NISM Series V-A · Unit 9 of 12 · about 10% of the paper
Mutual fund scheme selection: NISM Series V-A notes and practice questions
How to choose among thousands of schemes. This unit is mostly about SEBI's categories and what each is permitted to hold, plus the criteria a good distributor uses.
What to know in Unit 9
- Equity, debt, hybrid and solution-oriented categories.
- Market-cap definitions.
- Criteria for selecting a scheme.
Key terms, examples and exam traps
Large cap fund
A large cap fund invests at least 80% of its assets in the top 100 companies by market capitalisation.
Example. A scheme holds 85% in the 100 biggest listed companies.
Exam trap. This statement is false: A large cap fund invests mainly in companies ranked 251 onwards.
Mid cap fund
A mid cap fund invests at least 65% in companies ranked 101 to 250 by market capitalisation.
Example. A scheme keeps 70% in stocks ranked 101 to 250.
Exam trap. This statement is false: A mid cap fund invests mainly in the top 100 companies.
Small cap fund
A small cap fund invests at least 65% in companies ranked 251 and below by market capitalisation.
Example. A scheme invests mostly in companies outside the top 250.
Exam trap. This statement is false: A small cap fund must hold at least 80% in the top 100.
Multi cap fund
A multi cap fund must invest at least 25% each in large, mid and small cap stocks, and at least 75% in equity overall.
Example. A scheme must hold a quarter in each of three market-cap bands.
Exam trap. This statement is false: A multi cap fund can invest everything in large caps.
Flexi cap fund
A flexi cap fund invests at least 65% in equity with no restriction on market-cap allocation, so the manager can move across large, mid and small cap.
Example. A scheme can shift freely between large and small companies.
Exam trap. This statement is false: A flexi cap fund must hold 25% in each market-cap band.
Focused fund
A focused fund invests in a maximum of 30 stocks and at least 65% in equity, taking concentrated positions.
Example. A scheme holds just 25 stocks in its portfolio.
Exam trap. This statement is false: A focused fund holds more than 100 stocks.
ELSS
An Equity Linked Savings Scheme invests at least 80% in equity and has a three-year lock-in, and qualifies for the old tax regime deduction under Section 80C.
Example. An investor locks money in for three years to claim a deduction.
Exam trap. This statement is false: ELSS has a lock-in of one year.
Sectoral/thematic fund
A sectoral or thematic fund invests at least 80% in a particular sector or theme, such as banking or technology, and carries concentration risk.
Example. A scheme puts 85% of its money in a single industry.
Exam trap. This statement is false: A thematic fund is well diversified across all sectors.
Value and contra funds
A value fund follows a value strategy, and a contra fund follows a contrarian one, each investing at least 65% in equity; a fund house can offer only one of these two.
Example. A scheme buys out-of-favour stocks believing they are undervalued.
Exam trap. This statement is false: A value fund buys only stocks at record highs.
Overnight fund
An overnight fund invests in securities with a maturity of one day, so interest-rate and credit risk are very low.
Example. A scheme holds paper that matures the next day.
Exam trap. This statement is false: An overnight fund holds bonds of ten years' maturity.
Liquid fund
A liquid fund invests in debt and money-market securities with a maturity of up to 91 days.
Example. A scheme holds only paper maturing within three months.
Exam trap. This statement is false: A liquid fund holds securities of up to three years.
Gilt fund
A gilt fund invests at least 80% in government securities across maturities, so credit risk is negligible but interest-rate risk can be high.
Example. A scheme holds mostly central and state government bonds.
Exam trap. This statement is false: A gilt fund invests mainly in low-rated corporate bonds.
Credit risk fund
A credit risk fund invests at least 65% in corporate bonds rated AA and below, seeking higher yields at higher credit risk.
Example. A scheme chases higher yield by lending to lower-rated companies.
Exam trap. This statement is false: A credit risk fund holds only AAA-rated bonds.
Corporate bond fund
A corporate bond fund invests at least 80% in the highest-rated (AA+ and above) corporate bonds.
Example. A scheme holds mostly bonds of top-rated companies.
Exam trap. This statement is false: A corporate bond fund holds mostly AA-rated and below paper.
Aggressive hybrid fund
An aggressive hybrid fund invests 65% to 80% in equity and 20% to 35% in debt.
Example. A scheme keeps about 70% in equity and the rest in debt.
Exam trap. This statement is false: An aggressive hybrid fund holds less than 40% in equity.
Conservative hybrid fund
A conservative hybrid fund invests 10% to 25% in equity and 75% to 90% in debt.
Example. A scheme keeps 20% in equity and 80% in debt.
Exam trap. This statement is false: A conservative hybrid fund keeps 70% in equity.
Arbitrage fund
An arbitrage fund invests at least 65% in equity and equity-related instruments and profits from price differences between cash and futures markets; it is taxed as equity.
Example. A fund buys a share in the cash market and sells its future at a higher price.
Exam trap. This statement is false: An arbitrage fund takes a large one-sided view on stocks.
Index fund and ETF
An index fund or ETF replicates a market index, investing at least 95% in the index's securities, with low cost and no stock picking.
Example. A scheme mirrors the Nifty 50 with very low costs.
Exam trap. This statement is false: An index fund tries to beat its index through stock picking.
Solution-oriented funds
Retirement and children's funds have a lock-in of five years or until retirement age or the child turns 18, whichever is earlier.
Example. A scheme designed for a child's education has a five-year lock-in.
Exam trap. This statement is false: Solution-oriented funds have no lock-in.
Selection criteria
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.
Example. A distributor compares funds on several measures, not just last year's return.
Exam trap. This statement is false: Last year's top performer is always the best choice.
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? A mid cap fund invests at least 65% in companies ranked 101 to 250 by market capitalisation.
- Asset allocation pattern
- NPS
- Risk in mutual funds
- Mid cap fund
Q2. Which term is described here? An Equity Linked Savings Scheme invests at least 80% in equity and has a three-year lock-in, and qualifies for the old tax regime deduction under Section 80C.
- Disclosure of commission
- ELSS
- Rupee cost averaging
- Trustees
Q3. Which statement best describes “Arbitrage fund”?
- Gold is held as a hedge against inflation and uncertainty; it can be owned through physical gold, gold ETFs, sovereign gold bonds or gold funds.
- A closed-ended scheme has a fixed maturity and units are bought during the NFO only; investors exit at maturity or by selling on a stock exchange where listed.
- An arbitrage fund invests at least 65% in equity and equity-related instruments and profits from price differences between cash and futures markets; it is taxed as equity.
- Mutual fund units can be held in dematerialised form with a depository participant, in addition to a statement of account from the AMC.
Q4. Which term is described here? A large cap fund invests at least 80% of its assets in the top 100 companies by market capitalisation.
- XIRR
- Credit risk
- Credit risk fund
- Large cap fund
Q5. Which statement best describes “Sectoral/thematic fund”?
- A change of bank details needs a written request with proof of the new bank and is checked by the RTA; some schemes impose a cooling-off for large redemptions.
- A sectoral or thematic fund invests at least 80% in a particular sector or theme, such as banking or technology, and carries concentration risk.
- The cut-off time is the time of day by which a valid application with funds must be received to get that day's NAV. For most schemes it is 3:00 pm.
- A large cap fund invests at least 80% of its assets in the top 100 companies by market capitalisation.
Q6. Which statement best describes “Flexi cap fund”?
- A flexi cap fund invests at least 65% in equity with no restriction on market-cap allocation, so the manager can move across large, mid and small cap.
- Investors can file complaints against AMCs and intermediaries through SEBI's complaint system, and use the online dispute resolution platform if not satisfied.
- Liquidity risk is the chance a fund cannot sell securities quickly without a price discount, such as in thinly traded bonds.
- In India a mutual fund is constituted as a public trust under the Indian Trusts Act, and the trust is registered with SEBI.
Frequently asked questions
How much of NISM Series V-A comes from Unit 9?
Unit 9 (Mutual fund scheme selection) 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 9?
Equity, debt, hybrid and solution-oriented categories. Market-cap definitions. Criteria for selecting a scheme.
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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