CHAPTER 1: INVESTMENT LANDSCAPE

1. Financial goals should have__________

a. Time Horizon
b. Money Required
c. Both A & B
d. None of the above

Ans: (c) After identifying and assigning priorities to the goals, the investor has to
assign a timeline as well as the amount of funding required at the time of such
events.
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2. Investors tend to extrapolate the current event into the future and expect a
repeat. This example is called_________
a. Herd Mentality
b. Familiarity
c. Recency
d. Overconfidence

Ans: (c) In Recency basis, investors tend to extrapolate the event into the future
and expect a repeat. A bear market or a financial crisis leads people to prefer
safe assets. Similarly, a bull market makes people allocate more than what is
advised for risky assets.

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3. If the asset allocation is maintained at a constant ratio of 75%-25%, it is called
a. Dynamic Asset Allocation
b. Fixed Asset Allocation
c. Variable Asset Allocation
d. Strategic Asset Allocation

Ans: (b) In a Fixed asset allocation strategy, the portfolio is rebalanced on a

regular interval to maintain original asset allocation which was decided at the
initial stage.
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4. The purchasing power of currency changes on account of which of the
following?
a. Asset allocation
b. Compound interest
c. Inflation
d. Diversification

Ans: (c) Due to Inflation, to buy the same amount of good every year we have to
spend more and more money. Thus, it reduces the purchasing power of money.

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5. Inflation Risk is also referred as
a. Credit Risk
b. Liquidity Risk
c. Purchasing Power Risk
d. None of the above

Ans: (c) Inflation or price inflation is the general rise in the prices of various
commodities, products, and services that we consume. Inflation erodes the
purchasing power of the money. Inflation risk is also referred to as purchasing
power risk, is the risk that inflation will undermine the real value of cash flows
made from an investment.
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6. Which of these is a physical asset?
a. Gold futures
b. Real estate fund
c. Real estate
d. Mortgaged backed securities

Ans: (c) Real estate means physical property in the form of land and buildings.
Real estate funds, gold futures, and mortgage backed securities are all financial
assets.

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7. Which statement is FALSE with reference to risk appetite?
a. Risk appetite can be assessed by risk profiling.
b. Preferred risk appetite is different from ideal risk appetite.
c. Risk appetite indicates the level of risk that investor is comfortable with.
d. People of same age will have same risk appetite.

Ans: (d) One of the common factors that many people use to evaluate the
investor's risk profile is the investor's age. It is popularly believed that younger
investors have the potential for taking higher risks compared to old people.
However, this may not be correct as 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. In such cases, it
may not be prudent to categorize investors on the basis of age alone.
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8. What is asset allocation?
a. Deciding which and how many mutual fund schemes to invest in.
b. Finalizing which mutual fund schemes would deliver the highest returns in
future.
c. Deciding how to invest money across various asset categories in line with
one's risk profile, financial objectives and current situation.
d. Deciding which asset category would outperform the others and investing in it.

Ans: (c) 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.

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9. What can happen if an investor has an Overconfidence bias?
a. He will make careful investment choices
b. He will take higher risks in his investments
c. His portfolio will have all good blue chip shares
d. He will keep the risks low in his investment portfolio

Ans: (b) Overconfidence 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.
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10. What is the 'Goal-Based approach to Financial Planning' focused on?
a. To generate a limited amount of money
b. An investment plan which is focused on a specific goal
c. An investment plan with a specific risk profile
d. A specific option of investment

Ans: (b) A goal-Based approach to Financial Planning is a financial plan for a

specific goal. For example - Investments which will be used for higher studies of
a child. An alternate approach is a "comprehensive financial plan" where all the
financial goals of a person are taken together, and the investment strategies are
worked out on that basis.

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11. Which amongst the following bias can lead to concentrated portfolio?
a. Familiarity Bias
b. Herd Mentality
c. Overconfidence Bias
d. Recency Bias

Ans: (a) Familiarity Bias: 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.
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12. Asset allocation must primarily match ______
a. Long term value creation
b. Investment needs
c. Financial goals
d. Tax saving needs

Ans: (b) The investor's need from the investment will determine the asset class
that is most suitable for the investor. Along with the need from the investment,
the investor's ability to take risk and the investor's investment horizon is equally
important to select the appropriate asset class.

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13. State True or False. When compared to Goal based financial planning,
Comprehensive financial planning requires more time commitment.
a. True
b. False

Ans: (a) A comprehensive financial plan calls for significantly more time
commitment on the part of both the investor and the financial planner. The
comprehensive financial plan captures the estimated inflows from various
sources, and estimated outflows for various financial goals, including post-
retirement living expenses. The plan can go several decades into the future.
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14. Risk profile of an investor is influenced by _____
A. the need to take risks
B. the willingness to take risks
C. the ability to take risks
a. Only C
b. A and B
c. A and C
d. All A, B and C

Ans: (d) 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 and the investment risks associated with various
mutual fund schemes would be essential for deciding the asset allocation in an
investor's portfolio.

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15. _______ is the process of determining the ability of an investor to bear losses
from various investments.
a. Delta Hedging
b. Asset Allocation
c. Portfolio Churning
d. Risk Profiling

Ans: (d) Risk profiling is an approach to understand the risk appetite of investors
and is an essential pre-requisite to advise investors on their investments.
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16. The biggest advantage of investment in gold is
a. High returns
b. High appreciation in value
c. Low Purchase price
d. Hedge against inflation

Ans: (d) Historically, Gold as an asset class has given marginally more returns
than the inflation. Hence, it is considered as a best hedge against the inflation.

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17. Rebalancing in required in case of which asset allocation?
a. Tactical Asset Allocation
b. Strategic Asset Allocation
c. Both of the above
d. None of the above

Ans: (c) Rebalancing is required in both Tactical and Strategic Asset allocation.
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18. Amongst the following options, ________is the most illiquid.
a. Gold
b. Real Estate
c. Shares
d. Bank Fixed Deposits

Ans: (b) Illiquid means which cannot be sold easily. From the above options,
Real Estate or Property cannot be sold easily as compared to others.

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19. Higher the Capital Base, _________the Risk Appetite.
a. Higher
b. Lower
c. Capital base has no effect on risk appetite
d. No change

Ans: (a) Higher the capital base, better the ability to financially take the
downsides that come with risk - so the risk appetite is higher.
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20. There are various risk profiling tools available on the internet. A financial
planner can use any of these as risk profiling is just a process - State True or
False?
a. True
b. False

Ans: (b) Risk profiling is an approach to understand the risk appetite of investors
- an essential pre-requisite to advise investors on their investments. There are
various factors which have influence on risk appetite. Internet risk profiling tools
are useful pointers, but it is important to understand the robustness of such tools
before using them in the practical world. Some of the tools featured in websites
have their limitations. So, these tools cannot be always used.

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21. What is the relationship between Interest Rates and Real Estate prices?
a. Rise in interest rates lead to fall in real estate prices
b. Fall in interest rates lead to fall in real estate prices

Ans: (a) When interest rates rises and money becomes expensive, there is less
demand for real estate - therefore this softens the real estate market. When
money is cheap and easily available, more people buy real estate. This pushes
up real estate values.
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22. Commodities as an asset class does not include __________
a. Food Crops
b. Industrial Metals
c. Gold
d. Real Estate

Ans: (d) Real Estate is not a commodity as it cannot be standardised. Food crops
(Rice, wheat), Industrial Metals (Copper, Nickel) and Gold are all commodities.

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23. Risk appetite increases as the number of earning members ________
a. decreases
b. increases
c. becomes zero
d. None of the above

Ans: (b) More earning members means more income and so the risk taking
capacity increases.
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24. While doing an asset allocation for an investor, which amongst the following
factors will have the least importance?
a. RBl's announcement that there could be huge recession
b. RBl's announcements of changes in interest rates
c. Bonus issued by one of the MF schemes
d. Changes in prices of equity shares

Ans: (c) The purpose of asset allocation is not to enhance returns, but to reduce
the risk. Bonus issue is just a book entry and will have no effect on asset
allocation.

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25. Risk Appetite is influenced by which financial factor(s)?
a. Capital Base
b. Regularity of Income
c. Both 1 and 2
d. None of the above

Ans: (c) Higher the capital base, better the ability to financially take the
downsides that come with risk. People earning regular income can take more risk
than those with unpredictable income streams.
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26. Today's costs can be translated into future requirement of funds using the
formula:
a. A = P / (1 + i)^n
b. A = P X (1 + i)^n
c. P = A^n X (1 + i)
d. P = A^n X (1 + i)^n

Ans: (b) The costs in today's terms, can to be translated into the rupee
requirement in future. This is done using the formula A = P X (1 + i)^n where:
A = Rupee requirement in future, P = Cost in today's terms, i = Rate of inflation, n
= Number of years into the future, when the expense will be incurred.

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27. Tactical Asset Allocation is the decision that comes out of calls on the likely
behaviour of the market - True or False?
a. True
b. False

Ans: (a) 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 rise in share markets, is taking a tactical
asset allocation call.
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28. Which among the following investment avenues does not offer income on a
regular Basis?
a. Stocks
b. Real Estate
c. Debentures
d. Physical Gold

Ans: (d) Stocks offer regular income in the form of dividends, Real estate gives
rent and Debentures give interest. Physical gold give no regular return.

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29. The asset allocation that is worked out for an investor based on risk profiling
is called ____________
a. Strategic Asset Allocation
b. Fixed Asset Allocation
c. Tactical Asset Allocation
d. Flexible Asset Allocation

Ans: (a) Risk profiling is key to deciding on the strategic asset allocation. For
example – If the investor is a retired/old person he should have more debt in his
portfolio.
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30. Which among the following asset categories can also be purchased for
consumption purposes apart from investment?
a. Bonds
b. Real Estate
c. Debentures
d. Stocks

Ans: (b) One may invest in a residential property and give it on rent to generate
income. This is investment. At the same time, one may also buy a flat to live in-
for residential purpose. Such a self-occupied house may not be an investment.

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31. A person wishes to avail of a loan. For which of the below options he cannot
get a loan?
a. To start a textile factory
b. To buy a car of value above Rs. 20 lacs
c. To buy a high priced lottery ticket
d. To buy a house in a Union Territory

Ans: (c) A person cannot get a loan to buy a high priced lottery ticket.
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32. Suresh sees that his friends are investing in a finance scheme which is
promising very high returns (a ponzi scheme). He also blindly invests in the same
scheme. Which bias is Suresh exhibiting?
a. Herd mentality
b. Loss Aversion
c. Confidence Bias
d. Anchoring

Ans: (a) In behavioural finance, Herd Mentality bias refers to investors' tendency
to follow and copy what other investors are doing. They are largely influenced by
emotion and instinct, rather than by their own independent analysis. This often
works against investors interests in the financial markets.

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33. Risk appetite of investors is assessed through _______
a. Asset Allocators
b. Financial Plan
c. Risk Profilers
d. Risk Appetizers

Ans: (c) Risk Profilers usually revolve around investors answering a few
questions, based on which the risk appetite score gets generated.
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34. What is real rate of return?
a. Return that the investor gets after adjusting inflation
b. Return that the investor gets after adjusting the risks
c. Return that the investor gets after taxes
d. Return that the investor gets after payment of all expenses

Ans: (a) The returns on investment without factoring inflation is known as

"nominal rate". However, when this number is adjusted for inflation, one gets
"real rate of return".

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35. The distribution of an investor's portfolio between different asset classes is
called asset allocation – True or False?
a. True
b. False

Ans: (a) The investor's asset allocation is a decision regarding how much money
should be allocated to which scheme category (asset class). This decision can
be taken only after assessing the investor's risk profile and analysing investor's
goals and situation.
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36. ____ strategy is supposed to be a risky strategy of asset allocation.
a. Strategic Asset Allocation
b. Tactical Asset Allocation
c. Both 1 and 2
d. None of the above

Ans: (a) Tactical Asset Allocation is the strategy when the investor presumes the
likely behaviour of the market and goes over weight on equities. This is very
risky. Strategic Asset Allocation is as per risk profile of an individual depending
on the individuals age etc. This is a safer strategy.

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37. The strategy of maintaining a constant ratio of asset allocation is known as
_____________
a. Dynamic Asset Allocation
b. Fixed Asset Allocation
c. Flexible Asset Allocation
d. SIP

Ans: (b) For eg: Balanced funds adopt a stable asset allocation policies, e.g.
55:45 between equity and debt at all times, are said to be operating within a fixed
asset allocation framework.
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38. The peak of earning capacity of an investor reached during the pre-
retirement phase. True or False?
a. True
b. False

Ans: (a) In the Accumulation stage, the investor gets to build his wealth. It covers
the earning years of the investor i.e. the phases of the life cycle from Young
Unmarried to Pre-Retirement.

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39. The strategy of Tactical Asset Allocation is considered to be a risky strategy.
True or False?
a. True
b. False

Ans: (a) Tactical Asset Allocation is the strategy when the investor presumes the
likely behaviour of the market. An investor who decides to go overweight on
equities i.e. take higher exposure to equities, because of expectations of
buoyancy in industry and share markets. Such strategies are very risky and can
backfire.
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40. Which of these statement(s) is/are true?
A. In equity investments, the probability of losing money over the long term is
lesser than losing money in the short term
B. Fundamental Analysis consists of studying the financial statements, price
trends, candlestick charts, etc.
a. Only A is correct
b. Only B is correct
c. Both A & B are correct
d. None of the above

Ans: (a) Historically, equity investing has delivered higher returns than other
asset classes in the past. Equity share prices generally fluctuate a lot in short
term due to sentiments of the investor. However, over long periods of time, the
share prices follow the growth in profits of the firm. (In Fundamental Analysis,
one does not study the charts like Candle Stick chart etc. Study of charts is done
in Technical Analysis).

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41. Investors will prefer lower risk and will settle for a lower return.
a. Aggressive
b. Adventurous
c. Moderate
d. Conservative

Ans: (d) A conservative investor is someone who wants his money to grow but
does not want to risk his principle investment. Conservative investors choose
financial products that do not fluctuate much in value, such as conservative
mutual funds.
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42. Decisions in Tactical Asset Allocation are taken on the basis of___________.
a. likely behaviour of the markets
b. the risk profile of the investor
c. income level of the investor
d. All of the above

Ans: (a) In Tactical asset allocation, the allocation between the asset categories
changes dynamically. The purpose of such an approach may be to take
advantage of the opportunities presented by various markets at different points of
time.

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43. What does financial goal setting involve?
a. Determination of risk profile
b. Estimating the amount required for a major life event
c. Determining asset allocation

Ans: (b) The first step in financial goal setting is to identify events in life that will
require major funding - like child education, marriage, retirement, etc. Asset
allocation / Risk profiles are looked into later while deciding the investments etc.
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44. Commodities as an asset class do not include__________.
a. Art
b. Fibres
c. Spices
d. Energy products

Ans: (a) Art is not a commodity. It cannot be standardized. It's valued as per the
perception of the buyer etc. Fibres (eg. -Cotton yarn), Spices (eg.- Turmeric), and
Energy Products (eg. -Oil) are all commodities.

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45. What does 'Asset Allocation' mean?
a. Allocating a portfolio to cash
b. Allocating various mutual funds to investors
c. Allocating units to unit holders
d. Allocating a portfolio to different asset classes

Ans: (d) 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.
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46. A trader believes that he can always outperform the market. This is an
example of __________ bias.
a. Recency
b. Overconfidence / Optimism
c. Herd Mentality
d. Anchoring

Ans: (b) 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.

23
47. An investor chooses a mutual fund scheme based on whether
his/her_______________matches with that of the scheme.
a. Investment period
b. Investment objective
c. Investment strategy

Ans: (b) Every scheme has a pre-announced investment objective. Investors

invest in a mutual fund scheme whose investment objective reflects their own
needs and preference.
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48. Tactical Asset Allocation is suitable only for seasoned investors operating
with large investible surplus. State True or False?
a. True
b. False

Ans: (a) Tactical Asset Allocation is the decision that comes out of calls on the
likely behaviour of the market. It is suitable only for seasoned investors operating
with large investible surpluses.

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49. Mrs. Neeta needs Rs. 5,00,000 in 3 years from now. The interest rate is 6%.
By which formula can we calculate the amount which is required to be invested
today to achieve the goal?
a. 500000*(1+0.06)*3
b. 500000/(1+0.06)^3
c. 500000/(1+0.06)*3
d. 500000*(1-0.06)^3

Ans: (b) Present value formula = F/ (1+r)^n. Where F is the future value
(500000); r is the rate of interest (6% p.a.); and n is the number of years (3). PV
= 500000 / (1+0.06)^3
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50. The main objective of asset allocation is risk management. True or False?
a. True
b. False

Ans: (a) The distribution of an investor's portfolio between different asset classes
like Equity, Debt, Gold, etc. is called asset allocation.

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 CHAPTER 2: CONCEPT & ROLE OF MUTUAL FUND

1. The Profit and Loss made by the Mutual Fund Belongs to

a. Trustee
b. AMC
c. Sponsors
d. Unit Holders

Ans: (d) The money mobilized 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 unit holders. No other
entity involved in the mutual fund in any capacity participates in the scheme’s
profits or losses.
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2. In whose beneficial interest is a mutual fund managed?
a. Trustee
b. Unit holders
c. Sponsors
d. AMC

Ans: (b) An investor (unit holder) in a MF scheme is the beneficial owner of the
units one has bought. The MF is managed for the beneficial interest of the unit
holders.

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3. Ultra-short-term debt scheme invests in debt and money market instruments
with Macaulay duration between _________
a. 1 to 3 months
b. 3 to 6 months
c. 6 to 12 months
d. 1 year to 3 years

Ans: (b) Macaulay Duration is the weighted average of the time to receive the
cash flows from a bond. An open ended ultra-short-term debt scheme invests in
debt and money market instruments with Macaulay duration between 3 months
and 6 months.
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4. What is the portfolio of a 'Fund of Funds' made up of?
a. Money market securities
b. Equity stocks
c. Debt securities
d. Mutual Fund schemes

Ans: (d) Fund of funds is a mutual fund which utilizes 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.

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5. Which of the below statements is an important advantage of an Exchange
Traded Fund (ETF)?
a. A person can closely track the current valuation of an ETF and buy/sell the
units on a stock exchange at those prices
b. ETFs generally give higher returns than other Mutual Funds
c. An investor in an ETF can have a control on where his money can be invested
d. All of the Above

Ans: (A) ETFs are passive funds whose portfolio replicates an index or
benchmark such as an equity market index or a commodity index.
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6. Once a New Fund Offer closes, an open ended mutual fund is open for
purchases _______
a. by existing investors only
b. by existing investors on the stock exchange platform only
c. by both existing and new investors on the stock exchange platform only
d. by both existing and new investors

Ans: (d) An Open Ended mutual fund can be purchased by both new and existing
investors through the traditional way or through stock exchanges.

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7. In case of a floater Fund, what is the Required Minimum Investment in floating
rate investment of total assets invested?
a. 0.65
b. 0.45
c. 0.55
d. 0.75

Ans: (a) Floater Fund is an open-ended debt scheme predominantly investing in

floating rate instruments (including fixed rate instruments converted to floating
rate exposures using swaps/derivatives). Minimum investment in floating rate
instruments (including fixed rate instruments converted to floating rate exposures
using swaps/derivatives) shall be 65 percent of total assets.
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8. Equity Linked Savings Schemes (ELSS) are eligible for deduction under
Section SOC of the Income Tax Act. However, such schemes have a lock-in
period of _________from the date of investment.
a. 3 years from the date of allotment of each individual unit
b. 3 years from the date of original investment even in case of subsequent
purchases
c. 5 years from the date of allotment of each individual unit
d. If tax exemption is NOT availed, there will not be any lock-in period

Ans: (a) The lock-in 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 lock-
in for 3 years.

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9. In which categories of stocks do Multi Cap equity funds invest in?
a. Mostly large cap stocks only of various companies
b. Mostly mid cap stocks only of various companies
c. Mostly small cap stocks only of various companies
d. A mix of large, mid and small cap stocks

Ans: (d) 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 capitalization stocks.
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10. Multi Asset Allocation funds invest in atleast ____________ asset classes
with a minimum allocation of at least 10 percent in each class.
a. 2
b. 3
c. 4
d. 5

Ans: (b) Multi Asset Allocation: An open-ended hybrid scheme investing in atleast
3 asset classes with a minimum allocation of at least 10 percent each in all three
asset classes.

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11. In an Arbitrage fund, the minimum investment in equity and equity related
instruments shall be _________ of total assets.
a. 0.5
b. 0.55
c. 0.6
d. 0.65

Ans: (d) 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.
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12. Indian mutual funds cannot invest in _______
a. Real Estate
b. Art
c. Securitised Debt
d. Gold

Ans: (b) Investment in Art is not permitted for mutual funds in India.

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13. Which of these is a key advantage of Exchange Traded Funds (ETFs)?
a. ETFs generally give higher returns than normal funds
b. ETFs offer tax benefits
c. Investors can control the money they have invested as to where the ETF can
invest
d. Investors can buy or sell ETFs on a stock exchange at prices which are close
to current valuations

Ans: (d) Exchange Traded Funds (ETFs) are passive funds whose portfolio
replicates an index or benchmark such as an equity market index or a commodity
index. The units of the ETF are traded at real time prices that are linked to the
changes in the underlying index.
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14. What is the tax applicable on the AMC for the income earned by the mutual
fund schemes?
a. Income earned by a mutual fund is exempt from taxes
b. 10 percent plus surcharge and cess
c. It is a function of the marginal rate of tax applicable to the respective investor
in the mutual fund scheme
d. It is a function of the type of income since dividends, short term capital gains
and long term capital gains attract different tax rates

Ans: (a) As per the prevailing tax laws in India, a mutual fund's income is exempt
from income tax, since mutual funds are constituted as trusts in India for the
benefits of the unit holders. (Income earned by the unit holders i.e. mutual fund
investors is taxable).

32
15. Which of these is an advantage of Mutual Funds?
a. Portfolio Customization
b. Choice Overload
c. Control Over Costs
d. Economies of scale

Ans: (d) Large investment corpus of a mutual fund leads to various other
economies of scale. For instance, costs related to investment research and office
space gets spread across investors. Further, the higher transaction volume
makes it possible to negotiate better terms with brokers, bankers and other
service providers. Limitations of Mutual Fund -
- Lack of Portfolio Customization: A unit holder cannot influence what securities
or investments the scheme would invest into.
- Choice Overload: There are multiple mutual fund schemes offered by several
mutual fund houses and multiple options within those schemes which makes it
difficult for investors to choose between them.
- No Control Over Costs: An individual investor has no control over the costs in a
scheme.
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16. ______ invests mainly in Corporate Bonds.
a. Diversified Equity Schemes
b. Diversified Debt Schemes (Income Funds)
c. Nifty Index Funds
d. Gold Funds

Ans: (b) Diversified Debt Schemes (Income Funds) invests mainly in Corporate
Bonds.

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17. A Mutual Fund Trust must have beneficiaries. State True or False?
a. True
b. False

Ans: (a) Every trust has beneficiaries. In case of a mutual fund trust, the
beneficiaries are the investors who invest in various schemes of the mutual fund.
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18. "To achieve growth by investing in equity and equity related investments,
balanced with income generation by investing in debt and money market
instruments" is the likely investment objective of a Diversified Debt Scheme.
State True or False?
a. True
b. False

Ans: (b) This is the likely objective of a Balanced Scheme. The investment
objective of a diversified debt scheme could be: "To generate income by
investing predominantly in a wide range of debt and money market securities".

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19. Liquid schemes are a variant of debt schemes that invest only in debt
securities of upto 60-days maturity. True or False?
a. True
b. False

Ans: (b) Liquid schemes are a variant of debt schemes that invest only in short
term debt securities. They can invest in debt securities of upto 91 days maturity.
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20. What minimum percentage of the mutual fund scheme corpus must be
invested in equity and related instruments in case of Equity Linked Savings
Schemes (ELSS)?
a. 65 percent
b. 70 percent
c. 80 percent
d. 95 percent

Ans: (c) The ELSS notification requires that atleast 80 percent of the ELSS funds
should be invested in equity and equity-linked securities.

35
21. Interval funds combine features of both open-ended and close-ended
schemes. True or False?
a. True
b. False

Ans: (a) 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.
-----------------------------------------------------------------------------------------------------------
22. A Mutual Fund wants to launch a new scheme with a Face Value of Rs. 50.
Will it get the required permissions?
a. Yes
b. No

Ans: (b) As per the law, every unit has a face value of Rs. 10.

36
23. Every trust has beneficiaries and the beneficiaries, in the case of a mutual
fund trust, are _________
a. the Trustees of the AMC
b. the investors who invest in various schemes of the mutual fund.
c. the Employees of the Mutual Fund Company
d. the Chairperson and Managing Director of the AMC

Ans: (b) Every trust has beneficiaries. The beneficiaries, in the case of a mutual
fund trust, are the investors who invest in various schemes of the mutual fund.
-----------------------------------------------------------------------------------------------------------
24. The investment objective of a _______________might read as follows: "To
generate capital appreciation from a portfolio of predominantly equity related
securities"
a. Money market fund
b. Balanced Fund
c. Arbitrage Fund
d. Diversified Equity Fund

Ans: (d) A Diversified Equity Fund invests mainly in equity for long term capital
appreciation.

37
25. "To generate income by investing predominantly in a wide range of debt and
money market securities" - this could be the investment objective of a
_______________
a. Diversified debt scheme
b. Diversified equity scheme
c. ELSS Scheme
d. Arbitrage Funds are more riskier than Sectoral Funds

Ans: (A) "To generate income by investing predominantly in a wide range of debt
and money market securities" - this could be the investment objective of a
Diversified debt scheme.
-----------------------------------------------------------------------------------------------------------
26. In case of Exchange Traded Funds (ETFs), the minimum investment in
securities of a particular index (which is being replicated/ tracked) shall be
______ percent of total assets.
a. 100
b. 95
c. 85
d. 75

Ans: (b) Index Funds / Exchange Traded 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.

38
27. In India, the Mutual funds are constituted as ___________
a. Limited Company
b. Non-Government Organisation
c. Self Regulatory Organisations
d. Trusts

Ans: (d) Mutual funds are constituted as Trusts. Therefore, they are governed by
the Indian Trusts Act,1882.
-----------------------------------------------------------------------------------------------------------
28. What is the investment objective of a mutual fund which seeks to grow in
value over a period of time?
a. Capital Adequacy
b. Capital Appreciation
c. Safety of Capital
d. Safety of Capital

Ans: (b) Equity funds generally grow in value over a period of time and their
investment objective is to generate capital appreciation/income from a portfolio,
predominantly invested in equity and equity related instruments.

39
29. In Interval Fund the minimum duration of transaction period is _____, and
maximum duration of interval period is _____.
a. 15 days, 2 days
b. 2 days, 10 days
c. 10 days, 2 days
d. 2 days, 15 days

Ans: (d) 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. Minimum duration of the transaction period is 2 days, and maximum
duration of the interval period is 15 days.
-----------------------------------------------------------------------------------------------------------
30. The minimum investment in G-Secs (as a percentage of total assets) in case
of a Gilt Fund is ____________.
a. 0.9
b. 0.95
c. 0.8
d. 0.75

Ans: (c) A 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).

40
31. The principle of caveat emptor (let the buyer beware) applies to mutual fund
investments. True or False?
a. True
b. False

Ans: (a) The principle of caveat emptor (let the buyer beware) applies to mutual
fund investments. So, the unit-holder cannot seek legal protection on the
grounds of not being aware, especially when it comes to the provisions of law,
and matters fairly and transparently stated in the Offer Document.
-----------------------------------------------------------------------------------------------------------
32. Passive funds are safe, as the NAV of such funds do not go down even when
the respective markets fall. State whether this is True or False.
a. True
b. False

Ans: (b) Passive funds are those funds in which the fund manager has no say on
the selection of stocks or strategies etc. He has to invest as per the index which
the fund follows. For eg: NSE Nifty fund. Passive funds cannot be said to be safe
as if the index falls, the NAV of these funds will also fall.

41
33. The fund that takes contrary positions in different markets/securities such
that the risk is neutralized and return is earned are called ____________
a. Thematic funds
b. Dividend yield schemes
c. Arbitrage funds
d. Sector funds

Ans: (c) Arbitrage funds take opposite positions in different markets I securities,
such that the risk is neutralized, but a return is earned. For instance, by buying a
share in BSE, and simultaneously selling the same share in the NSE at a higher
price.
-----------------------------------------------------------------------------------------------------------
34. In mutual funds, the assets are held by ___________
a. Fund Manager of that scheme
b. Registrar and Transfer Agents
c. Custodian
d. Trustees

Ans: (c) The custodian has custody of the assets of the fund. Also, as a part of
this role, the custodian needs to accept and give delivery of securities of the
various schemes of the fund.

42
35. _____ cannot invest in gold mining companies.
a. Gold Sector Fund
b. Gold ETF
c. Tax Saving ELSS Fund
d. Balanced Fund

Ans: (b) Gold ETF merely tracks the gold prices. It does not invest in any Gold
Mining Company. All other funds can invest in Gold Mining Companies as per the
fund strategy.
-----------------------------------------------------------------------------------------------------------
36. Is Real Estate Fund a physical asset or a financial asset?
a. Physical Asset
b. Physical Asset

Ans: (b) Investment in Real Estate Fund does not provide the investor with any
physical land, house etc. The investor is allotted units of the scheme. Therefore
it's a financial asset.

43
37. Mutual funds are constituted as _________and therefore, they are governed
by the ____________
a. Companies, Indian Companies Act
b. Trusts, Indian Trusts Act
c. Investment Agencies, SEBI Act
d. NGOs, NGO Act

Ans: (b) Mutual funds are constituted as Trusts and therefore, they are governed
by the Indian Trusts Act.
-----------------------------------------------------------------------------------------------------------
38. Every trust has beneficiaries - True or False?
a. True
b. False

Ans: (a) Every trust has beneficiaries. The beneficiaries, in the case of a mutual
fund trust, are the investors who invest in various schemes of the mutual fund.
The Trust acts through its trustees. Therefore, the role of protecting the interests
of the beneficiaries (investors) is that of the Trustees.

44
39. "To achieve growth by investing in equity and equity related investments,
along with income generation by investing in debt and money market
instruments" would be the investment objective of a ______
a. Debt fund
b. Balanced scheme
c. ELSS Fund
d. Sectoral Equity fund

Ans: (b) "To achieve growth by investing in equity and equity related investments,
along with income generation by investing in debt and money market
instruments" would be the investment objective of a balanced scheme.
-----------------------------------------------------------------------------------------------------------
40. That mutual fund which has an investment charter that provides for a
reasonable level of investment in both equity and debt is known as ______
a. Fixed maturity plan
b. Hybrid fund
c. ELSS Fund
d. Liquid Fund

Ans: (a) That mutual fund which has an investment charter that provides for a
reasonable level of investment in both equity and debt is known as Hybrid Fund.

45
41. What is the investment range for the mutual fund house to invest in debt
instruments for a Balanced Hybrid Fund?
a. 20 percent and 40 percent
b. 40 percent and 60 percent
c. 10 percent and 30 percent
d. 20 percent and 50 percent

Ans: (b) In open-ended balanced scheme the investment in equity and equity-
related instruments shall be between 40 percent and 60 percent of total assets
while investment in debt instruments shall be between 40 percent and 60
percent.
-----------------------------------------------------------------------------------------------------------
42. Which of these is a Passive Fund?
A) Gold Sector Fund B) Gold Mining Companies Fund
C) Gold Exchange Traded Fund D) Gilt Funds
a. Both A and B
b. Only D
c. Only C
d. All A, B, C and D

Ans: (d) Passive funds invest on the basis of a specified index; whose
performance it seeks to track. For eg. the Nifty Index fund. Exchange-Traded
Funds (traded on exchanges) are also passive funds that generate returns in line
with the index or benchmark. So, from the above options, only Gold Exchange
Traded Fund is a passive fund.

46
43. At what price can investors buy or sell units of an open-ended fund after the
New Fund Offer?
a. The NAV of the mutual fund units
b. The New Fund Offer (NFO) price
c. The face value
d. The monthly average price

Ans: (a) Investors of an open ended fund can buy and sell mutual fund units as
per its current Net Asset Value - NAV price.
-----------------------------------------------------------------------------------------------------------
44. When compared to open ended funds, investors in close ended funds face a
higher level of_____________.
a. Credit risk
b. Liquidity risk
c. Market risk
d. Investment risk

Ans: (a) Investors may choose the close-ended funds only if they can keep the
money locked-in such schemes. Although they are listed on stock exchanges,
many a times there is very low liquidity / volumes and also the price could be
lower than NAV. Anyone, who prefers liquidity option, should consider investing in
open-ended funds.

47
45. The units of a Close-ended mutual fund are traded between the unit
holders/investors and __________on the stock exchange.
a. The Mutual Fund
b. Other unit holders/investors
c. Specially appointed market makers to enhance liquidity
d. The Sponsors

Ans: (b) Post NFO, the sale and purchase transactions of a close-ended fund
happen on the stock exchange between two different investors, and the mutual
fund is not involved in the transaction.
-----------------------------------------------------------------------------------------------------------
46. What is fixed in a Closed-end fund?
a. The Net Asset Value
b. The Rate of Return
c. The Unit Capital
d. The Market Price

Ans: (c) 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. Whatever 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.

48
47. Investment objective defines the broad investment charter.
a. True
b. False

Ans: (a) From Investment Objective, one can find out in which asset class, the
scheme is going to invest.
-----------------------------------------------------------------------------------------------------------
48. Which of the Following is true?
a. A Mutual Fund is a Pass-through Vehicle.
b. Mutual Fund comes under “Equity” asset class.
c. A Mutual Fund is a special Purpose Vehicle.
d. All of the above

Ans: (a) A Mutual fund is a pass through vehicle which invests in different asset
class as per the investment objective of the Fund.

49
49. Which of the followings are least comparable?
a. Liquid and Savings account
b. Liquid and Current account
c. ETF and Index fund
d. GILT and Sector fund

Ans: (d) Gilt fund invest in government securities, while sector fund invest in
stock within the same sector.
-----------------------------------------------------------------------------------------------------------
50. Which transaction of an open-ended fund is based on the Net Asset Value
(NAV) pricing?
a. Purchase of units
b. Redemption of units
c. Both purchase and redemption of units

Ans: (c) Purchase and redemption of units are always done based on the NAV of
the scheme.

50
51. Which type of Hybrid Fund has the least exposure to equity?
a. Aggressive Hybrid Fund
b. Balanced Hybrid Fund
c. Conservative Hybrid Fund
d. Arbitrage Hybrid Fund

Ans: (c) A Hybrid fund is classified into Aggressive, Balanced, and Conservative
depending on the equity exposure of the fund. Conservative Hybrid Fund: 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 instruments shall be between 10 percent
and 25 percent of total assets.
-----------------------------------------------------------------------------------------------------------
52. In a Contra Fund, the minimum investment in equity & equity related
instruments shall be___________of total assets.
a. 40 percent
b. 50 percent
c. 55 percent
d. 65 percent

Ans: (d) A contra fund is an open-ended equity scheme following a contrarian

investment strategy. Minimum investment in equity & equity-related instruments
shall be 65 percent of total assets.

51
53. Zero-coupon securities are securities that do not pay regular interest, but
accumulate the interest, and pay it along with the principal when the security
matures. True or False?
a. True
b. False

Ans: (a) Zero coupon bonds do have interest component, these bonds are
offered at a discounted price and thus do not pay regular interest. The Interest
component is discounted in price.
-----------------------------------------------------------------------------------------------------------
54. By investing in mutual funds an investor uses the services of___________.
a. a professional actuary
b. a professional insurance agent
c. a professional investment manager
d. a professional tax planner

Ans: (c) Mutual Funds employ professional investment experts to manage the
money of investors by investing in suitable stocks/debt etc.

52
55. The lock-in for Equity Linked Savings Scheme (ELSS Funds) is____.
a. 1 year
b. 2 years
c. 3 years
d. 5 years

Ans: (c) The investment in Equity Linked Savings Schemes is subject to lock-in
for a period of 3 years during which it cannot be redeemed, transferred, or
pledged.
-----------------------------------------------------------------------------------------------------------
56. When a Mutual fund scheme makes profits or losses, these profits and
losses belong to_____________.
a. The AMC
b. The Trustees
c. The Fund Manager
d. The Investor

Ans: (d) The investor enjoys the profits as well as bears the losses of his
investments in Mutual Funds.

53
57. __________________ invest in those securities which have maturity
matching the maturity of the scheme.
a. Fixed Maturity Plans
b. Exchange-Traded Funds
c. ELSS Funds
d. High Yield Funds

Ans: (a) Fixed Maturity Plans are a kind of close-ended debt fund where the
duration of the investment portfolio is closely aligned to the maturity of the
scheme. Fixed Maturity Plan is ideal when the investor's investment horizon is in
sync with the maturity of the scheme, and the investor is looking for a more
predictable return than any conventional debt scheme, and a return that is
generally superior to what is available in a fixed deposit.
-----------------------------------------------------------------------------------------------------------
58. In which of these cases will the 'lock-in' in a retirement fund be lower than the
prescribed 5 years?
a. When the retirement age is earlier than 5 years from the date of investment
b. When the age of the investor at the time of making an initial investment is not
less than 50 years
c. When the targeted corpus is achieved before 5 years
d. All of the above

Ans: (a) Retirement Fund is an open-ended retirement solution-oriented scheme

having a lock-in of 5 years or till retirement age (whichever is earlier). Scheme
having a lock-in for at least 5 years or till retirement age whichever is earlier.

54
59. What is the investment in equity and equity-related instruments in a Balanced
Hybrid Fund?
a. Between 20% to 30% of total assets
b. Between 10% to 20% of total assets
c. Between 40% to 60% of total assets
d. Between 60% to 80% of total assets

Ans: (c) Balanced Hybrid Fund is an open-ended balanced scheme investing in

equity and debt instruments. The investment in equity and equity-related
instruments shall be between 40 percent and 60 percent of total assets.
-----------------------------------------------------------------------------------------------------------
60. The minimum investment limit in equity/equity-related instruments of large-
cap companies for a Large Cap mutual fund scheme is_________ of total
assets.
A. 70%
b. 80%
c. 85%
d. 90%

Ans: (b) A Large Cap Fund is an open-ended equity scheme predominantly

investing in large-cap stocks. As per SEBI rules on asset allocation, the minimum
investment in equity and equity-related instruments of large-cap companies shall
be 80 percent of total assets.

55
61. Identify the TRUE statement.
1. Retail investors can buy units of Gold ETF.
2. Banks as well as Mutual Funds, both offer Gold deposit schemes.
3. Gold ETF is a close-ended fund and so the holdings are not for perpetuity.
a. Only statement 1 is true
b. Only statement 2 is true
c. Only statement 3 is true
d. All 1, 2 and 3 are true

Ans: (a) Gold ETFs can be easily bought by retail investors as the minimum
traded quantity is 1 unit i.e. 1 gram. The Gold deposit scheme is offered only by
banks to mobilize 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. All
Exchange Traded Funds are open-ended schemes.
-----------------------------------------------------------------------------------------------------------
62. An investor is interested in buying some units of a Close-ended fund after the
NFO is over. How can he buy the same?
a. He can buy the units on the stock exchange from market makers appointed by
the mutual fund.
b. He can buy the units on the stock exchange from other investors who were
allotted the units and are interested in selling.
c. He can buy the units from the mutual fund itself when they open the sale at
periodic intervals as announced by the fund.
d. He cannot buy units of a close-ended fund.

Ans: (b) A close-ended scheme offers liquidity through its listing on a stock
exchange. Unit holders who are interested in selling can offer their quotes and
new investors can buy them.

56
63. Open-ended schemes generally offer exit options to investors through a
stock exchange.
a. True
b. False

Ans: (b) Close-ended schemes generally offer exit options to investors through a
stock exchange. The open-ended schemes can be easily sold at their current
NAV back to the mutual fund through an agent or directly.
-----------------------------------------------------------------------------------------------------------
64. Which amongst the following categories of mutual funds have a fixed maturity
date?
a. Exchange-Traded Funds
b. Open-ended funds
c. Close-ended funds
d. Interval funds

Ans: (c) Close-ended funds have a fixed maturity. Investors can buy units of a
close-ended scheme, from the fund, only during its NFO.

57
65. Can Indian mutual funds invest in Real Estate?
a. True
b. False

Ans: (a) Real Estate Mutual Funds scheme means a mutual fund scheme that
invests directly or indirectly in real estate assets or other permissible assets in
accordance with the SEBI (Mutual Funds) Regulations, 1996. So Mutual Funds
can invest in real estate directly but currently, they are mostly into buying real
estate-related stocks or in Real Estate Investment Trusts - which invests in
property directly.
-----------------------------------------------------------------------------------------------------------
66. At which price a Close Ended fund can be sold?
a. At a price higher than NAV
b. At a price lower than NAV
c. At a price same as NAV
d. At a price that can be higher or lower or the same as NAV

Ans: (d) The only way to sell a Close Ended fund before the fund closing date is
by selling it on the stock exchange where its traded prices on the stock exchange
for a fund can be higher or lower or the same depending on the demand /
supply / liquidity etc.

58
67. The speciality of a Sector Fund is that it invests in various economic sectors -
True or False?
A. True
b. False

Ans: (b) Sector Funds are sector-specific and invest in various companies of a
specific sector. For eg: the Banking Sector Fund will invest in shares of various
Banks.
-----------------------------------------------------------------------------------------------------------
68. Which of the following is an advantage of mutual funds?
a. Convenience to buy stocks and bonds directly from the mutual fund
b. Customized portfolio
c. Economies of scale

Ans: (c) The large investment corpus of a mutual fund leads to various other
economies of scale. For instance, costs related to investment research and office
space get spread across investors. Further, the higher transaction volume makes
it possible to negotiate better terms with brokers, bankers and other service
providers.

59
69. Each mutual fund scheme must have a stated investment objective. State
whether its True or False.
a. True
b. False

Ans: (b) Every scheme has a pre-announced investment objective. Investors

invest in a mutual fund scheme whose investment objective reflects their own
needs and preference.
-----------------------------------------------------------------------------------------------------------
70. The transparency levels in mutual funds are very low. State whether True or
False.
a. True
b. False

Ans: (b)The structure of the mutual funds and the regulations by SEBI have
ensured that investors get full transparency about their investments. There are
three essential places from where the investor can get enough information for
making informed decisions, viz., scheme-related documents (SID, SAI, and KIM),
portfolio disclosures, and the NAV of the scheme.

60
 CHAPTER 3: LEGAL STRUCTURE OF MUTUAL
FUNDS IN INDIA

1. As per SEBI Regulations, MF scheme should have atleast ______ investors.

a. 50
b. 20
c. 25
d. 100

Ans: (b) Each scheme should have a minimum of 20 investors and no single
investor should account for more than 25% of the corpus of the scheme/plan(s).
-----------------------------------------------------------------------------------------------------------
2. What is the role of the custodian of a mutual fund?
a. To issue statement of funds holding to the investors
b. To execute the buy and sell orders in the stock market
c. To keep the safe custody of the securities of the mutual fund scheme
d. To issue account statements to the Mutual Fund unit holders

Ans: (c) The custodian has custody of the assets of the fund. As part of this role,
the custodian needs to accept and give delivery of securities for the purchase
and sale transactions of the various schemes of the fund. Thus, the custodian
settles all the transactions on behalf of the mutual fund schemes.

61
3. Who is responsible for overall investments of the fund?
a. Fund manager
b. Market analyst
c. Individual financial advisor
d. Chief investment officer

Ans: (d) The Chief Investment officer is responsible for overall investments of the
fund.
-----------------------------------------------------------------------------------------------------------
4. Identify the duty of a SPONSOR of a mutual fund.
a. Guards the interest of the mutual fund unit holders
b. Contributes to the capital of the Asset Management Company
c. Looks after the day to day administration of the mutual fund
d. Regularly report to SEBI on the working of the fund

Ans: (b) The application to SEBI for registration of a mutual fund is made by the
sponsor. Thereafter, the sponsor invests in the capital of the AMC.

62
5. The auditor appointed to audit the scheme accounts is the same as the auditor
of the AMC accounts. State True or False?
a. True
b. False

Ans: (b) 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.
-----------------------------------------------------------------------------------------------------------
6. Which of these is NOT a function of Registrars and Transfer Agents?
a. Maintaining investors records
b. Processing redemption and dividend payouts
c. Analysing mutual fund performance and making it available to investors
d. Updating unit capital of fund

Ans: (c) 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.

63
7. _________ ensures that the information contained in the scheme related
documents (SID and SAI) are fully complied with.
a. The Trustees
b. The Sponsor
c. The Fund Manager
d. The AMC

Ans: (a) The trustees shall ensure that all transactions entered into by the AMC
are in compliance with the regulations and the scheme's objectives and intent.
-----------------------------------------------------------------------------------------------------------
8. Registrar and Transfer Agency function must be independent of the Asset
Management Company, and it cannot be retained in-house. State whether this
statement is True or False.
a. True
b. False

Ans: (b) Mutual funds can have their in-house Registrar and Transfer agency.

64
9. All the records of the investors of a Mutual Fund are maintained by the Fund
Manager. True or False?
a. True
b. False

Ans: (b) The RTA (Registrar and Transfer Agents) maintains investor records.
Sometimes the AMC itself does this activity.
-----------------------------------------------------------------------------------------------------------
10. AMC directors are appointed with the permission of SEBI. True or False?
a. True
b. False

Ans: (b) AMC directors are appointed with the permission of Trustees.

65
11. Who handles the day-to-day management of the mutual fund?
a. Unit holders
b. Mutual Fund Trustees
c. Registrar and Transfer Agency
d. Asset Management Company

Ans: (d) Day to day management of the schemes is handled by an Asset

Management Company (AMC). The AMC is appointed by the sponsor or the
Trustees.
-----------------------------------------------------------------------------------------------------------
12. Who receives and delivers securities on behalf of the Mutual Fund?
a. Authorised Stock Brokers
b. The AMC to which the fund belongs
c. Custodian
d. Merchant Bankers

Ans: (c) The custodian has custody of the assets of the fund. The custodian
accepts and gives delivery of securities for the purchase and sale transactions of
the various schemes of the fund.

66
13. The empanelment of a mutual fund distributor by an Asset Management
Company can be terminated_________________.
a. In case all the investors of the distributors shift to direct plans
b. When the term of empanelment is over
c. Any time by the AMC
d. All of the above

Ans: (c) The AMC has the power to terminate the empanelment of the mutual
fund distributor at any time.
-----------------------------------------------------------------------------------------------------------
14. ____________forms the basis of appointment of a distributor by an AMC.
a. SEBI approval
b. Agreement between the investor and the distributor
c. Power of attorney from the AMC
d. An agreement between the AMC and the Distributor

Ans: (d) An agreement between the AMC and the Distributor forms the basis of
appointment of a distributor by an AMC.

67
15. Who applies to SEBI for the registration of a Mutual Fund?
a. The Asset Management Company (AMC)
b. Board of Trustees
c. The Sponsors
d. Chief Fund Manager

Ans: (c) The application to SEBI for registration of a mutual fund is made by the
sponsors.
-----------------------------------------------------------------------------------------------------------
16. Who has the responsibility of overseeing legal compliance in a mutual fund?
a. The Custodian
b. The Sponsors
c. The AMC
d. The Trustees

Ans: (d) SEBI expects Trustees to perform a key role in ensuring legal
compliances and protecting the interest of investors.

68
17. Who appoints the trustees of a Mutual Fund?
a. RBI
b. SEBI
c. Sponsor
d. AMC

Ans: (c) The sponsor 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.
-----------------------------------------------------------------------------------------------------------
18. What is the role of the custodian?
a. To issue account statements to the MF unit holders
b. To keep the safe custody of the securities of the mutual fund scheme
c. To issue a statement of funds holding to the investors
d. To execute the buy and sell orders in the stock market

Ans: (b) The custodian has custody of the assets of the fund. As part of this role,
the custodian needs to accept and give delivery of securities for the purchase
and sale transactions of the various schemes of the fund. Thus, the custodian
settles all the transactions on behalf of the mutual fund schemes.

69
19. As per the SEBI Code of Conduct, mutual fund schemes portfolios should be
managed in the interest of ___________.
a. Trustees
b. Sponsors
c. Brokers
d. All classes of unit holders

Ans: (d) As per the SEBI Code of Conduct - Trustees and asset management
companies shall carry out the business and invest in accordance with the
investment objectives stated in the scheme-related documents and take
investment decisions solely in the interest of unit holders.
-----------------------------------------------------------------------------------------------------------
20. Identify which of these is a function of Association of Mutual Funds in India
(AMFI)?
a. To calculate the correct NAVs
b. To make available the AUM, NAV, and other important data of the mutual fund
industry
c. To regulate and control insider trading
d. To manage the Investor Protection Fund

Ans: (b) 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).

70
21. NFOs for ELSS schemes can remain open for ______days.
a. 10
b. 20
c. 25
d. 30

Ans: (d) In the case of ELSS / RGESS schemes, the offering period shall not be
more than 30 days.
-----------------------------------------------------------------------------------------------------------
22. As per the SEBI guidelines, how often should the mutual fund scheme's
portfolio be published?
a. Monthly
b. Half-yearly
c. Annually
d. Quarterly

Ans: (b) The AMCs shall send to its unit holders, a half-yearly portfolio via email
within 10 days from the end of each half-year. The half-yearly portfolio of the
schemes is available on the AMFI's website and the website of AMC on or before
the 10th day of the succeeding month.

71
23. SEBI regulates Mutual Funds as well as Registrars and Transfer Agents.
True or False?
a. True
b. False

Ans: (a) SEBI regulates Mutual Funds, Registrars and Transfer Agents,
Depositories, Stock Brokers, etc.
-----------------------------------------------------------------------------------------------------------
24. Which one is the Self Regulatory Organisation (SRO) for the mutual fund
industry?
a. SEBI
b. Sponsors
c. Trustees
d. None of the above

Ans: (d) The Mutual Funds industry in India is in the process of getting an SRO
to oversee its distributors. (AMFI is not an SRO).

72
25. The sponsor needs to contribute a minimum___________of the net worth of
the AMC.
a. 25%
b. 40%
c. 50%
d. 66%

Ans: (b) The sponsor needs to contribute a minimum 40% of the net worth of the
AMC.
-----------------------------------------------------------------------------------------------------------
26. In most cases, the auditor appointed to audit the scheme accounts and the
auditor to audit AMC accounts are the same. State True or False?
a. True
b. False

Ans: (b) The AMC Auditor and the Scheme Auditor is always different.

73
27. Which of the following is not a function of R&T?
a. Process Dividend and redemption
b. Maintain the records
c. Settling investors transaction of fund
d. Calculation of NAV

Ans: (d) Calculating NAV is the function of Fund Accountant and not of R&T
Agent.
-----------------------------------------------------------------------------------------------------------
28. Day-to-day management of the Mutual Fund schemes is handled by the
Trustees. True or False?
a. True
b. False

Ans: (a) Day-to-day management of the schemes is handled by an AMC. The

AMC is appointed by the sponsor or the Trustees.

74
29. Mutual funds in India are governed by SEBI (Mutual Fund) Regulations,
1996. True or False?
a. True
b. False

Ans: (a) Mutual funds in India are governed by SEBI (Mutual Fund) Regulations,
1996.
-----------------------------------------------------------------------------------------------------------
30. AMFI is an industry body, but not a self-regulatory organization. True or
False?
a. True
b. False

Ans: (a) Asset Management Companies in India are members of the Association
of Mutual Funds in India (AMFI), an industry body that has been created to
promote the interests of the mutual fund industry. AMFI is neither a regulatory
body nor a Self-Regulatory Organisation (SRO).

75
 CHAPTER 4: LEGAL & REGULATORY FRAMEWORK

1. In case of any unresolved complains against AMC, investors can approach.

a. AMFI
b. Sponsor
c. Trustees
d. SEBI

Ans: (d) If there is any issue with AMC or Mutual Fund Scheme, the AMC can
First approach AMC’s Investor Service Center. If the issue is not resolved or the
investor is not happy with the solution or response, he can raise the issue at
higher level in AMCs. If still unresolved, investor can approach SEBI through
SCORES.
-----------------------------------------------------------------------------------------------------------
2. As per AMFl's code of ethics, an Asset Management Company has to disclose
which of the following scheme related information to the unit holders?
a. Only B
b. A and B
c. B and C
d. A, B and C

Ans: (b) Asset Management Company (AMC) shall disclose to unit holders
investment pattern, portfolio details, ratios of expenses to net assets and total
income and portfolio turnover wherever applicable in respect of schemes on
annual basis.

76
3. Securities and Exchange Board of India (SEBI) functions does not include
which of the following?
a. Regulation of Stock Exchanges
b. Enforcing compliance of its regulations
c. Making regulations for the Mutual Fund industry
d. Approving the fund managers which have been appointed by the AMC

Ans: (d) An approval of SEBI is not required by the AMC while appointing the
fund managers.
-----------------------------------------------------------------------------------------------------------
4. Which of the following is not a fair selling practice by a mutual fund distributor
a. Informing the investor of the various investment options
b. Carefully understanding the clients financial needs
c. Encouraging the churning of investments
d. Giving personalised after sales service

Ans: (c) Churning means frequent buying and selling. Encouraging over
transacting and churning of Mutual Fund investments to earn higher
commissions by MF agents is a bad practice.

77
5. When is a Consolidated Account Statement (CAS) dispatched to the investor?
a. Whenever the investor asks for a CAS
b. Bi-monthly for dormant investors
c. Every month, before the 10th working day of the following month
d. Whenever there is a transaction in the folio

Ans: (c) A Consolidated Account Statement (CAS) for each calendar month is
sent by post or email on or before 10th of the succeeding month provided there
has been a financial transaction in the folio in the previous month.
-----------------------------------------------------------------------------------------------------------
6. SEBI Advertisement Code for Mutual Funds mentions the various guidelines to
be followed by _________.
a. the investors who are interpreting the performance of their investments
b. the AMC's while it is advertising the performance of their funds
c. the distributors while advertising their various services
d. the fund managers while monitoring the performance of the schemes they
manage

Ans: (b) There are various guidelines laid down by SEBI which have to followed
by the AMC while it is advertising the performance of its funds. For eg - i)
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. ii) Where the
scheme has been in existence for less than one-year, past performance shall not
be provided, etc.

78
7. The main purpose why SEBI has issued norms for investments by mutual fund
schemes is to __________.
a. get better returns by mutual fund schemes
b. improve the credit ratings of the mutual fund schemes
c. protect the interests of the mutual fund investors
d. protect the interests of the mutual fund industry

Ans: (c) 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.
-----------------------------------------------------------------------------------------------------------
8. Which of these is NOT a function of SEBI?
a. Giving approvals to the appointment of fund managers
b. Making regulations for the Mutual Fund industry
c. Regulating Stock Exchanges
d. Enforcing compliance of its regulations

Ans: (a) SEBI does not play any role in appointment of Fund Managers.

79
9. Consolidated Account Statement (CAS) has to be dispatched to the investors
____________.
a. only when the investors sends a request for it
b. on a monthly basis, before the 10th of the succeeding month
c. for every transaction for every folio
d. quarterly for dormant investors

Ans: (b) A Consolidated Account Statement (CAS) for each calendar month will
have to be sent by post or email on or before 10th of the succeeding month. If
there are no transactions, then a six monthly CAS can be sent.
-----------------------------------------------------------------------------------------------------------
10. As per the AMFI Code of Ethics, an AMC has to disclose which amongst the
following information to its unit holders ?
a. investment pattern
b. portfolio turnover
c. transactions of purchase and sale of securities entered into with any of their
associates
d. All of the above

Ans: (d) As per the AMFI Code of conduct, the AMC has to disclose the
investment objectives, investment policies, financial position and general affairs
of the scheme, investment pattern, portfolio details, ratios of expenses to net
assets and total income, portfolio turnover, transactions of purchase and sale of
securities entered into with any of their associates or any significant unit holder
etc. to the unit holders.

80
11. The unaudited accounts of the Mutual Fund schemes must be published
once in every six months __________.
a. on the AMC website
b. on the AMFI website
c. in a minimum of 2 newspapers
d. Both - on the AMC website and in a minimum of 2 newspapers

Ans: (d) As per SEBI rules: The mutual fund shall before the expiry of one month
from the close of each half year shall display the unaudited financial results on
AMC website, the advertisement in this reference will be published by the fund in
at least one English daily newspaper having nationwide circulation and in a
newspaper having wide circulation published in the language of the region where
the head office of fund is situated.
-----------------------------------------------------------------------------------------------------------
12. One of the disclosure which an AMC has to make is ______
a. the commission paid to the distributors in the financial year on the website of
AMC
b. the distributor wise amount mobilised in the financial year on the website of
AMC
c. the annual report (scheme wise) and the abridged summary on the website of
AMC
d. All of the above

Ans: (c) The Annual Report of the AMC has to be displayed on the website of the
mutual fund. The Scheme-wise Annual Report will mention that unit-holders can
ask for a copy of the AMC 's Annual Report.

81
13. Advertisements regarding Mutual Fund schemes shall not contain statements
which directly or by implication or by omission may mislead the investor. State
True or False?
a. True
b. False

Ans: (a) As per the SEBI Regulations related to Sales Practices - Advertisements
shall not be so designed as likely to be misunderstood or likely to disguise the
significance of any statement. Advertisements shall not contain statements which
directly or by implication or by omission may mislead the investor.
-----------------------------------------------------------------------------------------------------------
14. As per SEBI rules, the NAV has to be published _______in at least
______daily newspapers having circulation all over India.
a. Daily, 4
b. Weekly, 2
c. Daily, 2
d. Weekly, 4

Ans: (c) As per SEBI rules, the NAV has to be published daily in at least 2 daily
newspapers having circulation all over India.

82
15. Investors in Mutual Fund are not responsible for ________
a. monitoring their investments regularly
b. checking the risk factors before investing
c. reading the offer documents carefully
d. taking investment decisions of behalf of the fund manager

Ans: (d) Investors need to note that their investment is governed by the principle
of caveat emptor i.e. let the buyer beware. An investor is presumed to have read
the Offer Document, checked the risk factors etc. However, an investor cannot
ask or instruct the fund manager to buy / sell particular security.
-----------------------------------------------------------------------------------------------------------
16. According to guidelines given by SEBI, every mutual fund scheme should
have a minimum of __________investors.
a. 10
b. 20
c. 25
d. 50

Ans: (b) Every mutual fund scheme/plan should 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).

83
17. AMFI Code of Ethics states that ___ cannot become a distributor of mutual
fund.
a. Banks
b. HNls
c. Employees of AMC
d. None of the above

Ans: (c) Employees of Asset Management Companies (AMCs) cannot become

mutual fund distributors.
-----------------------------------------------------------------------------------------------------------
18. An important objective of SEBI is to represent to the Government, Reserve
Bank of India and other bodies on all matters relating to the Mutual Fund
Industry. True or False?
a. True
b. False

Ans: (b) An important objective of AMFI is to represent to the Government,

Reserve Bank of India and other bodies on all matters relating to the Mutual
Fund Industry.

84
19. SEBI approval is required for an AMC to appoint a distributor. True or False?
a. True
b. False

Ans: (b) No SEBI approval is required. A person has to clear the exam and get
an AMFI number. Based on this number AMC signs an agreement with the
individuals / companies and appoint them distributors.
-----------------------------------------------------------------------------------------------------------
20. Pension Funds Regulatory and Development Authority (PFRDA) is the
regulator for the National Savings System.
a. True
b. False

Ans: (b) Pension Funds Regulatory and Development Authority (PFRDA) is the
regulator for the National Pension System.

85
21. All advertisements and Sales Literature containing an AMC(s)/Mutual Fund
ranking must prominently disclose _______
a. The publisher of the ranking data.
b. Criteria on which the ranking is based.
c. The name of the Ranking Entity.
d. All of the above

Ans: (d) All advertisements and Sales Literature containing an AMC(s)/Mutual

Fund ranking must prominently disclose all of the given options.
-----------------------------------------------------------------------------------------------------------
22. In case a fund manager is managing more than six funds, then performance
data of top _____and bottom _________ schemes has to be disclosed in all
performance related advertisements.
a. 2,2
b. 3,3
c. 4,4
d. 6,6

Ans: (b) 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.

86
23. A Mutual Fund investor can file a case against the ________for breach of
trust.
a. Mutual Fund
b. Trustees
c. Stock Exchange
d. No, a MF investor cannot file a suit.

Ans: (b) If an investor feels that the trustees have not fulfilled their obligations,
then he can file a suit against the trustees for breach of trust.
-----------------------------------------------------------------------------------------------------------
24. Which of the following regulates mutual funds in India?
a. Asset Management Companies
b. Securities and Exchange Board of India
c. Board of Trustees of mutual funds
d. Association of Mutual Funds in India

Ans: (b) 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 (RTAs) in the country.

87
25. Open-ended schemes, except ELSS, have to re-open for ongoing sale or re-
purchase within ________business days of allotment.
a. 3
b. 5
c. 10.
d. 30

Ans: (b) Open-ended schemes, except ELSS, have to re-open for ongoing sale
or re-purchase within 5 business days of allotment.
-----------------------------------------------------------------------------------------------------------
26. Mr. Sonu reads about the risk factors given in the offer document and invests
in an equity mutual fund scheme. After a few days the stock market crashes and
NAV of the equity fund goes down. What can Mr. Sonu do in such a situation?
a. He can appeal to SEBI and get a remedy
b. He can get a remedy from the AMC
c. He is not likely to get any remedy from the AMC
d. He is likely to get a remedy from the trustees of the AMC

Ans: (c) The offer document of a mutual fund cleary states that – 'Mutual fund
investments are subject to market risks'. When the fund invests in equity market
where prices fluctuate a lot, the NAV of the fund is likely to witness huge
fluctuations. So the AMC nor SEBI nor anyone else can otter a remedy. The
fluctuations are a part of equity markets.

88
27. As per SEBl's mandate, AMCs has to put in place a due diligence process to
regulate distributors. Which of these mutual fund distributors would NOT be
subjected to the due diligence process?
a. AUM raised of Rs. 60 crore across industry in the non-institutional category
b. Commission received of over Rs. 125 lakhs p.a. across industry
c. Multiple point presence in more than 25 locations
d. Commission received of over Rs. 75 lakhs from a single mutual fund

Ans: (a) 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 crore
across industry in the non-institutional category but including high net worth
individuals (Hnls), Commission received of over Rs. 1 Crore p.a. across industry,
Commission received of over Rs. 50 Lakhs from a single mutual fund.
In the above question, the mutual fund distributor has raised an AUM of Rs. 60
crores across industry in the non-institutional category, which is less than Rs.
100 crores.
-----------------------------------------------------------------------------------------------------------
28. Dividend warrants have to be sent to investors within 30 days of dividend
declaration. True or False?
a. True
b. False

Ans: (a) Dividend warrants have to be sent to investors within 30 days of

dividend declaration.

89
29. Statement of Account is to be sent to investors within ___days of NFO
closure.
a. 3
b. 5
c. 10
d. 30

Ans: (b) Statement of Account is to be sent to investors within 5 days of NFO

closure.
-----------------------------------------------------------------------------------------------------------
30. For next 30 days after a New Fund Offer closes, an investor can buy units at
face value. True or False?
a. True
b. False

Ans: (b) Post-NFO, when investors buy into a scheme, they need to pay a price
that is linked to its NAV.

90
31. "Please read the scheme related documents carefully" – which documents
does this line refer to?
a. Scheme Information Document and Statement of Additional Information
b. Statement of Additional Information and fund fact sheet
c. Trust deed and Key Information Memorandum
d. Scheme Information Document and audited balance sheet of the Asset
Management Company

Ans: (a) "Mutual fund investments are subject to market risks. Please read the
scheme related documents carefully before investing." - The scheme related
documents are Scheme Information Document (SID) and Statement of Additional
Information (SAI).
-----------------------------------------------------------------------------------------------------------
32. While selling mutual fund products of the distributors’ group / affiliate /
associates, the distributor shall make disclosure to the customer regarding the
conflict of interest arising from the distributor selling such products. True or
False?
a. True
b. False

Ans: (a) While selling mutual fund products of the distributors' group / affiliate /
associates, the distributor shall make disclosure to the customer regarding the
conflict of interest arising from the distributor selling such products.

91
33. What is the restriction on a mutual fund scheme investing in the equity
instruments of a company?
a. 2% of the net assets
b. 5% of the net assets
c. 7.5% of the net assets
d. 10% of the net assets

Ans: (d) The Mutual Fund under all its schemes shall not own more than 10
percent of a company's paid up capital bearing voting rights. Provided no
sponsor of a mutual fund, its associate or group company including the Asset
Management Company of the fund, through the schemes of the mutual fund or
otherwise, individually or collectively, directly or indirectly, have 10 percent or
more of the shareholding or voting rights in the asset management company or
the trustee company of any other mutual fund.
-----------------------------------------------------------------------------------------------------------
34. Even thought investment in Mutual Funds are subject to market risks, an
investor invests in an equity fund after reading the risk factors etc. Due to a fall in
the stock markets the value of the fund goes down drastically. The investor
___________.
a. can get some remedy if he appeals to SEBI
b. can get some remedy if he appeals to AMC
c. can get some remedy if he appeals to AMFI
d. cannot get any remedy from the AMC

Ans: (d) Even thought investment in Mutual Funds are subject to market risks, an
investor invests in an equity fund after reading the risk factors etc. Due to a fall in
the stock markets the value of the fund goes down drastically. The investor
cannot get any remedy from the AMC.

92
35. In Liquid funds, simple annualised return method is used to show the returns
because _________.
a. Its a simpler way to calculate and investors understand it easily
b. The investment made is fixed for 30 / 90 / 180 days
c. The return is calculated over smaller time horizons
d. The amount invested is usually small

Ans: (c) In case of Money Market schemes and liquid plans, wherein investors
have very short investment horizon, the performance can be measured and
advertised by simple annualisation of yields.
-----------------------------------------------------------------------------------------------------------
36. If a person wants to appeal against the ruling of SEBI, he can do so with
__________.
a. RBI
b. Commerce Ministry
c. Company Law Board
d. Securities Appellate Tribunal

Ans: (d) Anyone who is aggrieved by a ruling of SEBI, can file an appeal with the
Securities Appellate Tribunal (SAT).

93
37. Which is the first step that a mutual fund distributor should take in building a
mutual fund portfolio for his investors?
a. He should list the best performing funds for the investor to select.
b. He should set the financial goals of the investor.
c. He should invest the amount in a liquid fund and set a Systematic Transfer
Plan in good equity funds.
d. He should list good equity funds with the lowest expense ratio for the investor
to select.

Ans: (b) The selection of a mutual fund scheme for an investor will depend upon
the need that the investor has from the investment. The objective could be a
financial goal like reaching a certain level of wealth in a specified period of time;
or it could be funding a major expense related to an important life event like
education of one's children or funding one's retirement. The sight of the goal
must never be missed. Therefore, the first step is to set the financial goals.
-----------------------------------------------------------------------------------------------------------
38. In case a fund manager is managing more than six funds, then________ in
all performance related advertisements.
a. the total number of schemes managed by him hs to be disclosed
b. performance data need not be given
c. performance data of top 2 and bottom 2 schemes has to be disclosed
d. performance data of top 3 and bottom 3 schemes has to be disclosed

Ans: (d) 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. schemes
managed by that 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 fund manager in all performance related advertisements.

94
39. Identify the true statement(s) with respect to Scheme Performance
Disclosures?
A) The data relating to funding performance of all mutual funds is available on
the AMFI website.
B) SEBI has mandated disclosure of performance data by all the AMCs.
a. Only A is true
b. Only B is true
c. Both A and B are true
d. Both A and B are false

Ans: (c) AMFI website (www.amfiindia.com) carries the performance data of all
the mutual fund schemes. SEBI has mandated disclosure of performance data
by all the asset management companies (AMCs). These disclosures can be
accessed through certain scheme documents and website of the fund house.
-----------------------------------------------------------------------------------------------------------
40. Can the fundamental attributes of scheme be changed? If yes - how?
a. Yes- but with the consent of 100% of the unit holders
b. Yes - with the permission of SEBI and AMFI
c. Yes - but this should be communicated to unit holders who should be provided
an option to exit the scheme
d. No - the fundamental attributes cannot be changed as it is based on these
attributes that investors have invested their money

Ans: (c) The trustees shall not permit a change in the fundamental attributes of
the scheme or any other change that will affect the interests of the unit holders
unless written communication is sent to each unit holder, a notice is given in the
newspaper with national circulation and the unit holders are given the option to
exit at NAV without paying an exit load.

95
41. The AMFI Code of Ethics (ACE) sets out___________.
a. The standards of good practices are to be followed by the AMCs in their
operations and in their dealings with investors, intermediaries, and the public.
b. The standards of good practices to be followed by the AMCs in their
operations and in their dealings with mass media.
c. The standards of good practices to be followed by mutual fund distributors in
their dealings with AMFI, AMCs, and investors.
d. The standards of good practices to be followed by fund managers in their
dealings with AMFI and investors.

Ans: (a) The AMFI Code of Ethics (ACE) sets out the standards of good practices
to be followed by the Asset Management Companies (AMCs) in their operations
and in their dealings with investors, intermediaries, and the public.
-----------------------------------------------------------------------------------------------------------
42. Who handles the appeals which are made against the rulings of SEBI?
a. Company Law Board
b. AMFI
c. Securities Appellate Tribunal
d. High Court

Ans: (c) Persons aggrieved by an order of Adjudicating Officer passed under the
SEBI Act can prefer an appeal to Securities Appellate Tribunal (SAT) under
section 15T of the SEBI Act.

96
43. A mutual fund scheme can invest_________ in the equity instruments of a
company.
a. 5% of the net assets
b. 10% of the net assets
c. 15% of the net assets
d. 25% of the net assets

Ans: (b) The SEBI Regulations provide for various limits to the kind of
investments that are possible in mutual fund schemes. One of the restriction is -
The Mutual Fund under all its schemes shall not own more than 10 percent of a
company's paid up capital bearing voting rights.
-----------------------------------------------------------------------------------------------------------
44. One of the objectives of_______is to undertake a nationwide investor
awareness program to promote proper understanding of the concept and working
of mutual funds.
a. SEBI
b. BSE / NSE
c. AMFI
d. NISM

Ans: (c) AMFI is the association of all the registered Asset Management
Companies. One of the objectives of AMFI is to undertake a nationwide investor
awareness program to promote proper understanding of the concept and working
of mutual funds.

97
45. Mutual funds must publish their unaudited accounts once every six
months________.
a. on the AMFI website
b. on the AMC website
c. on the SEBI website
d. in atleast two English newspaper

Ans: (b) As per SEBI rules: The mutual fund shall before the expiry of one month
from the close of each half-year, shall display the unaudited financial results on
the AMC website, the advertisement in this reference will be published by the
fund is at least one English daily newspaper and one regional language
newspaper.
-----------------------------------------------------------------------------------------------------------
46. In a Corporate Bond fund, the minimum investment in highest rated corporate
bonds is__________percent of the total assets.
a. 50
b. 60
c. 70
d. 80

Ans: (d) In Corporate Bond Fund, minimum investment in corporate bonds shall
be 80 percent of total assets (only in AA+ and above rated corporate bonds).

98
47. Identify the true statement with respect to 'Unclaimed Dividend' in mutual
fund schemes.
a. If the plan is a regular plan, then it is the distributor's responsibility that the
investor claims the dues
b. It is the sole responsibility of the investor that he/she claims the dues
c. The Asset Management Company (AMC) is expected to make a continuous
effort to remind the investors through letters to claim their dues.
d. All of the above are true

Ans: (c) Right to unclaimed amounts- AMC is expected to make a continuous

effort to remind the investors through letters to claim their dues. The Annual
Report has to mention the unclaimed amount and the number of such investors
for each scheme.
-----------------------------------------------------------------------------------------------------------
48. Identify the true statement.
a. Mutual funds which are bank-sponsored are regulated by RBI and not SEBI
b. Stock Exchanges regulates mutual funds in India
c. SEBI regulates mutual funds in India
d. SEBI and AMFI both regulate mutual funds in India

Ans: (c) 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.

99
49. If there is a breach of the Code of Conduct by an intermediary and a second
violation by the intermediary is proved then the registration of the intermediary
is________.
a. Not renewed
b. Cancelled
c. Suspended
d. Withhold

Ans: (b) In the event of a breach of the Code of Conduct by an intermediary, the
following sequence of steps is initiated by AMFI: If there is a proven second
violation by the intermediary, the registration will be cancelled, and intimation
sent to all AMCs.
-----------------------------------------------------------------------------------------------------------
50. The investors of a mutual fund can terminate the AMC or wind up a scheme
if_______% or more of the unit holders agree to it.
a. 50
b. 75
c. 70
d. 60

Ans: (b) Mutual fund Investors' Rights & Obligations - Rights to terminate the
appointment of an AMC: 75 percent of unit holders can terminate the
appointment of an AMC. Also, 75 percent of the unit holders (unit holding) can
pass a resolution to wind up a scheme.

100
51. One of the below options is a function of AMFI - which one?
a. To manage the investor protection fund
b. To compute the NAV
c. To make available the data on AUM, NAV, and other data of the mutual fund
industry
d. To regulate insider trading

Ans: (c) AMFI publishes the AUM, NAVs, etc. on its website. (Investor Protection
fund is managed as per SEBI guidelines, NAVs are calculated by the AMCs and
SEBI regulates insider trading).
-----------------------------------------------------------------------------------------------------------
52. Identify the true statement as per AMFI's Code of Conduct for Intermediaries
of Mutual Funds.
a. Intermediaries should rebate some of the commission received by them to the
investors.
b. Intermediaries should abstain from making negative statements about any
Asset Management Company or scheme.
c. Intermediaries should split applications so that they can earn higher
transaction charges.

Ans: (b) One of the clauses under AMFI's Code of Conduct for Intermediaries of
Mutual Funds is - Abstain from making negative statements about any AMC or
scheme and ensure that comparisons, if any, are made with similar and
comparable products along with complete facts.

101
53. What are the guidelines issued by AMFI for intermediaries known as?
a. SEBI Brokers and Intermediaries guidelines
b. Know Your Distributor guidelines
c. AMFI Guidelines & Norms for Intermediaries (AGNI)

Ans: (c) 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 mutual fund products.
-----------------------------------------------------------------------------------------------------------
54. On what basis will the payment be made to an investor who claims his
erstwhile unclaimed redemption amount within three years?
a. The amount paid will be based on the prevailing NAV after adding the income
earned on the unclaimed profits.
b. The amount paid will be based on the NAV at the time of original redemption
plus income earned on the unclaimed amount.
c. The amount paid will be based on the NAV at the time of original redemption
plus income earned on the unclaimed amount and deducting any penalty on the
same.
d. The amount paid will be based on the average of the NAV at the time of
original redemption and today's NAV after accounting for income earned and
penalty if any.

Ans: (a) Recovery of unclaimed amounts by the investors is as follows:• If the

investor claims the money within 3 years, then payment is based on prevailing
NAV i.e. after adding the income earned on the unclaimed money.• If the
investor claims the money after 3 years, then payment is based on the NAV at
the end of 3 years.

102
55. For which mutual fund distributors is a due diligence process mandated by
SEBI?
a. A mutual fund distributor who services more than 25 investors
b. A mutual fund distributor who receives a commission of over Rs. 50 Lakhs
from a single mutual fund
c. A mutual fund distributor who brings in investments from investors of over Rs.
1 crore for a single mutual fund
d. All of the above

Ans: (b) SEBI has mandated AMCs to put in place a due diligence process to
regulate distributors who qualify any one of the following criteria: (i) Multiple point
presence (More than 20 locations), (ii) AUM raised over Rs. 100 crore across the
industry in the non-institutional category but including high net worth individuals
(HNIS), (iii) Commission received of over Rs. 1 Crore p.a. across industry, (iv)
Commission received over Rs. 50 Lakhs from a single mutual fund.
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56. If an investor claims his unclaimed redemption amount after 3 years then the
payment will be based on the_____________.
a. average of the NAVs i.e. current NAV and NAV at the time of original
redemption
b. current NAV
c. NAV at the end of three years
d. NAV at the time of original redemption

Ans: (c) Recovery of unclaimed amounts by the investors is as follows: If the

investor claims the money within 3 years, then payment is based on prevailing
NAV i.e. after adding the income earned on the unclaimed money. If the investor
claims the money after 3 years, then payment is based on the NAV at the end of
3 years.

103
57. Mutual funds can buy and sell securities only on a delivery basis. State
whether this statement is True or False.
a. True
b. False

Ans: (a) The Mutual Fund will buy and sell securities on a delivery basis.
Securities purchased will be transferred in the name of the Mutual Fund because
of the respective scheme.
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58. Whose job is it to track the various corporate actions like bonuses, dividends,
or rights issues in companies where the mutual fund scheme has invested?
a. Custodian
b. Registrar and Transfer Agency
c. Unit holders
d. Auditors of the Asset Management Company

Ans: (a) The custodian has custody of the assets of the fund. As part of this role,
the custodian needs to accept and give delivery of securities for the purchase
and sale transactions of the various schemes of the fund.

104
59. ________of the Unit-holders can pass a resolution to wind up a scheme.
a. 25%
b. 50%
c. 60%
d. 75%

Ans: (d) 75 percent of unit holders can terminate the appointment of an AMC.
Also, 75 percent of the unit holders (unit holding) can pass a resolution to wind
up a scheme
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60. The full form of AGNI is___________________
a. AMFI Guidelines for New Investors
b. AMFI Guidelines for New issues and Investments
c. AMFI Guidelines for Nominations and Investments
d. AMFI Guidelines and Norms for Intermediaries

Ans: (d) AMFI Guidelines and Norms for Intermediaries.

105
61. Which of the below documents can be inspected by the unit holder?
a. Trust Deed
b. Custodial Services Agreement
c. Investment Management Agreement
d. All of the above

Ans: (d) Unit-holders have the right to inspect key documents such as the Trust
Deed, Investment Management Agreement, Custodial Services Agreement, RTA
agreement, and Memorandum & Articles of Association of the AMC.
-----------------------------------------------------------------------------------------------------------
62. Mutual funds have to follow the regulations of the Reserve Bank of India
(RBI) for investments in____________.
a. Securities market
b. Gold
c. Money market
d. Commodity market

Ans: (c) 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.

106
63. __________________ is the regulator for the National Pension System.
a. AMFI
b. COMMERCE MINISTRY
c. SEBI
d. PFRDA

Ans: (d) Pension Funds Regulatory and Development Authority (PFRDA) is the
regulator for the National Pension System.
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64. Which of the following statements is 'True' with respect to celebrity
endorsement for mutual funds?
a. Celebrities can endorse only ongoing mutual fund schemes.
b. Celebrities can endorse only NFOs.
c. SEBI has permitted celebrity endorsements for the promotion of individual
mutual fund schemes.
d. SEBI has permitted celebrity endorsement at the industry level for the purpose
of increasing the awareness of mutual funds.

Ans: (d) SEBI has permitted celebrity endorsements at the industry level for the
purpose of increasing awareness of Mutual Funds as a financial product
category with a few restrictions like - The celebrity endorsements shall not
promote a scheme of a particular Mutual Fund or be used as a branding exercise
of a Mutual Fund house/AMC, etc.

107
 CHAPTER 5: SCHEME RELATED INFORMATION

1. A Segregated portfolio is created ________________.

a. keeping in mind any future financial contingency.
b. when debt or money market instrument are affected by a credit event
c. to create a portfolio of unrated debt securities
d. All of the Above

Ans: (b) To ensure fair treatment to all investors in case of a credit event and to
deal with the liquidity risk, in December 2018, SEBI permitted creation of
segregated portfolio of debt and money market instruments by mutual funds
schemes. “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.
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2. New Fund offer dates are mentioned on _________.
a. KIM & SID
b. SID
c. KIM
d. SAI

Ans: (a) SID has information on relevant NFO dates (opening, closing, re-
opening). KIM is essentially a summary of the SID & SAI. It contains the key
points of the offer document including the dates of issue opening, issue closing &
re-opening for sale & re-purchase.

108
3. If an investor wants to get updated monthly performance and portfolio data on
mutual funds, which of the following documents should he read?
a. Scheme Information Document (SID)
b. Fund Fact Sheet
c. Key Information Memorandum (KIM)
d. Statement of Additional Information (SAI)

Ans: (b) The fund fact sheet plays a vital role in giving updated information on the
mutual fund schemes and usually is published on a monthly basis by all the fund
houses. Fact sheet is not a statutory requirement.
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4. Where are the 'Standard Risk Factors' of a Mutual Fund scheme disclosed?
a. Fund Fact Sheet
b. Addendum
c. Statement of Additional Information (SAI)
d. Scheme Information Document (SID)

Ans: (d) The Scheme Information Document (SID) highlights two broad
categories of risks,(1) Standard risk factors, and (2) Specific risk factors. The
standard risk factors are the risks that all mutual fund investments are exposed
to whereas there are certain risks specific to individual asset category.

109
5. Which of these documents have to be updated once in a year?
a. Mandatory portfolio disclosures
b. Scheme Information Document
c. Fund Fact sheet
d. All of the above

Ans: (b) The Scheme Information Document (SID) of each scheme needs to
updated once every year, accordingly, the scheme performance numbers have to
be updated as a part of this exercise. Mandatory portfolio disclosures are done
every six months and Fund fact sheets are published every month.
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6. Which document will an investor look at if he has to know the fundamental
attributes of a mutual fund scheme?
a. Key Information Memorandum (KIM)
b. Addendum
c. Scheme Information Document (SID)
d. Statement of Additional Information (SAI)

Ans: (c) The Scheme Information Document contains the fundamental attributes
of a scheme under the 'Information about the scheme' column.

110
7. Where are the New Fund Offer dates mentioned?
a. Key Information Memorandum – KIM
b. Scheme Information Document - SID
c. Statement of Additional Information - SAI
d. Both SID and KIM

Ans: (d) 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.
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8. The details and information provided in Scheme Information Document (SID)
and Statement of Additional Information (SAI) are _____
a. applicable only for closed ended schemes
b. applicable only for open ended schemes
c. common for all schemes - open or close ended
d. applicable only for a particular scheme

Ans: (d) SID and SAI form a part of the Offer Document which gives the details of
a New Fund Offer I.e. when a new scheme is launched in the market. Thus every
scheme will have its own SID and SAI as per the investment objectives, etc. of
that particular scheme.

111
9. Which of the below is/are FUNDAMENTAL ATTRIBUTES of a scheme?
a. The type of scheme
b. Investment objective(s) of the scheme
c. Terms of the issue
d. All of the above

Ans: (d) The Offer Document is the most important sources of information on the
core aspects of the scheme called its fundamental attributes. The fundamental
attributes of the scheme includes:
• The type of scheme i.e. Open ended or Close ended or Equity or Balanced etc.
• Investment objective(s) i.e. Growth / Income etc.
• Terms of the issue i.e. listing / repurchase / redemption etc.
-----------------------------------------------------------------------------------------------------------
10. If an investor in a Multi-cap Fund wants to know the industry wise allocation
of the funds then which document should he refer to?
a. Fund Fact sheet
b. SID and SAI
c. Investment management agreement
d. Annual accounts of the AMC

Ans: (a) One of the most popular document from the mutual fund is the monthly
Fund Fact sheet. This document is extensively used by investors, fund
distributors, fund rating agencies, research analysts, media and others to access
information about the various schemes of the mutual fund. In the fact sheet,
security wise as well as industry or sector wise allocation is provided for equity
schemes.

112
11. The Scheme Information Document (SID) prepared by the AMC is approved
by __________.
a. SEBI
b. Board of Trustees
c. Sponsors
d. Stock Exchanges

Ans: (b) Scheme Information Document and Statement of Additional Information

are the part of Offer Documents. AMC prepares the Offer Document for the NFO.
This needs to be approved by the Trustees and the Board of Directors of the
AMC. SEBI does not approve or disapprove Offer Documents, it gives its
observations and these are incorporated.
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12. The trustees / AMC cannot make any change in the fundamental attributes of
a scheme, unless approval is received from ________
a. Unit holders
b. SEBI
c. Sponsor
d. Fund Manager of that scheme

Ans: (a) The trustees / AMC cannot make any change in the fundamental
attributes of a scheme, unless a written communication about the proposed
change is sent to each Unit-holder and their approval is sought. The Dissenting
unit-holders are given the option to exit at the prevailing Net Asset Value.

113
13. Of the following documents, which is required to be appended to the
application form of a MF scheme?
a. Statement of Additional Information – SAI
b. Addendum
c. Scheme Information Document - SID
d. Key Information Memorandum - KIM

Ans: (d) KIM is essentially a summary of the SID and SAI. As per SEBI
regulations, every application form is to be accompanied by the KIM.
-----------------------------------------------------------------------------------------------------------
14. As per SEBI regulations, every application form is to be accompanied by
____________.
a. Key Information Memorandum (KIM)
b. Scheme Information Document (SID)
c. Addendum
d. Statement of Additional Information

Ans: (a) As per SEBI regulations, every application form is to be accompanied by

the KIM. KIM is essentially a summary of the SID and SAI. It is more easily and
widely distributed in the market.

114
15. When is the Scheme Information Document (SID) updated?
a. Every year
b. Every month
c. Every two years
d. As per AMC decision

Ans: (a) Scheme Information Document (SID) is updated every year.

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16. The interim changes in a mutual fund scheme are updated to the investors
through ______________.
a. Key Information Memorandum (KIM)
b. Statement of Additional Information (SAI)
c. Addendum
d. Scheme Information Document (SID)

Ans: (c) While the SID, SAI and KIM need to be updated periodically, the interim
changes are updated through the issuance of Addendum. The addendum is
considered to be a part of the scheme related documents, and must accompany
the KIM.

115
17. Which of these is NOT included in the Key Information Memorandum (KIM)?
a. Dates of Issue Opening, Issue Closing and Re-opening
b. Investment Objective
c. Risk profile of the scheme
d. Functions of the sponsor, trustee and AMC

Ans: (d) Some of the key items contained in the KIM are as follows:
- Name of the AMC, mutual fund, Trustee, Fund Manager and scheme
- Dates of Issue Opening, Issue Closing and Re-opening for Sale and Re-
purchase
- Investment Objective
- Asset allocation pattern of the scheme
- Risk profile of the scheme i.e. a snapshot of the risk to the principal invested,
the suitable investment horizon for investment and the type of securities that the
scheme will invest in.
- Plans and Options
- Benchmark Index
- Dividend Policy
- Performance of scheme and benchmark over last 1 year, 3 years, 5 years and
since inception.
- Expenses of the scheme
- Information regarding registration of investor grievances

116
18. The Mutual Fund application form is attached to the ________
a. KIM
b. SAI
c. SID
d. AMC Memorandum

Ans: (a) KIM is a summary of the SID and SAI. It is more easily and widely
distributed in the market. As per SEBI regulations, every application form is to be
accompanied by the KIM.
-----------------------------------------------------------------------------------------------------------
19. In the Scheme Information Document (SID), the condensed financial
information (for schemes launched in last 3 financial years) is mentioned - True
or False?
a. True
b. False

Ans: (b) Condensed financial information (for schemes launched in last 3

financial years) is mentioned in the Statement of Additional Information (SAI).

117
20. To source the data required to track the performance of mutual funds most
_______offer free tools on their websites for this purpose.
a. AMC's
b. Distribution Houses
c. MF Research companies
d. All of the above

Ans: (d) An investor who wants to study the performance of a MF by collecting

daily NAV, etc. from the newspapers can find it frustratingly time consuming.
However, ready-made solutions are available in the market. Many AMCs,
distribution houses and mutual fund research houses offer free tools in their
website.
-----------------------------------------------------------------------------------------------------------
21. Which of the following is an important aspect of an OFFER DOCUMENT?
a. To inform the investors about the AMC's views on Stock Markets
b. To inform the investors on the performance of the scheme
c. To provide a comparison of the schemes
d. To inform the investors on the detailed information about the scheme

Ans: (d) To inform the investors on the detailed information about the scheme is
an important aspect of an OFFER DOCUMENT.

118
22. Once the New Fund Offer (NFO) of a Close Ended Fund has closed, a
person can buy the listed units of such close ended fund _________.
a. At prices usually higher than NAV
b. At prices usually lower than NAV
c. At prices which can be higher or lower than NAV
d. Units of a Close Ended Fund cannot be bought after NFO

Ans: (c) After the NFO of a close ended fund, sale and purchase transactions
happen on the stock exchange between two different investors, and that the fund
is not involved in the transaction. The transaction price is likely to be different
from the NAV. Depending on the demand-supply situation for the units of the
scheme on the stock exchange, the transaction price could be higher or lower
than the prevailing NAV.
-----------------------------------------------------------------------------------------------------------
23. When is the Statement of Additional Information (SAI) updated?
a. Every month
b. Before 10th of January and 10th of July every six months
c. Every three months
d. Before the end of 3 months of every financial year

Ans: (d) 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)

119
24. Who issues a due diligence certificate stating compliance with all legal
formalities at the time of making a new offer of mutual fund units?
a. Board of Trustees
b. AMC
c. Compliance Officer
d. Custodian

Ans: (b) The cover page of Scheme Information Document (SID) has the
following standard clause - "The particulars of the Scheme have been prepared
in accordance with the Securities and Exchange Board of India (Mutual Funds)
Regulations 1996, as amended till date, and filed with SEBI, along with a Due
Diligence Certificate from the AMC.
-----------------------------------------------------------------------------------------------------------
25. A synopsis of the scheme related information documents is found in
the________________.
a. Statement of Additional Information - SAI
b. Articles of Association
c. Trust Deed
d. Key Information Memorandum - KIM

Ans: (d) Key Information Memorandum - KIM is essentially a summary of the SID
and SAI. It contains the key points of these documents that are essential for the
investor to know to make a decision on the suitability of the investment for their
needs. As per SEBI regulations, every application form is to be accompanied by
the KIM.

120
26. Which document has the statutory information about the mutual fund or AMC,
that is offering the scheme?
a. Scheme Information Document (SID)
b. Statement of Additional Information (SAI)
c. Red Herring Prospectus
d. Fund Fact Sheet

Ans: (b) 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.
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27. What is the time duration in which SEBI has to approve the scheme-related
documents?
a. 7 working days
b. 3 working days
c. 14 working days
d. SEBI does not approve the documents. It gives its observations.

Ans: (d) SEBI does not approve or disapprove the Scheme Related Documents,
it gives its observations. The mutual fund needs to incorporate these

121
observations in these documents. Thus, the Documents in the market are
"vetted" by SEBI, and not approved by SEBI.
28. Where is the information regarding investor service centres, minimum
investment amount, and how to make the purchases of mutual funds mentioned?
a. Application Form
b. Nomination Form
c. Transaction Slip
d. Key Information Memorandum (KIM)

Ans: (d) KIM is a summary of the Scheme Information Document (SID) and
Statement of Additional Information (SAI) wherein all the details of the scheme
are mentioned.
-----------------------------------------------------------------------------------------------------------
29. In which document is a commentary on the current state of the economy and
markets is also generally provided?
a. Statement of Additional Information (SAI)
b. Key Information Memorandum (KIM)
c. Fund Fact Sheet
d. Scheme Information Document (SID)

Ans: (c) Apart from providing information about the schemes in the fund fact
sheet, AMCs may also provide periodic updates on markets and the

122
economy. The fact sheet is also used by the fund manager to communicate their
views on the economy and the markets to the investors.
30. If one wants to know the General Risk Factors, then which document should
he read?
a. Fund Fact Sheet
b. Documents filed with SEBI
c. key information memorandum (KIM)
d. Scheme Information Document (SID)

Ans: (d) The risks in the scheme are listed in the segment on Risk Factors in
Section I, Sub-section A of the Scheme Information Document (SID). This section
includes standard or general risk factors that affect all mutual fund schemes.
-----------------------------------------------------------------------------------------------------------
31. Identify the false statement with respect to mutual fund scheme-related
documents.
a. KIM and SID are two broad types of scheme documents
b. SID has details of the particular scheme
c. SAI has statutory information about the mutual fund
d. KIM is essentially a summary of the SID and SAI

123
Ans: (a) Option 1 is wrong 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.
32. Identify the true statement(s)-
A) An Addendum must accompany the KIM
B) Addendum is considered to be a part of the Scheme Related Documents
a. Only A is true
b. Only B is true
c. Both A and B are true
d. None of them are true

Ans: (c) While the SID, SAI, and KIM need to be updated periodically, the interim
changes are updated through the issuance of an Addendum. The addendum is
considered to be a part of the scheme related documents, and must accompany
the KIM.
-----------------------------------------------------------------------------------------------------------
33. ________________is/are included in the Key Information Memorandum
(KIM).
a. Name of the fund manager, trustees, etc.
b. Performance of schemes
c. Asset allocation plan

124
Ans: (d) KIM is essentially a summary of the SID and SAI. It contains the key
points of the offer document that are essential for the investor to know to make a
decision on the suitability of the investment for their needs. All the above details
and more are included in the KIM.
34. The Offer Document will NOT give any information on_______________.
a. The risk factors of the scheme
b. The name of stocks in which the scheme is likely to invest
c. Investment objectives of the scheme
d. The features of the portfolio of the scheme

Ans: (b) The decision on the stocks to invest in a closed-door procedure is

decided by the fund managers in association with the research and analysis
team.
-----------------------------------------------------------------------------------------------------------
35. Which of the following is an important aspect of an OFFER DOCUMENT?
a. To inform the investors about AMC's views on Stock Markets
b. To inform the investors of the performance of the scheme
c. To provide a comparison of the schemes
d. To inform the investors on the detailed information about the scheme

125
Ans: (d) SID and SAI together are the primary source of information for any
investor—existing as well as prospective. These are the operating documents
that describe the product. Since the investor is required to make an informed
investment decision, these documents serve the purpose of providing the
required information in an easy-to-understand language.
36. With respect to KIM - Key Information Memorandum, which of the following
statement is NOT true?
a. KIM is basically an abridged version of the offer document
b. KIM basically contains only the names of Sponsor, Trust, and AMC and not
their functions
c. cannot sell but can switch the units to another scheme
d. KIM has to be provided only if the investors ask for it

Ans: (d) KIM is essentially a summary of the SID and SAI. It contains the key
points of the offer document that are essential for the investor to know to make a
decision on the suitability of the investment for their needs. It is more easily and
widely distributed in the market. As per SEBI regulations, every application form
is to be accompanied by the KIM.
-----------------------------------------------------------------------------------------------------------
37. The Key Information Memorandum (KIM) is an abridged version of which of
these documents?
a. The yearly statement of the portfolio of the fund
b. The half-yearly statement of the financial statement of the fund
c. The annual accounts of the fund
d. Scheme related documents

126
Ans: (d) KIM is essentially a summary of the Scheme Information Document -SID
and Statement of Additional Information -SAI. Scheme-related documents consist
of SID and SAI. It contains the key points of these documents that are essential
for the investor to know to make a decision on the suitability of the investment for
their needs.
38. Identify from the following what is not considered as a scheme fundamental
attribute?
a. Type of scheme
b. Investment objective
c. Investment pattern
d. Name of fund manager

Ans: (d) The fund manager and his/her name is not a fundamental attribute of a
scheme.
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39. Legally SAI is part of the SID - True or False?
a. True
b. False

127
Ans: (a) In practice, Scheme Information Document (SID) and Statement of
Additional Information (SAI) are two separate documents, though the legal
technicality is that SAI is part of the SID.
40. Offer documents of mutual fund schemes are approved by SEBI - True or
False?
a. True
b. False

Ans: (b) Offer Documents in the market are "vetted” by SEBI, though SEBI does
not formally "approve" them.
-----------------------------------------------------------------------------------------------------------
41. How often should the Key Information Memorandum (KIM) be updated?
a. At least once a month
b. At least once every six months
c. At least once a year
d. It need not be updated after it is issued once

128
Ans: (c) KIM is to be updated at least once a year or early in case of change in
fundamental attributes.
42. Which of the following statements is 'TRUE' with respect to the Scheme
Information Document (SID) and Statement of Additional Information (SAI)?
a. These two documents are prepared in the format prescribed by the
Association of Mutual Funds in India as part of AMFI's Code of Conduct.
b. These two documents are prepared in the format prescribed by the
Association of Mutual Funds in India as part of AMFI's Best Practices Circular.
c. These two documents are prepared in the format prescribed by the Securities
and Exchange Board of India.
d. Each Asset Management Company is free to prepare these documents in the
format they desire.

Ans: (c) SAI and SAI documents are prepared in the format prescribed by SEBI
and submitted to SEBI. The contents need to flow in the same sequence as in
the prescribed format. The mutual fund is permitted to add any other disclosure,
which it feels, is 'material for the investor.
-----------------------------------------------------------------------------------------------------------
43. Statement of Additional Information' SAl contains information that
is_____________.
a. meant only for Close Ended Schemes
b. applicable for all schemes
c. applicable only for Open-Ended Schemes
d. meant only for one particular scheme

129
Ans: (b) The Offer Document has two parts: i) Scheme Information Document
(SID), which has details of the particular scheme. ii) Statement of Additional
Information (SAI), which has statutory information about the mutual fund, that is
offering the scheme. Therefore, A single SAI is relevant for all the schemes
offered by a mutual fund.
44. As per the common disclosure - Investments in mutual funds are subject to
market risks and therefore _____________.
a. will provide insurance
b. will not provide a guarantee of returns or capital protection
c. will provide a guarantee of returns
d. will guarantee capital protection in the long run

Ans: (b) There is NO guarantee of returns or capital protection in a Mutual Fund.

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45. A summary of the scheme related information documents is found in
the_____________.
a. Statement of Additional Information (SAI)
b. Fact Sheet
c. Key Information Memorandum - KIM
d. Addendum

130
Ans: (c) Key Information Memorandum - KIM is essentially a summary (synopsis)
of the SID and SAI. It contains the key points of these documents that are
essential for the investor to know to make a decision on the suitability of the
investment for their needs. It is more easily and widely distributed in the market.
As per SEBI regulations, every application form is to be accompanied by the
KIM.
46. The investment objective is closely linked to_____________.
a. Plan
b. Scheme
c. Option
d. Maturity

Ans: (b) Every scheme has a pre-announced investment objective. When

investors invest in a mutual fund scheme, they are effectively buying into its
investment objective.
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47. KIM has to be updated every________________.
a. three months
b. six months
c. one year
d. five year

131
Ans: (c) KIM shall be updated at least once in half-year, within one month from
the end of the respective half-year, based on the relevant data and information
as at the end of September and March and shall be filed with SEBI forthwith
through electronic mode only.

CHAPTER 6: FUND DISTRIBUTION AND CHANNEL

MANAGEMENT PRACTICES

1. For how long is the trail commission paid to the mutual fund distributor?
a. For the first one year only
b. For the first three years only
c. For the first ten years only
d. Till the money is held in the fund

Ans: (d) A mutual fund distributor is paid trail commission for as long as the
investor's money is held in the fund.
-----------------------------------------------------------------------------------------------------------
2. 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?
a. Institutional distributors who have points of presence in more than 10 locations
b. Individual distributors who have points of presence in more than 10 locations
c. Distributors who have received commission of over Rs. 1 crore p.a. across
industry
d. All of the above

132
Ans: (c) 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:
Multiple point presence (more than 20 locations), AUM raised over Rs. 100 crore
across industry in the non-institutional category but including high net worth
individuals (HNls), Commission received of over Rs. 1 crore p.a. across industry
and Commission received of over Rs. 50 lakhs from a single mutual fund.
3. A mutual fund distributor cannot charge a transaction fee on which of these
transactions?
a. Systematic Transfer Plan
b. A new investor making a purchase in a mutual fund scheme
c. An existing investor making a purchase in a mutual fund scheme
d. Systematic Investment Plan (SIP)

Ans: (a) Transaction charges do not apply to transactions other than

purchases/subscriptions that result in fresh inflows.
-----------------------------------------------------------------------------------------------------------
4. Which of the following information about mutual fund distributors who have
multiple points of presence (more than 20 locations) must be disclosed by the
AMCs?
A) Distributor-wise gross inflows and net inflows; B) Average assets under
management; C) Total commission and expenses paid to distributors
a. B and C
b. A and C
c. A and B
d. All A, B and C

133
Ans: (d) For mutual fund distributors having multiple point of presence (More
than 20 locations), mutual funds or AMCs need to disclose the total commission
and expenses paid to distributors, disclosures regarding distributor-wise gross
inflows (indicating whether the distributor is an associate or group company of
the sponsor(s) of the mutual fund), net inflows, average assets under
management and ratio of AUM to gross inflows on their respective website on a
yearly basis.
5. Which type of transactions are allowed on a stock exchange platform for
mutual fund trading?
a. Only B
b. A, B and C
c. A & B
d. B & C

Ans: (b) Investors can now transact in mutual fund units through the stock
exchanges. The units of close-ended funds and ETFs are compulsorily listed on
at least one stock exchange. At the same time, units of open ended funds are
also available through special segments on the stock exchanges.
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6. Which certification examination is mandated by SEBI for becoming a mutual
fund distributor in the India?
a. NCFM Series VA Mutual Fund Distributors
b. NISM Series VA Mutual Fund Distributors
c. AMFI VA Mutual Fund Distributors
d. SEBI VA Mutual Fund Distributors

134
Ans: (b) 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.
7. If a person has to trade in units of a closed-ended mutual fund on the stock
exchange platform then the units have to be held in _____.
a. Dematerialized form
b. Physical form
c. Both of these
d. None of these

Ans: (a) Trading in mutual fund units on stock exchange platform can be done
only in dematerialized form. Schemes, where the money can be recovered from
the mutual fund only on closure of the scheme like a closed-ended fund, are
compulsorily listed on a stock exchange. In such schemes, the investor can sell
the de-materialized units through the stock exchange platform to recover the
prevailing value of the investment.
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8. With respect to the procedure for getting empanelled as a mutual fund
distributor with AMC, the applicant needs to sign a declaration for ______.
a. Guarantee of adding a minimum of 5 investors every month
b. Declaring the rebates given back to the investors
c. Ensuring that all employees who are selling mutual funds will have more than
on ARN code
d. Commitment to abide by statutory codes, guidelines and circulars

135
Ans: (d) The applicant needs to sign a declaration which provides for, among
other conditions, the commitment to abide by instructions given, as also statutory
codes, guidelines and circulars.
9. When the distributors are empanelled, the mutual funds should categorize the
customer relationship and transactions in which of the following ways?
a. Advisory, Sale
b. Advisory, Execution
c. Financial Planning, Distribution
d. Priority Sale, Retail Sale

Ans: (b) Customer relationship and transactions shall be categorized as:

Advisory: where a distributor represents to offer advice while distributing the
product, it will be subject to the principle of 'appropriateness' of products to that
customer category. Execution Only: in case of transactions that are not booked
as 'advisory'.
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10. State True or False – There are no SEBI regulations regarding the minimum
or maximum commission that distributors can earn.
a. True
b. False

136
Ans: (a) There are no SEBI regulations regarding the minimum or maximum
commission that distributors can earn. However, SEBI has laid down limits on
what the total expense (including commission) in a scheme can be.
11. ________ is responsible for settlement of Mutual Fund transactions which
are executed on the Stock Exchanges.
a. AMC
b. Stock Exchange
c. Clearing House
d. AMFI

Ans: (a) A Stock Exchange is essentially an order routing system between the
investors and the AMC, the exchanges do not offer Settlement Guarantee.
Responsibility for settlement is that of the AMC.
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12. Only individuals are allowed to distribute mutual funds in India. State whether
True or False.
a. True
b. False

137
Ans: (b) Mutual funds are distributed in India to the investors through multiple
channels, viz., individual mutual fund distributors, bank branches, national
distributors through their branches or their sub-agents, post offices, and directly
by the AMCs.
13. The mutual fund schemes' sale and purchase of investments are executed
by the ___________in the stock market.
a. Operator
b. Dealer
c. AMC
d. Sponsor

Ans: (b) The various dealers of a Stock Broker buy and sell shares as per the
orders of the Mutual Fund.
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14. Mutual Fund distributors receive commission on investments made by their
clients as well as on the investments they make for themselves in their own
name. State True or False?
a. True
b. False

138
Ans: (b) Distributors get commission on investments made through them by their
clients. However, no commission is payable on their own investments.
15. To maintain neutrality, all AMC's have same commission structure with
respect to commissions payable to distributors. State True or False?
a. True
b. False

Ans: (b) The commission structures vary between AMCs. Even for the same
AMC, different commissions are applicable for different kinds of schemes.
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16. The AMC pays commission to Mutual Fund Agents, but no such commission
is paid to stock brokers who trade in mutual funds on the Stock Exchange
platform. State True or False.
a. True
b. False

139
Ans: (a) The AMC does not pay the brokers any commission on the trades
through them on the Stock Exchange platform. The Stock Brokers get their
commissions from the investor by charging brokerages on MF transactions.

17. An investor purchases through a distributor 5000 units of a mutual fund

scheme at a NAV of Rs. 25. The current NAV of the scheme is Rs. 43. What will
be the trail commission for today if the trail commission rate is 1% per annum.
a. Rs. 2150
b. Rs. 33.1854
c. Rs. 3.4246
d. Rs. 5.8904

Ans: (d) Trail commission is always calculated on the current NAV. The current
total value of investments in the above question is Rs. 43 X 5000 units = Rs.
2,15.000. Trail commission for the day = Current value X trail commission rate
p.a. / 365 = 215000 X 1% / 365 days = 2150 I 365 = Rs. 5.8904.
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18. Identify the TRUE statement.
a. The mutual fund investor has the complete freedom to change the distributor
any time he wants.
b. Once an investor had invested through a distributor, he cannot change the
distributor.
c. Once an investor had invested by online method, he cannot change the
distributor.
d. Once an investor had invested through a distributor, he cannot invest directly
with the mutual fund house.

140
Ans: (a) Investors can choose to change their distributor or opt for direct
investing. This needs to be done through a written request by the investor. In
such cases, AMCs will need to comply, without insisting on any kind of 'No
Objection Certificate' from the existing distributor.
19. The ARN number is assigned by _________
a. AMC
b. SEBI
c. AMFI
d. Stock Exchange

Ans: (c) The ARN number is assigned by AMFI

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20. Earlier, the amount which was paid to the distributor at the time the money is
invested in a scheme was called __________.
a. Trail Commission
b. Upfront Commission
c. Rebate
d. Fund Incentive

141
Ans: (b) The amount which is paid to the distributor at the time the money is
invested in a scheme is called Upfront Commission.
21. Which of the following options form the basis of appointment of a Mutual
Fund distributor?
a. An agreement between the AMC and the Distributor
b. Approval from SEBI
c. Power of Attorney from the AMC
d. An agreement with AMFI

Ans: (a) Empanelment with the AMC (or enrolment as an agent of an empanelled
distributor) is compulsory to be able to sell mutual fund schemes and earn the
commissions.
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22. The Stock Exchanges which provide facilities for Mutual Fund trading also do
the functions of Mutual Fund RTAs. State True or False.
a. True
b. False

142
Ans: (b) Stock Exchanges are not required to do the role of Registrars and
Transfer Agents (RTA).
23. The trail commission paid by Mutual Funds to a distributor _____________
a. Is paid only for high valued transactions
b. Is linked to the NAV
c. Grows at a steady rate
d. Is paid to the Corporate and Bank Distributors only

Ans: (b) Trail Commission is calculated on net assets so the distributors benefit
from increase in net assets arising out of valuation gains in the market. If the
value of portfolio rises the trail commission also rises.
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24. Investors can choose to change their distributor or go direct and AMCs will
need to comply after getting a 'No Objection Certificate' from the existing
distributor. True or False?
a. True
b. False

143
Ans: (b) Investors can choose to change their distributor or go direct. In such
cases, AMCs will need to comply, without insisting on No Objection Certificate
from the existing distributor.
25. Trail commissions are linked to valuation of portfolio in the market. True or
False?
a. True
b. False

Ans: (a) Trail Commission is calculated on net assets so the distributors benefit
from increase in net assets arising out of valuation gains in the market. If the
value of portfolio rises the trail commission also rises.
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26. Investments in Mutual Funds can be done only through AMFI authorized MF
distributors. True or False?
a. True
b. False

144
Ans: (b) Investors can directly invest in MF's by visiting the MF office and other
Point of Sales (POS).
27. AMCs has to put in place a due diligence process to regulate distributors
who_____________.
a. has received commission received of over Rs. 25 lakhs from a single mutual
fund
b. has raised AUM of over Rs. 25 crores from non-institutional investors
c. has presence in more than 20 locations
d. All of the above

Ans: (a) 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 crore across
industry in the non-institutional category but including high net-worth individuals
(HNIS), Commission received of over Rs. 1 crore p.a. across industry and
Commission received of over Rs. 50 lakhs from a single mutual fund.
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28. ________is not a mutual fund distribution channel.
a. Branches of Public sector banks
b. Branches of Reserve Bank of India
c. Branches of Private sector banks
d. Branches of Foreign banks

145
Ans: (b) Reserve Bank of India or its branches are not involved in the sales and
distribution of mutual fund products.
29. In which of the following cases is the transaction charge to be paid to the
mutual fund distributor, deducted from the gross investment of the investor?
a. When the investor purchases mutual fund units worth Rs. 5000 through a
mutual fund distributor
b. When the investor purchases mutual fund units worth Rs. 10000 through a
mutual fund distributor
c. When the investor purchases mutual fund units worth Rs. 5000 through the
website of the mutual fund
d. When the investor purchases mutual fund units worth Rs. 10000 through the
website of the mutual fund

Ans: (b) 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.
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30. In a mutual fund application form, if 'Direct' is mentioned in the space
provided for ARN and the choice of regular plan is indicated then the application
will be considered as_________.
a. Direct plan application
b. Regular plan application
c. Incomplete and rejected

146
d. Incomplete and sent to the investor for completion

Ans: (a) Investors have the option to invest directly without routing the
investment through a distributor (Direct Plan). In this case, the investor must
mention "Direct" in the space provided in the application form for entering the
AMFI Registration Number (ARN).
31. To become a mutual fund distributor in India, one has to pass an exam which
is conducted by__________.
a. Securities and Exchange Board of India - SEBI
b. National Stock Exchange - NSE NCFM
c. National Institute of Securities Markets - NISM
d. Association of Mutual Funds in India's - AMFI

Ans: (c) Distributors need to pass the NISM Certification Examination (NISM-
Series - V-A: Mutual Fund Distributors (MFD) Certification Examination) and
register with AMFI.
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32. As per SEBI rules, commissions cannot be paid to______________.
a. Brokers of the stock exchange
b. Banks
c. Sponsor distributors
d. Investors

147
Ans: (d) As per SEBI rules, a mutual fund distributor has to sign a declaration
mentioning: undertake not to rebate commission back to investors, or attract
investors through the temptation of rebate/gifts, pass back of commission etc.
33. The stock exchanges which provide mutual fund trading facilities also have to
provide for settlement guarantee. State True or False?
a. True
b. False

Ans: (a) Stock Exchanges trading facility for MFs is essentially an order routing
system between the investors and the AMC, the exchanges do not offer
Settlement Guarantee. Responsibility for settlement is that of the AMC.
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34. ______________is not a fair selling practice by a mutual fund distributor.
a. Informing the investor of the various investment options
b. Carefully understanding the client's financial needs
c. Encouraging the churning of investments
d. Giving personalized after-sales service

148
Ans: (d) Churning means frequent buying and selling. Encouraging over
transacting and churning of Mutual Fund investments to earn higher
commissions by MF agents is a bad practice.
35. The Asset Management Company primarily compensates the mutual fund
distributors through___________
a. Commissions
b. Salaries
c. Salary + Commission
d. Share in AMC's profit

Ans: (a) The mutual fund distributor earns revenue in the form of commission
income for the distribution of the mutual fund products/schemes. The
commission may be linked to either the transaction or to the assets under
management.
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36. Distributors can ‘opt-out' of charging transaction charges________________.
a. at AMC level
b. cancelled
c. at scheme level
d. at distributor level

149
Ans: (d) Distributors have the option of opting out of charging transaction
charges. But such opting out shall be applicable only at the distributor level. This
means that the distributor cannot choose to charge transaction charges from one
investor and not from another.
37. Identify the true statement with respect to investments in mutual funds
through Stock Exchanges?
a. Stock exchanges have now become another important channel for mutual
fund companies to sell their units to investors
b. One can buy mutual fund units on the stock exchange but cannot sell them on
the stock exchange
c. cannot sell but can switch the units to another scheme
d. None of the above are true

Ans: (a) SEBI has facilitated buying and selling of the units of mutual funds
through the stock exchanges. Exchanges have developed mutual fund
transaction engines for this purpose. The low cost and deeper reach of the stock
exchange network enable an increased level of participation of retail investors in
mutual funds.
-----------------------------------------------------------------------------------------------------------
38. BSE's platform for Mutual Fund trading is known as BSE Solar Mutual Funds
Platform. True or False?
a. True
b. False

150
Ans: (b) BSE's platform is the BSE STAR Mutual Funds Platform. BSE STAR MF
stands for BSE Ltd's online stock exchange platform for Allotment and
Redemption of Mutual Fund units.
39. 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?
a. Rs. 4950
b. Rs. 4900
c. Rs. 4875
d. Rs. 5000

Ans: (d) 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.
-----------------------------------------------------------------------------------------------------------
40. In what form do mutual fund distributors earn revenue?
a. Investment advisory fee from mutual funds
b. Commission received from Association of Mutual Funds in India
c. Fees collected from the investors
d. Commission from mutual funds for the distribution of the schemes

151
Ans: (d) The mutual fund distributor earns revenue in the form of commission
income for the distribution of the mutual fund products/schemes. The
commission may be linked to either the transaction or to the assets under
management.
41. After the New Fund Offer, units of the Close Ended fund can be bought and
sold through______________.
a. The close ended funds cannot be bought and sold till the closure of the term
b. The offices/branches of the respective AMC's
c. Stock Exchanges
d. The bank in which the unit holder has an account

Ans: (c) A close-ended scheme offers liquidity through listing in stock exchange.
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42. Can an investor transact directly through the websites of some mutual fund
companies?
a. Yes, they can buy / sell units on the MFs website
b. No, this is not allowed in India

152
Ans: (a) 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.
43. The distributors are mainly compensated through_________ by the mutual
funds.
a. commissions
b. salaries
c. portfolio profits
d. annual fees

Ans: (a) Agents receive trail commission on the current value of the investment
mobilized by them till the time the investor remains invested.
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44. With which agency are the mutual fund distributors registered?
a. Securities and Exchange Board of India
b. Fund Accounting Team
c. Depositories
d. Association of Mutual Funds in India

153
Ans: (d) Distributors need to pass the NISM Certification Examination (NISM-
Series-V-A: Mutual Fund Distributors (MFD) Certification Examination) and
register with AMFI.

CHAPTER 7: NET ASSET VALUE, TOTAL EXPENSE

RATIO & PRICING OF UNITS

1. The asset Management company has to disclose the Total Expense Ratio
(TER) of every scheme on the website on a ___________ basis.
a. Daily
b. Monthly
c. Half-Yearly
d. Yearly

Ans: (a) 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 under a separate head – “Total Expense Ratio of
Mutual Fund Schemes” on their website.
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2. If the average share in the scheme are held for 18 months the turnover ratio
would be
a. 0.5
b. 0.67
c. 1
d. 1.5

154
Ans: (b) If the portfolio turnover ratio is 1, that means the average stocks in the
portfolio is held for one year, with the same logic if the portfolio is held for 18
months that means the portfolio turnover ratio will be 12/18, i.e. 67%.
3. The expenses which can be charged by an Asset Management Company to a
Mutual Fund scheme are limited by _____
a. Fund Managers
b. Sponsors
c. Investors
d. SEBI

Ans: (d) The expenses which can be charged and the expense ratios etc. are
mentioned in the SEBI Mutual Fund Regulations,1996 which the AMC's have to
adhere to.
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4. Identify the TRUE statement.
a. 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
b. 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
c. None of these

155
Ans: (b) If there is an entry load on the scheme then while calculating the
scheme returns, the initial value of the NAV is taken as NAV plus the entry load
because the cost of purchase increases due to entry load. So entry load has to
be added to the NAV and not subtracted.
For redemptions, instead of the later value of NAV (which is used for calculating
the scheme returns), the amount actually received or receivable by the investor
(NAV minus exit load) would need to be used.
5. How is the redemption transaction of a mutual fund priced?
a. NAV plus exit load
b. NAV minus exit load
c. NAV plus entry load
d. NAV minus entry load

Ans: (b) Schemes are permitted to keep the re-purchase Price lower than the
NAV. The difference between the NAV and re-purchase Price is called the "exit
load". If the NAV of a scheme is Rs. 11.00 per unit, and it were to charge exit
load of 1 percent, the re-purchase Price would be Rs. 11-1 percent on Rs. 11 i.e.
Rs. 10.89.
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6. Investments are carried at __________ in a mutual fund portfolio.
a. Market Value
b. Face Value
c. Book Value
d. Cost Value

156
Ans: (a) Investments are taken at their market value. This is done, to ensure that
sale and re-purchase transactions are effected at the true worth of the unit,
including the gains on the investment portfolio. The process of valuing each
security in the investment portfolio of the scheme at its current market value is
called 'mark to market' i.e. marking the securities to their market value.
7. Dividends which are paid by mutual funds can be paid out of _______
a. Profits of the Asset Management Company
b. Mark to Market profits
c. All realised and unrealised gains
d. Distributable surplus only

Ans: (d) SEBI guidelines stipulate that dividends can be paid out of distributable
reserves. In the calculation of distributable reserves: All the profits earned (based
on accrual of income and expenses as detailed above) are treated as available
for distribution.• Valuation gains are ignored. But valuation losses need to be
adjusted against the profits. That portion of sale price on new units, which is
attributable to valuation gains, is not available as a distributable reserve.
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8. The average net assets of a fund were Rs. 800 crore and the investment
transactions of the fund were Rs. 1600 crore. Calculate the Portfolio Turnover
Ratio.
a. 10 times
b. 0.5 times
c. 2 times
d. 20 times

157
Ans: (c) Portfolio Turnover Ratio is calculated as Value of Purchase and Sale of
Securities during a period divided by the average size of net assets of the
scheme during the period.
Portfolio Turnover Ratio = 1600 / 800 = 2
9. 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?
a. Rs. 76500
b. Rs. 79200
c. Rs. 80000
d. Rs. 78400

Ans: (d) 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
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10. As per the Principles of fair valuation of mutual funds, the valuation of the
securities shall be ________
a. done aggressively
b. done conservatively
c. always rising
d. reflective of the realizable value of the securities

158
Ans: (d) As per Principle No. 1 of SEBl's Fair Valuation Principles - The valuation
of investments shall be based on the principles of fair valuation i.e. valuation
shall be reflective of the realizable value of the securities/assets. The valuation
shall be done in good faith and in true and fair manner through appropriate
valuation policies and procedures.
11. Which of these expenses can be charged to a fund?
a. Office salaries of fund management team
b. Rent of the AMC registered office
c. AMC general administration expenses
d. Custodian and Fund Administrator fees

Ans: (d) Custodian and Fund Administrator fees can be charged to the fund.
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12. In which of the following cases can Goods and Service Tax (GST) be
charged to the mutual fund scheme over and above the Total Expense Ratio of
the scheme?
a. GST applicable on any fees must be within the Total Expense Ratio.
b. GST applicable on distributor commission only can be charged to the scheme
over and above the Total Expense Ratio.
c. GST applicable on AMC fees as well as distributor commission can be
charged to the scheme over and above the Total Expense Ratio.
d. GST applicable on AMC fees only can be charged to the scheme over and
above the Total Expense Ratio.

159
Ans: (d) AMC(s) can charge GST, as per applicable Taxation Laws, to the
schemes within the limits prescribed under SEBI (Mutual Fund) Regulations.
GST on fees paid on investment management and advisory fees shall be
charged to the scheme in addition to the overall limits specified as per the Total
Expense Ratio (TER) provisions. The commission payable to the distributors of
mutual funds may be subject to GST, as applicable in case of the ARN holder.
Such tax cannot be charged to the scheme.
13. Calculate the NAV for the following information : Value of stock 200 cr, Value
of money market instruments – Rs. 25 cr, Dividend accrued but not received –
Rs. 10 cr, Amount receivable on sale of shares – Rs. 5 cr, Amount payable on
purchase of shares: Rs. 10.5 cr, Fees payable – Rs. 1 cr. No. of outstanding
units - 3 cr
a. 75.83
b. 80.77
c. 76.16
d. 79.17

Ans: (c) NAV = (Value of stocks + Value of money market instruments + Dividend
accrued but not received + Amount receivable on sale of shares - Amount
payable on purchases of shares - Fees payable) / No. of outstanding units
= 200 cr + 25 cr + 10 cr + 5 cr - 10.5 cr - 1cr / 3 cr
= 228.5 cr / 3 cr = 76.16
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14. Management fees cannot be charged by liquid schemes and other debt
schemes on funds parked in short-term deposits of commercial banks - State
True or False?
a. True
b. False

160
Ans: (a) Management fees cannot be charged by liquid schemes and other debt
schemes on funds parked in short-term deposits of commercial banks.
15. In which of the following transactions a 'Transaction charge' can be
deducted?
a. Online purchases
b. Systematic transfer plan (STP) transaction
c. Purchases of Rs. 10000 or more
d. Purchase made on stock exchanges

Ans: (c) 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.
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16. What is the Total Expense Ratio for an Index fund or an ETF?
a. Total Expense Ratio shall not exceed 1.00 per cent of the daily net assets.
b. Total Expense Ratio shall not exceed 2.00 per cent of the daily net assets.
c. Total Expense Ratio shall not exceed 1.5 per cent of the daily net assets
d. Total Expense Ratio shall not exceed 0.50 per cent of the daily net assets

161
Ans: (a) In case of an Index fund scheme or Exchange traded fund (ETF), the
total expense ratio of the scheme including the investment and advisory fees
shall not exceed 1.00 per cent of the daily net assets.
17. The valuation of Illiquid securities held by a Mutual Fund is done as per
________
a. the last traded price of that security on BSE or NSE
b. the norms prescribed by SEBI to arrive at a fair valuation
c. the average price of bid and ask quotation
d. the lowest price calculated as per the above three methods

Ans: (b) Non traded securities/Illiquid securities are valued '"in good faith'" by the
asset management company on the basis of the valuation principles laid down by
SEBI.
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18. The current market value of the stocks of a Mutual Fund scheme portfolio is
Rs. 12 cr and the current liabilities are 7 cr. The unit capital is Rs. 10 cr and the
face value per unit is Rs. 10. What is the current NAV of this scheme?
a. Rs. 10
b. Rs. 12
c. Rs. 19
d. Rs. 5

162
Ans: (d) Current Valuation is Rs. 12 cr less Rs. 7 cr (current liability) = Rs. 5 cr.
Thus the Rs. 10 cr unit capital has now become Rs. 5 cr i.e. 50% fall. So, Rs. 10
NAV when the scheme was launched has now fallen by 50% to Rs. 5.
19. The NAV of an equity fund is Rs. 76.45 and the face value is Rs. 10. An
investor invests Rs. 30,000. How many units will be allotted to him? (There is no
entry load)
a. 1866.43
b. 477
c. 392.41
d. 3000

Ans: (c) Units are allotted as per the current NAV. The amount invested divided
by the NAV will give the units allotted. Rs. 30,000 / 76.45 = 392.41
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20. The expenses of _______cannot be charged to a mutual fund scheme.
a. custodian fees
b. software development
c. registrar services for transfer of units sold
d. GST - Goods and Service tax

163
Ans: (b) The expenses on software development is not for a particular scheme
but for the AMC as a whole and cannot be charged to a particular scheme.
21. Identify the false statement(s).
A. When an investor wants to redeem from a scheme, the distributor must
suggest redemption from the scheme with the maximum exit load.
B. The mutual fund distributors can ignore the impact of exit load at the time of
repurchase.
a. Only statement A is false
b. Only statement B is false
c. Both statements A and B are false

Ans: (c) 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.
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22. Identify the FALSE statement(s) -
A. For Index funds, the NAV is calculated upto 4 decimal points.
B. The AMC and a mutual fund scheme of the AMC can have the same auditor.
a. Only A is false
b. Only B is false
c. Both A and B are false

164
Ans: (b) NAV is to be calculated upto 4 decimal places in the case of index funds,
liquid funds and other debt funds. Accounts of the mutual fund schemes need to
be maintained independent of the accounts of the AMC. The auditor appointed to
audit the mutual fund scheme accounts needs to be different from the auditor of
the AMC.
23. Lower the expenses of a Mutual Fund, lower would be the NAV - True or
False?
a. True
b. False

Ans: (b) NAV is basically the value of Portfolio less the MF expenses. So Lower
the expenses, higher would be the NAV.
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24. NAV of Equity funds is to be calculated upto ____ decimals.
a. 1
b. 2
c. 3
d. 4

165
Ans: (b) NAV for equity and balanced funds is to be calculated upto at least 2
decimal places. NAV is to be calculated upto 4 decimal places in the case of
index funds, liquid funds and other debt funds.
25. The difference between NAV and re-purchase price is ______________
a. Exit Load
b. Entry Load
c. Commission of the MF Agent
d. Dividend Stripping

Ans: (a) The difference between the NAV and Re-purchase Price is called the
"exit load". If the NAV of a scheme is Rs. 20.00 per unit, and it were to charge
exit load of 1%, the Re-purchase Price would be Rs. 20 - 1% i.e. Rs. 19.80.
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26. Recurring expenses cannot be charged to a Mutual Fund scheme as it drags
down the NAV - True or False?
a. True
b. False

166
Ans: (b) Recurring Expenses can be charged to the scheme. Since the recurring
expenses drag down the NAV, SEBI has laid down the expenses and their limits
which can be charged to the scheme.
27. The Entry & Exit Loads and Taxes do not have an impact on the returns to
the investors - True or False?
a. True
b. False

Ans: (b) Loads and taxes pull the investor's returns below that earned by the
Scheme.
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28. Expenses incurred to launch a new fund can be charged to the fund - True or
False?
a. True
b. False

167
Ans: (b) Initial Issue Expenses are one-time expenses that come up when the
scheme is offered for the first time (NFO). These need to be borne by the AMC
and cannot be charged (either one time or deferred) to the scheme.
29. An investor purchases through a distributor 20000 units of a mutual fund
scheme at a NAV of Rs. 65. The current NAV of the scheme is Rs. 62. What will
be the trail commission for today if the trail commission rate is 1% per annum.
a. Rs. 35.6164
b. Rs. 33.9726
c. Rs. 19.5543
d. Rs. 28.1217

Ans: (b) Trail commission is always calculated on the current NAV. The current
total value of investments in the above question is Rs. 62 X 20000 units = Rs.
12,40,000. Trail commission for the day = Current value X trail commission rate
p.a. / 365 = 12,40,000 X 1% / 365 days = 12400 / 365 = Rs. 33.9726
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30. The cost of fund management are the highest in ________
a. Passive Funds
b. Active Funds
c. Index Funds
d. None of the above

168
Ans: (b) In Active Funds like Diversified Equity Funds, the Fund manager does a
lot of buying / selling. Also, a lot of research work goes into it. So the cost of fund
management are higher.
31. The Market Value of a scheme is Rs. 579 crores. Dividend accrued but not
received is Rs. 18 crore. The Expenses payable are Rs. 3 crore. The total
number of outstanding units is 300 lakhs. What is the NAV of the scheme?
a. 188
b. 198
c. 208
d. 218

Ans: (b) Total Market Value of Rs. 579 crore Add Dividend Accrued of Rs. 18
crore, Less Expenses Payable of Rs. 3 crore Divided by Units 300 lakhs
= 198 NAV
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32. Which of these statement(s) is / are TRUE?
A. The Asset Management Company (AMC) is not accountable for the
procedures for detecting incorrect valuation.
B. It is mandatory for the AMC to disclose the valuation policy.
a. Only A is true
b. Only B is true
c. Both A and B are true
d. Both A and B are false

169
Ans: (b) The responsibility of true and fairness of valuation and correct NAV shall
be of the Asset Management Company, irrespective of disclosure of the
approved valuation policies and procedures. Disclosure of the valuation policy
and procedures approved by the Board of the AMC shall be made in Statement
of Additional Information, on the website of the AMC to ensure transparency of
valuation norms to be adopted by asset management company.
33. As SEBI has banned _______,the Sale Price of a MF unit is the same as
NAV.
a. Entry Load
b. Exit Load
c. Commission Refund
d. SIP Transact on Charges

Ans: (a) For eg: If the NAY of a MF unit is Rs. 50 and entry load was 1% then the
unit was sold to the investors at Rs. 50 + 1% i.e. Rs. 50.50. Now with the ban on
entry loads the Sale price is equal to NAV (Rs. 50 in above example).
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34. Mutual funds are allowed to charge differential exit loads based on the
amount of investment.
a. True
b. False

170
Ans: (b) While charging exit loads, no distinction will be made among unit holders
on the basis of the amount of subscription.
35. Which of the below expenses can be charged to a fund?
a. Expenses to manage a fund
b. Expenses to launch a new fund
c. Expenses done by the AMC
d. Expenses done by the Investors

Ans: (a) Earlier expenses to launch a fund were charged to the fund but now they
cannot.
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36. How often does a mutual fund disclose the information on Total Expense
Ratio charged to a mutual fund scheme and where is this published?
a. Daily - on the mutual fund website
b. Weekly - on the mutual fund website
c. Once a month in the fund Fact sheet
d. Once a year when it makes the mandatory disclosures to SEBI and AMFI

171
Ans: (a) 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 under a separate head — "Total Expense Ratio
Of Mutual Fund Schemes" on their website.
37. Identify the true statement with respect to Total Expense Ratio?
a. The AMC is not allowed to change the Total Expense Ratio of a scheme during
its entire life time.
b. The AMC can change the Total Expense Ratio and it need not be
communicated to the unit holders as its an internal matter.
c. The AMC can change the Total Expense Ratio and it has to be communicated
to all the unit holders.
d. There is no term as - Total Expense Ratio for a mutual fund scheme.

Ans: (d) As per SEBI regulations - The AMCs are required to send the update to
the investors through email whenever there is a change in the expense ratio.
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38. Which of the following statement is true with respect to 'Mark to Market’?
a. Securities in the portfolio are valued at current market prices
b. Securities in the portfolio are valued at 52 week high prices
c. Securities in the portfolio are valued at 52 week low prices
d. Securities in the portfolio are valued at purchase price

172
Ans: (a) the process of valuing each security in the investment portfolio of the
scheme at its current market value is called Mark to Market (MTM). The mark-to-
market valuation is done on a daily basis for the calculation of daily NAV of a
mutual fund scheme.
39. Mr. Suresh invests Rs. 2,00,000 in a mutual fund with a face value of Rs. 10
and NAV of Rs. 50. How many units will be allotted to him?
a. 4000 units
b. 20000 units
c. Will be lower than 4000 units due to entry load
d. Will be lower than 20000 units due to entry load

Ans: (a) Units are allotted as per current NAV. The NAV is Rs. 50 and the amount
invested is Rs. 200000. Units allotted = 200000 / 50 = 4000
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40. Which expenses can be charged by the AMC to a mutual fund scheme?
a. Expenses that are incurred to manage the fund
b, Expenses that are incurred to launch the fund
c. Expenses that are incurred by the AMC
d. Expenses that are incurred by the investors in buying the fund

173
Ans: (a) Expenses for managing the fund are charged to the fund. Any expense
other than the investment advisory fee and recurring expenses shall be borne by
the asset management company or trustee or sponsors.
41. In case of any conflict between the Principles of Fair Valuation and AMC's
Valuation Guidelines, _________________.
a. Asset class
b. Index
c. Investment objective
d. Benchmark

Ans: (d) To know how well a mutual fund scheme is performing, it has to be
compared to a pre-defined comparable benchmark.
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42. In case of any conflict between the Principles of Fair Valuation and AMC's
Valuation Guidelines,____________________.
a. The Valuation Guidelines will prevail
b. The Principles of Fair Valuation will prevail
c. Both are the same so there will never be a conflict
d. SEBI will decide which is correct

174
Ans: (b) To ensure 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.
43. When there is a need to withdraw money from a scheme (i.e. repurchase /
redemption), the distributor must assess the implications of___________ &
__________on the investor's portfolio.
a. entry loads and exit loads
b. capital gains tax and exit loads
c. capital gains tax and entry loads
d. entry loads and dividend tax

Ans: (b) 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 the
scheme, the distributor must assess the implications of capital gains tax and exit
loads.
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44. From which of these can the mutual fund NOT distribute dividends?
a. Income accruals
b. Dividends that are received from equity investments
c. Realized gain from the sale of investments
d. Unrealized appreciation in the value of investments

175
Ans: (d) SEBI guidelines stipulate that dividends can be paid out of distributable
reserves. In the calculation of distributable reserves: (i) All the profits earned are
treated as available for distribution. (ii) Valuation gains are ignored. But valuation
losses need to be adjusted against the profits. (iii) That portion of sale price on
new units, which is attributable to valuation gains, is not available as a
distributable reserve.
45. Identify which statement is true?
a. Investors cannot hold the units of a mutual fund in fraction of 1 unit
b. Investors can hold the units of a mutual fund in fraction of 1 unit
c. Investors can hold the units of a mutual fund in market lots of 50 units
d. Investors can hold the units of a mutual fund in market lots of 100 units

Ans: (b) Investors can hold their units even in a fraction of 1 unit. For example,
an investor is holding 650 units in a dividend re-investment scheme of a mutual
fund. The announcement of dividends, when converted into units, could result in
say addition of 20.5 units. Thus his total holding will become 650 + 20.5 = 670.50
units - which is a fraction.
-----------------------------------------------------------------------------------------------------------
46. The NAV of a mutual fund unit changes every day due to changes
in_____________.
a. number of investors in the mutual fund
b. the market value of the mutual fund portfolio
c. the size of the portfolio
d. the units remaining in the portfolio

176
Ans: (b) NAV = (Current value of investments held + Income accrued + Current
assets - Current liabilities - Accrued expenses / No. of outstanding units). When
the current value of the investment held (i.e. the market value of the portfolio)
changes, the NAV will also change.
47. In case of_____________the Net Asset Value has to be declared for up to 4
decimal points.
a. Mid Cap and Small Cap Funds
b. Liquid Funds
c. Aggressive Hybrid Funds
d. ELSS Funds

Ans: (b) NAV is to be calculated up to 4 decimal places in the case of index

funds, liquid funds, and other debt funds. (NAV for equity and balanced funds is
to be calculated up to at least 2 decimal places)
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48. What is the Net Asset Value (NAV) after dividend payment called?
a. ex-Dividend NAV
b. ex-Load NAV
c. cum-Dividend NAV
d. Net NAV

177
Ans: (a) After a dividend pay-out, the reduced NAV is called ex-Dividend NAV.
(After a dividend is announced, and until it is paid out, it is referred to as cum-
Dividend NAV).
49. When can mutual funds charge an additional expense of 0.30% of daily net
assets of the scheme?
a. If the new inflows from beyond the 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
b. If the new inflows from beyond the 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
c. If the new inflows from beyond the 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
d. If the new inflows from beyond the 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

Ans: (a) In order to promote mutual funds beyond 30 cities, AMC pays an extra
0.30% brokerage to distributors. However, the inflows the inflows from beyond 30
cities are atleast. If the new inflows from beyond the 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.
-----------------------------------------------------------------------------------------------------------
50. Some of the costs incurred by the Asset Management Companies to manage
the mutual fund schemes can be changed to___________in proportion to their
holding of units in the scheme.
a. Distributors
b. Stock Brokers
c. Unit holders
d. Independent Financial Advisors

178
Ans: (c) All the investor's money is pooled together in a scheme. Costs incurred
for managing the scheme are shared by all the Unit-holders in proportion to their
holding of units in the scheme.
51. A 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______________.
a. Average traded price of AAA Ltd. on 10th April across all stock exchanges
b. The opening price of AAA Ltd. on 10th April at BSE/NSE
c. The closing price of AAA Ltd. on 10th April at BSE/NSE
d. Average traded price of AAA Ltd. on 10th April at BSE/NSE

Ans: (c) 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.
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52. NAV of income funds is to be calculated upto_____________decimals.
a. 1
b. 2
c. 3
d. 4

179
Ans: (d) NAV is to be calculated up to 4 decimal places in the case of income
funds, liquid funds, and other debt funds. NAV for equity and balanced funds is to
be calculated up to at least 2 decimal places.
53. In the case of mutual fund schemes, dividends can be paid only out
of__________.
a. Unit capital
b. The distributable surplus generated by the scheme
c. Premium reserve account
d. Mark-to-market profits

Ans: (b) SEBI guidelines stipulate that dividends can be paid out of distributable
reserves. In the calculation of distributable reserves:
- All the profits earned (based on the accrual of income and expenses as detailed
above) are treated as available for distribution.
- Valuation gains are ignored. But valuation losses need to be adjusted against
the profits.
- That portion of the sale price on new units, which is attributable to valuation
gains, is not available as a distributable reserve.
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54. It's due to loads and taxes that there is a difference between scheme returns
and investor returns - True or False?
a. True
b. False

180
Ans: (a) Loads like Exit Load and Taxes like STT reduce the scheme returns.

55. ____________ indicates how much money can be generated per unit of
mutual fund in case the scheme is liquidated.
a. Market price
b. Exit load
c. Asset Under Management
d. Net Asset Value

Ans: (d) The true worth of a unit of the mutual fund scheme is otherwise called
the Net Asset Value (NAV) of the scheme. The NAV is also the net realizable
value per unit in case the scheme is to be liquidated-how much money could be
generated if all the holdings of the scheme are sold and converted into cash.
-----------------------------------------------------------------------------------------------------------
56. Investments owned by the scheme may be quoted in the market at higher
than the cost paid. Such gains in values on securities held are called_________.
a. Valuation gains
b. Notional gains
c. Valuation losses
d. Notional losses

181
Ans: (a) Investments owned by the scheme may be quoted in the market at
higher than the cost paid. Such gains in values on securities held are called
valuation gains. Similarly, there can be valuation losses when securities are
quoted in the market at a price below the cost at which the scheme acquired
them.
57. Investors have bought 20 crore units of a mutual fund scheme at Rs. 10
each. The scheme has thus mobilized 20 crore units X Rs. 10 per unit i.e. Rs.
200 crore. An amount of Rs. 140 crore is invested inequities. The balance
amount of Rs. 60 crore, mobilized from investors, was placed in bank deposits.
Interest and dividend receivable (accrued but yet not received) by the scheme is
Rs. 8 crore, scheme expenses payable (accrued but not paid yet) is Rs. 4 crore.
Calculate the scheme's NAV per unit.
a. Rs. 10.00
b. Rs. 20.00
c. Rs. 10.20
d. Rs. 20.40

Ans: (c) NAV = (Current value of investments + Income accrued + Current assets
- Current liabilities - Accrued expenses) / No. of outstanding units)
Current Value of investments is Rs. 140 cr in equities + Rs. 60 cr in bank
deposits = Rs. 200 crores.
Income accrued = Rs. 8 crores. Accrued expenses = Rs. 4 crores
Thus, NAV = 200 cr + 8 cr - 4 cr / 20 cr = 204 cr / 20 cr = 10.20
-----------------------------------------------------------------------------------------------------------
58. What is the maximum Total Expense Ratio chargeable in the case of index
funds?
a. It depends as the TER changes in line with the size of the scheme
b. Any amount that the AMC may deem appropriate
c. 1 percent of the daily net assets
d. 1.5 percent of the daily net assets

182
Ans: (c) In the case of an index fund scheme or exchange-traded fund, the total
expense ratio of the scheme including the investment and advisory fees shall not
exceed 1.00 percent of the daily net assets.

CHAPTER 8: TAXATION

1. Mutual Fund units issued against purchase transaction will be subjected to the
stamp duty of _________ at the invested amount.
a. 0.50%
b. 0.05%
c. 0.005%
d. 0.0005%

Ans: (c) With effect from July 1, 2020, mutual fund units issued against Purchase
transactions would be subject to levy of stamp duty at the rate of 0.005% of the
amount invested. Transfer of mutual fund units (such as transfers between demat
accounts) is subject to payment of stamp duty @0.015%.
-----------------------------------------------------------------------------------------------------------
2. Which of the following statement/s is/are false?
A. If money market scheme is sold after three years, the gain/loss will be
considered as capital gain/loss.
B. If Debt scheme is sold after three years, the gain/loss will be considered as
capital gain/loss.
C. If Arbitrage scheme is sold after three years, the gain/loss will be considered
as capital gain/loss.
a. Statement A is false
b. Statement A & B is false
c. Statement C is false
d. All are false

183
Ans: (b) Arbitrage funds are treated as equity funds for taxation. If you stay
invested for less than one year, then you make short-term capital gains (STCG).
If you stay invested for more than a year, then gains will be considered as long-
term capital gains (LTCG).
3. Which of these statement(s) is/are FALSE?
a. If an investor holds his investments in a debt fund for more than three years,
the capital gain will be considered as a long term capital gain
b. As the purchase and re-purchase is done with the mutual fund, the investor
does not have to pay any capital gain tax
c. Both 'a' and 'b' are false
d. None of the above

Ans: (b) The difference between the purchase price and the selling price of the
units would be treated as capital gain and such capital gains are subject to tax.
Long term is defined as the holding period of more than 3 years in case of non
equity oriented funds like debt funds, whereas the same is more than 1 year in
case of equity oriented funds.
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4. Long term capital gains is NOT taxed in which of these funds?
A. Balanced Advantage Funds B. Balanced Funds
C. Diversified Equity Funds
a. Both A & B
b. Only C
c. Only A
d. Capital gains from all types of MF are taxed subject to certain conditions

184
Ans: (d) Capital gains from equity, debt and hybrid funds are taxable subject to
certain conditions like holding period, etc.
5. The loss booked from a debt investment of 15 months can be set off against
_______.
a. Long term capital loss
b. Short term capital loss
c. Short term capital loss or long term capital loss
d. It cannot be set off

Ans: (c) A capital gain or loss from an investment of less than 3 years in a debt
instrument is considered as Short term. 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.
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6. Stamp duty is required to be paid for which of these mutual fund transactions?
A. New purchases B. Systematic Investment Plan (SIP)
C. Dividend reinvestment D. Systematic Transfer Plan (STP)
a. A, B and D
b. Only A
c. B & D
d. A, B, C and D

185
Ans: (d) Stamp duty will be applicable to all transactions pertaining to scheme
inflows: Purchase, Additional Purchase, Dividend re-investment, Systematic
Investment Plan (SIP), Systematic Transfer Plan (STP) and Dividend Transfer
Plan (DTP).
7. The loss booked from an equity investment of 18 months can be set off
against _______.
a. Long term capital loss only
b. Long term capital gain only
c. Short term capital gain only
d. Short term capital gain or long term capital gain

Ans: (b) A capital gain or loss from an equity investment of more than than 12
months is considered as Long term. Long term capital loss can only be set off
against long term capital gain.
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8. Which tax is payable on the redemption of units of Equity Oriented fund?
a. Dividend distribution tax
b. Securities transaction tax
c. Wealth tax
d. Alternate dividend tax

186
Ans: (b) STT is payable on sale of units of equity oriented mutual fund.
9. Amongst the following options, which of the following is TRUE?
a. STT is paid on purchase of the units of Equity Mutual Funds through a stock
exchange
b. STT is paid on purchase of the units of Equity Mutual Funds from the fund
house
c. STT is paid on repurchase I redemption of the units of Equity Mutual Funds
d. STT is paid on purchase of the units of Debt Mutual Funds

Ans: (c) Securities Transaction Tax (STT) is applicable on sale / redemption

transactions in units of equity mutual fund schemes. There is no STT on Debt
funds.
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10. STT is ________on transactions in debt or debt-oriented mutual fund
(including liquid fund) units.
a. Applicable
b. Not Applicable

187
Ans: (b) STT is applicable only on equity transactions.
11. An investor in debt oriented mutual fund receives the benefit of ______on
long term capital gains.
A. Indexation B. Tax exemption
a. Only A
b. Only B
c. Both A and B

Ans: (a) Indexation means that the cost of acquisition or the cost of purchase is
adjusted upwards to reflect the impact of inflation. An investor in long term debt
funds receives the benefit of indexation but they are not exempted from paying
long term capital gains tax.
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12. Long term capital loss from an investment can be set off against _______.
a. short term capital gains only
b. short term capital gain or long term capital gain
c. long term capital gains only
d. long term capital loss cannot be set off

188
Ans: (c) As per the Income Tax Act: (1) Short term capital loss is to be set off
against short term capital gain or long term capital gain, (2) Long term capital
loss can only be set off against 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).
13. The Income Tax Act allows setting off of the short term capital loss against
long term capital gains. State whether True or False.
a. True
b. False

Ans: (a) As per Income Tax rules: (1) Short term capital loss can be set off
against short term capital gain or long term capital gain. (2) Long term capital
loss can only be set off against long term capital gain.
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14. For calculating Capital Gains, investment in mutual funds for less then 1 year
is considered as _____.
a. Long Term
b. Medium Term
c. Short Term
d. Ultra Short Term

189
Ans: (c) For calculating Capital Gains, investment in mutual funds for less then 1
year is considered as short term.
15. As per the Income Tax Act - which of the below option is True?
a. Capital loss, short term or long term, can be set off against any other head of
income
b. Long term capital loss can be set off against long term and short term capital
gain
c. Short Term Capital gains is a tax free income
d. Short term capital loss is to be set off against short term capital gain or long
term capital gain

Ans: (d) A few key provisions of the Income Tax Act are: (1) Capital loss, short
term or long term, cannot be set off against any other head of income (e.g.
salaries). (2) Short term capital loss is to be set off against short term capital gain
or long term capital gain. (3) Long term capital loss can only be set off against
long term capital gain.
-----------------------------------------------------------------------------------------------------------
16. As per the provisions of the Income Tax Act - Short term capital loss is to be
set off against short term capital gain or long term capital gain. True or False?
a. True
b. False

Ans: (a) Some key provisions of IT Act related to Capital Gains are: (1) Capital
loss, short term or long term, cannot be set off against any other head of income

190
(e.g. salaries). (2) Short term capital loss is to be set off against short term
capital gain or long term capital gain. (3) Long term capital loss can only be set
off against long term capital gain.
17. Dividend Distribution Tax (DDT) on Equity oriented mutual fund schemes for
Corporate Investors is _____.
a. 0.1
b. 0.25
c. 0.3
d. NIL Tax

Ans: (d) In the Union Budget presented by the Finance Minister in February
2020, the dividend distribution tax has been done away with.
-----------------------------------------------------------------------------------------------------------
18. In which of these funds is Securities Transaction Tax (STT) not charged?
a. Fixed Maturity Plans (FMPs)
b. Equity index ETFs
c. ELSS - Equity Linked Savings Scheme
d. Blue chip equity funds

191
Ans: (a) Securities Transaction Tax is not applicable to transactions in debt
securities or debt mutual fund schemes. Fixed Maturity Plans are close-ended
debt funds and STT is not applicable on them.
19. In the non-equity oriented funds, the rate of long term capital gains tax is
___________.
a. 10 percent with indexation
b. 10 percent without indexation
c. 20 percent with indexation
d. 20 percent without indexation

Ans: (c) The rate of tax on long term capital gains from non-equity-oriented funds
is 20% with indexation.
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20. The dividend received by a Mutual Fund investor will be taxed at a rate of
12.5%. True or False?
a. True
b. False

Ans: (b) As per the Union Budget presented by the Finance Minister in February
2020, the dividend distribution tax has been done away with, whereas the

192
dividend would henceforth be added to the taxable income of the assessee for
the year. This means, the dividends would be taxable in the hands of the
recipient at the applicable tax rate.
21. There is no Tax Deducted at Source (TDS) on dividend payments or re-
purchase payments of Mutual Funds for Indian investors. True or False?
a. True
b. False

Ans: (b) In case of dividends from mutual fund schemes, even for resident
Indians, TDS is applicable. There is no TDS on re-purchase proceeds to resident
investors.
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22. At what rate is the Securities Transaction Tax charged on sale of units of debt
oriented mutual fund in a stock exchange ?
a. 0.01%
b. 0.1%
c. 0.125%
d. 0%

193
Ans: (d) STT is not applicable on transactions in debt or debt-oriented mutual
fund (including liquid fund) units.
23. What is Indexation?
a. Reduction of short and long term capital gains tax by using an index based
calculation
b. Benchmarking the index fund against a suitable index like Sensex / Nifty
c. Adjusting the cost of acquisition upwards to reflect the impact of inflation
d. Adjusting the cost of acquisition downward to reflect the impact of inflation

Ans: (c) 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.
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24. The Securities Transaction Tax levied on re-purchase of units of debt mutual
funds is_______________.
a. 0.001%
b. 0.03%
c. 0.25%
d. STT is not applicable

Ans: (d) STT is not applicable to transactions in debt securities or debt mutual
fund schemes. STT is applicable only on redemption/switch to other

194
schemes/sale of units of equity-oriented mutual funds whether sold on a stock
exchange or otherwise.
25. Short term capital loss from an investment can be set off
against______________.
a. short term capital gains only
b. short term capital gain or long term capital gain
c. long term capital gains only
d. Short term capital loss cannot be set off

Ans: (b) 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.
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26. Which of the statement is true with respect to the applicability of TDS in the
case of capital gains from mutual fund units?
a. There are NIL TDS on capital gains in the mutual funds for all investors.
b. TDS is required to be deducted at 10 percent on all declared dividend.
c. All capital gains from mutual fund investments are subject to TDS @ 10%.
d. TDS is not applicable on capital gains for resident individuals but is applicable
for Non-Resident Individuals (NRI).

195
Ans: (d) There is no TDS on re-purchase proceeds to resident investors.
However, for certain cases of non-resident investments, the same is applicable.
27. Mr. X has invested Rs. 3,00,000 in a 370-day FMP and on maturity he
received Rs. 3,25,000. What is the capital gain in this transaction?
a. Rs. 325000
b. Nil
c. Rs. 25000
d. Insufficient Data

Ans: (c) Capital Gains are calculated as the difference between the sum invested
and the sum realized when the units are sold/matured. So in the above question,
the capital gain is Rs. 325000 - 300000 = Rs. 25000/-.
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28. In the case of capital gains from mutual fund investments, Tax Deduction at
Source (TDS) is applicable for:
a. All investors who have invested more than Rs. 5 lacs
b. Minor through guardian
c. TDS is not applicable in the case of mutual funds
d. Non-Resident Indians (NRIs)

196
Ans: (d) TDS will be deducted at source on gains made on sale/redemption of
mutual fund investments by NRIs as applicable.
29. Redemption from which of the following mutual fund schemes would attract
Securities Transaction Tax (STT) for an investor?
a. Liquid Fund
b. Overnight Fund
c. Multi-cap mutual fund
d. Government Securities Fund

Ans: (c) In the given options, only Multi cap fund is an equity fund, and the rest
are debt funds. STT is applicable only on redemption/switch of units of Equity
oriented mutual funds whether sold on a stock exchange or otherwise. STT is not
applicable on the purchase of units of an equity scheme. It is also not applicable
to transactions in debt securities or debt mutual fund schemes.

197
 CHAPTER 9: INVESTOR SERVICES

1. If you want to delete the default bank in a Mutual Fund Folio?

a. All the nominees have to sign the bank change form
b. A new Folio has to be opened with the same joint holding as the new default
account.
c. Another Account should be added as the default bank account.

Ans: (c) Before deleting the bank account, new account has to be added as
default bank.
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2. For which of the documents time stamping is mandatory
a. Purchase Application
b. Payment Instrument
c. Additional Purchase
d. All of the Above

198
Ans: (d) Time stamping is mandatory for both financial and non-financial
transactions. However, in-case of non-financial transactions, the stamping of time
is not relevant; the date stamping is pertinent.
3. Banks and NBFCs can lend money against _______of MF units.
a. Nomination
b. Redemption
c. Pledge
d. All of the Above

Ans: (c) Banks, NBFCs and other financiers often lend money against pledge of
Units by the Unit holder. This is effected through a Pledge Form executed by the
unit-holder (pledger). The form has a provision for specifying the party in whose
favour the units are pledged (pledgee).
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4. A mutual fund scheme's NAV is said to be cum-dividend from _________________.
a. the date the dividend is announced till it is paid out
b. date the dividend is paid
c. date unit holders approve the dividend
d. date of notice of meeting

199
Ans: (a) When a dividend is announced, and until it is paid out, it is referred to as
cum-dividend NAV.
5. In which of these options can an investor expect a cash flow in his bank
account?
a. Bonus
b. Dividend Payout
c. Dividend Re-investment
d. Growth

Ans: (b) Only, if the investor chooses Dividend Payout option in his mutual fund
investments, the money will flow into his bank account when ever the mutual
fund pays the dividend. In a growth option, dividend is not declared. Therefore,
nothing is received in the bank account. In a dividend reinvestment option, the
investor does not receive the dividend in his bank account; the amount is
reinvested in the same scheme and additional units are allotted to the investor. In
a bonus issue, the investor does not pay anything. The fund allots new units for
free.
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6. The opening of time stamping machine needs to be documented and reported
to ______.
a. Sponsors
b. Trustees
c. SEBI
d. Asset Management Company

200
Ans: (b) The points of acceptance for mutual fund transactions have time
stamping machines with tamper-proof seal. Opening the machine for repairs or
maintenance is permitted only by vendors or nominated persons of the mutual
fund. Such opening of the machine has to be properly documented and reported
to the Trustees.
7. The NAV applicable for purchase in a gilt fund of Rs. 50 Lakhs if the cheque is
received after 2 pm will be _______.
a. Same day NAV if received before cut off time.
b. Closing NAV of day immediately preceding the date of application
c. Closing NAV of the next business day
d. NAV of the business day on which the funds are available for utilisation

Ans: (d) For all type of debt funds (except liquid funds), if the amount is above
Rs. 2 lakhs, irrespective of the time of receipt of application, NAV of the business
day on which the funds are available for utilisation without availing of any credit
facility before the cut-off time (3 pm) of that day is applicable.
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8. A mutual fund application form with multiple holders has to be signed by
________.
a. Any of the holders
b. All the holders
c. Only the first holder
d. Only the first two holders

201
Ans: (b) The application has to be signed by all the holders irrespective of the
mode of holding.

9. When an investment is done by a minor, what is rule regarding Know Your

Customer (KYC) requirement?
a. No KYC is required
b. It depends whether the investment is in equity funds or debt funds
c. KYC will be required only if the transaction is thorough a stock exchange
d. KYC of the guardian is required

Ans: (d) An investment made for a minor (less than 18 years) is done through a
guardian who has to comply with the KYC and PAN requirements and all other
formalities as if the investment was for themselves.
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10. For KYC verification _________ is not accepted as a photo identity
documentation for Micro SIP's.
a. Credit Card
b. Employee ID cards issued by companies registered with Registrar of
Companies
c. Card issued to National Pension System (NPS) subscribers
d. Photo Debit Card

202
Ans: (a) Credit card is not accepted because it may not be backed up by a bank
account.

11. What is the investment of a constant amount at regular intervals in a mutual

fund scheme called?
a. Systematic Withdrawal Plan
b. Systematic Transfer Plan
c. Value Investing
d. Systematic Investment Plan (SIP)

Ans: (d) It is considered a good practice to invest regularly, particularly into

volatile markets such as equity markets. Systematic Investment Plan – SIP is an
approach where the investor invests constant amounts at regular intervals.
-----------------------------------------------------------------------------------------------------------
12. By mistake the ARN number is wrongly mentioned in the application form.
How will such an application be processed?
a. The application will be rejected
b. It will be returned for rectification
c. As a Direct Plan application
d. As a Regular Plan, provided the error being corrected within a time frame

203
Ans: (d) If the wrong ARN code is mentioned in the application form, then the
application will be processed as a Regular Plan. However, the AMC will contact
the investor/distributor for the right ARN code within 30 calendar days of the
receipt of the application form. If the error is not rectified within these 30 days,
the application will be reprocessed as a direct application without charging any
exit load.
13. Which of these documents is NOT required to be submitted by institutional
investors while investing in mutual funds?
a. Profit and Loss Statement
b. PAN card copy
c. List of authorised signatories
d. Memorandum of Association and Articles of Association

Ans: (a) A Profit and Loss Statement is not required to be submitted by an

institutional investor while making investments in mutual funds.
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14. __________is / are Non Financial transaction(s) in a mutual fund.
A. Switch B. Pledge of units
C. Nomination D. Transmission
a. A, B and C
b. B, C and D
c. A, C and D
d. C and D

204
Ans: (b) Pledge of units, Nomination and Transmission are Non Financial
transactions in a mutual fund. A switch is a redemption from one scheme and a
purchase into another combined into one transaction and is a financial
transaction.
15. A mutual fund has to report which of the following information of an investor
who comes under the Foreign Account Tax Compliance Act (FATCA)?
a. The entire investment value of all the folios of the investor
b. The identity of the account holders
c. The identity of the beneficial holders
d. All of the above

Ans: (d) To comply with the requirements of Foreign Account Tax Compliance Act
(FATCA), the mutual fund application form requires information to be provided if
the citizenship/nationality/place of birth/tax residency are places other than India
for all categories of investors, the entire investment value of all the folios held,
the identity of the investors and their direct and indirect beneficiaries and
controlling persons etc.
-----------------------------------------------------------------------------------------------------------
16. The expenses on ___________cannot be charged to the mutual fund
scheme.
a. Custodian fees
b. Depreciation on fixed assets of the Asset Management Company
c. Trustee Fees
d. Marketing Expenses

205
Ans: (b) The depreciation on fixed assets of the Asset Management Company
cannot be charged to a particular mutual fund scheme.
17. Which of these investors is/are exempted from proving PAN details for
investments in Mutual Funds?
a. Systematic investment plans, where annual investment does not exceed Rs
50000
b. Investors residing in the state of Sikkim
c. Transactions undertaken on behalf of Central/State government
d. All of the above

Ans: (d) 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.
-----------------------------------------------------------------------------------------------------------
18. Which of the below investors will require the approval of board before
investing in mutual funds?
a. Non Resident investors
b. Institutional investors
c. High Net worth investors
d. Retail investors

206
Ans: (b) Authorisation will be required from the board for the institution to invest.
This is typically in the form of a Board Resolution.
19. Mr. X invests in a liquid fund at 4 pm and the funds are not available for
investments the same day. What will be the applicable NAV in this case for
allotment of units?
a. Closing NAV of the day preceding the day funds are available
b. Closing NAV of the day the funds are available
c. Closing NAV of the day immediately preceding the date of application
d. Closing NAV of the day of the date of application

Ans: (a) For Liquid Funds: Irrespective of the time of receipt of applications,
where the funds are not available for utilisation before the cut-off time, without
availing any credit facility, closing NAV of the day immediately preceding the day
on which the funds are available for utilisation.
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20. State True or False. On every new business day in the morning the time
stamping machine is set to serial number 1 and the application received on that
day are affixed with time stamp and serial number starting from 1.
a. True
b. False

207
Ans: (b) Applications are sequentially numbered from the first number of the
machine to the last number of the machine, before a new numbering cycle is
started for the machine. The daily time stamping of application DOES NOT start
with serial 1. It starts with the number subsequent to the day before last number.
21. A company wishes to invest in a specific scheme of a Mutual Fund. Which
document authorises it to do so?
a. The Memorandum of Association
b. The Articles of Association
c. Share holders resolution
d. Specific Board resolution

Ans: (d) The specific resolution has to be passed in Board of Directors meeting
for investments in a MF scheme.
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22. The party in whose favour the Units are pledged is called a _____
a. Pledger
b. Pledgee
c. Pledge
d. Pledion

208
Ans: (b) The unit holder is the Pledger. The party in whose favour the Units are
pledged is called the Pledgee.
23. The dividend is declared on units which are under a lien will be paid
to___________.
a. the unit holder only
b. the lien holder only
c. the unit holder or lien holder as per the agreement
d. the unit holder or lien holder as per the terms of issue of mutual fund units

Ans: (c) The dividend pay-outs declared on units under lien may be paid to the
unit holder or the lender (lien holder) depending upon the agreement.
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24. What is the maximum number of joint holders allowed per mutual fund
application?
a. 3
b. 4
c. 5
d. 6

209
Ans: (a) The maximum number of joint holders allowed per mutual fund
application is three.
25. Dormant investors are those investors who have not transacted during the
previous _________months.
a. 3
b. 6
c. 12
d. 24

Ans: (b) Dormant investors are those investors who have not transacted during
the previous 6 months.
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26. Mutual funds offer facilities that help investor invest constant amounts
regularly through a _____________.
a. Systematic Withdrawal Plan
b. Systematic Transfer Plan
c. Systematic Saving Plan
d. Systematic Investment Plan (SIP)

210
Ans: (d) Mutual funds offer facilities that help investor invest constant amounts
regularly through a SIP.
27. An investor can convert his Mutual Fund units into demat form but again
converting the demat unit into physical form is not allowed. State True or False?
a. True
b. False

Ans: (b) The investor also has the option to convert the demat units into physical
form. This process is called re-materialisation.
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28. Amit does not have a PAN Card. He wishes to invest Rs. 1 lakh in a mutual
fund scheme. He does not fall into any exempt investor category. In which way
can he invest?
a. He cannot invest as PAN Card is mandatory
b. He can sign up for a SIP and get an exemption from the requirements of a
PAN card
c. He can provide additional prescribe photo proofs like the Aadhaar, Voter Id etc.
d. None of the above

Ans: (a) Permanent Account Number (PAN) Card with photograph is mandatory
for all applicants except those who are specifically exempt from obtaining PAN.

211
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
and Investments (including SIPs and lump sum investments) in Mutual Fund
schemes upto Rs. 50,000/- per investor per year per mutual fund.
29. Which document is NOT required for the KYC process by a mutual fund
investor?
a. Proof of Income
b. Proof of Address
c. Proof of Identity
d. PAN card

Ans: (a) For the KYC process (for establishing proof of identity and address)
following documents are required:
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30. What exception is made for investments by Systematic Invest Plans, if the
annual investment is below Rs. 50000?
a. KYC is not required to be done
b. Photo identity is not required
c. PAN Card is not required
d. None of the above

212
Ans: (c) Providing Permanent Account Number (PAN) is compulsory for all
mutual fund investments. Exception has been made for Micro-SIPs i.e. SIPs
where annual investment (12 month rolling or April-March financial year) does
not exceed Rs. 50,000.
31. If the ARN code is not mentioned and choice of plan is not indicated in the
application form, then the application will be ________.
a. processed as a Direct Plan application
b. rejected
c. processed as a Regular Plan application
d. treated as incomplete application and will be returned to the investor for
completion

Ans: (a) If the ARN code is not mentioned and choice of plan is not indicated
then the application will be processed as a Direct Plan application.
-----------------------------------------------------------------------------------------------------------
32. Foreign investors can invest in equity schemes of MFs registered with SEBI
after completing KYC process. State True or False?
a. True
b. False

213
Ans: (a) Foreign investors can invest in equity schemes of MFs registered with
SEBI after completing KYC process.
33. If a charitable trust wishes to invest in a Mutual Fund, which amongst the
following document is not required to be submitted?
a. Memorandum and Articles of Association
b. Trust Deed
c. Board Resolution authorising the investments
d. List of authorised signatories

Ans: (a) A Charitable Trust does not have any Memorandum and Articles of
Association. It has a Trust Deed.
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34. Mr. Gupta invests Rs. 1 crore in a Gilt Mutual Fund scheme and gives a local
cheque at 1pm. Which will be the applicable NAV for allotment of units to Mr.
Gupta?
a. Closing NAV of the day on which the application was made.
b. NAV of the business day on which the funds are available for utilisation before
the cut-off time of that day is applicable.
c. Next business day NAV.
d. Closing NAV of the day immediately preceding the application day.

214
Ans: (b) For all Equity oriented funds and Debt funds (except liquid funds) if the
transaction is more than Rs. 2 lakhs: Irrespective of the time of receipt of
application, NAV of the business day on which the funds are available for
utilisation before the cut-off time of that day is applicable.
(If it is below Rs. 2 lakhs: Same day NAV if received before cut off time i.e. 3 pm)
35. The facility of ASBA - 'Application Supported by Blocked Amount' is mainly for
additional purchase of Mutual Funds units. State True or False?
a. True
b. False

Ans: (b) ASBA can only be used for IPO's of equity shares and NFO's of Mutual
Funds. It cannot be used for additional purchase.
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36. Investors who have not transacted during the previous ________ are known
as dormant investors.
a. 15 months
b. 12 months
c. 9 months
d. 6 months

215
Ans: (d) Dormant investors are those who have not transacted for previous six
months.
37. Mr. Mohit has filled up an application form for subscribing to a mutual fund
scheme. However, the address mentioned in the application form is different from
the address provided at the time of KYC compliance. Which address will be
included in the mutual funds records once the KYC compliance is validated?
a. The address provided for KYC compliance
b. The address provided in the application form
c. Mr. Mohit can indicate which address is correct
d. The address provided in the application form will be used for all
communications

Ans: (a) Once the first holder's PAN is validated for KYC, the address provided in
the KYC form will override the information provided in the application form.
-----------------------------------------------------------------------------------------------------------
38. Who uses the information collected under the Foreign Account Tax
Compliance Act (FATCA)?
a. Foreign Government or foreign agencies
b. Indian Government
c. Indian Tax authorities
d. All of the above

Ans: (d) To comply with the requirements of Foreign Account Tax Compliance Act
(FATCA) and Common Reporting Standards (CRS) provisions, financial
institutions, including mutual funds, are required to undertake due diligence

216
process to identify foreign reportable accounts and collect such information as
required under the said provisions and report the same to the US Internal
Revenue Service/any other foreign government or to the Indian Govt. / Tax
Authorities for onward transmission to the concerned foreign authorities.
39. Which of these entities can invest in Indian mutual funds?
A. Foreign portfolio investor B. Insurance company C. Salaried individual
a. Only C
b. A and B
c. B and C
d. All A, B and C

Ans: (d) All of the above can invest in Indian mutual funds.
-----------------------------------------------------------------------------------------------------------
40. Identify the TRUE statements with respect to Transmission of mutual fund
units.
A. Before the transfer is effected, the mutual fund will insist for an indemnity
against future problems for the mutual fund arising out of the transfer.
B. Before the transfer is effected, the mutual fund will not insist on the death
certificate of the deceased unit-holder.
C. Before the transfer is effected, the mutual fund will insist on the KYC
documentation from the nominee.
a. A and B are true
b. B and C are true
c. A and C are true
d. All A, B and C are true

Ans: (c) Transmission is the process of transferring units to the person entitled to
receive it in the event of the death of the unit holder. In case of transmission,
before the transfer is effected, the mutual fund will insist on the KYC

217
documentation from the nominee, death certificate of the deceased unit-holder,
and an indemnity against future problems for the mutual fund arising out of the
transfer.
41. Identify the true statement(s) -
A) A systematic transaction cannot be cancelled.
B) Assuming a mutual fund scheme is profitable then the investors can keep en-
cashing some profits through a Systematic Withdrawal Plan
a. Only A is true
b. Only B is true
c. Both A and B are true

Ans: (b) 1. A systematic transaction (like SIP etc.) can be stopped. 2. Assuming
the scheme is profitable, the re-purchase ensures that some of the profits are
being regularly encashed by the investor.
-----------------------------------------------------------------------------------------------------------
42. Which of these statements are TRUE with respect to time stamping on
mutual fund documents?
A. Time stamping is relevant for non-financial mutual fund transactions.
B. The daily time stamping of application does not start with serial 1.
C. Breakdown of time stamping process or breaking of seal is mandated to be
duly recorded and reported to the Trustees.
a. A and B are true
b. B and C are true
c. A and C are true
d. A, B and C are true

Ans: (b) (1) Applications for non-financial transactions like change of address are
stamped. However, here stamping of time is not relevant; the data stamping is
pertinent. (2) Applications are sequentially numbered from the first number of the
machine to the last number of the machine, before a new numbering cycle is
started for the machine. The daily time stamping of application does not start with

218
serial 1. (3) The points of acceptance have time stamping machines with tamper-
proof seal. Opening the machine for repairs or maintenance is permitted only by
vendors or nominated persons of the mutual fund. Such opening of the machine
has to be properly documented and reported to the Trustees.
43. Cut-off timing guidelines are not applicable for ________.
a. International Funds
b. New Fund Offer (NFO)
c. Both of the above
d. None of the above

Ans: (c) The cut-off timing is not applicable for NFOs and International Schemes.
-----------------------------------------------------------------------------------------------------------
44. Investments in mutual fund are allowed using __________.
a. ASBA
b. Cheque or DD
c. Remittance
d. Any of the above

219
Ans: (d) Investments in mutual fund are allowed using any of the given options
45.Investors' KYC details are stored in the server of _________.
a. AMFI
b. AMC
c. KRA
d. SEBI

Ans: (c) KRA means KYC Registration Agency. The KRA after checking the KYC
details uploads the details in the server of any centralised KRA.
-----------------------------------------------------------------------------------------------------------
46. Investors have the right to specify upto ______ nominees for their mutual
fund investment folios.
a. 1
b. 2
c. 3
d. 4

220
Ans: (c) The investors can appoint upto 3 nominees, who will be entitled to the
'Units' in the event of the demise of the investors. The investor can also specify
the percentage distribution between the nominees. If no distribution is indicated,
then an equal distribution between the nominees will be presumed.
47. PAN No. and KYC documentation is compulsory for mutual fund investments
with the only exception of _________.
a. ELSS Funds
b. Micro SIPs
c. Gilt Funds
d. Government Mutual Funds

Ans: (b) Micro SIPs: SIPs where annual investment (12 month rolling or April-
March financial year) does not exceed Rs. 50,000.
-----------------------------------------------------------------------------------------------------------
48. How many (maximum) bank accounts can a resident individual investor
register with a mutual fund folio?
a. 1
b. 2
c. 3
d. 5

221
Ans: (d) 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, upto ten.
49. STP is a combination of SIP and SWP. True or False?
a. True
b. False

Ans: (a) In a STP (Systematic Transfer Plan), the amount that is withdrawn from
a scheme is re-invested in some other scheme of the same mutual fund. Thus, it
operates as a SWP (Systematic Withdrawal Plan) from the first scheme, and a
SIP (Systematic Investment Plan) into the second scheme.
-----------------------------------------------------------------------------------------------------------
50. Mutual Funds cannot accept cash from investors for investing in their
schemes. True or False?
a. True
b. False

222
Ans: (b) Mutual funds usually do not accept cash. However for small investors,
who may not be tax payers and may not have PAN/bank accounts, such as
farmers, small traders/businessmen/workers are allowed cash transactions for
purchase of units in mutual funds to the extent of Rs. 50,000/- per investor, per
mutual fund, per financial year.
51. An investor gives a cheque of Rs. 1 lacs for investing in a Debt scheme at
3.30 pm at a Mutual Fund office. The NAV of which day will be applicable to him?
a. NAV of the same day
b. NAV of the next business day
c. NAV of the day on which funds will be available
d. None of the above

Ans: (b) For all Equity and Debt funds (except Liquid funds) - For investment of
Rs. 2 lacs and below - NAV of the same day if received before 3 pm (cut off
time). If received after 3 pm then NAV of the next business day. For investments
of amount over Rs. 2 lacs, irrespective of the time of receipt of application, NAV
of the business day on which the funds are available for utilisation before the cut-
off time of that day is applicable.
-----------------------------------------------------------------------------------------------------------
52. Relaxation in documentation requirements for micro SIPs is not available for
________.
a. Non Resident Indians
b. Hindu Undivided Family
c. Individuals
d. All of the above

223
Ans: (b) Relaxation in documentation requirements for micro SIPs is not
available for HUFs and non individuals. Such relaxation is available for
individuals or NRIs.

53. A Mutual Fund scheme is known to distribute dividends from time to time.
Such MF can be used as a source of ________.
a. Good Capital Appreciation
b. Regular Income
c. Safety of Capital
d. Tax Planning

Ans: (b) A Mutual Fund scheme is known to distribute dividends from time to
time. Such MF can be used as a source of regular income.
-----------------------------------------------------------------------------------------------------------
54. Mutual funds can accept cash to the tune of Rs. ______________from small
investors who do not have a PAN.
a. Rs. 50,000
b. Rs. 20,000
c. Rs. 10,000
d. Rs. 5,000

224
Ans: (a) Mutual funds usually do not accept cash. However for small investors,
who may not be tax payers and may not have PAN/bank accounts, such as
farmers, small traders / businessmen / workers are allowed cash transactions for
purchase of units in mutual funds to the extent of Rs. 50,000/- per investor, per
mutual fund, per financial year.
55. What are the benefits of Dematerialisation?
A. Reduction in paper work B. Auto credit of bonus units
C. No inconvenience of safekeeping paper certificates, etc.
a. A and C
b. B and C
c. A and B
d. All A, B and C

Ans: (d) The benefits from a demat account are as follows:

- Less paperwork in buying or selling the mutual fund units, and correspondingly,
accepting or giving delivery of the units.
- Direct credit of bonus and rights units that the investor is entitled to, into the
investor's demat account.
- Change of address or other details need to be given only to the Depository
Participant, instead of separately providing it to every company/mutual fund
where the investor has invested and holds demat units.
- Consolidate all investments in mutual funds, direct equity, debentures and
others under one account.
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56. Minors are not legally eligible to contract, so for investing in Mutual Funds
they ________.
a. have to become 18 years before investing
b. can invest through their guardians
c. can invest only in long term capital gain funds

225
d. can invest in specific 'Minors Only' Mutual Funds

Ans: (b) Minors i.e. persons below the age of 18 are not legally eligible to
contract, they need to invest through their Parents/Lawful guardians.
57. How can an investor remit money in an Indian mutual fund from abroad?
a. Through Society for Worldwide Interbank Financial Telecommunication
(SWIFT)
b. Through Immediate Payment Service (IMPS)
c. Through Real time gross settlement (RTGS)
d. Through National electronic funds transfer (NEFT)

Ans: (a) For investments in mutual funds, remittance can be made directly to the
bank account of the scheme through Real Time Gross Settlement
(RTGS)/National Electronic Funds Transfer (NEFT) facilities (for transfers within
India) or SWIFT transfer (for transfers from abroad). SWIFT transfers tend to
pass through multiple banks in different geographies, and multiple levels within
the same bank, resulting in delays.
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58. Which of these investors is allowed to do a nomination?
a. Only SIP investors
b. Only Equity Mutual Fund investors
c. Only Institutional Investors
d. Only Individual Investors

226
Ans: (d) Only individual investors can make a nomination.

59. In which of these options will the unit balance increase in the mutual fund
investors folio without any transaction being done by the investor?
a. Redemption
b. Dividend Re-investment option
c. Dividend Payout option
d. Growth option

Ans: (b) In a Dividend Re-investment option, the investor does not receive the
dividend in his bank account; the amount is re-invested in the same scheme and
additional units are allotted to the investor. (The reinvestment happens at the ex-
dividend NAV).
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60. Nomination and Pledge options are not available for mutual fund investors.
True or False?
1. True
2. False

227
Ans: (b) Nomination and Pledge options are available for mutual fund investors.
61. Tax Deferral is a key feature of ______________
a. Dividend Option
b. Growth Option
c. Arbitrage Fund
d. Liquid Schemes

Ans: (b) Tax Deferral is a key feature of Growth Option.

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62. Mr. Mahesh gives his investment application form to the distributor at 10 am.
The distributor then goes to the Mutual Fund office and submits this application
at 1pm. What is the cut off time for this investment?
a. 0.5416
b. 0.416
c. 0.6041
d. 0.625

228
Ans: (a) The cut off time is when the investment is submitted to the PoA - Point of
Acceptance is relevant - not the time when the investor submits the transaction
request to the distributor.
63. If an Institutional Investor is making an application for investing in a Mutual
Fund, which additional document is required?
a. Audited Accounts for the last 3 years
b. Bank Statements
c. Board Resolution
d. Approval letter from SEBI

Ans: (c) If an Institutional Investor is making an application for investing in a

Mutual Fund, Board Resolution is required.
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64. As regards cut-off timing, the time when it is submitted to the Points of
Acceptance PoA is relevant - not the time when the investor submits the
transaction request to the distributor. True or False?
a. True
b. False

229
Ans: (a) This can be explained using an example. Suppose an investor gives a
MF investment application form on Monday to his distributor but the distributor
submits the form to the official PoA on Tuesday before the cut-off time, the NAV
of Tuesday will be considered while allotting the units to the investor.
65. The Transaction Slips are used by ___________
a. First time investors of Mutual Funds
b. NFO Investors
c. Existing Investors
d. Relatives of Existing Investors

Ans: (c) For a first time investment in a mutual fund Full application form is to be
filled. Then once an investor has a folio with a mutual fund, subsequent
investments / sale with the same mutual fund do not call for the full application
form. Only Transaction Slip needs to be filled and submitted.
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66. Relaxation in documentation requirements for micro SIPs is available for
__________.
a. Non Resident Indians
b. Non Individuals
c. Hindu Undivided Family
d. None of the Above

230
Ans: (a) Relaxation in documentation requirements for micro SIPs is only
available to individuals and not for HUFs and non-individuals. Such relaxation is
available for NRIs as they are individuals.
67. A Board Resolution is not required for an institutional investor to invest in
Mutual Funds if the Memorandum and Articles of Association permit it to do so.
True or False?
a. True
b. False

Ans: (b) A Board Resolution is required as an authorisation for the investing

institution to invest.
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68. To do away with multiple KYC formalities with various intermediaries, SEBI
has mandated a unified KYC for the securities market through the Depository
Participants registered with SEBI. True or False?
a. True
b. False

231
Ans: (b) To do away with multiple KYC formalities with various intermediaries,
SEBI has mandated a unified KYC for the securities market through KYC
Registration Agencies registered with SEBI.
69. Which of the following is true with respect to Growth Option in Mutual Fund
schemes?
a. The change in NAV captures the scheme performance
b. Units rise or fall depending on the schemes performance
c. The NAV falls as and when dividend is declared
d. Dividend Distribution Tax is applicable

Ans: (a) In Growth Option, the NAV rises or falls depending on the schemes
performance. No dividend is declared in Growth Option.
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70. When a dividend is paid, the NAV of the units__________ to that extent.
a. rises
b. falls
c. There is no change

232
Ans: (b) 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.
71. ____________ is considered as an Institutional Investor.
a. Non-Resident Indians
b. Trusts
c. Persons of Indian Origin (PIO)
d. High Net worth Individuals

Ans: (b) Charitable Trusts / Private Trusts are considered as institutional

investors. Non-Resident Indians (NRIs)/Persons of Indian Origin (PIO) / HNls are
individual investors.
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72. What will happen if one of the joint holders of a mutual fund folio dies?
a. The folio will be cancelled and the amount refunded
b. The units will be transferred to nominees
c. The units will be transferred to the heir of deceased holder
d. The units will continue to be held by surviving joint holders

233
Ans: (d) Transmission is the process of transferring units to the person entitled to
receive them in the event of the death of the unit holder. If a folio is jointly held
and has nominations, the right of the joint holder will be given priority.
73. 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
a. Only A is true
b. Only B is true
c. Both A and B are true
d. Both A and B are false

Ans: (b) Nomination is only an authorization for the mutual fund to transfer the
units to the nominee in the event of the 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.
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74. If a third-party payment is to be made for subscribing to a mutual fund
scheme, then which of the following is/are essentially required?
a. The minimum investment has to be Rs. 50,000
b. The third-party has to provide PAN details and also comply with the KYC
norms
c. The third-party should also have a folio with the mutual fund
d. All of the above

234
Ans: (b) Compliance with the KYC norms and providing the PAN details are
mandatory by the third party making the payment irrespective of the amount
involved. The third party need not have a folio with the mutual fund.

75. Which investor need not provide a PAN card at the time of making a mutual
fund investment?
a. Investor who is investing up to Rs. 50,000 in a mutual fund scheme (excluding
SIPs) per year per mutual fund.
b. Investor who is investing up to Rs. 50,000 in a mutual fund scheme (including
SIPs) per year per mutual fund.
c. An investor who is investing up to Rs. 1,00,000 in a mutual fund scheme
(excluding SIPs) per year per mutual fund.
d. Investor who is investing up to Rs. 1,00,000 in a mutual fund scheme
(including SIPs) per year per mutual fund.

Ans: (b) The following categories of investors are exempt from producing PAN:
1. In case of transactions undertaken on behalf of Central/State government and
by officials appointed by the court. 2. Investors residing in the state of Sikkim. 3.
UN entities/Multilateral agencies exempt from paying taxes/filing tax returns in
India. 4. Investments (including SIPs and lump sum investments) in Mutual Fund
schemes upto Rs. 50,000/- per investor per year per mutual fund.
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76. Identify the false statement(s)-
A) Share certificate is a physical asset
B) Debenture is a physical asset as the paper on which it is printed has value
a. Statement A is false
b. Statement B is false
c. Both statements A and b are false

235
Ans: (c) Shares and Debentures are not physical assets. They are financial
assets. Physical assets include Gold, Building, Art, etc.
77. 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?
a. The SIP will be registered for 3 years.
b. The SIP will be registered for only 2 years.
c. The SID will be registered for only 1 year till the investor attained majority.
d. The SIP will be registered for 3 years from the date of attaining the majority.

Ans: (c) 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.
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78. An investor already has a folio in a mutual fund scheme where he is a joint
holder. Now he wants to do additional investments in the same scheme as a sole
holder. How can he make the change?
a. He will have to do the investments under a new folio and select the mode of
holding as single
b. He can do the investments by mentioning the mode of holding in the
application as single to apply only for the fresh investments being made
c. He can do the investment by changing the mode of holding for the additional
units after the investment has been made.

236
Ans: (a) Once a mutual fund folio is created as a jointly held account there can
be no change in the joint holders or mode of holding except in the event of a
death.
79. Which information has to be provided by a normal investor to be identified as
an existing investor in the mutual fund?
a. PAN
b. PEKRN
c. Folio Number
d. KYC acknowledgment

Ans: (c) An existing investor can use the application form to make fresh
purchases in other schemes of the same mutual fund or even make additional
purchases in a scheme. In this case, the assigned folio number has to be
provided and all the personal information already captured under the folio will
apply to the new investment being made also.
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80. Identify the true statement(s) with respect to the stamping of application for
Non Financial transactions of a mutual fund.
A) Time stamping is relevant B) Date stamping is pertinent
C) Date and Time stamping is done
a. All A, B, and C are true
b. Only A and B are true
c. Only B and C are true
d. Only A and C are true

237
Ans: (c) Applications for non-financial transactions like a change of address and
investor's acknowledgment are date and time-stamped. However, here stamping
of time is not relevant; the date stamping is pertinent (relevant).
81. When should the information under Foreign Account Tax Compliance Act
(FATCA) be provided?
a. Only if the investment is made from a foreign bank account
b. Only if the place of birth is other than India
c. Only if an NRI is doing the investment
d. Only if the investor is a resident of the USA or Europe

Ans: (b) For 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).
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82. Who is NOT authorized to attest the documents submitted for Know Your
Customer compliance, in case originals are not produced at the time of KYC?
a. Notary Public
b. Manager of a Scheduled Commercial Bank
c. Mutual Fund distributor
d. Gazetted Officer

238
Ans: (c) In the KYC process, the supporting documents (identity and address
proof) are verified with the original documents. Alternatively, the investor can
provide a True Copy attested by a Notary Public, Gazetted Officer, or Manager of
a Scheduled Commercial Bank.
83. Identify the true statement(s)-
A) Individuals can register up to 5 bank accounts with a mutual fund
B) A Non-Individual can register up to 10 bank accounts with a mutual fund
a. Only A is correct
b. Only B is correct
c. Both A and B are correct

Ans: (c) Mutual funds provide investors the facility to register multiple bank
accounts to facilitate receiving the redemption, dividends, and any other payouts
from the fund. An individual investor can register up to five bank accounts and a
non-individual investor, ten.
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84. Which of these statement(s) is/are TRUE?
A) If the mutual fund units are held in Demat form, they cannot be converted into
physical form.
B) When a mutual fund is redeemed or when there is a dividend pay-out, the
amount will be credited to the bank account linked to the Demat account for
those mutual fund investors who opt for demat units.
a. Only A is correct
b. Only B is correct
c. Both A and B are correct
d. Both A and B are incorrect

239
Ans: (b) The mutual fund investor has the option to convert the Demat units into
physical form. This process is called re-materialisation. Dividends & redemption
proceeds will be credited directly to the bank account. electronic modes such as
direct credit, NEFT, NACH facility.
85. Mr. Sandesh invests Rs. 75 lakhs in a Gilt Fund and gives a local cheque at
3.30 pm. What will be the applicable NAV for the allotment of units?
a. NAV of the business day on which the funds are available for utilization.
b. Same day NAV if received before the cut-off time.
c. The closing NAV of the next business day.
d. The closing NAV of the day immediately preceding the date of application.

Ans: (a) A sector fund would invest in only the concerned sector so the
benchmark has to be a similar index. For eg., A Banking Sector fund can be
benchmarked against S&P BSE Bankex and an Infrastructure Fund can be
benchmarked against Nifty Infrastructure Index to get the correct picture.
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86. Which of these documents is not required to be submitted for investing in
mutual funds by a charitable organization?
a. List of authorized signatories
b. Trust deed
c. Board resolution
d. Memorandum and Articles of Association

240
Ans: (d) A Charitable Trust does not have any Memorandum or Articles of
Association. It has a Trust Deed.
87. In case the units are pledged, the unit holder__________________.
a. can sell the units after the lock-in period
b. cannot sell the units
c. cannot sell but can switch the units to another scheme
d. cannot do an additional purchase

Ans: (b) Once units are pledged, the Unit-holder/s cannot sell or switch out the
pledged units, until the pledgee gives a written no-objection to release the
pledge.
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88. What is the maximum percentage of holding can a single investor have in a
mutual fund scheme?
a. 5%
b. 10%
c. 20%
d. 25%

241
Ans: (d) 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.
89. Who cannot invest in Mutual Funds in India?
a. Minors
b. HUFs
c. NRIs
d. All of the above

Ans: (a) Minors i.e. persons below the age of 18, are not legally eligible to enter
into a contract. They need to invest through their guardians. Hindu Undivided
Families (HUFs) and Non-Resident Indians (NRIs) can invest in Indian MFs as
per guidelines.
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90. Gold futures contract______________.
a. are traded in commodity exchanges
b. are not standardized contracts
c. are available through mutual funds
d. None of the above

242
Ans: (a) CAGR is the mean annual growth rate of an investment over a specified
period of time longer than one year. It represents one of the most accurate ways
to calculate and determine returns for individual assets, investment portfolios,
and anything that can rise or fall in value over time.
91. The dividend declared on units under lien is paid to___________________
a. always to the lien holder
b. always to the unit holder
c. the lien holder or the unit holder as per the agreement
d. Units under lien do not receive any dividends

Ans: (c) The dividend pay-outs declared on units under lien may be paid to the
unit holder or the lender depending upon the agreement.
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92. The mechanism used to ensure that the cut off timing is strictly followed is
called________.
a. Stamp time
b. Time verification
c. Timestamping
d. Auditing

243
Ans: (c)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. Timestamping is the process by which a stamp is put with
details like date and exact time of receipt etc. on the transaction form.
93. As the Unit Certificates are non-transferable, they do not offer any real
transactional convenience for the Unit-holder. State True or False?
a. True
b. False

Ans: (a) 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 the request.
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94. A board resolution for investing in a mutual fund scheme is compulsorily
required by______________.
a. Non-Resident Indians - NRIs
b. Hindu Undivided Family - HUF
c. Institutional Investors
d. Minors

244
Ans: (c) Institutional investors require authorization the invest in any security /
asset, etc. This is typically in the form of a Board Resolution.
95. What is the maximum permissible limit of investment a single investor can
have in a scheme?
a. 5% of the corpus
b. 10% of the corpus
c. 20% of the corpus
d. 25% of the corpus

Ans: (d) As per SEBI rules, 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(s).
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96. Which of these statements is TRUE with respect to Cut-off timings?
a. Cut-off timings are prescribed by SEBI from time to time
b. Cut-off timings are agreed upon between the AMC and the Collection centers
c. Cut-off timings are different from AMC to AMC
d. Cut-off timings are different for different RTAS

245
Ans: (a) SEBI has prescribed cut-off timing to determine the applicable NAV and
these timings are uniformly applicable for all mutual funds.
97. _____________ can be used in lieu of dividend payouts.
a. Systematic Transfer Plan (STP)
b. Systematic Withdrawal Plan (SWP)
c. Systematic Investment Plan (SIP)
d. Total Redemption

Ans: (b) Mutual funds make it convenient for investors to manage their SWPs by
registering the amount, periodicity (generally, monthly), and period for their SWP.
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98. Which of these statements is true with respect to a Switch transaction?
a. Switch transaction is allowed only after one year from the date of purchase
b. Switch transaction is similar to a purchase transaction
c. Switch transaction is similar to a sale transaction
d. Switch transaction is redemption from one mutual fund scheme and
simultaneous purchase into another scheme

246
Ans: (d) A switch is redemption from one scheme and purchase into another
combined into one transaction. For example, investors who believe that equity
markets have peaked and want to book profits can switch out from an equity
scheme and switch into a short-term debt fund.
99. Identify the TRUE statement(s) for an Equity Linked Saving Scheme (ELSS).
a. Only 1
b. Only 2
c. Only 3
d. Only 2 and 3

Ans: (b) If one opts for a dividend reinvestment plan, each time a dividend is
reinvested, the same would also attract a 3-year lock-in. (Note - Currently the
dividend reinvestment plan in EL SS has been abolished).
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100. Where should the change in status of an individual from a Resident to a
Non-Resident Indian be updated for mutual fund investments?
a. lt should be updated with the Registrar and Transfer Agent
b. It should be updated with the KYC Registration Agency
c. It should be updated directly with the Mutual Fund
d. It can be updated with any of the three options provided

247
Ans: (b) The KYC Registration Agency (KRA) prescribes a 'Change Form' to be
used to register change, if any, in the information provided at the time of the
Know Your Customer (KYC) process. These include: Change in Name, Change
in Status/ Nationality, Change in PAN, Change in permanent address or address
for correspondence, etc.
101. Investments have to be made only through authorized signatories for
investments by_______________.
a. Institutional investors
b. Hindu Undivided Family (HUF)
c. Non Resident Indians (NRI)
d. High net worth individuals (HNI)

Ans: (a) Since institutional investors are not natural persons, authorized
individuals invest on behalf of the institution. Authorization for the investing
institution to invest is typically in the form of a Board Resolution.
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102. The form for registering a change in the default bank account has to be
signed_______________.
a. by the first holder only
b. by all the holders of the folio
c. according to the mode of holding of the folio
d. by all the holders of the bank account

248
Ans: (c)The form for registering the change in the default bank account has to be
signed according to the mode of holding of the folio.
103. Identify the FALSE statement(s)-
A. Authorised signatories have to sign the request for transactions of institutional
investors in mutual funds.
B. Even if the Memorandum of Association and Articles of Association does not
permit investment in mutual funds, the company can invest in a mutual fund on
the basis of a Board Resolution.
a. Statement A is false
b. Statement B is false
c. Both statements A and B are false

Ans: (b) 1. A company cannot invest in mutual funds if its incorporation

documents ((Memorandum of Association and Articles of Association) do not
provide for investments of this type. 2. The mutual fund can allow transactions
only if the transaction form/slip carries the signature of any (one or more, as
required) of the authorised signatories.
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104. The investor cannot pledge the units of a Mutual Fund as a security to a
financier. True or False?
a. True
b. False

249
Ans: (b) The investor can pledge the units as a security to a financier.
105. _________assumes that all dividend payouts are re-invested in the scheme
at the ex-dividend NAV.
a. Compounded Returns
b. Compounded Annual Growth Rate
c. Annualised Returns
d. Simple Returns

Ans: (b) Whenever a dividend is paid and compounding is to be considered, the

CAGR (Compounded Annual Growth Rate) technique prescribed by SEBI is
used. This calculation is based on an assumption that the dividend would be re-
invested in the same scheme at the ex-dividend NAV.
-----------------------------------------------------------------------------------------------------------
106. An investor gives a local cheque of Rs. 3 crore for investment in the Gilt
scheme at 11.30 am. What would be the applicable NAV for this investment?
a. The closing NAV of the day preceding the date of application
b. The closing NAV of the next working day
c. The closing NAV of the application day
d. The NAV of the business day on which the funds are available for utilization

250
Ans: (d) Applicable NAV For all Debt Funds (except Liquid Funds) in respect of
transaction equal to or more than Rs. 2 lakhs - Irrespective of the time of receipt
of the application, NAV of the business day on which the funds are available for
utilization without availing of any credit facility before the cut-off time of that day
is applicable.
107. The facility of Application Supported by Blocked Amount (ASBA) can be
used for_______________.
a. application for additional purchase of MF units
b. applications by SIP
c. application for New Fund Offers (NFO)
d. Fresh purchase by a new investor of an existing scheme

Ans: (c) Application Supported by Blocked Amount (ASBA) - This is a facility

where the investment application in a New Fund Offer (NFO) is accompanied by
an authorization to the bank to block the amount of the application money in the
investor's bank account. The benefit of ASBA is that the money goes out of the
investor's bank account only on the allotment. Until then, it keeps earning interest
for the investor.
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108. Investors in India are usually highly organized in managing their financial
transactions and taking decisions related to Financial Planning. State True or
False?
a. True
b. False

251
Ans: (b) 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.
109. Mr. Shah gives a local cheque at 2.30 pm of Rs. 30 lacs for investment in an
Equity Scheme. Which will be the applicable NAV for the allotment of units to Mr.
Shah?
a. NAV of the business day on which the funds are available for utilization
b. The closing NAV of the next business day
c. The closing NAV of the day immediately preceding the date of application
d. Same day NAV if received before the cut-off time.

Ans: (b) Applicable NAV for purchases of Equity oriented funds and debt funds
(except liquid funds) in respect of transaction equal to or more than Rs. 2 lakhs -
Irrespective of the time of receipt of the application, NAV of the business day on
which the funds are available for utilization.
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110. At what price are the bonus units issued to the unit holder?
a. The bonus units are allotted free of cost
b. At the prevailing NAV divided by the bonus ratio
c. The price is decided by the AMC in consultation with the trustees
d. At the prevailing NAV

252
Ans: (a) In a bonus issue, the investor does not pay anything. The fund allows
new units for free. Thus, in a 1:3 bonus issue, the investor is allotted 1 new unit
(free) for every 3 units already held by the investor.
111. Which of the following statement is true?
a. Hindu Undivided Families (HUFs) are not allowed to invest in mutual fund
schemes.
b. Foreign investors can invest in Indian mutual fund schemes, provided they
have completed the know-Your-Client (KYC) formalities
c. None of the above

Ans: (b) Foreign investors can invest in equity schemes of MFs registered with
SEBI after completing the KYC process.
-----------------------------------------------------------------------------------------------------------
112. If an investor wants to invest a sum of below Rs. 50000 in cash in a Mutual
Fund then a PAN card is not required. True or False?
a. True
b. False

Ans: (a) 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.

253
50,000/- per investor, per mutual fund, per financial year. This is subject to
compliance with the Prevention of Money Laundering Act, 2002 and SEBI
Circulars on Anti Money Laundering (AML) and other applicable AML rules,
regulations, and guidelines.
113. Whose KYC needs to be completed in case of an application by a minor?
a. The minor
b. The guardian
c. Any family member of the minor
d. No KYC is required in case of applications by minors

254
Ans: (b) An investment made for a minor (less than 18 years) is done through a
guardian who complies with the KYC and PAN requirements and all other
formalities as if the investment was for themselves.

CHAPTER 10: RISK, RETURN & PERFORMANCE OF

FUNDS

1. Long Duration debt scheme invest in debt instruments with Macaulay duration
of _________.
a. Less than 3 years
b. Less than 4 years
c. Less than 5 years
d. More than 7 years

Ans: (d) They are an open-ended debt scheme investing in debt and money
market instruments with Macaulay duration greater than 7 years.
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2. What is the purpose of Credit enhancement in case of securitised
Transaction?
a. Higher Coupon Payment
b. Higher Term
c. Higher Credit Quality
d. Higher Profits

255
Ans: (c) In order to improve the overall credit rating, than the originator’s own
credit rating, credit enhancement is done. The overall objective is to ensure
timely payment to the investors, if the actual collection from the pool of
receivables for a given period is short of the contractual pay-out on securitisation.
3. Identify the TRUE statements.
A. MF scheme with a beta of less than 1 is less risky than market.
B. Diversified stock index has a beta of 1.
C. Unsystematic risk is measured by its beta.
a. Only A is true
b. B and C are true
c. A and B are true
d. All A, B and C are true

Ans: (c) 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.
Schemes, whose beta is more than 1, are seen as more risky than the market.
Beta less than 1 is indicative of a scheme that is less risky than the market.
Systematic risk is measured by its Beta.
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4. A bond issued by a company has a coupon of 7%. The interest rate in the
market for bonds of similar tenor and credit quality is now 8%. An investor
holding the bond will see ________.
a. The market price of the bond going up
b. The market price of the bond going down
c. The coupon of the bond going up
d. No change in the market price

256
Ans: (b) In the above question, the interest rates have risen in the economy. If
the coupon (interest rate) rises, then the bond with lower coupon is no longer an
attractive investment. It will therefore lose value.
5. Identify the TRUE statement/s -
a. Rolling return are the average annualized returns calculated for alternate
holding period
b. Holding period returns (HPR) do not provide an accurate picture of returns of
fund if its initial value is too high or low
c. Both 1 and 2
d. None of the above

Ans: (b) Holding period returns is calculated for a fixed period such as one
month, three months, one year, three years or since inception. Holding period
returns may not present an accurate picture of the returns from a fund if the initial
value or the end value used for calculation was too high or low. To eliminate this
impact rolling returns are calculated. Rolling returns is the average annualized
return calculated for multiple consecutive holding periods in an evaluation period.
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6. Which of these funds has the highest risk?
a. Gilt funds
b. Index funds
c. Money market funds
d. Sector funds

257
Ans: (d) 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 very risky
because of the concentration in one sector. If the sector under performs then the
scheme's returns is likely to be poor.
7. 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?
a. 3
b. 6
c. 1.6
d. 4

Ans: (d) 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'.
Numerator = Return Earned - Risk free Return = 9 - 5 = 4.
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8. A major factor affecting the rate of interest of a corporate deposit is ______
a. the assets it has
b. the market share its product has
c. the profits of the company
d. the credit rating assigned to it

258
Ans: (d) The interest rate offered by Corporate Deposits depends on the credit
rating assigned to it. Higher the credit risk, higher is likely to be the interest rates
offered.
9. A company has Earning Per Share (EPS) of Rs. 5 and Price to Earning (PE)
ratio of 30. What will be the market price of the shares of this company?
a. Rs. 0.60
b. 6
c. Rs. 150
d. Rs. 75

Ans: (c) Price to Earnings Ratio (P/E Ratio) = Market Price / EPS So, Market
Price = PE X EPS = 30 x 5 = Rs. 150.
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10. Who issues the 'Certificate of Deposit'?
a. Government
b. Multinationals
c. Banks
d. Mutual Funds

259
Ans: (c) Certificates of Deposit are issued by Banks (for 7 days to 1 year) or
Financial Institutions (for 1 to 3 years).
11. Which of these assets has the highest risk of loss through theft?
a. Real Estate
b. Commercial papers
c. Shares and Debentures
d. Gold

Ans: (d) Gold suffers one of the highest risks of loss through theft.
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12. Which of the below is used to measure risk-adjusted performance?
a. Sharpe Ratio
b. Standard Deviation
c. R-squared
d. Beta Coefficient

260
Ans: (a) Some important measures of risk-adjusted returns are Sharpe Ratio,
Treynor Ratio, Alpha etc. (Higher the Sharpe Ratio, better the scheme is
considered to be).
13. Mrs. Reena purchases MF units at NAV Rs. 13. After 500 days, she redeems
it at NAV Rs. 15.70. What is the compounded rate of return?
a. 13.69%
b. 14.70%
c. 15.00%
d. 15.88%

Ans: (b) The formula to find the CAGR- Compounded Annual Growth Rate
holding period return is: [(End Price / Bgn Price) ^ (1/n)] - 1
End Price = 15.70; Begin Price = 13; n = time.
We have to find yearly return so 500 / 365 = 1.369
So [(15.70/13)^ 1/1.369] – 1 = (1.207 ^ 0.73) - 1
On the scientific calculator of your computer type 1.207 then use x^y key and
then type 0.73 = 1.147
1.147 –- 1 = 0.147 x 100 = 14.7 %
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14. ______ have to make additional disclosures related to credit evaluation
policy, sectors and types of investments in the offer document.
a. ELSS Funds
b. Debt Funds
c. Sectoral Funds
d. Equity Funds

261
Ans: (b) Debt Funds have to make additional disclosures related to credit
evaluation policy, sectors and types of investments in the offer document.
15. Smita is a young investor and her parents advice her to invest in fixed
deposits of banks so that these funds can be used for her retirement. If Smita
follows her parents advice, what risk does she face?
a. She has to select the correct bank which is financially strong
b. There is a high risk of default in her portfolio
c. There is a risk of low returns
d. There is no risk as fixed deposits are quiet safe

Ans: (c) Fixed deposits usually give a low rate of return and when adjusted
against inflation, the return can sometimes be very low or even negative. This will
not help in building her retirement corpus. Smita is a young investor and has
plenty of time in her hand. So she should invest in growth stocks I equity mutual
funds rather than fixed deposits.
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16. Indicate which of these funds have the lowest to highest risk sequence?
A) Liquid Fund B) Credit Risk Fund C) Corporate Bond Fund
a. B-C-A
b. C-A-B
c. A-B-C
d. A-C-B

262
Ans: (d) Liquid funds are least risky as they invest in high quality debt
instruments. Corporate Bond Funds are little more risky as they predominantly
invest in AA+ and above rated corporate bonds. Credit Risk Funds are much
more risky as they invest in below highest rated corporate bonds. The minimum
investment in corporate bonds shall be 65 percent of total assets only in AA
(excludes AA+ rated corporate bonds) and below rated corporate bonds.
17. Beta as a risk measure is relevant for _________.
a. Only Equity Schemes
b. Only Debt Schemes
c. Both Equity and Debt schemes
d. FMP's

Ans: (a) Beta as a measure of risk is relevant only for equity schemes. The
diversified stock index, by definition, has a Beta of 1. Companies or schemes,
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.
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18. Arbitrage Funds have BASIS risks - True or False?
a. True
b. False

263
Ans: (a) Arbitrage fund have basis risk ie. the risk that both cash and F&O
position on a company cannot be reversed at the same time. During the time gap
between unwinding of the two positions, the market can move adverse to the
scheme.
19. A Mutual Fund scheme has a portfolio of shares whose beta is less than 1.
This indicates that the scheme is ________.
a. Very Very risky compared to the market
b. Some what risky than the market
c. Less risky than the market
d. Equally risky as the market

Ans: (c) Beta is a measure of risk of a security or a portfolio. If the Beta more
than 1, this means the security or the portfolio will rise or fall more than the index.
Similarly if the Beta of a scrip or portfolio is less than 1, this means the security
or the portfolio will rise or fall less than the index.
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20. For an investor to get a quick sense of the level of risk involved in a mutual
fund scheme, SEBI suggested a simplified framework known as _________
a. Risk factors
b. Investor's risk profile
c. Risk-o-meter
d. Fact sheet

264
Ans: (c) Market regulator SEBI has a system of product labelling in place that
ensures the investor makes investments in mutual fund schemes that correspond
to the investor's risk profile. The product labelling of mutual funds is based on the
concept of 'Riskometer' and this meter depicts the level of risk in any specific
mutual fund scheme. The Riskometer depicted risk areas like - Low, Moderately
Low, Moderate, Moderately High and High Risk.
21. Usually Diversified Equity funds are safer than Diversified Debt funds - True
or False?
a. True
b. False

Ans: (b) Under normal circumstances Equity Funds are always riskier than Debt
Funds.
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22. Identify the TRUE statement(s) with respect to risk levels in mutual funds?
a. Only A is true
b. Only B is true
c. A and B are true
d. A and B are false

265
Ans: (b) 1. Credit risk funds are more riskier than Corporate bond funds as they
invest in bonds which are rated lower. 2. Gilt funds invest in longer term debt
securities as compared to liquid funds, so the changes in yields will have a larger
impact on them.
23. Which of the following is a measure of fluctuation in periodic returns in an
equity mutual fund scheme?
a. Variance
b. Modified duration
c. Jensen's Alpha
d. Sharpe ratio

Ans: (a) Variance measures the fluctuation in periodic returns of a scheme, as

compared to its own average return.
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24. Prediction of equity markets in the short run is easier than in the long run.
True or False?
a. True
b. False

266
Ans: (b) In the long run, equity markets are a good barometer of the real
economy. In the short run, markets can get over-optimistic or over-pessimistic,
leading to spells of greed and fear and so are very unpredictable in the short
term.
25. Of the below options, what is FALSE with respect to Arbitrage Funds?
a. Arbitrage Funds have Basis Risks
b. Arbitrage Funds invest in Equity Markets
c. Arbitrage Funds invest in both Spot and Futures Market
d. Arbitrage Funds are more riskier than Sectoral Funds

Ans: (d) Arbitrage Funds make profits by using the price differences between two
markets - so they are the least risky among Equity Funds. Sectoral Funds are the
most risk funds as they are not diversified. Arbitrage Funds have basis risk - the
risk that both cash and F&O position on a company cannot be reversed at the
same time. During the time gap between unwinding of the two positions, the
market can move adverse to the scheme.
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26. Identify the difference between Sharpe Ratio and Treynor Ratio.
a. Both are same.
b. Sharpe Ratio uses Standard Deviation for its calculations whereas Treynor
Ratio uses Beta.
c. Sharpe Ratio is used for underperforming schemes whereas Treynor Ratio is
used for outperforming schemes.
d. None of the above

267
Ans: (b) Sharpe ratio is calculated as : (Rs minus Rf) / Standard Deviation
Treynor Ratio is calculated as : (Rs minus Rf) / Beta
(Rf is the risk-free rate of return and Rs is the actual return earned).
27. _____ is the risk of mis-pricing or improper valuation of derivatives.
a. Counter party Risk
b. Model Risk
c. Basis Risk
d. Credit risk

Ans: (b) Model Risk is the risk of mispricing or improper valuation of derivatives.
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28. Which of the following type of analysis tracks the price and volume data
related to trading in the security?
a. Situation analysis
b. Technical analysis
c. Fundamental analysis
d. Quantitative analysis

268
Ans: (b) Technical Analysts believe that price behaviour of a share over a period
of 'time throws uptrends for the future direction of the price. Technical Analysts
therefore study price-volume charts of the company's shares to decide support
levels, resistance levels etc.
29. An investor invested in scheme A when the scheme's NAV was Rs.120 per
unit. The investor redeemed the investments at the NAV of Rs.135. Calculate the
simple return.
a. 0.1
b. 0.125
c. 0.15
d. 0.1111

Ans: (b) We have to use the Holding Period formula i.e.:

({End Price - Begin Price + Income (If Any)} / (Begin Price))
= ((135 - 120) / 120) = 0.125
0.125 x 100 = 12.50%
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30. Which amongst the following is a measure of risk-adjusted returns of mutual
fund scheme?
a. Standard deviation
b. Beta
c. Variance
d. Sharpe ratio

269
Ans: (d) Sharpe ratio is a very commonly used measure of risk-adjusted returns.
31. What is the Absolute Return for a Mutual Fund investor if he had bought at
NAV 20 and sold at NAV 40 after two years?
a. 1
b. 0.5
c. 0.25
d. Insufficient Data

Ans: (a) Absolute Return or Simple Return is simply the change in the value of an
investment over a period of time. Its not calculated on a yearly basis etc.
In the above example - A person bought a MF at NAV 20 and sold it after 2 years
at NAV 40, then the Absolute Return is: ((Sale Price - Buy Price) I Buy Price) X
100 = 40 - 20 / 20 = 1 or 100% absolute return.
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32. An Index fund has a beta of 1 - State True or False?
a. True
b. False

270
Ans: (a) Beta is a measure of risk of a security or a portfolio as compared to the
market i.e. Index. Since an Index fund invests in shares which are a part of the
index, the NAV will rise or fall as per the movements of index. So the beta is 1.

33. Long term debt funds would be sensible in declining interest rate scenarios -
True or False?
a. True
b. False

Ans: (a) As yields in the market goes down, debt securities gain in value.
Therefore, long term debt funds would be sensible in declining interest rate
scenarios.
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34. __________ arises due to a difference in the price movement of the
derivative vis-à-vis that of the security being hedged.
a. Model Risk
b. Interest rate risk
c. Counterparty Risk
d. Basis Risk

271
Ans: (d) Basis Risk arises due to a difference in the price movement of the
derivative vis-à-vis that of the security being hedged.
35. Which of the following is a measure of market risk?
a. Beta Coefficient
b. Sharpe Ratio
c. Treynor Ratio
d. None of the above

Ans: (a) Beta Coefficient is a measure of market risk.

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36. Which of the following scheme categories would be considered the least risky
in terms of credit risk?
a. Dynamic bond
b. Gilt fund
c. Corporate bond fund
d. Credit risk fund

272
Ans: (b) A Gilt fund invests only in Government Securities and therefore is
virtually risk free.
37. Investing in_____ can be a risky prospect during periods of Economic
Turmoil.
a. Gilt Securities
b. Debt Funds
c. Mid Cap Funds
d. Large Cap Funds

Ans: (c) Mid Cap Stocks are intrinsically not as strong as the front line (large cap)
stocks, so they become riskier during periods of economic turmoil.
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38. ____ is a Non-Diversifiable risk.
a. Unsystematic Risk
b. Systematic Risk
c. Both of the above
d. None of the above

Ans: (b) The risks that impact the entire economy are known as Systematic risks.
For eg - Inflation in the economy is a systematic risk that impacts all the
businesses within the country. Such risks cannot be reduced through

273
diversification by the fund manager or investor. The risks that impact the specific
company are called company specific or unsystematic risks. For example, a
labour strike in a manufacturing plant is a company specific risk. The company
specific risks can be reduced by a fund manager through diversification across
diverse set of companies.
39. A Mutual Fund scheme gave an annualised return of 9.86% and the
annualised Standard Deviation of the fund is 3.47. The current risk free return is
8%. Calculate the Sharpe Ratio.
a. 0.89
b. 0.72
c. 0.49
d. 0.53

Ans: (d) The formula for Sharpe Ratio is: (Rs-Rf) / Standard Deviation i.e.
(Return Earned - Risk free Return) / Standard Deviation
= (9.86 - 8) / 3.47 = 1.86 / 3.47 = 0.53
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40. If a Segregated portfolio is created, it shall be effective from__________.
a. the day of credit event
b. seven days prior to the credit event
c. one year from the date of the credit event
d. the day that security was bought in the portfolio

274
Ans: (a) To ensure fair treatment to all investors in case of a credit event and to
deal with the liquidity risk, in December 2018, SEBI permitted creation of
segregated portfolio of debt and money market instruments by mutual funds
schemes. Segregated portfolio shall be effective from the day of credit event.
41. Identify the TRUE statement(s).
A) In an Assured Return scheme, if the scheme is not able to pay the assured
return amount then the guarantor has to pay the same.
B) Investor returns might vary from the scheme returns on account of choices
regarding investment schedule.
C) The returns published in a mutual fund advertisement factor the entry or exit
load, as may be applicable.
a. B and C are true
b. A and C are true
c. A and B are true
d. All A, B and C are true

Ans: (c) (1) Mutual funds are not permitted to promise any returns unless it is an
assured returns scheme. Assured returns schemes call for a guarantor who is
named in the SID. The guarantor will need to write out a cheque if the scheme is
otherwise not able to pay the assured return.
(2) Investor returns might vary from the scheme returns also on account of
choices regarding investment schedule, i.e., the additional investment being

275
made during the period or redeeming a portion of the investment. In such a case,
for the same period investor's returns may be different from the published returns
of the scheme.
(3) The returns published in a mutual fund advertisement would be without
factoring in the entry or exit load, as may be applicable.
42. To measure the fund managers' performance, the difference between the
scheme's actual return and its optimal return is calculated and this is known as
a. Alpha
b. Beta
c. Sharpe
d. Treynor

Ans: (a) The difference between a scheme's actual return and its optimal return
is its Alpha-a measure of the fund manager's performance. Alpha, therefore,
measures the performance of the investment in comparison to a suitable market
index.
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43. An existing bond fund will tend to lose value when market interest
rates____________.
a. Rise
b. Fall
c. remains constant
d. are equal to yields

276
Ans: (a) Suppose an investor has invested in a debt security that yields a return
of 8 %. Subsequently, yields in the market for similar securities rise to 9 %. It
stands to reason that the security, which was bought at 8 % yield, is no longer
such an attractive investment. It will therefore lose value.
44. 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.
a. Value investment style
b. Cyclical investment style
c. Target investment style
d. Growth investment style

Ans: (d) Growth investment style entails investing in high growth stocks i.e.
stocks of companies that are likely to grow much faster than the market.
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45. Which of these funds has the highest risk?
a. Index Funds
b. Diversified Equity fund
c. Long Duration Funds
d. Gilt Funds

277
Ans: (b) Equity funds are always riskier than Debt funds. So in the above
question, Index fund and Diversified Equity Fund (Equity funds) will be more
riskier than Gilt fund and Long Duration fund (Debt funds). Among Index funds
and Diversified Equity funds, the latter is usually riskier than the former.
46. Among these funds, which will have the lowest Interest Rate Risk?
a. Money market fund
b. Diversified Equity Fund
c. Pharma Sector fund
d. Dynamic Bond Fund

Ans: (a) 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. A money market fund is a type of a mutual a fund that invests
in high-quality, short-term debt instruments, cash, and cash equivalents.
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47. In the case of a securitized asset,________________will not be an originator
to a Special Purpose Vehicle (SVP)?
a. non-banking finance company
b. housing finance company
c. commercial bank
d. RBI

Ans: (d) A securitization transaction involves the 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

278
(SPV), is 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.
48. State True or False - The Thematic funds will always have a wider exposure
than Sector funds.
a. True
b. False

Ans: (a) Thematic funds invest in line with an investment theme. Therefore, the
investment is more broad-based than a sector fund. Sector funds invest in only a
specific sector.
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49. The difference between the yield on Gilt and the yield on non-Government
Debt security is called its______________.
a. ΥΤΜ
b. Credit Spread
c. Yield to Call
d. Risk Spread

279
Ans: (b) 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 non-Government Debt security is called its credit spread.
50. From the listed below,______________has the highest credit risk.
a. High yield funds
b. ELSS Funds
c. Gilt funds
d. Index funds

Ans: (a) 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.
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51. Usually, active funds give higher returns as investors bear a higher fund
management expense - State True or False?
a. True
b. False

280
Ans: (b) 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.
52. In which type of fund is the risk of the investor not selecting the correct sector
maximum?
a. Thematic Funds
b. Sector Funds
c. Arbitrage Funds
d. Index Funds

Ans: (b) Sector funds suffer from concentration risk - the entire exposure is to a
single sector. If that sector does poorly, then the scheme returns are seriously
affected. Sector funds are considered to carry the highest risk among the equity
mutual funds.
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53. When the interest rates are rising, the bond funds which have short average
maturity are more likely to outperform - State True or False?
a. True
b. False

281
Ans: (a) Short-term debt funds help earn higher interest income in a rising
interest rate scenario. Long-term debt funds help investors earn higher returns
from capital gains in falling interest rate scenarios.
54. An ongoing bond fund will lose value when the interest rates in the
market__________.
a. Rise
b. Fall
c. remains same
d. will be equal to yields

Ans: (a) 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 a 7 percent
yield, is no longer such an attractive investment. It will therefore lose value.
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55. State True or False - Gilt schemes have more risks than liquid schemes as
their NAV fluctuates more due to changes in the yield market.
a. True
b. False

282
Ans: (a) Gilt schemes, which invest in only long-term government securities,
have a higher price risk because their NAV can fluctuate a lot more, on account
of changes in yield in the market. The greater the proportion of longer-maturity
securities in the portfolio, the higher would be the fluctuation in NAV.
56. Identify the TRUE statements
A) Unsystematic risk is measured by its Beta.
B) The diversified stock index has a Beta of 1.
C) An investment with a beta of 0.7 will move 7 percent when markets move by
10 percent.
a. A and B are true
b. B and C are true
c. A and C are true
d. All A, B, and C are true

Ans: (b) 1) Systematic risk is measured by its Beta. 2) The diversified stock
index, by definition, has a Beta of 1. Schemes, whose beta is more than 1, are
seen as riskier than the market. A beta less than 1 is indicative of a scheme that
is less risky than the market. 3) An investment with a beta of 0.7 will move 7
percent when markets move by 10 percent. This applies to increase as well as
fall in values. An investment with a beta of 1.2 will move by 12 percent both on
the upside and downside when markets move (up/down) by 10%.
-----------------------------------------------------------------------------------------------------------
57. ______________ risk arises because of the difference in price movement of
the derivative vis-a-vis that of the security being hedged.
a. Model Risk
b. Basis Risk
c. Market Liquidity Risk
d. Credit Risk

283
Ans: (b) Basis Risk arises due to a difference in the price movement of the
derivative vis-à-vis that of the security being hedged.
58. Identify the true statement with respect to measuring returns for Mutual
Funds schemes.
1. Simple Return can be calculated using the formula: Sale Price - Cost Price /
Sale Price
2. Compounded Annual Growth Rate 'CAGR' technique has been prescribed by
SEBI when a dividend is paid and compounding is to be considered
3. CAGR is the recognized standard for calculating returns for an investment
horizon of greater than or equal to 1 year
a. 1 and 2
b. 2 and 3
c. 3 and 1
d. 1, 2 and 3

Ans: (b) 1. Simple Return can be calculated with the following formula: Sale Price
- Cost Price / Cost Price.

284
2. Whenever a dividend is paid - and compounding is to be considered the
CAGR technique for the reinvestment method, as some call it) prescribed by
SEBI is used.
3. The return is calculated using CAGR if the holding period is over one year. If
returns are less than one year than Simple Return is calculated.
59. Which of these statement(s) is/are TRUE?
1. There cannot be a price impact on mutual fund units due to portfolio
rebalancing and/or liquidity demands on account of redemptions.
2. Market liquidity of mutual fund units can get impacted on account of company/
sector-related events.
a. Only 1
b. Only 2
c. Both 1 and 2

Ans: (b) Liquidity Risk is one of the general risk factors involved in Mutual Fund
investments. The liquidity of investments made in the Scheme may be restricted
by trading volumes, settlement periods, and transfer procedures. Although the
investment universe constitutes securities that will have high market liquidity,
there is a possibility that market liquidity could get impacted on account of
company/sector general market-related events and there could be a price impact
on account of portfolio rebalancing and/or liquidity demands on account of
redemptions.
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60. The most appropriate measure of returns for a scheme in existence for
several years is__________.
a. CAGR
b. Annualized Return
c. Dividend Return
d. Simple Return

285
Ans: (a) CAGR, is the mean annual growth rate of an investment over a specified
period of time longer than one year. It represents one of the most accurate ways
to calculate and determine returns for individual assets, investment portfolios,
and anything that can rise or fall in value over time.
61. Identify the TRUE statement(s):
A. A diversified index will have a Beta of 1
B. Unsystematic risk can be measured by Beta
C. A portfolio that has Beta of less than 1 is less risky than the market
a. A and B
b. A and C
c. B and C
d. Only B

Ans: (b) The diversified stock index, by definition, has a Beta of 1. Companies or
schemes, whose beta is more than 1, are seen as riskier than the market. A beta
less than 1 is indicative of a company or scheme that is less risky than the
market. The risks that impact the entire economy are known as systematic risks.
The company-specific risks are also known as unsystematic risks. Systematic
risk is measured by its Beta.
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62. If the fund manager is expecting the interest rates to fall, then the
manager______________
a. would buy fixed-rate instruments of shorter tenor
b. would buy longer-term fixed-rate debt securities
c. would buy floating rate instruments
d. None of the above

286
Ans: (b) When the interest rates fall, the current debt instruments of a longer
duration become more valuable.
63. The credit rating of a bond migrates from AAA to AA+. Determine what will
the impact of this migration on the market price of the bond?
a. The bond price will rise
b. The bond price will fall
c. No change in the bond price
d. The price can rise or fall depending on the market conditions

Ans: (b) Fixed income securities are exposed to rating migration risk, which could
impact the price on account of a change in the credit rating. For example, One
notch downgrade of an AAA-rated issuer to AA+ will have a negative impact on
the price of the security and vice-versa for an upgrade of a AA+ issuer.
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64. A Segregated Portfolio be created out of a debt fund scheme
when_____________.
a. there is a credit event
b. a change occurs in the fund management team
c. interest rates move down
d. interest rates move up

287
Ans: (a) "Segregated portfolio" means a portfolio, comprising of debt or money
market instrument affected by a credit event that has been segregated in mutual
fund scheme.
65. Identify the FALSE statement.
1. Arbitrage funds can invest in both Futures/Options(F&O) and cash markets
2. The only objective of an Arbitrage fund is to provide capital appreciation
3. Arbitrage funds have lower risk compared to Equity Funds
a. Only 1
b. Only 2
c. Both 2 and 3
d. Both 1 and 3

Ans: (b) Arbitrage funds work on the mispricing of equity shares in the spot and
futures market. The fund manager simultaneously buys shares in the cash
market and sells them in futures or derivatives markets. The difference in the
cost price and the selling price is the return you earn. Their risk level is
comparable with that of a pure debt fund. The returns from an Arbitrage fund are
comparable to a debt fund. There is no capital appreciation.
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66. If the fund manager of a debt fund is expecting the interest rates to rise, he
will__________________.
a. increase the exposure to longer-term fixed-rate debt securities
b. switch the portfolio towards a higher proportion of floating-rate instruments
c. The fund Manager cannot do much as all his money is generally fully invested
d. None of the above

288
Ans: (b) When interest rates rise, the current debt instruments become less
valuable. So by buying Floating Rate instruments (floating rate i.e. a rate linked
to some other rate that may be prevailing in the market) he can be relatively
safer.

CHAPTER 11: MUTUAL FUND SCHEME

PERFORMANCE

1. Which is the ideal benchmark for balanced hybrid scheme?

a. Crisil Hybrid 25+ 75, Aggressive Index
b. Crisil Hybrid 75+ 25, Conservative Index
c. Crisil Hybrid 50+ 50, Moderate Index
d. Any of the Above

Ans: (c) Aggressive Hybrid Fund – CRISIL Hybrid 25+75, Aggressive Index
Balanced Hybrid Fund - CRISIL Hybrid 50+50, Moderate Index Conservative
Hybrid Fund - CRISIL Hybrid 75+25, Conservative Index.
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2. What is negative Alpha?
a. It is indicative of out-performance by the fund manager
b. It is indicative of under-performance by the fund manager
c. It is indicative of over-hedging by the fund manager
d. It is indicative of under-hedging by the fund manager

289
Ans: (b) The difference between a scheme's actual return and its optimal return
is its Alpha-a measure of the fund manager's performance. Alpha, therefore,
measures the performance of the investment in comparison to a suitable market
index. Positive alpha is indicative of out-performance by the fund manager;
negative alpha might indicate under-performance.
3. Which of these statement(s) is/are FALSE with respect to Benchmarks?
A) Portfolio concentration is an important factor while selecting a benchmark for
an equity mutual fund.
B) Choice of investment universe is not an important factor while selecting an
appropriate benchmark for debt mutual funds.
a. Only A is false
b. Only B is false
c. Both A & B are false

Ans: (b) Choice of investment universe is important and drives the choice of
benchmark in debt schemes. For eg ·Liquid schemes invest in securities of upto
91 days' maturity. Therefore, a short term money market benchmark such as
NSE's MIBOR or CRISIL Liquid Fund Index is suitable. Non-liquid schemes can
use other type indices depending on the nature of their portfolio.
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4. Calculate the Treynor Ratio from the following data : Return from a mutual
fund scheme is 7.5%. The beta is 0.62. The risk free rate of return is 6%.
a. 11.6
b. 4.77
c. 3.08
d. 2.42

290
Ans: (d) Treynor Ratio = (Return Earned - Risk Free Return) / Beta
= (7.5 - 6) / 0.62 = 1.5 / 0.62 = 2.42
Treynor Ratio is a risk premium per unit of risk. Higher the Treynor Ratio, better
the scheme is considered to be.
5. Identify the TRUE statement with respect to 'Tracking Error'.
A. Tracking error is calculated as the standard deviation of the excess returns
generated by the fund.
B. While comparing different index funds, one should invest in a fund with high
tracking error.
a. Only A is true
b. Only B is true
c. Both A & B are true
d. None of the above

Ans: (a) Tracking error is a measure of the consistency of the out-performance of

the fund manager relative to the benchmark. The tracking error has to be low for
a consistently out-performing fund. While investing in an Index Fund, one should
invest in a fund with the lowest tracking error.
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6. What should an investor see to evaluate the Consistency of Mutual Fund
scheme performance?
a. Point to Point
b. Standard Deviation
c. Discrete annual returns
d. Beta

291
Ans: (c) 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 (eg: annually,
monthly, or weekly). Continuous compounding uses a natural log-based formula
to calculate and add back accrued interest at the smallest possible intervals.
7. A creditable benchmark of a mutual fund scheme should be in sync with
the_____.
A. Size of scheme B. Investment objective of the scheme
C. Investment strategy of the scheme D. Expenses ratio of the scheme
E. Asset allocation pattern of the scheme
a. B, C and E
b. A, C and D
c. B, D and E
d. A and B

Ans: (a) A credible benchmark should meet the following requirements: It should
be in sync with (a) the investment objective of the scheme; (b) asset allocation
pattern; and (c) investment strategy of the scheme.
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8. Return from a fund is 11.5% and the risk free rate is 7%, the Standard
deviation is 3 & Beta is 1.9. What will be the denominator for calculating the
Sharpe ratio?
a. 4.5
b. 3
c. 1.9
d. 11.5

292
Ans: (b) 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'. So the Denominator is Standard
Deviation = 3
9. The actual performance of an index fund can be better or worse than its
benchmark due to _________.
a. Arbitrage error
b. Tracking error
c. Systematic risk
d. Investment objective

Ans: (b) An index scheme mirrors the index. The fund manager of an index fund
invests in the same securities which are in the index and in the same ratio or
weightage. However, there could be some minor difference and that is due to
Tracking Error.
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10. A Mutual Fund scheme gives a return of 10 % and the beta of that scheme is
0.5. The risk free return is 7.5%.What is the Treynor Ratio of this scheme?
a. 0.03
b. 0.05
c. 0.075
d. 0.11

293
Ans: (b) Treynor Ratio measures the returns earned in excess of that which
would have earned on a riskless investment. Treynor Ratio Formula: (Return
earned on the Scheme - Risk Free Rate) / Beta of the Scheme
= (10 - 7.5) / 0.5 = 5
11. Which is the most appropriate measure of evaluating how closely an index
fund is tracking its benchmark?
a. Total Expense Ratio (TER)
b. Assets Under Management (AUM)
c. Tracking error
d. Treynor ratio

Ans: (c) Tracking error is a measure of the consistency of the out-performance of

the fund manager relative to the benchmark. Earlier it was used as a measure of
how closely an index fund tracked the returns from the benchmark to which it
was indexed. Now, the tracking error is used to measure how consistently a fund
is able to out-perform its benchmark.
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12. What would be the most appropriate benchmark for a short term debt
scheme?
a. 10 year dated GOl security
b. 3 year dated Gol security
c. 1 year T-Bill
d. No such benchmark exists

294
Ans: (c) Appropriate Benchmarks:
# Equity scheme – Sensex or Nifty.
# Long term debt scheme – 10 year dated Gol security.
# Short-term debt fund – 1 year T-Bill.
13. Due to _________the Index scheme's performance could be higher or lower
than that of the benchmark.
a. Market Volatility
b. Bull Run
c. Tracking Error
d. Systematic Risks

Ans: (c) Gaps between the scheme performance, and that of the benchmark, are
called tracking errors. An index fund manager would seek to minimize the
tracking error. Due to the tracking error, the scheme performance could be higher
or lower than that of the benchmark.
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14. While deciding on investments for his clients, what should be the right
sequence?
a. Selection of Scheme - Risk Profiling - Making a Model Portfolio
b. Risk Profiling - Making a Model Portfolio - Selection of Scheme
c. Making a Model Portfolio - Risk Profiling - Selection of Scheme
d. Selection of Scheme - Making a Model Portfolio - Risk Profiling

295
Ans: (b) It is a good practice to first understand the risk exposure that is
appropriate for an investor, then decide how the investor's investments should be
distributed between different asset classes and make a model portfolio. Once
this is over, select the good schemes most suitable as per the model portfolio.
15. The Price Earning (PE) Ratio of a company is 7 and its Earning Per Share is
Rs. 10. What is the Market Price of this company?
a. Rs. 49
b. Rs. 70
c. Rs. 700
d. Rs. 10

Ans: (b) PE Ratio = Market Price / EPS

7 = Market Price / 10
Market Price = 7 x 10 = 70
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16. Gold Future Contracts ______________.
a. are traded on the Commodity Exchanges
b. are not standardised products
c. can be bought through Mutual Funds
d. None of the above

296
Ans: (a) Gold futures contracts are traded in commodity exchanges like the
National Commodities Exchange (NCDEX) and Multi-Commodity Exchange
(MCX). The value of these contracts goes up or down in line with increases or
decreases in gold prices.
17. 'Once it is finalized, a mutual fund scheme's benchmark cannot be changed
at a later date'. State whether the statement is True or False.
a. True
b. False

Ans: (b) The fund may choose to change the benchmark. This could be for
various reasons. For instance, the investment objective of the scheme may
change, or the construction of the index may change, or a better index may
become available in the market.
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18. Many AMCs, distribution houses and mutual fund research houses offer free
tools in their website which can be used for evaluating a funds performance -
True or False?
a. True
b. False

297
Ans: (a) Many AMCs, distribution houses and mutual fund research houses offer
free tools in their website which can be used for evaluating a funds performance.
19. Which of the given statements below aptly fit the description of actively
managed funds?
a. Increased role of fund manager and high running cost
b. Decreased role of fund manager and high running cost
c. Decreased role of fund manager and low running cost
d. Increased role of fund manager and low running cost

Ans: (a) Increased role of fund manager and high running cost applies to the
description of actively managed funds.
-----------------------------------------------------------------------------------------------------------
20. Mutual funds today are benchmarked to the Total Return variant of an Index
(TRI) and not to Price Return variant of an Index (PRI). What is the advantage of
TRI over PRI?
A. It ensures that the performance comparison is fair.
B. Increases transparency.
a. True
b. False

Ans: (c) Earlier, the Mutual Fund schemes were benchmarked to the Price
Return variant of an Index (PRI). PRI only captures capital gains of the index
constituents. Now the mutual fund schemes are· benchmarked to the Total
Return variant of an Index (TRI). The Total Return variant of an index takes into
account all dividends/interest payments that are generated from the basket

298
of constituents that make up the index in addition to the capital gains. Such a
change was required to ensure that the performance comparison is fair. The shift
to TRI has been another one in the direction of increasing transparency of mutual
funds.
21. Benchmarking helps in assessing under-performance or out-performance -
True or False?
a. True
b. False

Ans: (a) How well or how bad did a scheme perform can be assessed by
comparing its performance to a pre-defined comparable i.e. benchmark against
which the scheme can be compared.
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22. Stock selection is important in bottom-up approach - True or False?
a. True
b. False

299
Ans: (a) Stock selection is important in bottom-up approach. In a top-down
approach, sector allocation is the key decision.
23. Generally long term investment decisions taken through fundamental
analysis and for shorter term speculative decisions including intra-day trading
one uses Technical Analysis - True or False?
a. True
b. False

Ans: (a) It is generally agreed that longer term investment decisions are best
taken through a fundamental analysis approach. Technical analysis is generally
used for shorter term speculative decisions, including intra-day trading.
-----------------------------------------------------------------------------------------------------------
24. It is generally agreed that longer term investment decisions are best taken
through a fundamental analysis approach. Technical analysis is generally used
for shorter term speculative decisions, including intra-day trading.
a. True
b. False

300
Ans: (b) Technical analysis is evaluation of the strength of the company's price-
volume charts. Fundamental Analysis is the study of the company's
fundamentals - financial statements, quality of management, competitive position
in its product / service market etc.
25. For which of the following fund can NSE's MIBOR be used as a benchmark?
a. ELSS Fund
b. Liquid Fund
c. 5 year constant maturity G-sec fund
d. Long duration fund

Ans: (b) 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.
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26. On which of the following factors does returns from an international fund
depend on?
a. Asset Class performance
b. Foreign currency exchange rates
c. Both A and B

301
Ans: (c) 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.
27. Identify the false statement(s).
A) The best strategy in selecting a mutual fund scheme is that based on its past
performance.
B) When an investor wants to redeem from a scheme, the distributor must
suggest redemption from the scheme with the maximum exit load.
a. Only statement A is false
b. Only statement B is false
c. Both statements A and B are false

Ans: (c) A. Experience has shown time and again, the top performers during one
period may not necessarily remain as top performers 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.
B. When an investor wants to redeem from a scheme, the distributor must
suggest redemption from the scheme with the minimum exit load.
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28. A person who wants to retain liquidity in his investments will invest in______.
a. ELSS Schemes
b. Fixed Deposits
c. PPFs
d. Liquid Funds

302
Ans: (d) A person who wants liquidity should invest in liquid funds as they can be
redeemed very fast. Equity-linked saving schemes (ELSS) have a lock-in period
of three years Fixed Deposits and Public Provident Fund (PPF) cannot be easily
encashed before maturity.
29. Which of the following cannot be considered for the purpose of selecting a
scheme's benchmark?
a. Scheme's asset allocation pattern
b. Mutual fund scheme's investment objective
c. Scheme's past returns
d. The investment strategy of the MF scheme

Ans: (c) A credible benchmark should meet the following requirements: It should
be in sync with (1) the investment objective of the scheme; (2) the asset
allocation pattern; and (3) the investment strategy of the scheme.
The scheme's past performance is not considered while selecting the
benchmark.
-----------------------------------------------------------------------------------------------------------
30. Choice of benchmark for a Debt Scheme could be chosen on the basis of:
1. Scheme Size 2. Scheme Type
3. Investment Universe
a. Both 1 and 2
b. Both 2 and 3
c. Both 1 and 3
d. All 1, 2 and 3

303
Ans: (b) Scheme type and choice of investment universe drive the choice of
benchmark in debt schemes. The size of the scheme is immaterial.
31. Identify the true statement(s) with respect to benchmark for mutual fund
schemes.
A) For the International Equity fund, the ideal benchmark will be BSE 500 index
as it is a very broad-based index covering 500 companies.
B) For Gold ETF, gold prices will be the ideal benchmark.
a. Only A is correct
b. Only B is correct
c. Both A and B are correct
d. Neither A nor B is correct

Ans: (b) The gold price would be the benchmark for Gold ETF funds. For
International Funds - The benchmark would depend on where the scheme
proposes to invest. Thus, a scheme seeking to invest in China might have a
Chinese index as the benchmark and a scheme that would invest largely in the
US market can have S&P 500 index as the appropriate benchmark.
-----------------------------------------------------------------------------------------------------------
32. _______________investment style involves buying stocks that are valued
lower as per the fundamental analysis.
a. Tactical
b. Growth
c. Cyclical
d. Value

304
Ans: (d) Value investment style is an approach of picking up stocks, which are
priced lower than their intrinsic value, based on fundamental analysis. The belief
is that the market has not appreciated some aspect of the value in a company's
share - and hence it is cheap. When the market recognizes the intrinsic value,
then the price would shoot up.
33. Identify the true statement(s) with respect to benchmark for Sector Funds.
A) Its ideal to benchmark a sector fund against an index representing the
respective sector.
B) It's advisable to benchmark a sector fund against a diversified fund to get the
correct picture.
a. Only A is correct
b. Only B is correct
c. Both A and B are correct
d. Both A and B are incorrect

Ans: (a) A sector fund would invest in only the concerned sector so the
benchmark has to be a similar index. For eg, A Banking Sector fund can be
benchmarked against S&P BSE Bankex and an Infrastructure Fund can be
benchmarked against Nifty Infrastructure Index to get the correct picture.
-----------------------------------------------------------------------------------------------------------
34. The indices based on Government securities will be an appropriate
benchmark for which type of funds?
a. Credit Risk Funds
b. Gilt Funds
c. Money Market Funds
d. Liquid Funds

305
Ans: (b) Gilt funds invest only in Government securities. Therefore, indices based
on Government Securities are the appropriate benchmark.
35. A person wants to create a synthetic index. Guide him as to in which of these
categories the weightage of equity index would be the lowest?
a. Super aggressive hybrid fund
b. Aggressive hybrid fund
c. Balanced hybrid fund
d. Conservative hybrid fund

Ans: (d) In a CRISIL Conservative Hybrid Fund, the equity component will be
only 25% and Debt will be 75%. In an Aggressive Hybrid Fund, the ratio of Equity
and Debt is 75% and 25% and in a Balanced Hybrid Fund, the ratio is 50% and
50%.
-----------------------------------------------------------------------------------------------------------
36. ___________ takes into account all dividends generated from the basket of
constituents that make up the index in addition to the capital gains.
a. Price return index
b. Dividend return index
c. Total return index

306
Ans: (c) Earlier, the Mutual Fund schemes were benchmarked to the Price
Return variant of an Index (PRI). PRI only captures capital gains of the index
constituents. With effect from February 1, 2018, the mutual fund schemes are
benchmarked to the Total Return variant of an Index (TRI). The Total Return
variant of an index takes into account all dividends/interest payments that are
generated from the basket of constituents that make up the index in addition to
the capital gains.
37. Identify the true statement(s)-
A) Beta is a measure of risk only for equity schemes.
B) Variance is a measure of risk for both debt and equity schemes.
C) A fall in prices of the debt securities due to default etc. is known as a 'credit
event'.
a. Only A and B are true
b. Only A and C are true
c. Only B and C are true
d. All A, B, and C are true

307
Ans: (d) Variance as a measure of risk is relevant for both debt and equity
schemes. Beta as a measure of risk is relevant only for equity schemes. In the
debt markets, the credit risk arises on account of three things, viz., default, delay
in payments, or rating downgrade. Any of these may result in fall in prices of the
concerned debt securities. Such an event is also called a 'credit event'.

CHAPTER 12: MUTUAL FUND SCHEME SELECTION

1. If the sale and purchase transactions for a year amounted to Rs. 10,000 crore,
and the average size of net assets is Rs. 5,000 crore, this means that
investments are held in the portfolio, on an average for
a. 2 months
b. 3 months
c. 6 months
d. 12 months

Ans: (c) Portfolio turnover ratio is calculated as value of purchase and sale of
securities during a period divided by the average size of net assets of the
scheme during the period. Rs. 10000 cr / Rs. 5000 cr = 2 or 200%.
This means the investments are held in the portfolio on an average for 12
months / 2 = 6 months.
-----------------------------------------------------------------------------------------------------------
2. Which strategy can be used to ensure that a mutual fund scheme is suitable to
the investors need and situation?
a. Indexation
b. Dividend Stripping
c. Asset Allocation
d. Tax harvesting

308
Ans: (c) Asset Allocation is a process of allocating money across various asset
categories in line with a stated objective which is as per the needs and situation
of the investor.
3. 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. A and B are false
b. B and C are false
c. A and C are false
d. All A, B and C are false

Ans: (b) 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

309
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.
4. An investor in India is investing in US Dollar based funds. He/She will benefit
when __________.
a. The US Dollar becomes weaker
b. The US Dollar becomes stronger
c. The US Dollar remains steady
d. None of the above

Ans: (b) 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).
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5. Identify the TRUE statement -
A. The AMC is not liable for any losses suffered by the foreign portfolio investors
due to adverse currency movements
B. The AMC has to compensate to foreign portfolio investors for any losses
suffered due to adverse currency movements
a. Only A
b. Only B
c. Both A & B
d. None of the above

310
Ans: (a) 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.
6. Which of these is an important criteria for choosing either Growth option or
Dividend option in the same mutual fund scheme?
a. Returns on the scheme
b. Fund Manager
c. Tax status of the investor
d. Assets Managed by the scheme

Ans: (c) Mutual funds offer options, whereby the investor can let the money grow
in the scheme for several years. By selecting such options, it is possible for the
investor to defer the tax liability. So, if the investor wants to differ his tax
payments, he should choose the Growth option. However, if the tax liability of the
investor is low, he can choose the dividend option so that even the dividend can
taxed at a low rate every year.
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7. Floating interest rate is ______.
a. A rate which is payable only on maturity
b. Base Rate + Spread
c. Prime rate of lending
d. the yield on spread

311
Ans: (b) Interest rates on floating rate securities are specified as a "Base +
Spread". For example, 5-year G-Sec + 2 percent, this means that the interest
rate that is payable on the debt security would be 2 percent above whatever is
the rate prevailing in the market for Government Securities of 5-year maturity.
8. Arrange these funds according to their risk sequence - highest to lowest.
a. Capital protection oriented, Flexible allocation, Monthly income plan
b. Flexible allocation, Monthly income plan, Capital protection oriented
c. Monthly income plan, Capital protection oriented, Fixed allocation
d. Monthly income plan, Fixed allocation, Capital protection oriented

Ans: (b) Capital gains from equity, debt and hybrid funds are taxable subject to
certain conditions like holding period, etc.
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9. Which of the following cycle will a financial planner not consider?
a. Business cycle
b. Karma cycle
c. Wealth cycle
d. Life cycle

312
Ans: (b) Karma Cycle is related to birth and rebirth of an individual and is not
related to financial planning.
10. Fund Age is a more important criteria to be studied while investing in
________.
a. Debt Schemes
b. Equity Schemes
c. Treasury Bonds
d. None of the above

Ans: (b) A Mutual fund scheme with a long history has a track record that can be
studied before deciding on investments. Fund age is very important for equity
schemes, where there are more investment options, and divergence in
performance of schemes within the same category tends to be more.
-----------------------------------------------------------------------------------------------------------
11. Which amongst the following has the highest to lowest risk sequence?
a. Capital Protection Oriented Funds - Monthly Income Plans - Balanced Funds
(Flexible Allocation)
b. Monthly Income Plans - Balanced Funds (Fixed Allocation) - Balanced Funds
(Flexible Allocation)
c. Capital Protection Oriented Funds - Balanced Funds (Flexible Allocation) -
Monthly Income Plans
d. Balanced Funds (Flexible Allocation) - Monthly Income Plans - Capital
Protection Oriented Funds

313
Ans: (d) The risk hierarchy of the above mentioned schemes is (Highest to
Lowest): Balanced Funds (Flexible Allocation) - Balanced Funds (Fixed
Allocation) – Monthly Income Plans - Capital Protection Oriented Funds.
12. Floating rate debt securities tend to hold their values, even if interest rates
fluctuate. State True or False?
a. True
b. False

Ans: (a) A debt instrument with a variable interest rate is known as a "floater" - a
floating rate note's Interest rate is tied to a benchmark. Floating rate debt
securities tend to hold their values, even if interest rates fluctuate.
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13. Mutual Funds gives more investment options as compared to National
Pension Scheme. State True or False?
a. True
b. False

314
Ans: (a) There are several restrictions in investments for the NPS and so it offers
fewer portfolio choices than mutual funds.
14. The size of equity portfolio of a young unmarried investor is determined by
_________.
a. Liquidity Needs
b. Lifestyle
c. Income Needs
d. All of the above

Ans: (d) The size of equity portfolio of a young unmarried investor is determined
by Lifestyle, income needs and liquidity needs.
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15. Monthly Income Plan (MIPs) have no exposure to equity. State True or
False?
a. True
b. False

315
Ans: (b) MIPs have an element of equity in its portfolio to give a boost to the
fund's return. This can typically range from 5 percent to 30 percent.
16. The first step in developing a model portfolio is _______.
a. Deciding the size of portfolio
b. Selection of the Mutual Fund schemes
c. Setting of goals
d. None of the above

Ans: (c) Steps for developing a Model Portfolio - i) Enable your investor to
identify his investment needs and goals. ii)Understand the various financial
products - their risk, return, liquidity and maturity profile. iii) Combine the features
of financial products with the investors' financial needs and determine
appropriate mix of investments, technically referred to as asset allocation. iv)
Suggest suitable mutual fund schemes within the asset choices.
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17. With respect to model portfolio for Senior Citizens, it will not have any
exposure to equity. State True or false?
a. True
b. False

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Ans: (b) As per model portfolio for couple in their seventies, with no immediate
family support: 15 percent diversified equity index scheme; 10 percent gold ETF,
30 percent diversified debt fund, 30 percent MIP, 15 percent liquid schemes. This
shows some exposure can be taken in equities.
18. Identify 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
a. Only A is false
b. Only B is false
c. Both A and B are false

Ans: (c) The Gold deposit scheme 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. All Exchange Traded Fund
are open-ended schemes.
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19. Which is the ideal investment class for an investor who wishes to hedge
against inflation and has a long term perspective?
a. Blue chip Equity Shares
b. Gold
c. Real Estate
d. Government Bonds

317
Ans: (b) Higher inflation means a weakening rupee which also leads to rise in
gold prices. So, Gold is the best bet to hedge against inflation.
20. While making a Comprehensive Financial Plan ___________.
a. High time commitment is required from the investor / client
b. High time commitment is required from the planner
c. High time commitment is required both from the client and planner
d. Not much time commitment as all the planning is done in the computer

Ans: (c) A comprehensive financial plan calls for significantly more time
commitment on the part of both the investor and the financial planner. The steps
in creating a comprehensive financial plan are as follows:
- Establish and Define the Client-Planner Relationship
- Gather Client Data, Define Client Goals
- Analyse and Evaluate Client's Financial Status
- Develop and Present Financial Planning Recommendations and / or Options
- Implement the Financial Planning Recommendations
- Monitor the Financial Planning Recommendations
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21. If an investor wishes to beat the benchmark and is also ready to bear the
risks, then he should opt for Actively managed funds. State True or False?
a. True
b. False

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Ans: (a) Actively managed funds are funds where the fund manager has the
flexibility to choose the investment portfolio. The fund manager invests in better
performing sectors so that the returns are better than the benchmark index.
However, this strategy could also give lower or negative returns if the fund
managers predictions go wrong.
22. Amongst the below given options, which one is NOT an example of Transition
Phase?
a. house to be purchased
b. trying to get a better job
c. children's higher education
d. marriage approaching

Ans: (b) Transition is a phase when financial goals are in the horizon. As funds
will be soon required, investors tend to increase the proportion of their portfolio in
liquid assets.
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23. What is the NAV if the value of stocks in a Mutual Fund scheme is Rs. 100 cr,
Value of Bonds is Rs. 10 cr, Value of Money Market Instruments is Rs. 25 cr,
Dividend Accrued but not received is Rs. 3 cr and Fees payable is Rs. 5 cr. The
number of outstanding units is 75 lacs.
a. 173.33
b. 177.33
c. 184
d. 186.74

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Ans: (b) NAV = (Value of stocks + Value of bonds + Value of money market
instruments + Dividend accrued but not received + Interest accrued but not
received - Fees payable) / No. of outstanding units.
= 100 cr + 10 cr + 25 cr + 3 cr + 0 - 5 cr / 75 lacs
= 133 cr / 75 lacs = 177.33
24. _________ is a basis to select the better scheme in Index Funds.
a. Tracking Error
b. Beta
c. 5 year performance
d. Fund Managers past record

Ans: (a) The difference between an index fund's return and the market return is
the tracking error. An index fund manager would seek to minimize the tracking
error. Because of the tracking error, the scheme performance could be higher or
lower than that of the benchmark.
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25. Which of the following is a truly international asset class?
a. Gold
b. Equity Share
c. Real Estate
d. Debt

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Ans: (a) Gold is a truly international asset class.
26. Gold ETF's are meant only for Fl's and Fll's - True or False ?
a. True
b. False

Ans: (b) Gold Exchange Traded Funds (ETF) can be bought even by retail
investors in small quantities like one unit (one gram).
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27. The __________is the phase when the earning years usually starts.
a. Young Unmarried
b. Young Married
c. Married with one children
d. During graduation

321
Ans: (a) The young unmarried is the phase when the earning years usually
starts.
28. An International Fund is investing in US stocks. What would be the impact
on it if US Dollar depreciates against the Indian Rupee?
a. The NAV of the scheme in Indian Rupees will depreciate
b. The NAV of the scheme in Indian Rupees will appreciate
c. No impact on the fund as its investing in stocks and not currency
d. None of the above

Ans: (a) International Equity funds: 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.
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29. Identify the TRUE statement with respect to benchmark for Gold ETFs.
a. CRISIL Gilt fund index is widely used as a benchmark for Gold
b. ETFs Gold ETFs are benchmarked against gold prices
c. There can be no benchmark for Gold ETFs
d. Internationally it is proven that there is no need of any type of benchmark for
Gold ETFs

322
Ans: (b) Gold price would be the benchmark for Gold Exchange Traded Funds
(ETFs).
30. Which of these funds are suitable for investors who have a long term
investment horizon and are looking for growth?
a. Income Funds
b. Long duration funds
c. Equity funds
d. Liquid funds

Ans: (c) Although equities as an asset class are volatile investments but over a
long duration of time they tend to give good growth. Income funds, Long duration
funds and Liquid funds are all debt funds the returns from them will only be the
interest received. They are more for security and steady returns and not for
growth.
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31. While choosing an Option in a Mutual Fund scheme, taxation and liquidity
needs are a major factor in deciding which option (Growth or Dividend Payout) to
go for. True or False?
a. True
b. False

323
Ans: (a) While choosing an Option in a Mutual Fund scheme, taxation and
liquidity needs are a major factor in deciding which option (Growth or Dividend
Payout) to go for.
32. Accumulation is the phase applicable to __________
a. Young Unemployed
b. Young Unmarried
c. 10th Pass
d. Retired Manager

Ans: (b) Accumulation is the stage when the investor gets to build his wealth. It
covers the earning years of the investor i.e. the phases of the life cycle from
young unmarried to Pre-retirement.
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33. An elderly couple who have no immediate family members should ideally
invest in _______
a. ELSS Funds
b. Debt Funds
c. Sectoral Funds
d. Blue Chip Equity Funds

324
Ans: (b) Debts funds carry the least amount of risk so they can be recommended
to the elderly couple. The other funds are Equity oriented and carry huge market
risks.
34. Gold ETF's cannot be bought by retail investors - True or False?
a. True
b. False

Ans: (b) Gold ETF's can be easily bought by retail investors as the minimum
traded quantity is 1 unit i.e. 1 gram.
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35. Mutual Fund offer various plans/options in accordance to the risk profile of
the investor - True or False?
a. True
b. False

325
Ans: (b) MF's have various SCHEMES like Large Cap Funds, Mid Cap Funds.
Sectoral Funds etc. to suit varied investment requirements. (Plans and Options
like Dividend / Growth etc. form a part of the scheme).
36. You are expecting interest rates (yields) to rise in the markets. Where would
you invest your money considering this forecast?
a. Long Terms Debt Funds
b. Short Term Debt Funds
c. Equity Funds
d. Banking Sector Funds

Ans: (b) If it is expected that interest rates would go up, it would be safer to go
with Short Term Debt Funds. As the rates rise, the short-term bonds would
mature, allowing the fund manager to deploy the proceeds at higher rates.
On the contrary, as interest rates in the market goes down, debt securities gain in
value. Therefore, long term debt funds would be sensible in declining interest
rate scenarios.
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37. An investor who has a long term view and is looking for capital appreciation
and also has high risk tolerance should opt for investments in _______
a. Gold
b. Equities
c. Fixed Deposits

326
d. High interest bearing junk bonds

Ans: (b) An investor who has a long term view and is looking for capital
appreciation and also has high risk tolerance should opt for investments in
Equities.
38. For a Young Unmarried - which of the following phase is applicable?
a. Accumulation
b. Distribution
c. Transfer
d. None of the above

Ans: (a) Accumulation is the stage when the investor gets to build his wealth. It
covers the earning years of the investor i.e. the phases of the life cycle from
Young Unmarried to Pre-Retirement.
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39. An investor wishes to invest in debt mutual funds but wants high liquidity -
should he invest in Fixed Maturity Plans ?
a. Yes
b. No

327
Ans: (b) Fixed maturity plans are a kind of debt fund where the investment
portfolio is closely aligned to the maturity of the scheme. AMCs tend to structure
the scheme around pre-identified investments. So it will not be easy to liquidate
the FMPs.
40. The floating rate debt securities tend to hold their value, despite changes in
yield in the debt market - True or False?
a. True
b. False

Ans: (a) Floating rate funds invest largely in floating rate debt securities i.e. debt
securities where the interest rate payable by the issuer changes in line with the
market. Since the interest rate itself keeps adjusting in line with the market, these
floating rate debt securities tend to hold their value, despite changes in yield in
the debt market.
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41.______________ gives the investor exposure to international assets.
a. Index funds
b. ELSS Fund
c. Arbitrage Funds
d. International Funds

328
Ans: (d) International funds invest in markets outside India, by holding certain
foreign securities in their portfolio.
42. Mr. A has a small business and will generally need more allocation to liquid
funds than Mr. B, who is a senior manager with a multinational company. - State
True or False?
a. True
b. False

Ans: (a) Mr. A may need funds for his business anytime so will allocate more
amounts to liquid funds. Mr. B has a good high-paying job, so he has a regular
flow of money in form of salary. He will generally have no liquidity problems and
will invest less in liquid funds and more in growth funds.
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43. When should an investor adopt a strategy of limiting equity exposure to index
funds?
a. In the Accumulation phase
b. In the Retirement phase
c. In the Sudden wealth phase
d. None of the above

329
Ans: (b) Investors in the retirement 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.
44. When the Capital Base of an investor rises, his or her risk appetite will tend
to___________.
a. decrease
b. increase
c. remain same
d. change randomly

Ans: (b) Higher the capital base, better the ability to financially take the
downsides that come with risk. For eg - A person with a capital of Rs. 1 crore can
take more risks than a person with Rs. 10000.
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45. For those investors who find it difficult to pay for insurance cover, Money
back policy is recommended - State True or False?
a. True
b. False

330
Ans: (c) Money back policy provides life coverage during the term of the policy
and the maturity benefits are paid in installments. It's ideal for individuals who
need regular income at their disposal and fulfils their financial goals
uninterrupted.
46. A person gets sudden wealth by winning a big lottery. Which of the below
options is NOT advisable for him?
a. Investment in STP for investing in equities
b. Investment in the liquid fund for a short period
c. Investment of the full amount inequities
d. Revisiting his financial plan

Ans: (c) 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 at one go.
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47. In the top-down approach, sector allocation precedes stock selection - True
or False?
a. True
b. False

331
Ans: (a) In a top-down approach, the portfolio manager decides how to distribute
the investible corpus between countries and sectors. Thereafter, the good stocks
within the identified sectors are selected for investment. Thus sector allocation is
a key decision. In a bottom-up approach, not much importance is given to the
country-allocation and sector-allocation. If a stock is good, it is picked for
investment.
48._____________style is an approach of picking up stocks, which are valued
lower, based on fundamental analysis.
a. Dividend Yield
b. Value Investing
c. Growth Investing
d. Top Down Approach

Ans: (b) Value investment style is an approach of picking up stocks, which are
priced lower than their intrinsic value, based on fundamental analysis. The belief
is that the market has not appreciated some aspect of the value in a company’s
share – and hence it is cheap. When the market recognizes the intrinsic value,
then the price would shoot up.
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49. For a life-long investment in gold, one should prefer Gold Futures as against
Gold ETF - True or False?
a. FALSE
b. TRUE

332
Ans: (a) Gold futures contracts are traded in commodity exchanges and have an
expiry date. Gold ETF on the other hand has no expiry date. They can be bought
and the delivery takes place in Demat Form which can be held as long as you
want.

333