NISM Series V-A: Mutual Fund Distributors Mock Test (Set 5)

Explanation

The depositor can also prematurely close the bank fixed deposit at any time, in order to meet liquidity requirements. However, a penalty needs to be borne for such premature closure.

Explanation

As per the prevailing tax laws in India, a mutual fund’s income is exempt from income tax, since mutual funds are constituted as trusts in India for the benefits of the unitholders.

(Income earned by the unit holders ie. mutual fund investors is taxable)

Explanation

Investments owned by the scheme may be quoted in the market at higher than the cost paid. Such gains in values on securities held are called valuation gains.

Similarly, there can be valuation losses when securities are quoted in the market at a price below the cost at which the scheme acquired them.

Explanation

Whenever there is a liquidity issue, one can go for a loan. The purpose of taking a loan can be anything from repaying an old debt, going on vacation, business expenses, funding for the down payment of a house/car, and medical emergency to purchasing big-ticket furniture or gadget.

However loan cannot be taken for buying a lottery / gambling.

Explanation

A close-ended scheme offers liquidity through a listing in a stock
exchange.

Explanation

The offer Document have two parts:

a) Scheme Information Document (SID), which has details of the particular scheme

b) Statement of Additional Information (SAI), which has statutory information about the mutual fund, that is offering the scheme.

A single SAI is relevant for all the schemes offered by a mutual fund.

Explanation

Custodian and Fund Administrator fees can be charged to the fund.

Explanation

The Sponsor is the main body that establishes the Mutual fund. The Sponsor can be compared to a promoter of a company

It should be contributing a minimum of 40 per cent net worth of the AMC.

Explanation

Analysis have shown that returns from Equities (Stocks) tend to be quiet higher over the long term period. However investing in stock market can also be risky.

Explanation

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

Explanation

The sale and re-purchase prices are a function of the applicable NAV for the transaction, which in turn will depend upon the cut-off time prescribed for the particular type of scheme and the transaction value.

The cut-off timings are different for different type of funds (Equity/Debt).

Explanation

Real Estate Mutual Funds scheme means a mutual fund scheme that invests directly or indirectly in real estate assets or other permissible assets in accordance with the SEBI (Mutual Funds) Regulations, 1996

So Mutual Funds can invest in real estate directly but currently they are mostly into buying real estate related stocks or in Real Estate Investment Trusts – which invests in property directly.

Explanation

The true worth of a unit of the mutual fund scheme is otherwise called Net Asset Value (NAV) of the scheme.

The NAV is also the net realizable value per unit in case the scheme is to be liquidated–how much money could be generated if all the holdings of the scheme are sold and converted into cash.

Explanation

Goal Based approach to Financial Planning is a financial plan for a specific goal. For example – Investments which will be used for higher studies of a child.

An alternate approach is a “comprehensive financial plan” where all the financial goals of a person are taken together, and the investment strategies worked out on that basis.

Explanation

The full form of AGNI is – AMFI Guidelines and Norms for Intermediaries.

Explanation

International funds invest in markets outside India, by holding certain foreign securities in their portfolio.

Explanation

Application Supported by Blocked Amount (ASBA) – This is a facility where the investment application in a New Fund Offer (NFO) is accompanied by an authorization to the bank to block the amount of the application money in the investor’s bank account.

The benefit of ASBA is that the money goes out of the investor’s bank account only on allotment. Until then, it keeps earning interest for the investor.

Explanation

KIM is essentially a summary of the SID and SAI. It contains the key points of the offer document 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.

Explanation

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

Therefore, someg 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.

Explanation

SEBI does not play any role in appointment of Fund Managers.

Explanation

Fixed income securities are exposed to rating migration risk, which could impact the price on account of change in the credit rating.

Explanation

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.

Explanation

Scheme Information Document (SID) and Statement of Additional Information (SAI) contain the details of the particular scheme and the statutory information about the mutual fund or AMC, that is offering the scheme.

Explanation

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

Explanation

Vide SEBI circular dated September 17, 2020, it was decided that with respect to purchase of units of MF schemes – both Debt and Equity (except liquid and overnight schemes), closing NAV of the day shall be applicable, on which the funds are available for utilisation irrespective of the size and time of receipt of such application.

Until now, investors who gave a cheque for below Rs 2,00,000 got the same day’s NAV, while those putting more got the NAV of the day when the cheque was realised.

Explanation

The investors have no control, over the investment management of the mutual fund. It is in this context that SEBI has laid down regulations pertaining to investment universe, restrictions and portfolio diversification for investment by mutual fund schemes.

Such regulations intend to control the risks taken by the mutual fund managers.

Explanation

Most mutual fund schemes offer two 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 of 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, dividend is not declared. Therefore, nothing is received in the bank account.

Explanation

“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.

No redemption or subscription is allowed in the segregated portfolio.

However, in order to facilitate exit to unitholders in segregated portfolio, AMC shall enable listing of units of segregated portfolio on the recognized stock exchange.

Explanation

When an investor needs money in the short term, he should invest in debt funds like liquid funds, money market funds, overnight fund etc. where he can withdraw money without any risk of capital loss.

He should not invest in an Index fund as its an equity fund and there can be possibility of losses in the short term due to stock market fluctuations.

Explanation

Securities Lending is lending of securities through an approved intermediary to a borrower under an agreement for a specified period with the condition that the borrower will return equivalent securities of the same type or class at the end of the specified period along with the corporate benefits accruing on the securities borrowed.

There are risks inherent in securities lending, including the risk of failure of the other party. Such failure can result in a possible loss of rights to the collateral, the inability of the approved intermediary to return the securities deposited by the lender and the possible loss of corporate benefits accruing thereon.

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 categories. 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 various 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.

Explanation

If one is investing in ELSS through SIP then each investment would be
locked-in for 3 years from the date of the respective investment. The
lock-in for the entire amount would not get over on completion of 3 years
from the date of the first SIP instalment.

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.

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.

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.

Explanation

As per the AMFI Code of Ethics – All transactions of purchase and sale of securities by key personnel who are directly involved in investment operations shall be disclosed to the compliance officer of the member at least on half yearly basis and subsequently reported to the Board of Trustees if found having conflict of interest with the transactions of the fund.

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.

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.

Explanation

Interest rate risk is the risk that an investment’s value will change as a result of a change in interest rates.

The interest rate risk varies for bonds with different maturities. Those with longer maturity would witness higher price fluctuations in comparison to those with shorter maturities.

Similarly short term debt funds will have lower interest rate risk when compared to longer term debt funds.

In the above question, Liquid funds have the shortest duration and so will have less adverse effect of interest rate risk when compared to Money market funds and Medium term bond funds.

Explanation

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

Management of investments by mutual funds is governed by SEBI and RBI.

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.

Explanation

Appropriate Benchmarks :

Equity scheme – Sensex or Nifty

Long term debt scheme (more than 1 year maturity) – 10 year dated GoI security

Short-term debt fund – 1 year T-Bill

Explanation

Mutual funds usually do not accept cash. Small investors, who may not be taxpayers and may not have PAN/bank accounts, such as farmers, small traders/businessmen/workers are allowed cash transactions for the purchase of units in mutual funds to the extent of Rs. 50,000/-per investor, per mutual fund, per financial year.

This facility is available only for resident individuals, sole proprietorships and minors investing through their guardians.

NRI / PIO is not among the eligible investors.

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 two categories: short term capital gains and long-term capital gains. Long-term is defined as a holding period of more than three years in case of non-equity oriented funds (Debt funds etc.), whereas the same is more than 1 year in case of equity-oriented funds.

Explanation

A close-ended scheme offers liquidity through its listing on a stock exchange. Typically, towards the maturity of the scheme, the market price converges towards the NAV.

Explanation

Investment time horizon : As against the investor’s age, one should consider the time horizon to the respective financial goal for which one is investing. Longer the horizon to the goal, the ability to take risk is higher, whereas one may avoid risks when the goal is in the near future.

Explanation

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 (i.e., Rupee becomes stronger), he loses or the portfolio returns will be lower.

Explanation

The Income distribution cum capital withdrawal (dividend) pay-out option seems attractive for investors wanting a regular income. It should however be kept in mind that even in a mutual fund scheme with a monthly pay-out option, dividend declaration is a function of distributable surplus. If there is no surplus to distribute, dividend cannot be declared.

Therefore, the investor is not assured of dividend in the scheme even when there is a monthly dividend option.

Explanation

STT is not applicable to transactions in debt securities or debt mutual fund schemes. STT is also not applicable on purchase of units of an equity scheme.

STT is applicable on sale/redemption of equity mutual funds.

Explanation

In a Systematic Transfer Plan (STP), the amount that is withdrawn from a scheme (called the source scheme) is re-invested in some other scheme (called the target scheme) of the same mutual fund.