NISM Series XII · Unit 5 of 7 · about 20% of the paper
Mutual funds: NISM Series XII notes and practice questions
Mutual funds pool money from many investors. This chapter covers structure, NAV, scheme types, costs, SIP and what to read before investing.
What to know in Unit 5
- Structure of a mutual fund and its NAV.
- Scheme types: equity, debt, hybrid, index, ETF.
- SIP, expense ratio, exit load and riskometer.
- How to choose a fund.
Key terms, examples and exam traps
Mutual fund
A mutual fund pools money from many investors and invests it in securities through professional managers, and each investor owns units in proportion.
Example. A group of investors puts money together, and a team invests it for them.
Exam trap. This statement is false: A mutual fund guarantees returns.
NAV
The Net Asset Value is the per-unit value of a mutual fund scheme, calculated as total assets less liabilities divided by the units outstanding.
Example. A scheme with ₹500 crore net assets and 10 crore units has a value of ₹50 per unit.
Exam trap. This statement is false: NAV is the price paid for a share on the exchange.
Asset Management Company
The AMC manages the mutual fund's schemes and investments and is appointed by the trustees.
Example. A company runs the fund's portfolios and employs the fund managers.
Exam trap. This statement is false: The AMC owns the securities of the fund.
Open-ended fund
An open-ended fund allows investors to buy and sell units at NAV on any business day, with no fixed maturity.
Example. An investor redeems on any working day at the day's NAV.
Exam trap. This statement is false: An open-ended fund can be redeemed only at maturity.
Closed-ended fund
A closed-ended fund has a fixed maturity and units are bought during the offer period and redeemed at maturity, or traded on an exchange.
Example. A scheme with a three-year term takes money only at launch.
Exam trap. This statement is false: Closed-ended funds allow daily fresh purchases.
Equity fund
An equity fund invests mainly in shares and aims for long-term capital growth, with higher volatility.
Example. A fund holds mostly shares to build wealth over many years.
Exam trap. This statement is false: An equity fund invests mainly in government bonds.
Debt fund
A debt fund invests in fixed-income securities such as bonds, treasury bills and money-market instruments, aiming for stable income.
Example. A fund lends to governments and companies and earns interest.
Exam trap. This statement is false: A debt fund invests mostly in equity shares.
Hybrid fund
A hybrid fund invests in a mix of equity and debt to balance growth and stability.
Example. A scheme keeps 65% in equity and the rest in debt.
Exam trap. This statement is false: A hybrid fund invests only in gold.
Index fund
An index fund passively replicates a market index such as the Nifty 50, holding its stocks in the same weights, with low cost.
Example. A scheme tracks the Nifty 50 without trying to beat it.
Exam trap. This statement is false: An index fund tries to outperform the index through stock picking.
Exchange traded fund (ETF)
An ETF is a fund whose units trade on a stock exchange like a share and typically tracks an index or commodity.
Example. An investor buys units of a fund through her demat account during market hours.
Exam trap. This statement is false: An ETF can only be bought directly from the AMC at NAV.
Liquid fund
A liquid fund invests in debt and money-market securities maturing within 91 days, for parking short-term surplus.
Example. A company parks idle cash for a few weeks in a low-risk fund.
Exam trap. This statement is false: A liquid fund invests for 10 years in equity.
ELSS
An Equity Linked Savings Scheme is an equity fund with a three-year lock-in that qualifies for a tax deduction under the old tax regime.
Example. An investor locks funds for three years to claim a deduction.
Exam trap. This statement is false: ELSS has a one-year lock-in.
SIP
A Systematic Investment Plan invests a fixed amount at regular intervals, building discipline and averaging the cost of purchase.
Example. An investor puts ₹5,000 into a fund on the 5th of every month.
Exam trap. This statement is false: A SIP guarantees profit.
Rupee cost averaging
With a fixed amount invested regularly, more units are bought when NAV is low and fewer when it is high, reducing the average cost.
Example. A SIP buys more units when prices fall.
Exam trap. This statement is false: Rupee cost averaging removes market risk.
Expense ratio
The expense ratio is the annual percentage of a scheme's assets charged for managing it. It is built into the NAV.
Example. A fund with a 1% expense ratio retains ₹1 of every ₹100 each year for costs.
Exam trap. This statement is false: The expense ratio is a one-time charge when investing.
Exit load
Exit load is a fee charged when units are redeemed within a specified period, and it goes into the scheme.
Example. An investor redeems after 6 months and 1% is deducted.
Exam trap. This statement is false: Exit load is charged on all purchases.
Direct plan
A direct plan is bought directly from the AMC without a distributor, so it has a lower expense ratio than a regular plan.
Example. An investor buys on the fund house's website with no commission.
Exam trap. This statement is false: A direct plan has the highest expense ratio.
Riskometer
The riskometer is a gauge on each scheme showing its risk level on six levels from low to very high.
Example. A scheme's cover shows a dial reading very high.
Exam trap. This statement is false: The riskometer shows past returns.
Growth and IDCW options
In the growth option, gains stay invested and reflect in NAV. In the IDCW option, the fund may pay out part of the gains periodically, reducing NAV.
Example. An investor who wants regular cash payouts picks the income distribution option.
Exam trap. This statement is false: IDCW is a guaranteed dividend.
KYC for mutual funds
Investors must complete KYC with PAN and address proof before investing in mutual funds, and KYC is done once for the whole market.
Example. A new investor completes identity verification before her first purchase.
Exam trap. This statement is false: KYC is not required for small investments.
Past performance
Past performance does not guarantee future returns; investors should look at consistency, risk and costs rather than a single year's number.
Example. A fund topped the chart last year but may not repeat.
Exam trap. This statement is false: The best performer last year will stay best.
Fund manager
The fund manager is the person responsible for the investment decisions of a scheme, within its stated objective and asset allocation.
Example. A professional decides which securities the scheme buys.
Exam trap. This statement is false: The fund manager guarantees returns.
Portfolio disclosure
Mutual funds publish portfolios and factsheets regularly so that investors can see their holdings.
Example. An investor checks a scheme's top ten holdings in the monthly factsheet.
Exam trap. This statement is false: Portfolios are secret.
SEBI scheme categories
SEBI defines scheme categories and prevents AMCs from creating overlapping schemes with the same name and features, to make comparison easy.
Example. A fund house cannot offer two identical large-cap funds.
Exam trap. This statement is false: AMCs can define their own categories freely.
Tax on equity funds
Equity-oriented fund gains are taxed as short-term if held up to 12 months and long-term beyond that, at rates set by law.
Example. An investor sells units after 18 months and the gain is long-term.
Exam trap. This statement is false: Equity fund gains are tax free in all cases.
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 “Hybrid fund”?
- Investors must complete KYC with PAN and address proof before investing in mutual funds, and KYC is done once for the whole market.
- A retail individual investor is one who bids for shares worth up to ₹2 lakh in an issue.
- A hybrid fund invests in a mix of equity and debt to balance growth and stability.
- In a buyback, a company repurchases its own shares from shareholders, reducing the number of shares outstanding.
Q2. Which statement best describes “Rupee cost averaging”?
- A rupee today is worth more than a rupee tomorrow because it can be invested to earn a return.
- Speculation is taking a view on price direction and positions to profit from it, accepting the risk of loss.
- With a fixed amount invested regularly, more units are bought when NAV is low and fewer when it is high, reducing the average cost.
- A put option gives its buyer the right to sell the underlying at the strike price, and is used for protection or for gains when prices fall.
Q3. Which statement best describes “Growth and IDCW options”?
- A preferential allotment is the issue of shares to a select group of investors at a negotiated price, subject to regulatory pricing rules.
- In the growth option, gains stay invested and reflect in NAV. In the IDCW option, the fund may pay out part of the gains periodically, reducing NAV.
- Financial intermediaries connect savers and borrowers and add value through pooling, risk management and information.
- The money market deals in short-term debt instruments with a maturity of up to one year, such as treasury bills and commercial paper.
Q4. Which statement best describes “Fund manager”?
- A liquid fund invests in debt and money-market securities maturing within 91 days, for parking short-term surplus.
- The lot size is the fixed number of units in one derivatives contract, set by the exchange. Trading is in multiples of lots.
- A put option gives its buyer the right to sell the underlying at the strike price, and is used for protection or for gains when prices fall.
- The fund manager is the person responsible for the investment decisions of a scheme, within its stated objective and asset allocation.
Q5. Which statement best describes “Expense ratio”?
- A depository holds securities in electronic form and enables transfer of ownership through book entries. India has two: NSDL and CDSL.
- The expense ratio is the annual percentage of a scheme's assets charged for managing it. It is built into the NAV.
- The secondary market is where existing securities are bought and sold among investors, usually on a stock exchange, providing liquidity.
- Inflation is the sustained rise in the general price level, reducing the purchasing power of money.
Q6. Which statement best describes “SIP”?
- SEBI defines scheme categories and prevents AMCs from creating overlapping schemes with the same name and features, to make comparison easy.
- A liquid market allows securities to be bought and sold quickly with little effect on price, shown by tight spreads and high volumes.
- REITs and InvITs are trusts that pool money to invest in income-generating real estate and infrastructure and distribute most income to unit holders.
- A Systematic Investment Plan invests a fixed amount at regular intervals, building discipline and averaging the cost of purchase.
Frequently asked questions
How much of NISM Series XII comes from Unit 5?
Unit 5 (Mutual funds) usually carries about 20% of the questions. The whole exam has 100 questions and the pass mark is 60%.
What should I study in NISM Series XII Unit 5?
Structure of a mutual fund and its NAV. Scheme types: equity, debt, hybrid, index, ETF. SIP, expense ratio, exit load and riskometer. How to choose a fund.
Are these NISM Series XII practice questions free?
Yes. Take the full free mocks to see the correct answer and the reason for every question.
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