Hi All, I have following doubt in March 2018 IAI question paper: In Q5. iii) part mentions about flow of fund towards ETF from Active funds. I am not clear with this since we consider ETFs don't have any inflow or outflow and buy/sell is possible if there is a counterparty. Let me know if my understanding is not correct . In Q7, ii) I am not sure how Year 1 share capital value has come up. Can you please let me know the calculation behind 36.07 value? I am attaching the link to the question paper and solution. Looking forward to your help. Thanks Ayushi http://www.actuariesindia.org/downloads/exampapers/mar2018/Q_ST5.pdf http://www.actuariesindia.org/downloads/exampapers/mar2018/SOL/ST5.pdf
Hi, I have one more doubt from this question paper. Question 6.part iii) demonstrates the numerical example of how to get the same 15% rate, the investor can invest 91 and not 100. What I am not clear here is how if investor investors 91 initially with expectation of 15% , will he not taxed with LTCG? Not sure if I understand the objective of the solution. Note I am clear with how the numbers came.
For Q5(iii) I can see your thinking around the number of shares being fixed and so inflow or outflow to a particular fund not being possible. However, the overall size of the market may increase. If there is demand for ETFs then more of them may be set up and so there will be an overall shift of money from active funds to ETFs. For Q7(ii) I think it's a case of working backwards. So knowing at the end of the year we need share capital of 40 and then completing the table with the only unknown being the start capital. I used a goal seek in Excel then to find that the start capital is 36.07 which then generates profit, investment profit, surplus etc required to get to a end capital of 40.
Agreed here that buying at 91 would not generate a 15% return. If he is always expecting returns to be 15% pa from whatever price he buys from then the payment of capital gains tax will always bring that return down from 15%. I don't feel that the wording is particularly clear but it seems the examiners have assumed that the price is always going to rise to 814 (rather than returns before tax are always going to be 15%), and then we look at how to generate 15% returns from there with tax.
Q5iii) Ok yes, we can create new ETFs and this makes sense. However, solution has this line which says " Conversely when flows reverse passive selling could lead to significant downfall in the market" What is meant here by when flows reserve? How ETF funds can be diverted into active funds? Also the third paragraph of the solution states ETFs and Active funds as stakeholders. Can you please put light on this.Thanks
