NISM Series V-A Mutual Fund Distributors Mock Test - 2

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.

Explanation:

NSE’s MIBOR (Mumbai Inter-Bank Offered Rate) is based on short term money market. Liquid schemes invest in securities of upto 91 days’ maturity. Therefore, a short term money market benchmark such as NSE’s MIBOR is suitable.

Explanation:

Close-ended Schemes have an NFO Open Date and NFO Close Date. But, they have no Scheme Re-opening Date, because the scheme does not sell or re-purchase units. What ever sale-purchase of units takes place is between the investors on the stock exchange. So the unit capital of a closed-end fund does not change.

(The number of units issued by a scheme multiplied by its face value (Rs. 10) is the capital of the scheme–its Unit Capital).

Explanation:

Statement of Additional Information (SAI), has statutory information about the mutual fund or AMC, that is offering the scheme. Therefore, a single SAI is relevant for all the schemes offered by a mutual fund.

(Scheme Information Document (SID) has details of the particular scheme)

Explanation:

As per the Income Tax Act –

– Short term capital loss is to be set off against short term capital gain or long term capital gain.
– Long term capital loss can only be set off against long term capital gain.
– Capital loss, short term or long term, cannot be set off against any other head of income (e.g. salaries).

Explanation:

When the performance of a particular mutual fund scheme is advertised, the advertisement shall also include the performance data of all the other schemes managed by the fund managers of that particular scheme.In case the number of schemes managed by a fund manager is more than six, then the AMC may disclose the total number of schemes managed by that fund manager along with the performance data of top 3 and bottom 3 schemes managed by that fund manager in all performance related advertisements.

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.

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).

Explanation:

The first step in financial goal setting is to identify events in life which will require major funding – like child education, marriage, retirement etc.

Asset allocation / Risk profile are looked into later while deciding the investments etc.

Explanation:

To cater to people with small saving potential and to increase reach of mutual fund products in urban areas and smaller towns, SEBI has allowed a transaction charge per subscription of Rs. 10,000/- and above to be paid to distributors of the mutual fund products. However, there shall be no transaction charges on direct investments.

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.

Explanation:

Thematic funds invest in line with an investment theme. For example, an infrastructure thematic fund might invest in shares of companies that are into infrastructure construction plus in toll-collection, cement, steel, telecom, power, etc. The investment is thus more broad-based than a sector fund. Sector funds invest in only a specific sector. For example, a banking sector fund will invest in only shares of banking companies.

Explanation:

The NAV that is applicable to a transaction depends, among other things, on the day and time at which the transaction request was received at the official point of acceptance. It is therefore very critical to record the time at which a transaction was received and use this information to determine the applicable NAV for a transaction. Time stamping is the process by which a stamp is put with details like date and exact time of receipt etc. on the transaction form.

Explanation:

The auditor appointed to audit the scheme accounts needs to be different from the auditor of the AMC. While the scheme auditor is appointed by the Trustees, the AMC auditor is appointed by the AMC.

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 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 scenarios.

Explanation:

The internet gave an opportunity to mutual funds to establish direct contact with investors. Investors can now access the website of the mutual fund and deal directly with the fund.

Explanation:

Most investors are either not organized, or lack the ability to make the calculations required for financial planning. A financial planner’s service is therefore invaluable in helping people realize their needs and aspirations.

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.

Explanation:

In situations of ‘Sudden Wealth’, it is advisable to initially block the money by investing in a liquid scheme. An STP (Systematic Transfer Plan) from the liquid schemes into equity schemes will help the long-term wealth creation process. One should not invest 100% of the amount in equities in one go.

Explanation:

Scheme Information Document (SID), Statement of Additional Information (SAI) and Key Information Memorandum (KIM) are part of the Offer Documents. These give detailed information about the mutual fund scheme.

Explanation:

Suppose an investor has invested in a debt security that yields a return of 7 percent. Subsequently, yields in the market for similar securities rise to 8 percent. It stands to reason that the security, which was bought at 7 percent yield, is no longer such an attractive investment. It will therefore lose value.

Explanation:

The yield on Gilt (Govt. securities) is generally the lowest in the market for a given tenor. Since non-Government issuers can default, they tend to offer higher yields for the same tenor.

The difference between the yield on Gilt and the yield on a non-Government Debt security is called its credit spread.

Explanation:

The investor enjoys the profits as well as bears the losses of his investments in Mutual Funds.

Explanation:

Fundamental analysis is a study of the business and financial statements of a firm. It does not study the charts like the Candle-Stick charts.

Charts are studied by the Technical analysts.

Explanation:

The formula for Sharpe Ratio is : ( Rs-Rf ) / Standard Deviation

ie. ( Return Earned – Risk free Return ) / Standard Deviation

= (8.3 – 5) / 0.6

= 3.3 / 0.6

= 5.5

Explanation:

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

Explanation:

The application to SEBI for registration of a mutual fund is made by the Sponsor(s).

The Sponsors then appoints the Trustees.

The operations of the mutual fund trust are governed by a Trust Deed, which is executed between the sponsors and the trustees.

Explanation:

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

Explanation:

As per the SEBI Advertisement Code for Mutual Funds – No celebrities shall form part of the advertisement.

(AMFI can use celebrities but individual mutual funds cannot use celebrities)

Explanation:

As per the AMFI Code of Ethics for Mutual Funds :

Members shall in respect of transactions of purchase and sale of securities entered into with any of their associates or any significant unitholder :

1. Submit to the Board of Trustees details of such transactions, justifying its fairness to the scheme

2. Disclose to the unitholders details of the transaction in brief through annual and half yearly reports.

Explanation

Day to day management of the schemes is handled by an AMC.

The AMC is appointed by the sponsor or the Trustees.

Explanation

Mutual funds provide investors the facility to register multiple bank accounts to facilitate receiving the redemption, dividends and any other pay outs from the fund.

An individual investor can register up to five bank accounts and a non-individual investor, ten.

Explanation

A Multi-Cap fund invests in Large Cap, Mid Cap and Small Cap stocks as per proportions stipuated by SEBI.

The Nifty500 index represents top 100 large cap companies, top 150 Mid-cap companies and top 150 small cap companies. Therefore, it can be a good benchmark for a Multi-Cap fund.

Explanation

The mutual fund trust is created by one or more Sponsors, who are the main persons behind the mutual fund business.

The sponsor is the promoter of the mutual fund. The sponsor brings in capital and creates a mutual fund trust and sets up the AMC.

The sponsor makes an application for registration of the mutual fund and contributes at least 40% of the net worth of the AMC. In other words, every MF needs a sponsor before it can commence operations.

Explanation

SEBI has mandated AMCs to put in place a due diligence process to regulate distributors who qualify any one of the following criteria:

– Multiple point presence (More than 20 locations)

– AUM raised over Rs. 100 crores across the industry in the non-institutional category butincluding high net worth individuals (HNIs)

– The commission received of over Rs. 1 Crore p.a. across industry

– The commission received of over Rs. 50 Lakhs from a single mutual fund

Explanation

The formula for calculating NAV is: (Total Assets minus Liabilities other than to Unitholders) / No. of outstanding Units

Total assets minus liabilities = 15 cr – 2 cr = Rs 13 cr

Number of outstanding units = Unit Capital / Face value = 10 cr / 10 = 1 crore outstanding units

NAV = 13 cr / 1 cr = Rs. 13

Explanation

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. In such a case, simply buying into a scheme due to good returns in the recent past may not be a wise approach.

The mutual fund advertisements use the disclaimer: “Past performance may or may not be sustained in future”.

Explanation

Gilt Fund is an open-ended debt scheme investing in government securities across maturity. The minimum investment in G-secs is defined to be 80 percent of total assets (across maturity).

Explanation

The risk levels in different categories of mutual fund schemes can be understood with the help of product labelling of Mutual Funds.

SEBI had introduced product labelling of mutual funds to address the issue of mis-selling and to provide investors an easy understanding of the kind of product/scheme they are investing in and its suitability to them.

All the mutual funds were required to ‘Label’ their schemes on the parameters such as – Nature of scheme, Investment objective, Level of risk depicted by colour code boxes etc.

Explanation

Since institutional investors like Companies etc. are not natural persons, authorised individuals invest on behalf of the institution.

Therefore, some additional documents are essential and one of them is – Authorisation for the investing institution to invest. This is typically in the form of a Board Resolution.

Explanation:

1. Long-term capital loss can only be set off against long-term capital gain.

2. Short-term capital loss is to be set off against short-term capital gain or long-term capital gain

3. Capital loss, short-term or long-term, cannot be set off against any other head of income (e.g., salaries).

Thus, as per points 1 and 2, Long-term capital gains will be taxed after adjusting for both long-term and short-term capital loss.

Explanation:

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.

For eg. An investor invests Rs 80,000 to buy 1000 units of a US fund when the USDINR rate was Rs 80 per Dollar. If the US Dollar becomes stronger against Indian Rupee to say Rs. 82, he will receive Rs 82,000 when he repariates the amount to India. (Assuming the funds NAV remains the same).

Explanation:

A Compliance Officer signs a due-diligence certificate to the effect that all regulations have been complied with, and that all the intermediaries mentioned in the scheme related documents have the requisite statutory registrations and approvals. The Compliance Officer works closely with the Trustees on various compliance and regulatory issues. It is the responsibility of the compliance officer to report any issue of non-compliance directly and immediately to the trustees.

Explanation:

Conservative Hybrid Fund is an open-ended hybrid scheme investing predominantly in debt instruments. Investment in debt instruments shall be between 75 percent and 90 percent of total assets while investment in equity and equity instruments shall be between 10 percent and 25 percent of total assets.

Conservative Hybrid Fund can invest in only AAA-rated debt securities with a Macaulay duration of less than one year.

(The Macaulay duration of a bond is the weighted average maturity of cash flows, which acts as a measure of a bond’s sensitivity to interest rate changes. Bonds with a higher duration will carry more risk, and hence have a greater volatility in prices when compared to bonds with lower durations).

Explanation:

A Mutual Fund Scheme may be denominated in Indian Rupees (INR) which is different from the home currency for Foreign Portfolio Investors in the mutual fund units. The INR value of investments when translated into home currency by Foreign Portfolio Investors could be lower because of the currency movements.

The AMC does not manage currency risk for Foreign Portfolio Investors and it is the sole responsibility of the Foreign Portfolio Investors to manage or reduce currency risk on their own. The Sponsor/Fund/Trustees/ AMC are not liable for any loss to Foreign Investors arising from such changes in exchange rates.

Explanation:

Interval funds combine features of both open-ended and close-ended schemes. They are largely close-ended but become open-ended at pre-specified intervals. The benefit for investors is that, unlike in a purely close-ended scheme, they are not completely dependent on the stock exchange to be able to buy or sell units of the interval fund.

The options offered under a scheme allow investors to structure their investments in line with their liquidity preference and tax position.

Explanation:

SEBI has allowed a transaction charge per subscription of Rs. 10,000/- and above to be paid to distributors of the mutual fund products. The transaction charge, if any, is deducted by the AMC from the subscription amount and paid to the distributor; and the balance amount is invested.

However, there shall be no transaction charges on direct investments. Therefore the entire Rs. 25000 will be invested.

(In a Direct Plan, an investor has to invest directly with the AMC, with no distributor to facilitate the transaction)

Explanation:

At the time of empaneling distributors and during the period i.e., review process, mutual funds/AMCs have to undertake a due diligence process to satisfy ‘fit and proper’ criteria that incorporate, amongst others, the following factors:

a. Business model, experience and proficiency in the business.

b. Record of regulatory/statutory levies, fines and penalties, legal suits, customer compensations made; causes for these and resultant corrective actions taken.

c. Review of associates and subsidiaries on the above factors.

d. Organizational controls to ensure that the following processes are delinked from sales and relationship management processes and personnel:

i. Customer risk/investment objective evaluation.

ii. MF scheme evaluation and defining its appropriateness to various customer risk categories.

Explanation:

AMFI has framed a set of guidelines and a 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 mutual fund products.

Explanation:

Index Funds are open-ended scheme replicating/tracking a specific index. The minimum investment in securities of a particular index (which is being replicated/ tracked) shall be 95 percent of total assets.