Investment Products
What you must know
Products differ on three examinable dimensions: the legal claim they give the investor, the source of their return, and their risk, liquidity and tax profile.
Equity and equity funds
Equity is an ownership claim: dividends, price appreciation, voting rights and the lowest priority in liquidation. Equity mutual funds pool money and price units at NAV. Direct plans carry a lower expense ratio than regular plans because no distributor commission is embedded; the underlying portfolio is the same. Index funds and ETFs track a benchmark; an ETF trades at a market price that can differ slightly from NAV.
Debt
A debt instrument is a contractual claim on interest and principal. The key risks are credit (default), interest rate (prices fall when yields rise, and longer duration means greater sensitivity) and liquidity. G-secs and treasury bills carry sovereign credit risk; corporate bonds pay a spread for credit risk.
Pooled and specialised vehicles
- Mutual funds: SEBI (Mutual Funds) Regulations, 1996; open-ended, closed-ended, index and ETFs.
- Portfolio management services: discretionary and non-discretionary, minimum Rs 50 lakh per client.
- Alternative investment funds: Category I, II and III, for sophisticated investors.
- REITs and InvITs: listed yield vehicles for real estate and infrastructure.
- Insurance: ULIPs and traditional plans regulated by IRDAI; ULIPs carry a five-year lock-in.
- Small savings: PPF, NSC and post office schemes, sovereign-backed with long lock-ins.
Worked example
A 65-year-old needs Rs 1 lakh a year from a Rs 20 lakh corpus with a three-year horizon. Equity is unsuitable: a 30 percent drawdown would force selling at a loss. Short-duration debt or a laddered deposit matches the horizon with predictable cash flow.
Traps
Treating insurance as an investment first. Ignoring expense ratio over long horizons. Assuming AAA means no credit risk. Confusing ETF market price with NAV.