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- Navigate the world of Mutual Funds-Part 2
Navigate the world of Mutual Funds-Part 2
1. Which statement is true regarding tax on mutual funds?
Correct option is C - Gains from equity and debt funds are taxed differently. In the case of equity funds, short term capital gains (holding period of less than 1 year) are taxed at 15% while long term capital gains (holding for more than 1 year) are taxed at 10% on gains over ₹1 lakh in a financial year. In the case of debt funds, all the gains are taxed as per your slab rate for the investments starting April 01, 2023.
2. What is the purpose of a Systematic Withdrawal Plan (SWP) in a mutual fund?
Correct option is C - Systematic Withdrawal Plan (SWP) is a tool that allows you to withdraw a fixed amount of money from your mutual fund holdings at regular intervals. The main aim of SWP is to create a reliable stream of money to cover your regular expenses. This method is especially useful for generating a consistent income during retirement. By setting up regular withdrawals, you ensure a dependable flow of funds to manage your day-to-day needs. You have the flexibility to choose how often you withdraw and how much, based on your requirements.
3. How does Systematic Transfer Plan (STP) work in mutual funds?
Correct option is B - Systematic Transfer Plan (STP) allows you to systematically move a fixed amount from one fund to another at scheduled intervals. STP helps you manage your investments by gradually shifting money between funds based on your needs. For example, you might slowly transfer funds from an equity fund to a debt fund, or the other way around, to handle risks and adjust your investment mix. If you came into unexpected gains, instead of putting all the money into an equity fund at once, you could start with a debt fund and then move it little by little into an equity fund. Additionally, when nearing a long-term financial goal, you can safeguard your investments by regularly shifting from an equity fund to a debt fund. STP offers a disciplined approach to fine-tune your investments over time.
4. Which of the following statements is accurate about the direct plan of a mutual fund?
Correct option is A - while options B and C are not correct when it comes to the differences between regular plans and direct plans in mutual funds. Let's break down the distinctions between these plans. As the name suggests, a direct plan is a type of mutual fund that you can buy directly from the fund house itself. Conversely, a regular plan can be purchased through a distributor, broker, aggregator, or financial advisor. These intermediaries get a commission from the mutual fund company for their services. This is where the key difference lies: regular plans include this commission, which can lead to slightly higher expenses compared to direct plans, where such fees are absent. Due to the variation in fees, the NAV of direct plans tends to be higher than that of regular plans. Direct plans suit individuals who are knowledgeable about mutual fund investing and prefer a DIY approach. On the other hand, regular plans are better suited for those who may not have the time or expertise to choose mutual funds on their own.
5. Which of the following statements is accurate regarding the mutual fund's total expense ratio (TER)?
Correct option is D - All the statements mentioned in options A, B, and C are true regarding a mutual fund's total expense ratio (TER). Thus, option D is the correct answer. The TER represents the total cost incurred by the mutual fund to manage and operate the fund. It includes various components such as fund management fees, distributor commission, marketing expenses, and operating expenses like custodian and legal fees. The mutual fund’s NAV is reported after netting off the fees and expenses. As a result of this, if a fund earns 10% and has a TER of 1.5%, then it means a return of 8.5% return for an investor. Thus, TER is an important parameter when selecting a mutual fund scheme.
6. Investing in physical gold is safer than Gold ETF/ Gold fund?
Correct option is B - There are many hassles in investing in physical gold like storage costs, making charges, concerns over purity, etc. However, when you invest in gold exchange traded funds (ETFs) and gold funds, you don't have to worry about these hurdles. This is because they help you buy gold in electronic format. Gold ETFs can be bought in multiples of one unit which represents 1 gram of gold. They can be easily bought and sold on exchanges. To invest in gold ETF, you need to have a demat account. In case you don't have a demat account, you can buy gold funds that invest in units of gold ETFs. You can even invest via SIP in gold funds.
7. Which of the following are the benefits of investing in international funds?
Correct option is D - All the statements mentioned in options A, B, and C are true regarding international funds. Thus, option D is the correct answer. International funds invest in a variety of markets and regions around the world. This diversification helps spread risk, as different economies and markets can perform differently at different times. Further, they give you access to sectors that might not be available in the domestic market. This allows you to invest in companies with strong growth potential, innovative technologies, or unique products and services that may not be present in India. When you invest in international funds, you're buying units in a foreign currency. If that currency appreciates or if the Indian rupee depreciates, you can make more money when you convert your investments back into rupees or vice versa.
8. Which hybrid fund has the highest exposure in the equity asset class?
Correct option is C - Aggressive hybrid funds have the highest exposure in the equity asset class among the given options. These funds typically invest a significant portion of their portfolio in equities, ranging from 65% to 80%, while the remaining portion is allocated to debt instruments. This higher equity exposure aims to generate potentially higher returns but also comes with a relatively higher level of risk compared to other hybrid fund categories. Conservative hybrid funds, on the other hand, have a higher allocation to debt instruments (75%-90%) and balance in equities, while multi-asset allocation funds have a more diversified allocation across different asset classes including equities, debt and gold.
9. Investors with a moderate risk appetite may invest in __________.
Correct option is A - Investors with a moderate risk appetite may choose to invest in hybrid funds. These funds offer a mix of different asset classes, such as equities and fixed income instruments. By combining the potential for long-term wealth creation from equities with the stability and regular income from debt instruments, hybrid funds aim to provide a balanced approach to investing. This diversification helps to reduce overall risk in the portfolio, making them suitable for investors with a moderate risk tolerance.
10. Which of the following funds are suitable for maintaining an emergency fund?
Correct option is A - The purpose of maintaining an emergency fund is to get quick and hassle-free access to your money to meet any unplanned expenses. Overnight and liquid funds can be a good option as they invest in highly liquid and safe debt instruments. Aggressive hybrid funds and large-cap funds, on the other hand, are more suitable for long-term growth and may carry higher levels of risk.
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This content is intended solely for informational purposes. The views expressed in this content are personal. Axis Bank and/or the author shall not be liable for any direct or indirect loss or liability incurred by the reader arising from reliance on the content herein. Readers are advised to consult a qualified financial advisor before making any financial decisions. Axis Bank does not endorse or guarantee the accuracy of any third-party content or links included in this content.
