Investment Products and Asset Classes
Domain 3: Investment Products and Asset Classes
This domain tests product knowledge: what each instrument is, how it generates return, its risks, liquidity, and suitability. Expect comparisons rather than definitions alone.
Core asset classes
- Equities: PSX-listed shares; return from dividends and price change; high volatility, residual claim, voting rights.
- Fixed income: T-bills (short-term), Pakistan Investment Bonds (longer-term), Ijara Sukuk and corporate TFCs/sukuk; return from coupon/rental and capital gain/loss; interest-rate and credit risk. Government securities carry lower credit risk but not zero price risk.
- Mutual funds: pooled vehicles; open-end funds issue/redeem at NAV, closed-end funds trade on the exchange, ETFs trade intraday. Loads, expense ratios, and tracking difference matter.
- REITs, derivatives, commodities, and foreign assets add diversification but also leverage, counterparty, currency, and liquidity risks. Shariah-compliant products must avoid prohibited elements and be approved by a Shariah advisor.
Worked example
A retiree needs liquidity in 6 months and cannot tolerate a 10% drawdown. Comparing a 6-month T-bill, a 10-year PIB, and a PSX equity fund: the T-bill matches the horizon and has minimal price risk if held to maturity; the PIB has duration risk; the equity fund can fall sharply. Suitable choice: T-bill or money-market fund, with credit and reinvestment risk disclosed. Higher expected return does not justify a horizon mismatch.
Traps
NAV is not a guaranteed redemption price for closed-end funds or ETFs. A government security is not automatically liquid at any size. Sukuk are not identical to conventional bonds: ownership, rental, and asset-backing matter.