NISM Series XIX-A · Unit 8 of 13 · about 15% of the paper
Fund due diligence: investor perspective: NISM Series XIX-A notes and practice questions
The most important unit for a distributor: how to evaluate a fund before recommending it. Expect scenario questions.
What to know in Unit 8
- Manager track record and team.
- Strategy and terms review.
- Operational and legal due diligence.
- Red flags.
Key terms, examples and exam traps
Fund due diligence
Due diligence is the investor's independent assessment of a fund and its manager before committing, covering people, process, performance, terms and operations.
Example. A distributor reviews a fund thoroughly before recommending it to a client.
Exam trap. This statement is false: Due diligence is unnecessary if the fund is SEBI-registered.
Track record analysis
A manager's track record should be checked for realised returns, consistency, attribution and whether the team that earned it is still present.
Example. An adviser reviews a manager's exits and the team behind them.
Exam trap. This statement is false: Only unrealised mark-ups should be considered.
Team stability
Stability and depth of the investment team, incentives and succession are critical to the fund's success.
Example. A fund where senior members have left raises concerns.
Exam trap. This statement is false: Team changes have no effect on a fund.
Strategy fit
The fund's strategy should be clear, repeatable and consistent with the client's goals, risk appetite and horizon.
Example. A fund's focus on late-stage companies is compared with the client's needs.
Exam trap. This statement is false: Any strategy suits any client.
Alignment of interest
Alignment is shown by meaningful manager commitment, performance-linked pay and fees that reward results rather than assets alone.
Example. The manager invests a large sum of its own money.
Exam trap. This statement is false: Alignment means the manager has no money in the fund.
Fee review
Investors should review management fee, carry, hurdle, catch-up, expenses and clawback to understand their total cost.
Example. A distributor compares the fee structures of two funds.
Exam trap. This statement is false: Only the management fee matters.
Operational due diligence
ODD examines back-office systems, valuation process, compliance, custody and controls to check that the manager can run the fund reliably.
Example. A review of the fund's administrators, auditors and valuation policy.
Exam trap. This statement is false: Operational checks are not needed for good performers.
Legal due diligence
Legal DD reviews the offer documents, structure, regulatory standing and litigation to ensure investor protection.
Example. A lawyer checks the trust deed and the PPM.
Exam trap. This statement is false: Legal review is only about taxes.
Reference checks
Speaking with existing investors, investee CEOs and co-investors gives independent views on the manager's conduct and value addition.
Example. An adviser calls entrepreneurs the manager has backed.
Exam trap. This statement is false: References should be taken only from the manager.
Performance attribution
Attribution separates returns due to skill from those due to market conditions, leverage or one lucky investment.
Example. An adviser checks whether one deal produced most of the gains.
Exam trap. This statement is false: Attribution is the same as total return.
Portfolio concentration review
Reviewing the fund's concentration by company, sector and vintage reveals risks of overexposure.
Example. A fund has half its capital in one sector.
Exam trap. This statement is false: Concentration review is irrelevant for private funds.
Valuation policy review
Investors should check how the fund values holdings, how often, and who reviews valuations, to avoid inflated NAVs.
Example. A fund uses an independent valuer under a documented policy.
Exam trap. This statement is false: Valuations can be set by the manager without any policy.
Red flags
Red flags include unclear strategy, no track record, excessive fees, weak controls, related-party deals, resistance to disclosure and promised returns.
Example. A manager promises a return of 25% a year and refuses to share documents.
Exam trap. This statement is false: Promised high returns are a sign of safety.
Compliance and regulatory standing
Checking registration, past SEBI actions and compliance history helps assess the manager's integrity.
Example. An adviser checks the manager's regulatory record.
Exam trap. This statement is false: Past regulatory actions are irrelevant.
Concentration of investor base
A fund dependent on one or two large investors may face redemption or governance pressure; diverse investors are generally healthier.
Example. A fund where one investor holds most units.
Exam trap. This statement is false: A single large investor makes a fund safer.
Client suitability for AIFs
AIFs suit investors with surplus funds who can lock money for years and tolerate loss; not those needing liquidity.
Example. A client needing money in two years is not a fit.
Exam trap. This statement is false: AIFs suit every client regardless of horizon.
Documentation of due diligence
Distributors should document the due diligence and reasons for recommending a fund, to evidence suitability.
Example. A file records the checks made before recommending the fund.
Exam trap. This statement is false: Records of due diligence are unnecessary.
Ongoing manager review
Due diligence does not end at investment; monitoring continues through reports, meetings and performance reviews.
Example. An adviser reviews the fund's quarterly report each time it arrives.
Exam trap. This statement is false: After investing, no further review is needed.
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 “Alignment of interest”?
- Alignment is shown by meaningful manager commitment, performance-linked pay and fees that reward results rather than assets alone.
- Reviewing the fund's concentration by company, sector and vintage reveals risks of overexposure.
- Screening filters opportunities against the fund's strategy, size, sector and risk criteria before detailed work begins.
- Investors, especially large ones, negotiate on fees, governance rights, reporting, key-person triggers and transfer terms.
Q2. Which term is described here? ODD examines back-office systems, valuation process, compliance, custody and controls to check that the manager can run the fund reliably.
- Accredited investor
- Track record analysis
- Operational due diligence
- Term and extension
Q3. Which term is described here? A fund dependent on one or two large investors may face redemption or governance pressure; diverse investors are generally healthier.
- Concentration of investor base
- Strategy fit
- KYC and AML
- Client suitability for AIFs
Q4. Which statement best describes “Fee review”?
- The hurdle rate or preferred return is the minimum return investors must receive before the manager earns carry.
- Investors should review management fee, carry, hurdle, catch-up, expenses and clawback to understand their total cost.
- An AIF is a privately pooled investment vehicle that raises money from investors for investing as per a defined policy, regulated by SEBI.
- Screening filters opportunities against the fund's strategy, size, sector and risk criteria before detailed work begins.
Q5. Which term is described here? Red flags include unclear strategy, no track record, excessive fees, weak controls, related-party deals, resistance to disclosure and promised returns.
- Sponsor and manager commitment
- Valuation policy review
- Sponsor
- Red flags
Q6. Which statement best describes “Fund due diligence”?
- Category I and II AIFs enjoy pass-through status: income other than business income is taxed in the investors' hands, retaining its character.
- An AIF scheme cannot have more than 1,000 investors (200 for angel funds) as it raises money through private placement.
- Due diligence is the investor's independent assessment of a fund and its manager before committing, covering people, process, performance, terms and operations.
- Business income earned by a Category I or II AIF is taxed at the fund level and is not passed through.
Frequently asked questions
How much of NISM Series XIX-A comes from Unit 8?
Unit 8 (Fund due diligence: investor perspective) usually carries about 15% 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 8?
Manager track record and team. Strategy and terms review. Operational and legal due diligence. Red flags.
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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