Investment Classification in Banks: HTM, AFS & HFT for IIBF 2026

For any bank treasury, investment classification determines how securities are valued, how gains and losses hit the books, and how much capital must be held. The IIBF Treasury Investment and Risk Management paper tests investment classification heavily because it sits at the crossroads of accounting, regulation and market risk. This guide explains the categories, their valuation rules and the duration concept examiners love to test.

The Investment Categories

Traditionally, Indian banks classified their investment portfolio into three buckets. Held to Maturity (HTM) covers securities the bank intends to hold until they mature; these are carried at acquisition cost (amortised) and not marked to market, so interest-rate swings do not affect their book value. Available for Sale (AFS) and Held for Trading (HFT) cover securities the bank may sell, and these are marked to market, with HFT positions intended for short-term trading gains.

Under the revised RBI framework aligned with global accounting, the portfolio is reorganised into HTM, Available for Sale (AFS) and Fair Value Through Profit and Loss (FVTPL), with HFT becoming a sub-category of FVTPL. The classification depends on the bank's business model for managing the security and the nature of its cash flows. Getting the investment classification right at acquisition matters, because shifting between categories is tightly restricted. Practise distinguishing the categories with our IIBF treasury practice tests, which use realistic portfolio scenarios.

Valuation and Mark to Market

Valuation rules flow directly from investment classification. HTM securities are held at cost, with any premium over face value amortised over the remaining life; they are not subject to mark-to-market, which gives the bank earnings stability. AFS securities are marked to market with valuation changes routed through a reserve in equity (an AFS reserve) rather than the profit and loss account, so the bank's capital reflects market movements without distorting reported profit.

FVTPL and HFT securities are marked to market with gains and losses flowing straight through the profit and loss account, making earnings sensitive to market volatility. Mark to market means revaluing a security at its current market price; where a liquid market price is unavailable, banks use yield-to-maturity curves published by recognised agencies. Depreciation on a portfolio must be provided for, and the treatment of net appreciation versus depreciation is a frequent numerical. Candidates should be able to explain why a rise in interest rates lowers bond prices and therefore the marked-to-market value of AFS and FVTPL holdings. Reinforce the valuation logic with our treasury terms match game.

Duration, Interest-Rate Risk and the Trading Book

Because marked-to-market portfolios move with interest rates, treasuries measure their sensitivity using duration. Duration is the weighted average time to receive a bond's cash flows and approximates the percentage change in price for a one-percent change in yield. Modified duration refines this measure, and a higher duration means greater price sensitivity. A treasury that expects rising rates will shorten the duration of its trading book to limit losses, while one expecting falling rates may lengthen it.

The trading book also attracts a market risk capital charge under Basel norms, computed for interest-rate, equity, foreign-exchange and other positions. Concepts such as the PV01 (the price change for a one-basis-point move) and Value at Risk (VaR) quantify potential losses. The bank's Investment Fluctuation Reserve cushions the profit and loss account against mark-to-market volatility on the AFS and FVTPL books. Detailed prudential norms are issued by the Reserve Bank of India. These risk metrics regularly appear as both theory and numerical questions. Deepen your grasp through our advanced bank financial management course.

The G-Sec Market and SLR Linkage

Most of a bank's investment portfolio sits in government securities (G-Secs), which also help meet the Statutory Liquidity Ratio. G-Secs are issued through RBI auctions on the e-Kuber platform and traded on the Negotiated Dealing System, with settlement guaranteed by the Clearing Corporation of India. Treasury bills cover short maturities up to one year, while dated securities run for longer tenors, and State Development Loans are issued by state governments.

The yield on G-Secs forms the risk-free benchmark for pricing across the financial system, so movements in the ten-year yield ripple into loan and deposit rates. A treasury manages its SLR portfolio, its trading positions and its liquidity together, balancing return against interest-rate and liquidity risk. Linking investment classification to valuation, duration and the G-Sec market gives you the complete picture this paper demands. Track yield movements and policy actions on our RBI rates page and read more analysis on the study blog.

Common Pitfalls and Final Tips

A frequent mistake in this paper is memorising definitions without being able to apply them to a scenario. The IIBF examiner often wraps the HTM, AFS and FVTPL categories, mark-to-market rules and duration inside a short case, so practise translating each concept into a worked example rather than reciting it. Another common slip is confusing closely related terms, so keep a running list of easily-mixed concepts and test yourself on the distinctions until they are automatic.

In the final week, prioritise active recall over passive reading: attempt full-length mocks under timed conditions, review every incorrect answer, and revisit only the topics where you stumble. Manage the clock carefully in the exam hall by flagging difficult questions and returning to them rather than losing momentum on a single item. Read each question stem twice, since negatively-phrased options such as "which is NOT" trip up even well-prepared candidates.

Finally, link your study to current developments, because the exam increasingly tests recent regulatory changes alongside core theory. Combine this disciplined approach with our timed treasury mock tests, the quick-revision match games and the detailed explainers on our study blog, and you will walk into the exam confident and well-prepared.

Conclusion

Investment classification is the thread that ties together valuation, mark-to-market accounting, duration and the G-Sec market. Master which category is valued how, then layer on duration and the Basel market-risk charge. Those distinctions are tested in almost every session, so commit them to memory. Test yourself with a timed treasury mock and continue with our advanced banking course.