Basic of Investment


what is investment

What is investment?

Income, Expenses, Inflation Rate

  1. Income
    Money received from any kind of source is called Income.
    Source of Income are like : Any earning, Salary, Wages, Interest, Stipend, Remuneration, Pay etc.
  2. Expenses
    The required cost to pay against any purchase or services are our expenses.
    Shopping, Education fees or Donation, Phone bill, Credit Card bill, Electricity Bill are some example of expenses.

  • Interest
    Money paid on regular basis against lent money is called Interest.
    RD Return, FD Return, Penalty on delay payment against bill are example of  Interest.
  • Inflation Rate:
    The rate at which cost of any item or services increase over the period of time, resulting in a fall in the value of money is called Inflation Rate. The Average Inflation rate of India is approx 6%.

Fees hike, cost hike of regular item are some example of inflation rate.

Example : 

Suppose if we wish to purchase any television of Rs.30000/- INR at this time and Inflation rate is 6% for the year. After one if we wish to purchase the same then we have to pay Rs.31800/- INR.

Why to invest?

We have different goals in our life and we need capital to make them true, so we made our investment to appreciate our capital to achieve our goal.

Here are some common goals.
  1. Own Home
  2. Child Education
  3. Child Marriage
  4. Funds for personal requirement after retirement.
  5. Other (Luxury Vehicles, Vacation Trip etc.)

Types of Investment Options

  1. RD – Recurring Deposit
    RD is kind of Term Deposit where investor invest a fixed amount in bank every month and his account receive a fixed interest rate. Minimum invest period is 6 month and maximum is 10 Years.
  2. FD – Fixed Deposit
    Fixed Deposit (FD) is a financial instrument provided by banks. In fixed deposit investor receive higher rate of interest than a regular savings account, until the given maturity date.
  3. PF – Provident Fund
    PF is a part of salary, which is deducted every month and deposit on your behalf. Private company pays the same amount as it is deducted from your account and you can apply for withdraw after leaving company.
  4. Gold –  Gold is physical asset, where you can purchase it from your nearest jewelry shop and MCX exchange. There is no any fixed return in gold, its depends on demand and availability in market.
  5. NSC – National Saving Certificate
    NSC is an Indian Government Savings Bond. NSC used for small savings and income tax saving investments in India. Investor can also invest in NSC from post office. Maturity period is 5 Year or 10 Year.It is an entry level exam for professionals working in a area of mutual fund distribution. This exam cover topics such as mutual fund regulations, code of conducts for distributors, financial planning etc. the exam is a mandate one under SEBI (CAPSM) under regulations,2007. Out team has drafted a few FAQs about the examination for the course taker. This NISM Mutual fund mock test / AMFI mock test helps you pass the real mutual fund exam.

What is Mutual Fund

A vehicle for investing in stocks and bonds.

A mutual fund is an alternative investment option to stocks and bonds.

Benefits/Advantages of Mutual Fund

  1. Professional Money Management
    Fund managers are responsible for implementing a consistent investment strategy that reflects the goals of the fund.
  2. Diversification
    Diversification is one of the best ways to reduce risk. Mutual funds offers an opportunity to diversify across assets as their investment needs to investors.
  3. Liquidity
    Investors can sell their mutual fund units on any business day and receive the current market value on their investments within a short time period (normally three- to five-days).
  4. Affordability
    The minimum initial investment for a mutual fund is fairly low (as low as Rs.500/ for some schemes) for most funds.
  5. Convenience
    Most private sector funds provide you the convenience of periodic purchase plans, automatic withdrawal plans and the automatic reinvestment of interest and dividends.
  6. Flexibility and variety
    You can pick from conservative, blue-chip stock funds, sectoral funds, funds that aim to provide income with modest growth or those that take big risks in the search for returns. You can even buy balanced funds, or those that combine stocks and bonds in the same fund.
  1. Equity Funds – Short term capital gains is taxed at 15%. Long term capital gains is not applicable.
  2. Debt Funds – Short term capital gains is taxed as per the slab rates applicable to you. Long term capital gains tax to be lower of – 10% on the capital gains without factoring indexation benefit and 20% on the capital gains after factoring indexation benefit.

How to select a Scheme within a Scheme Category?

he investor’s need from the investment will determine the asset class that is the most suitable. An investor looking for growth will find equity the best suited to meet their needs. The need for income will be best by debt, an investor who  wants regular income will look at a hybrid fund such as a Monthly Income Plan.

How to select a Scheme within a Scheme Category?

An investor buying into a scheme is essentially buying into its portfolio. Most AMCs share the portfolio of all their schemes in their website on a monthly basis.

Fund Performance 

The fund’s performance is a primary criterion in its selection from amongst other schemes. The return that the fund has generated relative to its benchmark is evaluated over a period of time. The fund should ideally have consistently outperformed the benchmark. Not only should it have over-performed in a bull market, but in a falling market it should have been able to protect the downside.

In case of equity funds, the performance should be seen for longer periods, at least last 5 years.

Fund Portfolio & Turnover

The fund’s portfolio has to be evaluated to determine the risk and return in the scheme. In case of equity funds, the  level of diversification across sector and stocks, the market segment in which the fund invests, the extent of cash held and the conviction showed in terms of the length of holding in stocks and churn in the portfolio, have to be considered. In case of debt funds, the average maturity and duration of the portfolio have to be considered.

Portfolio Turnover Ratio is calculated as Value of Purchase and Sale of Securities during a period divided by the average size of net assets of the scheme during the period. Thus, if the sale and purchase transactions amounted to Rs 10,000 crore, and the average size of net assets is Rs 5,000 crore, then the portfolio turnover ratio is Rs 10,000 cr ÷  Rs 5,000 cr i.e. 200%. This means that investments are held in the portfolio, on an average for 12 months ÷ 2 i.e. 6 months.

Fund Age

A fund with a long history has a track record that can be studied. A new fund managed by a portfolio manager with a lacklustre track-record is definitely avoidable. A new fund that offers a new investment opportunity should be evaluated for its suitability.

Fund age is especially important for equity schemes, where there are more investment options, and divergence in performance of schemes within the same category tends to be more.

Fund Size 

The size of funds needs to be seen in the context of the proposed investment universe. For an equity fund that intends to invest in large cap stocks, a large fund size will be an advantage, while for a sector fund or a mid-cap fund with limited investment options a large fund size may be a disadvantage. A large fund size will allow better diversification and economies of scale. A small sized fund on the other hand is more flexible and better able to take advantage of market opportunities.

Scheme running expenses

Any cost is a drag on investor’s returns. Investors need to be particularly careful about the cost structure of debt schemes, because in the normal course, debt returns can be much lower than equity schemes. Similarly, since index funds follow a passive investment strategy, a high cost structure is questionable in such schemes.

Risk, return and risk-adjusted returns as parameters to evaluate schemes were discussed in the previous unit. These form the basis for mutual fund research agencies to assign a rank to the performance of each scheme within a scheme category (ranking). Some of these analyses cluster the schemes within a category into groups, based on well-defined performance traits (rating).

Which is the Better Option within a Scheme?

The underlying returns in a scheme, arising out of its portfolio and cost economics, is what is available for investors in its various options viz. Dividend payout, dividend re-investment and growth options.

Dividend payout option has the benefit of money flow to the investor; growth option has the benefit of letting the money grow in the fund on gross basis (i.e. without annual taxation).

Re-purchase transactions are treated as a sale of units by the investor. Therefore, there can be an    element of capital gain  (or capital loss), if the re-purchase price is higher (or lower) than the cost of acquiring those units.

Re-purchase transactions in equity schemes are subject to STT.  Further, there is no dividend distribution tax on equity schemes.  Therefore, subject to the set-off benefit that some investors might seek, it is better to receive moneys in an equity scheme in the  form of dividend, rather than re-purchase of units.

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