Posts in category: NISM Exams

Bonus units are issued to the unitholders without any cost. The units are given as a bonus to the existing unitholders based on the prevailing Net Asset Value (NAV) of the scheme and the bonus ratio determined by the asset management company (AMC).

The true statement is A) “While calculating scheme returns for an investor, if there is an entry load, then the initial value of the Net Asset Value (NAV) is taken as NAV plus Entry Load.” Entry load refers to the charges imposed by a mutual fund at the time of investment. To calculate the returns for an investor, the initial NAV is adjusted by adding the entry load. On the other hand, if there is an exit load, the later value of the NAV is adjusted by subtracting the exit load. Therefore, the correct answer is “Only A.”

The line refers to the Scheme Information Document (SID) and Statement of Additional Information (SAI). These documents provide detailed information about the mutual fund scheme, its features, investment objectives, risks, and other relevant details for investors to make informed decisions.

Among the given options, a multi-cap fund would have a lower risk of concentration. Multi-cap funds have the flexibility to invest across different market capitalizations and sectors, which helps in diversifying the portfolio and reducing the concentration risk associated with a specific segment or theme. Focused funds, thematic funds, and sector funds tend to have a narrower focus, which may result in a higher risk of concentration.

The statement is false. Mutual fund distributors can earn both upfront commissions and trail commissions from the mutual funds. Upfront commissions are paid at the time of investment, while trail commissions are recurring commissions paid over the holding period of the investor’s investment in the scheme.

Fixed maturity plans (FMPs) are close-ended debt funds. FMPs have a fixed maturity period and invest in debt securities with a similar maturity profile. These funds are typically launched with a specific investment objective and tenure, providing investors the option to invest for a defined period until maturity.

As per SEBI guidelines, mutual fund schemes’ portfolios should be published half-yearly. The portfolio disclosure provides transparency and allows investors to understand the composition of the scheme’s investments.

Investors have the right to specify up to three nominees for their mutual fund investment folios. Nominees are individuals who would receive the mutual fund units or proceeds in case of the investor’s demise.

Mutual funds in India are regulated by the Securities and Exchange Board of India (SEBI), which is the regulatory authority for the securities market. SEBI formulates rules and regulations to govern the functioning and operations of mutual funds.

The statement is true. The Registrar and Transfer Agency (RTA) function of a mutual fund must be independent of the Asset Management Company (AMC) and cannot be retained in-house to ensure transparency and impartiality in the operations of the mutual fund.

The day-to-day management of a mutual fund is handled by the Asset Management Company (AMC), which is responsible for managing the fund’s investments, operations, and other activities.

The statement is false. While passive funds, such as index funds or ETFs, aim to replicate the performance of their underlying benchmark, they are not inherently “safe” or immune to market fluctuations. The NAV of passive funds can go down when the respective markets fall, as they reflect the performance of the underlying index or assets.

SEBI has introduced a simplified framework known as the Risk-o-meter for investors to quickly assess the level of risk associated with mutual fund schemes. The Risk-o-meter categorizes mutual fund schemes into different risk levels, such as low, moderately low, moderate, moderately high, and high, based on their underlying risk attributes. This helps investors understand the risk profile of a scheme before investing.

The statement is false. Both individuals and entities can become mutual fund distributors in India, subject to fulfilling the eligibility criteria and obtaining the necessary registration or certification from the regulatory authorities.

The real rate of return is the return an investor receives after adjusting for inflation, which gives a more accurate measure of the actual increase in purchasing power.

Dividends in mutual fund schemes can be paid only out of the distributable surplus generated by the scheme. This surplus is the portion of the scheme’s income that is available for distribution to the unit holders after meeting expenses, provisions, and other necessary obligations.

The Key Information Memorandum (KIM) should be updated at least once a year. The KIM provides key details about the mutual fund scheme, and it is important to keep it updated to reflect any changes in the scheme’s features or objectives.

A loss from a debt investment held for less than three years is considered a short-term capital loss and can be set off against short-term or long-term capital gains. Long-term capital losses can only be set off against long-term capital gains.

Fixed asset allocation refers to maintaining a constant ratio of asset allocation in a portfolio through regular rebalancing. This means that the portfolio’s allocation to different asset classes, such as equity and debt, remains fixed and is adjusted periodically to maintain the desired allocation. This strategy helps investors maintain their desired risk and return profile over time.

The transparency levels in mutual funds are generally high. Mutual funds are required to provide regular disclosure of their holdings, performance, expenses, and other important information to investors.

The statement is false. Mutual fund scheme benchmarks can be changed at a later date if the fund house determines that a different benchmark is more appropriate or relevant for evaluating the scheme’s performance. The change in benchmark needs to be communicated to the investors and should be in line with the regulatory guidelines.

The expenses that can be charged by an Asset Management Company (AMC) to a Mutual Fund scheme are limited by the regulations set by SEBI (Securities and Exchange Board of India).

A ‘Fund of Funds’ invests its pool of resources in various other mutual fund schemes available in the market. It does not directly invest in equity or debt securities.

Negative Alpha is indicative of under-performance by the fund manager. Alpha measures the difference between a fund’s actual return and its expected return based on its level of risk. A negative alpha suggests that the fund has underperformed its expected return, indicating that the fund manager has not generated excess returns relative to the market or benchmark. Therefore, the correct answer is “It is indicative of under-performance by the fund manager.”

A long duration debt scheme invests in debt instruments with a Macaulay duration greater than 7 years. Macaulay duration is a measure of the weighted average time it takes to receive the cash flows from a bond. Long duration schemes have longer maturity bonds in their portfolio, which makes them sensitive to interest rate changes.

If an investor’s complaint is not resolved by the Asset Management Company (AMC), they should approach the Securities and Exchange Board of India (SEBI) for further redressal. SEBI is the regulatory authority that oversees mutual funds and can help address investor grievances. Investors can file their complaint through the SEBI Complaint Redress System (SCORES) for efficient resolution.

The Sharpe ratio is a measure of risk-adjusted returns of a mutual fund scheme. It assesses the excess return generated by the scheme per unit of risk taken, considering the risk-free rate of return. A higher Sharpe ratio indicates better risk-adjusted performance.

Asset Allocation is a strategy used to ensure that a mutual fund scheme is suitable for an investor’s needs and situation. Asset allocation involves allocating money across various asset categories in line with the investor’s objectives and risk tolerance. Therefore, the correct answer is “Asset Allocation.”

The Mutual Fund Distributors Certification Examination is offered by the National Institute of Securities Markets (NISM). Clearing this examination is one of the requirements for individuals to become mutual fund distributors in India.

The statement is false. Mutual fund distributors can earn commissions even when investors choose to invest in “direct” plans. In such cases, the commissions are paid separately by the asset management companies (AMCs) and not deducted from the investor’s investment amount. However, the commission rates may vary between regular plans and direct plans.

Banks and NBFCs can lend money against the pledge of mutual fund units. When an investor pledges their mutual fund units, it serves as collateral for obtaining a loan from banks or NBFCs. The units remain in the investor’s name, but they are held by the lender as security until the loan is repaid.

Unsystematic risk, also known as company-specific or diversifiable risk, can be reduced through diversification. By investing in a diversified portfolio of assets across different sectors and companies, an investor can reduce the impact of individual company or industry-specific risks on their overall portfolio.

The difference between the purchase price and the selling price of mutual fund units is treated as capital gain and is subject to tax. Long-term capital gains are taxed if the holding period is more than three years for non-equity-oriented funds.

The investor has redeemed the units within a year of investment, so the exit load applicable is 2%. Calculation: 2000 units × Rs 40 = Rs 80000, Less 2% exit load: 2% of Rs 80000 = Rs 1600 (Rs 80000 × 2 / 100), Net amount = Rs 80000 – Rs 1600 = Rs 78400. Therefore, the correct answer is “Rs. 78400.”

The Scheme Information Document (SID) and Statement of Additional Information (SAI) are prepared by mutual fund companies in the format prescribed by the Association of Mutual Funds in India (AMFI) as part of its Code of Conduct. These documents ensure uniformity and provide essential information to investors.

A mutual fund is managed for the beneficial interest of the unit holders, who are the investors in the fund.

Fixed maturity plans (FMPs) are close-ended debt funds. FMPs have a fixed maturity period and invest in debt securities with a similar maturity profile. These funds are typically launched with a specific investment objective and tenure, providing investors the option to invest for a defined period until maturity. The close-ended structure of FMPs means that investors cannot redeem their units before maturity, offering a predefined investment horizon.

The Registrar and Transfer Agency (RTA) of a mutual fund is responsible for tracking and processing various corporate actions in companies where the mutual fund scheme has invested.

If the wrong ARN code is mentioned in the application form, then the application will be processed as a Regular Plan. However, the AMC will contact the investor/distributor for the correct ARN code within 30 calendar days of the receipt of the application form. If the error is not rectified within these 30 days, the application will be reprocessed as a direct application without charging any exit load. Therefore, the correct answer is “As a Regular Plan, provided the error is corrected within a time frame.”

The beneficiaries of the trust formed by a mutual fund are the unitholders, who invest in the mutual fund scheme and hold units representing their proportionate ownership in the assets of the fund.

The statement is false. While passive funds, such as index funds or ETFs, aim to replicate the performance of their underlying benchmark, they are not inherently “safe” or immune to market fluctuations. The NAV of passive funds can go down when the respective markets fall, as they reflect the performance of the underlying index or assets. Investors should assess the risks associated with the underlying index and market conditions before investing in passive funds.

Mutual fund distributors are registered with the Securities and Exchange Board of India (SEBI), which is the regulatory authority for the securities market in India. Distributors need to comply with SEBI regulations to operate in the mutual fund industry.

In an Arbitrage fund, the minimum investment in equity and equity related instruments shall be 65 percent of total assets. Therefore, the correct answer is “65 percent.”

The term used to describe the NAV of the scheme after the dividend is paid out is the Ex-Dividend NAV. After the dividend is paid to the investors, the NAV of the scheme decreases by the amount of the dividend distributed.

A multi-cap fund would have a lower risk of concentration compared to focused, thematic, or sector funds. Multi-cap funds have the flexibility to invest across different market capitalizations and sectors, which helps in diversifying the portfolio and reducing concentration risk associated with a specific segment or theme.

Technical analysis tracks the price and volume data related to trading in the security. It uses historical price patterns, charting techniques, and various technical indicators to analyze and predict future price movements of the security.

When a dividend is announced and until it is paid out, the mutual fund scheme’s Net Asset Value (NAV) is said to be cum-dividend.

SEBI has suggested a simplified framework known as the Risk-o-meter for investors to get a quick sense of the level of risk involved in a mutual fund scheme. The Risk-o-meter categorizes mutual fund schemes into different risk levels (such as low, moderately low, moderate, moderately high, and high) based on their underlying risk attributes.

The tax applicable on the income earned by mutual fund schemes is a function of the type of income. Dividends, short-term capital gains, and long-term capital gains attract different tax rates and are taxed as per the provisions of the Income Tax Act applicable for the respective type of income.

Mutual funds benefit from economies of scale, as they pool funds from multiple investors to achieve lower transaction costs and access a diversified portfolio.

Gilt funds would be considered the least risky in terms of credit risk. Gilt funds predominantly invest in government securities, which are considered to have the lowest credit risk as they are backed by the government’s guarantee.

SEBI has permitted celebrity endorsements for the promotion of individual mutual fund schemes. Celebrities can endorse specific mutual fund schemes to create awareness and attract investors.

Credit card is not accepted because it may not be backed up by a bank account. Therefore, the correct answer is “Credit Card.”

A balanced hybrid scheme should use CRISIL Hybrid 50+50, Moderate Index as its benchmark. The CRISIL Hybrid indices are designed to reflect the risk-return characteristics of different types of hybrid funds. The Moderate Index, with a 50% allocation to equity and 50% allocation to debt, is suitable for balanced hybrid schemes.

Among the options provided, sector funds have the highest risk. Sector funds focus on investing in stocks of a specific sector of the economy, such as technology, healthcare, or energy. This concentration in a single sector increases the risk as the performance of the fund is dependent on the performance of that particular sector. If the sector underperforms, the fund’s returns are likely to be poor. Therefore, the correct answer is “Sector funds.”

The opening of a time stamping machine used for mutual fund transactions needs to be properly documented and reported to the Trustees. Time stamping machines have tamper-proof seals, and any opening of the machine for repairs or maintenance should be done by authorized vendors or nominated persons of the mutual fund. This documentation and reporting ensure transparency and accountability in the handling of time-stamped transactions. Therefore, the correct answer is “Trustees.”

The purchasing power of currency changes due to inflation, which erodes the value of money over time. Asset allocation, compound interest, and diversification are not direct factors affecting purchasing power.

Each mutual fund scheme must have a stated investment objective that defines its goals and strategies. This helps investors understand the purpose and focus of the fund.

The Portfolio Turnover Ratio is calculated as the Value of Purchase and Sale of Securities during a period divided by the average size of net assets of the scheme during the period. In this case, the calculation would be: Portfolio Turnover Ratio = Value of Purchase and Sale of Securities / Average Net Assets = 1600 crore / 800 crore = 2 times. Therefore, the correct answer is “2 times.”

In case of an application by a minor, the KYC (Know-Your-Client) needs to be completed for the guardian. Since the minor is not legally capable of entering into a contract, the guardian acts on behalf of the minor for the investment and the KYC formalities.

The scheme’s NAV per unit can be calculated by subtracting the accrued scheme expenses payable from the net assets and dividing it by the total number of units. Here, the net assets would be Rs. 200 crore – Rs. 4 crore (scheme expenses payable) = Rs. 196 crore. The total number of units is 20 crore. Therefore, the NAV per unit would be Rs. 196 crore / 20 crore = Rs. 10.20 per unit.

The total return index takes into account all dividends generated from the basket of constituents that make up the index, in addition to the capital gains. It provides a more comprehensive measure of the total return generated by the index, including both price appreciation and dividends received from the index constituents.

A resident individual investor can register a maximum of three bank accounts with a mutual fund folio. These bank accounts are linked for various purposes such as investments, redemptions, dividends, and other financial transactions related to the mutual fund investments.

Encouraging the churning of investments is not a fair selling practice by a mutual fund distributor. Churning refers to the frequent buying and selling of investments with the aim of generating higher commissions for the distributor. It is not in the best interest of the investor and may result in unnecessary costs and taxes. Fair selling practices involve informing the investor of various investment options, understanding their financial needs, and providing personalized after-sales service. Therefore, the correct answer is “Encouraging the churning of investments.”

The investment of a constant amount at regular intervals in a mutual fund scheme is called a Systematic Investment Plan (SIP). It is considered a good practice to invest regularly, particularly into volatile markets such as equity markets. Therefore, the correct answer is “Systematic Investment Plan.”

The statement that is true is “Foreign investors can invest in Indian mutual fund schemes, provided they have completed the Know-Your-Client (KYC) formalities.” Foreign investors are permitted to invest in Indian mutual fund schemes subject to the necessary regulatory and KYC requirements.

The statement is true. The Income Tax Act allows for the setting-off of short-term capital losses against long-term capital gains. This provision allows investors to reduce their tax liability by offsetting losses from certain investments against gains from others, subject to specified conditions and limits.

In the case of non-equity-oriented funds, the rate of long-term capital gains tax is 20 percent with indexation. Indexation refers to adjusting the cost of acquisition for inflation over the holding period, which helps in reducing the tax liability.

The purpose of credit enhancement in securitized transactions is to achieve higher creditworthiness for the securities. Credit enhancement techniques are employed to improve the credit rating of the securities backed by underlying assets. This provides investors with a higher level of confidence in the credit quality of the securities and enhances their marketability.

Time stamping is mandatory for both the application form/transaction slip and the payment instrument in mutual fund transactions. Time stamping ensures that the transactions are accurately recorded with the date and time, providing transparency and preventing any manipulation or backdating of transactions.

In the case of Equity Linked Savings Schemes (ELSS), a minimum of 80 percent of the scheme corpus must be invested in equity and related instruments. ELSS funds offer tax benefits under Section 80C of the Income Tax Act, and they have a mandatory lock-in period of three years.

Real estate refers to physical property in the form of land and buildings. Bank deposits, units by Real Estate Investment Trusts (REITs), and shares in physical form are financial assets.

A fund factsheet is not a statutory document. It is a summary document provided by mutual fund companies to provide concise information about the scheme’s performance, returns, and other relevant data. While it is important for investors, it is not part of the statutory documents required by regulations.

In terms of credit risk, gilt funds would be considered the least risky among the given options. Gilt funds predominantly invest in government securities, which are backed by the sovereign guarantee, making them relatively safer in terms of credit risk compared to other debt funds that invest in lower-rated or riskier bonds.

The false statement is B) “Choice of investment universe is not an important factor while selecting an appropriate benchmark for debt mutual funds.” In reality, the choice of investment universe is an important factor when selecting a benchmark for debt mutual funds. Different debt schemes have different investment mandates, such as government securities, corporate bonds, or money market instruments. The benchmark should reflect the investment universe and characteristics of the specific debt scheme. Therefore, the correct answer is “Only B is false.”

An investment made for a minor (less than 18 years) is done through a guardian who has to comply with the KYC and PAN requirements and all other formalities as if the investment was for themselves. Therefore, the correct answer is “KYC of the guardian is required.”

Once a New Fund Offer (NFO) closes, an open-ended mutual fund is open for purchases by both existingand new investors. After the NFO period, the mutual fund scheme transitions from being a newly launched fund to an ongoing open-ended fund. As an open-ended fund, it remains open for investment by both existing investors who want to increase their holdings and new investors who wish to invest in the scheme for the first time. This provides flexibility for investors to enter the fund at any time after the NFO period. Therefore, the correct answer is “By both existing and new investors.”

The valuation policy, as per the fair valuation principles laid out by SEBI, must be disclosed in the Statement of Additional Information (SAI). The SAI provides detailed information about the mutual fund scheme, including its investment policies, valuation practices, and other relevant details for investors.

Approving the fund managers which have been appointed by the AMC

Tax Deduction at Source (TDS) is applicable for Non-Resident Indians (NRIs) in case of capital gains from mutual fund investments. As per the Income Tax Act, TDS is required to be deducted on capital gains earned by NRIs.

A scheme’s past returns cannot be considered for the purpose of selecting its benchmark. The benchmark should be selected based on factors such as the mutual fund scheme’s investment objective, investment strategy, and asset allocation pattern. Past returns can vary over time and may not accurately represent the benchmark that aligns with the scheme’s investment philosophy.

Inflation risk, also known as purchasing power risk, refers to the risk that inflation will erode the real value of cash flows from an investment. Inflation reduces purchasing power.

The Net Asset Value (NAV) indicates the value per unit of a mutual fund. It represents the net value of the fund’s assets after deducting liabilities and divided by the total number of units.

Mutual fund distributors earn revenue in the form of commissions from mutual funds for distributing their schemes. The commission is typically based on a percentage of the assets invested by investors in the schemes.

Variance is a measure of fluctuation in periodic returns in an equity mutual fund scheme. It quantifies the dispersion of returns around the average return. A higher variance indicates higher volatility or risk associated with the scheme’s returns. Sharpe ratio, Modified duration, and Jensen’s Alpha are measures used to assess risk-adjusted performance and other aspects of mutual fund schemes.

The tracking error is the most appropriate measure of evaluating how closely an index fund is tracking its benchmark. It measures the deviation or difference between the returns of the index fund and its benchmark. A lower tracking error indicates a higher level of accuracy in replicating the benchmark performance.

Mutual funds are allowed to charge differential exit loads based on the amount of investment. The exit load is a fee charged to investors when they redeem or exit the mutual fund scheme. The amount of exit load can vary depending on the duration of investment and the amount being redeemed.

The Treynor Ratio is calculated as (Return Earned – Risk-Free Return) / Beta. Calculation: (7.5% – 6%) / 0.62 = 1.5% / 0.62 = 2.42. The Treynor Ratio is a risk premium per unit of risk. Therefore, the correct answer is “2.42.”

The maximum Total Expense Ratio (TER) chargeable in case of index funds is 1 percent of the daily net assets. The TER represents the total expenses incurred by the mutual fund scheme and is expressed as a percentage of the scheme’s average daily net assets.

Redemption from liquid funds would attract Securities Transaction Tax (STT) for an investor. STT is levied on the sale of units of equity-oriented mutual fund schemes and not on the sale of units of debt-oriented mutual fund schemes like liquid funds.

Asset allocation refers to the process of deciding how to invest money across various asset categories in line with one’s risk profile, financial objectives, and current situation. It involves diversifying investments among different types of assets, such as stocks, bonds, and cash, based on the investor’s goals and risk tolerance. The goal is to create a well-balanced portfolio that maximizes returns while managing risk effectively. Therefore, the correct answer is “Deciding how to invest money across various asset categories in line with one’s risk profile, financial objectives and current situation.”

A segregated portfolio refers to a portfolio that is created out of debt or money market securities affected by a credit event. In case of a credit event, such as a default or downgrade of a security, the mutual fund scheme can segregate the affected securities into a separate portfolio to protect the interests of the unitholders. This helps in isolating the credit risk associated with those securities and prevents it from impacting the overall portfolio.

When the interest rate in the economy increases, the price of existing bonds decreases. This is because higher interest rates make the existing fixed interest payments on bonds less attractive compared to newer bonds with higher yields.

The statement is false. Mutual funds can buy and sell securities on both delivery and non-delivery (derivative) basis, depending on the type of fund and the investment strategy outlined in its scheme documents.

Stamp duty will be applicable to all transactions pertaining to scheme inflows, including new purchases, systematic investment plans (SIPs), dividend reinvestment, and systematic transfer plans (STPs). Therefore, the correct answer is “A, B, C, and D.”

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

The simple return can be calculated using the formula: (Ending NAV – Beginning NAV) / Beginning NAV. In this case, the simple return would be (135 – 120) / 120 = 15 / 120 = 0.125 or 12.50 percent.

Government securities are considered to be risk-free to a great extent. They are backed by the sovereign guarantee of the government, which reduces the credit risk associated with them. However, they may still have some degree of interest rate risk and inflation risk.

Close-ended funds have a fixed maturity date, after which the fund is liquidated, and investors can redeem their units. Open-ended funds and Exchange Traded Funds (ETFs) do not have a fixed maturity date and can be bought or sold at any time. Interval funds have periodic windows for redemptions.

Units are allotted as per the current NAV. The amount invested divided by the NAV will give the units allotted. Rs 30,000 / 76.45 = 392.41

A mutual fund scheme should have a minimum of 20 investors as per regulations. This requirement ensures that there is a sufficient number of investors in the scheme and promotes broad-based participation.

An Addendum has to be issued for changes in the Scheme Information Document (SID). If there are any changes in the fundamental attributes of the scheme, an addendum to the existing SID should be issued and displayed on the AMC’s website. Other changes to the SID should also be communicated through an addendum.

Net Asset Value (NAV) is calculated up to 4 decimal places for index funds, liquid funds, and other debt funds.

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. When an investor wants to redeem from a scheme, the distributor must suggest redemption from the scheme with the minimum exit load.

To comply with the requirements of the Foreign Account Tax Compliance Act (FATCA) and Common Reporting Standards (CRS) provisions, financial institutions including mutual funds are required to undertake a due diligence process to identify foreign reportable accounts and collect the necessary information as required under the said provisions. They are then required to report the same to the US Internal Revenue Service/any other foreign government or to the Indian Tax Authorities for onward transmission to the concerned foreign authorities.

A sector fund should ideally be benchmarked against an index representing the respective sector it invests in. For example, a Banking Sector fund can be benchmarked against S&P BSE Bankex, and an Infrastructure Fund can be benchmarked against Nifty Infrastructure Index to get an accurate comparison and assessment of performance.

A scheme/plan must have a minimum of 20 investors, and no single investor can account for more than 25% of the corpus of the scheme/plan.

Cash investments in mutual funds up to a limit of Rs. 50,000 are allowed for resident individuals, sole proprietorships, and minors investing through their guardians. However, investments made by a Person of Indian Origin (PIO) are not eligible for cash investments in mutual funds up to this limit.

In a close-ended fund, after the New Fund Offer (NFO) is over, the units can be bought on the stock exchange from other investors who were allotted the units and are interested in selling. The listing on the stock exchange provides liquidity for investors.

Sectoral funds are open-ended equity schemes investing in a specific sector such as banks, power, etc. The minimum investment in equity and equity-related instruments of a particular sector/theme shall be 80 percent of total assets.

The denominator in the calculation of the Sharpe Ratio is the Standard Deviation, which in this case is given as 0.75. The Sharpe Ratio is calculated as the excess return of the fund (return – risk-free rate) divided by the standard deviation of the fund’s returns. It measures the risk-adjusted performance of the fund, taking into account both the return and the volatility (as measured by the standard deviation).

Mark-to-market 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, but valuation losses need to be adjusted against the profits while calculating distributable surplus. This conservative approach to calculating distributable reserves ensures that dividends are paid out of real and realized profits, after providing for all possible losses.

The sponsors of a mutual fund scheme have to mandatorily contribute to the corpus of the mutual fund. The sponsors are the main individuals or entities behind the creation of the mutual fund and they provide the initial capital to establish the fund.

Exit loads do not form part of the fundamental attributes of a mutual fund scheme.

Employees of Asset Management Companies (AMCs) cannot become mutual fund distributors.

As per the SEBI rules of valuation for equity shares, the securities shall be valued at the last quoted closing price on the stock exchange. When the securities are traded on more than one recognized stock exchange, the securities shall be valued at the last quoted closing price on the stock exchange where the security is principally traded. It would be left to the asset management company to select the appropriate stock exchange.

Fixed deposits usually give a low rate of return, and when adjusted against inflation, the return can sometimes be very low or even negative. This will not help in building her retirement corpus. Smita is a young investor and has plenty of time in her hand. So she should invest in growth stocks/equity mutual funds rather than fixed deposits.

The formula to calculate the present value required to achieve the goal is F / (1 + r)^n, where F is the future value (500000), r is the interest rate (6% p.a.), and n is the number of years (3). Therefore, the correct formula to calculate the amount required to be invested today is 500000 / (1+0.06)^3.

Apart from providing information about the schemes in the fund fact sheet, AMCs may also provide periodic updates on markets and the economy. The fact sheet is also used by the fund manager to communicate their views on the economy and the markets to the investors.

Costs incurred by the Asset Management Companies to manage the mutual fund schemes are shared by the unit holders in proportion to their holding of units in the scheme.

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. Proceeds of investments made on a repatriable basis can be credited to an NRE or FCNR account, as required by the investor.

The form for registering a change in the default bank account has to be signed according to the mode of holding of the folio.

Once the first holder’s PAN is validated for KYC, the address provided in the KYC form will override the information provided in the application form.

An AMC can recover investment management and advisory fees on the management of unclaimed amounts, but it is capped at a maximum rate of 0.50 percent per annum. This fee is charged to cover the costs incurred in holding and managing the unclaimed funds.

Authorized signatories have to sign the request for transactions of institutional investors in mutual funds. However, a company cannot invest in mutual funds if its Memorandum of Association and Articles of Association do not permit such investments. A Board Resolution is not sufficient to bypass this restriction.

A ‘Fund Of Funds’ (FOF) is an investment strategy of holding a portfolio of other investment funds rather than investing directly in stocks, bonds, or other securities. An FOF Scheme primarily invests in the units of another Mutual Fund scheme.

Goods and Service Tax (GST) can be charged to the mutual fund scheme over and above the Total Expense Ratio (TER) on AMC fees only. The GST charged on any other fees, such as distributor commission, should be within the Total Expense Ratio. This means that the AMC can charge GST on its fees separately, but the overall expense charged to the scheme should be within the prescribed limits of the TER.

The Sharpe Ratio is calculated using the formula: (Return Earned – Risk-Free Return) / Standard Deviation. In this case, the calculation would be (8.3 – 5) / 0.6 = 3.3 / 0.6 = 5.5.

AMFI’s function is to make available the Assets Under Management (AUM), Net Asset Value (NAV), and other important data of the mutual fund industry to investors.

While calculating scheme returns for an investor, if there is an exit load, the later value of the Net Asset Value (NAV) is taken as NAV minus Exit Load. Exit load is a fee charged to investors when they redeem their investment from the mutual fund scheme. The exit load reduces the sale value of the units, and thus, the later value of the NAV is considered for calculating the scheme returns. However, the initial value of the NAV is not adjusted for an entry load, as it is already accounted for at the time of investment.

Mutual funds can charge an additional expense of 0.30% of daily net assets of the scheme if the new inflows from beyond the top 30 cities are at least (a) 30 percent of gross new inflows in the scheme or (b) 15 percent of the average assets under management (year to date) of the scheme, whichever is higher. This additional expense allows for increased distribution reach and penetration in non-top 30 cities.

As per the AMFI Code of Ethics for Mutual Funds, members shall submit to the Board of Trustees details of transactions with associates, justifying its fairness to the scheme.

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 despite such a constraint, a Key Information Memorandum (KIM) is mandatorily circulated along with the application form.

The market price of a close-end mutual fund scheme tends to converge with the NAV price toward maturity. Initially, during the New Fund Offer, the market price may differ from the NAV price due to demand and supply factors. However, over time, as the maturity date approaches, market forces tend to bring the market price closer to the NAV price.

NAV is to be calculated up to 4 decimal places in the case of index funds, liquid funds, and other debt funds. Accounts of the mutual fund schemes need to be maintained independent of the accounts of the AMC. The auditor appointed to audit the mutual fund scheme accounts needs to be different from the auditor of the AMC.

Every mutual fund scheme/plan should 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).

FALSE

Expenses are the most relevant factor for comparing the performance of liquid funds of similar categories offered by different mutual fund houses. A fund with a high expense ratio can significantly impact the returns generated by the fund, reducing the overall profitability for the investor.

Stock exchanges have now become another important channel for mutual fund companies to sell their units to investors. SEBI has facilitated buying and selling of mutual fund units through stock exchanges, enabling increased participation of retail investors.

The statement “Not more than 25% of the Net Assets will be invested in the Derivatives Market” describes the investment policy of the mutual fund scheme. The investment policy sets guidelines and restrictions on the types of investments the scheme can make, including the allocation to the derivatives market. It ensures that the scheme adheres to regulatory requirements and manages the risk associated with derivative instruments.

The Statement of Additional Information (SAI) contains information about the mutual fund or AMC, including the rights of unit-holders, transmission procedures, and investment valuation norms. However, it does not include information about the SIP returns of the schemes, which can be found in the Mutual Fund Fact Sheet.

When mutual fund units are pledged, the unit holder/s cannot sell the units. Pledging units involves using them as collateral for obtaining loans or credit. The units are held as security and cannot be sold until the pledgee gives written permission to release the pledge.

While the Scheme Information Document (SID), Statement of Additional Information (SAI), and Key Information Memorandum (KIM) need to be updated periodically, the interim changes are updated through the issuance of an Addendum. The Addendum is considered to be a part of the scheme-related documents and must accompany the KIM.

A securitization transaction involves the 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 originator. The Reserve Bank of India (RBI) will not be an originator.

Redemption proceeds have to be paid to the mutual fund unit holders within the time specified by SEBI from time to time. SEBI sets the guidelines and regulations regarding the redemption process to ensure timely payments to investors.

The names of securities in the scheme’s portfolio are not contained in the Scheme Information Document (SID). The SID provides important information about the mutual fund scheme, including the investment objective, risk factors, and portfolio features. However, the specific names of securities in the scheme’s portfolio are typically not disclosed in the SID. Detailed information about the portfolio holdings can be found in periodic reports such as the Fact Sheet or Annual Report of the scheme.

The expenses on software development are not for a particular scheme but for the AMC as a whole and cannot be charged to a particular scheme.

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.

The trail commission is always calculated based on the current NAV. In this case, Ms Shweta purchased 5000 units at a NAV of Rs 30. The current NAV is Rs 28. The total value of her investment is 5000 units x Rs 28 = Rs 1,40,000. The trail commission for the day can be calculated as: Trail commission = Current value x Trail commission rate p.a. / 365 = Rs 1,40,000 x 1% / 365 = Rs 3.8356.

Liquidity Risk is one of the general risk factors involved in Mutual Fund investments. The liquidity of investments made in the Scheme may be restricted bytrading volumes, settlement periods, and transfer procedures. Market liquidity can be impacted by market-related events and company factors, which can have a price impact on mutual fund units. Therefore, statement 1 is true. However, liquidity demands due to redemption or portfolio rebalancing can also result in a price impact on mutual fund units. Hence, statement 2 is false.

The basic meaning of asset allocation is to allocate an investor’s money across asset categories to achieve some objective. However, in many cases, investors allocate their funds across various asset categories 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.

Arbitrage funds can invest in both Futures/Options (F&O) and cash markets. However, the objective of an Arbitrage fund is not only to provide capital appreciation but also to take advantage of price inefficiencies in the market. While Arbitrage funds have lower risk compared to Equity Funds, it does not mean they have lower risk than all equity funds.

The trustees shall ensure that all transactions entered into by the AMC are in compliance with the regulations and the scheme’s objectives and intent.

While empaneling with an AMC, the mutual fund distributor applicant signs a declaration that gives power to the AMC to terminate the empanelment at any time.

The institutional sales team of the Asset Management Company is likely to sell funds of only a single mutual fund house. They are employed by the mutual fund house and are responsible for promoting and selling the schemes of that particular AMC.

Since institutional investors are not natural persons, authorized individuals invest on behalf of the institution. Authorization for the investing institution to invest is typically in the form of a Board Resolution.

An Asset Management Company (AMC) can handle the function of Registrar and Transfer Agent (RTA) in-house. The RTA is responsible for maintaining the records of unit holders, processing transactions, and handling investor services. However, the AMC cannot provide custodial services or engage in broking activities. Custodial services are usually provided by specialized custodian banks, and broking activities are typically carried out by registered brokers.

When a mutual fund distributor empanels with an AMC, they have to sign a declaration committing to abide by statutory codes, guidelines, and circulars. This ensures that the distributor follows the regulations and guidelines set by the regulatory authorities and operates within the legal framework.

In the case of a Sectoral Fund, the minimum investment in equity and equity-related instruments of a particular sector of total assets should be 80%. This ensures that the fund remains focused on the specific sectorand provides investors with exposure to that sector. The minimum requirement helps maintain the thematic nature of the fund and ensures that investors are investing in a fund with a significant allocation to the intended sector.

Jensen’s Alpha is a risk-adjusted performance measure that indicates the outperformance of a mutual fund scheme after adjusting for the risk taken. It measures the excess return of the scheme compared to the expected return predicted by the capital asset pricing model (CAPM), considering the scheme’s beta and the market’s average return. A positive Jensen’s Alpha indicates that the scheme has outperformed its expected return, while a negative value indicates underperformance.

As per the Income Tax Act, 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. Capital loss, short-term or long-term, cannot be set off against any other head of income (e.g. salaries).

The FATCA is a US law that aims to combat tax evasion by US persons opening accounts offshore. It enhances due diligence and information reporting requirements for both individual and entity accounts. On July 9, 2015, India signed an Inter-Governmental Agreement (IGA) with the USA for the implementation of FATCA. This is applicable to all financial institutions, including mutual funds.

In a Contra Fund, the minimum investment in equity & equity-related instruments shall be 65% of the total assets. A Contra Fund follows a contrarian investment strategy.

One of the disadvantages of company fixed deposits compared to bank fixed deposits is lower safety. Company fixed deposits carry a higher credit risk compared to bank fixed deposits. In the case of a company defaulting, the investor may face difficulties in recovering their investment and may incur losses.

A systematic transaction (like SIP, etc.) can be stopped. Assuming the scheme is profitable, the repurchase ensures that some of the profits are being regularly encashed by the investor.

Irrespective of the time of receipt of application, for all equity-oriented funds and debt funds (except liquid funds) in respect of a transaction of any amount, the applicable NAV will be the NAV of the business day on which the funds are available for utilization.

The termination of an Asset Management Company (AMC) requires the approval of 75% of the unitholders of the scheme. This ensures that a majority of the investors agree to the termination and any subsequent changes in the management of the scheme.

The mutual fund investor has the option to convert the demat units into physical form through a process called re-materialization. Dividends and redemption proceeds for demat units are credited directly to the bank account linked to the demat account via electronic modes such as direct credit, NEFT, and NACH facility.

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

All of the above can invest in Indian mutual funds.

Mutual funds can charge an additional TER if the new inflows are from beyond the top 30 cities. However, the additional TER charged on inflows from beyond the top 30 cities shall be credited back to the scheme in case the said inflows are redeemed within a period of 1 year from the date of investment.

In a Systematic Transfer Plan (STP), the source scheme refers to the scheme from which funds are transferred to another scheme. The funds are systematically transferred from the source scheme to thetarget scheme at regular intervals as per the chosen transfer plan. Therefore, the source scheme is the one from which the funds are transferred.

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.

A top-performing scheme within a category may or may not remain the top performer in the future. Past performance is not a guarantee of future performance. The performance of mutual funds can change over time due to various factors, and it is important for investors to consider other factors and do thorough research before making investment decisions.

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

Liquid funds are least risky as they invest in high-quality debt instruments. Corporate Bond Funds are a little more risky as they predominantly invest in AA+ and above-rated corporate bonds. Credit Risk Funds are much more risky as they invest in below highest-rated corporate bonds. The minimum investment in corporate bonds shall be 65 percent of total assets only in AA (excludes AA+ rated corporate bonds) and below-rated corporate bonds.

In Active Equity Funds, the fund manager engages in more buying and selling, resulting in higher transaction costs and research expenses. Therefore, the fund management costs are generally higher compared to other funds.

Reserve Bank of India or its branches are not involved in the sales and distribution of mutual fund products.

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.

Asset allocation is determined based on the financial goals of the investor and their financial situation. It considers the returns required to achieve the goals, the time horizon, and the risk profile of the individual.

1) Applications for non-financial transactions like change of address are stamped. However, here stamping of time is not relevant; the data stamping is pertinent. 2) Applications are sequentially numbered from the first number of the machine to the last number of the machine, before a new numbering cycle is started for the machine. The daily time stamping of the application does not start with serial 1. 3) The points of acceptance have time stamping machines with tamper-proof seals. 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.

Trail commission is always calculated on the current NAV. The current total value of investments in the above question is Rs. 43 X 5000 units = Rs. 2,15,000. Trail commission for the day = Current value X trail commission rate p.a./365 = 215000 X 1% / 365 days = 2150 / 365 = Rs. 5.8904

If the investor claims the unclaimed redemption amount after 3 years, the payment will be based on the Net Asset Value (NAV) at the end of three years.

Transmission is the process of transferring units to the person entitled to receive it in the event of the death of the unit holder. In case of transmission, before the transfer is effected, the mutual fund will insist on the KYC documentation from the nominee, death certificate of the deceased unit-holder, and an indemnity against future problems for the mutual fund arising out of the transfer.

Different investors in the same age group may have different financial goals, risk tolerances, and investment preferences. Therefore, it is not necessary for investors of the same age group to have the same asset allocation in their investment portfolios. Each investor’s asset allocation should be based on their individual financial situation, risk appetite, and investment objectives.

To comply with the requirements of Foreign Account Tax Compliance Act (FATCA) and Common Reporting Standards (CRS) provisions, financial institutions, including mutual funds, are required to undertake a due diligence process to identify foreign reportable accounts and collect such information as required under the said provisions and report the same to the US Internal Revenue Service/any other foreign government or to the Indian Govt / Tax Authorities for onward transmission to the concerned foreign authorities.

In the event of the death of one of the joint holders of mutual fund units, the units will continue to be held by the surviving joint holders. The joint holding ensures that the ownership of the units is shared among the joint holders, and the surviving holders retain their ownership rights upon the death of one of the joint holders.

The fundamental attributes of a mutual fund scheme can be changed, but this change should be communicated to all the unit holders. They should be provided an option to exit the scheme if they do not agree with the proposed changes. This ensures transparency and gives unit holders the opportunity to make informed decisions regarding their investments.

In the KYC process, the supporting documents (identity and address proof) are verified with the original documents. Alternatively, the investor can provide a True Copy attested by a Notary Public, Gazetted Officer, or Manager of a Scheduled Commercial Bank.

To evaluate the performance of a mutual fund scheme, it should be compared to a pre-defined benchmark that represents a comparable market index. This allows investors to assess how well the scheme is performing against its intended benchmark.

The average holding period can be calculated using the formula: Average Holding Period = 12 (months) / Portfolio Turnover Ratio. In this case, with a portfolio turnover ratio of 25 percent, the average holding period would be 12 / 0.25 = 48 months, which is equivalent to 4 years.

Dormant means not active. Investors who have not transacted during the previous 6 months in a mutual fund are considered dormant investors.

Interest rate risk is the risk that an investment’s value will change as a result of a change in interest rates. In this case, the debt mutual funds have been arranged in order of increasing interest rate risk, with liquid funds having the lowest risk and medium-term bond funds having the highest risk.

SEBI has regulations in place to ensure that mutual fund schemes maintain a minimum level of diversification. This regulation helps mitigate risks by ensuring that funds are not excessively concentrated in a particular security or sector, thereby promoting diversification and risk management.

If the investor claims the erstwhile unclaimed redemption amount within three years, the payment will be based on the prevailing NAV at the time of claim, after adding the income earned on the unclaimed profits.

In addition to the regular limits, the following expenses may be charged to the scheme: i. Brokerage and transaction cost which are incurred for the purpose of execution of trade up to 0.12 percent of trade value in case of cash market transactions and 0.05 percent of trade value in case of derivatives transactions. ii. If the new inflows from beyond top 30 cities are at least a) 30 percent of gross new inflows in the scheme or b) 15 percent of the average assets under management (year to date) of the scheme, whichever is higher, funds can charge the additional expense of up to 0.30 percent of the daily net assets of the scheme.