Unit study guide · NISM Series V-A
Scheme Selection
18 questions in this unit
What this unit covers
- A first-time investor asks a distributor which mutual fund scheme to choose. What should the distributor establish first?
- A fund led its category in returns last year. How should that information be used when assessing the fund?
- An investor must make an essential payment in three months and has little capacity to replace a loss. Among the fund profiles below, which is the closest fit for that need, subject to checking actual risks and redemption arrangements?
- An investor can select and monitor schemes without a distributor and wants the direct plan. Which check is most relevant before confirming a purchase through an online platform?
- Two index funds track the same benchmark, which returned 10% over a stated year. Fund X returned 9.40% with a TER of 0.10%. Fund Y returned 9.70% with a TER of 0.20%. Both reported tracking error of 0.20% on the same basis. The fund returns are already net of scheme expenses. Which conclusion follows?
- A client enjoys volatile investments but will need the entire proposed investment for an essential, non-negotiable payment in six months. There are no backup funds. Which assessment best fits this goal?
- A goal originally 15 years away is now two years away. The required amount is almost accumulated, remains heavily invested in equity and is needed on a fixed date. The investor cannot easily replace a shortfall. Which review is most consistent with the changed circumstances?
- An investor needs a scheme’s detailed investment strategy and the mutual fund’s constitution and general legal information. Which document pairing is the most appropriate starting point, respectively?
- What is the main role of the Key Information Memorandum supplied with a mutual fund application?
- A printed SID states a ₹5,000 minimum for fresh subscriptions. An official addendum changes it to ₹1,000 for fresh subscriptions from 1 October. An investor applies for ₹1,500 on 10 October. With no later change or other issue, how should the minimum be assessed?
- A factsheet lists only a scheme’s ten largest holdings. An investor needs its exposure to one issuer across every security as at the same month-end. Which additional information is most useful?
- A fund report defines portfolio turnover as the lower of annual purchases and annual sales divided by average net assets. It reports purchases of ₹90 crore, sales of ₹60 crore and average net assets of ₹150 crore. Using that stated method, what is the turnover?
- An investor holds ₹3 lakh in Fund P, which has 20% in Company X, and ₹2 lakh in Fund Q, which has 10% in Company X. The investor adds ₹1 lakh to Fund R, which has 40% in Company X. Assume these percentages and values remain unchanged. What is the combined exposure to Company X as a percentage of the ₹6 lakh portfolio?
- An investor comparing options within the same scheme specifically wants returns retained in the option’s NAV without an IDCW declaration and reinvestment step. Which option matches that preference?
- A scheme advertises a ten-year performance record. Its current fund manager joined nine months ago, and the earlier returns were earned under another manager. Which interpretation is most appropriate when assessing the current manager?
- For a practice exercise, a debt allocation must contain only AAA-rated bonds and have a value-weighted modified duration no greater than 1.5 years. Fund P holds only AAA-rated bonds and has duration 1 year. Fund Q holds only AAA-rated bonds and has duration 3 years. Fund R holds only A-rated bonds and has duration 0.5 year. Which mix satisfies BOTH conditions? Use the stated weighted-duration method.
- A hypothetical scheme’s current SID permits equity between 40% and 80% of assets. Its month-end portfolio disclosure shows 55% equity. Which conclusion follows from these two documents alone?
- A switch would lower a ₹5 lakh holding’s annual expense rate from 1.40% to 1.00%, but creates a one-time ₹6,000 cost. For a simplified comparison, keep the expense base at ₹5 lakh and ignore compounding, return differences and all other costs. The investor plans to exit in two years. When do cumulative expense savings first equal the switching cost?
Key ideas
From the practice bank · 1
A first-time investor asks a distributor which mutual fund scheme to choose. What should the distributor establish first?
These facts establish the basis for a suitability-led comparison. The goal and horizon identify what the money must achieve and when it may be required. needs and risk profile help assess which risks are tolerable. Only then can product features be compared meaningfully. Remember: Start with the investor, then compare products against those requirements.
Hint Common mistake: Treating scheme selection as a search for the highest recent return or the lowest NAV.
VA-024From the practice bank · 2
A fund led its category in returns last year. How should that information be used when assessing the fund?
This answer retains the information while placing it within a wider, suitability-led assessment. The result can be compared with a relevant benchmark, peer group and the risk taken to achieve it. A single year may reflect a market phase or strategy exposure. A broader review is more informative than mechanically selecting or rejecting the fund from that one number. Remember: Use history as evidence to investigate, not as a promise or an automatic selection rule.
Hint Common mistake: Choosing between the two extremes of blindly extrapolating history and ignoring it completely.
VA-050From the practice bank · 3
An investor must make an essential payment in three months and has little capacity to replace a loss. Among the fund profiles below, which is the closest fit for that need, subject to checking actual risks and redemption arrangements?
Its stated maturity, quality and price-sensitivity profile is closer to a near-term payment need than the other choices. This does not make it risk-free. The payment is essential and only three months away. There is little time or financial capacity to recover from a loss. A long-maturity portfolio can have substantial price sensitivity even when its borrowers have strong credit quality. Equity and lower-rated debt introduce other risks that conflict with the stated need. Among the choices, the short-maturity, high-quality profile is the closer fit. Actual scheme credit exposure, liquidity, settlement, costs and the investor’s circumstances still require review. No mutual fund is treated as a guaranteed substitute for the essential payment. The comparison is among the four stated profiles, not a personalised product recommendation. Remember: For a near-term essential goal, assess liquidity, price sensitivity and credit quality instead of choosing the highest recent return or yield.
Hint Common mistake: Equating government debt with low short-term price risk, or selecting a fund only for its yield.
VA-051From the practice bank · 4
An investor can select and monitor schemes without a distributor and wants the direct plan. Which check is most relevant before confirming a purchase through an online platform?
The plan selected determines whether the transaction is in the direct plan. Merely using an online interface does not establish this. The scenario states that the investor can make and monitor their own scheme choice, so distributor assistance is not assumed to be needed. A direct plan does not route the investment through a distributor. The investor should verify the explicit plan selection in the purchase details. An online platform can be only the transaction interface. It does not, by itself, prove which plan the investor is buying. The investor must still assess the scheme’s suitability and the platform’s separate terms. Lower distribution-related expenses do not make the underlying scheme suitable for every goal. Remember: Confirm the plan name rather than inferring it from the device, payment schedule or platform appearance.
Hint Common mistake: Assuming that every online mutual fund purchase automatically goes into a direct plan.
VA-052From the practice bank · 5
Two index funds track the same benchmark, which returned 10% over a stated year. Fund X returned 9.40% with a TER of 0.10%. Fund Y returned 9.70% with a TER of 0.20%. Both reported tracking error of 0.20% on the same basis. The fund returns are already net of scheme expenses. Which conclusion follows?
The 0.30-percentage-point shortfall is smaller than 0.60 percentage points. Fund X’s shortfall = 10.00% − 9.40% = 0.60 percentage points. Fund Y’s shortfall = 10.00% − 9.70% = 0.30 percentage points. Its net return was closer for this period. Equal tracking error does not imply equal net shortfalls. The lower TER alone does not reverse the observed net-return comparison. Because the returns are already net, subtracting TER again would double-count expenses. This historical comparison does not establish future superiority or personal suitability. Remember: Compare realised net tracking results as well as costs, and do not treat equal tracking error as equal return.
Hint Common mistake: Choosing an index fund from its TER alone or deducting the TER twice.
VA-053From the practice bank · 6
A client enjoys volatile investments but will need the entire proposed investment for an essential, non-negotiable payment in six months. There are no backup funds. Which assessment best fits this goal?
This answer separates the client’s preference from the financial ability to absorb a loss. The client’s stated enjoyment of volatility indicates willingness, not an ability to replace lost money. The near, non-negotiable payment and absence of backup funds restrict the capacity to absorb a loss for this goal. Neither willingness nor capacity should be inferred solely from the other. Remember: Assess willingness and capacity separately, then relate them to the particular goal.
Hint Common mistake: Using a risk questionnaire’s preference answers as a complete measure of financial suitability.
VA-054From the practice bank · 7
A goal originally 15 years away is now two years away. The required amount is almost accumulated, remains heavily invested in equity and is needed on a fixed date. The investor cannot easily replace a shortfall. Which review is most consistent with the changed circumstances?
The remaining two-year horizon, near-complete funding and limited shortfall capacity justify reviewing how to protect the goal amount rather than relying on its original horizon. The relevant horizon for the review is now two years, not the original 15 years. The goal is nearly funded and the payment date is fixed. A large loss could therefore create a shortfall that the investor cannot easily replace. Reviewing a reduction in risk on the amount needed is more consistent with these facts than maintaining or increasing equity risk solely because it was once a long-term goal. A practical transition must consider redemption timing, available liquidity, taxes and transaction costs. The question does not prescribe an exact equity percentage or require an immediate sale of every unit. Money genuinely surplus to this goal may have a different purpose and horizon, so its allocation need not automatically match the goal amount. Remember: Reassess the remaining time and shortfall capacity as a goal approaches, rather than mechanically preserving the starting allocation.
Hint Common mistake: Treating the original goal horizon as permanent, or interpreting de-risking as a universal instruction to sell every equity holding at once.
VA-055From the practice bank · 8
An investor needs a scheme’s detailed investment strategy and the mutual fund’s constitution and general legal information. Which document pairing is the most appropriate starting point, respectively?
The SID gives detailed scheme information. The SAI provides the mutual fund’s general, constitutional, tax and legal information. Identify what each part of the request needs. Investment strategy is specific to the selected scheme, while constitution and general legal information concern the mutual fund more broadly. The SID is the starting point for detailed scheme information. The standard document directs investors to the SAI for general mutual fund, tax and legal information. The documents complement each other, so the answer does not mean the investor should read one and ignore the other. Check relevant updates and addenda too. A personal account statement serves a different purpose and cannot replace these disclosures. Remember: Use SID for the scheme and SAI for general fund information, and read the relevant current documents together.
Hint Common mistake: Treating a personal account statement or one disclosure document as a substitute for the complete information needed.
VA-061From the practice bank · 9
What is the main role of the Key Information Memorandum supplied with a mutual fund application?
KIM provides essential information for the prospective investor and directs the reader to the fuller scheme and fund documents. The application stage requires a compact summary of the information an investor should know before subscribing. The prescribed KIM directs investors to SID and SAI for further scheme, fund, risk and legal details. Its summary format does not eliminate the need to consult those fuller documents and their applicable updates. The prescribed wording also distinguishes filing with SEBI from an approval of the investment’s merits. Remember: Treat KIM as a useful summary, not a replacement for fuller disclosures or proof of regulatory endorsement.
Hint Common mistake: Assuming that a short official-format document contains every detail or that filing it amounts to SEBI recommending the fund.
VA-062From the practice bank · 10
A printed SID states a ₹5,000 minimum for fresh subscriptions. An official addendum changes it to ₹1,000 for fresh subscriptions from 1 October. An investor applies for ₹1,500 on 10 October. With no later change or other issue, how should the minimum be assessed?
The addendum is effective for this fresh subscription and must be read with the SID. ₹1,500 meets the resulting minimum. The original printed minimum is ₹5,000. The official addendum replaces it with ₹1,000 for fresh subscriptions from 1 October. The application is a fresh subscription on 10 October, so both the date and the transaction type fall within the update. Read the SID with the applicable addendum and compare ₹1,500 with ₹1,000. The application meets this minimum condition. That conclusion is limited to the stated minimum. It is not a claim that every other purchase requirement has automatically been met. Remember: Match the transaction date and type to the latest applicable addendum rather than relying only on an old printed figure.
Hint Common mistake: Ignoring an effective addendum or adding a replacement minimum to the figure it supersedes.
VA-063From the practice bank · 11
A factsheet lists only a scheme’s ten largest holdings. An investor needs its exposure to one issuer across every security as at the same month-end. Which additional information is most useful?
This provides both the full set of holdings and the correct date for aggregating the issuer’s security exposures. The ten largest holdings may omit smaller securities of the same issuer. The full dated disclosure allows the investor to identify all relevant holdings and add the exposures using a consistent denominator. It establishes a snapshot for the stated date, not a guarantee of the holdings on a later day. Remember: Match the completeness and date of portfolio information to the exposure question.
Hint Common mistake: Treating a top-ten list as if it disclosed the entire portfolio.
VA-090From the practice bank · 12
A fund report defines portfolio turnover as the lower of annual purchases and annual sales divided by average net assets. It reports purchases of ₹90 crore, sales of ₹60 crore and average net assets of ₹150 crore. Using that stated method, what is the turnover?
The lower trading amount is ₹60 crore, which is 40% of average net assets of ₹150 crore. The report defines the numerator as the lower of purchases and sales. The lower amount is ₹60 crore. Divide by the stated average net assets: ₹60 crore ÷ ₹150 crore = 0.40. Convert to a percentage: 0.40 × 100 = 40%. The crore units cancel. This result uses the report’s specified method. It does not mean that 40% of investors redeemed or that the fund earned a 40% return. Remember: Read a ratio’s disclosed calculation method before interpreting its percentage.
Hint Common mistake: Adding purchases and sales when the stated turnover method uses the lower of the two.
VA-121From the practice bank · 13
An investor holds ₹3 lakh in Fund P, which has 20% in Company X, and ₹2 lakh in Fund Q, which has 10% in Company X. The investor adds ₹1 lakh to Fund R, which has 40% in Company X. Assume these percentages and values remain unchanged. What is the combined exposure to Company X as a percentage of the ₹6 lakh portfolio?
The rupee exposures total ₹1.20 lakh out of ₹6 lakh, giving 20%. Company X exposure through P = ₹3 lakh × 20% = ₹0.60 lakh. Exposure through Q = ₹2 lakh × 10% = ₹0.20 lakh, and through R = ₹1 lakh × 40% = ₹0.40 lakh. Total Company X exposure = ₹0.60 lakh + ₹0.20 lakh + ₹0.40 lakh = ₹1.20 lakh. Combined percentage = ₹1.20 lakh ÷ ₹6 lakh × 100 = 20%. The additional fund raises the exposure from its earlier level despite adding another fund name. Remember: Count underlying exposure in rupees before deciding whether adding another fund improves diversification.
Hint Common mistake: Assuming three fund names create three independent exposures, or averaging their holdings percentages equally.
VA-122From the practice bank · 14
An investor comparing options within the same scheme specifically wants returns retained in the option’s NAV without an IDCW declaration and reinvestment step. Which option matches that preference?
The growth option matches accumulation without an IDCW declaration-and-reinvestment process. Its NAV can still rise or fall with investment results. The preference excludes both a cash IDCW payment and a declaration followed by reinvestment. The growth option retains the investment outcome within its NAV rather than making an IDCW distribution under that option. IDCW reinvestment can also keep money invested, but it follows a declaration and additional-unit mechanism. That is precisely the extra step the investor wants to avoid. Remember: Keeping money invested through IDCW reinvestment is not the same mechanism as choosing the growth option.
Hint Common mistake: Assuming “no cash paid out” makes IDCW reinvestment identical to growth in unit and distribution mechanics.
VA-123From the practice bank · 15
A scheme advertises a ten-year performance record. Its current fund manager joined nine months ago, and the earlier returns were earned under another manager. Which interpretation is most appropriate when assessing the current manager?
This preserves the scheme record while avoiding unsupported personal attribution to the current manager. The ten-year series belongs to the scheme, including years when a different manager was responsible. Only nine months fall within the current manager’s stated tenure. Attributing the entire series to that manager would misstate the responsibility described. The earlier scheme history may still be useful context. It should be assessed alongside manager tenure, continuity of process and portfolio strategy, rather than automatically transferred or discarded. Remember: Check who managed the scheme during the period shown before attributing performance to an individual.
Hint Common mistake: Confusing the age of a scheme’s return series with the tenure of the person now managing it.
VA-124From the practice bank · 16
For a practice exercise, a debt allocation must contain only AAA-rated bonds and have a value-weighted modified duration no greater than 1.5 years. Fund P holds only AAA-rated bonds and has duration 1 year. Fund Q holds only AAA-rated bonds and has duration 3 years. Fund R holds only A-rated bonds and has duration 0.5 year. Which mix satisfies BOTH conditions? Use the stated weighted-duration method.
The mix is AAA-only and its weighted duration is exactly 1.5 years, which satisfies “no greater than 1.5”. Any allocation to R fails the AAA-only condition because R holds A-rated bonds, even though its duration is low. This eliminates the two mixes containing R. For 75% P and 25% Q, weighted duration = 0.75 × 1 + 0.25 × 3 = 1.5 years. Both funds hold only AAA-rated bonds, so this mix meets both conditions. For 50% P and 50% Q, duration = 0.50 × 1 + 0.50 × 3 = 2 years, which exceeds the limit. Only the 75% P and 25% Q mix passes the two stated tests. Passing this exercise is not proof that the mix is suitable for every investor or free from loss. Remember: Apply all selection conditions separately before identifying the option that passes them together.
Hint Common mistake: Accepting a lower-duration mix while overlooking a separate credit-quality restriction.
VA-125From the practice bank · 17
A hypothetical scheme’s current SID permits equity between 40% and 80% of assets. Its month-end portfolio disclosure shows 55% equity. Which conclusion follows from these two documents alone?
This correctly separates the permissible range from the dated observation. The disclosed 55% lies between the hypothetical 40% minimum and 80% maximum. It therefore satisfies this particular range at the reported date. That finding alone does not establish compliance with every other restriction. The snapshot is not a promise to retain 55% equity. Allocation can change within the stated mandate, and a different mix can change the risk exposure. Remember: Read permitted limits and actual holdings as different kinds of information.
Hint Common mistake: Treating one month-end portfolio as a permanent commitment.
VA-149From the practice bank · 18
A switch would lower a ₹5 lakh holding’s annual expense rate from 1.40% to 1.00%, but creates a one-time ₹6,000 cost. For a simplified comparison, keep the expense base at ₹5 lakh and ignore compounding, return differences and all other costs. The investor plans to exit in two years. When do cumulative expense savings first equal the switching cost?
Three years of ₹2,000 savings equal ₹6,000 and fall beyond the two-year horizon. Annual rate saving = 1.40% − 1.00% = 0.40 percentage points, or 0.004. With the fixed ₹5,00,000 base, annual saving = ₹5,00,000 × 0.004 = ₹2,000. Simple time = ₹6,000 ÷ ₹2,000 a year = 3 years. After the planned two years, savings total only ₹4,000, which is ₹2,000 below the one-time cost. Under these assumptions the expense saving alone has not recovered the cost by exit. Remember: Compare recurring savings with both the switching cost and the remaining holding period.
Hint Common mistake: Choosing a lower expense figure without checking how long the one-time cost takes to recover.
VA-150Liquidity describes how easily a given quantity can be traded.
Read moreBreakeven is the point at which a defined result is exactly zero.
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