Mutual Fund Distributors (Series V-A): 36 practice questions with answers

Our own questions on the subjects of this examination, under 12 topic headings. Try each before opening its answer.

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Read a question, choose your answer, and only then open "Show the answer". Each answer has a line of explanation; if it surprises you, find the topic in NISM's workbook and read that part again. The questions are written by us in the four kinds a multiple choice paper uses: definitions, roles, rules of principle and calculations. They are not NISM's questions and the real paper will word things differently, so learn the idea, not the sentence. We have left out figures that the regulator or the exchanges revise, such as tax rates, limits, timings and margins: take those from the current workbook. The real paper has 100 questions in 120 minutes with a pass mark of 50%; there is no negative marking.

The questions

Investment landscape

1. Which of these is a financial asset, as distinct from a physical asset?

1. A plot of land
2. A house
3. A bank fixed deposit
4. Gold jewellery

2. Inflation risk for an investor means that

1. the issuer may not repay
2. prices of all shares fall together
3. the purchasing power of the money returned is lower
4. the investment cannot be sold quickly

3. An investor keeps all savings in a savings bank account for a goal twenty years away. The main risk is

1. high volatility
2. credit risk
3. liquidity risk
4. inflation eroding the real value

4. Asset allocation refers to

1. dividing investments among asset classes such as equity, debt and gold
2. timing the market
3. buying only government securities
4. choosing the best single share

5. An investor who sells winning investments too early and holds losing ones too long is showing

1. herd behaviour
2. loss aversion
3. overconfidence
4. anchoring

Concept and role of a mutual fund

6. A mutual fund is best described as

1. an insurance policy
2. a company that guarantees returns
3. a vehicle that pools money from investors and invests it according to a stated objective
4. a bank deposit scheme

7. An open-ended scheme is one in which

1. investors can buy and redeem units with the fund on an ongoing basis
2. units are listed and cannot be redeemed with the fund
3. the scheme has a fixed maturity date
4. the fund invests only in government securities

8. Which type of scheme aims to mirror the composition of a market index?

1. Liquid fund
2. Sector fund
3. Balanced fund
4. Index fund

9. The difference between the return of an index fund and the return of its index is called

1. beta
2. alpha
3. tracking error or tracking difference
4. exit load

Legal structure

10. In the structure of mutual funds in India, the investments of a scheme are held on behalf of unit holders by the

1. distributor
2. sponsor
3. registrar
4. trust, through its trustees

11. Day to day investment management of a mutual fund scheme is carried out by the

1. asset management company
2. sponsor
3. custodian
4. trustees

12. Safekeeping of the securities owned by a scheme is the function of the

1. distributor
2. custodian
3. auditor
4. registrar and transfer agent

Legal and regulatory framework

13. Mutual funds in India are regulated primarily by

1. the Securities and Exchange Board of India
2. the Insurance Regulatory and Development Authority of India
3. the stock exchanges
4. the Reserve Bank of India

14. AMFI is

1. a credit rating agency
2. the industry association of mutual funds in India
3. the regulator of mutual funds
4. a stock exchange

Scheme related information

15. The document that gives the investment objective, asset allocation, risk factors and fees of a particular scheme is the

1. Scheme Information Document
2. annual report of the sponsor
3. Statement of Additional Information
4. account statement

16. A short summary of the key features of a scheme, given with the application form, is the

1. trust deed
2. fact sheet
3. Key Information Memorandum
4. offer letter

Distribution

17. A mutual fund distributor earns income mainly in the form of

1. salary from SEBI
2. a share of the scheme's profit
3. interest from the fund
4. commission paid by the AMC

18. Under a direct plan of a scheme

1. returns are guaranteed
2. the investor invests without a distributor and no distribution commission is charged to the plan
3. units are bought on the stock exchange only
4. only companies can invest

NAV, expenses and pricing

19. A scheme has assets of ₹105 crore, liabilities of ₹5 crore and 5 crore units outstanding. Its NAV per unit is

1. ₹21
2. ₹20
3. ₹19
4. ₹22

20. An investor puts ₹10,000 into a scheme at an applicable NAV of ₹25, with no entry charge. Units allotted are

1. 400
2. 250
3. 4,000
4. 2,500

21. A scheme's NAV is ₹50 and the exit load applicable is 1%. An investor redeeming 200 units receives

1. ₹10,000
2. ₹9,900
3. ₹10,100
4. ₹9,800

22. The total expense ratio of a scheme is

1. the profit of the AMC
2. the tax paid by the scheme
3. the commission paid by the investor on redemption
4. the annual expenses of the scheme as a percentage of its average net assets

Taxation

23. Under the growth option of a scheme

1. income is paid out every month
2. income is reinvested at par value
3. the investor receives bonus units every year
4. no payouts are made and the gains are reflected in a rising NAV

24. The gain made when units are redeemed for more than their purchase cost is called

1. interest
2. capital gain
3. dividend
4. exit load

Investor services

25. In a Systematic Investment Plan the investor

1. invests a fixed amount at regular intervals
2. invests only at the time of a new fund offer
3. switches between schemes daily
4. withdraws a fixed amount at regular intervals

26. An investor does an SIP of ₹1,000 in two months when the NAV is ₹10 and ₹20. The average cost per unit is

1. ₹16.67
2. ₹12.50
3. ₹13.33
4. ₹15.00

27. Moving money from one scheme to another scheme of the same fund house at regular intervals is called a

1. Systematic Transfer Plan
2. Systematic Withdrawal Plan
3. dividend reinvestment
4. lien

28. KYC stands for

1. Key Yield Calculation
2. Keep Your Capital
3. Know Your Commission
4. Know Your Customer

Risk, return and performance

29. An investment grows from ₹10,000 to ₹14,400 in two years. The compound annual growth rate is

1. 44%
2. 22%
3. 18%
4. 20%

30. The NAV of a scheme rises from ₹20 to ₹23 in six months. The absolute return is

1. 15%
2. 3%
3. 30%
4. 13%

31. Which measure indicates the sensitivity of a scheme's returns to movements in the market?

1. Beta
2. Standard deviation
3. Expense ratio
4. Modified duration

32. In debt funds, the risk that the issuer of a bond fails to pay interest or principal is

1. reinvestment risk
2. interest rate risk
3. liquidity risk
4. credit risk

33. When interest rates in the economy rise, the prices of existing bonds generally

1. rise
2. fall
3. stay unchanged
4. become zero

Scheme performance

34. A scheme earned 12% in a year when the risk-free rate was 6%. The standard deviation of its returns was 10%. Its Sharpe ratio is

1. 2.0
2. 0.6
3. 1.2
4. 0.5

35. The standard against which the performance of a scheme is compared is its

1. NAV
2. portfolio turnover
3. expense ratio
4. benchmark

Scheme selection

36. For an investor who needs the money in three months and cannot accept loss of capital, the most suitable category is likely to be

1. a long duration gilt fund
2. a liquid or money market fund
3. a sector fund
4. a small cap equity fund

What next

When you can answer these without hesitation, take them in timed test mode, where the order of questions and options is shuffled. Then return to the workbook for every topic where you slipped. See also how to prepare and exam day.

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