Table of Contents

Table of Contents

Performance Data for Investment Products:

  • Performance data for investment products is widely available and mandated by SEBI for Mutual Funds and Portfolio Management Services.
  • Information aggregators collect this data and provide value-added services for comparison across various schemes.
  • This data is easily available on various websites, and some value-added services may be on a paid basis.

Attribute Portfolio Performance and Evaluation of Investment Alternatives:

  • Investment instruments can be compared across three broad parameters: Risk, Return, and Liquidity.
  • Here is a comparison of instruments across these parameters:
Instruments Risk Return Liquidity
Stocks High High Low
Bonds Low to Moderate Low to Moderate Moderate
Mutual Funds Depends on Scheme Depends on Scheme Depends on Scheme
Fixed Deposits Low Low High
Real Estate High High Low
Gold Low to Moderate Low to Moderate High

Equity Linked Savings Scheme (ELSS) with other tax saving instruments:-

Parameter ELSS NPS Tier 1 & fixed income tax saving instruments such as PPF & Tax saving bank FD
Description ELSS is a diversified equity mutual fund that provides tax benefits under Section 80C of the Income Tax Act. NPS Tier 1 is a government-sponsored pension scheme, PPF is a government-backed long-term investment scheme, and Tax saving bank FD is a fixed deposit scheme that provides tax benefits under Section 80C of the Income Tax Act.
Risk of loss of invested capital ELSS is a high-risk investment instrument because it invests in equities. NPS Tier 1 and PPF are relatively low-risk investment instruments, while Tax saving bank FD is a low-risk, fixed-income investment instrument.
Returns ELSS has the potential to generate high returns over the long term, but the returns are not guaranteed. NPS Tier 1 and PPF offer moderate returns, while Tax saving bank FD offers low returns.
Liquidity ELSS has a lock-in period of three years, which means that you cannot withdraw your money before that time. NPS Tier 1 has a lock-in period until retirement, while PPF has a lock-in period of 15 years. Tax saving bank FD has a lock-in period of five years.

Mutual Funds V/s Portfolio Management Services V/s AIF Category 3-

Parameter Equity Mutual Funds Portfolio Management Services Alternative Investment Funds Category 3
Nature of Investments Diversified portfolio of stocks and securities Customized investment portfolio of stocks, bonds Alternative investments such as real estate, private equity, etc.
Risk High risk due to stock market fluctuations Customized risk profile based on client’s needs High risk due to alternative investments and market fluctuations
Minimum Investments As low as INR 1000 Generally INR 50 lakh and above Generally INR 1 crore and above
Maximum Percentage of Scheme Investment in a Specific Company 10% No restriction No restriction
Fees Payable by Investor Expense Ratio Management Fees and Performance Fees Management Fees and Performance Fees
For Whom it is Meant Retail Investors High Net Worth Individuals and Institutions High Net Worth Individuals and Institutions
Redemption and Costs of Redemption Can be redeemed at any time at prevailing NAV price Customized as per contract with the service Customized as per contract with the fund manager

Mutual Funds V/s Unit Linked Insurance Plans (ULIP)-

Sr No Parameter Mutual Funds Unit Linked Insurance Plan (ULIP)
1 Nature Pooled Investment Scheme managed by Asset Management Companies Pooled Investment scheme managed by Life Insurance Companies
2 Purpose Investments only Insurance cum Investments
3 Charges Maximum charges are regulated by SEBI Maximum charges are regulated by IRDAI. Insurance (mortality) and other charges are deducted from fund value
4 Returns Are dependent on market Are dependent on market
5 Tax status on withdrawals Taxable as per the tax laws. 10% on equity oriented Mutual funds held for more than a year and 15% for less than a year. 20% after indexation on debt mutual funds held for 3 years and regular tax rates for held less than 3 years Withdrawals/maturity is tax free if sum assured is at least 10 times of annual premium. However, the Finance Act, 2021 has amended section 10(10D) of the Income Tax Act where no exemptions are allowed to any ULIP issued on or after 1 February 2021 if the amount of premium payable for any of the previous year during the term of the policy exceeds Rs 2,50,000. For those who pay annual premiums below that, they would still get the benefit of EEE taxation.
6 Disclosure Transparent daily/periodic disclosures. Many independent media track disclosures and provide value added comparison services Lower disclosure standards and less availability of value added comparison services from independent media
7 Liquidity Open ended mutual funds can be redeemed at any time but may be subject to exit load Compulsory contribution required for 5 years (except single premium plans). No redemption for at least 5 years. Discontinuation charges apply, if premiums cease before 5 years.
8 Suitable for Any investor looking for investment options See section 2.3 of Chapter 2 under Module 7.

Actively managed equity mutual funds V/s Index fund

Parameter Actively Managed Equity Mutual Funds Index Funds
Nature and Purpose Actively managed by a fund manager who selects stocks with the aim of outperforming the market Passively managed by replicating the composition and performance of a market index
Cost Expense ratio is typically higher due to active management fees Expense ratio is typically lower due to passive management
Return Returns can vary based on the skill of the fund manager and the performance of the stocks selected Returns are generally close to the market index being tracked, without potential for outperformance or underperformance

Direct Equity and Equity Funds:

Parameter Direct Equity Equity Funds
Nature and Purpose Direct investment in individual stocks with the aim of generating capital appreciation and dividend income. Investment in stocks via a diversified portfolio managed by professional fund managers with the aim of generating capital appreciation and dividend income.
Cost Brokerage fees, transaction costs, and demat account charges. Expense ratio, transaction costs, and exit load (if any).
Return Can potentially generate higher returns due to the ability to choose individual stocks and timing of buying/selling. However, it also carries higher risk. Returns are dependent on the performance of the underlying stocks in the portfolio. It offers diversification and lower risk compared to direct equity investment.

Exchange Traded Funds (ETFs) V/s Index Funds-

Parameter ETFs Index Funds
Nature and Purpose Passive investment vehicle that tracks a specific index and trades like a stock Passive investment vehicle that tracks a specific index
Cost Expense ratio is generally lower than actively managed funds Expense ratio is generally lower than actively managed funds
Price Trades throughout the day on a stock exchange at market prices Trades once per day at net asset value (NAV)
Liquidity Highly liquid and can be bought and sold throughout the trading day Can be bought and sold at the end of the trading day at NAV

Comparison of Physical Gold, Gold Funds, Gold ETFs, and Sovereign Gold Bonds:

Sr No Parameter Physical Gold Gold Funds Gold ETF Sovereign Gold Bonds
1 Buy as per prevailing price at the moment Possible NAV at the end of the day Possible Every issue is priced based on price prevailing on last 3 days
2 GST cost is incurred Yes Yes as physical gold is bought by the fund and GST cost is incurred on purchase and added to the cost Yes as physical gold is bought by the fund and GST cost is incurred on purchase and added to the cost No
3 Purity concerns Very much there though some of it has been removed due to hallmarking Purity is ensured by the fund house Purity is ensured by the fund house No purity concerns as no physical gold is bought
4 Safety and storage costs Yes Yes in built into the Fund management charges Yes in built into the Fund management charges No such costs
5 Can it be exchanged with physical gold Not applicable Yes at a nominal cost Yes at a nominal cost Not available
6 Any Income No No No 2.50% p.a. interest payable
7 Taxability on sale Taxable as capital gains Taxable as capital gains Taxable as capital gains No tax if redeemed at maturity. Taxable as capital gains if sold in the market before maturity
8 Liquidity Can be sold in the market Redeemed by the fund house at end of day NAV Sellable on the exchange. Liquidity is decent Redeemable on its anniversary dates after 5 years. Last redemption after 8 years. Can be sold in the stock market in the interim but liquidity is moderate

Real Estate V/s REITs V/s INVITs-

Sr No Parameter Real Estate REITs InvITs
1 Exposure Large concentrated exposure to one or a couple of properties. Only large lump sum exposure is possible. Like a real estate mutual fund, the exposure is spread over many properties. Involves professional expertise. Lower minimum exposure possible. Like a mutual fund it invests in infrastructure projects. The exposure is again spread over many projects to reduce risk on one specific project. Like REITs, it makes possible lower minimum exposure.
2 Type of exposure Depends on the type of asset chosen by the Investor but many times includes under construction properties where the risk is very high Primarily in real estate commercial properties that provide rental income apart from possibility of capital appreciation Primarily in infrastructure projects like roads, bridges, etc.
3 Management of properties Needs to be managed by the Investor Managed by the Investment manager Managed by the Investment manager
4 Liquidity Being lumpy investments it is poor and time consuming REITs maybe listed on the stock exchange and have relatively better liquidity Invits may be listed on the stock exchange and have relatively better liquidity

Debt Instruments V/s Debt Funds V/s Fixed Maturity Plan V/s Bank Fixed Deposit

Sr No Parameter Debt Instruments Open-ended Debt Fund Fixed Maturity Plan Bank Fixed Deposit
1 Safety Depends on the instrument chosen Depends on the type of assets in which the scheme can invest. But definitely diversification across many instruments provides relatively higher safety for the same level of rated instruments Depends on the type of assets in which the scheme can invest. But definitely diversification across many instruments provides relatively higher safety for the same level of rated instruments Safety is pretty high
2 Post tax Returns In proportion to risk taken Post tax returns can be better by investing in growth schemes and withdrawing needed amounts. This ensures that the withdrawal has a large element of capital Pre-defined, if held till maturity Pre-defined
3 Liquidity Pre-redemption liquidity for debt instruments in India tends to be poor, where available, a large premium needs to be paid in the form of much lower price Redemption facility is available from the fund house though there can be exit loads in some cases Though listed on the stock exchanges effectively there is very poor liquidity for a FMP Instant liquidity available from the bank though there can be clawback of interest paid and/or pre-mature redemption penalty

Index Futures V/s Index Options V/s Index Funds-

Sr No Parameter Index Futures Index Options Index Funds
1 Time Horizon From a few days to a maximum of 3 months, with poor volumes beyond a month in practice From a few days to a maximum of 3 months, with poor volumes beyond a month in practice Can be held for a very long tenure or for a lifetime as it is an actual investment
2 Cost Basically interest cost for the delayed purchase Apart from the interest cost for the delayed purchase, there is a risk premium to be paid as implementing the option is at the discretion of the option buyer Actual market cost at the time of purchase plus management cost paid to the AMC regularly
3 Risk Same as buying an index fund Maximum risk for the option buyer is equivalent to the option premium paid The risk of buying the securities underlying the fund

 

Mock Tests-

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NISM-Series-X-B: Investment Adviser (Level 2) Certification

Chapter 19: Comparison of products across categories

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1. What are the fees payable by investors in Equity Mutual Funds?

2 / 30

2. How does the risk differ between Alternative Investment Funds (AIF) Category 3 and Equity Mutual Funds?

3 / 30

3. Objective of actively managed equity mutual funds regarding returns

4 / 30

4. What determines the returns in Mutual Funds and ULIPs?

5 / 30

5. What services do information aggregators provide for performance data comparison?

6 / 30

6. What is the risk associated with Equity Linked Savings Scheme (ELSS)?

7 / 30

7. Which type of investor are Mutual Funds suitable for?

8 / 30

8. What is the liquidity feature of Mutual Funds and ULIPs?

9 / 30

9. What is the nature of Mutual Funds?

10 / 30

10. Nature and purpose of actively managed equity mutual funds

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11. What is the minimum investment requirement for Equity Mutual Funds?

12 / 30

12. Which regulatory body mandates the disclosure of performance data for mutual funds?

13 / 30

13. How do Mutual Funds and ULIPs differ in terms of disclosure?

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14. What is the purpose of performance data for investment products?

15 / 30

15. What are the risk and return characteristics of NPS (National Pension System)?

16 / 30

16. What is the liquidity feature of Equity Linked Savings Scheme (ELSS)?

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17. Which investment instrument has a guaranteed rate of return and varying rate of returns?

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18. How is the maximum percentage of scheme investment regulated in Equity Mutual Funds?

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19. What are the returns offered by Fixed Income Tax saving Instruments such as PPF and Tax saving bank FD?

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20. What is the liquidity feature of Fixed Income Tax saving Instruments such as PPF and Tax saving bank FD?

21 / 30

21. Difference in risk between direct equity investment and equity funds

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22. Difference between direct equity investment and equity funds

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23. How do Portfolio Management Services (PMS) differ from Equity Mutual Funds?

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24. What is the nature of investments in Equity Mutual Funds?

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25. Level of attention/expertise needed for direct equity investment and equity funds

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26. How are withdrawals taxed in Mutual Funds and ULIPs?

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27. Which parameter is used to compare investment instruments?

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28. How are the charges regulated in Mutual Funds and ULIPs?

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29. Difference in cost between actively managed mutual funds and index funds

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30. What is the purpose of Unit Linked Insurance Plans (ULIP)?

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