Investment Fundamentals Quiz

Investment Landscape

• Investments are often misunderstood, focusing on the investment rather than the investor's needs and goals.
• Financial objectives are the requirements of an investor, such as higher education, buying a house, or retirement.
• Goal setting is essential in investment planning, assigning amounts and timelines to financial objectives.

Short-term Needs vs. Long-term Goals

• Different goals have different timelines and require separate planning.
• Retirement goals can be broken into two parts: accumulating a sum for retirement and generating income from the corpus.

Savings vs. Investments

• Savings and investments are not the same thing, but two steps of the same process.
• Savings involve reducing consumption to save money, while investments aim to earn profits.
• There is a trade-off between risk and return in investments.

Factors to Evaluate Investments

• Safety: understanding the risks involved in an investment.
• Liquidity: ease of converting an asset into cash.
• Returns: regular income or capital appreciation.
• Convenience: ease of investing, withdrawing, and monitoring the investment.
• Ticket size: minimum investment required.
• Taxability of income: considering taxes when evaluating investments.
• Tax deduction: considering tax deductions available on certain investments.

Different Asset Classes

• Real estate: considered a popular asset class, but often not for investment reasons.
• Commodities: investing in commodities through derivatives or precious metals.
• Fixed income: bonds, which are generally considered safer than equity, but still carry risks.
• Equity: owner's capital in a business, considered risk capital.

Investment Risks

• Inflation risk: erosion of purchasing power due to inflation.
• Liquidity risk: difficulty in converting an asset into cash.
• Credit risk: default or delay in repayment of principal or interest.
• Market risk and price risk: losses due to market price movements.
• Interest rate risk: change in interest rates affecting investment value.

Behavioral Biases in Investment Decision Making

• Availability heuristic: relying on readily available information instead of thorough research.
• Confirmation bias: seeking information that confirms existing beliefs.
• Familiarity bias: preferring familiar investments over new ones.
• Herd mentality: following the crowd without proper evaluation.
• Loss aversion: fear of losses leading to risk aversion.
• Overconfidence: overestimating one's abilities or judgment.
• Recency bias: extrapolating recent events into the future.

Understanding Asset Allocation

• Strategic asset allocation: allocating assets to achieve financial goals.
• Tactical asset allocation: dynamically adjusting asset allocation to take advantage of market opportunities.
• Rebalancing: periodically adjusting the asset allocation to maintain the desired ratios.

Concept and Role of a Mutual Fund

• Mutual fund: a vehicle to mobilize money from investors to invest in different markets and securities.
• Role of mutual funds: assists investors in earning income or building wealth, mobilizes savings, and facilitates infusion of capital into the economy.

Different Schemes According to Investment Objectives

• Mutual fund schemes offer different investment objectives to cater to various investor preferences.
• Each scheme has a pre-announced investment objective, and investors invest in a scheme that aligns with their needs.

Investment Policy of Mutual Fund

• Mutual fund schemes announce their investment objectives and seek investments from investors.
• The scheme earns interest income or dividend income and may incur capital gains or losses.
• The scheme's asset allocation is disclosed in the Scheme Information Document (SID).

Important Concepts in Mutual Funds

• Units: the investment made by an investor in a scheme.
• Face value: the nominal value of a unit (typically Rs. 10).
• Unit capital: the total capital of the scheme.
• Recurring expenses: fees or commissions paid to mutual fund constituents.
• Net asset value (NAV): the true worth of a unit of the mutual fund scheme.
• Assets under management (AUM): the total size of the mutual fund scheme.

Advantages of Mutual Funds for Investors

• Professional management: investors benefit from professional management of their investments.
• Affordable portfolio diversification: investors can diversify their portfolios with a small investment.
• Economies of scale: pooling of money from many investors allows for cost savings.
• Liquidity: investors can recover the market value of their investments at any time.
• Tax deferral: investors can defer tax liability by selecting schemes with a long-term horizon.
• Tax benefits: specific schemes offer tax benefits to investors.
• Convenient options: investors can structure their investments according to their liquidity preference and tax position.
• Investment comfort: once an investment is made, investors can make further purchases with ease.
• Regulatory comfort: mutual funds are regulated by SEBI, providing a level of protection to investors.
• Systematic approach to investments: mutual funds offer facilities for systematic investments, withdrawals, and transfers.

Limitations of a Mutual Fund

• Lack of portfolio customization: investors have no control over the securities or investments in the scheme.
• Choice overload: numerous mutual fund schemes and options make it difficult for investors to choose.
• No control over costs: investors have no control over the costs incurred in managing the scheme.### Types of Funds
• Open-Ended Funds: Allow investors to enter or exit at any time, even after the New Fund Offer (NFO). The scheme continues operations with the remaining investors.
• Close-Ended Funds: Have a fixed maturity. Investors can buy units only during the NFO. The fund makes arrangements for the units to be traded on a stock exchange post-NFO.
• Interval Funds: Combine features of both open-ended and close-ended schemes. They are largely close-ended but become open-ended at pre-specified intervals (called transaction periods).

Fund Management Style

• Actively Managed Funds: The fund manager has the flexibility to choose the investment portfolio, within the broad parameters of the investment objective. Expenses are higher, and investors expect better performance than the market.
• Passive Funds: Invest in a specified index, tracking its performance. They are not designed to perform better than the market.
• Exchange-Traded Funds (ETFs): A type of passive fund whose portfolio replicates an index or benchmark. Units are traded on a stock exchange at real-time prices linked to the underlying index.

Equity Schemes

• Multi Cap Fund: Invests across large cap, mid cap, and small cap stocks. Minimum investment in equity is 65% of total assets.
• Large Cap Fund: Predominantly invests in large cap stocks. Minimum investment in equity and large cap companies is 80% of total assets.
• Large and Mid-Cap Fund: Invests in both large cap and mid cap stocks. Minimum investment in equity and mid cap stocks is 35% of total assets.
• Mid Cap Fund: Predominantly invests in mid cap stocks. Minimum investment in equity and mid cap companies is 65% of total assets.
• Small Cap Fund: Predominantly invests in small cap stocks. Minimum investment in equity and small cap companies is 65% of total assets.
• Dividend Yield Fund: Predominantly invests in dividend-yielding stocks.
• Value Fund or Contra Fund: A value fund that follows a value investment strategy.
• Focused Fund: Invests in a maximum of 30 stocks, mentioning the focus area (e.g., multi cap, large cap, mid cap, small cap).
• Sectoral/Thematic Fund: Invests in a specific sector (e.g., banking, power) or thematic area (e.g., infrastructure).
• Equity Linked Savings Scheme (ELSS): An open-ended equity-linked saving scheme with a statutory lock-in of 3 years and tax benefits.

Debt Schemes

• Overnight Fund: Invests in overnight securities with a maturity of 1 day.
• Liquid Fund: Invests in debt and money market securities with a maturity of up to 91 days.
• Ultra Short Duration Fund: Invests in debt and money market instruments with a Macaulay duration between 3 months and 6 months.
• Low Duration Fund: Invests in debt and money market instruments with a Macaulay duration between 6 months and 12 months.
• Money Market Fund: Invests in money market instruments with a maturity of up to 1 year.
• Short Duration Fund: Invests in debt and money market instruments with a Macaulay duration between 1 year and 3 years.
• Medium Duration Fund: Invests in debt and money market instruments with a Macaulay duration between 3 years and 4 years.
• Medium to Long Duration Fund: Invests in debt and money market instruments with a Macaulay duration between 4 years and 7 years.
• Long Duration Fund: Invests in debt and money market instruments with a Macaulay duration greater than 7 years.
• Dynamic Bond: Invests across duration.
• Corporate Bond Fund: Predominantly invests in AA+ and above-rated corporate bonds. Minimum investment in corporate bonds is 80% of total assets.
• Credit Risk Fund: Invests in below highest-rated corporate bonds. Minimum investment in corporate bonds is 65% of total assets.
• Banking and PSU Fund: Predominantly invests in debt instruments of banks, Public Sector Undertakings, Public Financial Institutions, and Municipal Bonds.
• Gilt Fund: Invests in government securities across maturity.
• Floater Fund: Predominantly invests in floating rate instruments. Minimum investment in floating rate instruments is 65% of total assets.

Hybrid Schemes

• Conservative Hybrid Fund: Invests predominantly in debt instruments. Investment in debt instruments is between 75% and 90% of total assets, and in equity between 10% and 25% of total assets.
• Balanced Hybrid Fund: Invests in equity and debt instruments. Investment in equity is between 40% and 60% of total assets, and in debt instruments between 40% and 60% of total assets. No arbitrage is permitted.
• Aggressive Hybrid Fund: Invests in equity and equity-related instruments between 65% and 80% of total assets, and in debt instruments between 20% and 35% of total assets.
• Dynamic Asset Allocation or Balanced Advantage: Invests in equity and debt instruments, with investment managed dynamically.
• Multi Asset Allocation: Invests in at least three asset classes, with a minimum allocation of at least 10% each in all three asset classes.
• Arbitrage Fund: Invests in arbitrage opportunities. Minimum investment in equity and equity-related instruments is 65% of total assets.
• Equity Savings: Invests in equity, arbitrage, and debt. Minimum investment in equity and equity-related instruments is 65% of total assets, and in debt is 10% of total assets.

Solution-Oriented Schemes

• Retirement Fund: An open-ended retirement solution-oriented scheme with a lock-in of 5 years or till retirement age (whichever is earlier).
• Children's Fund: An open-ended fund for investment for children, having a lock-in for at least 5 years or till the child attains the age of majority (whichever is earlier).

Other Schemes

• Index Funds/ Exchange Traded Fund: An open-ended scheme replicating/tracking a specific index. Minimum investment in securities of a particular index is 95% of total assets.
• Fund of Funds (Overseas/Domestic): An open-ended fund of fund scheme investing in an underlying fund. Minimum investment in the underlying fund is 95% of total assets.

Fixed Maturity Plans and Capital Protection Funds

• Fixed Maturity Plans: A kind of close-ended debt fund where the duration of the investment portfolio is closely aligned to the maturity of the scheme.
• Capital Protection Funds: Closed-end hybrid funds that invest in debt instruments and equity derivatives to provide a minimum return guarantee.

Infrastructure Debt Funds

• Infrastructure Debt Funds: Investment vehicles that can be sponsored by commercial banks and NBFCs in India, allowing domestic/offshore institutional investors to invest through units and bonds issued by the IDFs.

Real Estate Mutual Fund Schemes/Real Estate Investment Trusts

• Real Estate Mutual Fund Schemes
• Real Estate Investment Trusts (REITs)
• Infrastructure Investment### Mutual Fund Regulations and Investor Protection
• The objective of SEBI regulations is to protect the interests of mutual fund investors and empower them to make informed investment decisions.
• The regulations can be broken down into categories, including:
  • Scheme related documents
  • Conversion and consolidation of existing schemes
  • New products
  • Risk management system
  • Disclosures and reporting norms
  • Governance norms
  • Secondary market activities
  • Net Asset Value (NAV) and Valuation
  • Loads, fees, and expenses
  • Dividend distribution procedure
  • Investment by schemes
  • Advertisements
  • Investor rights and obligations
  • Certification and registration of intermediaries
  • Categorization of mutual fund schemes
  • Segregated Portfolio
  • Scheme Performance

Investment Restrictions

• SEBI regulations set limits on the kind of investments that can be made in mutual fund schemes.
• The limits are set to mitigate risks and protect investor interests.
• There are aggregate limits for all schemes of a mutual fund together.
• Restrictions include:
  • Debt Securities
  • Equity
  • REITs and INvITs

Investor Rights and Obligations

• Investors have the right to:
  • Beneficial ownership
  • Change the distributor
  • Inspect documents
  • Appoint nominees
  • Pledge mutual fund units
  • Grievance redressal
  • Terminate appointment of an AMC
  • Unclaimed amounts

SEBI Complaint Redress System (SCORES)

• SCORES is a web-based centralized grievance redress system.
• Investors can lodge, follow up, and track the status of complaints online.
• Market intermediaries and listed companies can receive and redress complaints.

Scheme Related Information

• Mandatory documents include:
  • Scheme Information Document (SID)
  • Statement of Additional Information (SAI)
  • Key Information Memorandum (KIM)
• These documents provide information about the scheme and are essential for making an informed investment decision.

Role of Mutual Fund Distributors

• Mutual fund distributors assess the needs, limitations, resources, and financial goals of investors.
• They help construct a portfolio with the help of an expert.
• Distributors can be individuals or non-individual entities.
• Modes of distribution include:
  • Online
  • Stock Exchanges
  • MF Utilities
  • Computer-based and Mobile-based Apps
  • Electronic platforms created by AMCs

Revenue for Mutual Fund Distributors

• Revenue sources include:
  • Initial or Upfront Commission
  • Trail commission
  • Transaction charges
  • Additional commission for promoting mutual funds in small towns

Net Asset Value, Total Expense Ratio, and Pricing of Units

• Fair Valuation Principles ensure fair treatment to all investors.
• Valuation of securities is done in accordance with SEBI and AMFI guidelines.
• Net Asset Value (NAV) is the value of each unit of the scheme.
• Total Expense Ratio (TER) includes all types of expenses incurred by the AMC.

Taxation

• Income from mutual fund investments is subject to tax.
• Taxes are applicable at two levels: income earned by the fund and income earned by the investor.
• Capital gains are subject to tax and are classified depending on the period of holding and the type of funds invested in.
• Dividend stripping is a potential tax avoidance approach.
• Securities Transaction Tax (STT) is applicable on redemption/switch to other schemes/sale of units of equity-oriented mutual funds.

Investor Services

• New Fund Offer (NFO) is an opportunity for investors to invest in a mutual fund scheme for the first time.
• Direct and Regular Plans are available for investors.
• Dividend Pay-out, Dividend Re-Investment, and Growth Options are available for investors.