NISM Series V-A · Unit 1 of 12 · about 6% of the paper
Concept and role of a mutual fund: NISM Series V-A notes and practice questions
A mutual fund pools money from many investors and invests it in securities under professional management. Unit 1 builds the vocabulary everything else rests on: units, NAV, diversification and why a fund is not a guarantee.
What to know in Unit 1
- Why pooling gives small investors access to diversified portfolios.
- How NAV changes and what it does not tell you.
- The difference between a mutual fund and a bank deposit.
- Types of funds by structure: open-ended, closed-ended, interval.
Key terms, examples and exam traps
Mutual fund
A mutual fund is a trust that pools money from many investors and invests it in securities such as shares and bonds, managed by professionals for the benefit of unit holders.
Example. Two hundred small investors put in ₹5,000 each and one team invests the combined sum across many companies.
Exam trap. This statement is false: A mutual fund guarantees a fixed return to every investor.
Unit
A unit is the smallest share of a mutual fund scheme's portfolio that an investor owns. The number of units held shows the investor's proportional ownership.
Example. An investor puts in ₹10,000 when the NAV is ₹20 and receives 500 of these.
Exam trap. This statement is false: Each unit always stays worth ₹10.
Net Asset Value (NAV)
NAV is the per-unit value of a scheme: total market value of its assets less its liabilities, divided by the number of units outstanding.
Example. A scheme has assets of ₹520 crore, liabilities of ₹20 crore and 25 crore units, so this is ₹20.
Exam trap. This statement is false: A fund with a low NAV is cheaper and therefore a better buy.
Diversification
Diversification means spreading investments across many securities, sectors or asset classes so that a fall in one has a limited effect on the whole portfolio.
Example. A scheme holds 50 stocks across many sectors, so one company's collapse barely moves its NAV.
Exam trap. This statement is false: Diversification removes all risk from a portfolio.
Professional management
Professional management means a qualified fund manager and research team select and monitor securities for the scheme, for a fee charged as part of the expense ratio.
Example. An investor with no time for research relies on a team that tracks companies full time.
Exam trap. This statement is false: Professional management guarantees returns above the market.
Open-ended scheme
An open-ended scheme accepts purchases and redemptions at NAV on every business day after launch and has no fixed maturity.
Example. An investor can buy more units or redeem on any working day long after the launch.
Exam trap. This statement is false: An open-ended scheme can be redeemed only on maturity.
Closed-ended scheme
A closed-ended scheme has a fixed maturity and units are bought during the NFO only; investors exit at maturity or by selling on a stock exchange where listed.
Example. A scheme with a three-year maturity lets investors in only during the launch period.
Exam trap. This statement is false: A closed-ended scheme allows fresh purchases daily from the fund house.
Interval scheme
An interval scheme combines open and closed features: units can be bought or redeemed only during specified intervals, and units are listed on exchanges.
Example. A scheme allows transactions only during two intervals each year.
Exam trap. This statement is false: An interval scheme lets investors transact on any day.
Risk in mutual funds
Mutual fund investments are subject to market risk. The value of units can rise and fall, and past performance does not assure future results.
Example. An investor sees her equity fund fall 12% in a month during a market correction.
Exam trap. This statement is false: Mutual funds are as safe as a bank fixed deposit.
Liquidity
Liquidity in mutual funds means that units of open-ended schemes can be redeemed on any business day at the applicable NAV, subject to exit loads and settlement time.
Example. An investor needs cash and redeems units of an open-ended scheme, receiving payment in a few working days.
Exam trap. This statement is false: All mutual fund units can be encashed instantly at any hour.
Transparency
Mutual funds disclose NAV daily, portfolios monthly and factsheets regularly, so investors can see where their money is invested.
Example. An investor reads last month's portfolio holdings published by the fund house.
Exam trap. This statement is false: Fund houses are not required to publish their holdings.
Economies of scale
Economies of scale mean that large pooled funds can buy securities in bulk and spread costs, lowering per-unit costs for investors.
Example. A big pooled fund pays lower dealing costs per rupee than a small individual investor.
Exam trap. This statement is false: Pooling increases the cost per unit for every investor.
6 practice questions
Read each question and choose your answer before opening the free mock, which shows the correct answer and the reason.
Q1. Which term is described here? Liquidity in mutual funds means that units of open-ended schemes can be redeemed on any business day at the applicable NAV, subject to exit loads and settlement time.
- Risk-return trade-off
- Liquidity
- Tactical asset allocation
- Debt valuation
Q2. Which statement best describes “Diversification”?
- The SID contains scheme-specific details: investment objective, asset allocation, strategy, risk factors, load structure, benchmark and fees.
- A change in a scheme's fundamental attributes needs a written notice to unit holders and an exit option at the prevailing NAV without exit load for at least 30 days.
- SEBI has banned upfront commission to distributors; commissions are now paid on a trail basis, to align the distributor's interest with the investor's.
- Diversification means spreading investments across many securities, sectors or asset classes so that a fall in one has a limited effect on the whole portfolio.
Q3. Which term is described here? An interval scheme combines open and closed features: units can be bought or redeemed only during specified intervals, and units are listed on exchanges.
- Applicable NAV
- Asset Management Company (AMC)
- Risk-return trade-off
- Interval scheme
Q4. Which term is described here? Economies of scale mean that large pooled funds can buy securities in bulk and spread costs, lowering per-unit costs for investors.
- Riskometer
- Equity-oriented fund
- Distributor channels
- Economies of scale
Q5. Which statement best describes “Open-ended scheme”?
- A Systematic Withdrawal Plan redeems a fixed amount of units at regular intervals, giving the investor a regular cash flow.
- Rebalancing means bringing the portfolio back to its target allocation by selling what has grown too large and buying what has fallen behind.
- An open-ended scheme accepts purchases and redemptions at NAV on every business day after launch and has no fixed maturity.
- TER is the annual percentage of a scheme's average assets charged for management, distribution and operating costs, and it is reflected in the daily NAV.
Q6. Which statement best describes “Mutual fund”?
- An investor can invest in cash in a mutual fund up to ₹50,000 per investor per mutual fund per financial year.
- Liquidity in mutual funds means that units of open-ended schemes can be redeemed on any business day at the applicable NAV, subject to exit loads and settlement time.
- A mutual fund is a trust that pools money from many investors and invests it in securities such as shares and bonds, managed by professionals for the benefit of unit holders.
- Beta measures a fund's sensitivity to the market. A beta of 1.2 means it is expected to move 20% more than the market.
Frequently asked questions
How much of NISM Series V-A comes from Unit 1?
Unit 1 (Concept and role of a mutual fund) usually carries about 6% of the questions. The whole exam has 100 questions and the pass mark is 50%.
What should I study in NISM Series V-A Unit 1?
Why pooling gives small investors access to diversified portfolios. How NAV changes and what it does not tell you. The difference between a mutual fund and a bank deposit. Types of funds by structure: open-ended, closed-ended, interval.
Are these NISM Series V-A practice questions free?
Yes. Take the full free mocks to see the correct answer and the reason for every question.
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