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Reinvestment Risk

By: Punam Sharma

  • Reinvestment risk is one of the risk investor faces when invested in debt market.
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  • It refers to the risk that the coupon or principal amount will have to be reinvested at a lower yield rate prevailing at the time of maturity or when the coupon amount is received.
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  • Reinvestment risk is greatly influenced by market interest rate.
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  • When interest rate falls, investors face higher reinvestment risk.
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Reinvestment Risk & Interest Rate

 

  • Most of time, investors reinvest the coupon or principal amount received, which will be at the current market yields.
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  • The current market yield can be higher, lower or equal to the coupon rate at the time of investment.
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  • In case the current market yield is lower, the coupon proceeds or principal received will be reinvested at lower rate thereby reducing investor return.
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  • This risk of reinvesting at a lower rate is called reinvestment risk.
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Reinvestment Risk

     

  • One way investors can reduce reinvestment risk is by staying invested for a longer duration.
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Impact of Reinvestment Risk explained through example
 

 
Impact of Reinvestment Risk explained through example

 

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Industry Sector of GDP

By: Punam Sharma

Industry Sector of GDP

 

  • Industry sector’s share in total GDP has mostly remained stagnant between 10% and 20% since FY1951, FY2014 being 18.7%.
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  • Industry sector is broadly divided into 3 subsectors namely – Mining & Quarrying, Manufacturing and Electricity, Gas & Water Supply.
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  • Manufacturing sector since FY1951 has the largest share contribution to the industry sector. FY2014 being 14.94%.
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  • Sectors mining & quarrying, electricity, gas & water supply has minuscule share of around 2% each since FY1951.
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Industry Sector Growth
 

  • Industry sector has recorded average growth of around 5.8% (FY1952 to FY2014).
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  • FY2014, industry sector recorded a contraction at -0.15% on account of moderation in both domestic and global demand and rising input cost.
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  • Since FY1952, industry sector has only contracted 3 times – FY1980, FY1992 and FY2014.
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  • The industrial sector contraction mostly reflects manufacturing sector contraction due to its high share contribution.
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  • Mining sector consecutively since 2 years has contracted at -2.16% and -1.38% FY2013 and 2014 respectively.
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  • FY2014, manufacturing sector contracted by 0.71% reflecting poor investment demands and consumer spending weakness.
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  • Electricity sector since FY1952 has never recorded a contraction although electricity sector growth has fluctuated from 11.63% in FY1952 to 5.92% in FY2014.
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Industry and Sub Industry Sector Growth

 
Gross Capital Formation (GCF) in Industry Sector
 
Gross Capital Formation (GCF) in Industry Sector

 

  • Manufacturing sector GCF share to total GCF is the highest among all the sub sectors including from service and agriculture sector between 20% and 40%.
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  • However since 3 years, GCF in manufacturing sector has been declining from 35% in FY2011 to 24% in FY2014.
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  • Decline in GCF in manufacturing sector can be reflected in overall decline in industry sector GCF from 46% in FY2011 to 34% in FY2014.
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