NISM Series V-A · Unit 6 of 12 · about 10% of the paper
Accounting, valuation and taxation: NISM Series V-A notes and practice questions
How is NAV worked out, what costs are charged to investors, and how are gains taxed? This unit mixes formulas with rules and is heavily tested.
What to know in Unit 6
- NAV calculation and valuation of securities.
- Expense ratio and exit load.
- Taxation of equity, debt and hybrid funds.
Key terms, examples and exam traps
NAV calculation
NAV equals the market value of the scheme's assets less its liabilities, divided by units outstanding, and is declared every business day.
Example. A scheme's net assets are ₹1,000 crore and it has 50 crore units outstanding, so the value per unit is ₹20.
Exam trap. This statement is false: NAV is declared once a week.
Equity valuation
Listed equity shares are valued at the closing price on the principal stock exchange on the valuation day.
Example. A scheme values its holding of a listed company at the exchange closing price.
Exam trap. This statement is false: Shares are valued at the price at which they were bought.
Debt valuation
Debt securities are valued at prices provided by SEBI-approved valuation agencies appointed by AMFI, to ensure uniform valuation across funds.
Example. Two fund houses holding the same bond use the same price from an independent agency.
Exam trap. This statement is false: Each AMC values bonds as it sees fit.
Total expense ratio (TER)
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.
Example. A scheme's NAV is net of annual running charges that fund investors never see as a bill.
Exam trap. This statement is false: TER is deducted separately from the investor's bank account.
Slab-wise TER
SEBI sets maximum TER slabs that fall as a scheme's assets under management grow, so larger schemes charge a lower percentage.
Example. A very large scheme is permitted a lower maximum expense ratio than a small one.
Exam trap. This statement is false: The maximum TER rises as the scheme grows.
Exit load
Exit load is a charge levied when units are redeemed within a stated period. It is credited to the scheme, not kept by the AMC.
Example. An investor redeems within a year and has 1% deducted from the proceeds, which is returned to the scheme.
Exam trap. This statement is false: Exit load is paid to the distributor.
Entry load
SEBI has abolished entry load; no fee can be deducted from the investor's money at the time of purchase.
Example. An investor invests ₹10,000 and all of it is invested, with none deducted as load.
Exam trap. This statement is false: Entry load of 2.25% is still allowed on purchases.
STCG on equity funds
Gains on equity-oriented funds sold within 12 months are short-term and taxed at 20%.
Example. An investor sells an equity fund after eight months and pays the short-term rate.
Exam trap. This statement is false: Short-term equity gains are exempt from tax.
LTCG on equity funds
Gains on equity-oriented funds held over 12 months are taxed at 12.5% on the amount above ₹1.25 lakh in a financial year.
Example. An investor's long-term gain in a year is ₹3 lakh and only the portion above the exemption is taxed.
Exam trap. This statement is false: Long-term equity gains are taxed from the first rupee.
Equity-oriented fund
For tax purposes, an equity-oriented fund invests at least 65% of its assets in equity shares of domestic companies.
Example. A scheme holding 70% in domestic shares qualifies for equity tax treatment.
Exam trap. This statement is false: A scheme with 40% equity is equity-oriented.
Specified mutual fund
A specified mutual fund invests more than 65% in debt and money-market instruments. Gains on units bought from April 2023 are taxed at the investor's slab rate regardless of holding period.
Example. A debt fund bought in 2024 and held for four years is taxed at the investor's slab rate.
Exam trap. This statement is false: A debt fund held beyond three years gets indexation benefit.
IDCW taxation
Income distribution cum capital withdrawal payouts are added to the investor's income and taxed at the slab rate, with TDS where applicable.
Example. An investor receives a dividend from a scheme and adds it to total income.
Exam trap. This statement is false: IDCW is tax-free in the hands of all investors.
STT
Securities Transaction Tax is levied on the redemption of equity-oriented fund units; there is no STT on purchase, and none on debt funds.
Example. An investor sells equity fund units and a small tax is deducted on the sale value.
Exam trap. This statement is false: STT is charged on every purchase of mutual fund units.
Ex-dividend NAV effect
When an IDCW is paid, the scheme's NAV falls by the amount paid, so the investor's wealth is unchanged before tax.
Example. A scheme pays ₹2 per unit and its NAV drops by ₹2 the same day.
Exam trap. This statement is false: IDCW is extra money that does not reduce NAV.
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? Gains on equity-oriented funds sold within 12 months are short-term and taxed at 20%.
- SWP
- Multi cap fund
- Fund accountant and auditor
- STCG on equity funds
Q2. Which term is described here? SEBI has abolished entry load; no fee can be deducted from the investor's money at the time of purchase.
- Index fund and ETF
- Financial plan
- Entry load
- Flexi cap fund
Q3. Which statement best describes “Slab-wise TER”?
- A plan should be reviewed at least once a year and on major life events, and rebalanced to the target allocation.
- A glide path gradually reduces equity and raises safer assets as a goal date approaches, to protect accumulated gains.
- SEBI sets maximum TER slabs that fall as a scheme's assets under management grow, so larger schemes charge a lower percentage.
- The RTA maintains unit holders' records, processes purchases and redemptions, and sends statements on behalf of the AMC.
Q4. Which term is described here? 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.
- Total expense ratio (TER)
- Liquidity risk
- Dividend or IDCW payout timeline
- NAV calculation
Q5. Which term is described here? Exit load is a charge levied when units are redeemed within a stated period. It is credited to the scheme, not kept by the AMC.
- Cut-off time
- Mid cap fund
- Conflict of interest
- Exit load
Q6. Which term is described here? A specified mutual fund invests more than 65% in debt and money-market instruments. Gains on units bought from April 2023 are taxed at the investor's slab rate regardless of holding period.
- Model portfolio
- Specified mutual fund
- Documenting advice
- Disclosure of commission
Frequently asked questions
How much of NISM Series V-A comes from Unit 6?
Unit 6 (Accounting, valuation and taxation) 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 6?
NAV calculation and valuation of securities. Expense ratio and exit load. Taxation of equity, debt and hybrid funds.
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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