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    Do you understand the basic principles of investing? - ABSLMF

    Do you understand the basic principles of investing?

    • Q1. The past performance of an equity investment can reliably indicate future results
      • Wrong!

        False

        Better luck next time, mate. The stock market is dynamic, and its movements are based on a number of factors such as economic, social, political and even psychological fac-tors. Just because a stock did well in the past does not guarantee similar results in the fu-ture. But then - poor past results of a stock do not mean they’ll never do well in future ei-ther. Works both ways.

        Bingo! You sure do know your way around the dynamics of the stock market. Stocks are constantly bought and sold, moving up and down the graph sheet with changes in the economic, political, social situation, etc. in the world. Even investor sentiments can affect stock prices. Here, the past stays in the past, and the future is guided by such factors as mentioned above.

    • Q2. The main difference between saving and investing is -
      • Wrong!

        Saving is for emergencies and very short term goals, investing helps in long term wealth creation

        Wrong! But can’t blame you as this is a common misconception. Saving and investing are both important and can be done by everyone, no matter what your financial condition is. Investments don’t need lakhs of rupees. You can start your investment journey with just a Rs. 500 monthly Systematic Investment Plan (SIP).

        Sorry, but this is not the case. Saving money using traditional saving instruments also gives you returns, albeit limited. On the other hand, investments do not guarantee returns - a market downturn might also make you lose money. However, sound investment choices can help you gain better returns also.

        Give us a high-five! Yes, the basic difference between saving and investment lies in one thing - their purpose. While savings are a big support when it comes to sudden expenses, investments focus on creating wealth using a portion of those savings. Investments may be risky in the short term, but they can help achieve your big goals in the long term.

        You cannot be farther from the truth! Savings and investments are very different. Sav-ings are the portion of money you put away for a rainy day after all your regular expens-es are taken care of. Investments are made using some part of those savings to help your money compound and grow over time - making your money work to make you more money!

    • Q3. You receive a tip about a new opportunity that promises a guaranteed 40% annual return on in-vestment for the next 5 years. What should you do?
      • Wrong!

        Check the tip carefully and research more before investing

        No no no! Remember, investments are subject to various risks, and any tips that promise such things ought to be cautiously checked. Do not rely on anonymous or suspicious tips - they could prove to be very expensive indeed. If in doubt, consult an expert.

        Not really, unless your friends are certified investment experts themselves. And even then, it’s better to do your own homework and make your own decisions. After all, it’s your hard-earned money. Following the herd may not always be a wise decision when it comes to investing.

        Smart choice! Glad to see a cautious and aware investor like you. Investment decision making is no place for falling prey to peer pressure or proving your friendships. Take conscious and calculated financial decisions based on sound research and solid facts.

    • Q4. Reducing risks by investing your money in a wide array of sectors and asset classes is known as?
      • Wrong!

        Diversification

        Hmm, looks like you need a little help here. A portfolio is basically a collection of all your investments - stocks, bonds, commodities, cash, mutual funds, etc. A well-balanced port-folio needs diversification of assets and investments to reduce risks. So the answer is Di-versification.

        Bravo! Right you are! Diversified investments help hedge risks, especially in cyclical economies like India where sectors and stocks take turns in the limelight, making it quite volatile at times. A well-diversified portfolio keeps your investments afloat and growing even in difficult times.

        Ah, got you with that one, didn’t we? While investing in varied sectors is a way of reduc-ing risks, is it limited to equity. Diversification encompasses not just sectors, but different asset classes, market caps and investment products as well. So the correct answer is Diversification.

        You didn’t get it this time, but it’s okay. Risk tolerance is the measure of financial risk you can afford to take based on your current monetary situation, age, income, family de-pendence, etc. To increase this risk tolerance - and thereby reduce the risks themselves - diversification of your portfolio into different investment products, market caps, and as-set classes is important.

    • Q5. When you buy a company’s bond, what do you get?
      • Wrong!

        Predetermined interest until bond maturity

        Nope. Only equity shareholders get the right to vote on shareholder resolutions. They are part owners of the company and have exposure to both profit and loss of the company. Whereas a corporate bondholder makes you a lender, and the company has an obliga-tion to pay you interest as determined in the bond and then pay principal amount on ma-turity.

        Oops, wrong answer. Bond is a fixed income instrument, and it does give fixed yield. However, this yield is not distributed to bondholders for lifetime. When the bond matures, the company repays the principal amount and is no longer obligated to pay a predeter-mined interest.

        Righto! A bond is a fixed income instrument that pays you a predetermined yield for a specified time period. When the bond matures, the company repays the principal amount and is no longer obligated to pay the yield.

        Sorry, but no. Dividends are paid to shareholders and yields to bondholders. A company pays a dividend when it makes profits by distributing some of it to its shareholders. Whereas a company has to pay a yield to bondholders whether or not it makes a profit.

    • Q6. Index Funds are -
      • Wrong!

        Passive Funds

        No, dear friend, Index funds are passive funds. They follow a particular stock market in-dex and replicate it. This needs no special expertise or constant monitoring by fund man-agers, like active funds. Index funds are straightforward and simple and are often con-sidered a good starting point for new investors.

        You are a genius! Yes indeed, Index Funds are passive funds that need no continuous monitoring or special expertise, making them cost-effective too. They simply replicate a particular stock market index and give results accordingly. No wonder they are gaining much popularity these days.

        Wrong answer, but do not despair - many confuse ETFs with Index funds since both are passively managed, pooled investment instruments that follow an index. But the similari-ties end there. ETFs can be traded during exchange hours like normal stocks, while index funds are traded once, after market hours. Moreover, their liquidity, costs and taxation patterns are different too.

        You really need to study well before you begin your investing journey. Commodities are a different asset class altogether. Index funds, on the other hand, are a basket of stocks following a particular index. There are gold and silver ETFs that are passively managed and track commodity prices, but they are not index funds.

    • Q7. Which of the following accurately describes asset allocation?
      • Wrong!

        All of the above

        You are right, but not quite. Asset allocation is a strategy to invest your money in such a way that you can meet your short and long term goals, irrespective of the market volatili-ty. It is also about rebalancing your portfolio across different asset classes based on vari-ous life events at different ages like marriage, childbirth, retirement. Thus, all three points are important.

        Yes, but this is only part of the answer. Asset allocation requires you to determine a ratio to invest in equity, debt, liquid funds and any other asset class based on your risk appe-tite. A risk averse investor may invest a larger portion in debt whereas a risk seeker could be skewed towards equity. And at different stages in life, rebalancing your portfolio should be considered. So the right answer is, all of the above.

        You are almost right! Asset allocation is a dynamic strategy that changes according to your age, life events, and risk-taking capacity. A person nearing retirement might allocate a major portion in debt funds whereas a young investor may opt for investments in small and mid-cap stocks. Your investment objectives and strategies need rebalancing at regular intervals. Thus, all three points are right!

        You are an enlightened soul! Asset allocation is a strategy to customize your portfolio as per your age, your needs, and your risk appetite. Two people of the same age may have different investment objectives and risk appetites. Asset allocation can determine the right mix of investments that cater to their needs. So yes, all three points are correct!

    • Q8. How to select where to invest?
      • Wrong!

        None of the above

        You are mistaken. Each person has his or her own inherent investing style, strategy and objectives. Your friends may know you well, but that does not mean your investing style and purpose match. Even your risk profiles might differ. Thus, while you can discuss it with your friends, it is better if the final decision is yours alone.

        Missed the target! A basic rule of investing is - past performance is no guarantee of fu-ture returns. Simply put, just because a stock hit its 52-week high does not mean it will do so repeatedly in the future. The market is dynamic, so relying solely on its past perfor-mance is not a wise thing to do.

        Oh no! Wrong answer! While memes make us laugh all the time, meme stocks might not have the same results. Meme stocks are stocks whose prices jump due to sudden online popularity or attention. These jumps in stock price are not based on market movements or company performances, and so can be risky.

        Bang on target, buddy! Investing is a very person-specific activity that reflects one’s atti-tude, risk tolerance, objectives in life, time horizon and many other things. Joining the bandwagon or relying solely on online popularity can be a big risk. When it comes to in-vesting, prior background research, seeking financial advice from genuine experts and mapping your own strategy is the way to proceed.

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