Investment Process and Governance of Funds
15 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
- Fund Due Diligence – Investor Perspective23
- 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 | 10 of 100 marks (10%) |
Source: 19 March 2025 Annexure I, Unit 7: Investment Process and Governance of Funds
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 If a rule changes before your exam, treat the linked questions as out of date and check NISM's current workbook.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 15 questions on Investment Process and Governance of Funds, with answers
Q1What is the main purpose of deal sourcing in a private capital fund’s investment process?
Option A. Certifying that every contacted business is investment-ready
Why it is wrong: Sourcing produces candidates for assessment, not automatic investment approval.
Option B. Calculating each investor’s personal tax liability
Why it is wrong: Investor tax calculation is not the purpose of identifying investment opportunities.
Option C. Finding potential investments that fit the fund’s mandate — Correct answer
Option D. Distributing final winding-up proceeds to investors
Why it is wrong: Final distributions happen much later than the initial search for investments.
Answer: C. Deal sourcing identifies potential investments that may fit the fund’s mandate. A sourced opportunity still needs assessment and approval. Remember: Finding a deal is the start of evaluation, not its completion.
Hint, shown before you answer in practice mode: Place sourcing before detailed assessment and negotiation. Common mistake: Treating access to a deal as evidence that it is a good investment.
XIX-A-067easyconceptual
Q2Which question is primarily part of commercial due diligence on a potential investee business?
Option A. Whether the company’s title documents are legally valid
Why it is wrong: Legal title is primarily a legal due-diligence issue.
Option B. Whether the subscription agreement is properly executed
Why it is wrong: Execution of the transaction documents is primarily a legal documentation issue.
Option C. Whether customers will keep buying its products profitably — Correct answer
Option D. Whether securities are correctly entered in custody records
Why it is wrong: Custody record accuracy is an operational records issue rather than the central commercial question.
Answer: C. Commercial due diligence examines whether the business has a viable market and sustainable economics. This is different from verifying legal documents or custody records. Remember: Assess business quality separately from legal and operational checks.
Hint, shown before you answer in practice mode: Focus on the business’s market, customers and economics. Common mistake: Assuming that valid paperwork proves the business model is sound.
XIX-A-068easyconceptual
Q3Which matter is most directly examined through legal due diligence before an investment?
Option A. The efficiency of the factory’s production process
Why it is wrong: Production efficiency is principally a business or technical assessment matter.
Option B. Ownership rights and material outstanding litigation — Correct answer
Option C. Customers’ willingness to pay for a new product
Why it is wrong: Customer demand is principally a commercial due-diligence matter.
Option D. The annual return investors hope to receive
Why it is wrong: Investor expectations do not establish the legal condition of the target business.
Answer: B. Legal due diligence examines matters such as ownership rights and material litigation. A commercially attractive business may still have significant legal problems. Remember: A business can be commercially promising but legally difficult to invest in.
Hint, shown before you answer in practice mode: Look for rights, obligations and disputes that may affect the transaction. Common mistake: Allowing enthusiasm for business growth to replace legal checks.
XIX-A-069easyconceptual
Q4What is a central governance purpose of an investment committee in a fund?
Option A. Allowing undocumented investment exceptions whenever convenient
Why it is wrong: A governance process should support documented decisions rather than informal exceptions.
Option B. Reviewing proposed investments through an agreed decision process — Correct answer
Option C. Replacing every legal obligation of the fund manager
Why it is wrong: An investment committee does not automatically transfer away all of the manager’s responsibilities.
Option D. Guaranteeing profitable exits from every approved investment
Why it is wrong: Committee approval does not guarantee an investment’s outcome.
Answer: B. An investment committee supports a structured process for reviewing and deciding on investments. Its existence does not by itself guarantee compliance or performance. Remember: A committee is a governance mechanism rather than a performance guarantee.
Hint, shown before you answer in practice mode: Consider how proposed investments are challenged, authorised and recorded. Common mistake: Assuming that committee approval removes the need to assess the decision process.
XIX-A-070easyconceptual
Q5What does a tag-along right generally allow a protected minority shareholder to do?
Option A. Replace the board without following the agreed voting process
Why it is wrong: Tag-along rights do not confer a general power to replace the board.
Option B. Force every shareholder to accept the minority’s chosen sale
Why it is wrong: A right to compel others to sell is different from a right to join another shareholder’s sale.
Option C. Join a qualifying sale by the majority shareholder — Correct answer
Option D. Subscribe first to every new issue of shares
Why it is wrong: Priority to subscribe to a new issue is associated with pre-emption rights rather than tag-along rights.
Answer: C. A tag-along right generally lets a protected minority shareholder join a qualifying majority sale on the agreed terms. Its scope depends on the transaction documents. Remember: Tag-along rights help minority holders participate in specified exits.
Hint, shown before you answer in practice mode: Recall the right that lets a minority investor accompany another shareholder’s exit. Common mistake: Confusing a right to join a sale with a right to force other holders to sell.
XIX-A-071mediumconceptual
Q6What does a drag-along right generally permit when its agreed conditions are satisfied?
Option A. Buying newly issued shares before outside subscribers
Why it is wrong: Priority in a new share issue is a pre-emption matter rather than a drag-along right.
Option B. Requiring other shareholders to participate in a qualifying sale — Correct answer
Option C. Receiving company financial statements before each board meeting
Why it is wrong: Information access is separate from a right to compel participation in a sale.
Option D. Collecting a guaranteed minimum annual dividend
Why it is wrong: A drag-along right does not guarantee annual distributions.
Answer: B. A drag-along right can require other shareholders to participate in a qualifying sale when its agreed conditions are met. It is different from a minority holder’s option to tag along. Remember: Drag-along rights can compel participation, subject to agreed safeguards.
Hint, shown before you answer in practice mode: Focus on the exit right that can bring other shareholders into the same sale. Common mistake: Assuming that a drag-along right is merely an optional invitation to sell.
XIX-A-072mediumconceptual
Q7What is the main purpose of a pre-emption right on a new share issue?
Option A. Giving existing holders an opportunity to preserve their ownership proportion — Correct answer
Option B. Requiring the company to repay all equity as debt
Why it is wrong: A pre-emption right does not change equity into a debt repayment obligation.
Option C. Ensuring an existing holder pays nothing for additional shares
Why it is wrong: Preserving ownership normally requires subscribing under the applicable terms rather than receiving free shares.
Option D. Guaranteeing that the company’s total value will rise after the issue
Why it is wrong: A participation right cannot guarantee the company’s valuation.
Answer: A. A pre-emption right gives existing holders an opportunity to participate in a new issue and preserve their ownership proportion. The holder may need to contribute additional money to exercise it. Remember: A right to protect ownership proportion is not free protection against dilution.
Hint, shown before you answer in practice mode: Consider what new shares do to an existing investor’s percentage ownership. Common mistake: Assuming that an existing percentage is preserved without any further subscription.
XIX-A-073mediumconceptual
Q8Which contractual right most directly helps an investor review an investee company’s ongoing financial performance?
Option A. A right to subscribe before outsiders in a new issue
Why it is wrong: A new-issue participation right does not by itself provide regular financial reports.
Option B. A right to join a qualifying sale by another shareholder
Why it is wrong: A sale participation right concerns exit participation rather than routine performance information.
Option C. A right to receive agreed financial and operating reports — Correct answer
Option D. A right to receive capital before ordinary equity on liquidation
Why it is wrong: A liquidation priority concerns distribution order, not continuing information access.
Answer: C. An information right provides access to the agreed financial and operating reports. Access helps monitoring but does not itself confer day-to-day management control. Remember: Information rights support monitoring without necessarily giving operational control.
Hint, shown before you answer in practice mode: Choose the right linked to access to reliable operating information. Common mistake: Assuming that an exit or payment-priority right also provides regular information.
XIX-A-074mediumconceptual
Q9What is the primary function of representations and warranties in an investment agreement?
Option A. Providing contractual statements about specified facts and conditions — Correct answer
Option B. Allowing every investor to change the agreement unilaterally
Why it is wrong: Representations and warranties do not grant a general unilateral amendment power.
Option C. Replacing every investigation of the target business
Why it is wrong: Contractual statements complement rather than replace appropriate due diligence.
Option D. Promising that the investment must earn the target return
Why it is wrong: Representations about specified matters do not automatically guarantee an investment return.
Answer: A. Representations and warranties provide contractual statements about specified facts and conditions. Their remedies depend on the agreement and applicable law. Remember: Contractual factual assurances are not a substitute for diligence or a return guarantee.
Hint, shown before you answer in practice mode: Separate statements about the business from forecasts about its future. Common mistake: Reading a warranty about a fact as a promise of investment success.
XIX-A-075mediumconceptual
Q10What is the purpose of a condition precedent in an investment transaction?
Option A. A right for the investor to disregard documents signed before the transaction is completed
Why it is wrong: A condition precedent does not create a general right to disregard signed documents.
Option B. A performance fee that becomes payable whenever the fund completes a profitable exit
Why it is wrong: A performance fee is a payment term rather than a pre-closing requirement.
Option C. A specified requirement to be satisfied before the relevant closing obligation — Correct answer
Option D. A forecast of the company's future profit after the investor has exited the investment
Why it is wrong: A profit forecast is not a contractual condition that must be fulfilled for closing.
Answer: C. A condition precedent is a specified requirement that must be satisfied before the relevant closing obligation arises. Any waiver must follow the agreement and applicable law. Remember: A pre-closing requirement should be checked before the relevant funds or rights are transferred.
Hint, shown before you answer in practice mode: Place the condition on the timeline before completion of the relevant step. Common mistake: Treating a condition precedent as something that can always be dealt with after closing.
XIX-A-076mediumconceptual
Q11Which statement about a term sheet’s legal effect is most accurate?
Option A. No definitive agreement is needed after any term sheet is signed
Why it is wrong: A term sheet does not automatically replace the detailed definitive documentation.
Option B. Every provision is always fully binding once the document is emailed
Why it is wrong: Emailing a term sheet does not automatically give all provisions identical binding force.
Option C. Every provision is always non-binding because of the document’s title
Why it is wrong: A document’s title does not prevent specified provisions from being binding.
Option D. Some provisions may bind even when the main investment terms do not — Correct answer
Answer: D. A term sheet may contain binding provisions even when its main investment terms are non-binding. Confidentiality or exclusivity provisions may have a different stated effect from the commercial outline. Remember: Determine legal effect from the terms, not the label alone.
Hint, shown before you answer in practice mode: Read the binding-status wording of each relevant clause. Common mistake: Assuming that every term sheet is either entirely binding or entirely non-binding.
XIX-A-077mediumconceptual
Q12A fund’s agreement requires its consent before the investee issues new shares or sells a major business division. Ordinary purchases within the approved budget remain with management. What do these reserved-matter rights provide?
Option A. Control over every routine purchase and staff assignment
Why it is wrong: The case expressly leaves ordinary budgeted activities with management.
Option B. An unconditional guarantee against any decline in company value
Why it is wrong: A consent right cannot guarantee the value of the investment.
Option C. Automatic authority to ignore the company’s remaining shareholders
Why it is wrong: Specified consent rights do not erase other shareholders’ legal or contractual rights.
Option D. Consent protection over specified major decisions — Correct answer
Answer: D. These rights protect the fund by requiring its consent for specified major decisions. They do not automatically transfer all operating decisions to the fund. Remember: Reserved matters protect defined decisions rather than every business activity.
Hint, shown before you answer in practice mode: Distinguish a veto over listed matters from complete day-to-day control. Common mistake: Treating a limited consent right as complete management control.
XIX-A-078hardapplication
Q13Two funds run by the same manager can both invest in a scarce opportunity. The manager proposes allocating it entirely to the fund paying the higher fee, without applying its allocation policy. What is the main governance concern?
Option A. A fee-driven conflict may distort fair allocation between the funds — Correct answer
Option B. Disclosure alone always removes the need for an allocation process
Why it is wrong: Disclosure does not automatically replace an appropriate process for managing a conflict.
Option C. The higher fee always creates a legal priority over the opportunity
Why it is wrong: A higher management fee does not itself establish a right to receive the opportunity.
Option D. Common management automatically requires identical holdings in both funds
Why it is wrong: Fair allocation does not require every fund to hold identical investments regardless of mandate and circumstances.
Answer: A. The manager’s fee incentive creates a conflict that may distort allocation between the funds. The manager should apply its disclosed conflict and allocation arrangements rather than improvise a fee-based preference. Remember: An allocation decision must not be driven solely by the manager’s compensation.
Hint, shown before you answer in practice mode: Ask whose interests are driving the allocation decision. Common mistake: Assuming that a disclosed conflict no longer needs to be managed.
XIX-A-079hardapplication
Q14A portfolio borrower breaches an agreed financial covenant. The agreement allows specified remedies and a documented waiver process, and it does not say every breach causes immediate repayment. What should the fund do first?
Option A. Ignore the breach as long as the borrower has made interest payments
Why it is wrong: An interest payment does not remove the need to address a separate covenant breach.
Option B. Treat the breach as an automatic conversion into ordinary equity
Why it is wrong: Conversion requires an applicable contractual or legal basis, not simply the existence of a breach.
Option C. Review the breach and follow the agreement’s remedy or waiver process — Correct answer
Option D. Assume the entire debt is immediately repayable under every covenant
Why it is wrong: The case states that automatic immediate repayment does not follow every breach.
Answer: C. The fund should assess the breach and follow the agreed remedy or waiver process. A covenant breach has the consequences specified by the relevant agreement and applicable law. Remember: Read the actual consequence of a covenant breach.
Hint, shown before you answer in practice mode: Use the actual contractual consequences rather than a universal assumption. Common mistake: Assuming that every covenant breach triggers exactly the same remedy.
XIX-A-080mediumapplication
Q15An investor chooses either a non-participating ₹20 crore preference or 25% of ₹120 crore equity exit proceeds. Which choice gives the higher receipt?
Option A. ₹30 crore — Correct answer
Option B. ₹20 crore
Why it is wrong: ₹20 crore takes the preference even though the alternative proportional receipt is higher.
Option C. ₹50 crore
Why it is wrong: ₹50 crore adds the preference and the proportional share despite the stated either-or, non-participating terms.
Option D. ₹25 crore
Why it is wrong: ₹25 crore incorrectly takes 25% of the proceeds remaining after a preference that is not being taken.
Answer: A. Choosing the proportional share gives the higher receipt of ₹30 crore. Preference alternative = ₹20 crore. Proportional alternative = 25% × ₹120 crore = ₹30 crore. The non-participating terms do not allow both amounts. Remember: A non-participating preference and a conversion alternative must not be added together.
Hint, shown before you answer in practice mode: Calculate both permitted alternatives without combining them. Common mistake: Calculating a participating payout when the stated right is non-participating.
XIX-A-081hardnumerical
Investment Process and Governance of Funds: common questions
How many practice questions are there on Investment Process and Governance of Funds?
15 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 Investment Process and Governance of Funds?
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 Investment Process and Governance of Funds?
NISM's published syllabus outline gives it 10 of the paper's 100 marks, or 10% of the exam. It is quoted from the outline, not estimated. The published unit it comes from: 19 March 2025 Annexure I, Unit 7: Investment Process and Governance of Funds
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.
Fund Due Diligence – Investor Perspective
23 questions on Fund Due Diligence – Investor Perspective. Its quiz opens on that unit.
Open Fund Due Diligence – Investor PerspectivePaper Trading Try it on the practice trading desk