1

NISM
LESSON 1
1. What is a mutual fund?
Vehicle to mobilize money from investors
To invest in different markets and securities
As per investment objectives

2. What do you understand by units?

Issued by mutual fund to the investors
Issued for the amount invested
Should be for a face value of Rs. 10 as per the law

3. What is unit capital?

The number of units issued by the mutual fund multiplied by its face value, that is, Rs. 10
The formula for calculating unit capital is:
Unit capital = Number of units x Face value

4. What is valuation gain?

The gain recorded by the mutual fund over and above the original investment or unit capital
It may be on the account of dividend or market appreciation

5. What is Net Asset Value (NAV)?

The true worth of a unit of the scheme

6. The formula for calculating NAV is:

NAV = Market value + Receivables – Payables

7. What is a New Fund Offer (NFO)? - New scheme first made available for investment

8. What is AUM? - Present or market value of a scheme

9. What are the advantages of mutual funds for investors? - The advantages of mutual funds for investors
are:
Diversification
Professional management
Liquidity
Tax benefit
Systematic approaches
Transparency
Investment comfort
Convenient options
Tax deferral
Well regulated
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10. What are the disadvantages of mutual funds for investors?

The disadvantages of mutual funds for investors are:
No tailor-made separate portfolio as in the case of Portfolio Management Scheme
Due to many schemes, it is difficult to choose

11. What is an open-ended fund?

Open for investors to enter or exit any time

12. What is a close-ended fund?

Fixed maturity
Joining only at the time of NFO
Trades in the stock exchange

13. What is an interval fund?

A combination of an open- and close-ended scheme
Largely close-ended but becomes open-ended at pre specified intervals

14. What is an actively managed fund?

Managing the funds through buying, selling and holding different securities
Managing within the overall objectives of the scheme

15. What is an actively managed fund?

Managing the funds through buying, selling and holding different securities
Managing within the overall objectives of the scheme

16. What is a passive fund?

Investment in different stocks, which are part of an index with the idea to track the index
Once the investment is made, the Fund Manager need not do anything
Performance of a mutual fund is similar to that of an index
Also known as index fund

17. What is an equity fund?

Investment in equity shares and equity-related investments, such as convertible debentures

18. What is a debt fund?

Investment in debt securities, such as treasury bills, government securities, bonds and debentures

19. What is a hybrid fund?

Investment in both equity and debt

20. What are the different types of debt funds?

The different types of debt funds are:
Gilt fund: Investment only in treasury bills and government securities
Diversified debt fund: Investment in a mix of government and non-government securities
Junk bond scheme or high yield bond: Investment in poor credit quality debts
Fixed maturity plan: Portfolio aligned to the maturity of the scheme
Floating rate fund: Investment in floating rate debt securities
Liquid or money market scheme: Investment in debt securities where the money is repaid within 91 days
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21. What are the different types of equity funds?

The different types of equity funds are:
Diversified equity fund: Investment in a diverse mix of securities
Sector fund: Investment in a specific sector, such as banking- or
gold-related companies
Thematic fund: Investment as per the investment theme:
Example: Infrastructure thematic fund may invest in the shares of companies that are into sectors, such as
construction, toll collection, cement, steel, telecom, power and so on
More broad-based than a sector fund but narrower than a diversified equity fund
ELSS:
With tax benefit for investment upto Rs. 1,00,000 under Section 80C
Lock-in period of three years
Equity income or dividend yield scheme: Investment in companies with good dividends
Arbitrage fund: Takes contrary positions in different markets or securities, takes advantage of price differential
and earns a return

22. What are the different types of hybrid funds?

The different types of hybrid funds are:
Monthly income plan: Declares dividend every month out of debt investment
Capital protected scheme: Original investment made is protected to be repaid and zero coupon securities are
purchased to align with the maturity date

23. Name some other types of funds.

Some other types of funds are:
Gold fund:
Gold exchange traded fund: Similar to index fund that invests in gold
Gold sector fund: Investment in companies, which are engaged in gold mining and processing
Real estate fund:
Investment in real estate
Permitted by law but yet to be launched in India
Commodity fund:
Investment in commodities
International fund:
Investment outside the country

24. Fund of funds:

Investment in various other funds
Exchange traded fund:
Open-ended index funds that are traded in the stock exchange
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NISM
Lesson 2 – Legal Structure of Mutual Funds

1. Who are the constituents of the legal structure of a mutual fund?

AMC
Sponsor
Mutual fund trust
Custodian
RTA
Trustee

2. Role of Sponsors and Trustee

Sponsors are the main people behind the mutual fund operation
They should have a sound track record and reputation or integrity in all business transactions
Five years of experience in financial services with positive net worth for each of those years
Latest net worth more than contribution to AMC
Net profit in three of the previous five years
Minimum 40% shareholding in AMC
Anyone holding more than 40% shareholding in AMC must also fulfill the conditions applicable for a Sponsor

3. A Trustee is a person of ability, integrity and standing

A person with moral turpitude cannot be a Trustee
A person convicted for economic offence or violation of any security laws cannot be appointed as a Trustee
A Sponsor appoints at least four Trustees
A Trustee company should have a minimum of four Directors
At least two-third of the Trustees or Directors are independent Trustees

4. Concept of AMC
Day-to-day operations are handled by the Directors with adequate professional experience in finance- and
financial services-related field
Directors should not have been found guilty of moral turpitude or convicted for any economic offence or
violation of any security laws
Key personnel should not have worked for any AMC or mutual fund when its registration was suspended or
cancelled at any point of time
Trustee’s approval is required for appointing the Director of the AMC board
At least 50% of the Directors should be independent
Minimum net worth of Rs. 50 crores
5. Termination by a majority of Trustees or by 75% of unit holders
Any change in AMC is subject to SEBI and unit holder’s approval
An AMC usually has:
Managing Director (MD)
Executive Director or CEO
Chief Investment Officer
Securities Analysts
Securities Dealers
Chief Marketing Officer
Chief Operations Officer
Compliance Officer
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6. Role of Auditors and Fund Accountant

Appointed for audit of accounts
Scheme Auditor cannot be an Auditor of AMC
Scheme Auditors are appointed by the Trustees and AMC Auditor is appointed by the AMC
Fund Accountant calculates the NAV
AMC can handle this activity in-house or engage a service provider

7. Who is a Distributor?
Sells units to investors
Must pass the certificate test and register with AMFI

8. What is the role of collecting bankers?

Appointed by the AMC to:
Collect and keep the funds of schemes
Make payments as per the instructions

NISM
Lesson 3 – Role of SEBI

1. What does SEBI regulate?

Mutual funds
Depositories
Custodians
Registrars and transfer agents
Stock exchanges

2. Who regulates the money market and foreign exchange market in the country?
Reserve Bank of India regulates the money market and foreign exchange market in the country
MFs therefore, need also to comply with RBI’s regulations regarding investment in money market, investments
outside India, investments from people other than resident Indians, besides SEBI regulations
MFs also need to comply with rules of the stock exchanges having business relationship with:
Provision exits for appeal against SEBI ruling with SAT (Securities Appellate Tribunal)

3. SROs – prime responsibility to regulate their own members

Lay down broad policy frame work
Leave micro-regulation to SRO
Examples – Stock exchanges, ICAI (Institute of Chartered Accountants of India)
No SRO as yet in MF industry
Statutory regulatory bodies such as SEBI, lays down the broad policy framework within which SROs can operate
and form their own micro regulation:
Example – Stock exchanges

4. AMFI- Is an industry body created to promote interests of MF industry like CII & NASSCOM
AMCs in India are members of the AMFI.AMFI is not an SRO

5. Is the status of AMFI that of an SRO?

No, because SEBI has not authorized AMFI to be so.Therefore, mutual funds are directly regulated by SEBI

6. What is the status of AMFI?

AMCs in India are members of AMFI
An industry body to promote interests of the mutual fund industry
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7. What is the AMFI Code of Ethics (ACE)?

Sets the standard of good practices for AMC operations
Supplements the Fifth Schedule of the regulation of SEBI

8. What is AGNI?
AGNI stands for AMFI Guidelines and Norms for Intermediaries
Sets guidelines and code of conduct for intermediaries (individual agents, brokers, distribution houses and banks
engaged in selling mutual fund products)
Mandatory as per SEBI

9. What happens when there is a breach of code of conduct by an intermediary?

AMFI seeks explanation by giving three weeks’ time.
If the explanation is not received or is unsatisfactory, AMFI sends a warning letter indicating that any
subsequent violation will result in cancellation of the AMFI registration
If there is proved second violation, registration may be cancelled

10. Due diligence process by AMCs for distributors -Applicable to those AMCs satisfying following conditions;
Multiple point presence (>20 locations)
AUM raised > ` 100 crores across industry in non-institutional category including HNIs
Received commission > ` 1 cr. across industry
Received commission > ` 50 lacs from a single MF

10. Investment objective:

Defines the broad investment charter
Part of Offer Document (OD)

11. Investment policy:

Describes in greater detail the kind of portfolio that will be maintained
Part of OD

12. Investment strategy:

Goes into details, Not a part of OD, Decided more frequently

13. What is the time limit to allot units or refund money in case of NFOs?
Five business days of closure of NFO (not applicable for ELSS)

14. What is the time limit to reopen an ongoing sale or repurchase for an open-ended scheme?
Five business days of allotment (other than ELSS)

15. What is the time limit for sending a statement of account for an investment?

i. For NFO:
Five business days of closure of NFO

ii. For post NFO investment:

Ten working days of the investment

iii. For SIP/STP/SWP:

Within 10 working days
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16. What is the time limit for sending a statement of account on an ongoing basis?
Once, in every calendar quarter within 10 working days of the end of quarter
On specific request, within five working days without any cost
To dormant investors who have not transacted during previous 6 months – To be sent along with portfolio
statement /annual return
If mandated by investor soft copy to be e-mailed every month without any cost

17. What is a unit certificate? How is it different from the statement of account?
i. Unit certificate:
Mentions only the number of units held by an investor
Non transferable
If a unit holder asks for it, it should be provided within 30 days

ii. Statement of account:

Shows the opening balance, transactions and closing balance

18. What are the guidelines governing the publication of NAV?

Unit NAV is published daily in at least two newspapers:

For fund of funds:

NAV, sale price and repurchase price is to be updated on AMFI or mutual fund Website by 10:00 A.M. on the
following day

For other schemes:

The timing is 9:00 P.M.

19. How many nominees are permitted for a mutual fund investment?
Upto three nominees
Investor can specify the percentage distribution between the nominees
If no distribution is indicated, it will be considered as equal distribution

20. Can the units be pledged?

Yes

21. What is the time limit for dispatch of dividend warrants?

Thirty days of declaration of the dividend

22. What is the time limit for dispatch of redemption or repurchase of cheques?
Ten working days from the date of receipt of the request

23. What is the consequence of delay?

In case of delay, AMC has to pay interest at 15% per annum

24. Unit holders:

Have proportionate right to beneficial ownership of assets of scheme
Can change their distributor or go direct. AMCs not to insist on "NOC" from existing distributor
Can hold units in DEMAT form – DEMAT statement would meet all guidelines of SEBI on issuance of statement
Have right to inspect key documents – Trust Deed, Investment Management agreement, Custodial Services
Agreement etc,.
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25. Can the units be in dematerialised form? - Yes

26. What is the guideline for the publication of a complete scheme portfolio?
Published within one month from the closure of each half year
Published in an English newspaper having nationwide circulation and in a newspaper published in the language
of the region where the HO of the mutual fund is located
In lieu of the advertisement, statement can be sent to all the unit holders

27. What is the additional guideline for publication of debt-oriented/close-ended/interval schemes?

The portfolio should be disclosed in the Website every month by the third working day of the succeeding month

28. How are the fundamental attributes of a scheme changed?

By communicating to each unit holder
An advertisement in an English newspaper having nationwide circulation and in a newspaper published in the
language of the region where the HO of the mutual fund is located
Dissenting unit holders are given exit option for 30 days, at the prevailing NAV

29. How can the appointment of an AMC be terminated?

By the majority of the Trustees . By 75% of the unit holders

30. Can a MF scheme be wound up ?

Yes, when it is in the interest of investors
Decided by trustees with SEBI approval
By at least 75% of unit holders

31. Can unit holders sue the Trust?

No, but trustees can be sued when investors feel that trustees have not fulfilled their obligations
A proposed investor (some one who has not invested in a scheme) does not have that right

32. Merger or consolidation of two or more schemes?

Not considered as change in fundamental attributes of scheme if
Circumstances merit merger or consolidation of schemes in the interest of unit holders
There is no other change in fundamental attributes of scheme

33. What is the principle applicable for mutual fund investments?

Caveat emptor (let the buyer beware).
Protection under Companies Act 1956 also not available to investors

34. How are unclaimed dividend and redemption amount treated?

They are invested in the money market
AMC can charge 0.50% interest per annum
Investor can claim within three years at the prevailing NAV plus income earned
Investor can claim after three years at the prevailing NAV at the end of three years

35. How are proceeds of illiquid securities treated?

If the amount is substantial and recovered within two years, the amount is paid to the old investors
In other cases, it goes to the investor education fund

36. Can a MF scheme go bust?Where sponsor wish to move out of scheme – Must bring in before quitting
some other sponsor with SEBI's approval
Custodian provides protection to the scheme assets
Investors not comfortable with new sponsorship has option of exiting out of scheme with 30 days at full NAV
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NISM
Lesson 4 - Offer Document

1. What is the process involved in preparing an Offer Document (OD)?

The following flowchart represents the various steps involved in the process of preparing an OD:
 AMC prepares OD
 Trustee’s approval
 SEBI’s observation
 Again Trustee’s approval
 Distribution to investors

2. What are the two parts of OD?

The two parts of OD are:
 Scheme Information Document (SID): Contains the details of the scheme
 Statement of Additional Information (SAI): Contains the details about the statutory information of the
mutual fund

3. Role of offer document- Contains vital aspects of scheme called 'Fundamental Attributes'
Cannot be changed later without observing certain legal processes
Disclosures as suggested by SEBI
Important document for prospective investor to take well informed decisions before investing
Post investment – to review/evaluate various commitments made by AMC
Presumed to have been read by investor even if not read – Principle of 'Caveat Emptor' to apply (which means
"let the buyer beware")

4. What is the role of SEBI as regards to OD?

 OD is only vetted by SEBI and not approved
 Draft SID is made available on the SEBI’s Website for 21 working days
 Final SID, after incorporating SEBI’s observations, is hosted on the AMFI’s Website two days before the
issue opens

5. What are the contents of SID?

 Open-ended/close-ended/interval (the scheme structure)
 Equity/balanced/income/debt/liquid/ETFs (the expected nature of the scheme portfolio)
 FV of units
 Opening, closing and reopening dates
 The content of SID also includes:
 Date of SID
 Name of the mutual fund
 Name and contact information of the AMC and the trustee company
 Standard clauses
 Table of contents/highlights/introduction
 Risk factors, that is, standard- and scheme-specific
 Information about the scheme/units, offer/fees, expenses/rights of Unit Holders/penalties and litigation

6. How is SID updated?

 Scheme launched in the first six months of the financial year:
 First update is due within three months of the end of the financial year
 Scheme launched in the next six months of the financial year:
 First update is due within three months of the end of the next financial year
 Thereafter, SID to be updated every year
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 If fundamental attributes are changed, update after lapse of exit time is given to the investors
 Other changes are printed and attached as addendum with SID and are informed through newspapers,
advertisements and Website updates. Change to be updated on web site of MF
 Illustration:
 Scheme launched on : 25th July 2014
 First update due by : 30th June 2015
 Scheme launched on : 6th October 2014
 First Update due by : 30th June 2016

7. Product Labelling system instituted by SEBI -Done to provide investors an easy understanding of the
scheme/product that they are investing in
All mutual funds to label their schemes on following parameters:
Nature of scheme such as to create wealth or provide regular income in an indicative time horizon (short/
medium/ long term)
A brief about the investment objective followed by the kind of product in which the investor is investing (Equity/
Debt)
Level of risk, depicted by color boxes as under:
Blue – principal at low risk
Yellow – principal at medium risk
Brown – principal at high risk
The color codes should also be described in text besides the color code box.

8. What are the contents of SAI?

Information about the sponsors, AMC and trustee company (includes contact information,
shareholding pattern, responsibilities, names of directors and their contact information, profiles of key
personnel)
Contact information of Service Providers ( Custodians, R&T Agents, Statutory Auditors, Fund Accountant (if
outsourced) & Collecting Bankers
Condensed financial information for schemes launched in the last three financial years
Other details - a) How to apply for b) Rights of unit holders c) Investment Valuation norms d) Tax, Legal and
General information (including Investor grievance redressal mechanism, data on complaints received and
cleared )
Investors can access SAI of all MFs through AMFI website

9. How is SAI updated?

 Regular update by the end of three months of every financial year
 Material changes are updated, on an ongoing basis, on the Websites of mutual fund and AMFI

10. What do you understand by KIM?

 KIM is the summary of SID and SAI
 As per the SEBI regulations, every application form is to be accompanied by KIM

11. The contents of KIM are:

 Name of the AMC, mutual fund, Trustee, Fund Manager and scheme
 Date of issue with regards to opening, closing, reopening for sale and repurchase
 Plans and options, risk profile, price and minimum amount
 Benchmark
 Dividend policy
 Performance of scheme and benchmark over one, three and five years, and since inception
 Loads and expenses
 Contact information of Registrar
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12. When is KIM updated? –

At least once a year
To be updated in the case of change in Fundamental Attributes
Other changes can be disclosed through addendum attached to KIM

13. What are the various distribution channels for mutual funds?
 Independent Financial Advisors (individuals)
 Non bank distributors (brokerages, securities distribution companies and NBFCs)
 Bank distributors
 Post office and SHGs
 Internet
 Stock exchanges

14. What are the prerequisites to become a distributor of a mutual fund?

 No permission is required from SEBI
 Independent Financial Advisor/employee of a distributor or AMC must pass the exam prescribed by SEBI
 People aged above 50 years with 5 years of experience as on 30th September, 2003 are exempted but
they need to attend a prescribed refresher course
 After passing the exam, AMFI registration number should be taken
 Empanelment with AMC or with agents of a distributor, who is already empanelled with AMCs
 Institutions need to register with AMFI and their employees must have an ARN

15. Describe the details of distributor’s commission.

 No maximum or minimum commission is prescribed by SEBI
 Commission can be within the overall expenses permitted
 Initial or upfront commission on the amount is mobilised
 Trial commission is calculated on the NAV
 Distributors are not eligible for commission on own investment
 Must disclose the commission
 No rebating is permitted
 Explain the SEBI advertising code.
 Advertisements should be truthful
 Unit Holders should be informed about the risks involved
 All advertisements must state about the market risks (10% of display in posters and at least 5 seconds in
audio-visual media)
 Tombstone advertisements should not declare the NAV and performance, promise returns, compare
and use rankings given by a third party and are not for the NFOs

16. Advertising code must contain:

 Name of the mutual fund and AMC
 Name of the scheme and classification
 Investment objective, asset allocation or highlights
 Terms of issue
 Mode of sale and redemption of units

17. What are investor benefits and general services?

 Scheme and resources (in case of assured return)
 Logo/trademark/corporate symbol
 Risk factors
 Load structure
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 Contact information where SID, SAI and KIM are available

 Statement that an investor must read in SID and SAI

18. What are the prohibitions during product launch?

 The prohibitions to be followed while launching a product are:
 Declaration of the NAV and performance figures of any of the previous scheme
 Comparison with other mutual funds or schemes
 Ranking by any ranking entity
 Must identify the nature of the scheme and the basic investment objective
 Dividends declared or paid should be in rupees per unit with FV and prevailing NAV
 Compounded annualised yield is applicable for more than a year scheme only
 For one, three and five years, and since the launch of the scheme:-All calculations are on the basis of
NAV
 For money market/cash/liquid plans, yield for 7, 15 and 30 days can be provided

NISM
Lesson 5 - Concept of NAV and Mark to Market

1. What is NAV? How is it calculated?

NAV refers to the value of each unit of the scheme
The formulae for calculating NAV are:
(Unit holder’s funds in the scheme)/Number of units
(Total assets – Liabilities)/Number of units
(Present market value + Amount receivable – Amount payable)/Number of units
NAV would be high if the investment portfolio appreciates/interest/dividends & capital gains earnings are
higher. Low expenses of scheme would also lead to higher NAV.

2. What is mark to market?

Valuing each security at its market value
Marking the securities to the market value
Entry Load, Exit Load and Contingent Deferred Sales Charge

3. Why MTM?
To reflect true worth of each unit
Over a period of time investments made by MF Scheme appreciate/depreciate

4. What is entry load?

Entry load is prohibited now
Earlier, schemes used to charge (sales price) more than the NAV

5. What is exit load?

a. Schemes paying less than NAV
b. Repurchase price lower than NAV
c. Difference between NAV & repurchase price referred to as Exit Load
d. Usually, up to 1% generally if units redeemed within less than one year
e. Should be same for all investors of scheme
f. Say NAV ` 12 – Exit Load – 1%
g. Re-purchase price would be – ` 12 – 0.12 = ` 11.88
Investor on redemption gets less than prevailing NAV
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6. What is Contingent Deferred Sale Charge (CDSC)?

a. Load based on the period of holding
b. To incentivize investors to remain invested longer, load calibrated by reducing it with increasing
holding period
c. Exit loads/CDSC >1% to be credited back to scheme – not available to AMC for selling expenses

7. What is an initial issue expense?

One-time expenses for NFOs
Now, to be borne by the AMC

8. Transaction Charges
SIP Investments – Charges applicable only when total commitment (amount/SIP*number of instalments)
exceeds
` 10000
Such charges to be recovered in four equal instalments:
Transaction charges not applicable, when:
Investments not routed through distributor but made directly at designated collection centres/web site of AMC
Investment through distributor but < ` 10000
Switches/STPs where there is no additional cash flows
Purchase/Subscriptions through any stock exchange

9. OPT – OUT Option : Distributors can choose to opt out of charging the transaction charge based on type
of the product e.g. they can decide not to charge it for debt schemes. However, the ‘opt-out’ shall be at
distributor level and not investor level i.e. a distributor cannot charge one investor, and choose not to
charge another investor. Available to the distributors but not at the investor level

10. What is deferred load?

Initial expenses not debited to the fund immediately
Charged to the fund over a period
Now, not permitted by SEBI

11. What are recurring expenses?

Recurring expenses are charged to the scheme, which includes:
Fee to the service providers
Selling expenses including scheme to the distributors
Expenses on investor communication, account statements, dividend or redemption and cheques or warrants
Listing and depository fees
Service tax

12. What are the expenses that cannot be charged under the scheme?
Penalties and fines for infraction of laws
Interest on delayed payment to the unit holders
Legal, marketing, publication and other general expenses not attributable to any scheme
Fund accounting fee
Expenses on investment or general management
Expenses on general administration, corporate advertising and infrastructure cost
Depreciation on fixed assets and software development expenses

13. What are recurring expenses and management fee limits?

The following table displays the recurring expenses and the management fee limits:
Average Net Asset Equity Scheme Debt Scheme
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Upto Rs. 100 crores 2.50% 2.25%

Next Rs. 300 crores 2.25% 2.00%

Next Rs. 300 crores 2.00% 1.75%

Excess over Rs. 700 crores 1.75% 1.50%

Management fee will be within the limits explained in the previous slide, but should not exceed:
1.25% on the first 100 crores of net assets of a scheme
1% on the balance net assets
No management fee for liquid or debt schemes parked in STD of banks
ETF: Recurring expense of 1.50% (including management fee)
Management fee of 0.75%
FOF: Recurring expense limit of 0.75% (including management fee)

14. What do you understand by distributable reserves?

Dividend can be paid out of distributable reserves
Distributable reserve:
Includes all the profits earned (based on accrual of income and expenses)
Does not include valuation gains
Does not include the portion of the sale price of new units, which is attributable to valuation gains

15. What are the key accounting and reporting requirements?

Different Auditors for both the scheme and the AMC
Interest/dividend/bonus/rights norms should be followed
NAV:
Index, liquid and debt funds with four decimal
Equity and balanced funds with two decimal
Frequency of NAV reporting as stipulated

16. How are securities valued?

Traded securities: Based on closing price
Not traded or thinly traded securities: Equity shares - Based on EPS, book value and valuation of similar shares in
the market
Debt securities: Based on the matrix prepared by the valuation agency
Separate norms for NPAs
Independent value, if non traded individual security is more than 5%

17. How is STT charged?

Purchase or sale of equity shares or units from the stock
exchanges - 0.125%
Sale of futures and options in the stock exchange - 0.017%
Repurchase of units by the AMC - 0.250%

18. How is DDT charged?

MMMF or liquid schemes:
25% + Surcharge + Education cess
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Other debt funds:

Individual and HUF investors
12.5% + Surcharge + Education cess
Other debt funds (other investors):
20% + Surcharge + Education cess
No DDT on equity-oriented mutual fund

19. How is capital gain tax charged for equity-oriented scheme?

LTCG:
Nil (STT should have been paid)
Similar to debt-oriented (if STT is not paid)
STCG:
15% + Surcharge + Education cess (if STT has been paid)
Similar to debt-oriented (if STT is not paid)

20. How is capital gain tax charged for debt-oriented scheme?

STCG:
Added to income and hence, will be as per the slab applicable to the investor
LTCG:
10% + Surcharge + Education cess without indexation
20% + Surcharge + Education cess with indexation:
Whichever is less
Indexation:
Cost of acquisition adjusted for inflation

21. What are the provisions of TDS?

No TDS applicable for some NR investments
Withholding tax is applicable as per the IT Act:
This is based on the nature of the investor (Indian/foreign/individual/institution), nature of investment
(equity/debt), nature of income (dividend/capital gain) and DTAA

22. What are the provisions of setting off gains and losses?
The following figure represents the provisions of setting off gains and losses:

Setting off only under

the same head of
income

Short term capital Long term capital

Long term capital
loss can be set off loss on account of
loss can be
against short term equity-oriented
set off against
or long term scheme cannot be
long term capital gain
capital gain set off

23. What are dividend stripping and bonus stripping?

Buying units before declaration of the dividend or bonus
Receiving tax-free dividend or bonus
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Selling of original units at a capital loss

24. What are the IT provisions made to curtail the practice of dividend or bonus stripping?
If an investor buys units within three months prior to the record date of dividend or bonus and sells within nine
months after the record date
No set off allowed upto dividend income
Capital loss will be treated as the cost of acquisition of the bonus units

25. How much wealth tax is payable on mutual fund investments?

Exempted from wealth tax

NISM –
Lesson 6 - Mutual Fund Investments

1. Who can invest in mutual funds?

Resident individuals
Minors through guardians
HUFs
NRIs
PIO
Companies or corporate bodies registered in India
Registered and cooperative societies
Religious and charitable trusts
Trustees of private trusts
Firms
AOP or BOI
Banks, FIs and investment institutions
Mutual funds
FIIs registered with SEBI
International multilateral agencies approved by GOI
Army/navy/air force, paramilitary units and other eligible institutions
Scientific and industrial research organisations
Universities and educational institutions

QFIs (Qualified Foreign investors) have now been allowed to invest in MFs in India Vide SEBI/RBI Circular dated
9th August 2011, through two routes:
Direct Route – Holding MF units in DEMAT account
Indirect Route – Holding units via UCR (Unit Confirmation
Receipt)

2. Who are not permitted to invest in mutual funds in India?

Foreign nationals other than PIO/OCI/NRI
Any entity who is not an Indian resident as per FEMA (except FIIs registered with SEBI)
OCBs
Only authorised participants & large investors can invest in NFOs of ETFs – subsequently in Stock Exchange any
one eligible to invest can buy units of ETFs.
Good practice to check in Offer Document – 'Who can Invest'
 17

3. What are the documents required under KYC norms?

Proof of identity
Proof of address
PAN card
Photograph
KYC compliance now mandatory irrespective of investment amount
KYC of guardian in case of investment made on behalf of a minor.
Investment made by a POA holder – KYC of both investor & POA holder
IPV (In Person Verification) Mandatory w.e.f. January 1, 2012

4. How can the services of CDSL Ventures Limited be used for KYC requirements?
Select branches or offices of mutual funds and Registrars
Distributors act as a point of service
Investors can provide original (or Notary, Gazetted Officer, Bank Manager attested) copies, which are returned
Entries made in CVL system by POS
Mutual fund identification number, which is generated, can be used for any further investment

5. When can the PAN requirement be waived?

In case of micro SIPs where annual investment does not exceed
`50000
However, photo identification should be provided
This waiver is not available for HUFs, non individuals and PIOs

6. What are the additional documents required for institutional investors?

Eligibility for the investing institution to invest (as per their constitution)
Board’s resolution to invest Authorisation of the official to invest

7. Can the units be under DeMat account?

Yes
Physical units can be credited to the DeMat account, this process is known as dematerialisation
The investor can again convert it to the physical form, this process is known as rematerialisation

8. How do mutual funds provide online transactions facility?

On request, the Registrar allots the username and password
Investors can make further purchases or request repurchases
Some distributors provide online transactions facility
Now investors can buy online without intervention of distributors (Called Direct Plan) – will have lower
expense ratio

9. What are the different payment mechanisms permitted for purchase or additional purchase?
Cheque or demand draft:
In case of an NRI (on repatriable basis), Banker’s Certificate is required for inward remittance source (no post
dated or stale cheque)
Instruments must be payable locally
Through NEFT/RTGS/SWIFT
By ECS in SIP
ASBA for NFOs
By M-banking
By cheque (favouring the investor)
By directly crediting the investor’s bank account
 18

10. What are the different cut-off timings applicable for NAV on sale and repurchase? What is the
significance of time stamping?
Sale and repurchase price based on the cut-off time
Time stamping done to know the time of application
Tamper-proof time stamping machines installed
Applications numbered sequentially

11. Can mutual fund transactions be done through the stock exchange?
Yes
Fresh subscriptions/additional purchases/redemption possible
Transaction slip with the time stamp
NSE Platform - NEAT MFSS
BSE Platform - BSE STAR mutual funds platform
Timings - 9:00 A.M. to 3:00 P.M.

12. What are the details of the different options that are available?
Dividend payout option:
NAV declines
Number of units same
Total valuation comes down
Growth option:
Growth gets reflected in the NAV
Number of units same
Total valuation same
Dividend reinvestment option:
NAV declines
Number of units increases
Total valuation same

In-debt schemes:
Applicable DDT decreases the NAV

13. What is SIP?

Investment of constant amount at regular intervals
Investor gets units closer to the average of NAV
Benefit of rupee cost averaging

14. What is SWP?

Repurchase constant amount or units at regular intervals
Repurchase units at an average NAV
Repurchase can be for the appreciation in NAV
Useful to meet liquidity

15. What is STP?

Combination of SWP and SIP
Switching from one scheme to another at regular intervals

16. What is trigger option?

Investors can specify repurchase if the market reaches a particular level
Once market reaches the specified level units would be re-purchased
Eliminates execution of separate re-purchase documents
 19

Can also be used to transfer moneys from equity to debt or vice-versa to take benefits of changing market
conditions
Triggers are another way of bringing discipline into investing

17. X and Y have joint account (mutual fund). They have nominated A. If X dies, to whom the proceeds are
payable?
If X dies, the amount is payable to Y
If all the joint holders die, the amount is payable to the nominee, that is, A

18. Can mutual fund units be pledged?

Yes, mutual fund units can be pledged

NISM

Lesson 7 - Approaches of Securities Analysis

1. What are the approaches of securities analysis?

a. Fundamental

b. Technical

2. What is fundamental analysis?

a. Company’s fundamentals, such as financial statements, quality of management and competitive

position, are analysed

b. EPS/PE/PBV/book value are studied

3. What is technical analysis?

a. Technical analysis is the study of:

i. Price volume chart

ii. Chartist

iii. Support level

iv. Resistance levels

v. Break outs

4. What are the different investment styles?

a. Growth investment:

i. Invests in high growth stocks

ii. Valuation will be higher

b. Value investment:

i. Invests in stocks
 20

ii. Valuation will be lower

5. What is top-down/bottom-up approach?

a. Top-down:

i. To distribute between countries and sectors, good stocks within the sector

b. Bottom-up:

i. Not much importance to the country or sector allocation

ii. Concentrates on a particular stock

6. When dividend is paid, how is CAGR calculated?

a. Eligible units for the dividend paid is added with the holding

b. For the number of units, present value is considered and CAGR formula is applied

7. Can mutual funds promise any returns?

a. No

b. Except in the case of assured return schemes where there is a guarantor named in the OD

8. How redemption is taken care of in open-ended funds?

a. By keeping sufficient cash or bank balance

b. By reserving the right to limit or stop repurchasing in extreme cases of financial market
illiquidity or volatility

c. By borrowing (subject to limits)

9. Why are some assets kept in liquid form?

a. To meet redemption

b. When the market is over-heated, it is better to postpone the investment

10. How much a mutual fund scheme can borrow?

a. Upto 20% of net assets

b. Upto six months time

c. Only to meet dividend and repurchase payments

11. What are the provisions for use of derivatives by mutual funds?

a. Can use derivatives (options and futures) for the purpose of hedging but not for leveraging

12. What is 20:25 rule?

 21

a. Every scheme must have:

i. At least 20 investors

ii. No investor should represent more than 25% of the net assets

13. Explain the risks involved in mutual funds.

a. Generic: Return different from expectation due to overall changes in the economy, interest rate
and economic cycles

b. Portfolio-specific: Due to particular nature of the portfolio:

i. Example: Sectorial fund - if the particular sector is not functioning well, the mutual fund
performance will be poor

14. What are the measures of risk?

a. Standard deviation:

i. Measures fluctuations in the returns from a standard

ii. Measures the extent of deviation from a standard, which is taken to be the mean
returns

b. Variance:

i. Fluctuation in periodic returns of a scheme as compared to its own average

ii. Variance is the square of standard deviation

c. Beta:

i. Measures the sensitivity of a scheme with respect to the diversified stock index

ii. Calculated for equity schemes

d. Modified duration:

i. Measures the sensitivity of value of a debt security to changes in the interest rates

e. Weighted average maturity:

i. Indicative of the interest rate sensitivity of a scheme

15. What is a benchmark?

a. Performance of the scheme compared with a predefined arrangement or index

b. Should be in alignment with the scheme’s objectives

c. Should be calculated by an independent agency

16. Basis for benchmarks:

 22

a. Equity schemes:

i. Scheme type

ii. Choice of investment universe

iii. Choice of portfolio concentration

iv. Underlying exposure

b. Debt schemes:

i. Scheme type

ii. Choice of investment universe

c. Balanced funds:

i. Equity and debt index can be combined

d. Gold EFTs:

i. Gold price

e. Real estate fund:

i. Real estate index

f. International funds:

i. Particular country index

17. What is relative return?

a. Comparison of the fund performance with that of the benchmark

18. What is Alpha?

a. Alpha states whether the fund has produced returns justifying the risks it is taking or not

b. It can also be seen as a measure of a Fund Manager’s performance

c. It is the portfolio’s risk-adjusted performance or the value addition by a Manager

19. What is Sharpe ratio?

a. Any return should be evaluated based on the risk undertaken

b. Sharpe ratio measures return per unit of risk undertaken

c. Sharpe ratio is the difference between the portfolio’s return over and above the return earned
on a risk-free investment divided by the standard deviation of the portfolio

20. What is Treynor ratio?

 23

a. Similar to Sharpe ratio

b. In this case also, return is measured per unit of the risk undertaken

c. Portfolio beta is used (Sharpe ratio uses SD)

NISM

Lesson 8 -Steps Involved in Selecting a Mutual Fund Scheme

1. What are the steps involved in selecting a mutual fund scheme?

a. Understand the suitable risk exposure

b. Know asset allocation

c. Decide scheme category based on risk appetite and return expectation

d. Select the scheme within the category

e. Select the right option within the scheme

2. What are the principles to be kept in mind while investing in equity funds?

a. Investment should be long term, that is, for five years horizon

b. Higher risk appetite (active fund)

c. Moderate risk takers (passive fund)

d. Open-ended schemes (better liquidity)

e. Open-ended funds need to keep liquid funds to meet redemption obligation (will reduce the
return)

f. Exit load is also an expenditure

g. AUM under open-ended funds may fluctuate widely (pressure on the Fund Manager)

h. Large-cap companies normally have enormous strength, not so in case of the mid or small cap
stocks

i. In the long run, value funds may perform better

j. In a market correction, growth funds can decline more

k. Fund size should be optimum

l. Portfolio turnover also adds up to the cost

m. Portfolio turnover needs to be viewed in the light of investment style

n. International equity funds also contain exchange rate risk

 24

o. Less risky

p. MIPs include some equity exposure too unlike regular debt fund

q. FMP provides liquidity at the end of the scheme

r. Diversified debt fund’s return may be better than a gilt fund

s. Long term debt fund’s NAV will be volatile

t. MMF and liquid schemes have the lowest risk

u. NAVs of float rate debt tend to be steady

3. What are the factors that affect balanced schemes?

a. One can invest in a mix of equity and debt schemes or alternatively in a balanced scheme

b. Balanced schemes may be taxed as equity or debt

c. Scheme depends on the investment portfolio

4. What are the factors that affect balanced schemes?

a. One can invest in a mix of equity and debt schemes or alternatively in a balanced scheme

b. Balanced schemes may be taxed as equity or debt

c. Scheme depends on the investment portfolio

5. How to select a scheme within a scheme category?

a. Fund age

b. Scheme running expenses

c. Tracking error

d. Regular income yield in portfolio

e. Rating and performance ranking of the schemes

6. Can you name some agencies that provide mutual fund performance data?

a. Credence Analytics

b. CRISIL

c. Lipper

d. Morning Star

e. Value Research

7. What is the difference between physical and financial asset?

 25

a. Physical asset:

i. Have value

ii. Can be touched, felt and used

iii. May provide comfort of possession

iv. May be lost due to theft, fire and flood or in case of unforeseen events

v. Investor’s money in land or gold does not benefit the economy

b. Financial asset:

i. Intangible

ii. Have value but cannot be touched, felt or used

iii. May not provide comfort of possession as money invested may be lost

iv. Even if the document showing the evidence is lost, claim can be established

v. Can be economically productive for the economy

8. What are the implications of investing in gold in physical and financial form?

a. Physical form:

i. Risk of loss of theft

ii. No leveraging:

1. Attracts wealth tax

2. No nomination

b. Financial form:

i. Gold ETF, gold sector fund and gold futures contract

ii. Gold deposit schemes of bank:

1. No loss of theft

2. Exempted from wealth tax

iii. Higher exposure possible through futures by providing margin money

iv. Risk of leveraging nomination possible for various schemes

9. What are the implications of investment in real estate in physical and financial form?

a. Physical form:

i. Fire and other hazards

 26

ii. Minimum investment is high

iii. Maintenance problem

iv. Can be encroached

v. Illiquid

vi. Transaction costs

vii. If let out, getting back possession and rent recovery

b. Real estate mutual fund:

i. Ticket size is flexible

ii. Better position to manage other risks

REIT(Real Estate Investment Trusts)

iii. Scheme announced by GOI in budgetary proposals for FY 2014-15

iv. SEBI released guidelines in August 2014

v. Close Ended MFs

vi. Opportunity for institutions/HNIs & ultimately small investor to invest through a new
financial instrument

vii. Minimum investment ` 2 lacs

viii. Easy access to finance by Real estate Development

Companies

ix. At least 80% of funds to be invested in already completed

& rent generating assets for providing suitable returns
to investors

10. List out the differences between fixed deposit and debt scheme.

a. Fixed deposits:

i. Insured up to Rs. 1 lac

ii. Premature closure

iii. Availability of loan if required

iv. Interest taxable

b. Debt scheme:
 27

i. Possibility to earn higher return

ii. Growth in mutual fund scheme is not taxable to the investor

iii. Funds can be moved from one scheme to another

11. What are the features of the New Pension Scheme?

a. Regulated by PFRDA

b. Tier I (pension account) is non withdrawable

c. Tier II (savings account) is withdrawable (active Tier I is must for opening Tier II account)

d. Investment in asset class:

i. E: Equity market investments

ii. C: Debt securities

iii. G: Government securities

e. Investment based on the age of the investor (life cycle fund)

f. Six Pension Fund Managers manage the investment, therefore, there can be eighteen
alternatives

g. Provides for single Personal Retirement Account Number (PRAN)

h. Swavalamban Scheme – introduced in 2010-11 till 2015-16 for workers of unorganized sector

i. ` 1000 contributed by GOI where minimum subscription of ` 1000 & Max ` 12000 made by a
subscriber

NISM
Lesson 9 - Financial Planning

1. What is financial planning?

a. Planned and systematic approach to meet the financial goals and realise the needs and
aspirations
 28

2. What is the objective of financial planning?

a. To ensure that the right amount of money is available at the right time

b. To meet the various financial goals

3. How should you plan to achieve the financial goals?

a. List the current cost for the future expenses

b. Take inflation into account

c. Take the exchange rate impact into account if FX is involved:

i. This gives the future rupee requirement

4. How to assess the future fund requirement?

a. A: List the year-wise amount required

b. B: Calculate the amount available from regular saving in that particular year

c. C: Hence, the amount to be arranged is A – B (future value)

d. D: Convert the amount under C to the present value by taking the suitable discount:

i. This is the amount to be saved or arranged today to meet the future requirement

5. What are the benefits of financial planning?

a. Investor knows in advance when and how much amount he/she has to save

b. Corrective actions can be taken wherever there is a mismatch between what is required and
achievable
 29

c. Investor will know how to distinguish between need and desire and will be prepared for some
sacrifices to fulfill the needs

6. How can a Financial Planner be helpful?

a. Helps people to realise their needs and aspirations

b. Guides how and where to invest

c. Helps the investor to decide the optimal source of borrowing and structure loan arrangement

d. Helps the investor from taxation angle for investment and borrowing

e. Helps the investor to play for contingencies

7. How can you create a comprehensive financial plan?

a. As per CFP Board of Standards (USA)

b. Establish and define the client-planner relationship

c. Gather client data and define goals

d. Analyse and evaluate client’s financial status

e. Develop and present the recommended financial plan

f. Implement and monitor the financial plan

8. What are the different stages of human life cycle?

a. Childhood

b. Young unmarried

c. Young married

d. Married with young children

e. Married with older children

f. Preretirement

g. Retirement

9. What are the different wealth cycles?

a. Accumulation

b. Transition

c. Inter-general transfer

d. Reaping or distribution
 30

e. Sudden wealth

NISM
Lesson 10 - Risk Profiling
1. What is risk profiling?

a. Approach to understand the risk appetite of the investors

2. What is the need for risk profiling?

a. Levels of risk are different for various schemes

b. Risk appetite of various investors are different

c. Willingness to take risk may differ

3. What are the factors that influence the risk profile?

a. Earning members

b. Dependent members

c. Life expectancy

d. Age

e. Employability

f. Nature of job

g. Psyche

h. Capital base

i. Regularity of income

4. What are the tools available for risk profiling?

a. AMCs and securities research house’s Website

b. Investors to answer various questions (truthfully)

c. Based on the answers, risk appetite can be evaluated

5. What is asset allocation?

a. Distribution of an investor’s portfolio between different asset classes

6. What is strategic asset allocation?

a. Based on the risk profile of the investor, risk profiling is the key for strategic asset allocation

b. As a thumb rule, debt percentage should be same as the age of the investor
 31

7. What is tactical asset allocation?

a. Based on the likely behaviour of the market

b. Suitable only for seasoned investors with large funds

8. What are the different model portfolios?

a. Young call centre or BPO employee with no dependents:

i. 50% diversified equity schemes

ii. 20% sector funds

iii. 10% gold ETM

iv. 10% diversified debt fund v. 10% liquid schemes

b. Young married single income family with two school going kids:

i. 35% diversified equity schemes

ii. 10% sector funds

iii. 15% gold ETM

iv. 30% diversified debt fund

v. 10% liquid schemes

c. Single income family with grown-up children who are yet to settle down:

i. 35% diversified equity schemes

ii. 15% gold ETF

iii. 15% gilt fund

iv. 15% diversified debt fund

v. 20% liquid schemes

d. Couple in their seventies with no immediate family support:

i. 15% diversified equity index scheme

ii. 10% gold ETF

iii. 30% gilt fund

iv. 30% diversified debt fund

v. 15% liquid schemes