NISM Series V-A: Mutual Fund Distributors Mock Test (Set 1)

Explanation

As per SEBI, a Mutual Fund Scheme/Plan shall have a minimum of 20 investors and no single investor shall account for more than 25 percent of the corpus of the Scheme/Plan(s).

So a high impact cost is neither beneficial to the buyer nor the seller.

Explanation

The money received from investors is invested by the mutual fund scheme in a portfolio of securities as per the stated investment objective. Profits or losses, as the case might be, belong to the investors or unitholders.

No other entity involved in the mutual fund in any capacity participates in the scheme’s profits or losses. They are all paid a fee or commission for the contributions they make to launching and operating the schemes.

Explanation

With effect from July 1, 2020, mutual fund units issued against purchase transactions (whether through lump-sum investments or SIP or STP or switch-ins or dividend reinvestment) would be subject to levy of stamp duty @ 0.005% of the amount invested.

Explanation

If the default bank account is being deleted from the list of registered accounts, then before that, another account has to be designated as the default bank account.

Explanation

One of the important factors that impacts 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 on their website. The same must also be published on AMFI website.

Explanation

The first step in goal setting is to identify events in life which will require funding like – marriage, education, buying a vehicle etc.

The next step is to assign priorities – which of these events are more important than the others

After that, one needs to assign a timeline as well as amount of funding required at the time of such events.

Explanation

Portfolio Turnover Ratio is calculated as Value of Purchase and Sale of Securities during a period divided by the average size of net assets of the scheme during the period.
= Rs. 10,000 crore ÷ Rs. 5,000 crore = 2 or 200 percent

This means that investments are held in the portfolio, on an average for 12 months ÷ 2 i.e. 6 months.

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 lead people to prefer safe assets. Similarly, a bull market makes people allocate more than what is advised for risky assets. The recent experience overrides analysis in decision making.

Explanation

CRISIL blended indices for hybrid funds :

Aggressive Hybrid Fund – CRISIL Hybrid 25+75 , Aggressive Index

Balanced Hybrid Fund – CRISIL Hybrid 50+50 , Moderate Index

Conservative Hybrid Fund – CRISIL Hybrid 75+25 , Conservative Index

Explanation

Macaulay Duration is the weighted average of the time to receive the cash flows from a bond.

Long Duration Fund : An open-ended debt scheme investing in debt and money market instruments with Macaulay duration greater than 7 years.

Explanation

For eg – If a fund has a fixed asset allocation of 50:50 for Debt and Equity and if equity valuation rises by 10%, then as per the fixed asset allocation strategy, 10% of equity portfolio will be sold and debt will be bought so that the debt equity valuation will be 50:50.

Explanation

Time stamping is mandatory for all financial transactions in mutual funds like purchase, redemption etc. The application form, the payment instrument etc. have to be time and date stamped.

Explanation

To ensure fair treatment to all investors in case of a credit event and to deal with the liquidity risk, in December 2018, SEBI permitted creation of segregated portfolio of debt and money market instruments by mutual funds schemes.

“Segregated portfolio” means a portfolio, comprising of debt or money market instrument affected by a credit event, that has been segregated in a mutual fund scheme.

Explanation

In securitisation transactions, it is possible to work towards a target credit rating, which could be much higher than the originator’s own credit rating. This is possible through a mechanism called “Credit enhancement”.

The process of “Credit enhancement” is fulfilled by filtering the underlying asset classes and applying selection criteria, which further diminishes the risks inherent for a particular asset class.

Explanation

Banks, NBFCs and other financiers often lend money against pledge of Units by the Unitholder.

This is effected through a Pledge Form executed by the unit-holder (pledger). The form has a provision for specifying the party in whose favour the units are pledged (pledgee).

Explanation

In the event of any issue with the AMC or mutual fund scheme, the investor can first approach the AMC Investor Service Centre. If the issue is not redressed, even after taking it up at senior levels in the AMC, then the investor can write to SEBI (through SCORES) with the complaint details.

SEBI Complaint 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.

Explanation

Inflation, or price inflation is the general rise in the prices of various commodities, products, and services that we consume. Inflation erodes the purchasing power of the money.

Inflation risk is also referred to as purchasing power risk, is the risk that inflation will undermine the real value of cash flows made from an investment.

Explanation

If an investor holds his investments in a debt fund for more than three years, the capital gain will be considered as a long term capital gain – This is a true statement.

As the purchase and re-purchase is done with the mutual fund, the investor does not have to pay any capital gain tax – This is false as the difference between the purchase price of the units and the selling price of the units would be treated as capital gain and such capital gains are subject to tax.

Explanation

Capital gains from Equity, Debt and Hybrid funds are taxable subject to certain conditions like the holding period etc.

Explanation

An investor (unit holder) in a mutual fund scheme is the beneficial owner of the units one has bought. The mutual fund is managed for the beneficial interest of the unitholders.

Explanation:

A capital gain or loss from an investment of less than 3 years in a debt instrument is considered as Short term.

Short term capital loss is to be set off against short term capital gain or long term capital gain.

Long-term capital loss can only be set off against long-term capital gain.

Explanation

1) Any cost is a drag on 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

2) The mutual fund advertisements use the disclaimer: “Past performance may or may not be sustained in future”. There is a reason for that. 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 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.

3) When the limits are not tightly defined, the fund manager may assume an active role in managing the risk, e.g. 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.

Explanation

Macaulay Duration is the weighted average of the time to receive the cash flows from a bond.

An open ended ultra-short-term debt scheme invests in debt and money market instruments with Macaulay duration between 3 months and 6 months.

Explanation

Real estate means physical property in the form of land and buildings.

Units by Real Estate investment Trusts, Bank Deposits and shares in physical form are all financial assets.

Explanation

When a dividend is announced, and until it is paid out, it is referred to as cum-Dividend NAV.

Explanation

The expenses which can be charged and the expense ratios etc. are mentioned in the SEBI Mutual Fund Regulations, 1996 which the AMC’s have to adhere to.

Explanation

Fund of funds is a mutual fund which utilises its pool of resources to invest in various other kinds of mutual funds available in the market.

It does not directly invest in equity or debt securities.

Explanation

If there is an entry load on a scheme then while calculating the scheme returns, the initial value of the Net Asset Value (NAV) is taken as NAV plus the Entry load as the cost of purchase increases due to the entry load. So entry load has to be added to the NAV and not subtracted.

For redemptions, instead of the later value of NAV (which is used for calculating scheme returns), the amount actually received/receivable by the investor (i.e. NAV minus Exit Load, if any) would need to be used.

Explanation

Beta measures the fluctuation in periodic returns in a scheme, as compared to fluctuation in periodic returns of a diversified stock index (representing the market) over the same period.

The diversified stock index, by definition, has a Beta of 1. Schemes, whose beta is more than 1, are seen as more risky than the market. Beta less than 1 is indicative of a scheme that is less risky than the market.

Systematic risk is measured by its Beta

Explanation

SID has information on relevant NFO dates (opening, closing, re-opening),

KIM is essentially a summary of the SID and SAI. It contains the key points of the offer document including the dates of Issue Opening, Issue Closing & Re-opening for Sale and Re-purchase

Explanation

ETFs are passive funds whose portfolio replicates an index or benchmark such as an equity market index or a commodity index.

The units of the ETF are traded at real time prices that are linked to the changes in the underlying index.
The market price also tracks the NAV very closely.

Explanation

Asset Management Company (AMC) shall disclose to unitholders investment pattern, portfolio details, ratios of expenses to net assets and total income and portfolio turnover wherever applicable in respect of schemes on annual basis.

Explanation

Only if the investor chooses Dividend Payout option in his mutual fund investments, the money will flow into his bank account when ever the mutual fund pays the dividend.

In a growth option, dividend is not declared. Therefore, nothing is received in the bank account

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.

In a bonus issue, the investor does not pay anything. The fund allots new units for free.

Explanation

One of the common factors that many people use to evaluate the investor’s risk profile is the investor’s age. It is popularly believed that younger investors have the potential for taking higher risks compared to old people.

However, this may not be correct as 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. In such cases, it may not be prudent to categorize investors on the basis of age alone.

Explanation

The fund fact sheet plays a vital role in giving updated information on the mutual fund schems and usually is published on a monthly basis by all the fund houses.

Factsheet is not a statutory requirement.

Explanation

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

Explanation

Holding period returns is calculated for a fixed period such as one month, three months, one year, three years or since inception.Holding period returns may not present an accurate picture of the returns from a fund if the initial value or the end value used for calculation was too high or low.

To eliminate this impact rolling returns are calculated. Rolling returns is the average annualized return calculated for multiple consecutive holding periods in an evaluation period.

Explanation

Asset Allocation is a process of allocating money across various asset categories in line with a stated objective.

The basic meaning of asset allocation is to allocate an investor’s money across asset categories in order to achieve same objective.

Explanation

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

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

Explanation

Choice of investment universe is important and drives the choice of benchmark in debt schemes.

For eg – Liquid schemes invest in securities of upto 91 days’ maturity. Therefore, a short term money market benchmark such as NSE’s MIBOR or CRISIL Liquid Fund Index is suitable. Non-liquid schemes can use other type indices depending on the nature of their portfolio.

Explanation

The points of acceptance for mutual fund transactions have time stamping machines with tamper-proof seal.

Opening the machine for repairs or maintenance is permitted only by vendors or nominated persons of the mutual fund. Such opening of the machine has to be properly documented and reported to the Trustees.

Explanation

The difference between a scheme’s actual return and its optimal return is its Alpha—a measure of the fund manager’s performance.

Alpha, therefore, measures the performance of the investment in comparison to a suitable market index. Positive alpha is indicative of outperformance by the fund manager; negative alpha might indicate under-performance.

Explanation

An approval of SEBI is not required by the AMC while appointing the fund managers.

Explanation

Churning means frequent buying and selling.

Encouraging over transacting and churning of Mutual Fund investments to earn higher commissions by MF agents is a bad practice.

Explanation

If there is an exit load on a scheme then while calculating the scheme returns, the later value of the Net Asset Value (NAV) is taken as NAV minus the exit load as the sale value decreases due to the exit load.

So exit load has to be subtracted from the NAV and not added.

Explanation

An Open Ended mutual fund can be purchased by both new and existing investors through the traditional way or through stock exchanges.

Explanation

If the investor invests in the US, and the US Dollar becomes stronger during the period of his investment, he/she will benefit.

For eg. – An investor buys USD 1000 worth of units in a US mutual fund when the exchange rate was Rs 75 for 1 USD. So his investment is Rs 75000

If USD becomes stronger against India Rupee and rises to Rs. 77 and he sells USD 1000 worth of units, his realisation in Indian rupees is 1000 x 77 = Rs 77000. So he earns Rs 2000

(This is assuming all other factors like the NAV of the mutual fund remaining the same)

Explanation

Schemes are permitted to keep the re-purchase Price lower than the NAV. The difference between the NAV and re-purchase Price is called the “exit load”.

If the NAV of a scheme is Rs. 11.00 per unit, and it were to charge exit load of 1 percent, the re-purchase Price would be Rs. 11 – 1 percent on Rs. 11 i.e. Rs. 10.89.

Explanation

Tracking error is a measure of the consistency of the out-performance of the fund manager relative to the benchmark. The tracking error has to be low for a consistently out-performing fund.

While investing in an Index Fund, one should invest in a fund with the lowest tracking error.

Explanation

Investments are taken at their market value. This is done, to ensure that sale and re-purchase transactions are effected at the true worth of the unit, including the gains on the investment portfolio.

The process of valuing each security in the investment portfolio of the scheme at its current market value is called ‘mark to market’ i.e. marking the securities to their market value.