NISM SERIES VA

INDE
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Chapt Topic
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1 Investment Landscape
2 Concept and Role of Mutual Fund
3 Legal Structure of Mutual Funds in India
4 Legal Regulatory Framework
5 Scheme Related Information
6 Fund Distribution and Channel Management Practices
7 Net Asset Value, Total Expense Ratio and Pricing of
Units
8 Taxation
9 Investor Services
10 Risk, Return and Performance of Funds
11 Mutual Fund Scheme Performance
12 Mutual Fund Scheme Selection
 1. INVESTMENT LANDSCAPE

1. Tactical Asset Allocation decisions are based on which of these factor/s?

a) Likely behaviour of the markets

b) Age of the investor

c) Income of the investor

d) All of the above

Answer: a) Likely behaviour of the markets

Explanation: In Tactical asset allocation, the allocation between the asset categories changes dynamically. The
purpose of this approach is to take advantage of the opportunities presented by various markets at different
points in time.

2. _____ is an example of physical asset.

a) Bank Deposit

b) Shares and Debentures

c) Land and Building

d) Futures and Options

Answer: c) Land and Building

Explanation: Land and buildings are physical property.
Shares, Debentures, Bank Deposits and F&O are all financial assets/instruments.

3. Which of these is an important factor while estimating the correct future value of a financial goal?

a. Inflation Rate

b. Unexpected risks

c. Economic Growth

d. Return and Gains

Answer: a) Inflation Rate

Explanation: The formula for calculating the future value of an investment made today is A= P*(1+r)^n.

A=future value, P=present value, r=rate of inflation, n=no. of years

4. Identify the INCORRECT statement/s with respect to investments in real estate.

a. The minimum amount required (Ticket size) for investing in real estate is high compared to other
financial assets
 b. The transaction costs are low for investments in real estate as compared to other financial assets

c. The real estate market is quite illiquid and the pricing is not transparent

d. All of the above are incorrect

Answer: b) The transaction costs are low for investments in real estate as compared to other financial
assets
Explanation: Transaction costs, in the form of stamp duty, registration fees, brokerage, etc. are high in real
estate transactions.

Real estate is a less liquid asset class. The intermediation chain of real estate agents is largely unorganized in
India. Regulatory risk is high in real estate, as is the risk of litigation and other encumbrances. The transparency
level is low even among real estate development and construction companies.

5. Recency bias applies to _____ events.

a. only positive

b. only negative

c. both positive and negative

Answer: c) both positive and negative

Explanation: Recency bias: The impact of recent events on decision-making can be very strong. This applies
equally to positive and negative experiences. Investors tend to extrapolate the event into the future and expect
a repeat. A bear market or a financial crisis leads people to prefer safe assets. Similarly, a bull market makes
people allocate more than what is advised for risky assets.

6. Suresh see's that his friends are investing in a finance scheme that is promising very high returns (a ponzi
scheme). He also blindly invests in the same scheme. Which bias is Suresh exhibiting?

a. Herd mentality

b. Loss Aversion

c. Confidence bias

d. Anchoring

Answer: a) Herd mentality

Explanation: In behavioral finance, Herd Mentality bias refers to investors' tendency to follow and copy what
other investors are doing. They are largely influenced by emotion and instinct, rather than by their own
independent analysis.

This often works against investor's interests in the financial markets.

7. Risk Profilers are used to ascertain the risk appetite of an investor. State whether True or False?

a. True
b. False
Answer: a) True
Explanation: Risk Profilers usually revolve around investors answering a few questions, based on which the risk
appetite score gets generated. The risk profilers try to ascertain the risk appetite of the investor so that one
does not sell mutual fund schemes that carry a higher nak than what the investor can handle.

8. Mr. Tarun is in his 30's and has a steady job. He is investing most of his savings in bank deposits. Due to low
rate of return on bank deposits, he is putting his financial goals at risk. Which behavioral bias is his portfolio
suffering from?

a. Familiarity bias
b. Anchoring bias
c. Herd mentality
d. Confidence bias
Answer: a) Familiarity bias
Explanation: The familiarity bias is when investors tend to invest in what they know and are
comfortable with. An individual tends to prefer the familiar over the novel, as the popular proverb
goes, "A known devil is better than an unknown angel." This leads an investor to concentrate the
Investments in what is tamiliar, which at times prevents one from exploring better opportunities,
as well as from a meaningful diversification. As a result, investors are not diversified across
multiple sectors and types of investments.

9. Usually most investors might have invested across various asset categories. However the
problem with such asset allocation is that ____
a. such asset allocation earns low returns
b. such asset allocation is done without defining any objective or without any process
c. such asset allocation increases the portfolio risk
d. such asset allocation leads to payment of additional taxes

Answer: b) such asset allocation is done without defining any objective or without any
process
Explanation: The basic meaning of asset allocation is to allocate an investor's money across
asset categories in order to achieve some objective. In reality, most investors' portfolios would
have the money allocated across various asset categones. However, in many such cases, the
same may be done without any process or rationale behind it. Asset Allocation is a process of
allocating money across vanous asset categories in line with a stated objective. The underlined
words are very important. First, it is a "process", which always involves several steps, and those
steps should not be ignored or skipped. Second, the whole idea behind asset allocation is to
achieve some objective. Whichever approach one selects, one must go through the steps of the
process in order to achieve the objective.

10. Identify the factor which must be considered to determine the asset allocation for an
investor?
a. Financial goals of the investor and his financial situation
b. AUM of the scheme
c. Scheme expenses
d. Past performance of the scheme

Answer: a) Financial goals of the investor and his financial situation

Explanation: Asset Allocation is allocation aligned to the financial goals of the individual. It
considers the returns required from the portfolio to achieve the goals, given the time horizon
available for the corpus to be created and the risk profile of the individual.
 2. CONCEPT AND ROLE OF MUTUAL FUND

1. Identify the CORRECT statement/s with respect to Conservative hybrid funds.

A. A Conservative hybrid fund cannot invest in debt securities for which the Macaulay Duration is more than 1
year

B. A Conservative hybrid fund cannot invest more than 25% of its total assets in equity instruments

C. A Conservative hybrid fund cannot invest in debt securities that have lower than AAA rating

a) Only A and B are correct

b) Only B is correct

c) Only A and C are correct

d) All A, B and C are correct

Answer: d) All A, B and C are correct

Explanation: Conservative Hybrid Fund is an open-ended hybrid scheme investing predominantly in debt
instruments. Investment in debt instruments shall be between 75% and 90% of total assets while investment in
equity and equity instruments shall be between 10% and 25% of total assets.

Conservative Hybrid Fund can invest in only AAA-rated debt securities with a Macaulay duration of less than 1
year.

(The Macaulay duration of a bond is the weighted average maturity of cash flows, which acts as a measure of a
bond’s sensitivity to interest rate changes. Bonds with a higher duration will carry more risk and hence have
greater volatility in prices when compared to bonds with lower durations).

2. In the case of an Index Fund, the minimum investment in securities of a particular index (which is being
replicated/ tracked) shall be ____.

a) 80% of the total assets

b) 85% of the total assets

c) 90% of the total assets

d) 95% of the total assets

Answer: d) 95% of the total assets

Explanation: Index funds are open-ended schemes replicating/tracking a specific index. The minimum
investment in securities of a particular index (which is being replicated/tracked) shall be 95% of the total assets.

3. Which debt schemes of mutual funds invest only in debt securities where money will be repaid within 91
days?

a. Money Market Funds

 b. Medium-term debt funds

c. Fixed Maturity Plans

d. Liquid Funds

Answer: d) Liquid Funds

Explanation: A liquid fund is an open-ended liquid scheme whose investment is into debt and money market
securities with a maturity of up to 91 days only.

An investor seeking the lowest risk ought to go for a liquid scheme. However, the returns on such instruments
are low. These schemes are suitable for investors looking for a product to park their funds for very short periods
(up to 91 days).

4. For a VALUE FUND, the minimum investment in equity and equity-related instruments is 50% of the total
assets. State whether True or False.

a. True

b. False

Answer: b) False
Explanation: A value fund is an open-ended equity scheme following a value investment strategy. The minimum
investment in equity & equity-related instruments is 65% of total assets.

5. As the complete exposure is to a single sector, Sector Funds are high on ____

a. Credit Risk

b. Concentration Risk

c. Interest Rate Risk

d. Liquidity Risk

Answer: c) Concentration Risk

Explanation: The sector funds invest in stocks belonging to just one sector of the economy, to take advantage
within the said sector. Examples of such funds are: Pharma funds or Banking fund

Sector funds are risky because of the concentration in one sector. If the sector underperforms then the
scheme's returns are likely to be very poor.

6. Among equity funds, Focused funds carry _____ risks as compared to diversified funds due to _____.

a. Lower, highly concentrated portfolio

b. Higher, highly concentrated portfolio

c. Lower, lower expenses of the fund

d. Higher, investments in debt securities

Answer: b) Higher, highly concentrated portfolio
Explanation: Among the equity funds, some schemes may have a portfolio concentrated in a few stocks. Such
scheme category is known as "Focused funds".

These schemes carry higher risk than a diversified fund, due to higher concentration among a smaller number
of stocks.

7. In the usual course of events, a fund manager will have to provide the maximum liquid assets for _____

a. Gold ETFs

b. Equity ETFs

c. Close-end fund

d. Open-end fund

Answer: d) Open-end fund

Explanation: Open-end funds have to keep a minimum stipulated per cent of their corpus in liquid assets. This
has been done to ensure that there is enough liquidity available with the open-ended funds to meet redemption
needs.

8. The investment range in debt instruments is between ____ of total assets in a Conservative Hybrid Fund.

a. 80 percent and 95 percent

b. 75 percent and 90 percent

c. 50 percent and 65 percent

d. 025 percent and 50 percent

Answer: b) 75 percent and 90 percent

Explanation: Conservative Hybrid Fund is an open-ended hybrid scheme investing predominantly in debt
instruments.

Investment in debt instruments shall be between 75 percent and 90 percent of total assets while investment in
equity and equity instruments shall be between 10 percent and 25 percent of total assets.

9. In the case of Exchange Traded Funds (ETFs), the minimum investment in securities of a particular index
(which is being replicated/ tracked) shall be _____ percent of total assets.

a. 100

b. 95

c. 85

d. 75
Answer: b) 95
Explanation: Index Funds/Exchange Traded Fund are open-ended schemes replicating/tracking a specific
index. The minimum investment in securities of a particular index (which is being replicated/tracked) shall be 95
percent of total assets.

10. The minimum investment in G-Secs (as a percentage of total assets) in the case of a Gilt Fund is ____

a. 90%

b. 95%

c. 80%

d. 75%

Answer: c) 80%
Explanation: A Gilt fund is an open-ended debt scheme investing in government securities across maturity. The
minimum investment in G-secs is defined to be 80 percent of total assets (across maturity).

11. Which of these funds are suitable for investors who have a long-term investment horizon and are looking for
growth?

a. Income Funds

b. Long duration funds

c. Equity funds

d. Liquid funds

Answer: c) Equity funds

Explanation: Although equities as an asset class are volatile investments, over a long duration of time they tend
to give good growth.

Income funds, Long duration funds and Liquid funds are all debt funds the returns from them will only be the
interest received. They are more for security and steady returns and not for growth

12. What is the investment objective of a mutual fund that seeks to grow in value over a period of time?

a. Capital Adequacy

b. Capital Appreciation

c. Safety of Capital

d. Regular Returns

Answer: b) Capital Appreciation

Explanation: Equity funds generally grow in value over a period of time and their investment objective is To
generate capital appreciation/income from a portfolio, predominantly invested in equity and equity related
instrument.
 3. LEGAL STRUCTURE OF MUTUAL FUND IN INDIA

1. Who has to ensure the compliance of the information contained in the scheme-related documents with
regulations?

a) The Sponsors

b) The Asset Management Company

c) SEBI

d) The Trustees

Answer: d) The Trustees

Explanation: A Compliance Officer signs a due diligence certificate to the effect all regulations have been
complied with and that all the intermediaries mentioned in the scheme-related documents have the requisite
statutory registrations and approvals. The Compliance Officer works closely with the Trustees on various
compliance and regulatory issues. It is the responsibility of the compliance officer to report any issue of non-
compliance directly and immediately to the trustees

2. The sponsor of a mutual fund can be compared to the Chief Executive of a company. State True or False?

a. True

b. False

Answer: b) False
Explanation: The sponsor is the promoter of the mutual fund. The sponsor brings in capital and creates a mutual
fund trust and sets up the AMC.

3. Which one of these is an advantage of investing in Mutual Funds?

a. Economies of scale

b. Portfolio customization

c. Choice overload

d. All of the above

Answer: a) Economies of scale

Explanation: The large investment corpus of a mutual fund leads to various other economies of scale. For
instance, costs related to investment research and office space gets spread across investors. Further, the
higher transaction volume makes it possible to negotiate better terms with brokers, bankers and other service
providers.

4. In India, the Mutual funds are constituted as ___

a. Limited Company

b. Non-Government Organisation
 c. Self-Regulatory Organisations

d. Trusts

Answer: d) Trusts
Explanation: Mutual funds are constituted as Trusts. Therefore, they are governed by the Indian Trusts Act,
1882.

5. The trustees of a mutual fund is appointed by the ___

a. Sponsors
b. SEBI
c. Asset Management Company
d. Custodian

Answer: a) Sponsers
Explanation: The application to SEBI for registration of a mutual fund is made by the Sponsor(s). The Sponsors
then appoints the Trustees. The operations of the mutual fund trust are governed by a Trust Deed, which is
executed between the sponsors and the trustees.

6. From the below mentioned entities associated with a mutual fund, who has to mandatorily contribute to the
corpus of the mutual fund?
a. The Trustees
b. The Custodians
c. The Asset Management Company.
d. The Sponsors

Answer: a) Sponsers
Explanation: The mutual fund trust is created by one or more Sponsors, who are the main persons behind the
mutual fund business. The sponsor is the promoter of the mutual fund. The sponsor brings in capital and
creates a mutual fund trust and sets up the AMC. The sponsor makes an application for registration of the
mutual fund and contributes at least 40% of the net worth of the AMC. In other words, every MF needs a
sponsor before it can commence operations.

7. Who manages the contributions from investors and takes investment decisions in a mutual fund company?
a. The Investors
b. The Trustees
c. The Asset Management Company (AMC)
d. The Sponsors

Answer: c) The Asset Management Company (AMC)

Explanation: Fund management is the most critical function in an Asset Management Company. The main
function of this team is to invest the investors money in line with the stated objective of the scheme and to
manage the same effectively.

8. What is required for the termination of the services of an Asset Management Company (AMC)?
a. 75% of the mutual funds distributors should approve the termination of the Asset Management Company
b. 75% of the unitholders should approve the termination of the Asset Management Company
c. The custodian should approve the termination of the Asset Management Company
d. AMFI should approve the termination of the Asset Management Company
Answer: b) 75% of the unitholders should approve the termination of the Asset Management Company
Explanation: The appointment of the AMC for the Mutual Fund can be terminated by majority of the Directors of
the Trustee Board or by 75 percent of the Unitholders of the Schame

9. Which of the following function can an Asset Management Company (AMC) do in-house?
a. Custodial Services
b. Broking
c. Registrar and Transfer Agent

Answer: c) Registrar and Transfer Agent

Explanation: The appointment of Registrar and Transfer Agent (RTA) is done by the AMC. However, it is not
compulsory to appoint an RTA. The AMC can choose to handle this activity in-house. AMC cannot be a
custodian or a broker. An independent custodian ensures that the securities are indeed held in the scheme for
the benefit of investors, which is an important control aspect

10. ____would not be an originator to a special purpose vehicle, in case of securitized asset.
a. Reserve Bank of India (RBI)
b. Non-banking finance company
c. A Commercial Bank
d. Housing finance company

Answer: c) Reserve Bank of India (RBI)

Explanation: A securitization transaction involves sale of receivables by the originator (a commercial bank, non-
banking finance company, housing finance company, or a manufacturing/service company) to a Special
Purpose Vehicle (SPV), typically set up in the form of a trust. Investors are issued rated Pass Through
Certificates (PTCs), the proceeds of which are paid as consideration to the onginator. (RBI will not be an
originator). In this manner, the originator, by selling his loan receivables to an SPV, receives consideration from
investors much before the maturity of the underlying loans.
 4. LEGAL AND REGULATORY FRAMEWORK

1. What is the full form of AGNI?

a) AMFI Guidelines for New Issues and Investments

b) AMFI Guidelines and Norms for Intermediaries

c) AMFI Guidelines for New Investors

d) AMFI Guidelines for Nominations and Investments

Answer: b) AMFI Guidelines and Norms for Intermediaries

Explanation: AMFI has framed a set of guidelines and a code of conduct for intermediaries consisting of
individual agents, brokers, distribution houses and banks engaged in selling mutual fund products.

2. While empaneling mutual fund distributors, an AMC has to do due diligence to satisfy the 'Fit and Proper'
criteria for eligible distributors. Which of the following form a part of this due diligence process?

a) The eligible distributor should have the requisite Employee to Customer ratio as prescribed by SEBI
b) The eligible distributor should have strict internal controls to limit investors' exposure to an asset class or
fund house’
c) Adequate controls to delink sales functions from customer risk and investment objective evaluation
d) All of the above

Answer: c) Adequate controls to delink sales functions from customer risk and investment objective
evaluation
Explanation: At the time of empaneling distributors and during the period i.e review process, mutual
funds/AMCs have to undertake a due diligence process to satisfy ‘fit and proper’ criteria that incorporate,
amongst others, the following factors:

a. Business model, experience and proficiency in the business

b. Record of regulatory/statutory levies, fines and penalties, legal suits, customer compensations made;
causes for these and resultant corrective actions taken
c. Review of associates and subsidiaries on the above factors
d. Organizational controls to ensure that the following processes are delinked from sales and relationship
management processes and personnel:
i. Customer risk/investment objective evaluation
ii. MF scheme evaluation and defining its appropriateness to various customer risk categories

3. Identify which of these is NOT a function of the Association of Mutual Funds in India (AMFI).

a. To represent to the Government, Reserve Bank of India and other bodies on all matters relating to the
mutual fund Industry

b. To disseminate information on the mutual fund industry and to undertake studies and research directly
or in association with other bodies

c. To conduct a certification examination for Mutual Fund distributors

d. To undertake a nationwide investor awareness programme to promote a proper understanding of the

concept and working of mutual funds
Answer: c) To conduct a certification examination for Mutual Fund distributors
Explanation: The function of AMFI includes all of the above except - Conducting a certification examination for
Mutual Fund Distributors.

The National Institute of Securities Markets (NISM) conducts the certification examination for Mutual Fund
distributors.

4. SEBI Complaint Redress System (SCORES) helps an investor to _____

A. Lodge a complaint for a grievance

B. Make a follow-up on the complaint

C. Track the status of redressal of such complaints online

a) Only 1

b) Only 1 and 3

c) Only 1 and 2

d) All 1, 2 and 3

Answer: d) All 1, 2 and 3

Explanation: SEBI Compliant Redress System (SCORES) is a web-based centralized grievance redress system
of SEBI. SCORES enables investors to lodge, follow up on their complaints and track the status of redressal of
such complaints online on the website - http://scores.gov.in

5. No investor can have a holding of more than 25 percent of a scheme - State True or False?

a. True

b. False

Answer: b) False
Explanation: Requirement of a minimum of investors in a scheme - The Scheme/Plan shall have a minimum of
20 investors and no single investor shall account for more than 25% of the corpus of the Scheme/Plan(s)

6. Identify the INCORRECT statement with respect to the SEBI Complaint Redress System (SCORES).

a. SCORES enables the market intermediaries and listed companies to receive complaints from investors,
redress such complaints and report redressal

b. SCORES is a web-based centralized grievance redress system

c. SCORES is completely online, so an investor cannot lodge a physical compliant

d. lf an investor lodges a physical complaint such complaints are scanned and then uploaded in SCORES
for processing
Answer: c) SCORES is completely online, so an investor cannot lodge a physical complaint
Explanation: An investor who is not familiar with SCORES or does not have access to SCORES, can lodge
complaints in physical form at any of the offices of SEBI. Such complaints are scanned and then uploaded in
SCORES for processing.

7. As per the Advertisement Guidelines for Mutual Funds, Point-to-point returns on a standard investment of Rs.
10,000 shall also be shown in addition to CAGR for a scheme that has been in existence ______

a. More than 5 years

b. More than 3 years

c. More than 2 years

d. Irrespective of years of existence, all mutual fund schemes must show the point to point returns

Answer: b) More than 3 years

Explanation: As per the SEBI Advertisement Guidelines for Mutual Funds, when the mutual fund scheme has
been in existence for more than THREE years:

-Performance advertisement of mutual fund schemes shall be provided in terms of CAGR for the past 1 year, 3
years, 5 years and since inception.

Point-to-point returns on a standard investment of Rs. 10.000 shall also be shown in addition to CAGR for the
scheme to provide ease of understanding to retail investors.

8. Unitholders have the right to inspect key document/s like _____ with respect to their mutual fund investments.

a. Memorandum & Articles of Association

b. RTA agreement

c. Custodial Services Agreement

d. All of the above

Answer: d) All of the above

Explanation: As per Investors' Rights & Obligations:

Right to Inspect Documents Unit-holders have the right to inspect key documents such as the Trust Deed,
Investment Management Agreement, Custodial Services Agreement, RTA agreement and Memorandum and
Article of Association of the AMC.

9. Identify the document that authorizes a company to invest in a specific mutual fund.

a. The resolution passed in the shareholder's meeting

b. Specific Board resolution

c. As per the Companies Act, a company can invest in any mutual fund scheme as long it is beneficial to
the interest of the shareholders, without any special authorization
 d. As per the Companies Act, a company cannot invest in mutual funds

Answer: b) Specific Board resolution

Explanation: Since institutional investors like Companies, etc. are not natural persons, authorized individuals
invest on behalf of the institution.

Therefore, some additional documents are essential and one of them is - Authorisation for the investing
institution to invest. This is typically in the form of a Board Resolution.

10. Management of investments by mutual funds is governed by _____.

a. Association of Mutual Funds in India (AMFI)

b. Reserve Bank of India (RBI)

c. Securities and Exchange Board of India (SEBI)

d. Both RBI and SEBI

Answer: d) Both RBI and SEBI

Explanation: The applicable guidelines for mutual funds are set out in SEBI (Mutual Funds) Regulations, 1996.
The operations of the mutual fund trust are governed by a Trust Deed and SEBI has laid down various clauses
that need to be part of the Trust Deed.

RBI regulates the money market and foreign exchange market in the country. Therefore, mutual funds need to
comply with RBI's regulations regarding investment in the money market. Investments outside the country etc.

AMFI is not a regulatory body. Its main objective is to define and maintain high professional and ethical
standards in all areas of operation of the mutual fund industry.
 5. SCHEME RELATED INFORMATION

1. How often should the Key Information Memorandum (KIM) be updated?

a. Every quarter

b. Twice in a year

c. At least once a year

d. lt need not be updated after it is issued once

Answer: b) Twice in a year

Explanation: As per SEBI circular in 2021-KIM should be updated at least once in a half-year, within one month
from the end of the respective half-year, based on the relevant data and information as at the end of September
and March and shall be filed with SEBI forthwith through electronic mode only.

2. _____ is/are frequently used by media and research analysts to check the performance of various schemes
of a mutual fund.

a. Fund Fact Sheet

b. Annual Accounts of the AMC

c. Key Information Memorandum (KIM)

d. Investment Management Agreement

Answer: a) Fund Fact Sheet

Explanation: One of the most popular documents from the mutual fund is the monthly Fund Factsheet. This
document is extensively used by investors, fund distributors, fund rating agencies, research analysts, media and
others to access information about the various schemes of the mutual fund.

3. Key Information Memorandum (KIM) is a summary of ____

a. Only Scheme Information Document (SID)

b. Only Statement of Additional Information (SAI)

c. Both SID and SAI

d. Fund Factsheet

Answer: c) Both SID and SAI

Explanation: While an investor is expected to read all the scheme-related documents, circulation of the same
along with the application forms is too difficult and costly, especially if the printed forms are to be distributed. In
order to ensure the investor gets access to sufficient information in spite of such a constraint, a Key Information
Memorandum (KIM) is mandatorily circulated along with the application form.

KIM is essentially a summary of the SID and SAI (Scheme Related Documents). It contains the key points of
these documents that are essential for the investor to know to make a decision on the suitability of the
investment for their needs. It is more easily and widely distributed in the market. As per SEBI regulations, every
application form is to be accompanied by the KIM.

4. Identify the TRUE statements with respect to the Statement of Additional Information (SAI).
A. Regular update has to be done by the end of 3 months of every financial year
B. Material changes have to be updated on an ongoing basis and uploaded on the websites of the mutual fund
and AMFI.

a. Only A is true

b. Only B is true

c. Both A and B are true

d. None of the above

Answer: c) Both A and B are true

Explanation: Updation of Scheme Documents-Regulatory provisions

Updation of SAI: Regular update has to be done by the end of 3 months of every financial year. Material
changes have to be updated on an ongoing basis and uploaded on the websites of the mutual fund and AMFI.

5. ______ will help the investors understand the suitability of a mutual fund scheme to them.

a. Product Label

b. Standard Deviation / Beta

c. Tracking Error

d. Alpha of the scheme

Answer: a) Product Label

Explanation: The risk levels in different categories of mutual fund schemes can be understood with the help of
product labelling of Mutual Funds.

SEBI introduced product labeling of mutual funds to address the issue of mis-selling and to provide investors an
easy understanding of the kind of product scheme they are Investing in and its suitability to them.
All the mutual funds were required to "Label' their schemes on the parameters such as the nature of the
scheme, Investment objective, Level of risk depicted by colour code boxes, etc.

6. Mr. Sonu reads about the risk factors given in the offer document and invests in an equity mutual fund
scheme. After a few days, the stock market crashes and the NAV of the equity fund goes down. What can Mr.
Sonu do in such a situation?

a. He can appeal to SEBI and get a remedy

b. He can get a remedy from the AMC

c. He is not likely to get any remedy from the AMC

 d. He is likely to get a remedy from the trustees of the AMG

Answer: c) He is not likely to get any remedy from the AMC

Explanation: The offer document of a mutual fund cleary states that 'Mutual fund investments are subject to
market risks'.

When the fund invests inan equity market where prices fluctuate a lot, the NAV of the fund is likely to witness
huge fluctuations. So the AMC, SEBI nor anyone else can offer a remedy. The fluctuations are a part of equity
markets.

7. Which of these is NOT included in the Key Information Memorandum (KIM)?

a. Investment Objective

b. Dates of Issue Opening, Issue Closing and Re-opening

c. Functions of the sponsor, trustee and AMC

d. Risk profile of the scheme

Answer: c) Functions of the sponsor, trustee and AMC

Explanation: Some of the key items contained in the KIM are as follows:
● Name of the AMC, mutual fund. Trustee, Fund Manager and scheme
● Dates of Issue Opening, Issue Closing and Re-opening for Sale and Re-purchase
● Investment Objective
● Asset allocation pattern of the scheme
● Risk profile of the scheme ie, a snapshot of the risk to the principal invested, the suitable investment
horizon for investment and the type of securities that the scheme will invest in.
● Plans and Options
● Benchmark Index
● Dividend Policy
● Performance of scheme and benchmark over last 1 year, 3 years, 5 years and since inception.
● Expenses of the scheme
● Information regarding registration of investor grievances

8. When is the Scheme Information Document (SID) updated?

a. Every year

b. Every month

c. Every two years

d. Every six months

Answer: d) Every six months

Explanation: As per SEBI circular in 2021-For the open-ended and interval schemes, the SID shall be updated
within the next six months from the end of the 1st half or 2nd half of the financial year in the which schemes
were launched, based on the relevant data and information as at the end of the previous month. Subsequently,
SID shall be updated within one month from the end of the half-year, based on the relevant data and information
as of the end of September and March respectively.
9. The interim changes in an mutual fund scheme are updated to the investors through ____

a. Key Information Memorandum (KIM)

b. Statement of Additional Information (SAI)

c. Addendum

d. Scheme Information Document (SID)

Answer: c) Addendum
Explanation: While the SID, SAI and KIM need to be updated periodically, the interim changes are updated
through the issuance of Addendum.

The addendum is considered to be a part of the scheme related documents, and must accompany the KIM.

10. Identify the information which is NOT included in the Statement of Additional Information (SAI).
a. Rights of Unit-holders
b. Transmission procedure
c. SIP returns of the schemes
d. Investment Valuation Norms

Answer: c) SIP returns of the schemes

Explanation: Statement of Additional information (SAI), which has statutory information about the mutual fund or
AMC, that is offering the scheme like the Constituents of the mutual fund, Rights of Unit-holders, Investment
Valuation Norms, Rights of Unit-holders etc. It does not contain information on scheme returns etc. This
information is available in the Mutual Fund Fact Sheet.
 6. FUND DISTRIBUTION AND CHANNEL MANAGEMENT PRACTICES

1. An existing investor in mutual funds invests Rs 25,000 in the ABC scheme's direct plan. Calculate the
amount that will be the net investment made in the scheme after accounting for transaction charges.

a) Rs. 24,500

b) Rs 25,000

c) Rs 24,750

d) Rs 24,800

Answer: b) Rs. 25,000

Explanation: SEBI has allowed a transaction charge per subscription of Rs 10,000/- and above to be paid to
distributors of the mutual fund products. The transaction charge, if any, is deducted by the AMC from the
subscription amount and paid to the distributor; and the balance amount is invested.

However, there shall be no transaction charges on direct investments. Therefore the entire Rs. 25000 will be
invested.

In a direct plan, an investor has to invest directly with AMC, with no distributor to facilitate the transaction.

2. Which exam has to be cleared to get the Employee Unique Identification Number (EUIN) from AMFI?

a. SEBI-VA Mutual Fund Distributors Certification Examination

b. AMFI-VA Mutual Fund Distributors Certification Examination

c. NISM-VA Mutual Fund Distributors Certification Examination

d. NISM-VB Mutual Fund Distributors Certification Examination

Answer: c) NISM-VA Mutual Fund Distributors Certification Examination

Explanation: Institutions that are in the distribution of mutual funds need to register with AMFI. The employees
of these institutions need to clear the NISM Series V-A Mutual Fund Distributors Certification Examination and
obtain an Employee Unique Identification Number (EUIN) from AMFI.

3. A Trail Commission is paid ____

a. as long as the investor stays invested in the mutual fund scheme

b. when the investor invests in the mutual fund scheme

c. when the investor exits the mutual fund scheme

d. Trail Commission means no commission

Answer: a) as long as the investor stays invested in the mutual fund scheme
Explanation: Trail commission is calculated as a percentage of the net assets attributable to the units sold by
the distributable.

A mutual fund distributor is paid trail commission as long as the investor’s money is held in the fund.

4. In the Mutual Fund industry - every AMC gives an ARN code number to the mutual fund distributor which is to
be renewed every three years - True or False?

a. True-this is as per SEBI rules

b. False AMFI issues the ARN code number.

Answer: b) False AMFI issues the ARN code number.

Explanation: The ARN code is given by the Association of Mutual Funds in India (AMFI)

After obtaining the NISM VA certification and completing KYD requirements, one has to register with AMFI. On
registration, AMFI allots an AMFI Registration Number (ARN).

5. How can the empanelment of a mutual fund distributor be terminated?

a. The empanelment gets automatically terminated on the completion of the term of empanelment
b. Asset Management Company can terminate the empanelment at any time
c. When all the clients of the distributor shift to Direct Plans
d. All of the above

Answer: b) The empanelment gets automatically terminated on the completion of the term of
empanelment
Explanation: While empaneling with an AMC, the mutual fund distributor applicant signs a declaration which
gives power to the AMC to terminate the empanelment at any time.

6. Identify the FALSE statement: 1. As per AMFI guidelines, the intermediary has a no right of appeal to AMFI 2.
It is not the sole responsibility of the mutual fund distributors for spreading investor awareness
a. Only 1 is false
b. Only 2 is false
c. Both 1 and 2 are false

Answer: a) Only 1 is false

Explanation: One of the role and function of AMFI is: To undertake a nationwide investor awareness programme
to promote proper understanding of the concept and working of mutual funds. Thus, mutual fund distributors are
not solely responsible for spreading investor awareness. As per the AMF Guidelines & Norms for intermediaries
(AGN), the intermediary has a right of appeal to AMFI.

7. Amongst the distribution channel mentioned below, which one is likely to sell funds of only a single mutual
fund house?
a. Distribution Company
b. Independent financial advisor
c. Institutional sales team of the Asset Management Company
d. Bank
Answer: c) Institutional sales team of the Asset Management Company
Explanation: An independent financial advisor, a bank or a distribution company will sell mutual fund schemes
of various mutual fund houses as per their clients requirements and other considerations. However, an
institutional sales team of an Asset Management Company will sell schemes only of the single mutual fund
house which has appointed it.

8. The ARN is allotted to the mutual fund distributors by ___

a. SEBI
b. NISM
c. AMC
d. AMFI

Answer: d) AMFI
Explanation: A major role of AMFI involves the registration of mutual fund distributors, by allotting them AMFI
Registration Number (ARN), which is mandatory for becoming a mutual fund distributor.

9. When a mutual fund distributor empanels with an AMC, he/she has to sign a declaration for ____
a. declaring the rebates given back to the investors
b. ensuring that all employees who are selling mutual funds will have more than on ARN code
c. Guarantee of adding a minimum of 25 investors every month
d. Commitment to abide by statutory codes, guidelines and circulars

Answer: d) Commitment to abide by statutory codes, guidelines and circulars

Explanation: As per the procedure for getting empaneled as a mutual fund distributor with AMC, one of the
requirement is: The applicant needs to sign a declaration, which provides for the following - Commitment to
abide by instructions given, as also statutory codes, guidelines and circulars.

10. Ms Shweta purchases through a distributor 5000 units of a mutual fund scheme at a NAV of Rs 30. The
current NAV of the scheme is Rs 28. What will be the trail commission for today if the trail commission rate is
1% per annum
a. Rs. 13.8356
b. Rs. 7.2256
c. Rs 3.8356
d. Rs. 26.7463

Answer: d) Rs 3.8356
Explanation: Trail commission is always calculated on the current NAV. The current total value of investments in
the above question is Rs. 28 X 5000 units =Rs. 1,40.000. Trail commission for the day =Current value X trail
commission rate p.a./365. =1,40,000 X 1% / 365 days =1400/365 =Rs. 3.8356.
 7. NET ASSET VALUE, TOTAL EXPENSE RATIO AND PRICING OF UNITS

1. Which of these expenses can be charged to a mutual fund scheme by the AMC?
a) Rent for the registered office of the mutual fund

b) Fees of custodians and fund administrators

c) Salaries of the fund management team

d) General administration expenses of the AMC

Answer: b) Fees of custodians and fund administrators

Explanation: In addition to the investment and advisory fee, the AMC may charge the mutual fund scheme with
recurring expenses which include fees of custodians and fund administrators.

2. Identify the CORRECT statement/s.

A. Valuation gains are ignored. However, valuation losses need to be adjusted against the profits while
calculating distributable surplus.
B. The Mark-to-market gains form a part of the distributable reserves in the case of a mutual fund Income
Distribution Cum Capital Withdrawal plan.

a) Only A is correct

b) Only B is correct

c) Both A and B are correct

d) Both A and B are incorrect

Answer: a) Only A is correct

Explanation: SEBI guidelines stipulate dividends can be paid out of distributable reserves.

MTM gains are on paper - they are not realized. They will be realized when those investments are sold. So
these cannot be included in distributable reserves.

Also, valuation gains are ignored. However, valuation losses need to be adjusted against the profits.\

This conservative approach to calculating distributable reserves ensures that dividend is paid out of real and
realized profits, after providing for all possible losses.

3. Identify the FALSE statement/s:

A. For equity mutual funds schemes that are actively managed (eg. Diversified equity fund/Balance funds), the
net asset value need NOT be declared up to 4 decimal points

B. Each mutual fund scheme's account is combined with the accounts of the Asset Management Company
a) Only 1 is false

b) Only 2 is false
 c) Both 1 and 2 are false

Answer: b) Only 2 is false

Explanation: Key Accounting and Reporting Requirements for mutual funds:

- The accounts of the schemes need to be maintained distinct from the accounts of the AMC. The auditor
for the AMC has to be different from that of the schemes.
- NAV for equity and balanced funds is to be calculated up to at least 2 decimal places. NAV is to be
calculated up to 4 decimal places in the case of index funds, liquid funds and other debt funds.

4. The market value of a mutual fund scheme's portfolio is Rs. 15 crores. Its current liabilities are Rs. 2 crore.
The unit capital is Rs. 10 crore and the face value per unit is Rs 10. Calculate the NAV per unit.

a. Rs 15

b. Rs 10

c. Rs. 11.50

d. Rs 13

Answer: d) Rs. 13
Explanation: The formula for calculating NAV is: (Total Assets minus Liabilities other than to Unitholders) / No.
of outstanding Units

Total assets minus liabilities = 15 cr - 2 cr = Rs 13 cr

Number of outstanding units = Unit Capital / Face Value = 10 cr / 10 = 1 cr units

NAV = 13 cr / 1 cr = Rs. 13

5. Mr. Suresh invests Rs 30000 in an equity fund. The face value of this scheme is Rs 10 and the NAV is Rs 12.
The entry load is 2%. How many units will be allotted to Mr. Suresh?

a. 3000

b. 2142.8571

c. 2500

d. 2411.1574

Answer: c) 2500
Explanation: Exit load is not applicable on the purchase of units. It's applicable only on the sale of units.

The units will be allotted to Mr. Suresh as per the NAV which is Rs. 12.

The amount invested is Rs. 30,000

Units allotted = Amount Invested / NAV

=30000 / 12
=2500

6. Identify the false statement/s:

A. While evaluating the mutual fund schemes, the expense ratio matters more in debt funds than equity funds
B. An Ultra-short term debt fund has to mandatorily invest in high-credit quality debt securities

a. Only A is false

b. Only B is false

c. Both A and B are false

Answer: b) Only B is false

Explanation: Any cost is a drag on the Investor’s returns. Investors need to be particularly careful about the cost
structure of debt schemes because, in the normal course, debt returns can be much lower than equity schemes.
So expense ratio is more critical for debt funds.

When the limits are not tightly defined, the fund manager may assume an active role in managing the risk, eg an
ultra-short-term debt fund may take credit risk, since the SEBI regulations only define the permitted maturity
profile, which indicates how much interest rate risk the scheme can take.

7. Which of the following is true for unclaimed dividends in mutual fund schemes?

a. Asset Management Company is expected to make a continuous effort to remind the investors to claim
their dues
b. The responsibility for ensuring that the dues are claimed lies with the distributor in a dividend plan
c. The responsibility for ensuring that the dues are claimed lies solely with the investor

Answer: a) Asset Management Company is expected to make a continuous effort to remind the investors
to claim their dues
Explanation: AMC is expected to make a continuous effort to remind the investors through letters to claim their
dues.

The Annual Report has to mention the unclaimed amount and the number of such investors for each scheme.

8. Identify the TRUE statement with respect to the Total Expense Ratio (TER).

a. Disclosure of TER is very critical as there is no regulation capping it

b. As the TER of mutual fund schemes is highly regulated and therefore no disclosures are required

c. SEBI has specific and strict regulations regarding the cap for TER as well as the periodic disclosure of
the same

d. None of the above

Answer: c) SEBI has specific and strict regulations regarding the cap for TER as well as the periodic
disclosure of the same
Explanation: One of the important factors that impact the scheme's NAV is the Total Expense Ratio (TER),
charged to the scheme.
Though the same is very tightly regulated through SEBI regulations, the investor should know about the scheme
expense ratio. SEBI has mandated that the Asset Management Companies (AMCs) should prominently disclose
on a daily basis, the Total expense ratio (scheme-wise, date-wise) of all schemes.

9. Identify the category of mutual fund scheme in which the Net Asset Value (NAV) has to be declared for up to
4 decimal points.

a. Mid-Cap Funds

b. Blue Chip Funds

c. Hybrid Funds

d. Liquid Funds

Answer: d) Liquid Funds

Explanation: NAV is to be calculated up to 4 decimal places in the case of index funds, liquid funds and other
debt funds.

(NAV for equity and balanced funds is to be calculated up to at least 2 decimal places)

10. Ms. Priya redeems 2000 units at an NAV of Rs 13. If the exit load is 1 percent, what is the redemption value
of the investment?

a. RS 25500

b. Rs. 26250

c. Rs 26000

d. Rs. 25740

Answer: d) Rs. 25740

Explanation: Ms. Priya redeems 2000 units at an NAV of Rs 13 = 2000 x 13 = 26000

Exit load at 1% of 26000 = 260

Redemption value = 26000-260 = Rs. 25740

 8. TAXATION

1. Long-term capital loss will be taxed after adjusting for ____, if any.

a) long-term capital gain only

b) short-term capital gains only

c) both long-term and short-term capital gain

Answer: a) long-term capital gain only

Explanation: As per the IT Act, LTCL can only be set off against LTCG and STCL can be set off against STCG
and LTCG.

2. Which of these statement/s is/are TRUE?

a. Mutual Funds offer various options like Growth, Income distribution cum capital withdrawal / Reinvestment,
etc. as different investors have different preferences on how profits are to be handled

b. Interval funds offer better liquidity to investors as compared to Close-Ended mutual fund

a) Only 1 is True

b) Only 2 is True

c) Both 1 and 2 are true

Answer: c) Both 1 and 2 are true

Explanation: Interval funds combine features of both open-ended and close-ended schemes. They are largely
close-ended but become open-ended at specific pre-specified intervals. The benefit for investors is that, unlike
in a purely close-ended scheme, they are not completely dependent on the stock exchange to be able to buy or
sell units of the interval fund.

The options offered under a scheme allow investors to structure their investments in line with their liquidity
preference and tax position.

3. Securities Transaction Tax (STT) is applicable on redemption of both Equity mutual funds and Debt mutual
funds - State whether True or False.

a) True

b) False

Answer: b) False
Explanation: STT is not applicable to transactions in debt securities or debt mutual fund schemes. STT is also
not applicable to the purchase of units of an equity scheme. STT is applicable on the sale/redemption of equity
mutual funds.

4. Identify the FALSE statement:

A. When an investor sells his mutual fund units, the re-purchase is done by the mutual fund. Therefore the
investor does not have to bear a tax on the capital gains
B. When an investor invests in a debt mutual fund for more than three years, the capital gains will be considered
long-term capital gains

a. Only 1 is false

b. Only 2 is false

c. Both 1 and 2 are false

Answer: a) Only 1 is false

Explanation: Re-purchase transactions are treated as a sale of units by the investor. Therefore, there will be an
element of capital gain (or capital loss) and it will be taxed accordingly.

Capital gains are classified into 2 categories: STCG and LTCG. Long-term is defined as a holding period of
more than 3 years in the case of non-equity-oriented funds (Debt funds etc.) whereas the same is more than 1
year in the case of equity-oriented funds.

5. Sale of units of equity-oriented mutual fund (delivery-based) will attract Securities Transaction Tax at _____
%

a. 0.01

b. 0.001

c. 0.017

d. 0.125

Answer: b) 0.001
Explanation: When an investor sells units of an equity fund in the stock exchange or offers them for re-purchase
to the fund, he/she will have to incur Securities Transaction Tax (STT). STT is charged at 0.001% on such sale
transactions.

6. In which of these funds is Securities Transaction Tax (STT) not charged?

a. Fixed Maturity Plans (FMPs)

b. Equity index ETFs

c. ELSS-Equity Linked Savings Scheme

d. Blue chip equity funds

Answer: a) Fixed Maturity Plans (FMPs)

Explanation: Securities Transaction Tax is not applicable to transactions in debt securities or debt mutual fund
schemes.

Fixed Maturity Plans are close-ended debt funds and STT is not applicable on them

7. What happens in the process of Indexation?

 a. In indexation, the impact of capital gains tax is reduced in case of both short term and long term capital
gains
b. In indexation, the mutual fund's performance is benchmarked against a suitable index
c. In indexation, the cost of acquisition is adjusted upwards to reflect the impact of inflation
d. None of the above

Answer: c) In indexation, the cost of acquisition is adjusted upwards to reflect the impact of inflation
Explanation: Indexation means that the cost of acquisition or the cost of purchase is adjusted upwards to reflect
the impact of inflation. For eg. A stock was purchased at Rs 500 and sold for Rs 800 after 5 years. The long
term capital gains is Rs 300 on which tax is to paid. But when adjusted for indexation (as per data released by
Central Board of Direct taxes every year), the capital gains will be reduced and the tax will have to be paid on a
lower amount.

8. Identify the False statement/s- A. Valuation gains are ignored but valuation losses need to be adjusted
against the profits while calculating distributable surplus B. The Mark-to-market gains form a part of the
distributable reserves in case of mutual fund Income Distribution Cum Capital Withdrawal plan
a. Only A is false
b. Only B is false
c. Both A and B are false

Answer: b) Only B is false

Explanation: SEBI guidelines stipulate dividends can be paid out of distributable reserves. Mark-to-market gains
are on paper- they are not realised. They will be realized when those investments are sold. So these cannot be
included in distributable reserves. Also Valuation gains are ignored. But valuation losses need to be adjusted
against the profits. This conservative approach to calculating distributable reserves ensures that dividend is
paid out of real and realized profits, after providing for all possible losses.

9. State whether the statement is True or False - Investment in Income Distribution cum Capital Withdrawal re-
investment option grows faster than Growth option as the investor gets additional units.
a. Its true for all categories of mutual fund schemes
b. Its false for all categories of mutual fund schemes
c. Its true only for equity funds
d. It depends on whether the fund is open-end or close-end

Answer: b) Its false for all categories of mutual fund schemes

Explanation: In a Re-investment of income Distribution cum capital withdrawal plan, the NAV declines to the
extent of dividend. The resulting NAV is called ex-dividend NAV.However, the investor does not receive the
dividend in his bank account; the amount is re-invested in the same scheme and additional units are allotted to
the investor. The reinvestment happens at the ex-dividend NAV. The amount invested in the fund remains the
same. Only the units increases and NAV decreases. Therefore the growth is same for the Growth Option and
income Distribution cum Capital Withdrawal Re-investment option.

10. Mr. X has invested Rs. 2,00,000 in a 370 day FMP and on maturity he received Rs. 2,15,832. What is the
capital gain in this transaction?
a. Rs 7916
b. Rs. 13750
c. Rs 15832
d. Insufficient Data

Answer: c) Rs 15832
Explanation: Capital Gains is calculated as the difference between the sum invested and the sum realized when
the units are sold / matured. So in the above question capital gain is Rs 215832-200000 = Rs 1580
 9. INVESTOR SERVICES

1. The first Account Statement under SIP/STP shall be issued within 10 working days of the initial
investment/transfer - State whether True or False.

a) True

b) False

Answer: a) True
Explanation: As per SEBI rules for Account Statements - the first Account Statement under SIP/STP shall be
issued within 10 working days of the initial investment/transfer.

2. A folio which is held by a ______ CANNOT have a nominee.

Minor

Trust

Registered Company

All of the above

Answer: d) All of the above

Explanation: Only individual investors can make a nomination. Therefore, a Trust or Registered Company
cannot have a nominee.

Also, investments by minors cannot have a nomination.

3. Identify the TRUE statement/s:

1. The Indian inheritance laws are NOT applicable to mutual fund unit holders
2. A Power of Attorney (POA) cannot make or change nominations in a mutual fund

a. Only 1 is true

b. Only 2 is true

c. Both 1 and 2 are true

d. Both 1 and 2 are false

Answer: b) Only 2 is true

Explanation: The inheritance laws are applicable to the mutual fund unit-holder.
A Power of Attorney holder cannot make a nomination.

4. Mutual funds must publish their unaudited accounts once every six months _____

a. on the AMC website

 b. on the AMFI website

c. in at least two English newspaper

d. on the SEBI website

Answer: a) on the AMC website

Explanation: As per SEBI rules - the mutual fund shall before the expiry of 1 month from the close of each half
year, display the unaudited financial results on the AMC website, the advertisement in this reference will be
published by the fund in at least one English daily newspaper and one regional language newspaper.

5. Identify the TRUE statement with respect to the Systematic Investment Plan (SIP).

a. SIP cannot be done in a New Fund Offer (NFO)

b. SIP can be done only in an existing folio

c. SIP can be done in a Close-end fund

d. SIP can be used to initiate a fresh purchase of mutual funds

Answer: d) SIP can be used to initiate a fresh purchase of mutual funds

Explanation: An SIP can be used to initiate a fresh purchase in a scheme and open a folio.

It can be used to make additional purchases in an existing folio. A SIP can also be initiated during a NFO.

A close-ended fund does not have a SIP facility.

6. In which of the following options does an investor receive the distribution in hand?

a. Income Distribution cum capital withdrawal option only

b. Income distribution cum capital withdrawal reinvestment plan only

c. Income Distribution cum capital withdrawal option and Income distribution cum capital withdrawal
reinvestment plan both

d. Growth

Answer: a) Income Distribution cum capital withdrawal option only

Explanation: Most mutual fund schemes offer 2 options - Income Distribution cum capital withdrawal and
Growth. A third option, which is possible, is the Re-investment of income Distribution cum capital withdrawal
option

In a Pay-out Income Distribution cum capital withdrawal option, the investor receives the dividend in his bank
account.

In a Re-investment of Income Distribution cum capital withdrawal plan the investor does not receive the
dividend in his bank account; the amount is re-invested in the same scheme and additional units are allotted to
the investor.
In a growth option, the dividend is not declared. Therefore, nothing is received in the bank account.

7. Which of these are considered an Institutional group of investors?

a. Non-Resident Indians (NRIs)

b. Hindu Undivided Families (HUFS)

c. High Networth Individuals (HNIS)

d. Companies

Answer: d) Companies
Explanation: NRIs, HUFs and HNIs are considered individual investors.

Companies are non-individual investors ie. Institutional investors.

8. Which information has to be included in the mutual fund application form when a Non-Resident Indian (NRI)
subscribes for the units?

a. Passport details

b. Countries of residence in the past year

c. Details of investments made in the last year

d. Current overseas address

Answer: d) Current overseas address

Explanation: The information to be provided for mutual fund investments includes the name(s), nationality,
identity proof and KYC compliance, signatures of all the holder(s), and address and communication details of
the first holder.

In the case of NRI investors, an overseas address must also be provided.

9. In order to ensure fairness to investors, _____ has prescribed cut-off timing to determine the applicable NAV.

a. AMFI

b. SEBI

c. RBI

d. Stock Exchange

Answer: b) SEBI
Explanation: SEBI has prescribed cut-off timing to determine the applicable NAV and these timings are
uniformly applicable for all mutual funds.

10. Which intermediary is responsible for the implementation of uniform KYC?

 a. Asset Management Company

b. KYC Registration Agencies

c. Registrar and Transfer Agents

d. Depository participants

Answer: b) KYC Registration Agencies

Explanation: It is mandatory for all investors in the securities market, including mutual fund investors, to be KYC
(Know Your Customer) compliant under the provisions of the Prevention of Money Laundering Act.

If the investor has to go through the KYC process with each mutual fund, then it would become a repetitive
process. SEBI issued regulations for registration of central KYC Registry Agencies (KRAs). This introduced a
common KYC for investors investing in securities markets.

11. Mr. Amit wants to invest in a mutual fund scheme. He has to give the request for purchase specifying the
_____.

a. Units he wants

b. The amount he wants to invest

c. Lots he wants

Answer: b) Amount he wants to invest

Explanation: Purchase requests in an MF scheme can only be given specifying the amount the investor will be
investing. The units allotted will depend on the NAV of the date of allotment. Re-purchase (Sale) requests can
be given in Units to be sold or the Amount required.

12. .____ can be used in lieu of Income distribution cum capital withdrawal pay-outs.

a. Systematic Investment Plan

b. Systematic Transfer Plan

c. Systematic Withdrawal Plan

d. All of the above

Answer: c) Systematic Withdrawal Plan

Explanation: The Income distribution cum capital withdrawal (dividend) pay-out option is for investors wanting a
regular income.

Systematic Withdrawal Plan(SWP) is a facility that allows an investor to withdraw a fixed amount at pre-
determined intervals.

Therefore an income distribution cum capital withdrawal (dividend) pay-out option is similar to SWP. The
difference is that the dividend is paid only when the fund has a surplus amount and in SWP the amount is
compulsorily paid.
(The dividend pay-out plan is renamed as pay-out of income distribution cum capital withdrawal, dividend re-
investment plan is renamed as reinvestment of

income distribution cum capital withdrawal option followed by renaming of dividend transfer plan to transfer of
income distribution cum capital withdrawal plan).

13. Identify the TRUE statement/s -

A. Time stamping is relevant only for Financial transactions and not for Non-Financial transactions
B. Time stamping is relevant for both Financial and Non-Financial transactions

a. Only A is true

b. Only B is true

c. Both A and B are true

d. None of the above

Answer: a) Only A is true

Explanation: Time stamping for financial transactions like purchases and redemptions etc. is very crucial as it
determines the NAV at which the transaction will take place.

Time stamping for non-financial transactions like the change of address, investor's acknowledgment, etc. is not
crucial. Only date stamping is important for such non-financial transactions.\

14. In which of these options will the unit balance increase in the mutual fund investor folio without any
transaction being done by the investor?

a. Redemption

b. Dividend Re-investment option

c. Dividend Payout option.

d. Growth option

Answer: b) Dividend Re-investment option

Explanation: In a Dividend Re-investment option, the investor does not receive the dividend in his bank account;
the amount is reinvested in the same scheme and additional units are allotted to the investor.

(The reinvestment happens at the ex-dividend NAV).

15. How can an investor remit money in an Indian mutual fund from abroad?

a. Through Society for Worldwide Interbank Financial Telecommunication (SWIFT)

b. Through Immediate Payment Service (IMPS)

c. Through Real time gross settlement (RTGS)

d. Through National electronic funds transfer (NEFT)

Answer: a) Through Society for Worldwide Interbank Financial Telecommunication (SWIFT)
Explanation: For investments in mutual funds, remittance can be made directly to the bank account of the
scheme through Real Time Gross Settlement (RTGS)/National Electronic Funds Transfer (NEFT) facilities (for
transfers within India) or SWIFT transfer (for transfers from abroad).
SWIFT transfers tend to pass through multiple banks in different geographies, and multiple levels within the
same bank, resulting in delays.

16. Which of these investors is allowed to do a nomination?

a. Only SIP investors

b. Only Equity Mutual Fund investors

c. Only Institutional Investors

d. Only Individual Investors

Answer: d) Only Individual Investors

Explanation: Only Individual Investors can make a nomination.
 10. RISK, RETURN AND PERFORMANCE OF FUND

1. The AMC or its Trustees are not liable for any loss to Foreign Investors arising from adverse changes in
foreign exchange rates. - State whether True or False.
a) True
b) False

Answer: a) True
Explanation: A mutual Fund Scheme may be denominated in Indian Rupees (INR) which is different from the
home currency for Foreign Portfolio Investors in the mutual fund units. The INR value of investments when
translated into home currency by Foreign Portfolio Investors could be lower because of the currency
movements.

The AMC does not manage currency risk for Foreign Portfolio Investors and it is the sole responsibility of the
FPIs to manage or reduce currency risk on their own. The Sponsor/Fund/Trustees/ AMC are not liable for any
loss to Foreign Investors arising from such changes in exchange rates.

2. The interest rate sensitivity of a bond is determined by its maturity - State whether True or False.

a) False

b) True

Answer: a) True
Explanation: Interest rate sensitivity is a measure of how much the price of a fixed-income asset will fluctuate as
a result of changes in the interest rate environment.

Generally, the longer the maturity of the asset, the more sensitive the asset is to changes in interest rates. The
higher the duration of a bond, the more its prices will fall when interest rates rise and vice versa.

3. A Floating interest rate is ____.

a. usually the prime lending rate

b. The actual yield spread

c. only payable on maturity

d. Base rate + spread

Answer: d) Base rate + spread

Explanation: The interest rate payable on debt security may be specified as a fixed rate, say 6%. Alternatively, it
may be a floating rate i.e. a rate linked to some other rate that may be prevailing in the market, say the rate that
is applicable to GILT. Interest rates on floating rate securities (also called floaters) are specified as a “Base +
Spread”.

4. Diversified equity funds are less risky compared to Thematic funds in terms of ____ risk.

a. Duration

b. Size
 c. Concentration

d. Style

Answer: c) Concentration
Explanation: A Thematic fund invests in line with an investment theme. For example, an infrastructure thematic
fund might invest in shares of companies that are into infrastructure, construction, cement, steel, power,
telecom, etc.

A Diversified equity fund invests in many sectors and themes as per the investment policy and fund managers'
decisions.
Thematic funds are risky because of the concentration on one theme. If the theme underperforms then the
scheme’s returns are likely to be poor.

5. Mohit needs Rs. 2,00,000 in 5 years from now. The interest rate is 7%. The amount required today to be
invested can be calculated by using the formula ____.

a) 200000/(1+0.07)^5

b) 200000 (1-0.07)^5

c) 200000/(1+0.07)*5

d) 200000 (1+0.07)*5

Answer: a) 200000/(1+0.07)^5
Explanation: The formula for calculating the future value of an investment made today is A= P*(1+r)^n.

A=future value, P=present value, r=rate of interest rate, n=no. of years

6. Identify the TRUE statements with respect to measuring returns for mutual fund schemes.

A. The returns published in a mutual fund advertisement should factor in the entry or exit load

B. Compounded Annual Growth Rate (CAGR) is the accepted standard of showing returns for investment over
a holding period of more than one year

C. Simple returns can be calculated by the formula :(Sale price - Cost price / Cost price) x 100

a. Only 1 and 2 are true

b. Only 2 and 3 are true

c. Only 1 and 3 are true

d. All 1, 2 and 3 are true

Answer: b) Only 2 and 3 are true

Explanation: As per SEBI rules - The return is calculated using CAGR if the holding period is over one year and
simple absolute returns for less than one year.
The returns published in a mutual fund advertisement would be without factoring in the entry or exit load.

The Simple Return can be calculated with the following formula:

(Sale price - Cost price / Cost price) x 100

7. Performance of a portfolio is influenced by _____

a. Stock Selection

b. Investment Policy

c. Asset Allocation Strategy

d. All of the above

Answer: d) All of the above

Explanation: A portfolio consists of various types of investment products. It is influenced by the investment
policy including the scheme's asset allocation and investment style. Also, equity returns are a function of sector
and stock selection which will influence the portfolio performance.

8. _____ investment styles mean buying stocks that are priced lower in the markets than the assessment
based on fundamental analysis.

a. Growth

b. Blend

c. Value

d. Cyclical

Answer: c) Value
Explanation: Value investment style is an approach of picking up stocks, which are priced lower than their
intrinsic value, based on fundamental analysis.

The belief is that the market has not appreciated some aspect of the value in a company's share - and hence it
is cheap. When the market recognizes the intrinsic value, then the price will shoot up.

9. The equity share prices of gold mining companies can depend on

A. The gold reserves of company

B. The operational efficiency and management of the company

C. International prices of gold

a. Only 1 and 2

b. Only 2 and 3

c. Only 1 and 3
 d. All 1, 2 and 3

Answer: d) All 1, 2 and 3

Explanation: The profitability of gold mining companies is linked to several factors.

For eg. When gold metal price increases, gold mining companies with large reserves of gold can appreciate

If there are concerns about a company's management the share prices may see a decline irrespective of the
price of gold.

10. _____ is the risk of mispricing or improper valuation of derivatives.

a. Counterparty Risk

b. Model Risk

c. Basis Risk

d. Credit risk

Answer: b) Model Risk

Explanation: Model Risk is the risk of mispricing or improper valuation of derivatives.

11. An ongoing bond fund will lose value when the interest rates in the market ____

A. Rise
B. Fall
C. Remains Same
D. Will be equal to yields

Answer: a) Rise
Explanation: Suppose an investor has invested in a debt security that yields a return of 7 percent. Subsequently, yields in the market
for similar securities rise to 8 percent. It stands to reason that the security, which was bought at a 7 percent yield, is no longer such an
attractive investment. It will therefore lose value.
 11. MUTUAL FUND SCHEME PERFORMANCE

1. Identify which of the following statement/s is/are false in the context of benchmarks.
A. An independent agency should calculate the benchmark in a transparent manner
B. The process of choosing a benchmark for an Index Fund is very complex

a. Only A is false

b. Only B is false

c. Both A and B are false

d. None of the above

Answer: b) Only B is false

Explanation: The choice of benchmark is simplest for an index fund. The investment objective is clear on the
index that the scheme would track. That index would then be the benchmark for the scheme.

The benchmark should be calculated by an independent agency in a transparent manner, and published
regularly. Most benchmarks are constructed by stock exchanges, credit rating agencies, securities research
houses, or financial publications.

2. The appropriate benchmark for a short-term debt scheme will be ____

a. 1 Year T-Bill index

b. Nifty50

c. 10-year dated Gol security

d. 05 years dated Gol security

Answer: a) 1-Year T-Bill index

Explanation: Appropriate Benchmarks :

Equity scheme - Sensex or Nifty

Long-term debt scheme - 10-year dated GoI security
Short-term debt fund - 1 year T-bill

3. ____ is used to measure fund's risk relative to market index.

a. Tracking error

b. Beta coefficient

c. Treynor ratio

d. Sharpe ratio

Answer: b) Beta coefficient

Explanation: Beta is a commonly used risk measure and calculates the relative volatility of a stock or Mutual
Fund's returns as against its benchmark.

For example, if the Beta of a Mutual Fund scheme is 1, it means the fund moves in line with the benchmark.

Likewise, say the Beta of a fund is higher than 1. Assume it is 1.5. So, if the NIFTY 50 jumps by 1%, the fund
benchmarked against NIFTY 50 is likely to go up by 1.5%

4. Mutual funds today are benchmarked to the Total Return variant of an Index (TRI) and not to the Price
Return variant of an Index (PRI). What is the advantage of TRI over PRI?

A) It ensures that the performance comparison is fair

B) Increases transparency

a. Only A

b. Only B

c. Both A and B

Answer: c) Both A and B

Explanation: Earlier, the Mutual Fund schemes were benchmarked to the Price Return variant of an Index (PRI).
PRI only captures the capital gains of the index constituents. Now the mutual fund schemes are benchmarked
to the Total Return variant of an Index (TRI). The Total Return variant of an index takes into account all
dividends/interest payments that are generated from the basket of constituents that make up the index in
addition to the capital gains.

Such a change was required to ensure that the performance comparison was fair. The shift to TRI has been
another one in the direction of increasing transparency of mutual funds.

5. Identify the TRUE statement with respect tothe benchmark for Gold ETFs.

a. CRISIL Gilt fund index is widely used as a benchmark for Gold ETFS

b. Gold ETFs are benchmarked against gold prices

c. There can be no benchmark for Gold ETFS

d. Internationally it is proven that there is no need for any type of benchmark for Gold ETFS

Answer: b) Gold ETFS are benchmarked against gold prices

Explanation: Gold price would be the benchmark for Gold Exchange Traded Funds (ETFs).

6. The return from a mutual fund scheme is 8.3% and the Standard Deviation is 0.6. The risk-free rate of return
is 5%. Calculate the Sharpe ratio.
a. 3.5
b. 5.5
c. 2.87
d. 4
Answer: b) 5.5
Explanation: The formula for Sharpe Ratio is: =(Rs-Rf)/ Standard Deviation so ie. =(Return Earned - Risk free
Return) / Standard Deviation so =(8.3-5)/0.6 so =-3.3/0.6 so =5.5

7.Identify the TRUE statement with respect to 'Jensen's Alpha' of a mutual fund scheme?
a. *It is a measure of outperformance after adjusting for the risk taken
b. It is a measure of risk and outperformance is related to returnsIt is a measure of simple outperformance,
irrespective of the risk taken
c. It is a measure of simple outperformance, irrespective of the risk taken
d. None of the above

Answer: a) It is a measure of outperformance after adjusting for the risk taken

Explanation: Jensen's Alpha is used to determine the abnormal return of a security or portfolio of securities over
the theoretical expected return. It is a risk-adjusted performance measure that represents the average return on
a portfolio or investment, above or below that predicted by the capital asset pricing model (CAPM), given the
portfolio's or investment's beta and the average market return.

8. The return from a fund is 9%, Standard Deviation is 0.75 and the Beta is 1.4. The risk free rate of return is
7%. What is the DENOMINATOR in the calculation of the Sharpe Ratio?
a. 9
b. 0.4
c. 7
d. 0.75

Answer: d) 0.75
Explanation: In a fraction-Eg. 21/38, the number above the line (21) is called the Numerator and the number
below the line (the bottom number 38) is called the Denominator The formula for Sharpe Ratio is: (Return
Eamed-Risk free Return)/ Standard Deviation. Here the Numerator is "Return Earned-Risk free Return and the
Denominator is 'Standard Deviation. So the Denominator is the Standard Deviation which is given as 0.75.
 12. MUTUAL FUND SCHEME SELECTION

1. When will an Indian investor in a US dollar-based fund benefit?

a) When the US Dollar becomes weak

b) When the US Dollar becomes stronger

c) When the US Dollar remains steady

Answer: b) When the US Dollar becomes stronger

Explanation: An investor invests Rs 80,000 to buy 1000 units of a fund when the USDINR rate was Rs. 80 per
dollar. If the US Dollar becomes stronger against INR say Rs. 82, he will receive Rs. 82,000 when he
repatriates the amount to India. (Assuming the NAV remains the same).

2. While giving the mutual fund units for re-purchase, the distributor should consider the impact of ____ and
____ on the investor's portfolio.

a) Exit Load; Capital Gains Tax

b) Exit Load; Entry Load

c) Entry Load; Capital Gains Tax

d) Entry Load; Beta

Answer: a) Exit Load; Capital Gains Tax

Explanation: Both taxes and loads reduce investment returns. Therefore, the distributor needs to consider these
two aspects during repurchases/redemptions.

This means that when there is a need to withdraw money from a scheme, the distributor must assess the
implications of capital gains tax and exit loads.

3. Which of these statement/s is/are INCORRECT?

A. The impact of exit load can be ignored by the distributor at the time of re-purchase of a mutual fund units

B. When the investor wants to redeem mutual fund units, the distributor must suggest redemption from the
scheme with the maximum exit load

a. Only statement A is incorrect

b. Only statement B is incorrect

c. Both statements A and B are incorrect

Answer: b) Only statement B is incorrect

Explanation: Both taxes and loads reduce investment returns. Therefore, the distributor needs to consider these
two aspects during repurchases/redemptions.

This means that when there is a need to withdraw money from a scheme, the distributor must assess the
implications of capital gains tax and exit loads.
When the investor wants to redeem mutual fund units, the distributor must suggest redemption from the scheme
with the minimum exit load.

4. An International Fund is investing in US stocks. What would be the impact if the US Dollar depreciates
against the Indian Rupee?

a. The NAV of the scheme in Indian Rupees will depreciate

b. The NAV of the scheme in Indian Rupees will appreciate

c. No impact on the fund as it is investing in stocks and not currency

Answer: a) The NAV of the scheme in Indian Rupees will depreciate

Explanation: International Equity funds:

When an Indian investor invests in equities abroad, he is essentially taking two exposures:

An exposure on the international equity market. An exposure to the exchange rate of the rupee.

If the investor invests in the US, and the US Dollar becomes stronger during the period of his investment, he
benefits; if the US Dollar weakens (Le. Rupee becomes stronger), he loses or the portfolio returns will be lower.

5. _____ is the most relevant factor for comparing performance of liquid funds of similar category offered by
various mutual fund houses.
a. Expenses
b. Maturity
c. Current NAV
d. Taxation

Answer: a) Expenses
Explanation: Comparing the Expense Ratio of different schemes is imperative for investors looking for the best
liquid mutual fund. These schemes more or less earn similar returns. Hence, a fund with a high expense ratio
will significantly reduce the returns generated. For example, suppose two funds deliver returns of 5% and 5.5%,
respectively. Let's say the expense ratio of the first fund is 0.2%, and the second fund is 0.8%. Therefore, the
actual yield will be 4.8% and 4.7%. Hence, a fund with a lower expense ratio may be more profitable for an
investor.

6. Calculate the Average holding period if the portfolio turnover ratio is 25 percent.
a. 25 months
b. 48 days
c. 40 months
d. 4 Years

Answer: d) 4 Years
Explanation: Average Holding Period = 12 (months)/ Portfolio Turnover Ratio, Here the portfolio turnover ratio is
25 percentie 25/100 = 0.25, Average Holding Period = 12/0.25 = 48 months = 4 Years

7. A top performing scheme within a category ____

a. is the best choice for an investor to invest his funds
 b. May or may not be the top performer in the next years to come
c. usually remains the top performer for a long period of time
d. usually be the worst performer in the next years to come

Answer: b) May or may not be the top performer in the next years to come
Explanation: As experience has shown time and again, the top performers during one period may not
necessarily remain as a top performer forever or near the other top performers, in such a case simply buying
into a scheme due to good returns in the recent past may not be a wise approach. The mutual fund
advertisements use the disclaimer: Past performance may or may not be sustained in future.

8. Different investors of the similar age group should always have the same asset allocation in their investment
portfolios - State whether True or False?
a. True
b. False

Answer: b) False
Explanation: Different investors have different financial goals at different age levels. In fact, investors in the
same age group may also have different goals. Their financial situations may also differ. At the same time,
many of the financial goals may pertain to the whole families and not just an individual. In such cases, it may not
be prudent to categorize investors on the basis of age alone.

9. Identify the FALSE statement: A. When the mutual fund distributor understands the needs of his investor, one
can ignore the investment objective of the mutual fund schemes B. The best strategy in selecting a mutual fund
scheme is that based on its past performance
a. Only A is false
b. Only B is false
c. Both A and B are false
d. None of the above

Answer: c) Both A and B are false

Explanation: Experience has shown time and again, the top performers during one period may not necessarily
remain as a top performer forever or near the other top performers and vice versa. In such a case, simply
buying into a scheme due to good returns in the recent past may not be a wise approach. In order to evaluate
various mutual fund schemes, it is important to consider the scheme's investment objective and strategy. Both
of these can help one understand what to expect from the scheme. The suitability of a mutual fund scheme to
an investor depends upon the features of the scheme and matching it to the needs of the investor from the
investment. Therefore. one cannot ignore the investment objectives of the scheme.

10. Where is the performance data for all schemes across the mutual fund industry available?
a. The Scheme Information Document (SID)
b. Key Information Memorandum (KIM)
c. AMFI Website
d. The Fund Fact Sheet

Answer: c) AMFI Website

Explanation: Each AMC is required to publish a scheme performance dashboard on its website, and update it
on a regular basis. The scheme performance data is also available on the AMFI website. AMFI website
(www.amfindia.com) carries the performance data of all the mutual fund schemes This is an exhaustive
resource and one can access the same for various different periods, and fund categories.