Feel Real Exam 6- NISM-Series-V-A: Mutual Fund Distributors Certification

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.

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.

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 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.

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 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.

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.

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.

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.

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 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.

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 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 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.

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.

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.

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."

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.

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

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.

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.

Approving the fund managers which have been appointed by the AMC

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 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 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.

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.

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."

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.

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.

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

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."

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.

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.

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.

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."

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 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.

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.

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.

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.

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.

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."

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.

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).

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.

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.

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.

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.

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."

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.

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.

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.

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.

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.

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 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."

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.

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

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 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.

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 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.

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.

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.

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.

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

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).

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 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.

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.

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.

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."

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.

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.

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.

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.

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 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.

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.

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.

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.

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.

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.

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 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.

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.

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.

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.

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.

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."

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 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.

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."

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.