NISM Series V-A Mutual Fund Distributors -Full-Length Test

Beta measures systematic risk, not unsystematic risk. Beta quantifies a scheme’s returns relative to market fluctuations, while unsystematic risk is specific to individual securities and cannot be measured by Beta.

Per SEBI rules: Returns must exclude entry or exit loads when advertised. The Compounded Annual Growth Rate (CAGR) is the standard for investment periods exceeding one year, and simple returns are calculated using the formula:
$(SalePrice-CostPrice)÷CostPrice$ × 100.

As we move from Diversified Funds → Focused Funds → Thematic Funds → Sector Funds, the risk increases, not decreases, due to higher concentration in fewer stocks, themes, or sectors.

• Diversified Funds: Invest across multiple sectors and industries, reducing concentration risk through diversification.
• Focused Funds: Invest in a limited number of stocks, increasing concentration risk compared to diversified funds.
• Thematic Funds: Focus on a specific theme (e.g., technology or infrastructure), leading to higher concentration risk within that theme.
• Sector Funds: Invest in one particular sector (e.g., banking or pharmaceuticals), exposing investors to the highest concentration risk since performance depends entirely on that sector.

Why not the other options?

1. Interest rate risk: Related to bond prices, not equity funds.
2. Credit risk: Related to the default risk of bond issuers, not equity investments.
3. Inflation risk: Affects the purchasing power, but not directly tied to fund concentration.

Conclusion:

The risk discussed here is concentration risk (option 2), which increases as funds become more focused and less diversified.

Transaction costs, in the form of stamp duty, registration fees, brokerage, etc., are high in real estate transactions.

The Key Information Memorandum (KIM) is a concise summary of important details included in the Scheme Information Document (SID) and Statement of Additional Information (SAI). It provides key information such as investment objectives, risk factors, fees, and terms of the scheme in a simplified format to help investors make informed decisions. It serves as a quick reference document, complementing the comprehensive details in the SID and SAI.

The investor redeems 2000 units at a NAV of Rs. 40 after 6 months, which attracts an exit load of 2% as the redemption is within 1 year.

Step 1: Calculate the total redemption value before the exit load:

$$2000\times 40=80,000$$

Step 2: Calculate the exit load:

$$80,000\times 2\%=1600$$

Step 3: Deduct the exit load from the redemption value:

$$80,000-1600=78,400$$

Thus, the redemption amount receivable by the investor is Rs. 78,400.

A resolution to wind up a mutual fund scheme can be passed if 75% of the unit holders, by value, agree to it. This provision ensures that a significant majority of investors support the decision, protecting their collective interests. It is typically invoked in cases where the scheme becomes unviable, fails to meet its objectives, or experiences unfavorable market conditions.

Option (b) – ‘a only’ is correct.

(a) Global diversification is indeed one of the major reasons for investing in international funds. It allows investors to access global markets, reduce domestic market risks, and benefit from growth opportunities in other economies. It also provides currency diversification, which can protect against domestic currency depreciation.

(b) The statement that Indian investors do not have an option to diversify their investment internationally is false. Indian investors can invest in international mutual funds and exchange-traded funds (ETFs) that provide exposure to foreign markets, enabling global diversification.

Thus, only statement (a) is true.

The units of a closed-ended mutual fund are traded between other unit holders/investors on the stock exchange, similar to stocks. Once the fund is launched, new units cannot be created, and investors cannot redeem units directly with the fund house before maturity.

Instead, these units are listed on stock exchanges, providing liquidity by allowing investors to buy and sell units with other investors at prevailing market prices, which may differ from the fund’s net asset value (NAV).

Multi-cap equity funds invest in a mix of large-cap, mid-cap, and small-cap stocks, providing diversification across different market capitalizations.

• Large-cap stocks offer stability and lower risk due to their established market position.
• Mid-cap stocks provide a balance of growth and risk, with potential for higher returns.
• Small-cap stocks carry higher risk but also offer the potential for substantial growth.

This diversified approach allows multi-cap funds to capitalize on opportunities across various segments of the market while spreading risk, making them suitable for investors seeking long-term capital appreciation.

Equity Linked Savings Schemes (ELSS) are eligible for a tax deduction under Section 80C of the Income Tax Act, allowing investors to claim deductions up to Rs. 1.5 lakh in a financial year.

However, these schemes come with a mandatory lock-in period of 3 years from the date of allotment of each individual unit. This means that any additional investment or purchase made later will have its own 3-year lock-in period starting from its respective allotment date.

ELSS combines tax-saving benefits with wealth creation potential, as it primarily invests in equity and equity-related instruments. The lock-in period is the shortest among tax-saving instruments, making it a popular choice for investors seeking tax savings and growth opportunities.

Institutional investors, such as companies, trusts, and organizations, require investment approval through a board resolution to invest in a mutual fund scheme.

This ensures that the investment decision is formally authorized by the governing body of the institution, complying with legal and regulatory requirements, as well as internal governance policies.

Other categories like minors, HUFs, and NRIs do not need a board resolution but may require legal guardians, a karta, or self-declaration for compliance purposes.

A balanced hybrid fund is a type of mutual fund that invests 40% to 60% of its total assets in equity and equity-related instruments and the remaining in debt instruments.

This allocation provides a balanced approach by combining growth potential from equities and stability from debt, making it suitable for moderate-risk investors.

Balanced hybrid funds are not allowed to engage in arbitrage strategies, ensuring that the investments are straightforward and transparent.

The correct answer is (b) Yes, only through a guardian.

Minors can invest in mutual fund schemes, but the investment must be made through a guardian. The guardian can be either a parent or a court-appointed legal guardian.

Key conditions include:

1. The investment account is opened in the minor’s name, and the guardian operates it until the minor attains 18 years of age.
2. On turning 18, the minor must update KYC and convert the account to an individual account to continue transactions.
3. The guardian must also complete KYC formalities as required by SEBI regulations.

This process ensures compliance with legal and regulatory frameworks while enabling minors to start investing early for their future financial goals.

Investments in a mutual fund portfolio are valued at their market value, which represents the current price at which the securities held in the portfolio can be bought or sold.

This valuation method ensures transparency and provides an accurate reflection of the fund’s Net Asset Value (NAV). NAV is calculated daily based on the market value of the fund’s underlying assets, helping investors track the real-time performance of their investments.

Tactical Asset Allocation (TAA) involves making short-term adjustments to a portfolio’s asset allocation based on the likely behavior of the market or economic outlook.

It allows investors to take advantage of market opportunities or temporary mispricings by shifting weights in asset classes, such as equities, bonds, or cash, while still maintaining the long-term strategic allocation.

This approach is dynamic and aims to enhance returns by capitalizing on short-term trends without deviating from the investor’s overall risk tolerance and investment objectives.

Mutual fund categories differ in risk levels based on the market capitalization of the companies they invest in and their diversification strategy. Here’s the reasoning behind the risk hierarchy: 1. Large Cap Funds: Invest in large, stable companies, generally considered the least risky. 2. Large and Mid-cap Funds: Include some exposure to mid-cap stocks, adding moderate risk. 3. Multi-Cap Funds: Diversify across large, mid, and small-cap stocks, offering a balanced risk-reward profile. 4. Mid-cap Funds: Focus on mid-sized companies with higher growth potential and risk. 5. Small Cap Funds: Invest in smaller companies with the highest growth potential but also the highest risk.

SEBI mandates AMCs to perform due diligence for distributors meeting any of these criteria:

1. Operating in more than 20 locations.
2. AUM of over Rs.100 crore in the non-institutional category.
3. Commission exceeding Rs.1 crore annually across industries or Rs.50 lakhs from one mutual fund.

Basis risk arises when there is a difference in price movement between a derivative instrument (such as a futures or options contract) and the underlying security it is intended to hedge.

• Basis is the difference between the spot price of the underlying asset and the price of the derivative.
• If the price movements of the derivative and the underlying asset do not align perfectly, the hedge may not fully offset the risk, leading to basis risk.

Why not the other options?

1. Model Risk: Occurs when the mathematical model used for pricing or risk estimation is flawed.
2. Market Liquidity Risk: Refers to the inability to trade a security without significantly impacting its price.
3. Credit Risk: Arises when the counterparty fails to fulfill their financial obligations.

Ideally an investor’s portfolio should be divided into core and satellite portfolios. The core portfolio will be invested according to the long-term 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.

A 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. The word “conservative” in the name of the Conservative hybrid funds category only refers to the equity allocation. Therefore, a conservative hybrid fund cannot invest more than 25% of their total assets in equity instruments.

Debt funds primarily invest in fixed-income securities such as bonds and money market instruments. They are generally considered more suitable for investors seeking regular income with lower volatility than equity-oriented funds.

Know Your Customer (KYC) compliance is mandatory for all investors before investing in mutual funds. It helps verify identity and prevents misuse of the financial system.

NAV represents the per-unit value of the scheme. If NAV rises from Rs. 20 to Rs. 22 and units remain the same, the total value of the investor’s holdings increases accordingly.