Fund structure and constituents: NISM Series V-A notes and practice questions

Q1. Which statement best describes “Mutual fund as a trust”?

1. Higher potential return generally comes with higher risk. Investors who want higher returns must accept greater volatility.
2. The RTA maintains unit holders' records, processes purchases and redemptions, and sends statements on behalf of the AMC.
3. 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.
4. In India a mutual fund is constituted as a public trust under the Indian Trusts Act, and the trust is registered with SEBI.

Q2. Which statement best describes “Registrar and Transfer Agent (RTA)”?

1. A good selection looks at risk-adjusted return, consistency over several periods, expense ratio, portfolio quality, fund manager continuity and fit with the investor's profile.
2. Strategic asset allocation sets long-term target weights based on the client's profile, which are maintained by periodic rebalancing.
3. The RTA maintains unit holders' records, processes purchases and redemptions, and sends statements on behalf of the AMC.
4. Absolute return is the percentage change in value over a period, ignoring how long it took. It is (end value − start value) ÷ start value.

Q3. Which term is described here? The custodian safekeeps the securities and settles the trades of the schemes, and is independent of the sponsor.

1. Gilt fund
2. Custodian
3. Switch
4. XIRR

Q4. Which term is described here? Trustees hold the fund's property in trust for unit holders and supervise the AMC. At least two-thirds of the trustees must be independent of the sponsor.

1. LTCG on equity funds
2. Risk capacity versus tolerance
3. Trustees
4. Gilt fund

Q5. Which statement about “Fund accountant and auditor” is correct?

1. The fund accountant maintains the scheme's books and computes NAV, while auditors independently audit the accounts.
2. Long-term equity gains are taxed from the first rupee.
3. The AMC may appoint the sponsor's auditor to the scheme.
4. The riskometer has only three levels: low, medium and high.

Q6. Which statement best describes “Asset Management Company (AMC)”?

1. The AMC is appointed by the trustees to manage the schemes' investments and operations. At least half of its directors must be independent of the sponsor.
2. A conflict of interest arises when the distributor's earnings could bias the advice; it must be disclosed and managed in the client's favour.
3. Mis-selling is selling a product that is unsuitable for the client or by misrepresenting its features, risk or returns.
4. Modified duration estimates the percentage change in a bond's price for a 1% change in yield. A higher duration means more interest-rate sensitivity.