Ch.1 · Investment Landscape

Savings vs Investment Avenues

25 practice questions on this topic

What does CAGR stand for and what does it measure?

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EXPLANATION

CAGR (Compound Annual Growth Rate) represents the steady annual growth rate at which an investment would have grown from its beginning value to its ending value over a specified period, assuming profits are reinvested. It smooths out year-to-year volatility.

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What is the tax treatment of capital gains on Sovereign Gold Bonds (SGBs) if held to maturity (8 years)?

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EXPLANATION

Capital gains arising on redemption of SGBs at maturity are fully exempt from capital gains tax. Additionally, the 2.5% annual interest is taxable at slab rate. If sold before maturity on the secondary market, LTCG with indexation applies.

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What is the current lock-in period for a Public Provident Fund (PPF) account?

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EXPLANATION

A PPF account has a mandatory lock-in period of 15 years. It can be extended in blocks of 5 years after maturity. Partial withdrawals are permitted from the 7th financial year onwards.

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What is the concept of 'asset allocation' in financial planning?

A.Selecting the single best-performing asset class and concentrating investments in it

B.Allocating a fixed percentage to ELSS every year for Section 80C benefits

C.Assigning each investment to a tax category to minimise liability

D.Distributing investments across different asset classes (equity, debt, gold, cash) based on the investor's goals, risk tolerance, and time horizon

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An investor buys equity shares of a company. This means the investor:

A.Has lent money to the company and will receive fixed interest

B.Has become a part-owner of the company and is entitled to residual profits

C.Is guaranteed a minimum return by the company's board of directors

D.Will receive the face value of shares back after 5 years

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What is 'compounding' in the context of investments?

A.Investing in multiple schemes simultaneously to diversify risk

B.Earning returns on both the original principal and the previously accumulated returns

C.A tax calculation method used for long-term capital gains

D.Adding multiple investors' capital into a single pool for better returns

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A Commercial Paper (CP) is issued by:

A.The Reserve Bank of India to manage liquidity

B.Corporates and financial institutions as a short-term borrowing instrument

C.State governments to fund infrastructure projects

D.Scheduled commercial banks as an alternative to fixed deposits

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Which of the following investment alternatives has the LONGEST mandatory lock-in period?

A.ELSS — 3 years

B.National Savings Certificate (NSC) — 5 years

C.PPF — 15 years

D.Senior Citizen Savings Scheme (SCSS) — 5 years

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Which of the following is a key disadvantage of a Bank Fixed Deposit (FD) compared to a mutual fund?

A.FD returns are guaranteed but interest income is fully taxable as per the investor's slab rate, reducing real post-tax returns

B.FDs do not offer any returns

C.FDs are not regulated by any government authority

D.FDs cannot be prematurely broken under any circumstance

Q10

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What is 'yield to maturity' (YTM) of a bond?

A.The annual coupon rate stated on the bond certificate

B.The dividend yield of the bond's equity component

C.The profit earned by selling the bond before maturity

D.The total return an investor earns if the bond is held till maturity, expressed as an annualised rate

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