NISM Series XIX-A · Unit 5 of 13 · about 10% of the paper
AIF structuring: NISM Series XIX-A notes and practice questions
Legal forms, fund-of-funds, feeders and who the parties to a fund are.
What to know in Unit 5
- Trust, LLP and company.
- Parties to an AIF.
- Pass-through and feeder structures.
Key terms, examples and exam traps
Trust structure
Most AIFs are set up as trusts, with a trustee holding the fund's assets for investors as beneficiaries, giving flexibility and pass-through tax treatment.
Example. A fund is a trust with a trustee and beneficiaries.
Exam trap. This statement is false: Most AIFs are public limited companies.
LLP and company forms
An AIF can also be set up as a limited liability partnership or a company, but trusts are the most common form.
Example. A fund is structured as an LLP.
Exam trap. This statement is false: An AIF can only be a trust.
Sponsor
The sponsor is the person who sets up the AIF, and typically contributes capital and appoints the manager.
Example. The firm that creates the fund and invests its own money.
Exam trap. This statement is false: The sponsor is an investor with no role in formation.
Investment manager
The investment manager manages the fund's portfolio and operations under an investment management agreement, earning fees.
Example. A company makes the investment decisions of the fund.
Exam trap. This statement is false: The manager is an investor in the fund.
Trustee
The trustee holds the fund's assets in trust and is responsible for oversight and ensuring the fund follows its documents.
Example. An entity ensures the trust deed is complied with.
Exam trap. This statement is false: The trustee decides which companies to invest in.
Fund of funds
A fund of funds invests in other AIFs rather than directly in companies, adding diversification but another layer of fees.
Example. A Category II fund invests in several PE funds.
Exam trap. This statement is false: A fund of funds invests directly in start-ups.
Feeder fund
A feeder fund collects money from investors and invests it in a master fund, often used for foreign investors or to pool distributions.
Example. A fund channels investor money into a larger master fund.
Exam trap. This statement is false: A feeder fund invests in listed shares only.
Scheme versus fund
An AIF can launch multiple schemes under one registration, each with its own investors, strategy and tenure.
Example. A registered fund offers a new scheme every year.
Exam trap. This statement is false: An AIF can launch only one scheme.
Co-investment
Co-investment lets selected investors invest directly alongside the fund in a deal, often with lower fees, subject to regulatory conditions.
Example. An investor is offered a direct stake in a deal alongside the fund.
Exam trap. This statement is false: Co-investment is prohibited.
GIFT City funds
Funds set up in GIFT City's IFSC can pool money in foreign currency and are governed by a separate regulatory framework.
Example. A fund set up in the international financial centre raises dollar capital.
Exam trap. This statement is false: GIFT City funds are restricted to domestic rupee investing.
Pass-through
In a pass-through structure, income is taxed in the investors' hands rather than at the fund level, preserving the character of income.
Example. Investors are taxed on the fund's capital gains directly.
Exam trap. This statement is false: Pass-through means the fund pays all the tax.
Side pocket
A side pocket separates illiquid or distressed assets from the main portfolio so that exits and fees of other investors are not affected.
Example. A fund isolates a stuck investment for later realisation.
Exam trap. This statement is false: A side pocket merges all assets into one pool.
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 feeder fund collects money from investors and invests it in a master fund, often used for foreign investors or to pool distributions.
- Client suitability for AIFs
- Feeder fund
- Category III taxation
- Commitment
Q2. Which statement best describes “Trust structure”?
- The documents set conditions for transferring units, usually needing manager consent, as the fund is illiquid.
- Most AIFs are set up as trusts, with a trustee holding the fund's assets for investors as beneficiaries, giving flexibility and pass-through tax treatment.
- Legal DD reviews the offer documents, structure, regulatory standing and litigation to ensure investor protection.
- The difference between top and bottom funds is large in private markets, so manager selection matters more than in listed funds.
Q3. Which term is described here? A side pocket separates illiquid or distressed assets from the main portfolio so that exits and fees of other investors are not affected.
- Investee due diligence
- Sponsor
- Side pocket
- Last round price
Q4. Which term is described here? A fund of funds invests in other AIFs rather than directly in companies, adding diversification but another layer of fees.
- Term and extension
- Fund of funds
- Red flags
- Investment manager
Q5. Which term is described here? Funds set up in GIFT City's IFSC can pool money in foreign currency and are governed by a separate regulatory framework.
- Term sheet
- GIFT City funds
- Concentration of investor base
- Trustee
Q6. Which term is described here? The trustee holds the fund's assets in trust and is responsible for oversight and ensuring the fund follows its documents.
- Pass-through
- Trustee
- SEBI AIF Regulations 2012
- Team stability
Frequently asked questions
How much of NISM Series XIX-A comes from Unit 5?
Unit 5 (AIF structuring) usually carries about 10% of the questions. The whole exam has 100 questions and the pass mark is 60%.
What should I study in NISM Series XIX-A Unit 5?
Trust, LLP and company. Parties to an AIF. Pass-through and feeder structures.
Are these NISM Series XIX-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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