Unit ko samjho · NISM Series XIX-A
Risk and Return – Investor and Fund Perspective
15 questions is unit mein
Sawaal aur jawaab English mein hain, kyunki NISM ka exam paper bhi English mein hota hai.
Is unit mein kya hai
- Which risk arises when a borrower may fail to pay interest or repay principal as agreed?
- What commonly contributes to the early negative part of a private fund’s J curve?
- What mainly distinguishes an investor’s net internal rate of return from a comparable gross fund return?
- An investor pays ₹100 lakh today and receives ₹112 lakh exactly one year later, with no other cash flows. What is the annual return?
- An investor has paid ₹50 lakh and received ₹40 lakh in distributions. What is distributions to paid-in capital, or DPI?
- An investor has paid ₹50 lakh and retains a fund interest valued at ₹30 lakh. What is residual value to paid-in capital, or RVPI?
- Paid-in capital is ₹100 lakh, distributions are ₹60 lakh and residual value is ₹90 lakh. What is total value to paid-in capital, or TVPI?
- A fully realised investment cost ₹60 lakh and generated ₹150 lakh of total proceeds. What is its gross multiple on invested capital?
- Two investments each pay back twice their initial cost in one final payment. Which has the higher annualised return?
- How can incomplete information create adverse selection when investors choose a private fund?
- A 2% annual fee applies to a constant ₹100 crore base for exactly six months. Using simple half-year proration, what fee arises before tax?
- An investor pays ₹100 lakh today and receives ₹144 lakh exactly two years later, without interim flows. What is the annual internal rate of return?
- A manager receives carried interest, meaning a share of profits, after an early successful exit. Later losses leave the manager with more than its final contractual entitlement. The fund documents contain an enforceable clawback covering this excess. What is the purpose of that clause?
- All investor capital has been returned, and investors have received ₹10 crore of preferred profit. The manager then receives the next profits until it holds 20% of the combined profit distributions to investors and manager. Sufficient proceeds are available, with no other costs or payments. How much is this full catch-up payment?
- A private debt investment ranks ahead of ordinary equity in a company’s repayment order. The company’s assets could still be worth less than its total senior claims. What does the investment’s seniority establish?
Zaroori ideas
Practice bank se · 1
Which risk arises when a borrower may fail to pay interest or repay principal as agreed?
Credit risk is the risk that a borrower fails to meet agreed payment obligations. It can affect both interest receipts and recovery of principal. Remember: A promised debt payment still carries borrower risk.
Hint Focus on the borrower’s ability and willingness to honour the debt. Common mistake: Assuming that a contractual payment is certain to be received.
XIX-A-052Practice bank se · 2
What commonly contributes to the early negative part of a private fund’s J curve?
Early fees and other costs can arise before investments mature and gains are realised. This can produce the initial downward part of a J curve without assuring a later recovery. Remember: A J curve describes a possible cash-flow pattern, not a promised rebound.
Hint Compare when the fund begins paying costs with when exits may occur. Common mistake: Treating early losses as proof that later profits are guaranteed.
XIX-A-053Practice bank se · 3
What mainly distinguishes an investor’s net internal rate of return from a comparable gross fund return?
Net return reflects the relevant fees, expenses and profit sharing borne by the investor. A gross fund return should not be presented as the same investor experience. Remember: Check the cash-flow level at which a return is measured.
Hint Consider which cash flows the investor actually pays and receives. Common mistake: Comparing a manager’s gross result directly with an investor’s net result.
XIX-A-054Practice bank se · 4
An investor pays ₹100 lakh today and receives ₹112 lakh exactly one year later, with no other cash flows. What is the annual return?
The annual return is 12% because the one-year gain is ₹12 lakh on ₹100 lakh. Return = (₹112 lakh − ₹100 lakh) ÷ ₹100 lakh × 100 = 12%. With only these two cash flows one year apart, the annual internal rate of return is also 12%. Remember: Do not confuse ending value, value multiple and percentage gain.
Hint Measure the gain relative to the amount initially invested. Common mistake: Using the ending investment value as the denominator for return.
XIX-A-055Practice bank se · 5
An investor has paid ₹50 lakh and received ₹40 lakh in distributions. What is distributions to paid-in capital, or DPI?
DPI is 0.80 times because ₹40 lakh has been distributed against ₹50 lakh paid in. DPI = cumulative distributions ÷ paid-in capital = 40 ÷ 50 = 0.80. Remember: DPI measures realised distributions relative to contributed capital.
Hint Use cash already distributed, not the estimated value of unsold holdings. Common mistake: Including unsold asset values in a cash-distribution metric.
XIX-A-056Practice bank se · 6
An investor has paid ₹50 lakh and retains a fund interest valued at ₹30 lakh. What is residual value to paid-in capital, or RVPI?
RVPI is 0.60 times because the remaining fund interest is worth ₹30 lakh against ₹50 lakh paid in. RVPI = residual value ÷ paid-in capital = 30 ÷ 50 = 0.60. Remember: RVPI captures remaining value rather than cash already distributed.
Hint Focus on the value still held in the fund. Common mistake: Treating an estimate of residual value as money already received.
XIX-A-057Practice bank se · 7
Paid-in capital is ₹100 lakh, distributions are ₹60 lakh and residual value is ₹90 lakh. What is total value to paid-in capital, or TVPI?
TVPI is 1.50 times because total distributed and remaining value is ₹150 lakh. Total value = ₹60 lakh + ₹90 lakh = ₹150 lakh. TVPI = ₹150 lakh ÷ ₹100 lakh = 1.50. Remember: TVPI combines realised distributions and residual value.
Hint Combine value already returned with value still held. Common mistake: Interpreting the entire TVPI result as cash already returned.
XIX-A-058Practice bank se · 8
A fully realised investment cost ₹60 lakh and generated ₹150 lakh of total proceeds. What is its gross multiple on invested capital?
The gross multiple on invested capital is 2.50 times. Multiple = ₹150 lakh total proceeds ÷ ₹60 lakh invested = 2.50. This multiple alone does not state the holding period or an annual return. Remember: A value multiple is not an .
Hint Use total value received, not only the gain. Common mistake: Reading a 2.50-times multiple as a fixed annual percentage return.
XIX-A-059Practice bank se · 9
Two investments each pay back twice their initial cost in one final payment. Which has the higher annualised return?
The investment returning the same multiple sooner has the higher annualised return. Timing matters even when the total value multiple is identical. Remember: Compare both the multiple and the time taken to earn it.
Hint Hold the payment multiple constant and consider the effect of time. Common mistake: Ranking investments solely by their value multiple.
XIX-A-060Practice bank se · 10
How can incomplete information create adverse selection when investors choose a private fund?
Adverse selection can occur when investors cannot distinguish weaker opportunities from stronger ones because of information gaps. Due diligence aims to reduce, not magically remove, that problem. Remember: Information quality is part of investment risk assessment.
Hint Consider who knows more about the quality of the opportunity before commitment. Common mistake: Assuming that every disclosed product is equally easy to evaluate.
XIX-A-061Practice bank se · 11
A 2% annual fee applies to a constant ₹100 crore base for exactly six months. Using simple half-year proration, what fee arises before tax?
The six-month fee is ₹1 crore under the specified simple proration. Full-year fee = 2% × ₹100 crore = ₹2 crore. Half-year fee = ₹2 crore × 6 ÷ 12 = ₹1 crore. Remember: Apply a fee’s stated time basis as well as its capital base.
Hint Use both the fee rate and the stated fraction of a year. Common mistake: Charging a full annual fee for a shorter stated period.
XIX-A-062Practice bank se · 12
An investor pays ₹100 lakh today and receives ₹144 lakh exactly two years later, without interim flows. What is the annual internal rate of return?
The annual internal rate of return is 20% because two years of 20% compounding turn ₹100 lakh into ₹144 lakh. ₹100 lakh × (1 + r)² = ₹144 lakh. r = √1.44 − 1 = 0.20 = 20%. Remember: Annualising a multi-year investment requires compounding.
Hint Find the annual compounded rate that turns the initial amount into the final payment. Common mistake: Dividing a total multi-year percentage gain by the number of years.
XIX-A-063Practice bank se · 13
A manager receives carried interest, meaning a share of profits, after an early successful exit. Later losses leave the manager with more than its final contractual entitlement. The fund documents contain an enforceable clawback covering this excess. What is the purpose of that clause?
The clawback requires repayment of carried interest received above the manager’s final contractual entitlement. Actual recovery also depends on the clause’s scope and enforceability. Remember: An interim profit-share payment may need later adjustment.
Hint Compare the manager’s interim receipts with its final whole-fund entitlement. Common mistake: Assuming that early carried-interest payments can never be recovered.
XIX-A-064Practice bank se · 14
All investor capital has been returned, and investors have received ₹10 crore of preferred profit. The manager then receives the next profits until it holds 20% of the combined profit distributions to investors and manager. Sufficient proceeds are available, with no other costs or payments. How much is this full catch-up payment?
The full catch-up payment is ₹2.5 crore because that is 20% of the combined ₹12.5 crore profit distribution. Let the payment be x. x ÷ (₹10 crore + x) = 20%. Therefore 0.8x = ₹2 crore and x = ₹2.5 crore. Remember: A full catch-up percentage applies to combined profit distributions.
Hint The manager’s percentage is measured after including its own catch-up payment. Common mistake: Applying the carried-interest percentage only to the investors’ preferred profit.
XIX-A-065Practice bank se · 15
A private debt investment ranks ahead of ordinary equity in a company’s repayment order. The company’s assets could still be worth less than its total senior claims. What does the investment’s seniority establish?
Seniority establishes priority of claim but does not ensure that enough assets exist for full repayment. A senior investment can still suffer a loss. Remember: A stronger claim is not the same as a risk-free claim.
Hint Distinguish a place in the repayment queue from the amount available to pay it. Common mistake: Equating senior debt with guaranteed principal protection.
XIX-A-066CAGR expresses the change between a starting value and an ending value as a single constant annual rate.
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