NISM Series V-A: Mutual Fund Distributors Mock Test (Set 3)

Explanation:

The risk sequence is (highest risk to low risk) Flexible Allocation – Fixed Allocation – Monthly Income Plans – Capital Protection funds.

Explanation:

Balanced Fund provide investors simultaneous exposure to both equity and debt in one portfolio. A balanced scheme would have an investment objective like: “To achieve growth by investing in equity and equity-related investments, balanced with income generation by investing in debt and money market instruments”.

Explanation:

The maximum number of joint holders allowed per mutual fund application is three.

Explanation:

The dividend pay-outs declared on units under lien may be paid to the unitholder or the lender (lien holder) depending upon the agreement.

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 get spread across investors. Further, the higher transaction volume makes it possible to negotiate better terms with brokers, bankers and other service providers.

– Limitations of Mutual Fund

– Lack of Portfolio Customization

– A unitholder cannot influence what securities or investments the scheme would invest into.
Choice Overload

– There are multiple mutual fund schemes offered by several mutual fund houses and multiple
options within those schemes which makes it difficult for investors to choose between them. No Control Over Costs

– An individual investor has no control over the costs in a scheme.

Explanation:

The investor’s risk appetite is a function of three things—the need to take risks, the ability to take risks, and the willingness to take risks. Thus, an understanding of the risk profile and the investment risks associated with various mutual fund schemes would be essential for deciding the asset allocation in an investor’s portfolio.

Explanation:

IN THE MONEY – A call option with a strike price that is lower than the market price of the underlying asset, or a put option with a strike price that is higher than the market price of the underlying asset. In the money means that your stock option is worth money and you can turn around and sell or exercise it. For example, consider a stock that is trading at Rs 100. For such a stock, call options with strike prices below Rs 100 would be In the money calls ( ie Rs 80, Rs 90 calls) while put options with strike prices above Rs 100 (Rs 110 , Rs 120 calls etc.)would be In the money puts. For easy understanding, those calls or puts which are profitable are In the Money.

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.

Explanation:

Investment objective defines the broad investment charter. Investment policy describes in greater detail, the kind of portfolio that will be maintained. The investment policy includes the scheme’s asset allocation and investment style.

Explanation:

All details such as an address, bank account details, and nomination for the units held in DEMAT FORM is according to the information available in the depository’s records. Any changes to the said information have to be made by contacting his depository participant.

Explanation:

A 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 New Fund Offer (NFO).

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. An SIP can also be initiated during a New Fund Offer (NFO). A Close-end fund does not have SIP facility.

Explanation:

An aggressive Hybrid Fund is an open-ended hybrid scheme investing predominantly in equity and equity-related instruments. Investment in equity and equity-related instruments shall be between 65% and 80% of total assets while investment in debt instruments shall be between 20% and 35% of total assets.

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.

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 familiar, 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.

Explanation:

The S&P BSE Bankex index comprises constituents of the S&P BSE 500 that are classified as members of the banks sector as defined by the BSE industry classification system. The S&P BSE Bankex index contains banking stocks like State Bank of India, Axis Bank etc.

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.

Explanation:

Experience has shown time and again, that the top performers during one period may not necessarily remain as top performers 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. 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.

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.

Explanation:

Ideally an investor’s portfolio should be divided into Core and Satellite portfolios. The core portfolio will be invested according to the longterm needs of the investor and the satellite portfolio will be invested to take advantage of expected short-term market movements. However, the division between core and satellite portfolios will depend upon each investor’s profile. Conservative investors may like a very small proportion of their overall portfolio to be managed tactically and an investor comfortable with taking higher risk may have an even higher exposure to tactical investments. Different investors have different financial goals at different age levels. 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 based on age alone.

Explanation:

As per the SEBI Advertisement Code for Mutual Funds – No celebrities shall form part of the advertisement. (AMFI can use celebrities but individual mutual funds cannot use celebrities)

Explanation:

One of the important factors that impact the scheme’s NAV is the Total Expense Ratio (TER), charged to the scheme and SEBI has strict rules for capping the expenses for various types of funds. 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 daily, the Total expense ratio (scheme-wise, date-wise) of all schemes.

Explanation:

As per SEBI circular in 2021 – KIM shall be updated at least once in half-year, within one month from the end of the respective half-year.

Explanation:

Both taxes and loads reduce investment returns. Therefore, it is important for the distributor 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.

Explanation:

While calculating the daily NAV, apart from the change in value of investments, the actual and accrued income and expenses are also taken into account. These also affect the calculation of NAV. Changes in the number of investors can affect the Asset Under Management (AUM) of a scheme but it won’t affect the NAV.

Explanation:

Portfolio Turnover is the value of Purchase and Sale of Securities during a period in a mutual fund scheme. Purchase and sale of securities entails broking costs for the scheme. Frequent churning of the portfolio would add to the transaction costs.

Explanation:

Beta, and not Sharpe Ratio, 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%.

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) payout 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 compulsarily 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)

Explanation:

ETFs and Closed-end funds are listed on the stock exchanges and investors can sell their units there. They need not give redemption requests to the AMCs. So, the fund manager need not maintain liquid funds for Close-end funds and ETFs. 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.

Explanation:

Mr. Sunil redeems 5000 units at an NAV of Rs 30 = 5,000 x 30 = Rs. 1,50,000
Exit Load at 1% of 1,50,000 = 1,500

Redemption value = 1,50,000 – 1,500 = Rs. 1,48,500

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.

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. Conservative Hybrid Fund can invest in only AAA rated debt securities with a Macaulay duration of less than one 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 a greater volatility in prices when compared to bonds with lower durations).

Explanation:

Institutions that are into 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.

Explanation:

The sponsor is the promoter of the mutual fund. The sponsor brings in capital creates a mutual fund trust and sets up the AMC.

Explanation:

Under SEBI (Mutual Funds) Regulations, 1996, Mutual Funds are permitted to charge certain operating expenses for managing a mutual fund scheme – such as sales & marketing/advertising expenses, administrative expenses, transaction costs, investment management fees, registrar fees, custodian fees, audit fees – as a percentage of the fund’s daily net assets. All such costs for running and managing a mutual fund scheme are collectively referred to as ‘Total Expense Ratio’ (TER) The regulatory limits of TER that can be incurred/charged to the fund by a Mutual Fund AMC has been specified under Regulation 52 of SEBI Mutual Fund Regulations.

Explanation:

Interval funds combine features of both open-ended and close-ended schemes. They are largely close ended but become open-ended at prespecified 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.

Explanation:

As per the SEBI guidelines, the benchmark for debt should be developed by Research and Rating agencies recommended by AMFI.

Explanation:

Trail commission is calculated as a percentage of the net assets attributable to the units sold by the distributor. A mutual fund distributor is paid trail commission for as long as the investor’s money is held in the fund.

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, telecom, power etc. Thematic funds are risky because of the concentration in one theme. If the theme under-performs then the scheme’s returns is likely to be poor.

Explanation:

The sector funds invest in stocks belonging to just one sector of the economy, in order to take advantage within the said sector. Examples of such funds are: Pharma fund or Banking fund. Sector funds are risky because of the concentration in one sector. If the sector under-performs then the scheme’s returns are likely to be very poor.

Explanation:

As per SEBI Fair Valuation Principles – The responsibility of true and fairness of valuation of assets/securities and correct NAV shall be of the Asset management company (AMC), irrespective of disclosure of the approved valuation policies and procedures i.e., if the established policies and procedures of valuation do not result in fair/ appropriate valuation, the asset management company shall deviate from the established policies and procedures to value the assets/ securities at fair value.

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. A bond fund holds many bonds of various maturities. The average maturity will determine the interest rate sensitivity of such a bond fund.

Explanation:

For Non-resident investors, payment is made by the AMC in Rupees. In case the investment has been made on a repatriable basis, and the investor wishes to transfer the money abroad, the costs associated with converting the rupees into any foreign currency would be to the account of the investor.

Explanation:

The risk levels in different categories of mutual fund schemes can be understood with the help of product labelling of Mutual Funds. SEBI had introduced product labelling of mutual funds to address the
issue of miss-selling and to provide investors with 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 parameters such as – Nature of the scheme, Investment objective, Level of risk depicted by colour code boxes etc.

Explanation:

Units in a mutual fund scheme are offered to investors for the first time by a New Fund Offer (NFO). The following are a few key steps leading to the NFO :
1. AMC decides on a scheme to take to the market. This is decided based on inputs from the Chief Investment Officer (CIO) and the Chief Marketing Officer (CMO).
2. AMC prepares the Scheme Information Document (SID) for the NFO. This needs to be approved by the Trustees and the Board of Directors (BoD) of the AMC.
3. The documents are then filed with SEBI.
4. The AMC decides on a suitable timetable for the issue. launches its advertising and public relations campaigns etc
5. The Scheme Documents and Application Forms are distributed to market intermediaries, and circulated in the market so that investors can apply in the NFO.

Explanation:

The formula to calculate the Future Value is : A = P * (1 + r) ^ n
Where A is the future value ; P is the present value, r is the rate of inflation and n is the number of years. Therefore, the inflation rate is important for estimating the future value.

Explanation:

A value fund is an open-ended equity scheme following a value investment strategy. Minimum investment in equity & equity related instruments are 65 % of total assets. (Value investment style is an approach of picking up stocks, which are priced lower than their intrinsic value, based on fundamental analysis. When the market recognizes the intrinsic value, then the price would shoot up).

Explanation:

The condensed financial information about all the mutual fund schemes launched by the AMC in the last 3 years is provided in the Statement of Additional Information (SAI). Section I of the SAI gives complete details of the constituents of the mutual fund–Sponsors, AMC and Trustee Company, of service providers {Custodian, Registrar & Transfer Agent, Statutory Auditor, Fund Accountant (if outsourced) and Collecting Bankers}. This includes their experience, condensed financial information (for schemes launched in the last 3 financial years), key personnel, rights and obligations and other information the investor may require to evaluate the investment.

Explanation:

The benchmark would depend on where the scheme proposes to invest. Thus, a scheme seeking to invest in China might have the Shanghai Composite Index (Chinese index) as the benchmark. S&P 500 may be appropriate for a scheme that would invest largely in the US market. A scheme that seeks to invest across several countries, can structure a synthetic index that would be a blend of the indices relevant to the countries where it proposes to invest.

Explanation:

SEBI has facilitated the buying and selling of the units of open-ended mutual funds through the stock exchanges. The low cost and deeper reach of the stock exchange network enables an increased level of participation of retail investors in mutual funds. (Mutual fund units can be bought and sold on the stock exchange and they do not have a lock-in period except for some funds like ELSS).