NISM Series V-A · Unit 3 of 12 · about 10% of the paper
Legal and regulatory environment: NISM Series V-A notes and practice questions
Mutual funds are among the most regulated products in India. This unit covers SEBI, AMFI, the rules distributors must follow, the scheme categories, disclosures and investor grievance routes.
What to know in Unit 3
- SEBI's role and the SEBI (Mutual Funds) Regulations.
- AMFI, ARN, EUIN and the Code of Conduct.
- SEBI's scheme categorisation and riskometer.
- Disclosures, KYC and grievance redressal.
Key terms, examples and exam traps
SEBI
The Securities and Exchange Board of India is the statutory regulator that registers and regulates mutual funds and protects investors under the SEBI (Mutual Funds) Regulations, 1996.
Example. A fund house must obtain a certificate of registration before launching schemes.
Exam trap. This statement is false: AMFI is the statutory regulator of mutual funds.
AMFI
The Association of Mutual Funds in India is the industry body of AMCs. It sets best practices, issues the ARN to distributors, and publishes the daily NAVs.
Example. A distributor applies for a registration number through the industry association.
Exam trap. This statement is false: AMFI makes the laws that bind mutual funds.
ARN
The AMFI Registration Number is a unique number issued to a distributor who has passed the NISM certification and follows the Code of Conduct. It must be renewed periodically.
Example. A certified distributor quotes her unique registration number on every application.
Exam trap. This statement is false: A distributor needs no registration to sell mutual funds.
EUIN
The Employee Unique Identification Number identifies the individual employee or relationship manager who advises on a transaction, even when an ARN of the firm is used.
Example. A bank's relationship manager's own code is entered on the investor's form.
Exam trap. This statement is false: An EUIN is allotted to every investor on investing.
Scheme categorisation
SEBI groups schemes into equity, debt, hybrid, solution oriented and other categories with defined definitions, and each AMC may offer only one scheme per category, with a few exceptions.
Example. A fund house cannot launch two large-cap schemes that differ only in name.
Exam trap. This statement is false: AMCs can name and define scheme types as they like.
Riskometer
The riskometer shows a scheme's risk on six levels: low, low to moderate, moderate, moderately high, high and very high, and is updated based on portfolio risk.
Example. A scheme's cover page displays a dial pointing to very high.
Exam trap. This statement is false: The riskometer has only three levels: low, medium and high.
Fundamental attribute change
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.
Example. A fund house changes a scheme's investment objective and gives holders a window to leave free of exit load.
Exam trap. This statement is false: Fund houses can change fundamental attributes without informing investors.
Portfolio disclosure
Mutual funds publish portfolios of all schemes monthly on their websites and with AMFI, and publish the half-yearly financial results.
Example. An investor checks last month's holdings on a fund house's site.
Exam trap. This statement is false: Portfolios are disclosed once a year only.
Cash investment limit
An investor can invest in cash in a mutual fund up to ₹50,000 per investor per mutual fund per financial year.
Example. A person tries to invest ₹80,000 in cash in one fund house in a year.
Exam trap. This statement is false: There is no limit on investing in cash.
KYC
Know Your Customer is mandatory for all mutual fund investors. It verifies identity and address, and the records are kept with a KYC registration agency.
Example. A first-time investor is asked for PAN, address proof and a photograph.
Exam trap. This statement is false: KYC is required only for investments above ₹10 lakh.
Stamp duty on units
Stamp duty is charged at 0.005% on the purchase of mutual fund units, including switches and SIP instalments.
Example. An investor sees a tiny deduction at the time units are allotted.
Exam trap. This statement is false: Stamp duty is charged on units only when redeemed.
SEBI SCORES / ODR
Investors can file complaints against AMCs and intermediaries through SEBI's complaint system, and use the online dispute resolution platform if not satisfied.
Example. A holder whose redemption was delayed lodges a complaint online with the regulator.
Exam trap. This statement is false: Complaints against AMCs can be made only to the sponsor.
Code of Conduct
AMFI's Code of Conduct requires distributors to act honestly, disclose commissions, give suitable advice, and not mislead investors.
Example. A distributor tells the client the commission he earns on the scheme.
Exam trap. This statement is false: The Code of Conduct allows promising assured returns.
Product labelling
Each scheme's cover and advertisements must describe the product in plain language: what the scheme is, suited for whom, and what risk level applies.
Example. A scheme's documents say it is suited to investors seeking long-term growth and carries very high risk.
Exam trap. This statement is false: Product labels are optional for equity schemes.
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? Mutual funds publish portfolios of all schemes monthly on their websites and with AMFI, and publish the half-yearly financial results.
- Portfolio disclosure
- Multi cap fund
- Economies of scale
- Riskometer
Q2. Which statement best describes “AMFI”?
- 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.
- The Association of Mutual Funds in India is the industry body of AMCs. It sets best practices, issues the ARN to distributors, and publishes the daily NAVs.
- A corporate bond fund invests at least 80% in the highest-rated (AA+ and above) corporate bonds.
- Credit risk is the chance that a bond issuer fails to pay interest or principal on time. Lower-rated issuers carry higher credit risk.
Q3. Which term is described here? Stamp duty is charged at 0.005% on the purchase of mutual fund units, including switches and SIP instalments.
- Stamp duty on units
- SWP
- Corporate bond fund
- Registrar and Transfer Agent (RTA)
Q4. Which statement best describes “ARN”?
- In 'anyone or survivor' mode, any holder can operate the folio; in 'joint', all must sign. On a holder's death the units go to the survivors.
- The AMFI Registration Number is a unique number issued to a distributor who has passed the NISM certification and follows the Code of Conduct. It must be renewed periodically.
- 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.
- XIRR is the annualised return when there are multiple cash flows on different dates, such as SIP instalments.
Q5. Which term is described here? 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.
- Risk-return trade-off
- SIP
- Sponsor
- Fundamental attribute change
Q6. Which statement best describes “Product labelling”?
- Each scheme's cover and advertisements must describe the product in plain language: what the scheme is, suited for whom, and what risk level applies.
- The offer document lists the risks specific to the scheme, such as credit risk for debt schemes, so that investors make informed decisions.
- The riskometer shows a scheme's risk on six levels: low, low to moderate, moderate, moderately high, high and very high, and is updated based on portfolio risk.
- Pure term insurance protects against loss of life; it should be separated from investment, and mutual funds are not insurance products.
Frequently asked questions
How much of NISM Series V-A comes from Unit 3?
Unit 3 (Legal and regulatory environment) usually carries about 10% 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 3?
SEBI's role and the SEBI (Mutual Funds) Regulations. AMFI, ARN, EUIN and the Code of Conduct. SEBI's scheme categorisation and riskometer. Disclosures, KYC and grievance redressal.
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.
Next
UpperCrust Academy is independent study material from UpperCrust Wealth. It is not affiliated with NISM, SEBI or AMFI. For education only. Not investment advice. Always confirm the latest syllabus and rules on the official NISM website.