NISM Series V-A · Unit 5 of 12 · about 8% of the paper
Fund distribution and channel management practices: NISM Series V-A notes and practice questions
Distributors are the bridge between investors and AMCs. This unit covers channels, plans, commissions, mis-selling and the practices expected of a professional.
What to know in Unit 5
- Direct versus regular plans.
- Trail commission and how distributors are paid.
- Mis-selling, churning and suitability.
Key terms, examples and exam traps
Direct plan
A direct plan is bought directly from the AMC without a distributor, so no commission is paid and the expense ratio is lower.
Example. An investor buys directly from the fund house's website and pays no distributor commission.
Exam trap. This statement is false: A direct plan always earns higher returns than a regular plan in every period.
Regular plan
A regular plan is bought through a distributor, who is paid a commission from the scheme's expense ratio, making its expense ratio higher than the direct plan's.
Example. An investor buys through an adviser who is paid from the scheme's costs.
Exam trap. This statement is false: A regular plan has the same expense ratio as the direct plan.
Trail commission
Trail commission is paid to a distributor as long as the investor stays invested, usually as a percentage of the assets he has brought in.
Example. A distributor earns a small percentage every year on the client's holding.
Exam trap. This statement is false: Trail commission is paid only once, on the day of investing.
Upfront commission
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.
Example. A distributor cannot take a lump sum at the time of purchase.
Exam trap. This statement is false: Distributors can still take a large upfront commission.
Mis-selling
Mis-selling is selling a product that is unsuitable for the client or by misrepresenting its features, risk or returns.
Example. A distributor sells a high-risk equity fund to a retired client who needs safety by promising assured returns.
Exam trap. This statement is false: Mis-selling happens only when the product is illegal.
Churning
Churning is persuading an investor to frequently switch schemes mainly to earn the distributor more commission, with little or no benefit to the investor.
Example. A distributor shifts a client's money between schemes every month without any reason.
Exam trap. This statement is false: Churning benefits the investor through lower costs.
Suitability
Suitability means recommending a product that fits the client's goals, risk profile, time horizon and financial situation.
Example. A distributor checks a client's horizon and risk tolerance before suggesting a scheme.
Exam trap. This statement is false: Suitability is determined only by the scheme's past return.
Disclosure of commission
A distributor must disclose to the investor all commissions received from the AMC for the transaction, in a transparent manner.
Example. A distributor tells the client how much she will earn on the recommended scheme.
Exam trap. This statement is false: Commissions are confidential and need not be disclosed.
Distributor channels
Mutual fund distribution channels include independent financial advisers, national distributors, banks, and online platforms and direct AMC routes.
Example. A client may invest through a bank branch, an independent adviser or an app.
Exam trap. This statement is false: The only channel to buy mutual funds is a bank branch.
Segregation of roles
A person cannot be both a registered investment adviser and a distributor for the same client; roles and fees must be kept clearly separate to avoid conflicts of interest.
Example. An adviser charging fees to a client cannot also earn distribution commission from the same client.
Exam trap. This statement is false: An adviser can charge a fee and also take commission from the same client.
Know Your Distributor
AMCs carry out due diligence on distributors and check that their ARN, certification and code compliance are valid before accepting business.
Example. An AMC checks that the distributor's registration is valid before paying commission.
Exam trap. This statement is false: AMCs pay commissions without checking the distributor's registration.
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 statement best describes “Mis-selling”?
- 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.
- Mutual fund schemes do not protect capital; only specific instruments like bank deposits (up to the insured limit) and some government schemes offer greater safety.
- The Public Provident Fund is a government-backed savings scheme with a 15-year tenure and tax-free interest, with limited liquidity.
- Mis-selling is selling a product that is unsuitable for the client or by misrepresenting its features, risk or returns.
Q2. Which statement best describes “Know Your Distributor”?
- 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.
- A TRI reflects both price changes and reinvested dividends of the index constituents, and is the proper benchmark for comparison with a fund's returns.
- 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.
- AMCs carry out due diligence on distributors and check that their ARN, certification and code compliance are valid before accepting business.
Q3. Which term is described here? 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.
- Regular plan
- Liquid fund
- Asset allocation
- Upfront commission
Q4. Which statement best describes “Suitability”?
- The sponsor must contribute at least 40% of the net worth of the AMC.
- SEBI sets maximum TER slabs that fall as a scheme's assets under management grow, so larger schemes charge a lower percentage.
- Suitability means recommending a product that fits the client's goals, risk profile, time horizon and financial situation.
- The Public Provident Fund is a government-backed savings scheme with a 15-year tenure and tax-free interest, with limited liquidity.
Q5. Which statement best describes “Segregation of roles”?
- AMCs carry out due diligence on distributors and check that their ARN, certification and code compliance are valid before accepting business.
- A person cannot be both a registered investment adviser and a distributor for the same client; roles and fees must be kept clearly separate to avoid conflicts of interest.
- 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.
- 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.
Q6. Which statement best describes “Churning”?
- Churning is persuading an investor to frequently switch schemes mainly to earn the distributor more commission, with little or no benefit to the investor.
- A minor's folio is operated by a guardian, and when the minor turns 18 a fresh KYC is needed, and the guardian's operation stops.
- Rebalancing means bringing the portfolio back to its target allocation by selling what has grown too large and buying what has fallen behind.
- XIRR is the annualised return when there are multiple cash flows on different dates, such as SIP instalments.
Frequently asked questions
How much of NISM Series V-A comes from Unit 5?
Unit 5 (Fund distribution and channel management practices) usually carries about 8% 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 5?
Direct versus regular plans. Trail commission and how distributors are paid. Mis-selling, churning and suitability.
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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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.