Fund Due Diligence – Investor Perspective
23 questions. Each answer is explained.
Question 1 of 10Practice · Series XIX-A — Alternative Investment Funds (Category I and II) Distributors
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Learn these topics
More units in NISM Series XIX-A
- Overview of Alternative Investments7
- Alternative Investment Funds in India7
- Concepts in Alternative Investment Funds Industry7
- Regulatory Framework – Indian Context15
- Alternative Investment Fund Structuring15
- Risk and Return – Investor and Fund Perspective15
- Investment Process and Governance of Funds15
- Legal Documents and Negotiations – Investor Perspective15
- Fund Monitoring, Reporting and Exit7
- Valuation8
- Taxation – India specific8
- Good Practices8
Exam format
| Questions | 100 · 1 mark each |
|---|---|
| Duration | 120 min · 2 hours |
| Pass mark | 60% · 60 of 100 marks |
| Negative marking | 10% · 0.1 marks off per wrong answer |
| Certificate validity | 3 years · from the date of the examination |
| Marks for this unit | 15 of 100 marks (15%) |
Source: 19 March 2025 Annexure I, Unit 8: Fund Due Diligence – Investor Perspective
NISM Series XIX-A Alternative Investment Funds (Category I and II) Distributors
Exam rules read on NISM's site on 29 October 2026. Check the current rules on NISM's site (opens in a new tab)
What these answers assume, and when it was last checked
Each question uses the rules listed below. We last checked them on 5 September 2026. A Budget or SEBI circular can change a rate, lot size or expiry day. If a rule changes before your exam, treat the linked questions as out of date and check NISM's current workbook.
- NSE uses Tuesday expiry and BSE uses Thursday expiry. This applies from 1 September 2025.
- The January 2026 index lot sizes are NIFTY 65, BANKNIFTY 30, FINNIFTY 60, MIDCPNIFTY 120 and NIFTYNXT50 25.
- The October 2024 SEBI framework sets a minimum index contract value of Rs 15–20 lakh. Each exchange may list one weekly benchmark index.
- Option buyers pay the premium upfront from 1 February 2025. A short index option has an extra 2% Extreme Loss Margin on expiry day from 20 November 2024.
- Equity short-term capital gains are taxed at 20%. Long-term gains are taxed at 12.5% above Rs 1.25 lakh. Both rates apply from 23 July 2024.
- F&O income is non-speculative business income in ITR-3. NSE equity derivatives trade from 9:15 a.m. to 3:40 p.m.
- The final ten-minute session began on 3 August 2026. It aligns with the cash market Closing Auction Session.
- Most Securities Transaction Tax questions test the base and who pays. On an option sale, it is the premium and the seller pays. On a futures sale, it is the traded value and the seller pays.
- On exercise, Securities Transaction Tax uses intrinsic value: settlement price minus strike price. The buyer pays it.
- Two questions test the current rate. From 1 April 2026, option sales carry 0.15% on the premium and futures sales carry 0.05% on traded price. The earlier rates were 0.10% and 0.02% from 1 October 2024.
- This section uses the T+1 rolling settlement cycle. Obligations are fixed on T+1. A short delivery goes to buy-in auction on T+1 and settles on T+2.
- The trade-for-trade surveillance segment uses direct close-out. Funds pay in by 10:30 a.m. and pay out on or after 1:30 p.m. on settlement day.
- Securities pay in to the settlement pool by 10:30 a.m. They pay out directly to the client’s demat account by 3:30 p.m.
- The 3:30 p.m. deadline replaced 1:30 p.m. under SEBI’s 10 October 2024 circular. Direct client credit was required by SEBI’s 5 June 2024 circular.
- The optional T+0 cycle trades until 1:30 p.m. Obligations are fixed by 2:30 p.m. on the trade day. An early pay-in shortage is closed out directly.
- Cash-market Value at Risk margin is six times exponentially weighted moving-average volatility. It has a 9% floor for Group I, a 21.5% floor for Group II, and a fixed 50% or 75% level for Group III.
- Extreme Loss Margin is 3.5% for a share and 2% for a broad-market-index exchange traded fund. Mark-to-market margin is collected before the next day’s trading. The trade-for-trade segment has 100% upfront margin.
- Close-out uses the higher of the highest price from trade day to auction day and 20% above the auction day’s official close.
- A funds shortage costs 0.07% a day. The trading facility is withdrawn at a shortage of Rs 5 lakh or more.
- SCORES allows 21 calendar days, then two 15-day review levels. Online Dispute Resolution moves from conciliation to arbitration after the market participant and SCORES steps.
- At NSE, the Investor Protection Fund limit is Rs 35 lakh per investor for each defaulting or expelled member. This applies to claims arising after 13 August 2024.
- A Basic Services Demat Account has no annual maintenance charge up to Rs 4 lakh of holdings. It costs up to Rs 100 above that, until the Rs 10 lakh eligibility ceiling. These slabs apply from 1 September 2024.
- The rupee pairs are USD-INR, EUR-INR, GBP-INR and JPY-INR. The cross-currency pairs are EUR-USD, GBP-USD and USD-JPY.
- Each contract covers 1,000 units of the foreign currency, except JPY-INR. JPY-INR covers 100,000 yen and is quoted in rupees per 100 yen.
- The tick is 0.25 paise, or Rs 0.0025. It equals Rs 2.50 a contract.
- Rupee pairs trade from 9:00 a.m. to 5:00 p.m. A monthly contract stops trading at 12:30 p.m. two working days before the expiry month’s last business day.
- Final settlement is in cash at the FBIL reference rate on expiry day. FBIL, Financial Benchmarks India, has published this rate in place of the Reserve Bank since 2018. Premium-style European options are quoted in rupees. The buyer pays the premium in cash on T+1.
- Daily settlement is on T+1 and final settlement is on T+2.
- NSE Clearing circular 026/2020 sets SPAN margin plus Extreme Loss Margin. The futures margin is 0.50% for USD-INR, 0.15% for EUR-INR, 0.25% for GBP-INR and 0.35% for JPY-INR. A short option has 0.75%. These figures apply from 1 June 2020.
- A USD-INR client may hold 6% of total open interest or USD 20 million, whichever is higher. A trading member may hold 15% or USD 100 million.
- A resident user has one USD 100 million equivalent limit across all rupee pairs and exchanges. No document is needed below that limit, but a valid underlying contracted exposure must still exist. This clarification applies from 3 May 2024.
- The currency segment has no Securities Transaction Tax.
The exam figures (questions, time, pass mark, negative marking and certificate validity) come from NISM's own pages, read on 29 October 2026. Timed practice uses the same figures. Study with the official workbook as well.
The written-out answers on this page are hidden while your timed set runs.
All 23 questions on Fund Due Diligence – Investor Perspective, with answers
Q1What is the main purpose of fund due diligence before an investor makes a commitment?
Option A. Selecting the product with the highest advertised target return
Why it is wrong: A target return alone does not assess the fund’s quality, suitability or risk.
Option B. Confirming that the distributor receives the largest commission
Why it is wrong: Distributor compensation is a potential conflict rather than the investor’s assessment objective.
Option C. Assessing the fund, manager, terms and material risks — Correct answer
Option D. Proving that the fund cannot experience any future loss
Why it is wrong: Due diligence cannot establish that an investment will never lose money.
Answer: C. Fund due diligence assesses the fund, manager, governing terms and material risks before commitment. It supports an informed decision but cannot guarantee an outcome. Remember: Due diligence is evidence-based assessment rather than a guarantee.
Hint, shown before you answer in practice mode: Think about what evidence an investor needs before agreeing to long-term obligations. Common mistake: Reducing fund selection to the highest displayed return.
XIX-A-082easyconceptual
Q2What should be established before attributing a previous fund’s track record to a manager’s current investment team?
Option A. The current team’s preferred description of its market reputation
Why it is wrong: A description of reputation does not establish who made and managed the historical investments.
Option B. The current team’s willingness to repeat the previous return target
Why it is wrong: Repeating a target does not demonstrate ownership of the earlier track record.
Option C. The number of charts used in the current presentation
Why it is wrong: Presentation volume does not provide evidence of historical responsibility.
Option D. The current team’s actual responsibility for the earlier investments — Correct answer
Answer: D. The investor should establish the current team’s actual role in the earlier investments. A firm-level history cannot automatically be attributed to every person now employed by the firm. Remember: Track-record attribution requires evidence of responsibility.
Hint, shown before you answer in practice mode: Connect the historical investments to the people who actually worked on them. Common mistake: Assuming that every current employee created every past investment result.
XIX-A-083easyconceptual
Q3What does a key-person provision in a fund agreement typically address?
Option A. Each investor's right to appoint the fund's office staff while their investment remains
Why it is wrong: A key-person clause does not normally grant investors general staff-appointment powers.
Option B. A guarantee that all employees will stay with the fund until its final asset is sold
Why it is wrong: A contractual consequence for departure is not a guarantee that an employee cannot leave.
Option C. Consequences when specified important investment professionals become unavailable — Correct answer
Option D. The fund's process for deciding how many guests may attend its annual investor meeting
Why it is wrong: Meeting attendance limits do not address the loss of a named investment professional.
Answer: C. A key-person provision addresses agreed consequences when specified important professionals become unavailable. Possible restrictions and replacement procedures depend on the contract. Remember: Check what the agreement does if a crucial team member leaves.
Hint, shown before you answer in practice mode: Consider what happens when the people central to the strategy can no longer perform their roles. Common mistake: Assuming that naming a key person ensures that person will never depart.
XIX-A-084easyconceptual
Q4Why is a fund’s vintage year relevant when choosing a private capital performance benchmark?
Option A. Funds starting in similar periods may face more comparable conditions — Correct answer
Option B. The oldest vintage automatically has the strongest manager
Why it is wrong: A longer operating history does not automatically establish superior management quality.
Option C. The vintage year fixes a fund’s final return by regulation
Why it is wrong: A start-year classification does not set a legal investment return.
Option D. Funds from the same vintage must invest in identical companies
Why it is wrong: A common vintage does not require identical portfolios.
Answer: A. Vintage year helps identify funds that began under more comparable market conditions. Strategy, geography, fees and maturity still matter when selecting a benchmark. Remember: A useful benchmark should reflect both the strategy and the investment period.
Hint, shown before you answer in practice mode: Compare the market environment in which funds began deploying capital. Common mistake: Comparing funds from very different market cycles without adjustment.
XIX-A-085easyconceptual
Q5What makes a reference check more useful when assessing an investment manager?
Option A. Treating every introduction from the manager as independent proof
Why it is wrong: Introductions may be useful, but their selection and potential bias still need to be assessed.
Option B. Relying only on anonymous praise quoted in a brochure
Why it is wrong: Anonymous praise is difficult to verify and may omit negative experiences.
Option C. Speaking with relevant people who can describe firsthand experience — Correct answer
Option D. Asking only whether the reference recognises the manager’s name
Why it is wrong: Name recognition provides much less evidence than direct experience of conduct and execution.
Answer: C. References are more useful when relevant people describe firsthand experience that can be probed and compared. A reference’s relationship and possible bias should also be considered. Remember: Prefer specific, checkable experience over promotional praise.
Hint, shown before you answer in practice mode: Consider whether the reference can support its opinion with observed events. Common mistake: Treating a carefully selected testimonial as a complete reference check.
XIX-A-086easyconceptual
Q6Which review belongs most directly to operational due diligence on a fund manager?
Option A. Reviewing cash controls, record keeping and service-provider oversight — Correct answer
Option B. Forecasting the industry expected to grow fastest over the next ten years
Why it is wrong: An industry forecast is an investment thesis issue rather than an operational control review.
Option C. Choosing the long-term mix of asset classes that suits the investor best
Why it is wrong: Personal asset allocation differs from checking how the fund manager operates.
Option D. Estimating the price that one portfolio business could fetch when it is sold
Why it is wrong: A company valuation is not the central task of assessing the manager’s operational controls.
Answer: A. Operational due diligence examines controls such as cash handling, records and oversight of service providers. Strong investment ideas do not compensate for weak operations. Remember: Manager assessment includes the operating system behind investment decisions.
Hint, shown before you answer in practice mode: Look beyond investment ideas to how the organisation handles assets and information. Common mistake: Reviewing investment performance while ignoring cash and record controls.
XIX-A-087easyconceptual
Q7One fund advertises gross internal rate of return and another reports net investor return. What is needed for a meaningful comparison?
Option A. Rank the larger percentage without any adjustment
Why it is wrong: A larger gross percentage may not represent the better net investor result.
Option B. Reconcile both returns to a consistent cash-flow and fee basis — Correct answer
Option C. Subtract the same arbitrary percentage from both reported returns
Why it is wrong: An arbitrary deduction does not reflect either fund’s actual cash flows or fee terms.
Option D. Ignore the calculation dates because both figures are annualised
Why it is wrong: Annualisation does not remove differences in cash-flow dates, maturity or valuation timing.
Answer: B. The returns must be reconciled to a consistent cash-flow and fee basis before comparison. Their measurement dates and valuation assumptions also need to be compatible. Remember: Comparable return labels need comparable calculation inputs.
Hint, shown before you answer in practice mode: Check whether both percentages describe the same level of investor experience. Common mistake: Ranking different performance measures as though their percentages were interchangeable.
XIX-A-088mediumconceptual
Q8Why does a track record dominated by unsold holdings need particular scrutiny?
Option A. An estimated high value assures investors that a buyer will pay that price
Why it is wrong: A valuation estimate does not ensure that an actual buyer will pay the same amount.
Option B. Much of the reported value depends on valuations rather than completed exits — Correct answer
Option C. Unsold holdings must have a zero value under the law until the fund sells them
Why it is wrong: Unsold assets can have a supported valuation without being assigned zero automatically.
Option D. Gains shown on unsold holdings are always more reliable than cash from sales
Why it is wrong: Estimates are not automatically more reliable than completed cash realisations.
Answer: B. A track record dominated by unsold assets depends heavily on valuation assumptions. Those estimates need scrutiny because eventual sale prices and timing may differ. Remember: Understand how much performance is realised and how much is estimated.
Hint, shown before you answer in practice mode: Separate completed cash outcomes from estimated remaining values. Common mistake: Giving an unsold valuation the same certainty as a completed cash exit.
XIX-A-089mediumconceptual
Q9Why might departures of experienced deal leaders weaken reliance on a manager’s historical record?
Option A. Historical investments automatically become legally invalid after a departure
Why it is wrong: A staff departure does not automatically invalidate previous investments.
Option B. A departure guarantees that all remaining investments will lose money
Why it is wrong: Team changes are a risk factor, not proof of inevitable losses.
Option C. Every replacement manager must repeat exactly the same investment outcomes
Why it is wrong: Replacement professionals do not necessarily produce identical decisions or results.
Option D. The people responsible for past execution may no longer manage the fund — Correct answer
Answer: D. Past performance may be less relevant when the people responsible for it are no longer managing the fund. The remaining team’s capability and continuity should be assessed. Remember: A track record must be read together with team continuity.
Hint, shown before you answer in practice mode: Link the skills needed for future execution to the team that remains. Common mistake: Assuming that a management company’s historical record survives every team change unchanged.
XIX-A-090mediumconceptual
Q10Beyond the amount, why should an investor examine how the sponsor finances its commitment?
Option A. Financing terms can affect the sponsor’s economic exposure and incentives — Correct answer
Option B. Every borrowed contribution is automatically prohibited in every structure
Why it is wrong: A blanket prohibition should not be assumed without checking the applicable rule and arrangement.
Option C. A stated sponsor commitment proves every conflict has been eliminated
Why it is wrong: A commitment can support alignment while other conflicts remain.
Option D. The source of money guarantees the fund’s investment return
Why it is wrong: Financing arrangements do not guarantee portfolio outcomes.
Answer: A. The financing terms can change the sponsor’s economic exposure and incentives even when the stated amount is unchanged. The structure should therefore be understood rather than assessed only by its headline number. Remember: Alignment depends on economic exposure as well as the stated commitment.
Hint, shown before you answer in practice mode: Look at who ultimately bears gains and losses on the commitment. Common mistake: Treating the commitment percentage as a complete measure of alignment.
XIX-A-091mediumconceptual
Q11Why should a much larger successor fund be tested against the manager’s established investment strategy?
Option A. More capital may require different deal sizes or stretch available opportunities — Correct answer
Option B. A larger fund is legally required to repeat every old investment
Why it is wrong: A successor fund is not required to reproduce the predecessor’s exact portfolio.
Option C. A larger fund automatically reduces every portfolio concentration risk
Why it is wrong: Larger size alone does not prove that the portfolio will be better diversified.
Option D. A larger fund must always have a lower management fee in rupees
Why it is wrong: A bigger capital base does not necessarily produce a lower absolute management fee.
Answer: A. A larger fund may need larger deals or more opportunities than the previous strategy supported. The investor should assess strategy capacity rather than assume size is an improvement. Remember: Fund growth should be consistent with the strategy’s capacity.
Hint, shown before you answer in practice mode: Consider whether the original strategy can absorb the additional money. Common mistake: Assuming that raising more capital necessarily improves the investor proposition.
XIX-A-092mediumconceptual
Q12Why should due diligence examine a key manager’s outside business interests?
Option A. They replace the need to examine fund-level investment results
Why it is wrong: Outside interests are one assessment area, not a substitute for performance and process review.
Option B. They may create competing demands on time or conflicts of interest — Correct answer
Option C. They automatically cancel the manager’s existing fund registration
Why it is wrong: Outside interests do not automatically cancel registration in every situation.
Option D. They prove that every outside investment is unlawful
Why it is wrong: The existence of outside activity alone does not prove illegality.
Answer: B. Outside interests may create time pressures or conflicts with the fund’s responsibilities. Their nature, disclosure and management matter more than simply counting them. Remember: Assess whether outside activities affect the manager’s ability to serve the fund.
Hint, shown before you answer in practice mode: Consider attention, incentives and competing obligations. Common mistake: Ignoring other commitments because the manager has a strong reputation.
XIX-A-093mediumconceptual
Q13A ₹2 crore management fee is reduced by 50% of ₹0.6 crore transaction fees under the contract. What management fee remains before tax?
Option A. ₹2.3 crore
Why it is wrong: ₹2.3 crore adds the offset instead of reducing the management fee.
Option B. ₹1.4 crore
Why it is wrong: ₹1.4 crore deducts all transaction fees rather than the stated 50% offset.
Option C. ₹1.7 crore — Correct answer
Option D. ₹1 crore
Why it is wrong: ₹1 crore halves the management fee rather than applying 50% to transaction fees.
Answer: C. The management fee remaining is ₹1.7 crore under the stated contractual offset. Offset = 50% × ₹0.6 crore = ₹0.3 crore. Remaining fee = ₹2 crore − ₹0.3 crore = ₹1.7 crore. Remember: Apply a fee offset to the correct base and in the correct direction.
Hint, shown before you answer in practice mode: Identify the amount to which the offset percentage applies. Common mistake: Assuming that an offset percentage applies to the management fee itself.
XIX-A-094mediumnumerical
Q14On a ₹1 crore fee base, Plan A charges 1% plus ₹40,000 yearly. Plan B charges 1.2% only. What is their annual difference before tax?
Option A. Plan A costs ₹40,000 more
Why it is wrong: This compares only the fixed charge and ignores the difference in percentage fees.
Option B. Plan A costs ₹20,000 more — Correct answer
Option C. Plan A costs ₹20,000 less
Why it is wrong: This reverses the result after the fixed charge is included.
Option D. Both plans cost the same
Why it is wrong: The fixed charge makes the lower percentage plan more expensive on this base.
Answer: B. Plan A costs ₹20,000 more on the stated base. Plan A = 1% × ₹1 crore + ₹40,000 = ₹1,40,000. Plan B = 1.2% × ₹1 crore = ₹1,20,000. Difference = ₹20,000. Remember: A lower fee percentage can still produce a higher total charge.
Hint, shown before you answer in practice mode: Convert both fee arrangements into rupees before comparing them. Common mistake: Comparing percentages while ignoring fixed costs.
XIX-A-095mediumnumerical
Q15Capital calls of ₹18 lakh and ₹22 lakh fall before any receipts. Available cash is ₹25 lakh. What funding shortfall must be addressed?
Option A. ₹3 lakh
Why it is wrong: ₹3 lakh compares available cash only with the second call and ignores the first.
Option B. ₹40 lakh
Why it is wrong: ₹40 lakh is the total amount due before deducting the available cash.
Option C. ₹7 lakh
Why it is wrong: ₹7 lakh is the cash left after only the first call and ignores the second call.
Option D. ₹15 lakh — Correct answer
Answer: D. The funding shortfall is ₹15 lakh because total calls exceed available cash. Calls = ₹18 lakh + ₹22 lakh = ₹40 lakh. Shortfall = ₹40 lakh − ₹25 lakh = ₹15 lakh. Remember: Liquidity planning must include all relevant commitments, not just the next call.
Hint, shown before you answer in practice mode: Aggregate the obligations falling before the next cash inflow. Common mistake: Assessing each capital call separately against the same available cash.
XIX-A-096mediumnumerical
Q16A fund’s private placement memorandum limits investments to healthcare businesses. A sales presentation describes planned property-development deals that do not fit that limit. No approved strategy amendment is available. What should due diligence establish before commitment?
Option A. Resolve the mandate inconsistency through the authorised documents and process — Correct answer
Option B. Assume the new deals are permitted because they might be profitable
Why it is wrong: Possible profits do not establish that an investment is within the authorised strategy.
Option C. Treat the presentation as an automatic amendment to the fund mandate
Why it is wrong: A sales presentation does not by itself amend the governing mandate.
Option D. Ignore the discrepancy because the investor will not select the deals
Why it is wrong: Delegating investment selection does not remove the importance of the agreed mandate.
Answer: A. The investor should resolve the mandate inconsistency through the authorised documents and amendment process. Marketing material cannot silently expand the fund’s investment authority. Remember: A sales claim must be consistent with the authorised investment mandate.
Hint, shown before you answer in practice mode: Compare the proposed activity with the authority actually granted to the manager. Common mistake: Allowing an attractive new opportunity to override the agreed strategy without proper process.
XIX-A-097hardapplication
Q17A mature private credit fund reports a lower net return than a young venture capital fund. The venture figure depends mainly on unsold company valuations, and the funds have different risk and timing profiles. How should an investor interpret the ranking?
Option A. The two figures are not a sufficient like-for-like manager comparison — Correct answer
Option B. The credit manager is necessarily more skilled because its number is lower
Why it is wrong: A lower return does not itself establish more disciplined or superior management.
Option C. The venture manager is necessarily more skilled because its number is higher
Why it is wrong: The higher number may reflect different risk, maturity and valuation assumptions rather than superior skill.
Option D. Both managers must have equal skill because both returns are net
Why it is wrong: Using net returns does not remove all differences between strategies and cash-flow profiles.
Answer: A. The return figures alone do not provide a like-for-like comparison of manager skill. Appropriate strategy and vintage benchmarks, cash-flow details and valuation evidence are needed. Remember: Normalising fees is only one part of a meaningful benchmark comparison.
Hint, shown before you answer in practice mode: Examine strategy, maturity and valuation basis before drawing a conclusion about skill. Common mistake: Attributing differences in strategy returns entirely to manager skill.
XIX-A-098hardapplication
Q18A wealthy investor can fund all expected calls without borrowing. However, the investor says that even a small temporary loss would cause an immediate demand to withdraw. What additional issue must be assessed?
Option A. Only whether the investor’s wealth exceeds the next investor’s wealth
Why it is wrong: Relative wealth does not establish the investor’s comfort with risk or illiquidity.
Option B. Only whether the fund permits contributions from wealthy individuals
Why it is wrong: Eligibility does not resolve the specific behavioural and liquidity mismatch described.
Option C. Whether a high target return makes all loss concerns irrelevant
Why it is wrong: A target return cannot remove the investor’s aversion to losses or need for access.
Option D. Willingness to bear risk and accept the fund’s withdrawal restrictions — Correct answer
Answer: D. The investor’s willingness to bear risk and accept withdrawal restrictions still needs assessment. Wealth alone does not establish emotional tolerance or a compatible investment horizon. Remember: Risk capacity and risk tolerance are different aspects of suitability.
Hint, shown before you answer in practice mode: Separate the financial ability to bear a loss from the willingness to experience one. Common mistake: Using wealth as the sole measure of willingness to take investment risk.
XIX-A-099mediumapplication
Q19An investor selects four funds with different managers. Each fund has substantial exposure to the same narrow industry and several of the same businesses. What should the portfolio review focus on?
Option A. Overlapping businesses no longer matter when separate fund units are held
Why it is wrong: The economic exposures remain relevant even when held through separate vehicles.
Option B. The four manager names are sufficient proof of economic diversification
Why it is wrong: Different names do not remove overlap in underlying holdings and risk drivers.
Option C. Combined underlying exposure rather than just the number of funds — Correct answer
Option D. The investor’s risk is always one-quarter of a single-fund investment
Why it is wrong: Risk does not automatically fall in proportion to the count of funds.
Answer: C. The review should aggregate underlying exposures across the funds. Several funds can still leave the investor concentrated in the same companies or industry. Remember: Diversification must be assessed on a look-through basis.
Hint, shown before you answer in practice mode: Look through the fund labels to the businesses and sectors actually owned. Common mistake: Counting funds instead of examining shared underlying risk.
XIX-A-100hardapplication
Q20Why should an investor examine the repayment resources behind a carried-interest clawback?
Option A. A contractual repayment claim may be difficult to collect in practice — Correct answer
Option B. A written clawback makes collection certain in every circumstance
Why it is wrong: A written obligation does not automatically establish that the liable party has resources to pay.
Option C. A clawback always cancels every future management fee
Why it is wrong: A repayment clause does not necessarily cancel a separate management fee entitlement.
Option D. A clawback guarantees that the fund’s assets will recover in value
Why it is wrong: A manager repayment obligation does not guarantee recovery in portfolio asset values.
Answer: A. A clawback may be difficult to collect if the liable party lacks resources or the mechanism is weak. Due diligence should examine practical recovery arrangements as well as the wording. Remember: A protection is only as useful as its scope and practical enforceability.
Hint, shown before you answer in practice mode: Distinguish the existence of a legal claim from the practical ability to recover money. Common mistake: Stopping at the existence of a protective clause without assessing recovery.
XIX-A-101mediumconceptual
Q21A manager offers selected investors a separate co-investment alongside its fund. The proposed allocation of transaction expenses would leave the main fund bearing costs for both groups, and no supporting policy is provided. What requires scrutiny?
Option A. Whether the selected co-investors may set all charges without review by the main fund
Why it is wrong: Selected investors do not automatically obtain unilateral authority over expenses borne by the fund.
Option B. Whether calling the deal a co-investment automatically allows any split of transaction costs
Why it is wrong: Calling an investment a co-investment does not automatically authorise an arbitrary allocation of costs.
Option C. Whether investing in the same business removes the need to examine separate costs
Why it is wrong: Separate groups can share the same investment while bearing different and potentially unfair charges.
Option D. Whether costs and opportunities are allocated fairly under the applicable arrangements — Correct answer
Answer: D. The allocation of costs and opportunities needs review for fairness and consistency with applicable arrangements. A co-investment opportunity does not justify shifting unsupported costs to other investors. Remember: Co-investment diligence includes who pays, who benefits and how conflicts are managed.
Hint, shown before you answer in practice mode: Follow which investor group benefits from each expense and which group pays it. Common mistake: Focusing only on access to a deal while ignoring expense allocation.
XIX-A-102hardapplication
Q22When a fund claims to consider environmental, social and governance risks, what evidence most directly tests that claim?
Option A. A generic policy that contains no evidence of implementation
Why it is wrong: A policy statement alone does not demonstrate how the process affects investments.
Option B. Frequent use of sustainability terms in the sales presentation
Why it is wrong: Marketing vocabulary does not show whether material risks were assessed or acted on.
Option C. The total amount of investor commitments raised by the fund
Why it is wrong: The amount raised does not establish whether environmental, social and governance risks were considered.
Option D. Documented risk assessments linked to actual investment decisions — Correct answer
Answer: D. Documented assessments linked to investment decisions provide evidence that material environmental, social and governance risks are considered. Labels and general policy statements alone do not show implementation. Remember: Test environmental, social and governance claims through evidence of implementation.
Hint, shown before you answer in practice mode: Distinguish a stated policy from evidence that it influences decisions. Common mistake: Treating sustainability language as proof of a functioning investment process.
XIX-A-103mediumconceptual
Q23A manager shows an attractive fund return and says the result reflects a repeatable process. Most gains come from one unsold business valued using an unusually high multiple, while the rest of the portfolio is flat. What should the investor do next?
Option A. Give every holding in the portfolio a zero value because one investment dominates the gains
Why it is wrong: Concentration warrants investigation rather than automatically setting every asset value to zero.
Option B. Test the valuation and assess concentration and repeatability before relying on the return — Correct answer
Option C. Leave out the leading holding and judge the track record only by the number of investments
Why it is wrong: The dominant holding is central to understanding the reported return and associated risk.
Option D. Treat the claimed process as repeatable solely because the total return figure looks attractive
Why it is wrong: A high aggregate figure does not prove that the process is repeatable or the valuation is supportable.
Answer: B. The investor should test the dominant valuation and assess whether the result is concentrated and repeatable. A single estimated gain can make an aggregate track record look stronger than the underlying evidence. Remember: Investigate the sources of performance, not only the headline number.
Hint, shown before you answer in practice mode: Ask what actually drives the result and how much evidence supports that driver. Common mistake: Treating an aggregate return as proof of a consistently successful process.
XIX-A-104hardapplication
Fund Due Diligence – Investor Perspective: common questions
How many practice questions are there on Fund Due Diligence – Investor Perspective?
23 questions, all written out on this page with the correct answer and why each other option is wrong. This unit is one of the 13 practice topics for NISM Series XIX-A, which has 150 questions in total.
Are these real NISM Series XIX-A questions on Fund Due Diligence – Investor Perspective?
No. LearnNifty wrote every question from NISM's public syllabus. NISM does not publish its question bank, so nobody can offer you the real paper. Use these questions to check that an idea has gone in. Use the official NISM workbook to see what is examined.
How much of the NISM Series XIX-A exam is Fund Due Diligence – Investor Perspective?
NISM's published syllabus outline gives it 15 of the paper's 100 marks, or 15% of the exam. It is quoted from the outline, not estimated. The published unit it comes from: 19 March 2025 Annexure I, Unit 8: Fund Due Diligence – Investor Perspective
Does negative marking apply to NISM Series XIX-A?
Yes. NISM takes off 10% of a question's marks for a wrong answer. On a 1-mark question that is 0.1 marks off. A blank question earns nothing and loses nothing, so a wrong guess costs marks on this paper. Timed practice here uses the same rule.
Are these practice questions kept up to date?
Each question is written against the rules printed on this page, last checked on 5 September 2026. A Budget or a SEBI circular can change a rate, a lot size or an expiry day. If one of those rules changes before your exam, treat the questions that use it as out of date. Then check NISM's current workbook.
Legal Documents and Negotiations – Investor Perspective
15 questions on Legal Documents and Negotiations – Investor Perspective. Its quiz opens on that unit.
Open Legal Documents and Negotiations – Investor PerspectivePaper Trading Try it on the practice trading desk