Ch1 Flashcards
What is Investment?
Using savings to get a return in the future
Investment involves utilizing savings instead of keeping them idle to generate future returns.
Why should one invest?
To meet the cost of inflation and earn return on idle resources
Investing helps ensure that savings grow in value over time, countering inflation.
What is inflation?
The rate at which the cost of living increases
Inflation reduces the purchasing power of money over time.
How does inflation affect investments?
Investments must earn more than the inflation rate to increase in value
If the return is less than the inflation rate, the investment loses value.
What is the ‘real’ rate of return?
The return on an investment after accounting for inflation
It reflects the actual increase in purchasing power from the investment.
When is the best time to start investing?
The sooner one starts, the better
Early investing allows for compounding to increase income over time.
What are the three golden rules for investors?
- Invest early
- Invest regularly
- Invest for long term
These principles help maximize investment growth.
What care should one take while investing?
Ensure to assess the risk-return profile, verify legitimacy, and understand costs
These steps help make informed investment decisions.
What is Interest?
An amount charged to the borrower for using the lender’s money
Interest is typically a percentage of the principal amount borrowed.
How is interest usually calculated?
As a percentage of the principal balance
The rate can be fixed or variable depending on loan terms.
What factors determine interest rates?
Different types of rates for depositors and borrowers, government rates
Interest rates vary based on market conditions and the type of loan.
Fill in the blank: The aim of investments should be to provide a return above the _______.
inflation rate
This ensures the investment maintains or increases its value over time.
What is one consequence of an after-tax return on investment being less than the inflation rate?
Assets have decreased in value
This means the investment won’t buy as much as it did previously.
What are the main macroeconomic factors that govern interest rates?
- Demand for money
- Level of Government borrowings
- Supply of money
- Inflation rate
- Reserve Bank of India and Government policies
What are the two categories of investment options available?
- Physical assets (e.g., real estate, gold/jewellery, commodities)
- Financial assets (e.g., fixed deposits, insurance, securities market instruments)
What are the short-term financial investment options?
- Savings Bank Account
- Money Market/Liquid Funds
- Fixed Deposits with Banks
What is the typical interest rate range for Savings Bank Accounts?
4% - 6% p.a.
What are Money Market or Liquid Funds?
Specialized mutual funds that invest in short-term fixed income instruments to provide easy liquidity and protect capital
What is the minimum investment period for Fixed Deposits with Banks?
30 days
What are the long-term financial investment options available?
- Post Office Savings Schemes
- Public Provident Fund
- Company Fixed Deposits
- Bonds and Debentures
- Mutual Funds
What is the interest rate and maturity period for the Post Office Monthly Income Scheme?
8% per annum, maturity period of 6 years
What is the minimum and maximum investment for the Post Office Monthly Income Scheme?
Minimum: Rs. 1,000; Maximum: Rs. 3,00,000 (single) or Rs. 6,00,000 (jointly)
What are the tax benefits associated with the Public Provident Fund?
Tax benefits for the amount invested and tax-free interest accrued
How long is the maturity period for the Public Provident Fund?
15 years
What is the interest rate for Company Fixed Deposits?
6% - 9% per annum
What is a bond?
A fixed income instrument issued for more than one year to raise capital
What is the purpose of issuing bonds?
To raise capital
What is the Maturity Date in relation to bonds?
The specified date when the principal and interest are repaid
The interest received from Company Fixed Deposits is after what deduction?
After deduction of taxes
Fill in the blank: The minimum investment in the Post Office Monthly Income Scheme is _______.
Rs. 1,000
True or False: The interest on Fixed Deposits for less than 6 months is likely to be higher than money market fund returns.
False
What are Mutual Funds?
Funds operated by an investment company that raise money from the public and invest in a group of assets according to stated objectives.
Benefits include professional money management, buying in small amounts, and diversification.
What is the purpose of a Stock Exchange?
To assist, regulate, or control the business of buying, selling, or dealing in securities.
Defined by the Securities Contract (Regulation) Act, 1956 (SCRA).
Define ‘Equity’ or ‘Share’.
Equal units of small denominations into which a company’s total equity capital is divided.
Shareholders have voting rights in the company.
What is a Debt Instrument?
A contract where one party lends money to another on pre-determined terms regarding interest and repayment.
In India, ‘bond’ refers to government-issued debt, while ‘debenture’ refers to private corporate sector instruments.
What is a Derivative?
A product whose value is derived from one or more basic variables, called underlying assets.
Underlying assets can include equity, index, forex, or commodities.
What role do Mutual Funds play in the investment business?
They act as financial intermediaries, pooling money from investors and investing in various financial instruments.
Investment objectives specified in the prospectus are binding on the Mutual Fund scheme.
What is an Index?
A representation of how a specified portfolio of share prices is moving, indicating market trends.
It is a basket of securities whose average price movement indicates the index movement.
What is a Depository?
An institution that holds securities in electronic form, similar to a bank.
Securities can include shares, debentures, and government securities.
Define Dematerialization.
The process of converting physical certificates into an equivalent number of securities in electronic form.
These are credited to the investor’s account with a Depository Participant (DP).
Fill in the blank: Mutual Funds issue units to ______.
[investors]
True or False: Mutual Funds can invest in various asset classes like equity, bonds, and government securities.
True
What is the NAV in the context of Mutual Funds?
Net Asset Value, calculated as the value of all shares held by the fund minus expenses, divided by the number of units issued.
What are the two types of stock exchanges mentioned?
Regional stock exchanges and national exchanges.
NSE was incorporated as a National Stock Exchange.
What are the two categories of Mutual Funds based on investment duration?
Long-term investment vehicles and short-term instruments.
Money market mutual funds are examples of short-term instruments.
What is the primary function of derivatives in financial markets?
Originally emerged as hedging devices against fluctuations in commodity prices.
Fill in the blank: The appreciation of a Mutual Fund’s portfolio leads to an appreciation in the value of the units held by ______.
[investors]
