NISM Series V-D · Unit 3 of 12 · about 8% of the paper
Distribution, NAV, expenses and tax: NISM Series V-D notes and practice questions
How funds are sold, how NAV and TER work and how mutual fund income is taxed.
What to know in Unit 3
- Distribution channels.
- NAV and TER.
- Taxation of gains.
Key terms, examples and exam traps
Net asset value
NAV is the net assets of a scheme after liabilities divided by units outstanding, and is the price at which units are bought and sold.
Example. A scheme with ₹100 crore net assets and 5 crore units has a NAV of ₹20.
Exam trap. This statement is false: NAV is the market price set by supply and demand.
Total expense ratio
TER is the annual cost of running a scheme as a percentage of assets, charged to the scheme and reflected in NAV.
Example. A 1% TER reduces the return the investor sees by 1% a year.
Exam trap. This statement is false: TER is paid by the investor separately at purchase.
Direct and regular plans
A direct plan has no distributor commission and a lower TER, while a regular plan includes distributor commission in its expenses.
Example. A client buying through a distributor holds the regular plan.
Exam trap. This statement is false: A direct plan costs more than a regular plan.
Exit load
Exit load is a charge deducted on redemption within a stated period and goes to the scheme, reducing the amount the investor receives.
Example. A 1% exit load on redemption within one year reduces the proceeds.
Exam trap. This statement is false: Exit load is charged on all units regardless of holding period.
Cut-off time
Applications for liquid funds and others are allotted the NAV of the day only if received before the cut-off time, otherwise the next day's NAV applies.
Example. A purchase after the cut-off time gets the next day's NAV.
Exam trap. This statement is false: Any time of the day gets the same day's NAV.
Stamp duty on units
Stamp duty is charged at 0.005% on purchase of units, including switches and SIP instalments.
Example. A small deduction appears at allotment.
Exam trap. This statement is false: Stamp duty is charged only on redemption.
Equity fund taxation
Gains on equity-oriented funds are short-term if sold within 12 months, taxed at 20%, and long-term above that, taxed at 12.5% above ₹1.25 lakh in a year (as at writing).
Example. An investor with ₹3 lakh long-term gain pays tax on the amount above ₹1.25 lakh.
Exam trap. This statement is false: Equity fund gains are tax-free.
Taxation depends on portfolio
How a fund is taxed depends on the nature of its underlying portfolio, so distributors must check the scheme's tax treatment from its documents before advising.
Example. A distributor checks how the scheme is classified for tax.
Exam trap. This statement is false: All schemes are taxed alike.
Distributor commission
AMCs pay trail commission to distributors for regular plans and this must be disclosed to investors.
Example. A distributor tells the client how she is paid.
Exam trap. This statement is false: Commission is hidden from the investor.
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? Applications for liquid funds and others are allotted the NAV of the day only if received before the cut-off time, otherwise the next day's NAV applies.
- Three-tier structure
- Clearing corporation
- Gross exposure cap
- Cut-off time
Q2. Which term is described here? How a fund is taxed depends on the nature of its underlying portfolio, so distributors must check the scheme's tax treatment from its documents before advising.
- Who uses IRDs
- Inflation and real return
- Basis risk in IRF
- Taxation depends on portfolio
Q3. Which statement best describes “Stamp duty on units”?
- A long-short equity fund buys stocks expected to rise and uses futures or options to short those expected to fall, reducing market exposure.
- A holder of bonds fears a rise in yields and hedges by selling interest rate futures to offset the fall in bond values.
- Stamp duty is charged at 0.005% on purchase of units, including switches and SIP instalments.
- One basis point is one hundredth of a percentage point, so 100 basis points equal 1%.
Q4. Which term is described here? AMCs pay trail commission to distributors for regular plans and this must be disclosed to investors.
- Distributor commission
- Futures P&L
- ARN and EUIN
- Scheme categorisation
Q5. Which term is described here? TER is the annual cost of running a scheme as a percentage of assets, charged to the scheme and reflected in NAV.
- Interest rate derivative
- T-bill futures
- Government securities
- Total expense ratio
Q6. Which statement best describes “Equity fund taxation”?
- Accredited investors are exempt from the ₹10 lakh minimum investment.
- The SID contains the scheme's objective, strategy, risks, fees and other details an investor needs before investing.
- Selling futures against a stock portfolio offsets losses on the portfolio if the market falls, though it gives up gains on a rise.
- Gains on equity-oriented funds are short-term if sold within 12 months, taxed at 20%, and long-term above that, taxed at 12.5% above ₹1.25 lakh in a year (as at writing).
Frequently asked questions
How much of NISM Series V-D comes from Unit 3?
Unit 3 (Distribution, NAV, expenses and tax) usually carries about 8% of the questions. The whole exam has 150 questions and the pass mark is 60%.
What should I study in NISM Series V-D Unit 3?
Distribution channels. NAV and TER. Taxation of gains.
Are these NISM Series V-D 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.