Feel Real Exam 1- NISM-Series-V-A: Mutual Fund Distributors Certification

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.

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.

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.

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.

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

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.

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.

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.

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.

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.

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

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.

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.

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.

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

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.

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.

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.

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.

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.

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.

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.

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.

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.

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).

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.

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.

FALSE

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.

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 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.

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.

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

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.

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.

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 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.

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.

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.

All of the above can invest in Indian mutual funds.

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.

Only B is false

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.

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.

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.

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 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.

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.

If an investor wants to change their default bank account for mutual fund transactions, they need to communicate the change directly to the mutual fund (AMC). The investor can provide the new account details to the mutual fund and request them to update the default account for future transactions.

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.

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.

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.

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.

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.

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.

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

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.

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.

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.

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.

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.

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.

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.

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

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.

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.

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.

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.

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.

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.

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.

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).

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.

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.

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.

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.

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.

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.

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

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 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.

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

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.

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.

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.

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.

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.

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.

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.

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.

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.

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.

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.

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.

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).

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.