiate a consultative process aimed at strengthening investor safeguards and market discipline.

In July 2025, SEBI published a follow-up study incorporating data from the financial year 2024–25. This is a more detailed and expansive analysis and presents the underlying picture of retail trading patterns. It highlighted not only the growing scale of participation but also the concentration of risk and losses.

Key Findings

Here are some of the key findings of the SEBI report of July 2025:

Massive Retail Losses in Derivatives:

In FY 2024-25, 91% of individual traders in the Equity Derivatives Segment (EDS) incurred net losses, similar to the previous financial year.
Net losses of retail traders widened to ₹1.05 lakh crore in FY 2024-25 (up 41% from ₹74,812 crore in FY 2023-24).
Average loss per trader in FY 2024-25: ₹1.1 lakh (up 27%).
The details of losses are as follows:

Source: SEBI

Weekly Index Options Dominated Retail Activity

Majority of the retail losses were concentrated in weekly index options contracts (e.g. Nifty 50, Sensex, Bank Nifty and Bankex).
The number of contracts in these instruments saw exponential volume growth but were largely used speculatively, not for hedging.

Participation Trends and Contraction

Unique retail traders in the Equity Index derivatives segment (EDS) dropped 20% YoY in the December 2024–May 2025 period.
Despite the decline in the above-mentioned 6-month period, the participation is still 24% higher than what was seen two years ago.
Traders with low turnover (<₹1 lakh) saw the sharpest decline, yet they represented the largest growth cohort over two years.

Derivative Turnover Trends

Index options (premium terms) grew at a 5-year CAGR of 72%; notional turnover was up 101%.
In FY 2024-25, average daily traded value in EDS was ₹2.63 lakh crore, while Cash Market was ₹1.2 lakh crore.

Source: SEBI

Recent SEBI Measures in Equity Derivatives Segment

In the light of rising retail participation and alarming levels of losses in the Equity derivatives segment, SEBI introduced a series of regulatory measures between late 2024 and mid-2025. These steps aim to curb excessive speculation, enhance risk management, and ensure more informed and sustainable participation by individual investors. Below is the list of some of the key measures taken by SEBI:

Rationalized weekly Index derivative contracts to reduce speculative expiry-day trading.
Increased tail risk coverage on expiry days to better manage volatility and systemic risk.
Raised the minimum contract sizes for Index derivatives to limit over-leveraging by low-capital traders.
Standardized expiry days across Exchanges to streamline derivative contract lifecycles.
Mandated upfront collection of Option premiums from buyers to enforce capital discipline.
Removed calendar spread margin benefits on expiry days to curb misuse of hedging strategies.
Introduced intraday monitoring of position limits to prevent real-time breaches and ensure compliance throughout the trading session.

The Way Forward

As India’s Equity derivatives market expands, the focus must shift toward ensuring responsible and informed participation. SEBI’s recent measures are a step in the right direction. Enhancing financial literacy is the need of the hour. The Exchanges (where such contracts are traded) must come forward and conduct targeted Investor programmes with the aid of Pin-code analysis (to get an idea of the trading pattern across the country). Introduction of risk-profiling before retail access (aligned with international best practices) is also an important step to be considered. Brokers and Exchanges must promote transparent disclosures and better risk awareness. A dynamic, data-driven regulatory approach should continue to guide market reforms. Striking a balance between Innovation and Investor protection will be key to building a more resilient and inclusive Equity derivatives ecosystem going forward. SEBI must continue to remain committed towards its key functions of ‘protecting the investors of securities and promote the development of and regulating the securities market’.

SIFs—Will the New Long-Short Framework Succeed?

Posted on August 8, 2025 by Auburn Solutions

SEBI introduced the Specialized Investment Funds (SIF) framework effective from April 1, 2025. SIFs are designed to bridge the gap between mutual funds and portfolio management services (PMS), and offer both retail and sophisticated investors a new asset class for investment.

SIFs are designed to permit more aggressive strategies—especially long-short equity positions using derivatives—under a pooled investment structure, unlike the individually managed PMS accounts. The move aligns with global trends that see rising investor interest in tactical and sectoral strategies. However, the point to be noted is that it is often done using short positions as a hedge or return enhancer.

Under the SIF framework, SEBI has capped the maximum short exposure at 25%, and has not prescribed a minimum short threshold. This raises a concern that fund houses could technically launch a “long-short” fund, yet run it like a traditional long-only equity fund, claiming no shorting opportunity exists. These structures are designed to provide fund managers tactical flexibility within investor protection guardrails. The question, is whether these tools will be actively and effectively used, or whether the long-short promise will be diluted in execution.

Key Questions

Though forward looking, the SIF Framework raises key questions: Do fund managers have the conviction and capability to short effectively in India’s growing market? If Cat-III AIFs haven’t embraced shorting despite years of flexibility, will SIFs fare any better? Will SIFs be meaningfully different from long-only funds? Are there enough distributors for selling SIF ? Are Indian fund houses truly prepared—technically and institutionally—to navigate the risks of complex derivative strategies within SIFs?

Is the Shorting Skillset missing?

India’s markets have yet to develop a strong shorting culture. Post-liberalization, only few notable short-sellers had emerged, while currently majority of fund managers remain long-biased. Shorting demands deep conviction, discipline and risk management. Unless these capabilities evolve, SIFs risk becoming an underutilized regulatory innovation, launched in form but not in spirit.

Shorting in a Growing Economy?

India’s strong macroeconomic fundamentals makes shorting harder to justify. With over USD 700 billion in forex reserves, robust bank and household balance sheets, and FPIs holding over Rs. 80 trillion in assets under custody, the broader market narrative remains positive. Thus, executing nuanced short positions in such scenarios becomes both difficult and risky.

Cat III AIF—an eye opener?

Even in the AIF Cat III space, which has allowed long-short flexibility for years, fund houses have largely stuck to long-biased products, suggesting a lack of conviction or capability to run true short strategies. In practice, very few funds have meaningfully pursued shorting strategies. Most of them are long-biased, often structured to replicate PMS-like flexibility but in a pooled format.

Many Category III AIFs focus on buying and holding stocks (long-only), and are mainly set up this way to avoid the paperwork and complexity involved in handling individual PMS accounts. This shows that just having the rules in place doesn’t mean the market is ready or willing to use more advanced strategies like long-short.

As of March 31, 2024, only 258 of the 1,283 SEBI-registered AIFs are Cat III—the only category allowed to short through derivatives. That just 20% of the registered AIFs are Cat-III funds reflect a lack of traction even in the institutionalized AIF space. This raises further questions whether the SIF framework will have better fate—unless fund managers build real conviction in shorting strategies.

Lack of Certified Distributors

Distributor preparedness is limited, with few MF sellers certified in derivatives—and thus limiting the AMCs ability to garner assets in SIFs.

Derivatives and SIF—Are fund houses prepared?

SEBI’s finding that over 90% of retail traders in equity derivatives lose money, raises questions about the market’s preparedness for complex, derivative-heavy products like SIFs. SIFs are designed to allow long-short strategies, therefore their success depends on sound risk management, skilled fund managers, and investor awareness. Without these, there’s a real risk that SIFs could be misused, remain long-only in practice, or worse—further erode trust in the market they aim to deepen.

Policy Prescriptions

Without a significant shift in market mindset, distribution capability, and shorting skill, SIFs may struggle to scale despite their conceptual strength. To prevent long-only funds masquerading as SIFs, it would be better if certain ‘minimum’ threshold (say 10%-20%) for short positions is compulsorily required for SIFs instead of current requirements which mandates a short position of ‘max’ 25% (fund manager can sit at zero short position and effectively run a long only fund in the name of SIF).

To conclude, while SIFs offer strong structural benefits—such as the flexibility to hedge, take contrarian positions, and navigate volatile markets—their practical adoption may remain limited. Without the right ecosystem, SIFs could eventually be perceived as no different from existing PMS or AIF offerings, despite their differentiated design.

Authors:

Kunj Bansal is General Manager and Rasmeet Kohli, is Sr. AGM, at the National Institute of

Securities Markets. Views are personal.

Originally published in The Mint.

Rating Reset: Building Trust in India’s Debt Markets

Posted on August 7, 2025August 7, 2025 by Auburn Solutions

In any functioning debt market, Credit Rating Agencies (CRAs) play a critical role in bridging the gap between issuers, regulators, merchant bankers and investors. Rating agencies play a vital role in boosting the bond market by providing an independent and credible assessment of an Issuer’s creditworthiness. These ratings help reduce information asymmetry, enabling investors to make informed decisions and better manage risk. High-quality ratings of instruments / securities attract a wider pool of investors, thereby improving liquidity and market depth. They also assist in pricing bonds appropriately based on risk, which supports efficient capital allocation. Ultimately, by enhancing transparency and investor confidence, CRAs are supposed to contribute towards the growth and stability of the bond market.

In India, however, a series of bond defaults has exposed structural weaknesses in the credit rating ecosystem. Recent incidents, most notably the TruCap Finance default on structured market-linked debentures, have highlighted the issue with rating of debt instruments. Since 2016, India has witnessed several high-profile rating defaults, including IL&FS, DHFL, and Reliance Capital, exposing gaps in credit rating practices. These defaults shook investor confidence and highlighted concerns around rating timeliness and independence. Regulatory tightening followed, with SEBI mandating enhanced disclosures. Despite reforms, the need for more proactive, independent, unbiased, timely, objective and transparent ratings remains critical.

As India seeks to deepen its bond market, both in scale and sophistication, strengthening the credit rating framework is critical. Valuable lessons can be drawn from international reforms, especially in the U.S., EU, and China, regions that overhauled their CRA oversight following crises of their own.

Some Key Challenges faced by Indian CRAs
Despite their integral position in the market, Indian credit rating agencies have faced manifold challenges, mainly due to the following:

Reactive approach: Ratings often change only after the financial stress becomes visible or after a default has occurred.
Limited disclosure: Methodologies, assumptions, and stress scenarios are often not transparently shared with investors.
Lack of dynamic surveillance: CRAs typically rely on periodic financial disclosures and management interaction, rather than ongoing market intelligence or alternative data. Nothing prevents the CRAs from asking for additional information from the companies – in case needed to review the ratings on an ongoing basis.
Several high-profile defaults over the last decade, from IL&FS to DHFL have made these shortcomings increasingly untenable.

Global Experiences in CRA Reform

United States: The Dodd-Frank Era
The 2008 subprime mortgage crisis exposed how leading CRAs gave ratings to complex, risky financial instruments that ultimately resulted in default. In response, the Dodd-Frank Wall Street Reform and Consumer Protection Act was introduced to provide for the following:

Civil liability for CRAs in cases of gross negligence or misconduct.
Creation of the Office of Credit Ratings (OCR) under the SEC to conduct annual reviews of rating agencies’ practices, including governance, methodologies, and conflict management.
Mandatory disclosures of historical rating performance, analytical assumptions, and methodologies.
Enforced separation between analysts and commercial operations to avoid rating manipulation.
These measures emphasized accountability, transparency, and deterrence.

European Union: Centralized Oversight by ESMA
The European Securities and Markets Authority (ESMA) was given direct supervisory powers over CRAs. Reforms included:

Mandatory registration of all CRAs under strict guidelines.
Disclosure of rating performance histories and methodological updates.
A centralized public database, the European Rating Platform (ERP), allowing investors to access all rating changes and related documents in one place.
Stronger emphasis on managing conflicts of interest and preventing “rating shopping.”
The EU also introduced Sanctions for non-compliance, creating a culture of continuous accountability.

China: Enforcement and Data Integration
China has approached CRA reform with a focus on enforcement and integration of market data. Key steps include:

Regulatory penalties and suspensions for agencies that failed to downgrade entities in a timely manner.
Compulsory continuous surveillance rather than a one-time rating at issuance.
Use of a centralized credit registry, integrating data across banks, bond markets, and even shadow lenders to assess issuer risk holistically.
This approach combines discipline, technology, and surveillance to ensure rating credibility.

What India Can Learn: Consolidated Lessons from Global Reforms

Drawing from these international reforms, India can consider a series of concrete changes to strengthen the functioning of its credit rating agencies:

Establish a Dedicated Oversight Unit
Just as the U.S. created the Office of Credit Ratings under the SEC, SEBI could consider the establishment of a specialized CRA supervisory cell. This unit should:

Conduct annual inspections of Agencies’ governance, compliance, and internal control systems.
Track historical performance of rating actions, especially around defaults and stress events.
Ensure separation of analytical and commercial functions within CRAs.
Review adherence of CRAs to the IOSCO CRA code.

Mandate Real-Time and Event-Based Monitoring
Indian CRAs should move away from periodic reviews and move towards dynamic, event-triggered surveillance. Ratings must incorporate:

Bond yield movements and market signals.
Stock price crashes and promoter share pledging trends.
Resignations of key personnel.
Negative news or social media sentiment.
Advanced analytics, AI models, and integration with credit bureaus and exchanges can support this shift.

Improve Methodology Transparency
CRAs must be required to:

Disclose rating methodologies and assumptions in public domain documents.
Present stress-test scenarios (e.g., interest rate hikes, liquidity crunch) alongside base case ratings.
Include qualitative assessments, such as governance quality and regulatory exposure, in addition to financial ratios.
These measures help investors make better-informed decisions and evaluate rating reliability.

The IOSCO Code of Conduct Fundamentals for Credit Rating Agencies (the “IOSCO CRA Code”) is intended to offer a set of robust, practical measures as a guide to and a framework for CRAs with respect to protecting the integrity of the rating process, ensuring that investors and issuers are treated fairly, and safeguarding confidential material information. Globally, regulators are using the IOSCO CRA Code as the benchmark for registration and oversight programs related to CRAs. Regulators the world over are also looking at ways and means to address the basic issue of ‘Conflict of interest’ associated with the ‘Issuer pays’ model where lines often get blurred between Analyst divisions and Business development functions of CRAs.

India’s ambitions of building a vibrant, globally competitive bond market depend critically on investor confidence and that confidence is deeply tied to the credibility of credit ratings. Recent defaults, like that of TruCap, have shown that without meaningful reform, the current CRA framework risks falling behind the needs of a more dynamic, retail-inclusive debt market.

India doesn’t need to reinvent the wheel. The U.S., EU, and China have all faced similar crises and responded with regulatory clarity, stronger enforcement, and technological integration. These global models offer a clear path forward.

The time is right for a rating reset, where Indian CRAs transform from being reactive scorekeepers to independent, forward-looking sentinels of credit risk – and also looking at other risks which in turn impact the credit rating of instruments. With stronger oversight, better transparency, and smarter monitoring tools, Credit ratings can once again serve their true purpose – protecting investors and strengthening the integrity of financial markets.

Author:
CMA Suresh Narayan, Adjunct Faculty NISM

Index mutual funds: A silent revolution

Posted on August 4, 2025November 12, 2025 by Auburn Solutions

In India, the Unit Trust of India (UTI) launched the first UTI Nifty 50 index fund in 2000, recently marking its 25th anniversary.

In 1975, John Bogle established Vanguard Mutual Fund, introducing a new style of investing through index mutual funds. Though the first mutual fund was formed in 1924, it took another 50 years and the development of economic theory before index funds emerged.

In 1950, Harry Markowitz in his doctoral dissertation showed that a diversified portfolio of uncorrelated securities had lower risks than investing in a single high-return security. Markowitz’s work laid the foundation of portfolio theory. Despite initial doubts, he was awarded a doctorate in economics and later the 1990 Nobel Prize in economics along with William Sharpe and Merton Miller.

In 1956, William Sharpe advanced Markowitz’s theory by simplifying the computational complexity. He introduced the concept of beta—the covariance between a security and the benchmark index. Sharpe’s Capital Asset Pricing Model (CAPM) became a cornerstone of portfolio management theory.

In the 1960s, Eugene Fama added the Efficient Market Hypothesis (EMH), which posits that stock prices reflect all available information. As a result, no analysis can consistently predict stock movements. Fama received the 2013 Nobel Prize in economics with Robert Shiller and Lars Peter Hansen.

The combined insights of Markowitz, Sharpe, and Fama suggested that investing in a diversified, low-cost index fund is more beneficial than paying fees to active fund managers trying to beat the market.

Bogle implemented these lessons by launching the first low-cost index fund, the First Index Investment Trust (now Vanguard 500 Index Fund) in 1975. Vanguard significantly reduced expense ratios—from 0.68% in 1975 to 0.09% in 2021—contributing to the broader decline in mutual fund costs.

In 1993, Exchange Traded Funds (ETFs) were introduced, allowing index funds to be traded like stocks. Today, there are around 12,000 ETFs worth $13 trillion globally.

In India, UTI launched the first ETF in 2001. By 2007–08, there were 13 ETFs (including gold ETFs), accounting for 0.6% of total equity MF assets. Passive investing has grown rapidly since. By December 2020, there were 32 index funds and 87 ETFs, representing 0.5% and 9.2% of equity assets. By April, the numbers surged to 309 index funds and 253 ETFs, with shares of 4.1% and 12.5% respectively.

This growth is due to innovation in index and ETF offerings from both established and new MF companies. However, there’s still potential, as passive funds comprise nearly 50% of total assets in developed markets.

Index mutual funds have created a silent revolution by offering accessible, low-cost investing options. In countries like India, this revolution is just beginning.

Author: Amol Agrawal, Associate Professor

This article was originally published in Financial Express.