The chief benefit of investing through a Systematic Investment Plan (SIP) is:
- A.A guaranteed return fixed in advance
- B.Rupee cost averaging over market cycles
- C.Exemption from the expense ratio
- D.Freedom from all market risk
Correct answer
Explanation
The correct answer is B, rupee cost averaging. In an SIP the same sum is invested at fixed intervals, so it automatically buys more units when the NAV is low and fewer when it is high; over a full market cycle the average cost per unit therefore works out lower than a lump sum invested at a high point, and the investor need not try to time the market. Option A is wrong because a mutual fund is a market-linked product and no return can be guaranteed in advance. Option C is wrong because the total expense ratio is charged on the scheme itself and applies whether one invests in a lump sum or through an SIP. Option D is wrong because an SIP spreads market risk over time but cannot remove it; the value of the units still rises and falls with the market.
Read the full article: Mutual Funds and Investment Products: NAV, Types and SIP
Practice Questions
View allMutual Funds are regulated in India by which of the following institutions?
- A.RBI
- B.SEBI
- C.BSE
- D.NSE
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Mutual funds in India are registered with and regulated by the Securities and Exchange Board of India under the SEBI (Mutual Funds) Regulations, 1996, which lay down the three-tier structure of sponsor, trustees and asset management company, the scheme categories, the cap on the expense ratio and the disclosures a…
Read the full explanation →The net asset value (NAV) of a mutual fund scheme is calculated as:
- A.Total assets of the scheme divided by its total liabilities
- B.Market value of assets minus liabilities, divided by the number of units outstanding
- C.Total income of the scheme divided by the number of investors
- D.Face value of a unit plus the exit load
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The NAV is the per unit book value of a scheme: take the market value of all the securities and cash the scheme holds, subtract its liabilities and accrued expenses, and divide by the number of units outstanding.
Read the full explanation →Which was the first mutual fund organisation in India, set up in 1963 by an Act of Parliament?
- A.SBI Mutual Fund
- B.Unit Trust of India
- C.Life Insurance Corporation of India
- D.Industrial Development Bank of India
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The Unit Trust of India was established in 1963 by an Act of Parliament and launched its first scheme, Unit Scheme 1964 or US-64, in the following year; it held a monopoly of the business until 1987.
Read the full explanation →In the three-tier structure of an Indian mutual fund, which entity actually manages the schemes and takes the investment decisions?
- A.The sponsor
- B.The trustees
- C.The asset management company
- D.The custodian
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The AMC is appointed by the trustees, is registered with SEBI and runs the schemes from day to day: it employs the fund managers, decides which securities to buy and sell, and is paid a management fee out of the scheme.
Read the full explanation →What is the lock-in period of an Equity Linked Savings Scheme (ELSS)?
- A.One year
- B.Three years
- C.Five years
- D.Fifteen years
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An ELSS is an equity mutual fund scheme that qualifies for the deduction allowed on specified savings, and each instalment is locked in for three years from the date of investment, which is the shortest lock-in among the instruments eligible for that deduction.
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