NISM Series V-A · Unit 8 of 12 · about 10% of the paper
Return, risk and performance of funds: NISM Series V-A notes and practice questions
Measuring what an investment has earned and at what risk. Unit 8 is where formulas such as CAGR, standard deviation, beta and Sharpe ratio live.
What to know in Unit 8
- Absolute return, CAGR and XIRR.
- Standard deviation, beta, alpha, Sharpe.
- Duration, yield to maturity and credit risk in debt funds.
- Benchmarks and total return indices.
Key terms, examples and exam traps
Absolute return
Absolute return is the percentage change in value over a period, ignoring how long it took. It is (end value − start value) ÷ start value.
Example. A ₹10,000 investment grows to ₹12,000 in total, and the gain is expressed as 20%.
Exam trap. This statement is false: Absolute return already adjusts for the length of time.
CAGR
Compound Annual Growth Rate is the constant yearly rate at which an investment would have grown to reach its final value, used for periods over one year.
Example. ₹1 lakh becomes ₹1.21 lakh in two years, which is 10% a year compounded.
Exam trap. This statement is false: CAGR is the simple average of each year's return.
XIRR
XIRR is the annualised return when there are multiple cash flows on different dates, such as SIP instalments.
Example. An investor wants the true annual return on a SIP made across many months.
Exam trap. This statement is false: XIRR can be used only for lump-sum investments.
Standard deviation
Standard deviation measures how much a fund's returns vary around its average. A higher figure means more volatility.
Example. Two funds earn the same average return, but one swings far more from year to year.
Exam trap. This statement is false: A higher standard deviation means lower risk.
Beta
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.
Example. A fund tends to rise 12% when the market rises 10%.
Exam trap. This statement is false: Beta measures the fund's absolute return.
Alpha
Alpha is the excess return of a fund over what its risk (beta) would predict, showing the value added by the fund manager.
Example. A fund earns 3% more than a CAPM-based expectation for its risk.
Exam trap. This statement is false: A negative alpha shows outperformance.
Sharpe ratio
The Sharpe ratio is the excess return over the risk-free rate per unit of standard deviation. A higher ratio means better risk-adjusted performance.
Example. Two funds have the same return, but one takes less volatility to achieve it and has the higher ratio.
Exam trap. This statement is false: The Sharpe ratio uses beta as its risk measure.
Tracking error
Tracking error is the standard deviation of the difference between an index fund's return and its benchmark's. A lower figure means closer replication.
Example. An index fund drifts a little from its index return every year.
Exam trap. This statement is false: A high tracking error is desirable for index funds.
Total Return Index (TRI)
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.
Example. A fund's return is compared with an index that includes dividends.
Exam trap. This statement is false: A price index is the preferred benchmark because it includes dividends.
Modified duration
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.
Example. A bond fund with a duration of 5 falls about 5% if yields rise 1%.
Exam trap. This statement is false: Duration measures the credit rating of the bond.
Yield to maturity (YTM)
YTM is the annualised return earned if a bond is held to maturity and all coupons are reinvested at the same rate.
Example. A bond's expected return if held until it matures is called its yield.
Exam trap. This statement is false: YTM is the coupon rate printed on the bond.
Credit risk
Credit risk is the chance that a bond issuer fails to pay interest or principal on time. Lower-rated issuers carry higher credit risk.
Example. A fund holding a low-rated company's bonds suffers when the company defaults.
Exam trap. This statement is false: Government securities carry the highest credit risk.
Interest rate risk
When interest rates rise, the prices of existing bonds fall and vice versa, which affects debt fund NAVs, especially of longer-duration funds.
Example. A long-duration gilt fund loses value when the central bank raises rates.
Exam trap. This statement is false: Bond prices rise when interest rates rise.
Risk-return trade-off
Higher potential return generally comes with higher risk. Investors who want higher returns must accept greater volatility.
Example. An investor wanting equity-like returns must accept bigger swings in value.
Exam trap. This statement is false: High returns can be earned without any additional risk.
Liquidity risk
Liquidity risk is the chance a fund cannot sell securities quickly without a price discount, such as in thinly traded bonds.
Example. A fund finds it hard to sell a bond that few people trade, except at a lower price.
Exam trap. This statement is false: Liquidity risk affects only equity funds.
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 “XIRR”?
- The fund accountant maintains the scheme's books and computes NAV, while auditors independently audit the accounts.
- A folio is the account number allotted by an AMC to an investor, under which all that investor's units in that fund house are recorded.
- XIRR is the annualised return when there are multiple cash flows on different dates, such as SIP instalments.
- Units in an NFO are typically offered at ₹10 each, with no assurance that this is a better price than existing schemes' NAV.
Q2. Which term is described here? YTM is the annualised return earned if a bond is held to maturity and all coupons are reinvested at the same rate.
- Yield to maturity (YTM)
- Folio
- Conflict of interest
- KYC
Q3. Which term is described here? 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.
- Risk-return trade-off
- NAV calculation
- Statement of Additional Information (SAI)
- Total Return Index (TRI)
Q4. Which statement best describes “Modified duration”?
- 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.
- Risk profiling assesses a client's capacity and willingness to take risk through questions on age, income, dependants, goals and past behaviour, and guides product choice.
- Tracking error is the standard deviation of the difference between an index fund's return and its benchmark's. A lower figure means closer replication.
- The fund accountant maintains the scheme's books and computes NAV, while auditors independently audit the accounts.
Q5. Which term is described here? Tracking error is the standard deviation of the difference between an index fund's return and its benchmark's. A lower figure means closer replication.
- Slab-wise TER
- Scheme-specific risk factors
- Tracking error
- Conservative hybrid fund
Q6. Which term is described here? When interest rates rise, the prices of existing bonds fall and vice versa, which affects debt fund NAVs, especially of longer-duration funds.
- Interest rate risk
- Documenting advice
- Ex-dividend NAV effect
- Code of Conduct
Frequently asked questions
How much of NISM Series V-A comes from Unit 8?
Unit 8 (Return, risk and performance of funds) 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 8?
Absolute return, CAGR and XIRR. Standard deviation, beta, alpha, Sharpe. Duration, yield to maturity and credit risk in debt funds. Benchmarks and total return indices.
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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