NISM Series XIX-A · Unit 6 of 13 · about 10% of the paper
Risk and return: investor and fund perspective: NISM Series XIX-A notes and practice questions
The risks specific to private funds, how returns are measured and what they depend on.
What to know in Unit 6
- Risks: liquidity, valuation, concentration, manager.
- Return measures and drivers.
Key terms, examples and exam traps
Liquidity risk in AIFs
AIF investors cannot redeem on demand; capital is locked for the tenure and exit depends on the fund's realisations.
Example. An investor needs cash but the fund has two more years to run.
Exam trap. This statement is false: AIF units can be redeemed any day.
Valuation risk
Unlisted assets are valued by models and judgement, so reported NAV can differ from realised value.
Example. A fund's marked value drops when the asset is sold for less.
Exam trap. This statement is false: Valuation risk does not arise in private assets.
Concentration risk
AIFs often hold a small number of investments, so one failure can have a large impact on returns.
Example. A fund with ten investments loses heavily when one fails.
Exam trap. This statement is false: AIFs are always well diversified across hundreds of assets.
Manager and key-person risk
Returns depend on the skill and continuity of the manager's team; the departure of key people can damage a fund.
Example. A star investor leaves the fund house.
Exam trap. This statement is false: Manager risk does not matter for AIFs.
Leverage risk
Use of debt, at fund or investee level, amplifies gains and losses and may cause distress in downturns.
Example. An investee with heavy debt struggles when rates rise.
Exam trap. This statement is false: Leverage lowers the risk of losses.
Exit risk
The returns of a private fund rely on exits via IPO, sale or buyback, which depend on market conditions and may be delayed.
Example. A fund cannot list its investee because markets are weak.
Exam trap. This statement is false: Exit is guaranteed at the fund's tenure.
Regulatory and tax risk
Changes in law or tax treatment can reduce net returns or alter the structure.
Example. A change in tax rules reduces after-tax returns.
Exam trap. This statement is false: Regulations never change for AIFs.
Return expectations
Alternatives aim to deliver higher returns than listed markets as compensation for illiquidity and risk, but outcomes vary widely.
Example. A PE fund targets a premium over equity indices.
Exam trap. This statement is false: AIFs guarantee a return above listed markets.
Risk-adjusted performance
Because private assets are valued infrequently, volatility looks low; investors should look at drawdowns, dispersion and realised returns.
Example. An advisor looks at realised returns instead of reported NAV smoothness.
Exam trap. This statement is false: Low reported volatility proves low risk.
Dispersion of returns
The difference between top and bottom funds is large in private markets, so manager selection matters more than in listed funds.
Example. The best PE fund greatly outperforms the worst.
Exam trap. This statement is false: All funds in a category perform alike.
Fees and net returns
Management fees, carry and expenses reduce net returns, so investors compare returns after all costs.
Example. A fund's gross multiple looks good but net is lower after fees.
Exam trap. This statement is false: Gross returns are what investors receive.
Concentration limits as risk control
Regulatory limits on single-investee exposure help to reduce concentration risk in Category I and II AIFs.
Example. A fund cannot put more than 25% in one company.
Exam trap. This statement is false: There are no limits on a single investment.
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? The difference between top and bottom funds is large in private markets, so manager selection matters more than in listed funds.
- Fair value
- Venture capital
- Investor transfer rights
- Dispersion of returns
Q2. Which term is described here? Management fees, carry and expenses reduce net returns, so investors compare returns after all costs.
- Screening
- Fees and net returns
- IRR and MOIC
- Portfolio concentration review
Q3. Which term is described here? Unlisted assets are valued by models and judgement, so reported NAV can differ from realised value.
- Valuation risk
- Alternative Investment Fund
- Fair value
- Concentration of investor base
Q4. Which term is described here? Regulatory limits on single-investee exposure help to reduce concentration risk in Category I and II AIFs.
- Allocation of investments
- Investment manager
- Concentration limits as risk control
- Legal due diligence
Q5. Which statement best describes “Liquidity risk in AIFs”?
- Screening filters opportunities against the fund's strategy, size, sector and risk criteria before detailed work begins.
- Category I and II AIFs must be closed-ended with a minimum tenure of three years, and extension is allowed with investor consent.
- AIF investors cannot redeem on demand; capital is locked for the tenure and exit depends on the fund's realisations.
- Investments in associates and the manager's related parties need to be disclosed and approved by investors as per the regulations.
Q6. Which term is described here? Returns depend on the skill and continuity of the manager's team; the departure of key people can damage a fund.
- LLP and company forms
- Manager and key-person risk
- Active involvement
- Legal due diligence
Frequently asked questions
How much of NISM Series XIX-A comes from Unit 6?
Unit 6 (Risk and return: investor and fund perspective) 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 6?
Risks: liquidity, valuation, concentration, manager. Return measures and drivers.
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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