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1. It is advisable to invest in equity mutual funds rather than in direct stocks, if you:
Correct option is D - If you don't have time to track investments, lack the skills to research and identify the stocks, and want a well-diversified investment, mutual funds are a better and tax friendly option that invest in stocks directly. Investing in stocks requires research and regular tracking, and it can be risky due to market volatility and changes in company fundamental. Whereas mutual funds are managed by professional fund managers who are experts in analysing stocks and sectors. Apart from this, mutual funds also offer benefits like diversification, convenience, and a variety of other options. So, if you're looking for an easier way to invest in stocks, mutual funds are a good choice.
2. What are the options through which you can invest in the equity asset class?
Correct option is D - Investing in equity as an asset class can be done through various options, including individual stocks, mutual funds/alternate investment such as PMS and AIF that invest in stocks, and retirement schemes such as National Pension System (NPS), which allows equity exposure up to 75% of total investment. Therefore, these options can be looked upon as an investment avenues for investing in the equity asset class.
3. As a general rule of thumb, your exposure to risky asset classes like equities should ________ as you age.
Correct option is B - As you age, it is advisable to decrease your exposure to risky asset classes like equities. This is because your investment horizon becomes shorter, and your risk tolerance also decreases as you approach retirement. The equity asset class is volatile in the short term, and it is not advisable to have a high allocation during retirement. Therefore, it is advisable to reduce your equity investments as you age. But remember, this is not a hard and fast rule and will vary based on each individual’s situation.
4. To be a successful investor you should __________.
Correct option is B - Warren Buffett, a legendary investor, says 'Be fearful when others are greedy and be greedy when others are fearful.' This quote rightly describes how investors get influenced by emotions of greed and fear when markets are in euphoria and panic stage. However, most investors typically do the opposite and suffer losses. Hence, try to avoid making decisions based on emotions to be a successful investor. You can do this with regular investing, a long-term horizon, and an optimal diversification in different asset classes.
5. Diversifying your investments or investing in different assets helps to:
Correct option is C - Optimal diversification helps to eliminate risk by investing in various asset classes like equity, debt, and gold. Each asset class carries a different risk and return potential. By allocating your investments to multiple assets, the risk of one specific asset class is reduced. This helps you to find a balance between risk and returns.
6. How is the relationship between risk and return typically described in investing?
Correct option is A - Investments with higher risk offer the potential for higher returns. For example, equity products are volatile in nature but have the potential to generate higher returns. Fixed-income products, on the other hand, are less risky and provide steady but smaller/lower returns. Ideally, you should map your investments as per your risk profile. Higher risk takers may consider investing a higher share of their money in riskier investment avenues like equity products, while low risk takers may consider investing in fixed income products.
7. What is the impact of inflation on your investments?
Correct option is C - In simple terms, inflation refers to the increase in the prices of goods and services you consume. This in turn erodes the value of your money over time. For example, Rs 1,000 kept idle may decrease in value to Rs 558 after 10 years, assuming 6% annual inflation. To reduce the impact of inflation, it is advisable to invest your money.
Correct option is C - Compounding simply means growing your investments by reinvesting the gains or returns generated from initial investment. It involves earning returns not only on your initial investment but also on the accumulated gains over time. It's like earning interest on your interest. For instance, if you invest Rs 10,000 at 10% p.a. you will earn Rs 1,000 in the first year. In the second year, you will earn 10% on both (initial investment of Rs 10,000 and on Rs 1,000 income earned in the first year), resulting an earning of Rs 1,100 (Rs 1,000 + Rs 100). Similarly, your initial investment and accumulated gains will be compounded over time. This can significantly boost the growth of your investments over the long term. Investments such as fixed deposits, stocks, mutual funds, etc can help you to compound at different rates and grow your money and create wealth over longer period.
9. What does the term ‘Liquidity’ refer to in investing?
Correct option is B - Liquidity simply means how quickly and easily you can withdraw cash from your investments. Savings accounts and liquid mutual funds are highly liquid investments. Liquidity is a crucial factor you should ideally consider while building an emergency fund.
10. How risk profiling helps you in making investment decisions?
Correct option is C - Risk profiling helps in selecting investment products that align with your risk profile. Based on your risk tolerance, you can choose investment options that offer a suitable balance between risk and potential returns. For example, if you are a conservative investor, you may invest in fixed deposits, bonds, debt mutual funds, PPF, etc., whereas if you are an aggressive investor, you may consider investing in stocks and equity mutual funds.
11. What does the term ‘Risk profiling’ refer to in investing?
Correct option is B - Risk profiling is the process to assess your ability to take risks while investing. It considers factors such as age, financial responsibilities, horizon, annual income, etc. to assess the appropriate risk you can tolerate in your investments. The common risk profiles are conservative, moderate and aggressive, representing low, medium and high risk tolerance.
12. Which of the following represents an aspirational and essential goal for an investor?
Correct option is B - Goals in financial planning can be categorised based on their importance and individual priorities. Ideally, goals can be divided into essential and aspirational categories. Essential goals are high-priority and important objectives that include building an emergency fund, saving for a child's higher education, and building a retirement fund. Aspirational goals, on the other hand, are desires that are nice to have but are not top priorities, such as going on a global tour, buying a high-end smartphone, or purchasing a second home. It is important to strike a balance between essential and aspirational goals based on personal preferences. Among the options provided, the global tour represents an aspirational goal, while saving for retirement represents an essential goal for investors.
13. Which of the following represents a short-term, medium-term and long-term goal for a young investor?
Correct option is A - Ideally, setting up goals based on time frames depends on one’s priority. There is no clear-cut definition regarding the classification of goals based on time frames. However, short-term goals are usually those that can be achieved within a 1-3 years time frame, medium-term goals are between 3-5 years, and long-term goals are with horizon of 5 years and above. Among the options provided, buying a new smartphone represents a short-term goal, saving for the down payment for a new home represents a medium-term goal, and saving for retirement represents a long-term goal for young investors.
14. What should be the first step when you start planning for your investments?
Correct option is B - The first step when you start planning for your investments should be setting financial goals. This involves identifying your investment objectives, such as buying a car, planning a vacation, funding children's education, or building a retirement fund. Once you have set your goals, the next step is to assess your ability to take risks or determine your risk tolerance. Finally, acquiring knowledge about different investment products that are suitable for your goals based on risk tolerance and time horizon becomes crucial in making informed investment decisions.
15. Saving and investing are one and the same thing.
Correct option is B - No, saving and investing are two different concepts that people often misjudge. Both have different purposes. Saving is a part of income that is kept aside to be used for emergencies or short-term goals. Savings are usually parked in safe avenues like a bank account. Investing, on the other hand, is made in investment avenues like stocks, bonds, mutual funds, gold, etc. with an objective to create wealth over longer period and to fulfill set financial goals.
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