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1. What is the impact of interest rate changes on debt mutual funds
Correct option is A - Debt mutual funds invest in fixed-income securities such as bonds and government securities, which are influenced by changes in interest rates. In fact, there is an inverse relationship between interest rates and bond prices. As a result, when interest rates rise, the prices of existing bonds decrease, leading to a decline in the NAV (Net Asset Value) of debt funds. Conversely, when interest rates fall, the prices of existing bonds increase, resulting in an increase in the NAV of debt funds. However, it is important to note that the impact of interest rate changes can vary for different debt fund categories. Debt funds that have invested in bonds with shorter maturity will be less impacted by changes in interest rates compared to debt funds holding longer maturity bonds.
Correct option is B - While debt mutual funds are generally considered to be less risky than equity funds, they are not completely risk-free. Debt funds are primarily exposed to two types of risks -- credit risk and interest rate risk. Credit risk refers to the possibility of default by the issuer of the bonds held by the fund. Interest rate risk arises from changes in interest rates, which can impact the prices of bonds and subsequently the NAV of the debt fund. Therefore, although debt mutual funds are relatively safer than equity funds, they still carry certain risks that investors should be aware of.
3. As debt funds invest in fixed income securities, do they provide fixed returns to investors as fixed deposits?
Correct option is B - Debt funds do not provide fixed returns to investors like fixed deposits. While debt funds invest in fixed income securities such as bonds and government securities, the returns generated by these funds are not fixed. The returns from debt funds are subject to various factors such as changes in interest rates, credit quality of the underlying securities, and market conditions. As a result, the returns from debt funds can vary over time. It's important to note that debt funds aim to provide a relatively stable income, but they do not guarantee fixed returns like fixed deposits.
4. Which of the following pairs accurately matches a mutual fund category with its corresponding benchmark?
Correct option is D - All the choices accurately correspond to different mutual fund categories and their respective benchmarks. Thus, option D stands as the correct answer. A benchmark functions as a point of reference for assessing how well a mutual fund performs. It provides a means for investors to compare their investments with the broader market. The Nifty 100 Index portrays the performance of the top 100 companies based on their market capitalization, commonly serving as a benchmark for largecap funds. The Nifty 500 Index encompasses a wider array of companies and is designed to mirror the performance of the top 500 companies, covering largecap, midcap, and smallcap segments of the market. This index serves as a benchmark for diversified equity funds such as flexicap, multicap, and ELSS. The Nifty Smallcap 250 Index represents the remaining 250 companies (ranked 251-500) from the Nifty 500. Its purpose is to gauge the performance of companies with smaller market capitalisation, making it a benchmark for smallcap funds.
5. Which of the following are characteristics of index funds?
Correct option is D - Both option A and option B are characteristics of index funds. Index funds aim to replicate the performance of a specific market index (option A) and follow a rules-based approach by investing in the same securities as the benchmark index in the same proportion (option B). For example, if a particular stock represents 5% of the total market value in the index, the index fund will allocate 5% of its assets to that stock. Option C is incorrect, as index funds are considered a type of passive investment strategy, not an active investment strategy.
6. Which of the following aspects correctly explains the difference between active funds and passive funds?
Correct option is D - All the statements mentioned in options A, B, and C correctly explain the difference between active funds and passive funds. Thus, option D is the correct answer. The difference between active and passive funds lies in their investment approach. Active funds aim to outperform the market by actively selecting individual securities. They conduct extensive research and analysis to achieve higher returns than the market or a specific benchmark. On the other hand, passive funds aim to replicate the performance of a specific market index, like the Nifty 50 index, by investing in the same securities as the index in the same proportion. Passive funds involve less frequent trading and have lower management fees since they require minimal research. It's important to note that active funds are relatively riskier because they depend on a fund manager's stock selection skills to generate higher returns. On the other hand, passive funds follow a rule-based approach based on the benchmark's stock weights. The choice between the two depends on an investor's preference for potential outperformance (active funds) or a more hands-off approach with lower fees (passive funds).
7. Which mutual fund category provides tax benefits to investors?
Correct option is A - Equity Linked Saving Schemes (ELSS) as they provide tax benefits under Section 80C of the Income Tax Act. Investors can claim a tax deduction on investments of up to Rs 1.5 lakh in ELSS funds. However, it is important to note that ELSS funds have a lock-in period of three years, during which the invested amount cannot be redeemed. ELSS funds invest in a diversified portfolio of stocks, offering the dual benefits of long-term wealth creation and tax benefits.
8. Which category has relatively less risk among equity funds?
Correct option is C - Among the given options, largecap funds generally have relatively less risk compared to smallcap funds and sectoral funds. Largecap funds invest in well-established companies, which tend to be more stable and less volatile. Smallcap funds, on the other hand, invest in stocks of small-sized companies, which can be more risky and volatile. Sectoral funds focus on specific sectors or industries, which can also be subject to higher risks and fluctuations. However, it's important to note that all equity funds carry a certain level of risk, and investors should consider their risk tolerance and investment goals before choosing a fund.
9. Which of the following options has a higher potential for earning returns that can beat inflation returns in the long term?
Correct option is C - Equity funds have a higher potential to generate inflation beating returns in the long term. This is because they invest in stocks, which historically have shown the ability to generate higher returns over longer periods. However, it's important to note that equity funds also come with a higher level of risk compared to debt funds or hybrid funds, so you should carefully assess their risk tolerance before investing.
10. It is beneficial to invest in a larger number of mutual funds as it helps in creating a diversified portfolio.
Correct option is B - Diversification is a built-in characteristic of mutual funds as they invest in several securities. Therefore, investing in a larger number of funds may not necessarily provide additional diversification benefits. Determining the optimal number of funds for a portfolio does not have a definitive answer. Ideally, having a portfolio of 6-10 funds is generally considered optimal, but the actual number depends on factors such as your financial goals, investment timeframe, and the overall size of your portfolio.
11. Which is the right parameter to choose a mutual fund?
Correct option is D - All the points stated in options A, B, and C hold true as factors for selecting a mutual fund. Therefore, option D is the correct response. Although investors often check on the past performance while investing in a mutual fund. But several other factors must also be taken into account before considering an investment. Each fund presents distinct risk and returns potential, making it essential to pick one that suits your risk profile. The fund manager's historical performance and experience also offer valuable insights into their ability to deliver returns. Furthermore, evaluating the quality of the securities in the fund's portfolio provides insights into its investment approach. Additional aspects like fund size, expense ratio, and exit load etc. should also be considered. Taking all these factors into consideration contributes to an informed choice when opting for a mutual fund.
12. All mutual funds within the same category, such as equity, debt and hybrid, have the same features.
Correct option is B - False. While mutual funds within the same broad category, such as equity, debt and hybrid, share a common investment objective of long-term investment. However, each fund will have different features, investment styles and risk-return potential. Within each category, there are various sub-categories that offer different investment options. For example, in the equity category, you'll find large-cap funds, multi-cap funds, sectoral funds, global funds, and more. In the debt category, there are liquid funds, gilt funds, corporate bond funds, and others. The hybrid category includes aggressive hybrid funds, conservative hybrid funds, and more. It's crucial to choose the right fund that aligns with your financial goals, risk tolerance and investment timeframe. So, remember that not all mutual funds in the same category are the same. It's important to do your research and select the fund that suits your specific needs.
13. When equity market sees volatility, which of the following is the right investing approach?
Correct option is B - The best investing approach when markets are volatile is option B: Keep investing regularly through a SIP in equity funds.” When the markets turn volatile many investors start doubting their investment decisions and think of either redeeming their investments or stopping SIPs from equity funds. This is not a wise approach neither waiting for more stable market conditions before investing, as it is very difficult to time the market and one can lead to missed opportunities. Instead, investing through a systematic investment plan (SIP) is to be considered as this will help you end up buying more units. It allows you to buy more units when the market is down and fewer units when it's up, helping you accumulate more units at lower prices during market corrections. This approach benefits the long-term compounding of your investments. So one should not consider exiting the equity markets in volatile time rather stay put and continue their investment via SIP route as it also helps to average out your cost of acquisition during market volatility. Stick to your SIP plan and stay committed to your investment journey.
14. Which aspect of a mutual fund's Net Asset Value (NAV) is often misunderstood by investors?
Correct option is C - Mutual funds with a lower NAV are considered cheaper. NAV is calculated by dividing the total value of the fund's assets minus liabilities by the number of outstanding units. Lots of investors get confused about mutual fund’s NAV. They think that a mutual fund with a lower NAV is cheaper, while with a higher NAV is expensive. But the fact is the NAV only shows the movement in value of the fund's invested in underlying securities, like stocks and bonds. As the prices of these underlying securities in the portfolio move up and down, all these changes are captured in the NAV. However, the future performance of any fund is not dependent on the base of the NAV. Let’s understand this with the help of an example. Let's say you invest Rs 10,000 in scheme A, whose NAV is Rs 10, and another Rs 10,000 in scheme B, whose NAV is Rs 100. In scheme A, you'll get 1000 units (10000/10), while in scheme B, you'll receive 100 units (10000/100). Now, assuming both schemes have invested all their money in the exact same stocks and proportions, if the value of those stocks increases by 10%, the NAV of both schemes will also rise by 10%. This means scheme A's NAV will become Rs 11, and scheme B's NAV will become Rs 110. As a result, regardless of which scenario you consider, the value of your investment will increase to Rs 11,000.
15. Which of the following is a myth regarding mutual fund investing?
Correct option is D - as all the options mentioned are myths about investing in mutual funds. Many people believe that mutual funds are only for wealthy individuals, but that's not true. It's a common misconception that you need a lot of money to start investing in mutual funds. The reality is you can begin your mutual fund journey with minimum amount of Rs 500. Another common misconception that many people hold is that mutual funds are only for experienced investors. In fact, they are ideal for common investors who don’t have the time or skill set to independently invest in stocks and bonds. One of the benefits of investing in mutual funds is the portfolio are managed by a professional fund managers who performs extensive research and analysis to select individual stocks, this helps to lower the portfolio risk and in-turn safeguard your hard-earned money to larger extent. Many also believe that mutual funds only invest in stocks. But the fact is, they invest in multiple asset classes like equity, debt, international funds and even gold and silver. In fact, mutual funds are designed to make investing easy and accessible for everyone.
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