Risk and Return – Investor and Fund Perspective
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
- Investment Process and Governance of Funds15
- 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 6: Risk and Return – Investor and Fund 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 If a rule changes before your exam, treat the linked questions as out of date and check NISM's current workbook.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 15 questions on Risk and Return – Investor and Fund Perspective, with answers
Q1Which risk arises when a borrower may fail to pay interest or repay principal as agreed?
Option A. Concentration risk
Why it is wrong: Concentration risk concerns excessive exposure to a narrow set of holdings rather than the definition of payment default risk.
Option B. Currency risk
Why it is wrong: Currency risk concerns exchange-rate movements rather than the borrower’s failure to pay.
Option C. Reinvestment risk
Why it is wrong: Reinvestment risk concerns the rate available on reinvested cash rather than the promised payment failing.
Option D. Credit risk — Correct answer
Answer: D. 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, shown before you answer in practice mode: 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-052easyconceptual
Q2What commonly contributes to the early negative part of a private fund’s J curve?
Option A. Every investor receives the complete capital commitment back first
Why it is wrong: Full repayment of capital at the start is not the cause of early negative fund performance.
Option B. Early costs arise before investments mature and realise gains — Correct answer
Option C. All gains must legally be recognised before any costs
Why it is wrong: The J-curve explanation is not based on a rule requiring gains to precede costs.
Option D. The fund’s assets must earn a fixed negative interest rate
Why it is wrong: Early negative performance does not require assets with a fixed negative interest rate.
Answer: B. 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, shown before you answer in practice mode: 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-053easyconceptual
Q3What mainly distinguishes an investor’s net internal rate of return from a comparable gross fund return?
Option A. Net return ignores the dates when investors make capital contributions
Why it is wrong: Net internal rate of return still depends on the timing of investor cash flows.
Option B. Net return reflects applicable investor-level fees and profit sharing — Correct answer
Option C. Net return treats the fund's unsold assets as having no remaining value
Why it is wrong: A net performance calculation does not automatically value every unsold asset at zero.
Option D. Net return treats an investor's promised commitment as cash already received
Why it is wrong: Unpaid commitments are not automatically cash received by the investor.
Answer: B. 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, shown before you answer in practice mode: 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-054easyconceptual
Q4An investor pays ₹100 lakh today and receives ₹112 lakh exactly one year later, with no other cash flows. What is the annual return?
Option A. 112%
Why it is wrong: 112% expresses the ending amount as a percentage of the starting amount, without subtracting the original capital.
Option B. 1.12%
Why it is wrong: 1.12 is the value multiple, not a percentage return of 1.12%.
Option C. 12% — Correct answer
Option D. 10.71%
Why it is wrong: 10.71% divides the gain by the ending value rather than the starting investment.
Answer: C. 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, shown before you answer in practice mode: Measure the gain relative to the amount initially invested. Common mistake: Using the ending investment value as the denominator for return.
XIX-A-055mediumnumerical
Q5An investor has paid ₹50 lakh and received ₹40 lakh in distributions. What is distributions to paid-in capital, or DPI?
Option A. 0.20 times
Why it is wrong: 0.20 times measures the unpaid difference relative to contributions, not cumulative distributions.
Option B. 1.25 times
Why it is wrong: 1.25 times reverses the numerator and denominator.
Option C. 1.80 times
Why it is wrong: 1.80 times adds contributed capital to distributions before dividing, which is not DPI.
Option D. 0.80 times — Correct answer
Answer: D. 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, shown before you answer in practice mode: Use cash already distributed, not the estimated value of unsold holdings. Common mistake: Including unsold asset values in a cash-distribution metric.
XIX-A-056mediumnumerical
Q6An investor has paid ₹50 lakh and retains a fund interest valued at ₹30 lakh. What is residual value to paid-in capital, or RVPI?
Option A. 0.40 times
Why it is wrong: 0.40 times measures the difference from contributed capital rather than residual value.
Option B. 1.67 times
Why it is wrong: 1.67 times reverses the ratio by dividing contributed capital by residual value.
Option C. 0.60 times — Correct answer
Option D. 1.60 times
Why it is wrong: 1.60 times adds the original contribution to residual value, which overstates this metric.
Answer: C. 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, shown before you answer in practice mode: Focus on the value still held in the fund. Common mistake: Treating an estimate of residual value as money already received.
XIX-A-057mediumnumerical
Q7Paid-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?
Option A. 2.50 times
Why it is wrong: 2.50 times adds the original paid-in capital again, double counting it in total value.
Option B. 0.90 times
Why it is wrong: 0.90 times includes residual value alone and is RVPI rather than TVPI.
Option C. 0.60 times
Why it is wrong: 0.60 times includes distributions alone and is DPI rather than TVPI.
Option D. 1.50 times — Correct answer
Answer: D. 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, shown before you answer in practice mode: Combine value already returned with value still held. Common mistake: Interpreting the entire TVPI result as cash already returned.
XIX-A-058mediumnumerical
Q8A fully realised investment cost ₹60 lakh and generated ₹150 lakh of total proceeds. What is its gross multiple on invested capital?
Option A. 1.50 times
Why it is wrong: 1.50 times divides the profit of ₹90 lakh by cost rather than total proceeds by cost.
Option B. 0.40 times
Why it is wrong: 0.40 times reverses the ratio by dividing cost by proceeds.
Option C. 2.50 times — Correct answer
Option D. 3.50 times
Why it is wrong: 3.50 times adds the original cost to proceeds and counts returned capital twice.
Answer: C. 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 annualised return.
Hint, shown before you answer in practice mode: Use total value received, not only the gain. Common mistake: Reading a 2.50-times multiple as a fixed annual percentage return.
XIX-A-059mediumnumerical
Q9Two investments each pay back twice their initial cost in one final payment. Which has the higher annualised return?
Option A. The investment with the larger number of units
Why it is wrong: The unit count does not change the annualised return on identical proportional cash flows.
Option B. The investment that makes the final payment sooner — Correct answer
Option C. Both must have the same annualised return
Why it is wrong: Identical multiples do not imply identical annualised returns when timing differs.
Option D. The investment that makes the final payment later
Why it is wrong: With the same initial cost and final multiple, a longer wait lowers the annualised return.
Answer: B. 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, shown before you answer in practice mode: Hold the payment multiple constant and consider the effect of time. Common mistake: Ranking investments solely by their value multiple.
XIX-A-060mediumconceptual
Q10How can incomplete information create adverse selection when investors choose a private fund?
Option A. Investors can disregard differences in manager quality once the fee terms are disclosed
Why it is wrong: Fee disclosure alone does not reveal all relevant differences in manager or portfolio quality.
Option B. Investors automatically earn higher returns to make up for each gap in fund information
Why it is wrong: Information gaps do not automatically generate compensation or higher realised returns.
Option C. Investors may choose weaker opportunities they cannot distinguish from stronger ones — Correct answer
Option D. Investors remove every investment risk by choosing the fund with the longest lock-in
Why it is wrong: A long lock-in does not correct missing information about investment quality.
Answer: C. 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, shown before you answer in practice mode: 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-061mediumconceptual
Q11A 2% annual fee applies to a constant ₹100 crore base for exactly six months. Using simple half-year proration, what fee arises before tax?
Option A. ₹4 crore
Why it is wrong: ₹4 crore increases the full-year charge rather than prorating it for six months.
Option B. ₹2 crore
Why it is wrong: ₹2 crore is the full-year fee and ignores the stated half-year period.
Option C. ₹1 crore — Correct answer
Option D. ₹0.5 crore
Why it is wrong: ₹0.5 crore halves the annual rate and then halves the period again.
Answer: C. 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, shown before you answer in practice mode: 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-062mediumnumerical
Q12An investor pays ₹100 lakh today and receives ₹144 lakh exactly two years later, without interim flows. What is the annual internal rate of return?
Option A. 22%
Why it is wrong: 22% divides the total 44% gain by two and ignores annual compounding.
Option B. 44%
Why it is wrong: 44% is the total two-year gain rather than the annual internal rate of return.
Option C. 14.4%
Why it is wrong: 14.4% does not solve the compounded relationship between the stated cash flows.
Option D. 20% — Correct answer
Answer: D. 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, shown before you answer in practice mode: 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-063hardnumerical
Q13A 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?
Option A. To require repayment of the excess carried interest — Correct answer
Option B. To convert the manager’s excess payment into investor capital
Why it is wrong: A clawback is a repayment mechanism, not an automatic reclassification as investor capital.
Option C. To make investors pay the excess carried interest again
Why it is wrong: A clawback addresses the manager’s overpayment rather than charging it to investors a second time.
Option D. To excuse repayment whenever the earlier exit was profitable
Why it is wrong: The final contractual entitlement may require repayment despite an earlier profitable exit.
Answer: A. 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, shown before you answer in practice mode: 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-064hardapplication
Q14All 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?
Option A. ₹10 crore
Why it is wrong: ₹10 crore would give the manager half of combined profits rather than the stated 20%.
Option B. ₹8 crore
Why it is wrong: ₹8 crore applies the investor’s 80% share to the preferred profit instead of calculating the catch-up.
Option C. ₹2 crore
Why it is wrong: ₹2 crore is 20% of the investor amount alone, but the manager’s share must be 20% of the combined amount.
Option D. ₹2.5 crore — Correct answer
Answer: D. 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, shown before you answer in practice mode: 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-065hardapplication
Q15A 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?
Option A. Full repayment regardless of the company’s available assets
Why it is wrong: Priority cannot create assets that are unavailable for repayment.
Option B. Priority of claim, not certainty of full repayment — Correct answer
Option C. Automatic ownership of all profits before any contractual payments
Why it is wrong: A senior debt claim follows debt terms and does not automatically capture all company profits.
Option D. Protection from every change in the debt’s market value
Why it is wrong: Seniority does not remove valuation or market-related changes.
Answer: B. 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, shown before you answer in practice mode: 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-066hardapplication
Risk and Return – Investor and Fund Perspective: common questions
How many practice questions are there on Risk and Return – Investor and Fund Perspective?
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 Risk and Return – Investor and Fund 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 Risk and Return – Investor and Fund Perspective?
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 6: Risk and Return – Investor and Fund 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.
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