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MFD - Level 2

Quick and Easy Chapter Summaries

Chapter 10 : Asset Classes and Alternate Investment Products

Here are the important points to remember from this chapter :

» Equity is considered to be a growth asset

» Investment in equities is advisable only if the investor has a long time horizon

» Like equity, gold is viewed as a growth asset

» Debt is considered as an income asset, because a large part of the returns in debt comes out of interest income

» The interest rates that banks and other companies offer on their fixed deposits too changes in line with market conditions

» Investors need a mix of assets in their portfolio. This is called asset allocation and the asset classes might me equity, gold, real estate or debt

» Equity is an extremely volatile class and should be considered only for long term investments

» Gold is less volatile than equity and does well in situations of economic turmoil

» Real estate again is less volatile. It can be both a growth asset and an income asset

» Debt is an income asset- a defensive asset to have in one's portfolio

» Capital protection schemes are close ended and are structured to ensure that the investor's capital is protected

» In constant proportion portfolio insurance, after protecting the capital by investing in debt securities, the balance amount is invested in riskier securities like equities

» Option Based portfolio insurance is also based on investment in a debt security and the scheme can use the balance amount to buy options on equities

» Mutual funds offer standardised schemes to investors at large. Portfolio Management schemes (PMS) seek to offer a customised portfolio to every investor

» In a discretionary PMS, the fund manager individually and independently manages the funds of each client in accordance with the needs of the client

» In a non-discretionary PMS, the portfolio manager manages the funds in accordance with the directions of the client

» SEBI has prescribed a minimum investment of Rs. 25 lakh for each investor in a PMS

» Although PMS are also regulated by SEBI, they do not operate under the strict norms that are applicable for mutual funds

» Equity, debt and derivatives can be mixed to create new instruments called structured products

» In order to issue equity or market linked debentures, the issuer needs to have a minimum net worth of Rs. 100 crores

» The minimum investment for any investor is Rs. 10 lakh

» Equity or market linked debentures are fraught with model risk and credit risk

» Hedge funds are a high risk variant of mutual fund schemes. They mobilise their capital from high net worth investors

» One of the factors responsible for the riskiness of hedge funds is the use of leverage. Higher the leverage, higher the risk
» International hedge funds borrow from low interest rate countries and invest in the developing economies. Hence, hedge funds are fraught with currency risk

» Hedge funds may involve short selling which also adds to the risk element. Short selling is a an approach where the investor sells the security with the hope of buying it back
later at a lower price