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Revision and Practice Test Kit: Uma Shashikant
Revision and Practice Test Kit: Uma Shashikant
Version 2
Uma Shashikant
Prudential ICICI Asset Management Company Ltd.
Chapters 1 & 2
Key Points
A mutual fund is a pool of money collected from investors and is invested according
to stated investment objectives.
Mutual fund investors are like shareholders and they own the fund.
Mutual fund investors are not lenders or deposit holders in a mutual fund.
Everybody else associated with a mutual fund is a service provider, who earns a fee.
The money in the mutual fund belongs to the investors and nobody else.
Mutual funds invest in marketable securities according to the investment objective.
The value of the investments can go up or down, changing the value of the investors
holdings.
The net asset value (NAV) of a mutual fund fluctuates with market price movements.
The market value of the investors funds is also called as net assets.
Investors hold a proportionate share of the fund in the mutual fund. New investors
come in and old investors can exit at prices related to net asset value per unit.
Advantages of mutual funds to investors are:
o Portfolio diversification
o Professional management
o Reduction in risk
o Reduction in transaction cost
o Liquidity
o Convenience and flexibility
Disadvantages of mutual funds to investors are:
o No control over costs
o No tailor made portfolios
o Problems of managing a large portfolio of funds
UTI was the only mutual fund during the period 1963-1988.
UTI was the only fund for a long period and enjoyed monopoly status.
UTI is governed by the UTI Act, 1963.
In 1987 banks, financial institutions and insurance companies in the public sector
were permitted to set up mutual funds.
SEBI got regulatory powers in 1992.
SBI Mutual Fund was the first bank-sponsored mutual fund to be set up.
The first mutual fund product was UTIs Master Share in 1986.
The private sector players were allowed to set up mutual funds in 1993.
In 1996 the mutual fund regulations were substantially revised and modified.
In 1999 dividends from mutual funds were made tax exempt in the hands of
investors.
Mutual fund assets in mid-2002 were approximately Rs. 1,00,000 crore.
Mutual funds can be open ended or closed end.
In an open-ended fund, sale and repurchase of units happen on a continuous basis,
at NAV related prices, from the fund itself.
The corpus of open-ended funds, therefore, changes everyday.
Deleted:
A closed-end fund offers units for sale only in the IPO. It is then listed in the market.
Investors wanting to buy or sell units have to do so in the stock markets. Usually
closed-end funds sell at a discount to NAV.
The corpus of a closed-end fund remains unchanged.
Mutual funds also offer equity linked savings schemes (ELSS) that have the following
features:
3 year lock in
Minimum investment of 90% in equity markets at all times
Open ended or closed end
Rebate of 20% under section 88 for investments up to Rs. 10,000.
Gilt funds are funds that invest only in government securities
Sectoral funds are also called as specialty funds.
Equity funds are risky; liquid funds have the lowest risk.
Equity funds are for the long term; liquid funds are for the short term.
Investors choose funds based on their objective, risk appetite, time horizon and
return expectations.
Chapters 3 & 4
Key Points
Chapter 5
Mutual funds are regulated by the SEBI (Mutual Fund) Regulations, 1996.
SEBI is the regulator of all funds, except offshore funds.
Bank-sponsored mutual funds are jointly regulated by SEBI and RBI.
If there is a bank-sponsored fund, it cannot provide a guarantee without RBI
permission.
RBI regulates money and government securities markets, in which mutual funds
invest.
Listed mutual funds are subject to the listing regulations of stock exchanges.
Since the AMC and Trustee Company are companies, any complaints against their
board can be made to the CLB.
Investors cannot sue the trust, as they are the same as the trust and cannot sue
themselves.
UTI does not have a separate sponsor and AMC.
UTI is governed by the UTI Act, 1963 and is voluntarily under SEBI Regulations.
SROs are the second tier in the regulatory structure.
SROs get their powers from the apex regulating agency, act on their instructions and
regulate their own members in a limited manner.
SROs cannot do any legislation on their own.
All stock exchanges are SROs.
AMFI is an industry association of mutual funds. AMFI is not yet a SEBI registered
SRO.
AMFI is regulated by its own board made up of its members.
Deleted:
Chapter 6
Key Points
Offer Document (OD) is the most important source of information for investors.
Abridged version of the OD is called as Key Information Memorandum (KIM).
Investors are required to read and understand the offer document.
No recourse is available to investors for not reading the OD or KIM, as they sign the
form stating that they have read the OD.
The cover page contains the details of the scheme being offered and the names of
sponsor, trustee and AMC.
Mandatory disclaimer clause of SEBI should also be on the cover page of the Offer
document.
OD is issued by the AMC on behalf of the trustees.
KIM has to be compulsorily made available along with the application form.
Closed end funds issue an offer document at the time of the IPO.
Open ended funds have to update OD at least once in 2 years.
Trustees approve the contents of the OD and KIM.
The format and content of the OD has to be as per SEBI guidelines.
The AMC prepares the OD and is responsible for the information contained in the
OD.
The Compliance Officer has to sign the due diligence certificate. He is usually an
AMC employee.
The due diligence certificate states that:
o Information in the OD is according to SEBI formats
o Information is verified and is a true and fair representation of facts
o All constituents of the fund are SEBI registered
SEBI does not approve or certify the contents of the OD.
Factors common to all funds are called as standard risk factors. These include
market risk, no assurances of return, etc.
Factors specific to a scheme are scheme-specific risk factors in the Offer
Document.These include restrictions on liquidity such as lock-in period, risks of
investing in the first scheme of a fund, etc.
Fundamental attributes of a scheme include its basic features.
For any change in fundamental attributes, investor approval is not needed. Trustees
and SEBI should approve the change.
Each investor should be informed through a communication and given the option to
exit without paying any exit load.
A scheme cannot make any guarantee of return, without stating the name of the
guarantor, and disclosing the networth of the guarantor. The past performance of
the assured return schemes should also be given.
Information on existing schemes and financial summary of existing schemes to be
given for 3 years.
Information on transactions with associate companies to be provided for the past 3
years.
If any expense incurred is higher than what was stated in the OD, for past schemes,
explanations should be given.
Chapter 7
Key Points
FIIs can invest in mutual funds. They invest through the Non-resident rupee
account.
RBI permission for NRIs, OCBs and FIIs is a blanket permission. Every investment
does not need RBI approval.
Prospective investors have no legal remedies.
Agents can sell products of multiple mutual funds.
Agents are appointed after they clear the AMFI exam and sign an agreement with
the AMC on non-judicial stamp paper.
Fees and commissions are decided by the AMC and not subject to any regulation.
Investors have the right to receive redemption proceeds within 10 days.
Investors have the right to sue the AMC, Trustees or Sponsor.
Investors cannot sue the Trust as they are the Trust and cant sue themselves.
An open ended fund opens for sale and repurchase within 30 days from the date of
closure of the IPO.
Investors do not have any remedy for performance of the fund being below the
investors expectations.
If investors representing 75% of the unit capital approve, the AMCs services can be
terminated, or the scheme can be wound up.
The first right of the investor is towards the trustees.
If a fund does not redress their complaint they can go to SEBI.
AMFI does not require that every investment decision must be approved by an
investor.
Chapter 8
Tax Aspects
Approximate weightage 1 question; 2 marks
Key Points
Mutual funds themselves pay no tax on the incomes they earn. They are fully exempt
from tax.
If an investor holds units for 12 months or less, any gain from selling the units is
called as short-term capital gain.
Short-term capital gains are taxable at the marginal rate of taxation of the investor.
If an investors holding period is more than 12 months, any gain or loss from sale is
called as long-term capital gain.
Long-term capital gain can be indexed for inflation.
Indexing refers to updating of the purchase price, based on the cost of inflation
index published by the CBDT.The formula for indexation is purchase price X (index in
the year of sale/index in the year of purchase).
Investors can pay either 10% tax (plus surcharge) on the capital gain tax without
indexation or 20% (plus surcharge) on capital gains after indexation, which ever is
lower.
Example:
An investor invests Rs. 4,00,000 in a mutual fund. He sells his investments after 2
years for Rs. 6,00,000. What is the capital gains tax payable, without indexation?
(Ignore surcharge).
o In the above case the capital gain is Rs. 2,00,000, on which 10% is payable as
capital gains tax, without indexation. This amounts to Rs. 20,000.
Chapter 9
Key Points
Load is charged to the investor when the investor buys or redeems (repurchases)
units.
Load is an adjustment to the NAV, to arrive at the price.
Load that is charged on sale of units is called as entry load.
An entry load will increase the price, above the NAV, for the investor.
Load that is charged when the investor redeems his units is called an exit load.
Exit load reduces the redemption proceeds of the investor.
Load is primarily used to meet the expenses related to sale and distribution of units.
An exit load that varies with the holding period of an investor is called a (contingent
deferred sales charge) CDSC.
To arrive at the sale price, given NAV and load (%), we have to calculate the amount
of load and add it to the NAV. The amount of load will be = NAV x (entry load/100).
To arrive at the sale price, given NAV and load (%), we have to calculate the amount
of load and reduce it from the NAV. The amount of load will be = NAV x (exit
load/100).
Load is subject to SEBI regulations
SEBI has stipulated that the maximum level of entry or exit load cannot () be
higher than 7%.
SEBI also stipulates that the repurchase price cannot be less than 93% of the sale
price.
o Minimum repurchase price, given sale price is = NAV X (1 7%)
For closed end funds, the maximum entry of exit load cannot be higher than 5%.
The repurchase price cannot be less than 95% of the sale price.
Chapter 10
Key Points
The investment pattern of the fund is primarily dictated by the fund objectives.
A fund manager whose style is value investing, will prefer to invest in established
profit making companies, and will buy only if the price is right. He will look for
undervalued shares, which have a value proposition that is yet to be recognized by
the market.
A fund manager, whose style is growth, is more aggressive and is willing to invest in
companies with future profit potential. He is willing to buy even if the stock looks
expensive. He focuses on sectors that are expected to do well in future, and will be
willing to buy them even at higher prices.
Equity stocks can be classified as large cap and small cap stocks.
Large cap stocks are liquid and trade every day. They are established companies
offering normal profit potential.
Small cap stocks provide higher return potential. But they are generally not very
liquid.
Cyclical stocks are those whose performance is closely linked to macro economic
factors.
P/E ratio is the ratio of earnings per share (EPS) to market price per share. Growth
shares sell at higher P/E ratios than value shares.
Dividend yield is the ratio between the dividend per share and market price per
share. Growth shares have lower dividend yields than value shares.
If the market prices move up, P/E ratios are higher and dividend yields are lower.
If the market prices move down, P/E ratios are lower and dividend yields are higher.
An active fund manager hopes to do better than the market by selecting companies,
which he believes, will outperform the market.
A passive fund manager simply replicates the index, and hopes to do as well as the
index.
A passive fund manager tries to keep costs down and has to rebalance his portfolio if
the composition of the index changes.
Fundamental analysis is the analysis of the profit potential of a company, based on
the numbers relating to products, sales, costs, profits etc, and the management of a
company.
Technical analysis is an analysis of market price and volumes, to identify clues to the
market assessment of a stock.
A fund manager focuses on asset allocation; a dealer buys and sells shares; and an
analyst researches companies and recommends them for buy and sell.
Chapter 11
Key Points
Chapter 12
Revision and practice test kit
10
Restrictions on Investment
Approximate Weightage: 3 questions; 4 marks.
Key Points
Chapter 13 & 14
11
Key Points
Investors subscriptions to the mutual fund are accounted as unit capital, and not as
liabilities or deposits.
Assets of a mutual fund are the investments made by the fund.
Liabilities of a mutual fund are strictly short term in nature.
The unit capital account is maintained at face value.
NAV is the net assets per unit, computed as net asset divided by number of units
outstanding.
The day on which NAV is calculated is called as the valuation date.
All mutual funds have to disclose their NAV everyday, by posting it on the AMFI web
site by 8.00 p.m.
Open-ended funds have to compute and disclose NAVs everyday.
Closed end funds can compute NAVs every week, but disclosures have to be made
everyday.
Initial issue expenses of a scheme cannot exceed 6% of funds mobilised. Any
amounts above this have to be borne by sponsors or AMC.
For a closed end fund, initial issue expenses are charged over the life of the scheme,
on a weekly basis.
For an open-ended scheme, the initial issue expenses are carried in the balance
sheet of the fund as deferred revenue expenses. They are written off over a
period not exceeding 5 years.
The maximum limit on the expenses that can be charged to an equity mutual fund
are:
For net assets up to Rs. 100 crore: 2.5%
For the next Rs. 300 crore of net assets: 2.25%
For the next Rs. 300 crore of net assets: 2%
For the remaining net assets: 1.75%
These limits are lower by 0.25% for debt funds
These regulatory ceilings are applied on the weekly average net assets of the mutual
fund scheme.
The investment management fees are regulated by SEBI as follows:
For the first Rs. 100 crore of net assets: 1.25%
For net assets exceeding Rs. 100 crore: 1.00%
Valuation of equity shares is done on the basis of traded price; provided that price is
not more than 30 days old.
Debt securities with less than 182 days to maturity are valued on accrual basis. The
accrual is calculated as follows:
A t-bill is issued at Rs. 80 and redeemed at Rs. 100 after 364 days. The accrual per day
is = 20/364 = 0.5494
Illiquid securities cannot be more than 15% of the portfolios net assets. Any illiquid
assets above this limit have to be valued at zero.
Chapter 15 & 16
Revision and practice test kit
12
13
When comparing fund performance with peer group funds, size and composition of
the portfolios should be comparable.
Treynor and Sharpe ratios are used for evaluating performance of funds.
The quality of beta depends on ex-marks.
Chapter 17
Key Points
Chapter 18
Life Cycle and Wealth Cycle Stages
Revision and practice test kit
14
Key Points
Chapter 19
Investment Products
Prudential ICICI Mutual Fund
15
Key Points
Key features of all investment options should be remembered. Please note that the
questions are based on the date of the curriculum, which is December 2001. Any
changes in rates and other features after that date are not included in the
examination. For example, rate on the RBI Relief Bond, for the exam, is 8.5% and
not 8%.
Physical assets like gold and real estate are preferred by investors who like physical
ownership. These investments are not liquid.
Physical assets are perceived to be a hedge against inflation.
Real estate investment requires high initial investments.
Bank deposits are preferred by a large number of investors due to the perception of
bank deposits being safe and free of default.
Features of PPF
o 15 years deposit product made available through banks.
o 9.5% p.a. interest payable on monthly balances.
o Minimum Rs. 100 and maximum Rs. 60,000 p.a. investment allowed.
o Tax benefits u/s 88 under IT Act.
o Interest receipt and withdrawal of principal exempt from tax.
o Limited liquidity available.
o Only individuals and HUFs are eligible to invest
Features of RBI Relief Bonds
o Issued by banks on behalf of the RBI.
o Tenure of five years.
o 8.5% p.a. interest payable semi-annually.
o Option to receive or reinvest interest.
o Interest income exempt from tax.
Features of other government schemes
o Indira Vikas Patra and KVP issued by central government and sold by post
offices.
o Current yield on IVP is 10.5% (according to the curriculum).
o Interest is taxable.
o Investor identity is protected and investment in cash is possible.
Features of instruments issued by companies
o Commercial Paper: Short term (90days) unsecured instrument. Credit rated.
o Debentures: Secured fixed income instruments with credit rating.
o Equity Shares Liquidity through listing.
o Preference Shares Fixed rate of dividend.
o Fixed Deposits Unsecured deposits with credit risk.
o Bonds of FI Unsecured fixed income securities issued by public financial
institutions.
Features of insurance policies
Investors buy due to tax concessions, while they should buy for the
insurance cover.
With profit policy provides bonus along with sum assured.
Without profit policy only provides insurance cover.
Why MF is the best option
o Mutual funds combine the advantages of each of the investment products.
o Dispense the shortcomings of the other options.
o Returns get adjusted for the market movements.
16
Chapter 20
Investment Strategies
Key Points
Investors should choose to allow their investment to compound over the long run.
This can be achieved by choosing the growth or re-investment option of mutual
funds. Automatic reinvestment plans can also be used.
Buy and hold strategy which is preferred by many investors, may not be beneficial
because investors may not weed out poor performing companies and invest in better
performing companies.
Rupee-cost averaging (RCA) involves the following:
A fixed amount is invested at regular intervals.
More units are bought when price is low and fewer units are bought when
price is high.
Over a period of time, the average purchase price of the investors holdings
will be lower than if one tries to guess the market highs and lows.
RCA does not tell indicate when to sell or switch from one scheme to another. This is
a disadvantage.
Investors use the systematic investment plan or automatic investment plan to
implement RCA.
Value averaging involves the following:
A fixed amount is targeted as the desired value of the portfolio at regular
intervals.
If markets have moved up, the units are sold and the target value is
restored.
If markets move down, additional units are bought at the lower prices.
Over a period of time, the average purchase price of the investors holdings
will be lower than if one tries to guess the market highs and lows.
Value averaging is superior to RCA, because it enables the investor to book profits
and rebalance the portfolio.
Investors can use the systematic withdrawal and automatic withdrawal plans to
implement value investing.
Investors can also use a money market fund and an equity fund to implement value
averaging.
Chapter 21
17
Key Points
Asset allocation is about allocating money between equity, debt and money market
segments.
Asset allocation varies from one investor to another depending on their situation,
financial goals and risk appetite.
A model portfolio creates an ideal approach for the investors situation and is a
sensible way to invest.
The asset allocation for an investor will depend on his life cycle and wealth cycle.
Investors can have two strategies:
Fixed asset allocation
Flexible asset allocation
Fixed asset allocation means
Maintaining the same ratio between various components of the portfolio
Re-balancing the portfolio in a disciplined manner
Fixed allocation means a periodical review and returning to the original allocation. If
equity is going up, such investors would book profits. They are disciplined.
Flexible allocation means allowing the portfolios profits to run, without booking them.
If equity market appreciates, flexible asset allocation will result in higher percentage
in equity than in debt.
Graham recommends that most investors should choose a 50:50 allocation, that is
50% in equity and 50% in debt.
Bogle recommends that age, risk profile and preferences have to be combined in
asset allocation
Older investors in distribution phase - 50% equity; 50% debt
Younger investors in distribution phase - 60% equity; 40% debt
Older investors in accumulation phase - 70% equity; 30% debt
Younger investors in accumulation phase - 80% equity; 20% debt
Steps in developing a model portfolio for the investors:
Develop long term goals
Determine asset allocation
Determine sector distribution
Select specific fund schemes for investment
Jacobs Model Portfolios
Accumulation phase
o Diversified equity: 65 - 80%
o Income and gilt funds: 15 - 30%
o Liquid funds: 5%
Distribution phase
o Diversified equity: 15 - 30%
o Income and gilt funds: 65 - 80%
o Liquid funds: 5%
Chapter 22
Fund selection
Revision and practice test kit
18
Fund selection refers to the actual choice of funds according to the chosen model portfolio for
the investor.
Equity funds: Characteristics:
o Fund category the fund chosen should be suitable to investor objective
o Investment style Choose between growth and value depending on investors risk
perception
o Age of the fund Experienced funds are preferred to new funds
o Fund management experience Track record of the fund managers is important
o Size of the fund Larger funds have lower costs
o Performance and risk risk adjusted performance matters
o
Equity Funds: Selection Criteria
o Percentage holding in cash should be low Funds can always sell liquid stocks for liquidity
requirements.
o Concentration in portfolio should be low An equity fund should be well diversified.
o Market capitalization of the fund High capitalization means better liquidity
o Portfolio turnover Higher turnover means more transactions and costs, but exploitation
of opportunities. Low turnover represents patience and stable investments.
Risk Statistics
o Beta represents market risk, higher the beta higher the risk.
o Ex-Marks represents correlation with markets higher the ex-marks, lower the risk. A
fund with higher ex-marks is better diversified than a fund with lower ex-marks.
o Gross dividend yield represents return. Funds with higher gross dividend yield should be
preferred.
o Funds with low beta, high ex-marks and high gross dividend yield are preferable
Debt Funds: Selection Criteria
o A smaller or new debt fund may not necessarily be risky.
ratio.
o
o
o
o
19
20
Sample Test - 1
1.
b.
c.
d.
b.
c.
Financial institutions
d.
Portfolio diversification
b.
Risk reduction
c.
d.
4. Equity Linked Savings Scheme does not have which of the following features?
(1 mark)
(1 mark)
(1 mark)
(2 marks)
a.
b.
c.
A minimum stated level of investments is made in equity and equity related instruments
d.
NAV
b.
Fund Size
c.
Rate of Return
d.
Number of Distributors
Balanced Funds
b.
Gilt Funds
c.
d.
Debt Funds
b.
c.
d.
A Trust
b.
c.
d.
A trustee company
(1 mark)
(1 mark)
(2 marks)
(1 mark)
(1 mark)
21
a.
b.
c.
d.
No entity at all
11.
(1 mark)
SEBI
b.
RBI
c.
d.
AMFI
In case of merger of two AMC, 75% of the unit holders have to approve the merger in case of
(1 mark)
a.
b.
c.
d.
Board of Trustees
b.
c.
SEBI
d.
RBI
(1 mark)
(2 marks)
b.
c.
d.
14. An offer document contains an AMCs investor grievances history for the past
a.
1 fiscal year
b.
2 fiscal year
c.
3 fiscal year
d.
Six months
(1 mark)
15. For scheme to be able to change its fundamental attributes, the fund managers must obtain the
consent of
a.
(2 marks)
50% of the unit holders
b.
c.
d.
16. SEBI does not require the following to be included in the offer document issued by a mutual fund
(1 mark)
a.
b.
c.
d.
17. Mutual funds do not justify the need for paying commission to agents when the investors skip out of
the scheme before a specified period. In India this practice is adopted by
a.
(2 marks)
b.
c.
22
d.
The AMC
b.
The trustees
c.
d.
b.
c.
d.
(1 mark)
(1 mark)
20. If a charitable trust approaches a distributor with an application for investment in a mutual fund, the
distributor should
a.
b.
c.
d.
(2 marks)
21. One of your friends who have invested in a mutual fund is about to get Canadian citizenship. What
would you advise?
(2 marks)
a.
b.
c.
d.
He should immediately redeem his investment since foreign citizens are not eligible investors
22. The AMFI code of ethics does not cover the following prescriptions
(1 mark)
a.
b.
c.
d.
(2 marks)
a.
Obtaining from the trustees any information having an adverse effect on their investments
b.
c.
d.
24. A Debt fund distributes 10% dividend. How much tax does the investor have to pay on this dividend?
(2 marks)
a.
10%
b.
12%
c.
20%
d.
None
b.
c.
Is the same for all investors irrespective of how long they stay invested
d.
(1 mark)
26. The amount required to buy 100 units of a scheme having an entry load of 1.5% and NAV of Rs.20 is:
(2 marks)
23
a.
Rs.2000
b.
Rs.2015
c.
Rs.1985
d.
Rs.2030
27. A high P/E multiple of a fund in comparison to average market multiple could be of (1 mark)
a.
Value fund
b.
Growth fund
c.
Balanced fund
d.
28. A company whose earnings are strongly related to the state of economy is a
a.
Economy stocks
b.
Cyclical Stocks
c.
Value Stocks
d.
Growth stocks
(1 mark)
(2 marks)
b.
Stocks whose worth will be recognized by the market in the long term
c.
d.
Reinvestment risk
b.
Default risk
c.
Inflation risk
d.
Interest-rate risk
Also rise
b.
Fall
c.
d.
32. As per SEBI, mutual funds can borrow for short term to the extent of
a.
b.
c.
d.
b.
c.
Not at all
d.
b.
c.
d.
(1 mark)
(2 marks)
(2 marks)
(2 marks)
(1 mark)
35. A funds weekly average net assets are Rs. 1000 crore. What is the limit on the expenses of the fund?
(2 marks)
a.
24
b.
c.
d.
36. A fund's investments at market value total Rs.700 crores, Total liabilities stand at Rs.50 lacs and the
number of units outstanding is 28 Crores. What is the NAV?
a.
Rs.30.19
b.
Rs.24.98
c.
Rs.32.15
d.
Rs.40.49
(2 marks)
37. For valuation of traded securities, which of the following is not true?
a.
b.
c.
d.
(1 mark)
If the security has not been traded on valuation date, the trading price on any previous date
may be used, provided that date is not more than 30 days prior to valuation date.
b.
c.
d.
(1 mark)
b.
c.
Have no benchmarks
d.
(1 mark)
40. An Investor buys one unit of a fund at an NAV of Rs.20. He receives a dividend of Rs.3 when the NAV is
Rs. 21. The unit is redeemed at an NAV of Rs.22. Total Return is
a.
25.71%
b.
Rs. 27.51
c.
21.27%
d.
Rs. 21.75%
(2 marks)
41. For evaluating sectoral funds, the preferred benchmark would be the
a.
BSE Sensex
b.
c.
BSE 200
d.
(1 mark)
42. The appropriate benchmark for evaluating a fund's performance depends on (1 mark)
a.
b.
c.
SEBI
d.
AMFI
b.
c.
d.
44. The most suitable measure of fund performance for all fund types is
(1 mark)
25
a.
NAV Change
b.
Total Return
c.
d.
b.
c.
d.
b.
c.
d.
Asset Allocation
b.
Selection of fund
c.
d.
(1 mark)
(1 mark)
(1 mark)
48. Within an asset class, which individual security to invest in should be decided by (2 marks)?
a.
b.
c.
d.
An objective advisor
b.
c.
d.
10.5%
b.
11%
c.
10%
d.
9%
5 years
b.
6 years
c.
7 years
d.
8 years
(1 mark)
(1 mark)
(2 marks)
52. The most important factor look for when investing in a corporate fixed deposit is the (1 mark)
a.
Yield
b.
Rate of interest
c.
d.
53. The most important reason for an investor to prefer a bank deposit to a mutual fund is
(2 marks)
a.
26
b.
c.
d.
Rs.10000
b.
c.
d.
Balanced fund
b.
Growth fund
c.
Value fund
d.
Income fund
Guaranteed returns
b.
c.
Low risk
d.
High liquidity
9.5%
b.
c.
d.
b.
c.
Active switching
d.
(2 marks)
(1 mark)
(1 mark)
(2 marks)
(2 marks)
59. A very high proportion of investment in all types of equity funds is advisable for investors
(1 mark)
a.
In distribution phase
b.
In accumulation phase
c.
In transition phase
d.
(2 marks)
a.
b.
The right investment strategy depends upon who the beneficiaries are
c.
The right investment strategy depends upon the state of the stock market
d.
61. Of the following, which would be suitable for a retiree with a modest risk appetite
(1 mark)
a.
Value Fund
b.
c.
Growth Fund
d.
Balanced Fund
62. The strategy advisable for an investor to maximise investment return in the long run is
27
(2 marks)
a.
b.
c.
d.
b.
c.
d.
(1 mark)
64. Which of the following lets an investor book profits in a rising market and increase holdings in a falling
market
(2 marks)
a.
b.
c.
d.
(2 marks)
a.
b.
Over a period of time, the average purchase price will work out lower than if one tries to
guess the market highs and lows
c.
It does not tell you when to buy, sell or switch from one scheme to another
d.
Equity securities
b.
c.
Money market
d.
Real estate
b.
Is less risky
c.
d.
Is more risky
b.
c.
d.
b.
c.
d.
(2 marks)
(1 mark)
(2 marks)
(2 marks)
28
Sample Test 2
1. The Board of Trustees of the UTI does not have nominees from
a.
RBI
b.
LIC
c.
IDBI
d.
b.
c.
In short-term securities
d.
(1 mark)
(1 mark)
3. The private sector was granted permission to enter the mutual fund industry in (1 mark)
a.
1992
b.
1993
c.
1998
d.
1995
4. A close-ended scheme is quoted on the stock exchange at a discount to its NAV when
(2 marks)
a.
b.
Investors perceive that the fund will be unable to maintain the NAV
c.
d.
5. In the re-investment option offered by mutual funds, the number of units held by an investor increases
because of
(2 marks)
a.
b.
Reinvestment of dividend
c.
d.
b.
c.
d.
The AMC
b.
The Trustees
c.
The Registrars
d.
The custodians
(1 mark)
(1 mark)?
8. If the schemes of a mutual fund are taken over by another mutual fund, which of the following is false?
(2 marks)
a.
There is a change in the AMC of the schemes that are taken over
b.
There is a change in the Sponsor of the schemes that are taken over
c.
d.
29
b.
c.
d.
RBI
b.
c.
d.
(1 mark)
(2 marks)
The draft offer document forwarded to SEBI is in accordance with SEBI regulations
b.
All legal requirements connected with launching of the scheme have been complied with
c.
Disclosures made in the offer document are true, fair and adequate
d.
Investment rebate
b.
Offer document
c.
d.
(1 mark)
13. An offer document contains the summary of expenses history of all schemes for the past
(2 marks)
a.
1 fiscal year
b.
2 fiscal year
c.
3 fiscal year
d.
Six months
AMC
b.
Unit holders
c.
SEBI
d.
AMFI
Required by investors
b.
c.
d.
(1 mark)
(1 mark)
(2 marks)
b.
c.
d.
Indicate the redemption or repurchase price as at the end of the current fiscal year
(2 marks)
b.
Agents can sell products of mutual funds with whom he has entered into agreements
c.
d.
Through salaries
b.
Through commissions
(1 mark)
30
c.
d.
b.
c.
d.
(1 mark)
20. An investor buys units in a fund that has given excellent returns in the past, but his expectations are
not met, as the fund does not perform well this year. The investor can (2 marks)
a.
b.
c.
d.
No
b.
Yes
c.
d.
If AMFI approves
b.
c.
d.
(1 mark)?
(1 mark)
23. Distribution tax should be taken into account when computing net returns from (2 marks)
a.
Equity funds
b.
Debt funds
c.
d.
24. A mutual fund declares Re 1 as distribution. The income in the hands of unit holders is
a.
Taxable at 20%
b.
c.
d.
25. For a close-ended fund, the repurchase price should not be lower than
a.
NAV
b.
95% of NAV
c.
93% of NAV
d.
97% of NAV
(2 marks)
(1 mark)
a.
Entry fee
b.
c.
d.
The expenses incurred by fund managers for marketing a mutual fund scheme
b.
(2 marks)
(2 marks)
31
c.
A passive fund selects the stocks that are present in the index
d.
b.
Undervalued stocks
c.
d.
Voting rights
b.
c.
d.
No guaranteed rights
(1 mark)
(2 marks)
30. Continuous tracking of the companies in which a mutual fund has invested is done by
(1 mark)
a.
b.
Equity analysts
c.
Trustees
d.
Security dealers
b.
c.
d.
(1 mark)
(1 mark)
a.
b.
There are large players like banks, financial institutions, mutual funds, etc
c.
d.
33. A bond with a coupon of 9% when interest rates for similar maturities are 11% will sell
(2 marks)
a.
Above par
b.
Below par
c.
At par
d.
b.
Corporates
c.
d.
b.
c.
d.
36. A mutual fund may transfer investments from one scheme to another
a.
Not at all
b.
(1 mark)
(1 mark)
(1 mark)
32
c.
At cost price
d.
b.
c.
d.
(2 marks)
38. Which of the following measures are not taken by SEBI for protecting investors of mutual funds
(2 marks)
a.
b.
Ensuring that the funds are not used to favour a few companies
c.
d.
Liabilities
b.
Deposits
c.
Unit capital
d.
b.
c.
d.
Audit fees
b.
c.
d.
(1 mark)
(2 marks)
(1 mark)
42. The valuation norm for non-investment grade, performing assets is done: (2 marks)
a. On YTM basis using the Crisil valuation methodology
b. On YTM basis with 25% discount
c. At 25% discount to face value
d. At face value
43. Valuation norms for non-traded securities should be disclosed
a.
b.
Every quarter
c.
d.
b.
c.
d.
Growth fund
b.
Index fund
c.
Value fund
(1 mark)
(1 mark)
(1 mark)
33
d.
Balanced fund
b.
Greater efficiency
c.
d.
A rising market
(1 mark)
47. An investor can assess the performance of his mutual fund by comparing it with the performance of
(2 marks)
a.
b.
c.
d.
48. If the NAV of an open-ended fund was Rs.16 at the beginning of the year and Rs.22 after 13 months,
the annualized change in NAV is
a.
6.0%
b.
34.6%
c.
40.6%
d.
37.5%
(2 marks)
49. The choice of an appropriate benchmark for evaluating a fund's performance depends on
(1 mark)
a.
b.
c.
SEBI
d.
AMFI
50. When comparing a fund's performance with that of its peer group, the following cannot be compared
(2 mark)
a.
b.
c.
d.
(2 marks)
a.
b.
c.
d.
Because of its simplicity, simple Total Return is preferred in practice to Total Return with
Reinvestment of distribution
(1 mark)
To become a billionaire
b.
c.
d.
b.
(1 mark)
34
c.
d.
b.
c.
d.
(2 marks)
(1 mark)
a.
b.
c.
d.
56. Direct investment in stock market can be a better option than investing through mutual funds if the
investor
(2 marks)
a.
b.
c.
d.
Rural investors
b.
c.
Urban investors
d.
Risk protection
b.
Tax benefits
c.
Easy liquidity
d.
High returns
b.
c.
Both interest and principal are tax free in the year of withdrawal.
d.
b.
c.
d.
(1 mark)
(1 mark)
(2 marks)
(2 marks)
(2 marks)
a.
b.
Over a period of time, the average purchase price will work out lower than if one tries to
guess the market highs and lows
c.
It does not tell you when to buy, sell or switch from one scheme to another
d.
(1 mark)
Accumulating investors
35
b.
Affluent investors
c.
d.
In distribution phase
b.
In accumulation phase
c.
In transition phase
d.
(1 mark)
(2 marks)
Maintain balance in their portfolio by liquidating a part of the position in the asset class which
has given higher return and reinvesting in the other asset class which has lower return
b.
c.
d.
b.
Dramatic results
c.
d.
b.
c.
d.
(1 mark)
(2 marks)
(2 marks)
a.
b.
It is based on past returns, which does not necessarily indicate further performance
c.
It is an independent number
d.
b.
c.
d.
(1 mark)
69. Yield-to-maturity of a debt fund is more important if the investment objective is (2 marks)
a.
Current income
b.
Total return
c.
Liquidity
d.
36
Sample Test 3
1. A systematic withdrawal plan is ideal for investors who
a. Seek growth as the main objective
b. Wish to benefit from market fluctuations
c. Prefer a regular income stream
d. Not sure about themselves
2. Gilt funds invest in
a. IT sector
b. AAA securities
c. Money market securities
d. Government bonds
3. Which of the following is recommended by Bogle for older investors in
accumulation stage?
a. 50% in equity and 50% in debt
b. 60% in equity and 40% in debt
c. 70% equity and 30% debt
d. 40% equity and 60% debt
4. Illiquid securities in a portfolio
a. Cannot be transferred across schemes
b. Cannot be more than 15% of net assets
c. Cannot be more than 20% of net assets
d. a and b are true
e. a and c are true
5. Which of the following cannot invest in mutual funds?
a. NRIs
b. Charitable trusts
c. FIIs
d. Foreign investors
6. Which of the following is true for assured return schemes?
a. Name and net worth of guarantor to be given
b. Performance of past assured return schemes to be given
c. Whether assurance in earlier scheme was met to be stated
d. All of the above
7. Your friend in Dubai wants to invest in a mutual fund. She should be advised to
read
a. Trust deed
b. SEBI regulations
c. Offer document
d. AMC balance sheet
e. All of the above
8. While deciding on asset allocation, an investor must consider
a. The stage of his life
b. The purpose of making investment
c. His risk appetite
d. All of the above
9. Mutual funds should be recommended as
a. Investments to achieve long term goals
b. A get-rich quick option
c. Investments to take advantage of stock market
d. All of the above
10. A fund manager who believes in the growth philosophy looks for companies with
a. Above average earnings growth
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38
c. Associate of AMC
d. Employees of AMC
21. Stock exchanges can act as regulators of:
a. SEBI registered mutual funds
b. Closed end funds listed on the exchange
c. All sectoral funds
d. All equity mutual funds
22. A mutual fund cannot invest more than _____% of its net assets in un-rated
debt of one issuer. Total investments in un-rated debt cannot exceed ____% of
net assets.
a. 10; 20
b. 15; 25
c. 10; 25
d. 15;20
23. Which of the following is an ideal allocation for a wealth preserving affluent
investor?
a. 50% equity;50% debt
b. 70% equity; 30% debt
c. 30% equity;70% debt
d. 100% equity
24. If a 8% bond with face value of Rs. 1,000 is selling for Rs. 1,100, what is the
current yield?
a. 8%
b. 7.27%
c. 7.8%
d. 8.2%
25. If you maintain a flexible asset allocation you would
a. Rebalance debt and equity periodically
b. Rebalance debt and equity frequently
c. Generally avoid portfolio re-balancing
d. Keep fixed percentage in debt and equity at all times.
26. Which of the following will NOT require financial planning?
a. A 40 years old doctor with substantial savings
b. A retiree who is currently getting an income of 4,000 but would want Rs.
10,000 a month
c. An old person wanting to transfer all his wealth to his grandchildren
d. A young professional aged 26 years
27. What is the portfolio you will recommend to a young couple with two incomes
and two children?
a. 10% money market; 30% aggressive equity; 25% diversified equity;
35% bond funds
b. 40% aggressive equity; 30% money market; 30% bond fund
c. 60% equity; 30% money market; 10% debt
d. 70% bond funds; 30% equity funds
28. Financial planning is:
a. Investing funds to achieve a highest possible rate of return
b. Resorting to tax planning to keep taxes as low as possible
c. Planning for retirement with maximum income possible
d. Process of solving financial problems and reaching financial goals
29. You have just won a huge sum in a lottery. What should your ideal allocation
be?
a. Invest everything in sectoral funds, as NAV is very low.
b. Invest in government bonds, as risk is low.
Prudential ICICI Mutual Fund
39
c. Invest in money market funds and decide over the next few months
d. Consider the impact of tax
e. Both c and d
30. Which of the following is true for closed end funds?
a. The fund offers to buy and sell units at NAV
b. The corpus of the fund is constant
c. The net assets of fund does not change
d. None of the above
31. Which of the following represents the transition phase?
a. Investor has no need for investment income
b. Investor has a long term horizon
c. Investor cannot take risks
d. Investors financial goals are approaching.
32. P/E of which of these stocks is usually high?
a. Value stocks
b. Cyclical stocks
c. Small cap stocks
d. Growth stocks
33. If an AMC does not resolve an investors complaint, investor can appeal to:
a. SEBI
b. Ministry of Finance
c. Office of the public trustee
d. Company Law Board
34. Mutual funds can lend funds in the form of
a. Loans
b. Promissory notes
c. Securities
d. None of the above
35. An offer document of an open ended fund has to be revised
a. Once in 3 years
b. Not at all
c. Every year
d. Once in two years
36. A FII can invest in a mutual fund through its
a. Non resident external account
b. Non resident ordinary account
c. Non resident rupee account
d. RBI current account
37. You invest Rs. 25,000 in a mutual fund. After 2 years you redeem your units at
Rs. 32,000. Ignoring indexation and surcharge, what is the capital gain tax on
this transaction?
a. Rs. 7,000
b. Rs. 700
c. Rs.1,400
d. Depends on the marginal rate of taxation
38. If a funds NAV is Rs. 12, what is the maximum sale price it can charge,
according to SEBI regulations?
a. Rs. 12.70
b. Rs. 12.84
c. Rs. 13.68
d. Rs. 11.16
39. Debt securities with less than 182 days to maturity are valued at
a. Face value
Revision and practice test kit
40
b. YTM basis
c. Accrual basis
d. Duration basis
40. If a scheme holds more than 15% in illiquid securities, all securities above that
limit have to
a. Be valued at book value
b. Be valued at a discount of 25%
c. Valued at cost price
d. Assigned a value of zero
41. Ex-Marks of an equity fund measures its
a. Performance
b. Risk
c. Both the above
d. None of the above
42. Which of the following is untrue of an automatic reinvestment plan?
a. The plan allows for automatic reinvestment of all income and capital
gains
b. Automatic reinvestment allows for accumulation of additional units of the
fund
c. The major benefit of automatic reinvestment is compounding
d. The benefit of automatic reinvestment is often lost on account of the
heavy load charge on the reinvestment
43. Retired investors should
a. Not draw down on their capital
b. Not invest in securities which bear risk of capital erosion
c. Continue holding a major portion of their holding in equity growth funds
d. Never invest in equity
44. A criticism of rupee-cost averaging is
a. Investment is for the same amount at regular intervals
b. Over a period of time, the average purchase price will work out lower than
if one tries to guess the market highs and lows
c. It does not tell you when to buy, sell or switch from one scheme to
another
d. Rupee cost averaging has no serious shortcomings
45. A 55 year old investor, who is employed and earning well, can be said to be in
a. Accumulation stage
b. Transition stage
c. Distribution stage
d. Inter-generational wealth transfer stage
46. In order to decide an appropriate index as benchmark for an actively traded
fund, one should consider
a.
Fund size and portfolio composition
b.
Whether the fund is broad based or focused on specific type of securities
c.
Investment objective of the fund
d.
All of the above
e.
None of the above
47. An equity investor wants to maximise his return in the long run. He should
a. Buy and hold investments for a long time
Prudential ICICI Mutual Fund
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42
43
44
b.
44. c
2.
45. a
3.
46. d
4.
47. a
5.
48. c
6.
c.
49. b
7.
50. a
8.
51. a
9.
52. c
10. c
53. a
11. c
54. b
12. a
55. b
13. c
56. d
14. c
57. d
15. d
58. b
16. d
59. b
17. b
60. b
18. b
61. d
19. a
62. d
20. c
63. c
21. d
64. a
22. d
65. c
23. d
66. b
24. d
67. b
25. b
68. a
26. d
69. c
27. b
28. b
29. c
30. b
31. b
32. d
33. a
34. b
35. c
36. b
37. b
38. d
39. a
40. a
41. d
42. b
43. a
45
Sample test 2
1.
36. b
2.
37. c
3.
38. c
4.
39. c
5.
40. d
6.
41. d
7.
42. c
8.
43. c
9.
44. b
10. c
45. b
11. d
46. a
12. c
47. d
13. c
48. b
14. a
49. b
15. c
50. b
16. d
51. d
17. b
52. b
18. b
53. d
19. c
54. d
20. d
55. b
21. b
56. b
22. d
57. d
23. b
58. b
24. b
59. b
25. b
60. b
26. d
61. c
27. d
62. d
28. c
63. b
29. b
64. a
30. b
65. d
31. c
66. c
32. d
67. b
33. b
68. c
34. c
69. b
35. a
70.
Sample Test 3
1.
2.
3.
4.
5.
6.
7.
8.
9.
10.
11.
12.
13.
14.
15.
16.
17.
18.
19.
20.
21.
22.
23.
24.
25.
26.
27.
28.
29.
30.
31.
32.
33.
34.
35.
36.
37.
38.
39.
40.
41.
42.
43.
44.
45.
46.
47.
48.
49.
50.
51.
52.
c
d
c
d
d
d
c
d
a
a
b
c
d
d
e
d
a
c
b
d
b
c
c
b
c
c
a
d
e
b
d
d
a
c
d
c
b
b
c
d
b
d
b
c
b
d
d
e
b
d
d
d
53.
54.
55.
56.
57.
58.
59.
60.
61.
62.
63.
64.
65.
66.
d
a
a
a
d
a
d
c
c
a
c
b
e
a
47