Q 1. From the listed below, ______ has the highest credit risk .
High yield funds
ELSS Funds
Gilt funds
Index funds
CORRECT ANSWER
EXPLANATION
Junk bond schemes or high yield bond schemes invest in securities that have a lower credit rating indicating poor credit quality. This leads to high credit risk / default risk.
Q 2. Usually active funds give higher returns as investors bear a higher fund management expense – State True or False ?
False
True
CORRECT ANSWER
EXPLANATION
Higher fund management does not mean better performance.
Also some time passive funds like index funds can give better returns than active funds due to the fund managers wrong analysis.
Q 3. The main purpose why SEBI has issued norms for investments by mutual fund schemes is to _________ .
get better returns by mutual fund schemes
improve the credit ratings of the mutual fund schemes
protect the interests of the mutual fund investors
protect the interests of the mutual fund industry
WRONG ANSWER
CORRECT ANSWER
protect the interests of the mutual fund investors
EXPLANATION
Securities and Exchange Board of India (SEBI), has mandated strict checks and balances in the structure of mutual funds and their activities. Mutual fund investors benefit from such protection.
Q 4. The lock in for Equity Linked Savings Scheme (ELSS Funds) is ______ .
1 year
2 years
3 years
5 years
WRONG ANSWER
CORRECT ANSWER
3 years
EXPLANATION
Equity Linked Savings Schemes (ELSS) are diversified equity funds that offer tax benefits to investors under section 80 C of the Income Tax Act.
The investment is subject to lock-in for a period of 3 years during which it cannot be redeemed, transferred or pledged.
Q 5. As the Unit Certificates are non-transferable, they do not offer any real transactional convenience for the Unit-holder – State True or False ?
True
False
CORRECT ANSWER
EXPLANATION
Since Unit Certificates are non-transferable, they do not offer any real transactional convenience for the Unit-holder. However, if a Unit-holder asks for it, the AMC is bound to issue the Unit Certificate within 5 working days of receipt of request
Q 6. What does a portfolio which has beta less than 1 mean ?
Highly risky as compared to market
More risky than market
Less risky than market
Same risk as that of market
WRONG ANSWER
CORRECT ANSWER
Less risky than market
EXPLANATION
Beta measures the fluctuation in periodic returns in a scheme, as compared to fluctuation in periodic returns of a diversified stock index over the same period.
The diversified stock index, by definition, has a Beta of 1. Companies or schemes or portfolios, whose beta is more than 1, are seen as more risky than the market. Beta less than 1 is indicative of a company or scheme that is less risky than the market.
Q 7. When should an investor adopt a strategy of limiting his equity exposure via equity index funds ?
In the Accumulation phase
In the Retirement phase
In the Sudden wealth phase
None of the above
WRONG ANSWER
CORRECT ANSWER
In the Retirement phase
EXPLANATION
Retirement Phase – This is the stage when the investor needs the funds that have been accumulated over time. Hence, investors in this stage would move the funds to asset classes that meet their need for easy access to funds or regular periodic income as the case may be.
So the investor will invest more in debt / liquid funds and very less in equity funds.
Q 8. When the interest rates are rising, the bond funds which have short average maturity are more likely to outperform – State True or False ?
True
False
CORRECT ANSWER
EXPLANATION
Short-term debt funds help earn higher interest income in a rising interest rate scenario.
( Bonds are essentially loans. If prevailing interest rates on loans, including bonds, are rising, bond investors tend to demand the higher yielding bonds to make more money on their bond investments )
Long term debt funds help investors earn higher returns from capital gains in falling interest rate scenario.
Q 9. Where are the New Fund Offer dates mentioned ?
Key Information Memorandum – KIM
Scheme Information Document – SID
Statement of Additional Information – SAI
Both SID and KIM
WRONG ANSWER
CORRECT ANSWER
Both SID and KIM
EXPLANATION
SID has information on –
– Open-ended / Close-ended / Interval (the scheme structure)
– Equity / Balanced / Income / Debt / Liquid / ETF (the expected nature of scheme portfolio)
It also mentions the face value of the Units being offered, relevant NFO dates (opening, closing, re-opening), date of SID, name of the mutual fund, and name and contact information of the AMC and trustee company.
KIM is essentially a summary of the SID and SAI. It contains the key points of the offer document including the dates of Issue Opening, Issue Closing & Re-opening for Sale and Re-purchase
Q 10. Which of the below investors will require the approval of board before investing in mutual funds ?
Non Resident investors
Institutional investors
High Networth investors
Retail investors
WRONG ANSWER
CORRECT ANSWER
Institutional investors
EXPLANATION
Authorisation will be required from the board for the institution to invest. This is typically in the form of a Board Resolution.
Q 11. Condensed financial information for schemes launched in last 3 financial years is mentioned in the ______________.
Scheme Information Document (SID)
Statement of Additional Information (SAI)
Fact Sheet
Prospectus
WRONG ANSWER
CORRECT ANSWER
Statement of Additional Information (SAI)
EXPLANATION
Section I of the SAI gives complete details of the constituents of the mutual fund–Sponsors, AMC and Trustee Company, of service providers {Custodian, Registrar & Transfer Agent, Statutory Auditor, Fund Accountant (if outsourced) and Collecting Bankers}.
This includes their experience, condensed financial information (for schemes launched in last 3 financial years), key personnel, rights and obligations and other information the investor may require to evaluate the investment.
Q 12. Which of the following do not impact the calculation of Net Asset Value (NAV) ?
Change in value of investments held by the scheme
Daily accrual of expenses
Daily accrual of income
Change in the number of investors in the fund
WRONG ANSWER
CORRECT ANSWER
Change in the number of investors in the fund
EXPLANATION
While calculating the daily NAV, apart from the change in value of investments, the actual and accrued income and expenses are also taken into account. These also affect the calculation of NAV.
Change in the number of investors can affect the Asset Under Management (AUM) of a scheme but it won’t affect the NAV.
(A scheme cannot show better profits by delaying payments. While calculating profits, all the expenses that relate to a period need to be considered, irrespective of whether or not the expense has been paid. In accounting language, this is called the accrual principle. Similarly, any income that relates to the period will boost profits, irrespective of whether or not it has been actually received in the bank account. This again is in line with the accrual principle)
Q 13. Mr. Tarun is in his 30’s and has a steady job. He is investing most of his savings in bank deposits. Due to low rate of return on bank deposits, he is putting his financial goals at risk. Which behavioral bias is his portfolio suffering from?
Familiarity bias
Anchoring
Herd mentality
Confidence bias
CORRECT ANSWER
EXPLANATION
The familiarity bias is when investors tend to invest in what they know and are comfortable with.
An individual tends to prefer the familiar over the novel, as the popular proverb goes, “A known devil is better than an unknown angel.” This leads an investor to concentrate the investments in what is familiar, which at times prevents one from exploring better opportunities, as well as from a meaningful diversification. As a result, investors are not diversified across multiple sectors and types of investments.
Q 14. Mr. Ashu holds his mutual fund units in demat form. If he wants to change his nominee or his bank account, he has to contact the ______ and complete the required procedure.
Stock Exchange
Depository Participant
R&T agent of the mutual fund
AMC / Mutual fund
WRONG ANSWER
CORRECT ANSWER
Depository Participant
EXPLANATION
All details such as an address, bank account details, nomination for the units held in DEMAT FORM is according to the information available in the depository’s records.
Any changes to the said information have to be made by contacting his depository participant.
Q 15. Redemption proceeds has to be paid to the mutual fund unit holders within the time specified by _____ from time to time.
AMFI
SEBI
Registrar of Companies
Ministry of Finance
WRONG ANSWER
CORRECT ANSWER
SEBI
EXPLANATION
The applicable redemption guidelines for mutual funds are set out in SEBI (Mutual Funds) Regulations, 1996 and as amended from time to time.
Q 16. What is required for the termination of the services of an Asset Management Company (AMC) ?
75 % of the mutual funds distributors should approve the termination of the Asset Management Company
75 % of the unitholders should approve the termination of the Asset Management Company
The custodian should approve the termination of the Asset Management Company
AMFI should approve the termination of the Asset Management Company
WRONG ANSWER
CORRECT ANSWER
75 % of the unitholders should approve the termination of the Asset Management Company
EXPLANATION
The appointment of the AMC for the Mutual Fund can be terminated by majority of the Directors of the Trustee Board or by 75 percent of the Unitholders of the Scheme.
Q 17. Ms. Priya redeems 2000 units at an NAV of Rs 13. If the exit load is 1 percent, what is the redemption value of the investment?
Rs. 25500
Rs. 26250
Rs. 26000
Rs. 25740
WRONG ANSWER
CORRECT ANSWER
Rs. 25740
EXPLANATION
Ms. Priya redeems 2000 units at an NAV of Rs 13 = 2000 x 13 = 26000
Exit load at 1% of 26000 = 260
Redemption value = 26000 – 260 = Rs. 25740
Q 18. As the complete exposure is to a single sector, Sector Funds are high on _____ .
Credit Risk
Concentration Risk
Interest Rate Risk
Liquidity Risk
WRONG ANSWER
CORRECT ANSWER
Concentration Risk
EXPLANATION
The sector funds invest in stocks belonging to just one sector of the economy, in order to take advantages within the said sector. The examples of such funds are: Pharma fund, or Banking fund.
Sector funds are risky because of the concentration in one sector. If the sector under-performs then the scheme’s returns is likely to be very poor.
Q 19. These debt mutual funds have been arranged from lowest risk to highest risk. Identify the risk which we are discussing :
1. Liquid Funds 2. Money market funds 3. Medium term bond funds
Interest Rate Risk
Concentration Risk
Default Risk
Credit Risk
CORRECT ANSWER
EXPLANATION
Interest rate risk is the risk that an investment’s value will change as a result of a change in interest rates.
The interest rate risk varies for bonds with different maturities. Those with longer maturity would witness higher price fluctuations in comparison to those with shorter maturities.
Similarly short term debt funds will have lower interest rate risk when compared to longer term debt funds.
In the above question, Liquid funds have the shortest duration and so will have less adverse effect of interest rate risk when compared to Money market funds and Medium term bond funds.
Q 20. ______ is an example of physical asset.
Bank Deposit
Shares and Debentures
Land and Building
Futures and Options
WRONG ANSWER
CORRECT ANSWER
Land and Building
EXPLANATION
Land and buildings are physical property.
Shares, Debentures, Bank Deposits, F&O are all financial assets/instruments.
Q 21. Performance of a portfolio is influenced by _______ .
Stock Selection
Investment Policy
Asset Allocation Strategy
All of the above
WRONG ANSWER
CORRECT ANSWER
All of the above
EXPLANATION
A portfolio consists of various types of investment products. It is influenced by the investment policy includes the scheme’s asset allocation and investment style. Also equity returns are a function of sector and stock selection which will influence the portfolio performance.
Q 22. What would be the impact on an International fund investing in US stocks when the US Dollar appreciates against Indian Rupee?
The NAV of the scheme in Indian Rupees will appreciate
The NAV of the scheme in Indian Rupees will depreciate
No impact on the fund as its investing in stocks and not currency
CORRECT ANSWER
EXPLANATION
When an Indian investor invests in equities abroad, he is essentially taking two exposures:
– An exposure on the international equity market.
– An exposure to the exchange rate of the rupee.
If the investor invests in the US, and the US Dollar becomes stronger during the period of his investment, he benefits; if the US Dollar weakens (i.e., Rupee becomes stronger), he loses or the portfolio returns will be lower.
Q 23. Identify the FALSE statement/s :
1. For equity mutual funds schemes which are actively managed (eg. Diversified equity fund/Balance funds), the net asset value need NOT be declared up to 4 decimal points
2. Each mutual fund scheme’s account is combined with the accounts of the Asset Management Company
Only 1 is false
Only 2 is false
Both 1 and 2 are false
WRONG ANSWER
CORRECT ANSWER
Only 2 is false
EXPLANATION
Key Accounting and Reporting Requirements for mutual funds :
– The accounts of the schemes need to be maintained distinct from the accounts of the AMC. The auditor for the AMC has to be different from that of the schemes.
– NAV for equity and balanced funds is to be calculated up to at least 2 decimal places. (and not 4). NAV is to be calculated up to 4 decimal places in the case of index funds, liquid funds and other debt funds.
Q 24. Calculate the Average holding period if the portfolio turnover ratio is 25 percent.
25 months
48 days
40 months
4 Years
WRONG ANSWER
CORRECT ANSWER
4 Years
EXPLANATION
Average Holding Period = 12 (months) / Portfolio Turnover Ratio
Here the portfolio turnover ratio is 25 percent i.e. 25/100 = 0.25
Average Holding Period = 12 / 0.25 = 48 months = 4 Years
Q 25. Key Information Memorandum (KIM) and Scheme Information Document (SID) are two broad types of scheme documents – State whether True or False?
True
False
WRONG ANSWER
CORRECT ANSWER
False
EXPLANATION
Scheme Information Document (SID) and Statement of Additional Information (SAI) are primarily the two important documents.
Key Information Memorandum (KIM) is a summary of SID and SAI.
Q 26. Identify the TRUE statement/s with respect to Statement of Additional Information (SAI).
A. Regular update has to be done by the end of 3 months of every financial year
B. Material changes have to be updated on an ongoing basis and uploaded on the websites of the mutual fund and AMFI.
Only A is true
Only B is true
Both A and B are true
None of the above
WRONG ANSWER
CORRECT ANSWER
Both A and B are true
EXPLANATION
Updation of Scheme Documents—Regulatory provisions
Updation of SAI : Regular update has to be done by the end of 3 months of every financial year. Material changes have to be updated on an ongoing basis and uploaded on the websites of the mutual fund and AMFI.
Q 27. Which of these investors CANNOT do CASH investments in mutual funds up to a limit of Rs. 50,000?
Investments made by a PIO (Person of Indian Origin)
Investments made by Sole Proprietorship firm
Investments made by minors
Investments made by resident Indian investors without PAN
CORRECT ANSWER
EXPLANATION
Mutual funds usually do not accept cash. Small investors, who may not be taxpayers and may not have PAN/bank accounts, such as farmers, small traders/businessmen/workers are allowed cash transactions for the purchase of units in mutual funds to the extent of Rs. 50,000/-per investor, per mutual fund, per financial year.
This facility is available only for resident individuals, sole proprietorships and minors investing through their guardians.
PIO is not among the eligible investors.
Q 28. Identify the False statement – –
Mutual funds units which have been purchased on a stock exchange have a compulsory lock-in period
Mutual funds units can be bought on stock exchanges but they cannot be sold there
Both of the above are false
WRONG ANSWER
CORRECT ANSWER
Both of the above are false
EXPLANATION
SEBI has facilitated buying and selling of the units of open-ended mutual funds through the stock exchanges. The low cost and deeper reach of the stock exchange network enable an increased level of participation of retail investors in mutual funds.
Mutual fund units can be bought and sold on stock exchange and they do not have a lock-in period except some funds like ELSS.
Q 29. Mr. Suresh invests Rs 30000 in an equity fund. The face value of this scheme is Rs 10 and the NAV is Rs 12. The exit load is 2%. How many units will be allotted to Mr. Suresh ?
3000
2142.8571
2500
2411.1574
WRONG ANSWER
CORRECT ANSWER
2500
EXPLANATION
Exit load is not applicable on purchase of units. Its applicable only on sale of units.
The units will be allotted to Mr. Suresh as per the NAV which is Rs. 12.
Amount invested is Rs 30,000
Units allotted = Amount Invested / NAV
= 30000 / 12
= 2500
Q 30. Which of these statement/s is/are INCORRECT?
A. The impact of exit load can be ignored by the distributor at the time of re-purchase of a mutual fund units
B. When the investor wants to redeem mutual fund units, the distributor must suggest redemption from the scheme with the maximum exit load
Only statement A is incorrect
Only statement B is incorrect
Both statements A and B are incorrect
WRONG ANSWER
CORRECT ANSWER
Both statements A and B are incorrect
EXPLANATION
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.
Q 31. Where is the information regarding investor service centers, minimum investment amount and how to make the purchases of mutual fund mentioned?
Application Form
Nomination Form
Transaction Slip
Key Information Memorandum (KIM)
WRONG ANSWER
CORRECT ANSWER
Key Information Memorandum (KIM)
EXPLANATION
KIM is a summary of Scheme Information Document (SID) and Statement of Additional Information (SAI) where in all the details of the scheme are mentioned.
Q 32. In an Arbitrage fund, the minimum investment in equity and equity related instruments shall be ______ of total assets.
50 percent
55 percent
60 percent
65 percent
WRONG ANSWER
CORRECT ANSWER
65 percent
EXPLANATION
Arbitrage Fund: An open-ended scheme investing in arbitrage opportunities. The minimum investment in equity and equity related instruments shall be 65 percent of total assets.
Q 33. When a dividend is paid, the NAV of the units ______ to that extent.
rises
falls
There is no change
WRONG ANSWER
CORRECT ANSWER
falls
EXPLANATION
In a dividend pay-out option, the fund declares a dividend from time to time. When a dividend is paid, the NAV of the units falls to that extent.
The reduced NAV, after a dividend pay-out is called ex-Dividend NAV.
Q 34. What is the portfolio of a ‘Fund of Funds’ made up of ?
Money market securities
Equity stocks
Debt securities
Mutual Fund schemes
WRONG ANSWER
CORRECT ANSWER
Mutual Fund schemes
EXPLANATION
Fund of funds is a mutual fund which utilises its pool of resources to invest in various other kinds of mutual funds available in the market.
It does not directly invest in equity or debt securities.
Q 35. Which of these documents is not required to be submitted for investing in mutual funds by a charitable organisation?
List of authorized signatories
Trust deed
Board resolution
Memorandum and Articles of Association
WRONG ANSWER
CORRECT ANSWER
Memorandum and Articles of Association
EXPLANATION
A Charitable Trust does not have any Memorandum and Articles of Association. It has a Trust Deed.
Q 36. A mutual fund has the policy of imposing an exit load of 2% for redemption upto one year and 1% for redemptions beyond one year. If an investor redeems 2000 units at an NAV of Rs 40 at the end of six months from the date of investment, what will be redemption amount receivable by the investor
Rs. 76500
Rs. 79200
Rs. 80000
Rs. 78400
WRONG ANSWER
CORRECT ANSWER
Rs. 78400
EXPLANATION
The investor has redeemed the units within a year of investment, so the exit load applicable is 2%.
2000 units X Rs 40 = Rs 80000
Less 2% exit load : 2% of 80000 = 1600 (80000 x 2 / 100)
Net amount = 80000 – 1600 = Rs. 78400
Q 37. Among these funds, which will have the lowest Interest Rate Risk?
Money market fund
Diversified Equity Fund
Pharma Sector fund
Dynamic Bond Fund
CORRECT ANSWER
EXPLANATION
Interest rate risk is the risk that an investment’s value will change as a result of a change in interest rates. Interest rate risk is always associated with debt funds and not equity funds.
The interest rate risk varies for bonds with different maturities. Those with longer maturity would witness higher price fluctuations in comparison to those with shorter maturities. A money market fund is a type of a mutual fund that invests in high quality, short term debt instruments, cash and cash equivalents.
Q 38. For how long is the trail commission paid to the mutual fund distributor?
For the first one year only
For the first three years only
For the first ten years only
Till the money is held in the fund
WRONG ANSWER
CORRECT ANSWER
Till the money is held in the fund
EXPLANATION
A mutual fund distributor is paid trail commission for as long as the investor’s money is held in the fund.
Q 39. An existing bond fund will tend to lose value when market interest rates _______ .
Rise
Fall
remains constant
are equal to yields
CORRECT ANSWER
EXPLANATION
Suppose an investor has invested in a debt security that yields a return of 8 percent. Subsequently, yields in the market for similar securities rise to 9 percent. It stands to reason that the security, which was bought at 8 percent yield, is no longer such an attractive investment. It will therefore lose value.
(Conversely, if the yields in the market go down, the debt security will gain value. Thus, there is an inverse relationship between yields and value of such debt securities, which offer a fixed rate of interest)
Q 40. What should an investor see to evaluate the Consistency of Mutual Fund scheme performance ?
Point to Point
Standard Deviation
Discrete annual returns
Beta
WRONG ANSWER
CORRECT ANSWER
Discrete annual returns
EXPLANATION
The discrete annual returns help in assessing the consistency of the fund’s performance over different market scenarios.
Discretely compounded interest is calculated and added to the principal at specific intervals (e.g., annually, monthly, or weekly). Continuous compounding uses a natural log-based formula to calculate and add back accrued interest at the smallest possible intervals.
Q 41. In which categories of stocks do Multi Cap equity funds invest in ?
Mostly large cap stocks only of various companies
Mostly mid cap stocks only of various companies
Mostly small cap stocks only of various companies
A mix of large, mid and small cap stocks
WRONG ANSWER
CORRECT ANSWER
A mix of large, mid and small cap stocks
EXPLANATION
Multi cap funds spread the investments across the market capitalization spectrum in order to try and benefit from the opportunities across the market. They invest in a mix of large, mid and small market capitalisation stocks.
Q 42. When can mutual funds charge an additional expense of 0.30% of daily net assets of the scheme?
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
If the new inflows from beyond top 30 cities are at least (a) 20 percent of gross new inflows in the scheme or (b) 5 percent of the average assets under management (year to date) of the scheme, whichever is higher
If the new inflows from beyond top 15 cities are at least (a) 25 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
If the new inflows from beyond top 15 cities are at least (a) 10 percent of gross new inflows in the scheme or (b) 5 percent of the average assets under management (year to date) of the scheme, whichever is higher
CORRECT ANSWER
EXPLANATION
In addition to the normal expenses limit, the following expenses may be charged to the scheme :
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 additional expense of up to 0.30 percent of daily net assets of the scheme.
Q 43. Identify the true statement(s) –
A) The nominee is the beneficial owner of the mutual fund units
B) Nomination does not create any title or beneficial interest in the units in favour of the nominee after the death of the unit-holder
Only A is true
Only B is true
Both A and B are true
Both A and B are false
WRONG ANSWER
CORRECT ANSWER
Only B is true
EXPLANATION
Nomination is only an authorization for the mutual fund to transfer the units to the nominee in the event of demise of the unit-holder. The nominee holds the units in trust for the legal heirs of the investor. It does not
create any title or beneficial interest in the units in favour of the nominee after the death of the unit-holder.
An investor in a mutual fund scheme is the beneficial owner of the units one has bought.
Q 44. Indentify which of these statements is / are FALSE ?
A) Banks and mutual funds both offer the Gold Deposit Scheme
B) Gold ETFs are closed ended funds
Only A is false
Only B is false
Both A and B are false
WRONG ANSWER
CORRECT ANSWER
Both A and B are false
EXPLANATION
The Gold Deposit Scheme (GDS) is offered only by banks to mobilise the idle gold in the country and put it in productive use and to provide the customer an opportunity to earn interest on the idle gold holdings.
GDS is a scheme launched by the Government of India, where only banks (authorized by RBI) offer the scheme. Mutual funds do NOT offer Gold Deposit Schemes.
Gold Exchange Traded Funds (Gold ETFs) are open-ended funds, not closed-ended.
Q 45. On which of the following factors does returns from an international fund depend on?
Asset Class performance
Foreign currency exchange rates
Both 1 and 2
WRONG ANSWER
CORRECT ANSWER
Both 1 and 2
EXPLANATION
When an Indian investor invests in equities abroad, he is essentially taking two exposures:
An exposure on the international equity market (asset class)
An exposure to the exchange rate of the rupee. If the investor invests in the US, and the US Dollar becomes stronger during the period of his investment, he benefits; if the US Dollar weakens (i.e. Rupee becomes stronger), he loses or the portfolio returns will be lower.
Q 46. In case of any conflict between the Principles of Fair Valuation and AMC’s Valuation Guidelines, _________ .
The Valuation Guidelines will prevail
The Principles of Fair Valuation will prevail
Both are same so there will never be an conflict
SEBI will decide which is correct
WRONG ANSWER
CORRECT ANSWER
The Principles of Fair Valuation will prevail
EXPLANATION
In order to ensure a fair treatment to all investors, SEBI has laid down certain fair valuation principles of mutual fund schemes.
In case of any conflict between the Principles of Fair Valuation and Valuation Guidelines, the Principles of Fair Valuation shall prevail.
Q 47. Securities and Exchange Board of India (SEBI) functions does not include which of the following?
Regulation of Stock Exchanges
Enforcing compliance of its regulations
Making regulations for the Mutual Fund industry
Approving the fund managers which have been appointed by the AMC
WRONG ANSWER
CORRECT ANSWER
Approving the fund managers which have been appointed by the AMC
EXPLANATION
An approval of SEBI is not required by the AMC while appointing the fund managers.
Q 48. What is Indexation ?
Reduction of short and long term capital gains tax by using an index based calculation
Benchmarking the index fund against a suitable index like Sensex / Nifty
Adjusting the cost of acquisition upwards to reflect the impact of inflation
Adjusting the cost of acquisition downward to reflect the impact of inflation
WRONG ANSWER
CORRECT ANSWER
Adjusting the cost of acquisition upwards to reflect the impact of inflation
EXPLANATION
Indexation means that the cost of acquisition or the cost of purchase is adjusted upwards to reflect the impact of inflation.
For eg. – A stock was purchased at Rs 100 and sold for Rs 150 after 5 years. The long term capital gains is Rs 50 on which tax is to paid. But when adjusted for indexation (as per data released by Central Board of Direct taxes every year), the capital gains will be reduced and the tax will have to be paid on a lower amount.
Q 49. What is the maximum percentage of holding can a single investor have in a mutual fund scheme?
5%
10%
20%
25%
WRONG ANSWER
CORRECT ANSWER
25%
EXPLANATION
A Scheme/Plan shall have a minimum of 20 investors and no single investor shall account for more than 25 percent of the corpus of the Scheme/Plan.
Q 50. _______ is considered as an Institutional Investor.
Non-Resident Indians
Trusts
Persons of Indian Origin (PIO)
High Networth Individuals
WRONG ANSWER
CORRECT ANSWER
Trusts
EXPLANATION
Charitable Trusts / Private Trusts are considered as institutional investors.
Non-Resident Indians (NRIs)/Persons of Indian Origin (PIO) / HNIs are individual investors.
Q 51. Mr. A is an existing investor in a mutual fund scheme and he is now investing Rs. 5000 in the direct plan of the scheme. What will be his net investment in the scheme after considering the transaction charges?
Rs. 4950
Rs. 4900
Rs. 4875
Rs. 5000
WRONG ANSWER
CORRECT ANSWER
Rs. 5000
EXPLANATION
Each mutual fund has to offer two plans to the investors, viz., regular plan and direct plan. In a regular plan the investment is through a mutual fund distributor and in a Direct plan, the investor purchases units directly from the fund.
There are no transaction charges on direct investments.
Q 52. A board resolution for investing in a mutual fund scheme is compulsorily required by _______ .
Non Resident Indians – NRIs
Hindu Undivided Family – HUF
Institutional Investors
Minors
WRONG ANSWER
CORRECT ANSWER
Institutional Investors
EXPLANATION
Institutional investors require a authorisation for the investing in any security / asset etc. This is typically in the form of a Board Resolution.
Q 53. A mutual fund manager is planning to invest in Indian pharma companies as these companies are setting up new manufacturing capacities. Identify the investment style of the fund manager.
Value investment style
Cyclical investment style
Target investment style
Growth investment style
WRONG ANSWER
CORRECT ANSWER
Growth investment style
EXPLANATION
Growth investment style entails investing in high growth stocks i.e. stocks of companies that are likely to grow much faster than the market.
(Value investment style is an approach of picking up stocks, which are priced lower than their intrinsic value)
Q 54. What are the guidelines issued by AMFI for intermediaries known as?
SEBI Brokers and Intermediaries guidelines
Know Your Distributor guidelines
AMFI Guidelines & Norms for Intermediaries (AGNI)
WRONG ANSWER
CORRECT ANSWER
AMFI Guidelines & Norms for Intermediaries (AGNI)
EXPLANATION
AMFI has framed a set of guidelines and code of conduct for intermediaries (known as AMFI Guidelines & Norms for Intermediaries (AGNI)), consisting of individual agents, brokers, distribution houses and banks engaged in selling of mutual fund products.
Q 55. At what price can investors buy or sell units of an open-ended fund after the New Fund Offer?
The NAV of the mutual fund units
The New Fund Offer (NFO) price
The face value
The monthly average price
CORRECT ANSWER
EXPLANATION
Investors of an open ended fund can buy and sell mutual fund units as per its current Net Asset Value – NAV price.
Q 56. A minor has one more year to become a major. A 3 year SIP is started in the minors folio. Which of the following statement is true in this case?
The SIP will be registered for 3 years
The SIP will be registered for only 2 years
The SIP will be registered for only 1 year till the investor attains majority
The SIP will be registered for 3 years from the date of attaining majority
WRONG ANSWER
CORRECT ANSWER
The SIP will be registered for only 1 year till the investor attains majority
EXPLANATION
Standing instructions like Systematic Investment Plans (SIP) are registered in a minor folio only till the date of the minor attaining majority, even though the instructions may be for an extended period.
When the minor is approaching the age of majority, AMCs usually send letters advising the guardian and the minor to submit the form along with prescribed documents to change the status of the account/folio to “major”.
All SIP, STP, SWP and any other standing instruction registered in the minor’s account are suspended if the documents are not received by the date when the minor attains majority.
Q 57. Rising Sun Mutual Fund holds shares of AAA Ltd. in its portfolio. When the NAV of the scheme is calculated on 10th April, then each share of AAA Ltd. will be valued at ______ .
Average traded price of AAA Ltd. on 10th April across all stock exchanges
Opening price of AAA Ltd. on 10th April at BSE / NSE
Closing price of AAA Ltd. on 10th April at BSE / NSE
Average traded price of AAA Ltd. on 10th April at BSE / NSE
WRONG ANSWER
CORRECT ANSWER
Closing price of AAA Ltd. on 10th April at BSE / NSE
EXPLANATION
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 recognised 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)
Q 58. Identify which of these is a function of Association of Mutual Funds in India’s (AMFI)?
To calculate the correct NAVs
To make available the AUM, NAV and other important data of the mutual fund industry
To regulate and control insider trading
To manage the Investor Protection Fund
WRONG ANSWER
CORRECT ANSWER
To make available the AUM, NAV and other important data of the mutual fund industry
EXPLANATION
AMFI makes available the AUM, NAV and other important data of the mutual fund industry on its website.
(Calculation of NAV is the duty of the mutual fund / SEBI regulates insider trading / Stock exchanges manage the Investor protection fund)
Q 59. A mutual fund distributor cannot charge a transaction fee on which of these transactions?
Systematic Transfer Plan
A new investor making a purchase in a mutual fund scheme
An existing investor making a purchase in a mutual fund scheme
Systematic Investment Plan (SIP)
CORRECT ANSWER
EXPLANATION
Transaction charges do not apply to transactions other than purchases/subscriptions that result in fresh inflows.
Transactions like switches, systematic transfers, dividend transfers, dividend re-investment are not eligible for transaction charges.
Q 60. The NAV applicable for purchase in a gilt fund of Rs. 50 Lakhs if the cheque is received after 2 pm will be _____ .
Same day NAV if received before cut off time.
Closing NAV of day immediately preceding the date of application
Closing NAV of the next business day
NAV of the business day on which the funds are available for utilisation
WRONG ANSWER
CORRECT ANSWER
NAV of the business day on which the funds are available for utilisation
EXPLANATION
Vide SEBI circular dated September 17, 2020, it was decided that with respect to purchase of units of MF schemes – both Debt and Equity (except liquid and overnight schemes), closing NAV of the day shall be applicable, on which the funds are available for utilisation irrespective of the size and time of receipt of such application.
Until now, investors who gave a cheque for below Rs 2,00,000 got the same day’s NAV, while those putting more got the NAV of the day when the cheque was realised.
Q 61. SEBI Advertisement Code for Mutual Funds mentions the various guidelines to be followed by __________ .
the investors who are interpreting the performance of their investments
the AMC’s while it is advertising the performance of their funds
the distributors while advertising their various services
the fund managers while monitoring the performance of the schemes they manage
WRONG ANSWER
CORRECT ANSWER
the AMC’s while it is advertising the performance of their funds
EXPLANATION
There are various guidelines laid down by SEBI which have to follwed by the AMC while it is advertising the performance of its funds.
For eg – a) Performance advertisement of mutual fund schemes shall be provided in terms of CAGR for the past 1 year, 3 years, 5 years and since inception.
b) Where the scheme has been in existence for less than one-year, past performance shall not be provided ..etc.
Q 62. Information under Foreign Account Tax Compliance Act (FATCA) is to be provided ______ .
Only if the investment is made from a foreign bank account
Only if the country of birth/citizenship/nationality/tax residency is other than India
Only if an NRI is doing the investment
Only if the investor is a resident of USA or Europe
WRONG ANSWER
CORRECT ANSWER
Only if the country of birth/citizenship/nationality/tax residency is other than India
EXPLANATION
For mutual fund applicants, including guardians, whose country of birth/citizenship/nationality/tax residency is other than India, the application requires additional information under Foreign Account Tax Compliance Act (FATCA) and Common Reporting Standards (CRS).
Q 63. Which certification examination is mandated by SEBI for becoming a mutual fund distributor in the India?
NCFM Series VA Mutual Fund Distributors
NISM Series VA Mutual Fund Distributors
AMFI VA Mutual Fund Distributors
SEBI VA Mutual Fund Distributors
WRONG ANSWER
CORRECT ANSWER
NISM Series VA Mutual Fund Distributors
EXPLANATION
Distributors need to pass the NISM certification Examination (NISM-Series- V-A: Mutual Fund Distributors (MFD) Certification Examination) and register with AMFI to become mutual fund distributors in India.
Q 64. Mr. Sandesh invests Rs 75 lakh in a Gilt Fund and gives a local cheque at 3.30 pm. What will be the applicable NAV for allotment of units?
NAV of the business day on which the funds are available for utilisation
Same day NAV if received before cut off time.
Closing NAV of the next business day
Closing NAV of day immediately preceding the date of application
CORRECT ANSWER
EXPLANATION
Vide SEBI circular dated September 17, 2020, it was decided that with respect to purchase of units of MF schemes – both Debt and Equity (except liquid and overnight schemes), closing NAV of the day shall be applicable, on which the funds are available for utilisation irrespective of the size and time of receipt of such application.
Q 65. A trader believes that he can always outperform the market. This is an example of ____ bias.
Recency
Overconfidence / Optimism
Herd Mentality
Anchoring
WRONG ANSWER
CORRECT ANSWER
Overconfidence / Optimism
EXPLANATION
Overconfidence / Optimism bias refers to a person’s overconfidence in one’s abilities or judgment. This leads one to believe that one is far better than others at something, whereas the reality may be quite different. Under the spell of such a bias, one tends to lower the guards and take on risks without proper assessment.
Q 66. Which of these is NOT a function of Registrars and Transfer Agents ?
Maintaining investors records
Processing redemption and dividend payouts
Analysing mutual fund performance and making it available to investors
Updating unit capital of fund
WRONG ANSWER
CORRECT ANSWER
Analysing mutual fund performance and making it available to investors
EXPLANATION
The Registrars and Transfer Agents (RTAs) maintain investor records.
The functions of the RTA include processing of purchase and redemption transactions of the investor and dealing with the financial transactions of receiving funds for purchases and making payments for redemptions, dividends etc, updating the unit capital of the scheme to reflect these transactions, updating the information in the individual records of the investor, called folios, keeping the investor updated about the status of their investment account and information related to the investment.
Q 67. The Asset Management Companies have to disclose the Total Expense Ratios (TER) of the various schemes on their websites on a ______ basis.
Daily
Weekly
Monthly
Annual
CORRECT ANSWER
EXPLANATION
One of the important factors that impacts the scheme’s NAV is the Total Expense Ratio (TER), charged to the scheme. Though, the same is very tightly regulated through SEBI regulations, the investor should know about the scheme expense ratio.
SEBI has mandated that the Asset Management Companies (AMCs) should prominently disclose on a daily basis, the Total expense ratio (scheme-wise, date-wise) of all schemes on their website. The same must also be published on AMFI website.
Q 68. What does ‘Asset Allocation’ mean?
Allocating a portfolio to cash
Allocating various mutual funds to investors
Allocating units to unit holders
Allocating a portfolio to different asset classes
WRONG ANSWER
CORRECT ANSWER
Allocating a portfolio to different asset classes
EXPLANATION
The basic meaning of asset allocation is to allocate an investor’s money across asset categories (like Equity, Debt, Gold etc.) in order to achieve the objective.
Q 69. Which investor need not provide a PAN card at the time of making a mutual fund investment ?
Investor who is investing up to Rs. 50,000 in a mutual fund scheme (excluding SIPs) per year per mutual fund
Investor who is investing up to Rs. 50,000 in a mutual fund scheme (including SIPs) per year per mutual fund
Investor who is investing up to Rs. 1,00,000 in a mutual fund scheme (excluding SIPs) per year per mutual fund
Investor who is investing up to Rs. 1,00,000 in a mutual fund scheme (including SIPs) per year per mutual fund
WRONG ANSWER
CORRECT ANSWER
Investor who is investing up to Rs. 50,000 in a mutual fund scheme (including SIPs) per year per mutual fund
EXPLANATION
The following categories of investors are exempt from producing PAN:
– In case of transactions undertaken on behalf of Central/State government and by officials appointed by the court.
– Investors residing in the state of Sikkim.
– UN entities/Multilateral agencies exempt from paying taxes/filing tax returns in India.
– Investments (including SIPs and lump sum investments) in Mutual Fund schemes upto Rs. 50,000/- per investor per year per mutual fund.
Q 70. To whom does the profits or losses made by the mutual fund belong?
The investors
The Asset Management Company
Fund Managers
Trustees
CORRECT ANSWER
EXPLANATION
The money received from investors is invested by the mutual fund scheme in a portfolio of securities as per the stated investment objective. Profits or losses, as the case might be, belong to the investors or unitholders.
No other entity involved in the mutual fund in any capacity participates in the scheme’s profits or losses. They are all paid a fee or commission for the contributions they make to launching and operating the schemes.
Q 71. A Segregated Portfolio be created out of a debt fund scheme when ________ .
there is a credit event
a change occurs in the fund management team
interest rates move down
interest rates move up
CORRECT ANSWER
EXPLANATION
“Segregated portfolio” means a portfolio, comprising of debt or money market instrument affected by a credit event, that has been segregated in a mutual fund scheme.
Q 72. Return from a fund is 9% and the risk free rate is 5%, the Standard deviation is 3 & Beta is 1.6. What will be the NUMERATOR for calculating the Sharpe ratio?
3
6
1.6
4
WRONG ANSWER
CORRECT ANSWER
4
EXPLANATION
In a fraction, the number above the line is called the Numerator and the number below the line (the bottom number) is called the Denominator.
The formula for Sharpe Ratio is : ( Return Earned – Risk free Return ) / Standard Deviation
Here the Numerator is ‘Return Earned – Risk free Return’ and the Denominator is ‘Standard Deviation’
The question asked is to calculate the numerator.
Numerator = Return Earned – Risk free Return
= 9 – 5 = 4
Q 73. ______ forms the basis of appointment of a distributor by an AMC.
SEBI approval
Agreement between the investor and the distributor
Power of attorney from the AMC
An agreement between the AMC and the Distributor
WRONG ANSWER
CORRECT ANSWER
An agreement between the AMC and the Distributor
EXPLANATION
After obtaining the ARN No., the distributor can get empaneled with any number of AMCs.
An agreement between the AMC and the Distributor forms the basis of appointment of a distributor by an AMC.
Q 74. In case of a securitized asset, _______ will not be an originator to a Special Purpose Vehicle (SPV) ?
housing finance company
non-banking finance company
commercial bank
RBI
WRONG ANSWER
CORRECT ANSWER
RBI
EXPLANATION
A securitization transaction involves 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.
In this manner, the originator, by selling his loan receivables to an SPV, receives consideration from investors much before the maturity of the underlying loans.
Q 75. Multi Asset Allocation funds invest in at least _____ asset classes with a minimum allocation of at least 10 percent in each class.
2
3
4
5
WRONG ANSWER
CORRECT ANSWER
3
EXPLANATION
Multi Asset Allocation: An open-ended hybrid scheme investing in at least 3 asset classes with a minimum allocation of at least 10 percent each in all three asset classes.
Q 76. Identify the TRUE statement?
Mutual funds which are bank sponsored are regulated by RBI and not SEBI
SEBI and AMFI both regulate mutual funds in India
Stock Exchanges regulates mutual funds in India
SEBI regulates mutual funds in India
WRONG ANSWER
CORRECT ANSWER
SEBI regulates mutual funds in India
EXPLANATION
Securities markets in India are regulated by the Securities and Exchange Board of India (SEBI). It regulates, among other entities, mutual funds, depositories, custodians and registrars and transfer agents in the country.
(AMFI is neither a regulatory body nor a Self-Regulatory Organisation)
Q 77. Which of these statements are false?
A) While evaluating schemes, the Expense Ratio will matter much more in Debt Funds than Equity mutual funds.
B) A mutual fund with a long track record is always better for investments as it would give higher returns in the future
C) Ultra short term debt funds always invest in high credit quality debt securities
A and B are false
B and C are false
A and C are false
All A, B and C are false
WRONG ANSWER
CORRECT ANSWER
B and C are false
EXPLANATION
1) Any cost is a drag on investor’s returns. Investors need to be particularly careful about the cost structure of debt schemes, because in the normal course, debt returns can be much lower than equity schemes. So expense ratio is more critical for debt funds
2) The mutual fund advertisements use the disclaimer: “Past performance may or may not be sustained in future”. There is a reason for that. As experience has shown time and again, the top performers during one period may not necessarily remain as a top performer forever or near the other top performers and vice versa. In such a case, simply buying into a scheme due to good returns in the recent past may not be a wise approach.
3) When the limits are not tightly defined, the fund manager may assume an active role in managing the risk, e.g. an ultra-short term debt fund may take credit risk, since the SEBI regulations only define the permitted maturity profile, which indicates how much interest rate risk the scheme can take.
Q 78. Identify the true statement with respect to investments in mutual funds through Stock Exchanges?
Stock exchanges have now become another important channel for mutual fund companies to sell their units to investors
One can buy mutual fund units on stock exchange but cannot sell them on stock exchange
The mutual fund units purchased through a stock exchange have a mandatory lock-in period of 30 days
None of the above are true
CORRECT ANSWER
EXPLANATION
SEBI has facilitated buying and selling of the units of mutual funds through the stock exchanges. Exchanges have developed mutual fund transaction engines for the purpose. The low cost and deeper reach of the stock exchange network enables increased level of participation of retail investors in mutual funds.
Q 79. Identify the FALSE statement with respect to mutual fund scheme related documents.
KIM and SID are two broad types of scheme documents
SID has details of the particular scheme
SAI has statutory information about the mutual fund
KIM is essentially a summary of the SID and SAI
CORRECT ANSWER
EXPLANATION
Option 1 is FALSE as Scheme Information Document (SID) and Statement of Additional Information (SAI) are primarily the two important documents.
Key Information Memorandum (KIM) is a summary of SID and SAI.
Q 80. Which risk is higher in a Gilt Fund when compared to a Corporate Bond Fund?
Concentration Risk
Credit Risk
Interest Rate Risk
Duration Risk
WRONG ANSWER
CORRECT ANSWER
Interest Rate Risk
EXPLANATION
Interest rate risk is the risk that an investment’s value will change as a result of a change in interest rates. The interest rate risk varies for bonds with different maturities. Those with longer maturity would witness higher price fluctuations in comparison to those with shorter maturities.
Gilt funds get affected by interest rate movements as the Government borrowing typically happens to be for a longer duration. Corporate bond funds invest in corporate bonds with time period of 1 to 3 years. Due to lower duration, they have lower interest rate risks.
Q 81. What is the risk known as which arises out of the mis-pricing or improper valuation of derivative contracts?
Credit Risk
Basis Risk
Model Risk
Duration Risk
WRONG ANSWER
CORRECT ANSWER
Model Risk
EXPLANATION
Model Risk is the risk of mis-pricing or improper valuation of derivatives.
Q 82. Mr. Sachin wants to initiate a Systematic Investment Plan (SIP) in a mutual fund scheme. Which of the following statement is correct?
A SIP can be done only in an existing folio
A SIP can be used to initiate a fresh purchase of mutual funds
A SIP cannot be done in an New Fund Offer (NFO)
A SIP can be done in a Close-end fund
WRONG ANSWER
CORRECT ANSWER
A SIP can be used to initiate a fresh purchase of mutual funds
EXPLANATION
An SIP can be used to initiate a fresh purchase in a scheme and open a folio.
It can be used to make additional purchases in an existing folio. An SIP can also be initiated during a New Fund Offer (NFO).
A Close-end fund does not have SIP facility.
Q 83. __________ funds will benchmark themselves against indices based on Government securities.
Credit Risk
Liquid
Over-night
Gilt
WRONG ANSWER
CORRECT ANSWER
Gilt
EXPLANATION
Gilt funds invest only in Government securities. Therefore, indices based on Government Securities are the appropriate benchmark for Gilt funds.
Q 84. Which of the following is/are also stamped on the application form along with the time stamp?
A) Location Code
B) Serial Number
C) Machine Identifier
Only A and B
Only B and C
Only A and C
All A, B and C
WRONG ANSWER
CORRECT ANSWER
All A, B and C
EXPLANATION
When one submits an application form to a mutual fund or its registrar’s office, it is passed through a machine that stamps the time and day of submission. This process is called time-stamping and is the first acknowledgement or proof of investment.
Application for purchase of units is stamped with automatically generated location code, machine identifier, serial number, date and time.
Q 85. The information which is provided in a mutual fund advertisement has to be _______ .
Published in one English and one regional language newspaper
Approved by Securities and Exchange Board of India
Timely
Valid for at least 6 months investment horizon
WRONG ANSWER
CORRECT ANSWER
Timely
EXPLANATION
As per the SEBI Advertisement Code for Mutual Funds –
Advertisements shall contain information that is timely and consistent with the disclosures made in the Scheme Information Document, Statement of Additional Information and the Key Information Memorandum.
(No approval is required from SEBI except – Prior approval of SEBI shall be required for issuance of any endorsement of Mutual Funds as a financial product, which features a celebrity for the purpose of increasing awareness of Mutual Funds)
Q 86. Normally, a fund manager will have to provide the maximum liquid assets for which of these funds?
Open-end schemes
Close-end schemes
ETF-Gold
ETF-Equity
CORRECT ANSWER
EXPLANATION
ETFs and Close-end funds are listed on the stock exchanges and investors can sell their units their. They need not give redemption request to the AMCs. So, the fund manager need not maintain liquid funds for Close-end funds and ETFs.
Open-end funds have to keep a minimum stipulated per cent of their corpus in liquid assets. This has been done to ensure that there is enough liquidity available with the open-ended funds to meet redemption needs.
Q 87. As per SEBI regulations, _______ is required while declaring mutual fund scheme performance.
The new fund open and closing dates
Returns of the peer group mutual fund schemes
Returns of the scheme compared to other financial products
Returns of the scheme compared to the benchmark
WRONG ANSWER
CORRECT ANSWER
Returns of the scheme compared to the benchmark
EXPLANATION
To know how well a mutual fund scheme is performing, it has to be compared to a pre-defined comparable benchmark.
For eg. A midcap fund can be benchmarked / compared to Nifty Midcap index.
Q 88. Identify from the following practices, which is/are NOT an approved practice by a registered mutual fund distributor?
Not levying transaction charges on investors based on the value of their investments
Attracting new investors by offering them monetary incentives
Both of the above
None of the above
WRONG ANSWER
CORRECT ANSWER
Both of the above
EXPLANATION
As per the Obligations of the Mutual Fund Distributors (MFDs) :
– MFDs shall not rebate or pass-back commission to investors and shall refrain from attracting investors through inducement of rebate or gifts / gift-vouchers etc.
– MFDs shall ensure that financial incentive should not form the basis for recommending any particular scheme or transaction to any investor. MFDs shall promote a culture of ethics and integrity within the organization, so as to dissuade unfair practices, conflicts, aggressive sales tactics and other inappropriate conduct directed to achieve sales targets in disregard of its fiduciary duty of care, diligence and loyalty.
Q 89. An investor who wants liquidity in his investments will invest in ______ .
Equity Linked Saving Scheme (ELSS)
Fixed Deposits
PPF
Liquid Funds
WRONG ANSWER
CORRECT ANSWER
Liquid Funds
EXPLANATION
A person who wants liquidity should invest in liquid funds as they can be redeemed very fast.
Equity linked saving schemes have a lock in period of three years
Fixed Deposits and Public Provident Fund (PPF) cannot be easily encashed before maturity.
Q 90. Tactical Asset Allocation is the decision that comes out of calls on the likely behaviour of the market – True or False ?
False
True
WRONG ANSWER
CORRECT ANSWER
True
EXPLANATION
Tactical Asset Allocation is the decision that comes out of calls on the likely behaviour of the market.
An investor who decides to go overweight on equities because of expectations of a rise in share markets, is taking a tactical asset allocation call.
Q 91. Who can attest the copies of supporting documents in the KYC procedure ?
Gazetted Officer
Manager of a Scheduled Commercial Bank
Both of the above
Mutual Fund Distributor
WRONG ANSWER
CORRECT ANSWER
Both of the above
EXPLANATION
KYC documents can be attested by a Notary Public, Gazetted Officer or Manager of a Scheduled Commercial Bank.
They cannot be attested by a mutual fund distributor.
Q 92. Who has to sign the form for registering a change in the default bank account in a mutual fund folio?
By all the holders of the folio
By all the holders of the folio as per the mode of holding
Only by the first holder of the folio
WRONG ANSWER
CORRECT ANSWER
By all the holders of the folio as per the mode of holding
EXPLANATION
The form for registering the change has to be signed by all the holders according to the mode of holding of the folio.
Q 93. Identify the TRUE statement/s.
A) The Turnover Ratio will be higher in a momentum oriented investment strategy of an equity mutual fund.
B) Its always simpler to invest in balanced mutual funds as compared to investing separately in equity and debt funds, but this limits choices.
Only A is true
Only B is true
Both A and B are true
Neither A nor B is true
WRONG ANSWER
CORRECT ANSWER
Both A and B are true
EXPLANATION
Momentum mutual funds seek to capture upward trends in the market by investing in stocks that have shown strong recent performance. They follow the momentum factor, which involves buying assets that have been rising in price with the expectation that this positive trend will continue in the near future.
As such funds buy and sell several times, they will have a high turnover ratio (Turnover Ratio reflects the percentage of portfolio holdings that were changed/bought/sold/turned over in? a year)
Investing in a hybrid/balanced scheme makes things simpler for the investor, because fewer scheme selection decisions need to be taken. However, the investor cannot decide the composition of portfolio and would need to go by the debt- equity mix in the investment portfolio of the schemes.
Q 94. What will happen to the scheme’s Net Asset Value (NAV) after the dividend is paid?
The NAV will Rise
The NAV will Fall
The NAV will remain same
WRONG ANSWER
CORRECT ANSWER
The NAV will Fall
EXPLANATION
The Net Asset Value (NAV) of a scheme will always go down after dividend is paid out. The NAV will fall proportionally and get readjusted after the dividend is paid.
Q 95. Thematic funds are risky because of _________ in one theme.
under exposure
high beta
diversification
concentration
WRONG ANSWER
CORRECT ANSWER
concentration
EXPLANATION
A Thematic fund invests in line with an investment theme. For example, an infrastructure thematic fund might invest in shares of companies that are into infrastructure, construction, cement, steel, telecom, power etc.
Thematic funds are risky because of the concentration in one theme. If the theme under-performs then the scheme’s returns is likely to be poor.
Q 96. Identify the TRUE statement with respect to regulation of mutual funds in India.
AMFI along with SEBI regulates the mutual funds in India
The two stock exchanges NSE and BSE regulate the open-end mutual fund schemes
SEBI regulates the mutual funds in India
RBI along with SEBI regulate the bank sponsored mutual funds in India
WRONG ANSWER
CORRECT ANSWER
SEBI regulates the mutual funds in India
EXPLANATION
Securities markets in India are regulated by the Securities and Exchange Board of India (SEBI). It regulates, among other entities, mutual funds, depositories, custodians, registrars and transfer agents (RTAs) and credit rating agencies in the country.
AMFI does not regulate the Mutual Fund. The objectives of AMFI are to define and maintain high professional and ethical standards in all areas of operation of the mutual fund industry.
Q 97. Which of these expenses can be charged to a mutual fund scheme by the AMC ?
Office salaries of fund management team
Rent of the AMC registered office
AMC general administration expenses
Custodian and Fund Administrator fees
WRONG ANSWER
CORRECT ANSWER
Custodian and Fund Administrator fees
EXPLANATION
In addition to the investment and advisory fee, the AMC may charge the mutual fund scheme with recurring expenses including:
– marketing and selling expenses including agents’ commission, if any
– brokerage and transaction cost
– registrar services for transfer of units sold or redeemed
– fees and expenses of trustees
– audit fees
– custodian fees
etc.
Q 98. Identify the FALSE statement/s.
A) All investors of the similar age group should have the same asset allocation in their portfolio
B) Risk profile of the investor should not be considered if his mutual fund distributor understands the risks associated with the mutual fund scheme.
Only A is false
Only B is false
Both A and B are false
Neither A nor B are false
WRONG ANSWER
CORRECT ANSWER
Both A and B are false
EXPLANATION
Different investors have different financial goals at different age levels. In fact, investors in the same age group may also have different goals. Their financial situations may also differ. At the same time, many of the financial goals may pertain to the whole families and not just an individual. In such cases, it may not be prudent to categorize investors on the basis of age alone.
The investor’s risk appetite is a function of three things—the need to take risks, the ability to take risks, and the willingness to take risks. Thus, an understanding of the risk profile of the investor and the investment risks associated with various mutual fund schemes, both would be essential for deciding the asset allocation in an investor’s portfolio.
Q 99. Identify the security which will be most impacted by interest rate movements in the economy ?
Public Sector Units (PSU) Bonds
Money Market securities
Government securities
Corporate debentures
WRONG ANSWER
CORRECT ANSWER
Government securities
EXPLANATION
Interest rate sensitivity is a measure of how much the price of a fixed-income asset will fluctuate as a result of changes in the interest rate environment.
Generally, the longer the maturity of the asset, the more sensitive the asset to changes in interest rates. Higher the duration of a bond, the more its prices will fall when interest rates rise and vice versa.
Generally Government securities have a higher duration as compared to PSU bonds and Corporate debentures. Money market securities have the lowest duration.
Q 100. The Key Information Memorandum is attached to which of these documents?
The Application Form
The Scheme Information Document (SID)
The Statement of Additional Information (SAI)
The Transaction Slip
CORRECT ANSWER
EXPLANATION
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 in spite of such a constraint, a Key Information Memorandum (KIM) is mandatorily circulated along with the application form.
KIM is essentially a summary of the Scheme Information Document (SID) and Statement of Additional Information (SAI).