NISMVAImportantQuestions (1)

Chapter 1: Investment Landscape

Understanding Financial Goals

  • Financial goals should be defined in terms of time horizon and money needed.

    • Key Life Events: Child education, marriage, retirement, etc.

    • Prioritization: Assign priorities to events based on importance.

    • Timeline & Funding: Establish timeline and funding needs for each event.

Investor Behavior and Biases

  • Investors tend to exhibit recency bias, anticipating current trends to continue into the future.

    • Recency Bias (Answer: c): Affects decision-making based on recent events, leading to a preference for safe assets after a bear market or over-investment in risky assets after a bull market.

Chapter 2: Mutual Fund Concepts

Asset Allocation Strategies

  • Fixed Asset Allocation involves maintaining constant ratios through portfolio rebalancing.

    • Example: A 50:50 Debt to Equity allocation requires selling equity when it rises above this ratio.

Investment Risks

  • Inflation Risk (Answer: c): Also known as purchasing power risk, where inflation decreases real investment cash flow value.

Chapter 3: Legal Structure of Mutual Funds in India

Regulatory Requirements

  • Mutual funds must have a minimum of 20 investors, with no single investor holding more than 25% of the total corpus.

    • Custodian Role: Safeguard and ensure secure custody of assets.

    • Trustees: Ensures compliance with SEBI regulations and investor interests.

Chapter 4: Risk, Return & Performance of Funds

Assessing Risk and Performance

  • Controlling Risks: Use of metrics like Standard Deviation, Tracking Error, and Beta to evaluate performance and risks.

    • Beta: Measures volatility relative to market indices; a beta greater than 1 indicates higher risk.

    • Sharpe Ratio: Used to determine risk-adjusted return; denominator is standard deviation of portfolio returns.

Chapter 5: Fund Distribution and Channel Management Practices

Distribution Models and Commission Payments

  • SIP and Costs: Trail commission is ongoing as long as the investor holds the fund; upfront transaction charges are applied for large investments.

  • Channels for Investment: Options include direct investment via AMCs or through distributors.

Chapter 6: NAV, Total Expense Ratio & Fees

Understanding NAV and Fees

  • NAV is affected by expenses that can be directly charged to the scheme, typically detailed in the Total Expense Ratio (TER).

  • Impacts on NAV: fluctuations occur due to changes in fund performance, market conditions, and redemption requests.

Chapter 7: Taxation

Understanding Tax Implications

  • Long-Term Gains: Tax strategies vary based on fund type (e.g., tax exemptions based on holding periods and type of securities).

  • Tax Reporting: Understanding TDS regulations, particularly as they apply to NRIs.

Chapter 8: Investor Services

Transaction Handling & KYC

  • KYC Requirements: Essential for all investors; specific rules apply to minors and corporate investors.

    • Changing KYC: KYC registrations must be updated with any change of address or significant account changes.

Chapter 9: Selection and Market Performance

Evaluating Fund Performance

  • Use benchmarks appropriately for performance comparison; understanding that market fluctuations impact mutual fund performance.

    • Balanced Hybrid Index: Use appropriate indices like Crisil Benchmarks.

Chapter 10: Realizing Potential Returns

Strategies for Return Optimization

  • Comparative Analysis: Use metrics like Sharpe Ratio and Treynor Ratio to assess fund performance against benchmarks.

    • Historical performance is informative but does not guarantee future success.

Chapter 11: Performance Evaluation & Selection

Selecting Suitable Funds

  • Assess a fund's performance based on expense ratios, risks, and management quality, with attention to market conditions for long-term investments.

Chapter 12: General Best Practices

Making Informed Investments

  • Investors should always factor their risk tolerance and time horizon when selecting funds, whether through direct or managed routes.

  • Liquidation Awareness: Investors need to understand the liquidity requirements and potential penalties or fees associated with their holdings.