Unit study guide · NISM Series II-A
Basics of Mutual Funds
10 questions in this unit
What this unit covers
- Why is a mutual fund described as a collective investment vehicle?
- What does a unit normally represent in a mutual fund scheme?
- Which feature usually distinguishes an open-ended mutual fund scheme from a closed-ended scheme?
- A scheme has assets of ₹52 crore, liabilities of ₹2 crore and 2 crore units. What is its net asset value per unit?
- A scheme has 15 lakh units with ₹10 face value and ₹18 net asset value. What is its unit capital?
- An investor holds 8,000 of a scheme’s 4,00,000 units. What proportion of the scheme’s units does the investor own?
- A scheme’s objective is to track a broad equity index. Which portfolio approach is most consistent with that objective?
- A scheme’s net asset value rises from ₹20 to ₹23 without any distribution. What is the percentage increase?
- A scheme has ₹20 lakh net assets and 1 lakh units. It receives ₹4 lakh at current NAV, with no costs. What is the new NAV?
- A scheme has ₹30 lakh net assets and 1.5 lakh units. It redeems 30,000 units at current NAV without costs. What remains?
Key ideas
From the practice bank · 1
Why is a mutual fund described as a collective investment vehicle?
A mutual fund pools investor money into a portfolio managed according to the scheme’s objective. Remember: Mutual fund investors participate through units in a pooled portfolio.
Hint Think about how contributions are combined and managed. Common mistake: Confusing shared ownership with individual control of portfolio trades.
II-A-041From the practice bank · 2
What does a unit normally represent in a mutual fund scheme?
A unit represents a proportionate interest in the scheme’s net assets, rather than ownership of a specific underlying share. Remember: Fund units represent interests in the scheme, not in its management company.
Hint Focus on the scheme rather than the management company or one portfolio security. Common mistake: Treating scheme units as equity shares of the fund manager.
II-A-042From the practice bank · 3
Which feature usually distinguishes an open-ended mutual fund scheme from a closed-ended scheme?
An open-ended scheme normally offers ongoing purchases and redemptions under its terms rather than only operating for a fixed closed-ended tenure. Remember: Open-ended and closed-ended describe the scheme structure, not its risk level.
Hint Consider whether investors can normally enter or exit through the scheme on an ongoing basis. Common mistake: Assuming open-ended means risk-free or permanently liquid without conditions.
II-A-043From the practice bank · 4
A scheme has assets of ₹52 crore, liabilities of ₹2 crore and 2 crore units. What is its net asset value per unit?
The net asset value per unit is ₹25. Net assets = ₹52 crore − ₹2 crore = ₹50 crore. NAV = ₹50 crore ÷ 2 crore units = ₹25. Remember: Net asset value uses net assets, not gross assets.
Hint Unit holders share the assets remaining after scheme liabilities. Common mistake: Ignoring liabilities when computing NAV.
II-A-044From the practice bank · 5
A scheme has 15 lakh units with ₹10 face value and ₹18 net asset value. What is its unit capital?
Unit capital is ₹1.5 crore. Calculation: 15 lakh units × ₹10 face value = ₹150 lakh = ₹1.5 crore. Remember: Unit capital and net assets need not be equal.
Hint Unit capital is based on nominal value rather than the current value of net assets. Common mistake: Multiplying units by NAV when asked for unit capital.
II-A-045From the practice bank · 6
An investor holds 8,000 of a scheme’s 4,00,000 units. What proportion of the scheme’s units does the investor own?
The investor owns 2% of the scheme’s units. Calculation: 8,000 ÷ 4,00,000 × 100 = 2%. Remember: An investor’s proportion depends on units held relative to total units.
Hint Compare the investor’s units with all outstanding scheme units. Common mistake: Using the investment amount without considering total outstanding units.
II-A-046From the practice bank · 7
A scheme’s objective is to track a broad equity index. Which portfolio approach is most consistent with that objective?
Maintaining exposure designed to follow the stated index is consistent with an index-tracking investment objective. Remember: The disclosed objective should guide the fund’s investment approach.
Hint The investment process should follow the scheme’s disclosed purpose. Common mistake: Judging a portfolio without first checking the scheme’s objective.
II-A-047From the practice bank · 8
A scheme’s net asset value rises from ₹20 to ₹23 without any distribution. What is the percentage increase?
The NAV increase is 15%. Increase = ₹23 − ₹20 = ₹3. Percentage increase = ₹3 ÷ ₹20 × 100 = 15%. Remember: Percentage change is measured against the starting value.
Hint Compare the increase with the starting value, not with the ending value. Common mistake: Using the ending NAV as the denominator.
II-A-048From the practice bank · 9
A scheme has ₹20 lakh net assets and 1 lakh units. It receives ₹4 lakh at current NAV, with no costs. What is the new NAV?
The new NAV remains ₹20. Starting NAV = ₹20 lakh ÷ 1 lakh = ₹20. New units = ₹4 lakh ÷ ₹20 = 20,000. New NAV = ₹24 lakh ÷ 1,20,000 units = ₹20. Remember: An inflow at current NAV does not by itself create a gain for existing unit holders.
Hint New money creates new units at the same value per unit. Common mistake: Treating new investors’ money as investment profit.
II-A-049From the practice bank · 10
A scheme has ₹30 lakh net assets and 1.5 lakh units. It redeems 30,000 units at current NAV without costs. What remains?
The scheme retains ₹24 lakh net assets and 1.2 lakh units. NAV = ₹30 lakh ÷ 1.5 lakh = ₹20. Payout = 30,000 × ₹20 = ₹6 lakh. Remaining assets = ₹24 lakh and remaining units = 1.2 lakh. Remember: A redemption at NAV reduces both scheme assets and outstanding units.
Hint Redemption removes both the redeemed units and the cash paid for them. Common mistake: Removing only the units or only the cash.
II-A-050