Unit 4: Investment Vehicles

Inflation refers to the increase in the general level of prices of goods and services in an economy over a period of time. It is a measure of how much the purchasing power of money decreases. When inflation occurs, the value of money decreases, and it takes more money to buy the same goods and services. This can have various effects on the economy, such as reducing the purchasing power of consumers, increasing costs for businesses, and impacting interest rates and investments.

Ramesh is considering all the factors - returns, inflation, and taxes - before making his investment decision. This suggests that he is taking a comprehensive approach and not solely focusing on one or two factors. By considering all these factors, Ramesh aims to make an informed decision that takes into account the potential returns on his investment, the impact of inflation on his returns, and any tax implications that may affect his overall investment outcome.

The PPF account can be continued for a block of 5 years after maturity. This means that after the initial maturity period of 15 years, the account holder has the option to extend the account for an additional 5 years. During this extended period, the account will continue to earn interest and the account holder can make contributions to the account. This flexibility allows individuals to further grow their savings and continue enjoying the tax benefits provided by the PPF account.

A person can have only one PPF account in his name.

Returns from an investment can be in the form of capital gains, which refers to the profit made when selling an investment for a higher price than its purchase price. Additionally, returns can also come in the form of cash flow, which refers to the income generated by an investment, such as rental income from a property or dividends from stocks. Therefore, the correct answer is "Both the above" as both capital gains and cash flow can contribute to the returns from an investment.

Open-ended funds are investment funds that allow investors to buy and sell units directly from the fund house on any working day. This means that investors have the flexibility to enter or exit the fund at any time, based on their investment needs and market conditions. In contrast, closed-ended funds have a fixed number of units and are traded on stock exchanges, making them less flexible in terms of buying and selling. Therefore, the correct answer is "Open-ended."

The price at which an option is exercised is known as the strike price. This is the predetermined price at which the buyer of the option has the right to buy or sell the underlying asset. It is agreed upon at the time the option contract is created and remains fixed throughout the life of the option. The strike price is important because it determines the profitability of the option at expiration. If the market price of the underlying asset is higher than the strike price for a call option, or lower than the strike price for a put option, the option is considered in-the-money and can be exercised for a profit.

A PPF account has a maturity period of 15 years. Therefore, if the account is opened in FY 2005-2006, it will normally mature on 1st April, 2021.

The real return from any investment vehicle would be the return after taxes and inflation. Taxes reduce the overall return on investment by taking a portion of the earnings. Inflation erodes the purchasing power of the investment returns over time. Therefore, to determine the true profitability of an investment, it is essential to consider both taxes and inflation.

Money Market Mutual Funds are a type of mutual fund that invests in short-term, low-risk securities such as Treasury Bills, Certificates of deposit, and Commercial papers. These funds aim to provide stability and liquidity to investors by investing in highly liquid and safe instruments. They are suitable for investors who have a low-risk tolerance and want to preserve their capital while earning a modest return. Therefore, the given answer, Money Market MF, is the correct choice as it accurately describes the mutual funds that invest in these types of securities.

Treasury Bills (T-Bills) are short-term debt instruments issued by the government to raise funds. The range of period for which T-Bills are issued is 91 days to 364 days. This means that the maturity period of T-Bills can vary from a minimum of 91 days to a maximum of 364 days. T-Bills are considered to be low-risk investments and are often used by investors to park their surplus funds for a short duration while earning a fixed return.

The correct answer is "No limit". This means that there is no maximum limit in NSC (National Savings Certificate). NSC is a popular savings scheme offered by the Indian government, where individuals can invest their money and earn fixed interest over a specified period of time. Unlike other investment options, NSC does not have a maximum investment limit, allowing individuals to invest any amount they desire. This flexibility makes NSC an attractive option for those looking to save and earn interest on their savings without any restrictions.

It is recommended to keep three to six months of our average monthly expenses in cash form to cater for emergencies. This range allows for a sufficient cushion to cover unexpected expenses or loss of income without relying on credit or liquidating investments. It provides a financial safety net and peace of mind in case of unforeseen circumstances.

Mr. Rajesh can open a PPF account individually without the need for joint ownership or nomination. Therefore, the correct answer is Mr. Rajesh.

According to the Public Provident Fund (PPF) scheme, only one PPF account can be opened by an individual. In the given options, all the accounts can be opened under the PPF scheme except for the account in the name of Mr. and Mrs. X. Since both Mr. and Mrs. X are residents, they cannot open separate PPF accounts as the scheme only allows one account per individual.

The interest earned in a PPF (Public Provident Fund) is tax exempt. This means that the income generated from the PPF account is not subject to any taxes. Unlike other investment options, such as fixed deposits or savings accounts, where the interest earned is taxable, the interest earned in a PPF account is completely tax-free. This makes PPF a popular choice for individuals looking for tax-efficient savings and investment options.

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Kisan Vikas Patra is a scheme that allows individuals to invest a minimum of Rs.100 without any maximum limit. This means that individuals can invest any amount above Rs.100 in this scheme. Additionally, there is no tax deduction at source, which means that individuals do not have to pay taxes on the interest earned from this scheme. Moreover, after two and a half years, individuals have the option to withdraw their investment. Lastly, Kisan Vikas Patra can be pledged as collateral security to raise money, providing individuals with an additional benefit. Therefore, all three statements about Kisan Vikas Patra are true.

Partial withdrawals in a PPF account opened in the financial year 2000-2001 are allowed from the financial year 2006-2007.

An account under the senior citizen scheme can be extended for a period of three years. This means that after the initial term of the account expires, the account holder has the option to extend it for an additional three years. This extension allows senior citizens to continue benefiting from the scheme and its associated advantages for a longer period of time.

The minimum investment in Post Office Monthly Income Scheme (POMIS) is Rs. 1500. This means that individuals who wish to invest in POMIS must contribute at least Rs. 1500 as their initial investment. Investing a lower amount, such as Rs. 500, would not meet the minimum requirement for this scheme. Similarly, the options of Rs. 50,000 and Rs. 70,000 are higher than the minimum investment amount. Therefore, the correct answer is Rs. 1500.

Financial assets are resources with economic value that can be easily converted into cash. While a house and gold may have value, they are not considered financial assets because they cannot be readily converted into cash. Cash, on the other hand, is a financial asset as it is the most liquid form of asset and can be used for transactions and investments. Therefore, the correct answer is cash.

The correct answer is interest rate risk. Gilt funds are mutual funds that primarily invest in government securities, which are fixed-income securities. These securities are sensitive to changes in interest rates. When interest rates rise, the value of these securities decreases, leading to a decline in the net asset value (NAV) of the gilt fund. Therefore, gilt funds face interest rate risk as the fluctuation in interest rates can impact their returns.

The correct answer is A, B, D, E. This answer includes all the advantages of mutual funds mentioned in the question. Portfolio diversification is an advantage because it helps to spread risk by investing in a variety of assets. Professional management ensures that experienced professionals make investment decisions on behalf of the investors. Liquidity is an advantage because investors can easily buy or sell mutual fund shares. Convenience and flexibility are advantages because investors can choose from a variety of mutual fund options and easily manage their investments.

In Post Office Time Deposits (POTD), interest rates are calculated on a half-yearly basis. This means that the interest earned on the deposit is calculated and added to the principal amount every six months. This method of calculation allows for compounding of interest, as the interest earned in the first six months becomes part of the principal for the next six months. By calculating interest on a half-yearly basis, investors can benefit from the power of compounding and maximize their returns on their deposits.