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(NISM)

The National Institute of Securities Markets (NISM) is a public trust established in 2006 by the Securities and Exchange Board of India (SEBI), the regulator of the securities markets in India. The institute carries out a wide range of capacity building activities at various levels aimed at enhancing the quality standards in securities markets.

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Reimagining Urban Finance: Why Municipal Bonds Matter More Than Ever

Posted on 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 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 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 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 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.

RBI has initiated the rate cut cycle. Which debt funds should you prefer?

Posted on by Auburn Solutions

Mark-to-market gains should not be the only objective for investing in debt funds

For quite some time, market has been expecting rate cut(s) from the RBI. Based on this expectation, the recommendation has been for longer duration funds. The rationale is, given that interest rate and bond price move inversely, longer the duration of the fund, higher will be the gains. On 7 February 2025, the Reserve Bank of India (RBI) initiated the rate cut cycle. The repo rate, which is the signal for interest rates across the system, was reduced by 25 basis points from 6.5 percent to 6.25 percent. Now it is time to take stock.

View going forward

The expectation going forward is that the RBI would execute another 25 basis point cut, or at most two more cuts of 25 basis points each, at an appropriate time. This cycle is going to be a shallow rate cut cycle, as they have to take care of inflation as well. Markets, however, react in anticipation. The 10-year government bond yield eased from 7.2 percent on 1 January 2024 to 6.75 percent on 6 February 2025, even before any rate cut. As and when market starts anticipating the next rate cut, yield level on bonds would ease further. That is, there is further scope for gaining from interest rates coming down. However, it has to seen in context.

How debt funds work

Returns of debt funds come from two avenues. Bonds and other instruments in debt funds have coupon or interest, which is accounted for in every day’s net asset value (NAV) on a proportionate basis. This component of returns from debt funds, which is known as accrual as it accrues gradually every day, happens any which way, irrespective of market movements. The other part is mark-to-market gains or losses. The daily NAV is computed, taking that day’s bond prices into account. When interest rates come down (bond prices move up), it adds to accrual returns. When interest rates move up (bond prices come down) it takes away from accrual returns.

When there is a rally in the market i.e. bond yields are coming down, bond prices are moving up and adding to your returns, accrual levels for the subsequent period is coming down. Let us take an illustration. Year one, the yield-to-maturity of the fund is 8 percent and recurring expense is 1 percent. Hence the net accrual level is 7 percent. To be noted, this 7 percent is not a given, not a commitment from the Mutual Fund, but an illustration for understanding. If yield level in the market does not move, over one year, you will get approx. Rs 7 per Rs 100 of investment. Now let us say there is a rally in the market of 50 basis points (0.5 percent). The addition to accrual due to yield coming down is a function of the modified duration of the fund, which is a data point available in the monthly fact sheet.

If the portfolio maturity of the fund is say 9 years and modified duration is say 5 years, then the mark-to-market addition is 0.5 percent X 5 = 2.5. Your overall return is 7+2.5 = Rs 9.5 per Rs 100. If the portfolio maturity of the fund is 3 years and modified duration is 2.5 years, then the mark-to-market addition is 0.5 percent X 2.5 = 1.25. Your overall return is 7+1.25 = Rs 8.25 per Rs 100.

The point is, after the rally of year one, for the second year, your accrual level is 6.5 percent, down from 7 percent. Unless there is further rally in year two, your returns will be approx. 6.5 percent. If your approach is to benefit from the rally and move out i.e. you want to take 9.5 percent and exit, then you have to be clear in your mind. Post exit from the debt fund, where you would move to e.g. equity fund / any other category, and what is the rationale for the move. Your portfolio should not be managed on the basis of jumping from one asset class to another, but a judicious allocation as per your objectives.

Recommended approach

One defining aspect of debt funds is that there is a correspondence between fund portfolio maturity, volatility and ideal investment horizon. While volatility i.e. yield levels moving up or down will be there, the accrual will take care of it. The impact of volatility on the fund returns will be proportionate to the modified duration, which is a function of portfolio maturity of the fund. Longer the maturity and duration, higher the impact, and vice versa. As a ballpark guidance, it is recommended that you match your investment horizon with the portfolio maturity. When there is adverse volatility i.e. yield levels move up, the accrual over that period of time (your holding period) will take care of it.

In the earlier examples, when you get say 9.5 percent or 8.25 percent in year one and 6.5 percent in year two, over the investment horizon, it averages out. Your annualized return would be somewhere around the return which initially you would have realistically expected, not just looking at the benefit of the rally.

SEBI has defined 16 debt fund categories, and there is some extent of uniformity in the Mutual Fund industry on the portfolio maturity in a given category. As an example, Gilt Funds (government bond funds) would be run with a long portfolio maturity and portfolio duration. Corporate Bond Funds would have a portfolio maturity of say 4 – 5 years, and Short Duration Funds around 3 years. The data on portfolio maturity and duration is available on the monthly factsheet, which is published on the website of Mutual Funds.

Conclusion

If you want to benefit from the remaining part of the rally e.g. 10-year government bond yield moving to say 6.5 percent, you can play it through Gilt Funds, which usually have long duration. Towards the end of the rally, if you do not have the requisite long investment horizon, you can move to a relatively shorter maturity / duration fund. To be noted, this has a tax implication. Capital gains are taxable as short term capital gains at your  marginal tax slab, irrespective of your holding period. Dividends (now known as income distribution cum capital withdrawal) also are taxable at your marginal slab rate. You have to take your decision, keeping in mind the expected returns from the fund, and tax implication.

Author: Joydeep Sen, Corporate Trainer (Financial Markets)

Originally publish in Outlook Money on 19 th March, 2025

https://www.outlookmoney.com/invest/how-rbis-rate-cut-affects-debt-funds

Mind Over Money: Why Young Investors Need More Than Just Social Media Advice

Posted on by Auburn Solutions

Young adults, those between the ages of 18 and 35, form a key demographic in India. They account for a population of about 600 million individuals. Over 90% of them actively save money. About 30% of them actively invest some portion of their savings. Of these young adults who invest, almost 60% use social media, like YouTube and X, for financial guidance. For them, the first port of call for financial advice is the internet, and many of them invest money based on social media recommendations.

This dependence on the internet for financial decision-making brings with it a unique set of problems – of information overload, impulsive decision-making, and behavioral biases. Decades ago, the psychologist and Nobel laureate, Herbert Simon, pointed out that humans were struggling with an information overload and that the wealth of information we encounter every day creates a “poverty of attention”. This is especially true when it comes to financial advice. Every other TV channel, every third consolidated email, and innumerable financial websites are doling out financial advice. They are telling viewers and readers which Mutual Fund schemes, stocks, or bonds to buy or sell. The battle for focus – for a few seconds of attention – has reached epic levels. Competing demands for our attention can deplete our mental bandwidth and hinder our ability to make sound financial decisions. Along with this information overload, technology now permits investors to transact anytime, anywhere. This is making us more impulsive investors. We no longer see patience as a virtue. Instant access, coupled with our behavioral biases, fuels our FOMO.

Why is it that young adults find it so difficult to reach out to experts for financial advice? A few explanations come to mind:

  • In this internet age, it is much easier to access information online as compared to consulting with a financial advisor.
  • Young investors are unsure as to what supportive services their financial advisors have to offer, beyond what they can access on their own on the internet.

 

Young investors should and will demand low-touch, digitally driven solutions for routine services like KYC, transaction processing, tracking of their investments, etc. However, for high-quality solutions across lifecycle stages that fit their risk profiles, young investors must wean themselves away from the internet and social media and look for human assistance to support their decisions. A financial advisor can help them cut through the clutter and noise. They can help them with mindful investing.

Author: Shri Sashi Krishnan, Director, NISM

This article was originally published in NISM Newsletter July 2025.
To read the newsletter Click Here.

Mastering the Market: Investment Banking as a Career in India (Part 2)

Posted on by Auburn Solutions

1. Introduction: The Catalyst Behind Capital Allocation

Investment banking has quickly become a strategic pillar of India’s rapidly changing financial landscape. Whenever firms need to raise funds, negotiate mergers, or reach overseas investors, the expertise of investment bankers proves indispensable. In light of India’s goal of a $30 trillion economy by 2047 the demand forskilled professionals who command finance, regulation, and forward-looking strategy has never been greater.

Aspiring candidates hoping to enter this high-pressure, high-reward field benefit from clear, credible training routes. National Institute of Securities Markets (NISM) meets that need by offering certification courses and online modules that act as practical gateways into investment banking.

2. NISM’s Role in Financial Market Talent Development:

National Institute of Securities Markets (NISM)- A Capacity Building Initiate of SEBI has become India’s foremost center for education and certification in the securities market arena. Since 2006 it has been instrumental in developing ethical, competent professionals who are ready to engage with the market. NISM updates its curriculum regularly to reflect new regulations, technological advances, and international benchmarks.

Its certificates are now a standard credential across financial services, and many top employers in investment banking and equity research treat them as essential or preferred. The Institutes dedicated e-learning portal further broadens access, allowing learners from Tier I, II, and III cities to enroll in high-quality programmes, and thus promoting equitable growth in the country’s financial talent pool.

Whether you are a college student curious about capital markets, a finance graduate aiming for an analyst role or a working professional seeking to pivot into investment banking, NISM’s offerings modular and stackable pathways offer tailored solutions to suit your journey.

3. Certifications That Matter: A Roadmap for Aspiring Investment Bankers:

Table 1
NISM Certifications and E-learning Pathways for Investment Banking Careers

 
Career Stage NISM Certifications / E-Learning Modules Purpose and Benefits
Entry Level (0–2 yrs) Securities Markets Foundation Certification
Securities Market Primer (SMP)
Securities Law: Concept		 The module outlines core market principles, the functions of intermediaries, and key legal concepts in finance. It is designed for students, recent graduates, and early-career professionals who want a broad overview. All classes are offered online, providing the flexibility to study at convenient times.
Mid-Level (2–5 yrs) Research Analyst Certification
Corporate Restructuring: Concept
Merchant Banking – Concept		 The program trains participants in core analytical, valuation, and transaction-modeling techniques typically assessed during investment-banking interviews. Flexible, self-paced modules allow learners to advance their skills without interrupting their professional commitments.
Advanced (5+ yrs) Merchant Banking – Concept
Merchant Banking – Operations		 Tailored for experts preparing to step into leadership positions. A blend of certification training and specialized modules equips participants to confidently manage mandates such as IPOs, debt offerings, or M&A advisory.

4. Benefits of Pursuing NISM Certifications:

While hands-on work is undoubtedly useful, many financial employers now prioritize certified knowledge that can be easily verified. NISM qualifications offer this proof, strengthening your CV while reinforcing key technical and ethical skills.

Why Choose NISM?

  • Regulatory Alignment: Because every NISM exam meets SEBI rules and is revised with each policy change, certification signals immediate compliance.
  • Career Differentiator: Leading banks, brokerages, and boutique advisory houses often prefer, and sometimes require, NISM-trained talent for client-facing roles.
  • Geographical Reach: NISM’s flexible online platform removes location as a barrier, giving learners across India equal access to high-quality financial education.
  • Stackable Learning: Candidates can start with basic modules and steadily move toward advanced diplomas, creating a tailored, cumulative skill path.
  • Credibility and Trust: Originating from SEBI, each NISM badge carries weight, boosting your standing in every corner of India’s diverse finance sector.

 

5. Conclusion:

As India’s capital markets mature and the economy pursues greater global financial links, investment banking will continue to sit at the professions leading edge. Those who wish to join this change must arrive technically skilled, firmly ethical, and strategically informed.

NISM offers the ideal launchpad through relevant, cost-effective, and SEBI-recognized programs that take you from initial curiosity to solid competence. Whether you are entering investment banking for the first time or aiming to strengthen your current qualifications, your journey begins here.

References:

 

Author: Dr. Shubhangi Chaturvedi, A.M (Sr)- NISM

Mastering the Market: Investment Banking as a Career in India (Part 1)

Posted on by Auburn Solutions

1. Introduction: The Catalyst Behind Capital Allocation

Investment banking occupies a central position in the modern financial system, guiding firms through mergers and acquisitions, arranging both debt and equity financing, and crafting bespoke financial structures. In an information-rich global market, these banks analyze vast datasets to inform every deal, weighing risk, precise valuation, and long-term strategy.

For driven graduates, the sector promises challenging analytical work, visibility on landmark transactions, and a front-row seat to India’s economic transformation, all of which enrich professional development and personal ambition.

2. Why Build a Career in Investment Banking?

Investment banking sits at the core of modern finance, guiding firms through initial public offerings, mergers and acquisitions, debt placement, and organizational refinancing. With India’s goal of reaching a 30-trillion-dollar economy by 2047, these bankers will be essential in channeling capital and structuring transactions that support that ambitious expansion.

  • Strategic Impact & National Development: Investment bankers design the pathways through which firms tap both public and private capital, whether by shaping equity and debt offerings or by steering sensitive mergers and acquisitions. Their work therefore plays a crucial role in job creation, infrastructure financing, and the growth of new industries, positioning these professionals at the forefront of India’s ongoing economic transformation.

 

  • High Reward Potential & Mobility: The intricate nature and substantial dollar amounts involved in investment banking routinely led to generous salaries, large year-end bonuses, and opportunities for temporary assignments overseas or work on cross-border deals. In addition, core skills such as company valuation, detailed financial modeling, deal negotiation, and familiarity with regulatory frameworks are easily transferred, allowing former bankers to move into private equity, venture capital, corporate finance leadership, and even advisory roles in public policy.

 

  • Fast‐Paced Learning & Reputation: Daily routines in investment banking expose you to the latest financial strategies, sophisticated valuation methods like DCF, comparable, and LBO models, and the fast-moving pulse of the market. Working on headline transactions often reported by The Economic Times, Reuters, and other media not only enhances your reputation but also broadens your grasp of how global capital flows.

 

  • Alignment with Policy & FinTech Innovation: As the Indian government and SEBI continue to push for deeper markets, green finance, and FinTech innovation, employers increasingly seek professionals who can underwrite green bonds, structure ESG-linked deals, or run API-driven securities-issuance platforms. Careers in these areas are likely to remain strong and grow because both rules and technology will keep changing.

 

  • Timing & Demand: With an increasing number of Indian firms gearing up for initial public offerings—prompted by the need to exit from start-ups, by public sector undertakings seeking disinvestment, and by a more polished financial ecosystem—the call for investment banking professionals who possess strong analytical skills and valid SEBI or NISM credentials is set to grow. Market projections suggest that India’s investment banking revenues could expand at a compound annual growth rate of more than 8 percent through 2030 (MRFR, 2025), creating a solid pathway for newcomers who master the necessary competencies.

 

3. Skills, Education & Certifications:

Table 1
Key Skills, Education, and Certifications for Investment Banking Careers Sector

Category Key Requirements
Education International structuring and compliance
Certifications NISM Certification Exams, NISM E- Learning Courses, CFA, Financial

Modelling Courses
Technical Tools Excel, Python/R, Bloomberg, PowerPoint
Soft Skills Negotiation, Presentation, Financial Storytelling
Regulatory Awareness SEBI regulations, RBI frameworks, FEMA norms

Note: This table outlines essential qualifications and tools that support career development in investment banking.

4. Career Pathway: Roles by Experience

Table 2
Career Pathway in Investment Banking by Experience Level

Category Role Responsibilities
0–2 yrs Analyst Valuations, Models, Market Scans
2–5 yrs Associate Client Pitches, Deal Execution
5–10 yrs VP/Director Origination, Negotiations
10+ yrs MD/Partner Leadership, Strategic Direction, Public Presence

Note: Career progression in investment banking typically moves from analytical support roles to client-facing, strategic leadership positions.

5.Top Employers in India:

  • Global Players: Goldman Sachs, Morgan Stanley, J.P. Morgan
  • Domestic Leaders: Kotak IB, ICICI Securities, Axis Capital
  • Boutique Firms: Avendus, Ambit, Equirus
  • Fintech & ESG: Cred Avenue, Re New, Green Investment Bank India

 

6. Conclusion: Is IB the Right Career for You?

If you are intellectually curious, perform well in demanding settings, and want a role where your analyses literally reshape institutions and markets, investment banking stands out as one of the most consequential paths in finance.

Because India is rapidly positioning itself at the centre of the global economy and because fresh capital is urgently needed for infrastructure, startups, and sustainability projects, the call for well-trained bankers will only grow louder. Focus on solid foundational skills, seek out experienced mentors and earn credentials such as the NISM Certification in Investment Banking, CFA Charter and financial-modelling badges you can open a door to work that combines numbers, influence, and societal purpose.

On the long march towards Viksit Bharat by 2047, investment bankers are not merely casting spreadsheets- they are designing the very blueprints that guide the nation forward in wealth and opportunity.

References:

 

Author: Dr. Shubhangi Chaturvedi, A.M (Sr)- NISM

Common Myths of Derivatives Trading Debunked

Posted on by Auburn Solutions

Executive Summary
Derivatives trading, often portrayed as a high-stakes gamble reserved for financial elites, has seen a surge in retail participation — yet misconceptions continue to cloud public understanding.

Derivatives are widely misunderstood as overly complex, excessively risky or used exclusively by institutional investors and other sophisticated market participants.

When the world’s greatest investor terms them as “Weapons of mass destruction”, they are bound to evoke strong reactions. Some see them as sophisticated tools for hedging and speculation, while others view them as opaque instruments best left to professionals.

However, much of the fear and confusion stems from persistent myths. Let’s have a look at some of the most common misconceptions and try to unravel the truth behind derivatives trading.

This report aims to demystify the world of derivatives by addressing and debunking the most pervasive myths that mislead investors and distort market perception. It maintains that with proper understanding and risk management, derivatives can be a valuable tool for hedging, directional strategies, and portfolio diversification.

Common Myths of Derivatives Trading Debunked

Myth 1: Derivatives Are Only for Experts and Big Institutions
Debunked: It’s true that large players, particularly institutional investors, dominate the derivatives market. However, retail participation has increased significantly in the past 6-7 years — especially in equity options and futures. As per a recent SEBI report, individual traders constitute over 95% of participants in the Futures and Options segment and account for about 30% of the total turnover. With the rise of online platforms, fininfluencers, educational content, and risk management tools, derivatives are more accessible than ever. What will eventually matter is not the size of your transaction, but your strategy and discipline.
Reality: With proper education and risk controls, even individual investors can use derivatives effectively.

Myth 2: Derivatives Are Inherently Risky and Speculative
Debunked: Derivatives are instruments or tools — how you use them determines the level of risk. They can be used to protect portfolios, lock-in prices, or reduce exposure to volatility. They can also be used to amplify gains and losses through leverage per se, but the risk depends on the way it is used in the market and not the instrument itself.
Reality: Derivatives can reduce risk when used for hedging, just as they can increase it when used for speculation.

Myth 3: Derivatives Have No Real Value—They’re Just Gambling
Debunked: This myth confuses speculation with gambling. Derivatives derive their value from underlying assets like stocks, indices, agricultural products, precious metals, energy, metals, interest rates etc. They serve real economic purposes i.e. there is an economic rationale behind the functioning of such markets, namely price discovery, liquidity, and risk transfer.
The sheer size of the derivatives market, the quality of participants, lower transaction costs, benefit of leverage and the ability to go long and short will make the flow of information through the system almost instantaneous when seen in an overall context, and this in turn will lead to an efficient price discovery mechanism. There is enough empirical evidence to support the evidence that the introduction of derivatives trading has vastly improved the volumes and depth in the underlying market. Finally, the derivatives market functions like a gigantic insurance company redistributing risk amongst the various market participants.
In fact, many businesses use derivatives to stabilize cash flows and manage costs.
Reality: Derivatives are essential to modern financial markets and serve practical, value-adding functions.

Myth 4: You Need to Hold Derivatives Until Expiry
Debunked: It is widely believed that one must hold on to options or futures until expiration. In reality, derivatives can be traded like any other asset class in the market, i.e. you can enter or exit as per your preference. Therefore, most derivative contracts are traded day-in and day-out; they are closed out or rolled over before expiry. Liquidity in these markets allows for flexible entry and exit strategies.
Reality: You can exit a derivative position any time before expiry, just like selling a stock.

Myth 5: You Can Only Lose Your Premium in Options
Debunked: This is true for buyers (holders) of options, but not for sellers (writers). Selling naked options can expose the trader to unlimited losses. Many traders underestimate the risks of writing options without proper hedging. Writing options look like easy money to novice traders and attract them in droves almost everywhere in the world. The “lure of the lucre” is a temptation too strong to resist.
Reality: Option sellers face significant risk and must manage margin and exposure carefully.

Myth 6: Technical Analysis Doesn’t Work in Derivatives
Debunked: Contrary to popular perception, technical analysis and derivatives trading go hand in hand. Technical Analysis is widely applied in derivatives trading, particularly in short-term strategies. Indicators like Moving Averages, Super trend, RSI, MACD, Price-volume-OI profile and some important chart patterns like Marubozu, Hammer, Doji, Engulfing Pattern etc., can help a trader identify entry and exit points. In fact, derivatives markets often exhibit patterns and volatility that technical traders thrive on.
Reality: Technical indicators are highly relevant in derivatives, especially for timing trades.

Myth 7: Derivatives Are Only for Short-Term Trading
Debunked: While many use derivatives for short-term speculation, they’re also powerful tool for long-term strategies. Portfolio managers use index futures for tactical asset allocation, and corporations hedge currency or commodity exposure months or years in advance.
Reality: Derivatives can be tailored for both short-term trades and long-term hedging strategies.

Myth 8: Only Sellers of Options Have to Pay Initial Margins
Debunked: Although margins are largely payable by option writers or sellers, there are certain conditions under which even the buyer of the option needs to pay the margins. During the expiry week the buyer of the option will have to pay margins if his strike becomes in-the-money. This is applicable to both call options and put options. The margin increases as the expiry date approaches, giving the trader the time to arrange for funds or to exit from his position. On the expiry day the margins are 100% of the exposure.
Reality: In-the-money options attract margins, even for buyers, during expiry week.

And to finally conclude,  Derivatives are neither magic bullets nor ticking time bombs — they’re financial instruments that require understanding, discipline, and strategy. By debunking these myths, traders can approach derivatives with clarity and confidence.

For novice traders, it makes sense to begin with small positions, focus on learning, and always respect the power of leverage. The more you understand the mechanics, the more derivatives become a tool — not a trap.

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