Glad you took the personal finance quiz. In case you haven’t taken it yet, I’d suggest you give it a go before seeing all the answers here.
Answers to the personal finance quiz
Financial middlemen(agents/distributors) often walk away with a large chunk of your investment as commissions. Which investment products from the ones below do you suppose have the highest percentage of middleman commissions?
Correct answer : ULIPS & Endowment Life Insurance Policies
Why? : Whatever way they are marketed, the middlemen commissions on these insurance+returns products are often very high. Agents get anything from 25 to 35% as commissions in the first year. And anything from 5-10% for every year for the entire duration of the policy, which could be 20 years. Equity aggressive, hybrid mutual funds have annual overheads of just around 2 to 2.5%. This is called as an Expense Ratio.
Which investment among these do you suppose has consistently provided the highest long-term returns in India?
Correct answer : Stocks and Equities
Why? : So far, both Equities and Real Estate investments have been able to provide inflation beating returns. But over a long term(say 5-7 years or more), nothing has come close to beating the returns provided by Equities.
Say you decide to invest in a mutual fund. Which channel from these below will allow you to generate better returns from the same mutual fund?
Correct answer : An AMC website
Why? : The AMC website is the only option which allows you to invest in Direct plans of mutual funds. Direct plans, have even lower overheads and consequently provide higher returns. Over a long term, this small additional return leads to a much higher profits from the same mutual fund.
An investment of 10 Lakhs in a good piece of Real Estate in India in 1998 would’ve grown to about 1.8 Crores by 2015. That’s an 18X return over that 20 year period. If you were however unlucky enough to have put that 1 Lakh in an equity mutual fund, which had the poorest performance over the same period, how much do you suppose your return would have been?
Correct answer : Higher than real estate, around 20X.
Why? : This might come as a surprise to many, but it’s true. Even the worst equity performing mutual fund provided better returns than the best Real estate investment over that 20 year period, despite the 2008 market crash.
Out of the Equity related strategies from below, which has been known to provide the highest long term returns, time and time again?
Correct answer : Buy stocks of several good companies and wait for several years.
Why? : People often get lucky, but not even the biggest investors and financial pundits can anticipate how a stock price or the overall market will change. So buying stocks of several fairly valued companies, and staying invested in them for the long term has been the only strategy which has proven itself time and time. This is one of Warren Buffet's core principles to generate wealth. The strategy is called as 'Value Investing'.
How often shoulf you check how well your equity mutual fund investments are performing?
Correct answer : Once a year, or once every couple of years
Why? : Equities are long term wealth generators. So it makes very little sense to check up on them too often. This is even more true for mutual funds. You are already paying a MF manager to buy and sell stocks as needed. Hence checking them once a year is more than plenty.
If you had to, which type of financial advisor would you hire?
Correct answer : A fee-only financial advisor
Why? : Fee-only advisors who charge a fixed up-front free, are the best. Why? Because they don’t work on commissions. Commissions eat into your investments. In FY 2018, mutual fund middlemen(advisors/distributors) consumed 8500 Crores in commissions. A fee-only financial advisor only works with direct funds – which are inherently commission free. So he/she only works with your interests in mind.
Which is the best way to invest in Gold?
Correct answer : Sovereign Gold bonds
Why? : A Sovereign gold bond is the the more profitable, and the most efficient way to invest in Gold today. Because besides being backed by the Government of India, you get an additional 2.5 to 2.75% interest on your gold investments. This is besides any appreciation in the price of Gold itself. To top it off, there are no Long Term Capital Gains if these Gold Bonds are redeemed after their maturity period of 8 years.
Which from below is a good explanation of ‘Market Cap’?
Correct answer : Total shares issued by the company multiplied by its stock price
Why? : This answer requires no further explanation. This is an extremely fundamental stock terminology.
Which statements from below are true?
Correct answer : Short term capital gains tax is typically higher than long term capital gains tax
Why? : CAGR is far better than Absolute return to compare investments. And a stock market index like SENSEX, has only around 30 stocks. Nifty is composed of around 50. No other answer in this question is correct.
If you haven’t scored well in the personal finance quiz, worry not. There are plenty of ways you could get your journey started. You’ll find all the resources you need here.