NISM-VA Mutual Fund Distributor Question Bank

We’re preparing a comprehensive question bank for the NISM-VA Mutual Fund Distributor exam. It will cover all key areas of the syllabus with a variety of question types. This resource will be invaluable for your exam preparation.

Q.1 As per SEBI regulations, a mutual fund scheme should have at least ________ investors.

1. 10
2. 15
3. 20
4. 25
5. None of these

Answer (c)

Explanation: As per SEBI, a Mutual Fund 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(s).

Q.2 The Asset Management Companies have to disclose the Total Expense Ratios (TER) of the various schemes on their websites on a ______ basis.

1. Daily
2. Weekly
3. Monthly
4. Annual
5. None of these

Answer (a)

Explanation: The Asset Management Companies have to disclose the Total Expense Ratios (TER) of the various schemes on their websites on a Daily basis.The Securities and Exchange Board of India (SEBI) has mandated this disclosure to help investors make more informed decisions^. This also brings uniformity in the disclosure of actual TER charged to mutual fund schemes.

Q.3 ________ is a proper benchmark for a balanced hybrid

1. CRISIL Hybrid 75+25 , Conservative Index
2. CRISIL Hybrid 25+75 , Aggressive Index
3. CRISIL Hybrid 50+50 , Moderate Index
4. None of these

Answer (c)

Explanation: The proper benchmark for a balanced hybrid is the CRISIL Hybrid 50+50 , Moderate Index. This benchmark is used to evaluate the performance of balanced hybrid funds. The Securities and Exchange Board of India (SEBI) has mandated this benchmark to ensure transparency and help investors make informed decisions.

Q.4 Segregated portfolio means _________ .

1. a portfolio which is kept aside for a ‘rainy day’ or contingency fund
2. a portfolio which is created out of debt or money market securities affected by a credit event
3. a portfolio which is left after removing poor credit quality papers
4. All of the above
5. None of these

Answer (b)

Explanation: A segregated portfolio is a portfolio which is created out of debt or money market securities affected by a credit event. It is a mechanism used by mutual funds to protect the interests of all investors in case of a credit event, and also to deal with liquidity risk. The main objective of a segregated portfolio is to handle defaulted bonds in the portfolio separately so that the original scheme is not greatly affected.

Q.5 Identify the TRUE statement.

1. 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 minus Entry Load
2. While calculating scheme returns for an investor, if there is an exit load, then the later value of the Net Asset Value (NAV) is taken as NAV minus Exit Load

Answer (b)

Explanation: “While calculating scheme returns for an investor, if there is an exit load, then the later value of the Net Asset Value (NAV) is taken as NAV minus Exit Load”

Here’s why:

• Exit Load: The exit load is a fee charged by a mutual fund company when investors redeem or sell their units before a specified period. The exit load is calculated as a percentage of the value of the units being redeemed and is deducted from the redemption proceeds. For example, if an exit load of 1% applies and an investor redeems Rs 10,000 worth of units, the fund will deduct Rs 100 as the exit load, and the investor will receive Rs 9,900 as the redemption proceeds. From the Total Net Asset Value, the Asset Management Companies deduct the exit load. The remaining amount is credited to the account of the investors during the redemption process.
• Entry Load: Entry load is a fee charged at the time of purchase of the units. However, as per the guidelines of the Securities and Exchange Board of India (SEBI), no entry load is charged for Mutual Funds in India. Therefore, the statement about entry load is not applicable in the current context

Q.6 For how long is the trail commission paid to the mutual fund distributor?

1. For the first one year only
2. For the first three years only
3. For the first ten years only
4. Till the money is held in the fund
5. None of these

Answer (d)

Explanation: The trail commission is paid to the mutual fund distributor till the money is held in the fund^.

Here’s why:

Trail Commission: The trail commission, also known as the loyalty commission, is a fee paid to the intermediary every year that the investment remains in the fund. For instance, if you invest Rs. 1 lakh in an equity scheme through a mutual fund distributor, the fund house will pay the trailing commission to the distributor every year throughout the duration you remain invested in the fund

Trail Commission Calculation: The trailing commission is calculated as a percentage of the entire investment brought to a fund by a particular intermediary. It is calculated on a daily basis and paid every quarter

Trail Commission Applicability: As mentioned above, trailing commission is applicable to regular mutual fund investments. So, if you’ve invested in a mutual fund scheme through an agent, distributor, investment advisor, or banker, the intermediary is probably receiving a trailing commission from your investment.

Q.7 What is negative Alpha?

1. It is indicative of outperformance by the fund manager
2. It is indicative of under-performance by the fund manager
3. It is indicative of over-hedging by the fund manager
4. It is indicative of under-hedging by the fund manager

Answer (b)

Expla

nation: A negative Alpha is indicative of under-performance by the fund manager.

Here’s why:

Alpha: Alpha is a measure used in finance to represent the performance of an investment against a benchmark index. It reflects the degree to which a stock’s returns meet or exceed the returns generated by the market^. A positive alpha indicates the security is outperforming the market, while a negative alpha indicates the security fails to generate returns at the same rate as the broader sector.

Negative Alpha: A negative Alpha is used to indicate that the security is failing to generate returns at the same or similar rate when compared to the standard broader benchmark. Thus, a negative Alpha indicates that the stock, fund, investment portfolio, asset, or security is underperforming.

Q.8 An investor in India is investing in US Dollar based funds. He/She will benefit when ______

1. The US Dollar becomes weaker
2. The US Dollar becomes stronger
3. The US Dollar reamins steady
4. None of these

Answer (b)

Explanation: If the investor invests in the US, and the US Dollar becomes stronger during the period of his investment, he/she will benefit.

For eg. - An investor buys USD 1000 worth of units in a US mutual fund when the exchange rate was Rs 75 for 1 USD. So his investment is Rs 75000

If USD becomes stronger against India Rupee and rises to Rs. 77 and he sells USD 1000 worth of units, his realisation in Indian rupees is 1000 x 77 = Rs 77000. So he earns Rs 2000

(This is assuming all other factors like the NAV of the mutual fund remaining the same)

Q.9 What is asset allocation?

1. Deciding which and how many mutual fund schemes to invest in
2. Finalizing which mutual fund schemes would deliver the highest returns in future
3. Deciding how to invest money across various asset categories in line with one’s risk profile, financial objectives and current situation
4. Deciding which asset category would outperform the others and investing in it
5. None of these

Answer (c)

Explanation:Asset Allocation is a process of allocating money across various asset categories in line with a stated objective. 

The basic meaning of asset allocation is to allocate an investor’s money across asset categories in order to achieve same objective.

Q.10 Business model, experience and proficiency in the business is a compulsory criteria for empanelment and review of which of the following category of mutual fund distributors?

1. Institutional distributors who have points of presence in more than 10 locations
2. Individual distributors who have points of presence in more than 10 locations
3. Distributors who have received commission of over Rs. 1 Crore p.a. across industry
4. All of the above
5. None of these

Answer (c)

Explanation: SEBI has mandated AMCs to put in place a due diligence process to regulate distributors with respect to 'Business model, experience and proficiency in the business' who qualify any one of the following criteria: 

1. Multiple point presence (More than 20 locations)
2. AUM raised over Rs. 100 crore across industry in the non-institutional category but including high networth individuals (HNIs)
3. Commission received of over Rs. 1 Crore p.a. across industry
4. Commission received of over Rs. 50 Lakhs from a single mutual fund

Q.11 Equity Linked Savings Schemes (ELSS) are eligible for deduction under Section 80C of the Income Tax Act. However, such schemes have a lock-in period of _______ from the date of investment.

1. 3 years from the date of allotment of each individual unit
2. 3 years from the date of original investment even in case of subsequent purchases
3. 5 years from the date of allotment of each individual unit
4. If tax exemption is NOT availed, there will not be any lock-in period
5. None of these

Answer (a)

Explanation: The lockin period for an ELSS fund is 3 years from the date of allotment of each individual unit. 

So even for a SIP investment, each SIP will have a lockin for 3 years.

Q.12 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?

1. 3
2. 6
3. 6
4. 4
5. None of these

Answer (d)

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.13 Which document will an investor look at if he has to know the fundamental attributes of a mutual fund scheme?

1. Key Information Memorandum (KIM)
2. Addendum
3. Scheme Information Document (SID)
4. Statement of Additional Information (SAI)
5. None of these

Answer (c)

Explanation: Scheme Information Document (SID)

The SID is a detailed document prepared by the Asset Management Company (AMC) about a particular scheme and submitted to the Securities and Exchange Board of India (SEBI) for approval. It contains all the fundamental attributes like investment objective and policies, asset allocation pattern, fees, and liquidity provisions. It also provides information about the fund management team, all risk factors in the scheme as well as risk mitigation mechanisms, scheme details like load, plans and options, past performance, benchmark, general unitholder information, and other details like list of AMC branches, Investor Service Centres, Official Points of Acceptance.

Q.14 Identify the FALSE statement : A. The best strategy in selecting a mutual fund scheme is that based on its past performance B. When the mutual fund distributor understands the needs of his investor, one can ignore the investment objective of the mutual fund schemes.

1. Only A is false
2. Only B is false
3. Both A and B are false
4. None of these

Answer (c)

Explanation: Both A and B are false.

Here’s why:

Statement A: The best strategy in selecting a mutual fund scheme is that based on its past performance. This statement is false. While past performance can be a factor to consider, it should not be the only criterion for selecting a mutual fund scheme. Other factors such as the investor’s risk tolerance, investment goals, the fund’s investment objective, the fund manager’s experience, and the fund’s expense ratio should also be considered.

Statement B: When the mutual fund distributor understands the needs of his investor, one can ignore the investment objective of the mutual fund schemes. This statement is also false. The investment objective of a mutual fund scheme is a crucial factor that an investor should consider before investing. It provides information about the types of securities the fund invests in, the fund’s risk profile, and the fund’s expected returns. Even if the mutual fund distributor understands the needs of the investor, the investor should still consider the investment objective of the mutual fund schemes.

Q.15 The employees of institutions that are into the distribution of mutual funds need to clear the _______ and obtain an Employee Unique Identification Number (EUIN) from AMFI.

1. SEBI - VA Mutual Fund Distributors Certification Examination
2. SEBI - VB Mutual Fund Distributors Certification Examination
3. AMFI - VA Mutual Fund Distributors Certification Examination
4. NISM - VA Mutual Fund Distributors Certification Examination
5. None of these

Answer (d)

Explanation: Institutions that are into the distribution of mutual funds need to register with AMFI. The employees of these institutions need to clear the NISM Series V-A: Mutual Fund Distributors Certification Examination and obtain an Employee Unique Identification Number (EUIN) from AMFI.

Q.16 The heads of expenses that can be charged to a mutual fund scheme by the AMC is specified by SEBI - State whether True or False?

1. True
2. False

Answer (a)

Explanation: The statement is True.

Here’s why:

SEBI and Mutual Fund Expenses: The Securities and Exchange Board of India (SEBI) specifies the heads of expenses that can be charged to a mutual fund scheme by the Asset Management Company (AMC)^.

Types of Expenses: These expenses include advisory fee, fund managers fee, legal fee, operational costs, audit fees, registrar and transfer agent fee, investment management fee, distribution fees, and marketing fees. All these expenses charged by the mutual fund house are together called the Total Expense Ratio (TER).

SEBI Regulations: Under SEBI (Mutual Funds) Regulations, 1996, Mutual Funds are permitted to charge certain operating expenses for managing a mutual fund scheme – such as sales & marketing/advertising expenses, administrative expenses, transaction costs, investment management fees, registrar fees, custodian fees, audit fees – as a percentage of the fund’s daily net assets^. 

Q.17 A _______ determines the interest rate sensitivity of a bond fund.

1. Average Maturity
2. Asset Under Management
3. Credit Quality
4. Expense Ratio
5. None of these

Answer (a)

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.

A bond fund holds many bonds of various maturities. The average maturity will determine the interest rate sensitivity of such a bond fund.

Q.18 Monthly Income Plan (MIPs) have no exposure to Equity - State True or False ?

1. True
2. False

Answer (b)

Explanation: Monthly Income Plans (MIPs): MIPs are mutual funds that aim to provide a steady income to investors by investing in a mix of debt and equity securities.

Equity Exposure in MIPs: MIPs do have exposure to equities. They invest around 70% to 80% of their portfolio in debt instruments such as bonds, debentures, and money market instruments, and the remaining in equity and equity-related instruments .MIPs can be classified into two broad categories based on their equity exposure: Conservative and Aggressive. Conservative MIPs invest up to 15% of their portfolio in equity and equity-related instruments, while aggressive MIPs invest up to 25% or more.

MIPs and Risk: The equity component in MIPs helps to potentially enhance returns while the debt component aims to provide stability. Therefore, MIPs are suitable for investors who have a low to moderate risk appetite and a medium to long-term investment horizon.

Q.19 When a NRI applies for mutual fund units, he also has to provide ________ along with other information while filling the application form.

1. Current overseas address
2. Passport details
3. Investments made in the last one year
4. Countries of residence in the last one year
5. None of these

Answer (a)

Explanation:  In case of NRI investors, an overseas address must also be provided along with other information.

Q.20 By what percentage is the Securities Transaction Tax (STT) levied on re-purchase of units (by the mutual fund) of equity oriented schemes (delivery based)?

1. 1%
2. 025
3. NIL
4. 001
5. None of these

Answer (d)

Explanation: The Securities Transaction Tax (STT) levied on re-purchase of units (by the mutual fund) of equity-oriented schemes (delivery based) is 0.001%

Here’s why:

Securities Transaction Tax (STT): STT is a direct tax levied on every purchase and sale of securities that are listed on the recognized stock exchanges in India. STT is governed by the Securities Transaction Tax Act (STT Act), and the STT Act has specifically listed down various taxable securities transactions i.e., transactions on which STT is leviable.

STT on Equity-Oriented Mutual Funds: The STT rate for equity-oriented mutual funds at the time of redemption is 0.001% of the transaction value. For example, if an investor redeems units of an equity-oriented mutual fund worth INR 25,000, the investor would pay INR 2.5 as STT when redeeming the mutual fund units. 

Q.21 Mutual funds have to follow the regulations of Reserve Bank of India (RBI) for investments in _______ .

1. Securities market
2. Gold
3. Money market
4. Commodity market
5. None of these

Answer (c)

Explanation:  RBI regulates the money market and foreign exchange market in the country. Therefore, mutual funds need to comply with RBI’s regulations regarding investment in the money market, investments outside the country etc.

Q.22 Which of these form a part 'Fit and Proper' criteria for eligible distributors which an AMC should check before empaneling a distributor?

1. Adequate controls to delink sales functions from customer risk and investment objective evaluation
2. The eligible distributor should have strict internal controls to limit investors exposure to an asset class or fund house
3. The eligible distributor should have the requisite Employee to Customer ratio as prescribed by SEBI
4. All of the above
5. None of these

Answer (a)

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:

1. Business model, experience and proficiency in the business.
2. Record of regulatory/statutory levies, fines and penalties, legal suits, customer compensations made; causes for these and resultant corrective actions taken.
3. Review of associates and subsidiaries on the above factors.
4. Organizational controls to ensure that the following processes are delinked from sales and relationship management processes and personnel:
5. Customer risk/investment objective evaluation. ii. MF scheme evaluation and defining its appropriateness to various customer risk categories.

Q.23 What is the full form of AGNI ?

1. AMFI Guidelines for New issues and Investments
2. AMFI Guidelines and Norms for Intermediaries
3. AMFI Guidelines for New Investors
4. AMFI Guidelines for Nominations and Investments
5. None of these

Answer (b)

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.

Q24 In case of an Index Fund, the minimum investment in securities of a particular index (which is being replicated/ tracked) shall be ________ .

1. 80% of the total assets
2. 85% of the total assets
3. 90% of the total assets
4. 95% of the total assets
5. None of these

Answer (d)

Explanation: In case of an Index Fund, the minimum investment in securities of a particular index (which is being replicated/ tracked) shall be 95% of the total assets

• Index Funds: Index funds are mutual funds or ETFs that aim to replicate the performance of a specific market index. They do this by holding all (or a representative sample) of the securities in the index
• Minimum Investment in Securities: As per the regulatory guidelines, an Index Fund has to invest a minimum of 95% of its total assets in securities of a particular index (which is being replicated/ tracked by the scheme). This means that at least 95% of the fund’s assets must be invested in the securities that make up the index.
• Purpose of Minimum Investment Requirement: The purpose of this requirement is to ensure that the fund closely tracks the performance of the index. If the fund were allowed to invest a significant portion of its assets in securities not included in the index, it could potentially deviate from the performance of the index.

Q.25 Identify the CORRECT statement/s. A. Valuation gains are ignored. But valuation losses need to be adjusted against the profits while calculating distributable surplus. B. The Mark-to-market gains form a part of the distributable reserves in case of mutual fund Income Distribution Cum Capital Withdrawal plan

1. Only A is correct
2. Only B is correct
3. Both A and B is correct
4. Both A and B are incorrect
5. None of these

Answer (a)

Explanation: SEBI guidelines stipulate dividends can be paid out of distributable reserves.

Mark-to-market gains are on paper - they are not realised. They will be realized when those investments are sold. So these cannot be included in distributable reserves

Also Valuation gains are ignored. But valuation losses need to be adjusted against the profits.

This conservative approach to calculating distributable reserves ensures that dividend is paid out of real and realized profits, after providing for all possible losses.