NISM Series X-A · Unit 3 of 12 · about 9% of the paper
Mutual funds: NISM Series X-A notes and practice questions
Funds from an adviser's viewpoint: structure, categories, costs, taxation and how to compare schemes.
What to know in Unit 3
- Scheme categories and fit.
- Direct versus regular plans.
- Taxation of funds.
Key terms, examples and exam traps
Mutual fund structure
A mutual fund has a sponsor, trust, trustees and an AMC, supported by a custodian and RTA, and is regulated by SEBI.
Example. A three-tier structure oversees the investor's money.
Exam trap. This statement is false: A mutual fund is a bank deposit.
Direct plan for advisers
A registered investment adviser charging a fee should generally recommend direct plans to avoid receiving commissions.
Example. An adviser who charges a fee puts the client into the lower-cost plan.
Exam trap. This statement is false: An adviser charging a fee can also collect trail commission from the same client.
NAV
NAV is the per-unit value of a scheme, equal to total assets less liabilities divided by units outstanding.
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 price paid for shares on the exchange.
Equity fund categories
SEBI defines categories such as large cap, mid cap, small cap, flexi cap and ELSS, each with minimum equity allocations.
Example. A scheme must keep at least 80% in top-100 stocks to be called a large cap fund.
Exam trap. This statement is false: A large cap fund can hold any mix of stocks.
Debt fund risk
Debt funds are exposed to interest-rate risk, credit risk and liquidity risk, and returns are not guaranteed.
Example. A bond fund loses value when interest rates rise.
Exam trap. This statement is false: Debt funds are free of risk.
Hybrid funds
Hybrid funds combine equity and debt, with varied allocations, to balance growth and stability.
Example. A client wanting moderate risk holds a scheme with 65% equity and 35% debt.
Exam trap. This statement is false: Hybrid funds invest only in debt.
Expense ratio
The expense ratio is the annual charge as a percentage of a scheme's assets and reduces the investor's return.
Example. A scheme charging 1.5% costs the investor ₹1,500 yearly on ₹1 lakh.
Exam trap. This statement is false: The expense ratio is charged only at entry.
Exit load
Exit load is charged on redemption within a defined period and is credited to the scheme.
Example. A fund levies 1% if units are sold within a year.
Exam trap. This statement is false: Exit load is a commission paid to the adviser.
SIP
A Systematic Investment Plan invests a fixed sum at regular intervals and helps to average the purchase cost over time.
Example. A client invests ₹10,000 monthly in a fund.
Exam trap. This statement is false: A SIP assures positive returns.
Riskometer
The riskometer shows a scheme's risk on six levels from low to very high, and should match the client's risk profile.
Example. An adviser compares the scheme's risk label with the client's tolerance.
Exam trap. This statement is false: Riskometer shows the scheme's past return.
Tax on mutual funds
Equity-oriented funds are taxed on short- and long-term gains at different rates, while specified debt funds are taxed at the investor's slab rate.
Example. A debt fund gain is added to the investor's total income.
Exam trap. This statement is false: All mutual fund gains are tax-free.
Fund selection
An adviser compares funds on risk-adjusted return, consistency, costs, portfolio quality and fit with the client's goals, not just recent performance.
Example. An adviser reviews five-year rolling returns, not just last year.
Exam trap. This statement is false: The previous year's best fund is always the right choice.
ETF and index funds
ETFs and index funds replicate an index at low cost; ETFs trade on exchanges while index funds are bought from the AMC.
Example. A client buys a low-cost fund that mirrors the Nifty 50.
Exam trap. This statement is false: ETFs are bought only through the AMC at NAV.
Portfolio overlap
Holding several funds with similar portfolios increases overlap and reduces diversification benefits.
Example. A client owns five large-cap funds with the same top holdings.
Exam trap. This statement is false: More funds always mean better diversification.
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? Hybrid funds combine equity and debt, with varied allocations, to balance growth and stability.
- Post-tax return
- Hybrid funds
- National Pension System
- Government securities market
Q2. Which term is described here? Exit load is charged on redemption within a defined period and is credited to the scheme.
- Repo rate
- Exit load
- InvIT
- Term insurance
Q3. Which statement best describes “Debt fund risk”?
- A bucket strategy divides retirement money into near-term cash, medium-term income and long-term growth buckets.
- Human life value estimates the present value of the future income of a person that his family would lose on his death.
- Debt funds are exposed to interest-rate risk, credit risk and liquidity risk, and returns are not guaranteed.
- The primary market creates new securities and the secondary market trades existing ones, giving liquidity to investors.
Q4. Which term is described here? A mutual fund has a sponsor, trust, trustees and an AMC, supported by a custodian and RTA, and is regulated by SEBI.
- Mutual fund structure
- Benchmarking
- Safe withdrawal rate
- Rebalancing
Q5. Which term is described here? Holding several funds with similar portfolios increases overlap and reduces diversification benefits.
- Safe withdrawal rate
- Record keeping
- Portfolio overlap
- Recurring deposit
Q6. Which statement best describes “Direct plan for advisers”?
- A fixed deposit gives a fixed return for a fixed period, with capital safety up to the deposit insurance limit and interest taxable at slab rates.
- An AIF is a privately pooled fund investing in non-traditional assets and strategies, with a minimum investment of ₹1 crore.
- A registered investment adviser charging a fee should generally recommend direct plans to avoid receiving commissions.
- A power of attorney authorises another person to act for the principal in specified matters, and ends on the principal's death.
Frequently asked questions
How much of NISM Series X-A comes from Unit 3?
Unit 3 (Mutual funds) usually carries about 9% of the questions. The whole exam has 100 questions and the pass mark is 60%.
What should I study in NISM Series X-A Unit 3?
Scheme categories and fit. Direct versus regular plans. Taxation of funds.
Are these NISM Series X-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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