Free NISM Series V-A Practice Exam: Mutual Fund Distributors

NISM means National Institute of Securities Markets. Series V-A is the Mutual Fund Distributors certification examination for India’s mutual-fund distribution market.

This free full-length NISM Series V-A practice exam includes 100 original Finance Prep questions across the 12 official units.

These are original Finance Prep practice questions aligned to the exam outline. They are not official NISM questions, copied live-exam content, or exam dumps. Use them to preview question style and explanation depth before continuing with mixed sets, topic drills, and timed mock exams in Finance Prep.

Practice count note: NISM currently publishes this as 100 one-mark questions in 2 hours, with a 50% pass mark and no negative marking. Confirm current candidate and exam-day rules directly with NISM before booking.

Practice questions

Questions 1-25

Question 1

Topic: Investor Services

At an authorised point of acceptance, purchase applications with available funds received by 3:00 p.m. receive the same-day NAV; those received later receive the next-business-day NAV.

The time-stamping device is 12 minutes slow. An application actually received at 3:05 p.m. is stamped 2:53 p.m. The funds were already available.

Which interpretation best explains why accurate, valid time stamping is essential?

• A. It records the distributor’s collection time, allowing forms in one dispatch to receive the same NAV.
• B. It records the investor’s bank debit time, allowing fund availability alone to determine the applicable NAV.
• C. It records receipt at the authorised point, allowing the stated cut-off rule to be applied uniformly.
• D. It records the investor’s signing time, allowing the declared execution time to determine the applicable NAV.

Best answer: C

What this tests: Investor Services

Explanation: A valid time stamp provides objective evidence of when a transaction was received at an authorised point of acceptance. This enables the applicable cut-off rule to be applied consistently to all investors and reduces the risk of backdating, selective treatment, or processing based on unverifiable times. Here, the application was actually received at 3:05 p.m., so the defective 2:53 p.m. stamp would incorrectly place it in the pre-cut-off group. Availability of funds may be a separate requirement, but it does not replace valid evidence of receipt time. Consistent use of accurate time stamps therefore supports fair and auditable NAV applicability.

• Bank debit timing concerns fund availability and does not establish receipt at the authorised point.
• Distributor collection timing does not determine the official cut-off treatment at the acceptance point.
• Investor signing timing shows when the form was executed, not when the transaction was officially received.

The actual receipt time places the application after the cut-off and supports consistent NAV treatment.

Question 2

Topic: Legal Structure of Mutual Funds in India

A newly launched mutual fund scheme buys listed shares and debt securities. The AMC’s fund managers select the investments, while the trustees oversee the AMC. A core constituent must take delivery of the scheme securities, safeguard them, and support settlement.

Which entity performs this asset-custody function?

• A. The mutual fund’s sponsoring entity
• B. The mutual fund’s appointed custodian
• C. The mutual fund’s board of trustees
• D. The mutual fund’s asset management company

Best answer: B

What this tests: Legal Structure of Mutual Funds in India

Explanation: A mutual fund’s core constituents have distinct responsibilities. The custodian holds and safeguards the securities purchased for the schemes and supports settlement and related custody operations. This function is separate from investment management. The AMC manages scheme portfolios and makes investment decisions within the scheme mandate. The trustees supervise the AMC and protect unitholders’ interests through oversight. The sponsor establishes the mutual fund and initiates its trust structure but does not perform day-to-day custody of scheme assets. Separating investment management, oversight, and custody supports accountability and protects scheme property.

• The AMC selects and manages investments but does not perform the independent asset-custody function.
• The trustees oversee the mutual fund and AMC rather than hold scheme securities operationally.
• The sponsor establishes the mutual fund but does not safeguard securities purchased by its schemes.

The custodian takes delivery of and safeguards the securities owned by mutual fund schemes.

Question 3

Topic: Mutual Fund Scheme Selection

A mutual fund distributor has completed investor profiling, selected an appropriate scheme category, compared shortlisted schemes, and disclosed scheme risks, costs, and distributor remuneration. The investor retains decision authority, and the distributor has no discretionary mandate.

The file contains records for each completed stage. Which record most directly establishes that the distributor may submit the investor’s selected SIP purchase?

• A. The authenticated purchase instruction specifying the selected scheme, regular plan, growth option, SIP amount, and debit date.
• B. The signed investor profile recording the goal, time horizon, risk capacity, liquidity need, and review date.
• C. The acknowledged scheme-comparison and remuneration disclosure covering costs, risks, performance, and distributor compensation for shortlisted schemes.
• D. The category-selection worksheet linking the recorded profile and asset allocation to the selected hybrid scheme category.

Best answer: A

What this tests: Mutual Fund Scheme Selection

Explanation: A disciplined selection process moves from understanding the investor to implementing and reviewing the investment. The investor profile supports assessment of goals, horizon, risk capacity, and liquidity. The category-selection worksheet records why a product category fits that profile, while the comparison and remuneration disclosure supports informed evaluation of shortlisted schemes. None of these records, by itself, authorises a purchase. Because a mutual fund distributor does not exercise discretionary authority, the transaction should reflect an authenticated investor instruction identifying the selected investment and transaction details. After processing, the transaction confirmation and subsequent review records help verify implementation and support periodic reassessment.

• The investor profile supports suitability assessment but does not authorise a specific purchase.
• The category worksheet documents selection logic but does not establish the investor’s final scheme decision.
• The acknowledged disclosures evidence informed comparison but do not constitute a transaction instruction.

The authenticated instruction evidences the investor’s final decision and authorisation to submit the specified transaction.

Question 4

Topic: Legal and Regulatory Framework

An MFD reviews Meera’s mutual fund holding:

• Meera has a low risk profile and an 18-month investment horizon.
• Her current short-duration debt scheme remains suitable for her needs.
• A comparable scheme has delivered a higher one-year return but offers no material suitability advantage.
• Switching now would attract an exit load.
• The comparable scheme would pay the MFD a higher commission.

Which course of action best complies with the AMFI Code of Conduct for Mutual Fund Distributors?

• A. Advise switching now because recent return is higher despite similar risk, and disclose conflict and exit load.
• B. Advise switching to the target scheme because higher commission supports distributor service, and disclose conflict and exit load.
• C. Advise retaining the current scheme unless a documented investor-benefit basis supports switching, and disclose the remuneration conflict.
• D. Advise switching after the exit-load period because eliminating the load makes the switch appropriate, and disclose the remuneration conflict.

Best answer: C

What this tests: Legal and Regulatory Framework

Explanation: AMFI conduct standards require an MFD to act with integrity, exercise due diligence, place the investor’s interests ahead of personal remuneration, and avoid unnecessary switching or churning. Meera’s existing scheme remains suitable, while the proposed scheme provides no material suitability advantage and would impose an exit load. The higher commission creates a conflict that must be disclosed, but disclosure does not make an unsuitable recommendation acceptable. Similarly, waiting for the exit load to expire would remove one cost but would not create an investor-centered reason to switch. A higher recent return alone is also insufficient because past performance does not establish suitability for Meera’s goal, horizon, and risk profile.

• Higher distributor remuneration cannot justify a switch that lacks an investor-centered benefit.
• Expiry of the exit load removes one cost but does not establish that switching is suitable.
• Recent performance alone does not justify replacing an existing scheme that remains suitable.

The MFD must place Meera’s interests above remuneration and avoid recommending a switch without a suitability-based benefit.

Question 5

Topic: Mutual Fund Scheme Selection

Meera is investing in an open-ended mutual fund scheme and must select between its growth and IDCW options.

• She needs ₹50,000 at the end of each quarter for the next three years.
• She accepts redemption of units at the prevailing NAV, and no exit load applies.
• IDCW timing and amount are discretionary and depend on available distributable surplus.
• Under the supplied tax facts, the entire IDCW is taxable at 30%, while only the gain component of a redemption is taxable at 12.5%.

What is the best recommendation for Meera?

• A. Choose IDCW payout and use each distribution declared during the quarter for the cash need.
• B. Choose IDCW reinvestment and redeem ₹50,000 of units at the end of each quarter.
• C. Choose growth and register an SWP to redeem ₹50,000 at the end of each quarter.
• D. Choose growth and redeem ₹200,000 of units at the end of each year.

Best answer: C

What this tests: Mutual Fund Scheme Selection

Explanation: Meera needs a specified amount every quarter, so she should not rely on discretionary IDCW declarations. Under the growth option, earnings remain reflected in the NAV until units are redeemed. An SWP can schedule quarterly redemptions of ₹50,000 while sufficient units remain. The supplied tax treatment also favours this approach because only the gain component of each redemption is taxable at 12.5%, whereas the entire IDCW amount is taxable at 30%. An SWP is a redemption facility, not a guaranteed return or assured income stream. Redemptions can reduce the number of units and may consume capital if scheme performance is insufficient.

• IDCW payout cannot reliably meet a fixed quarterly requirement because its amount and timing are discretionary.
• An annual redemption does not match the required quarterly cash-flow schedule.
• IDCW reinvestment creates tax on the full distribution before units are subsequently redeemed.

A growth option with quarterly SWP matches the cash-flow timing and limits taxation to the gain component under the supplied facts.

Question 6

Topic: Scheme Related Information

A distributor is reviewing documents for a scheme of Prakash Mutual Fund. The distributor needs to verify the legal constitution and roles of the sponsor, trustee company, AMC, and custodian. Current documents are available, with no unincorporated updates.

Which document should the distributor consult as the primary source?

• A. The latest annual report issued for the selected scheme
• B. The current Key Information Memorandum of the selected scheme
• C. The current Statement of Additional Information of the mutual fund
• D. The current Scheme Information Document of the selected scheme

Best answer: C

What this tests: Scheme Related Information

Explanation: The Statement of Additional Information (SAI) provides statutory and organisational information that generally applies across the schemes of a mutual fund. It covers the mutual fund’s constitution and information about entities such as the sponsor, trustees, AMC, custodian, and other service providers.

The Scheme Information Document (SID) primarily contains scheme-specific information, including the investment objective, asset allocation, investment strategy, risks, fees, loads, and operational details. The Key Information Memorandum (KIM) presents essential information in a concise form for investors and accompanies the application process. Because the requested facts concern the mutual fund’s constituent entities rather than a particular scheme’s features, the SAI is the appropriate primary source.

• The SID is primarily used for detailed scheme-specific features rather than fund-level organisational information.
• The KIM is a concise investor summary and is not the main source for complete organisational details.
• The annual report focuses on financial statements and reporting for the relevant period, not the mutual fund’s foundational structure.

The SAI contains fund-level organisational and statutory information about the mutual fund and its constituent entities.

Question 7

Topic: Risk, Return and Performance of Funds

A fictional AMC is considering a temporary redemption restriction for an open-ended debt scheme.

Known facts:

• Redemption requests are unusually high, and the scheme has limited cash.
• The trustees have approved the proposed restriction.

Compliance standard:

A redemption restriction may be used only in exceptional circumstances when the market at large has become illiquid. Illiquidity limited to the scheme’s holdings or routine cash-flow pressure is insufficient.

Which additional record best supports the AMC’s conclusion that the liquidity condition for the restriction is met?

• A. Scheme portfolio report documenting an absence of executable bids for several held securities during the same period.
• B. Market-wide liquidity report documenting an absence of executable bids across comparable debt-market segments during the period.
• C. Scheme cash-flow forecast documenting expected subscription inflows below pending redemption requests during the same period.
• D. RTA transaction report documenting redemption requests materially above the scheme’s recent daily average during the same period.

Best answer: B

What this tests: Risk, Return and Performance of Funds

Explanation: An open-ended scheme ordinarily permits investors to redeem their units. A temporary redemption restriction limits that access and therefore cannot be used merely to manage routine liquidity pressure. Under the supplied standard, the decisive liquidity condition is exceptional, market-wide illiquidity. The trustees’ approval satisfies the stated governance condition, but it does not itself prove that the substantive liquidity trigger exists. Evidence showing an absence of executable bids across comparable debt-market segments demonstrates that the problem extends beyond securities selected by the scheme. Scheme-specific trading difficulty, unusually large redemption requests, or a cash-flow shortfall may require liquidity management, but they do not independently justify gating under the stated condition.

• Difficulty selling several portfolio securities establishes scheme-specific illiquidity, which the stated standard treats as insufficient.
• Elevated redemption requests demonstrate investor outflows but do not establish broader market illiquidity.
• A forecast cash shortfall demonstrates a liquidity mismatch but not the exceptional market condition required for gating.

It establishes market-wide illiquidity, the substantive trigger specified in the compliance standard.

Question 8

Topic: Investment Landscape

An MFD is preparing to discuss asset allocation with Meera. Her file contains these current records:

• Investor-needs assessment: Signed on June 10, 2026; records a ₹8 lakh education goal in 30 months, a ₹2 lakh liquidity reserve, moderate loss tolerance, and a target return of 7% annually.
• KYC acknowledgement: Confirms verification of PAN, identity, and address.
• Consolidated account statement: Lists existing mutual fund holdings and recent transactions.
• Scheme information document: Describes an equity scheme’s objective, risks, expenses, and redemption terms.

Which record provides the strongest evidence for the investor facts that should drive the investment decision?

• A. The scheme information document describing the equity scheme
• B. The signed investor-needs assessment dated June 10, 2026
• C. The KYC acknowledgement confirming identity and address verification
• D. The consolidated account statement listing holdings and transactions

Best answer: B

What this tests: Investment Landscape

Explanation: An investment decision should reflect the investor’s financial goal, investment horizon, liquidity requirement, ability and willingness to bear risk, and required return. A signed investor-needs assessment directly documents these decision-driving facts for Meera. It therefore provides the strongest investor-side basis for considering an appropriate asset allocation or scheme. KYC records establish identity and compliance status, while a consolidated account statement shows existing investments and transaction history. A scheme information document explains product features and risks. These other records are relevant to onboarding, portfolio review, or product evaluation, but they do not independently establish Meera’s personal investment needs.

• The KYC acknowledgement establishes identity and address verification, not investment needs or suitability factors.
• The consolidated account statement shows existing investments but does not establish the goal, horizon, liquidity need, or risk tolerance.
• The scheme information document describes the product rather than the investor’s financial circumstances and preferences.

It directly records Meera’s goal, horizon, liquidity need, risk tolerance, and target return.

Question 9

Topic: Net Asset Value, Total Expense Ratio and Pricing of Units

On May 15, 2026, an Indian mutual-fund scheme holds physical gold or silver. Under the valuation framework effective April 1, 2026, which price source is prescribed for valuing the holding?

• A. The morning reference price published by an overseas bullion market for international gold or silver transactions
• B. The closing futures price published by a recognised stock exchange for the nearest gold or silver derivatives contract
• C. The polled spot price published by a recognised stock exchange for settling physically delivered gold or silver derivatives
• D. The average retail bullion price collected from major domestic dealers for physical gold or silver transactions

Best answer: C

What this tests: Net Asset Value, Total Expense Ratio and Pricing of Units

Explanation: For valuation from April 1, 2026, physical gold or silver held by a mutual-fund scheme is valued using the polled spot price published by a recognised stock exchange and used for settlement of physically delivered gold or silver derivatives. This prescribed source supports consistent fair valuation and, consequently, accurate scheme NAV computation. It replaces reliance on the historical overseas bullion-market fixing basis. A futures closing price is not equivalent to the prescribed settlement spot price because futures pricing can reflect contract maturity and carrying costs. Retail dealer quotations are also unsuitable because they may include local premiums, margins, and transaction-specific factors rather than a standard prescribed valuation benchmark.

• An overseas bullion-market reference reflects the historical approach rather than the framework effective April 1, 2026.
• A nearest-contract futures closing price is not the prescribed polled spot price used for physical settlement.
• Average domestic dealer quotations are retail or transaction prices, not the specified exchange-published valuation source.

The current framework prescribes the exchange-published polled spot price used to settle physically delivered gold or silver derivatives.

Question 10

Topic: Mutual Fund Scheme Performance

A distributor notes that an equity scheme delivered a 14% one-year return. An investor describes this as strong performance, but no market comparison has yet been made.

Which record would best support a conclusion about whether the scheme performed strongly relative to its relevant market?

• A. The latest TER disclosure showing the direct and regular plan expense ratios during the same period
• B. The latest account statement confirming the investor’s units and transaction NAVs recorded during the same period
• C. The latest portfolio disclosure listing the scheme holdings and sector weights at the end of the period
• D. The latest performance disclosure comparing the scheme return with its stated benchmark TRI for the same period

Best answer: D

What this tests: Mutual Fund Scheme Performance

Explanation: A scheme’s return in isolation does not indicate whether its performance was strong or weak. A relevant benchmark represents the market segment or investment universe against which the scheme is intended to be assessed. Comparing the scheme and benchmark on the same return basis and over the same period shows whether the scheme outperformed or underperformed that reference market. Using a TRI is important because it includes both price changes and income from index constituents. Portfolio holdings, expenses, and transaction records provide useful information, but they do not establish the market return needed for relative performance interpretation.

• Portfolio holdings explain how the scheme was invested but do not provide a market-performance reference.
• TER information shows scheme expenses but does not establish relative performance against the market.
• An account statement confirms investor transactions and holdings but does not measure scheme performance against a benchmark.

It provides a like-for-like market reference for assessing the scheme’s one-year performance.

Question 11

Topic: Mutual Fund Scheme Selection

A distributor is helping Kavya select a satellite holding for her portfolio.

• Her investment horizon is 12 years, with no planned withdrawals.
• Her risk profile is Very High, and she accepts sharp interim declines.
• Her existing core portfolio is invested mainly in a large-cap index fund.
• The satellite holding should broaden market-cap exposure and seek long-term growth.

Which strategy characteristic is the best recommendation?

• A. Select a large-cap index strategy tracking the existing core benchmark and a Very High Riskometer.
• B. Select a short-duration debt strategy holding high-quality issuers and displaying a Moderate Riskometer.
• C. Select a diversified equity strategy with meaningful mid- and small-cap exposure and a Very High Riskometer.
• D. Select a single-sector equity strategy with concentrated holdings and a Very High Riskometer.

Best answer: C

What this tests: Mutual Fund Scheme Selection

Explanation: Scheme selection should align the investment strategy with the investor’s horizon, risk profile, and intended portfolio role. Kavya’s 12-year horizon and willingness to accept sharp declines support an equity-oriented strategy with a Very High Riskometer. Because her core portfolio already emphasizes large-cap stocks, the satellite allocation should add meaningful exposure beyond that segment. A diversified strategy with mid- and small-cap exposure provides the desired market-cap diversification without introducing the concentrated business risk of a single-sector fund. The Riskometer helps confirm risk alignment, but it should be considered together with the scheme’s investment strategy and the role it will play in the overall portfolio.

• Another large-cap index strategy would substantially duplicate the existing core exposure.
• Short-duration debt would emphasize relative stability rather than the stated long-term growth role.
• A single-sector strategy matches the risk tolerance but introduces concentration instead of broad market-cap diversification.

This strategy matches Kavya’s long horizon and risk profile while broadening exposure beyond her large-cap core holding.

Question 12

Topic: Scheme Related Information

Riverstone AMC has completed its end-of-day valuation and published the daily NAV of an open-ended scheme. Meera owns units and asks her distributor how this disclosure should be used before she decides whether to redeem. She has not authorised any transaction.

What should the distributor do next?

• A. Use the daily NAV to rank scheme quality against peers solely by their absolute NAV levels.
• B. Ignore the daily NAV and postpone the valuation review until the scheme publishes its annual report.
• C. Use the daily NAV as a guaranteed redemption price and submit the request without further authorisation.
• D. Use the daily NAV to explain the per-unit value and help her monitor the holding before deciding.

Best answer: D

What this tests: Scheme Related Information

Explanation: Daily NAV disclosure provides investors with timely information about the per-unit value of a mutual fund scheme. An existing investor can use it to monitor the value of the holding and make an informed decision about continuing, purchasing, or redeeming units. The absolute NAV level does not by itself show whether a scheme is cheaper or better than another scheme because schemes may have different histories and unit structures. A disclosed NAV is also not necessarily the NAV applicable to a later redemption; transaction pricing depends on the applicable NAV rules. Since Meera has not authorised a redemption, the distributor should provide information and allow her to retain decision authority.

• Ranking schemes solely by absolute NAV ignores performance, risk, portfolio, and scheme-specific factors.
• Treating the published NAV as guaranteed pricing overlooks applicable NAV rules and lacks investor authority.
• Waiting for the annual report defeats the timely monitoring purpose of daily NAV disclosure.

Daily NAV disclosure enables Meera to monitor the scheme’s per-unit value before making her transaction decision.

Question 13

Topic: Taxation

On September 10, 2026, an AMC pays ₹12,000 as IDCW to a resident individual investor who has a valid PAN. The investor received no earlier IDCW from that mutual fund during FY 2026-27 and has no lower or nil deduction certificate.

Under the rule effective April 1, 2025, the AMC must deduct TDS at 10% from the full IDCW amount when aggregate IDCW during the financial year exceeds ₹10,000.

How much TDS must the AMC deduct?

• A. ₹1,000
• B. ₹1,200
• C. ₹0
• D. ₹200

Best answer: B

What this tests: Taxation

Explanation: The ₹10,000 amount is a threshold for applying TDS, not a deduction from the taxable payment. Because the investor’s aggregate IDCW from the mutual fund is ₹12,000, the threshold is exceeded. The supplied rule therefore requires the AMC to apply the 10% rate to the full ₹12,000 payment. The TDS is ₹12,000 x 10% = ₹1,200. The investor’s valid PAN means that no higher rate applies, and the absence of a lower or nil deduction certificate means the stated 10% rate remains applicable.

• ₹200 applies the rate only to the amount exceeding the threshold, contrary to the supplied rule.
• ₹1,000 applies the rate to the threshold rather than to the full IDCW payment.
• Nil TDS incorrectly treats the threshold as exempting a payment that exceeds it.

The ₹12,000 IDCW exceeds the threshold, so 10% TDS on the full payment is ₹1,200.

Question 14

Topic: Net Asset Value, Total Expense Ratio and Pricing of Units

An AMC discloses the following annual expense ratios for a mutual fund scheme:

• Base Expense Ratio (BER): 1.40% of daily net assets
• Permitted expense components outside BER: 0.12% of daily net assets

Under the current framework, these permitted components are added to BER when determining Total Expense Ratio (TER).

Which statement correctly distinguishes BER from TER?

• A. BER is 1.52%, while TER is 1.52% because both measures include all components.
• B. BER is 1.52%, while TER is 1.40% after removing the permitted expense components.
• C. BER is 1.40%, while TER is 1.52% after adding the permitted expense components.
• D. BER is 1.40%, while TER is 1.40% because outside-BER components remain excluded.

Best answer: C

What this tests: Net Asset Value, Total Expense Ratio and Pricing of Units

Explanation: BER and TER are related but not interchangeable. BER is the base recurring expense ratio before adding expense components permitted outside it. TER represents the overall expense ratio after including those permitted components. Here, the TER is calculated as 1.40% plus 0.12%, giving 1.52% of daily net assets. The outside-BER component therefore affects TER but does not change the disclosed BER. TER reflects the broader expense burden charged to the scheme and consequently borne by its investors through the scheme’s NAV.

• Reversing the values incorrectly treats the total measure as the base measure.
• Keeping TER at 1.40% omits the permitted component that must be included in TER.
• Setting BER at 1.52% incorrectly incorporates the outside-BER component into the base measure.

TER includes the 1.40% BER plus the 0.12% permitted expense components charged outside BER.

Question 15

Topic: Investment Landscape

Before recommending a mutual fund scheme, which information set should primarily guide the distributor’s assessment of the investor’s needs?

• A. KYC status, tax residency, nomination choice, bank mandate, and contact preference
• B. Recent returns, scheme rating, AMC size, NFO price, and distributor commission
• C. Financial goals, investment horizon, liquidity needs, risk profile, and return expectations
• D. Age, occupation, residential city, application channel, and statement frequency

Best answer: C

What this tests: Investment Landscape

Explanation: An investment decision should begin with the investor’s financial goals and the time available to achieve them. Liquidity needs indicate whether money may be required before the planned investment period ends. The risk profile reflects the investor’s willingness and capacity to bear fluctuations or losses, while return expectations help determine whether the intended outcome is realistic for the accepted level of risk. Administrative information such as KYC, nomination, and bank details is necessary for processing and servicing investments, but it does not establish suitability. Likewise, recent performance, ratings, and AMC characteristics may help evaluate a scheme, but they cannot replace an investor-specific assessment.

• KYC, nomination, and banking details support onboarding and servicing rather than investment suitability.
• Demographic and communication details provide limited context but do not capture the investor’s complete financial needs.
• Performance, ratings, AMC size, and distribution factors describe products or channels rather than the investor’s requirements.

These facts define the investor’s required outcome, time frame, access to money, acceptable risk, and expected return.

Question 16

Topic: Mutual Fund Scheme Selection

A mutual fund distributor is assisting Meera with a ₹6 lakh lump-sum investment for her daughter’s postgraduate tuition.

• The target corpus is ₹9 lakh.
• Her completed risk assessment classifies her as a moderate-risk investor.
• She has a separate emergency reserve and will not need withdrawals before the tuition payment.
• She says the tuition payment will be required “within the next few years.”

What should the distributor clarify first before selecting a suitable scheme?

• A. Clarify whether she needs access to this money before the tuition payment.
• B. Clarify her assessed capacity and willingness to accept investment risk.
• C. Clarify the specific year in which the tuition payment will be due.
• D. Clarify the total target corpus required to fully meet the tuition payment.

Best answer: C

What this tests: Mutual Fund Scheme Selection

Explanation: A defined investment horizon is essential when selecting a mutual fund scheme for a time-bound goal. The phrase “within the next few years” is too vague because the suitable level of market risk can differ materially for a goal due in two years versus one due in six years. The distributor should establish the specific year of the tuition payment before evaluating scheme categories. Meera’s target corpus, moderate risk profile, and interim liquidity position are already stated. Those factors remain relevant, but they do not resolve the missing time horizon. Once the deadline is known, the distributor can assess whether the required return and proposed scheme risk are consistent with the goal.

• The target corpus is already stated as ₹9 lakh, so repeating that inquiry does not resolve the missing information.
• The completed risk assessment already identifies moderate capacity and willingness to accept risk.
• The separate emergency reserve and absence of planned withdrawals already establish the interim liquidity position.

The specific payment date is needed to establish the investment horizon and assess suitable scheme risk.

Question 17

Topic: Investor Services

Rohan’s mutual fund folio was opened while he was a minor, with his mother, Meera, as guardian. Rohan has now turned 18, but the folio still records him as a minor and retains the guardian-linked bank mandate. Meera asks the distributor to submit a redemption signed by her. No other transaction authority exists.

What should the distributor ask them to do next?

• A. Have Meera submit the redemption with her PAN, signature, and existing bank proof, then update the folio after payment.
• B. Have Rohan complete KYC formalities and submit the minor-to-major request, PAN, specimen signature, and bank proof before transacting.
• C. Have Rohan and Meera jointly sign the redemption with both bank proofs, while retaining the folio’s existing minor status.
• D. Have Rohan open a new adult folio with his KYC and bank proof, then transfer the units from the minor folio.

Best answer: B

What this tests: Investor Services

Explanation: A guardian’s authority to operate a minor’s folio does not continue after the investor attains majority. The existing folio must first be regularised through the prescribed minor-to-major process. The now-major investor should complete the applicable KYC formalities and provide the status-change request, PAN, specimen signature, and acceptable bank proof identifying him as an account holder. Until the AMC or RTA validates these records and updates the folio, a redemption based on the former guardian’s instructions should not proceed. The units can remain in the existing folio, so opening another folio and attempting a transfer is unnecessary. Joint signatures also do not correct the outdated minor status or independently restore the former guardian’s authority.

• A guardian-signed redemption assumes authority that ended when Rohan attained majority.
• Opening another folio does not replace the prescribed status change for the existing holdings.
• Joint signatures do not cure the outdated minor status or establish valid transaction authority.

Rohan must regularise the existing folio as a major and establish his transaction authority before a redemption can be processed.

Question 18

Topic: Net Asset Value, Total Expense Ratio and Pricing of Units

Meera invested in the regular-plan IDCW option of a mutual fund scheme. The published NAV increased from ₹18.00 on April 1 to ₹19.20 on March 31. She therefore claims a 6.67% profit and says the increase proves the scheme’s quality.

During the year, Meera made subscriptions on different dates, partially redeemed her units, and received IDCW. The latest NAV is available.

For a pre-tax rupee gain or loss assessment as at March 31, which available record best supports a valid investor-specific conclusion?

• A. The scheme’s performance disclosure showing one-year returns, benchmark returns, and riskometer classification.
• B. Meera’s folio transaction statement showing dated subscriptions, redemptions, IDCW cash flows, and remaining units.
• C. The scheme’s NAV history showing daily regular-plan IDCW NAVs and the latest per-unit value.
• D. The scheme’s TER disclosure showing regular-plan expenses, direct-plan expenses, and effective dates.

Best answer: B

What this tests: Net Asset Value, Total Expense Ratio and Pricing of Units

Explanation: NAV is the per-unit value of a scheme at a particular time. Its change between two dates does not establish an investor’s profit or loss because the investor may have purchased on different dates, redeemed some units, or received IDCW. Investor-specific gain or loss requires the invested amounts, redemption proceeds, IDCW cash flows, remaining units, and latest NAV. A simple rupee assessment compares total current value and cash received with total cash invested.

An NAV increase also does not by itself prove scheme quality. Meaningful evaluation may consider total return, benchmark comparison, risk, consistency, portfolio characteristics, and suitability. The absolute NAV level or its isolated movement is not a quality rating.

• NAV history does not capture Meera’s transaction timing, personal cash flows, or unit balance.
• Performance and risk disclosures help evaluate the scheme but do not establish Meera’s personal gain or loss.
• TER explains expenses reflected in NAV but does not identify the amounts Meera invested or received.

Combined with the latest NAV, the folio history provides the amounts invested, cash received, and remaining units needed to calculate Meera’s gain or loss.

Question 19

Topic: Investor Services

Meera wants to invest ₹8,000 monthly through a systematic investment plan (SIP) in an equity mutual fund. She asks her mutual fund distributor whether investing regularly will prevent losses.

Which statement should the distributor make to provide a fair and non-misleading explanation?

• A. Explain that the SIP reduces dependence on one entry date, so positive returns are assured if all scheduled instalments continue.
• B. Explain that the SIP fixes each instalment’s purchase NAV in advance, while returns vary according to the scheme’s market performance.
• C. Explain that the SIP makes periodic purchases at prevailing NAVs, while returns and principal remain exposed to the scheme’s market risk.
• D. Explain that the SIP averages periodic purchase costs across NAVs, so the invested principal is protected from the scheme’s market risk.

Best answer: C

What this tests: Investor Services

Explanation: An SIP is a transaction facility that enables an investor to invest a fixed amount periodically. Because each instalment purchases units at the applicable NAV, the investor generally buys more units when the NAV is lower and fewer units when it is higher. This may reduce dependence on investing the entire amount at one market level and can encourage investment discipline. However, rupee-cost averaging does not assure a profit or protect the principal. The value of accumulated units continues to fluctuate with the underlying scheme’s market performance. A distributor must therefore avoid presenting an SIP as a guarantee against loss or as an assured-return arrangement.

• Cost averaging does not protect the invested principal from market risk.
• Continuing every instalment does not assure positive returns over the investment period.
• An SIP does not fix future purchase NAVs; each instalment uses the applicable NAV.

An SIP supports disciplined recurring investment, but it does not guarantee profit or protect the investment from market losses.

Question 20

Topic: Scheme Related Information

On July 20, 2026, an investor asks an MFD for the complete securities, market values, and sector allocation of an equity scheme as at June 30, 2026. The AMC has published its prescribed June month-end portfolio disclosure. A campaign brochure displays only selected holdings and performance highlights.

Which document should the MFD provide to address the investor’s request?

• A. Provide the campaign brochure showing selected holdings, performance highlights, awards, and fund-manager commentary.
• B. Provide the current KIM showing key scheme features, risks, expenses, and application information.
• C. Provide the latest annual report showing audited financial statements, portfolio details, and year-end scheme information.
• D. Provide the June month-end portfolio disclosure showing all securities, market values, and sector allocation.

Best answer: D

What this tests: Scheme Related Information

Explanation: A scheme’s monthly portfolio disclosure is the appropriate source when an investor wants complete holdings and sector allocation for a specified month-end date. It presents the prescribed portfolio information rather than a selected or promotional view of the scheme. An annual report serves a broader financial-reporting purpose and relates to its reporting period, while the KIM summarises key scheme features and application information. A campaign brochure may highlight selected holdings or performance but cannot substitute for the complete prescribed disclosure requested by the investor.

• The annual report does not provide the requested portfolio information for the specified latest month-end date.
• The KIM summarises scheme features and does not contain the complete month-end portfolio.
• The campaign brochure presents selected promotional information rather than the prescribed complete disclosure.

The monthly portfolio disclosure directly provides the complete holdings and sector allocation for the requested date.

Question 21

Topic: Legal and Regulatory Framework

An investor tells a mutual fund distributor that redemption proceeds were not credited by the date stated in the AMC’s transaction confirmation. The investor has not yet lodged a grievance with the AMC. Which response should the distributor make first?

• A. Acknowledge the concern, record the supporting details, and help lodge it through the AMC’s designated grievance channel.
• B. Acknowledge the concern, record the supporting details, and help lodge it on SCORES before contacting the AMC.
• C. Acknowledge the concern, record the supporting details, and forward it to AMFI as the initial service-resolution authority.
• D. Acknowledge the concern, record the supporting details, and initiate online dispute resolution before contacting the AMC.

Best answer: A

What this tests: Legal and Regulatory Framework

Explanation: A distributor should respond constructively by acknowledging the complaint, documenting relevant facts, and helping the investor approach the concerned entity’s designated grievance channel. Here, the complaint concerns redemption proceeds handled by the mutual fund, so the AMC should receive the grievance first and issue an acknowledgement or reference. If the AMC does not resolve the matter satisfactorily, the investor may then use the applicable escalation mechanism. The distributor should facilitate the process without making unsupported promises about the outcome or bypassing the initial grievance channel.

• SCORES is an escalation mechanism rather than the initial route when the AMC has not yet received the grievance.
• AMFI is not the initial service-resolution authority for an AMC’s delayed redemption payment.
• Online dispute resolution is not the first step before allowing the concerned AMC to address the complaint.

The concerned AMC should receive the documented service grievance and have the first opportunity to resolve it.

Question 22

Topic: Taxation

On June 30, 2026, an AMC’s RTA is processing an IDCW payment for resident investor Meera.

Payment and tax facts:

• Gross IDCW for the financial year: ₹12,500
• Section 194K threshold: ₹10,000
• TDS rate: 10% on the full payment after the threshold is exceeded
• Meera has a valid PAN and no declaration or certificate for nil or lower deduction
• IDCW is taxable at Meera’s applicable income-tax rate

What should the RTA do next, and how should Meera treat the IDCW?

• A. Credit ₹12,500 without deduction; Meera reports ₹12,500 as income and settles the tax in her return.
• B. Deduct ₹1,250 and credit ₹11,250; Meera reports ₹11,250 as income and claims ₹1,250 TDS credit.
• C. Deduct ₹250 and credit ₹12,250; Meera reports ₹12,500 as income and claims ₹250 TDS credit.
• D. Deduct ₹1,250 and credit ₹11,250; Meera reports ₹12,500 as income and claims ₹1,250 TDS credit.

Best answer: D

What this tests: Taxation

Explanation: IDCW received by a resident investor is taxable at the investor’s applicable income-tax rate. Under the supplied Section 194K facts, the ₹12,500 annual IDCW exceeds the ₹10,000 threshold, and TDS applies to the full payment rather than merely the excess. The RTA therefore deducts ₹1,250, calculated as 10% of ₹12,500, and credits the net amount of ₹11,250. Meera must still report the gross IDCW of ₹12,500 as income. The ₹1,250 withheld is a tax credit, not the final determination of her tax liability. She may claim that credit while computing the tax payable or refund due in her income-tax return.

• Deducting tax only on the ₹2,500 excess incorrectly applies the supplied withholding rule.
• Paying the gross amount ignores the required deduction after the annual threshold is exceeded.
• Reporting only the net receipt incorrectly excludes the TDS amount from gross taxable IDCW.

The payment exceeds the threshold, so 10% TDS applies to the full IDCW while the gross amount remains taxable income.

Question 23

Topic: Legal and Regulatory Framework

During a July 2026 compliance review, an AMC confirms that a fresh purchase caused a scheme to exceed a binding investment restriction. No exception applies, and the excess did not arise from market movements.

The portfolio team has stopped further exposure and arranged prompt correction. What should the compliance head do next?

• A. Report the breach and corrective plan to the trustees and complete the prescribed SEBI reporting.
• B. Report the breach and corrective plan to the investment committee and close it after the correction.
• C. Report the breach and corrective plan to the custodian and retain it in operational records.
• D. Report the breach and corrective plan to the RTA and disclose it in investor service reports.

Best answer: A

What this tests: Legal and Regulatory Framework

Explanation: A binding investment restriction is a scheme governance control, not merely an operational limit. Because an AMC purchase caused the excess, stopping further exposure and promptly correcting the position are necessary but do not complete the compliance response. The breach and corrective plan must be escalated to the trustees, who oversee the AMC’s management of the mutual fund, and the prescribed reporting to SEBI must be completed. Internal committees and service providers may assist with review, settlement, records, or implementation, but their involvement cannot replace formal governance and regulatory escalation.

• Investment committee review may support remediation, but internal closure does not replace trustee and regulatory reporting.
• The custodian handles custody and settlement functions, not formal escalation of an investment-restriction breach.
• The RTA manages investor records and services, so investor-service reporting is not the required compliance route.

A confirmed active breach requires formal trustee escalation and prescribed regulatory reporting despite the planned correction.

Question 24

Topic: Investment Landscape

Meera estimates that her daughter’s higher education will require ₹18 lakh in 10 years. She can invest ₹9,000 each month. A mutual fund distributor wants to explain how disciplined investing could help fund this goal without suggesting that returns are guaranteed.

Which record would best support this explanation?

• A. A goal-funding projection showing the target, horizon, monthly investment, assumed return, and estimated corpus at the goal date
• B. A scheme disclosure showing the investment objective, portfolio strategy, riskometer level, expenses, and historical performance record
• C. A risk-profile report showing Meera’s investment experience, income stability, loss tolerance, and preferred level of portfolio risk
• D. A bank statement showing Meera’s monthly income, household expenses, emergency reserve, and current investible cash surplus

Best answer: A

What this tests: Investment Landscape

Explanation: A goal-funding projection connects the essential elements of goal-based investing: the future amount required, the available time, the planned periodic contribution, and an assumed investment return. It therefore shows how regular investments and potential compounding may help build the required corpus by the goal date. The assumed return is an estimate, not a guarantee, so the plan should be reviewed periodically and adjusted if the goal cost, time horizon, contributions, or investment performance changes. Other records may help assess affordability, risk tolerance, or product characteristics, but they do not directly demonstrate whether the investment plan is expected to fund the stated education goal.

• A risk-profile report supports risk assessment but does not estimate whether contributions may reach the target corpus.
• A bank statement supports assessment of investment capacity but does not project accumulation by the goal date.
• A scheme disclosure describes a product but does not connect Meera’s contributions with her specific financial goal.

The projection directly links Meera’s regular investments and potential growth to the amount required for her education goal.

Question 25

Topic: Legal and Regulatory Framework

During a portfolio review, Meera signs a blank switch request and gives it to her mutual fund distributor’s employee. She asks him to choose the target scheme and submit the request whenever he considers market conditions favourable. Meera has not provided any specific switch instruction, and the form has not been submitted.

Under the current AMFI Code of Conduct for Mutual Fund Distributors, what should the employee do next?

• A. Forward the blank form to the AMC with a request to confirm the switch details directly with Meera.
• B. Return the unused form and obtain a completed, dated instruction after Meera decides the switch details.
• C. Retain the signed form and complete it after selecting the scheme and timing considered most suitable.
• D. Complete the target scheme based on the discussion and submit the form when market conditions appear favourable.

Best answer: B

What this tests: Legal and Regulatory Framework

Explanation: A mutual fund distributor may explain scheme features, discuss suitability, and assist an investor with transaction procedures. However, the investor must retain decision-making authority and provide clear instructions for a switch. Accepting or using a blank signed transaction form creates a risk of unauthorised dealing and is inconsistent with the AMFI Code of Conduct for Mutual Fund Distributors. Because Meera has not chosen the target scheme or authorised the timing, the employee should not retain, complete, or submit the form. The unused form should be returned, and a properly completed and dated instruction should be obtained after Meera makes the transaction decision. A switch involves redemption from one scheme and investment in another, so the investor’s specific authority is necessary.

• Retaining the form would preserve an improper blank authority and allow the employee to make Meera’s transaction decision.
• Completing the form from a general discussion does not replace Meera’s specific authorisation of the scheme and timing.
• Sending an incomplete form to the AMC does not cure the distributor’s acceptance of a blank signed transaction request.

A distributor must not use a blank signed form or exercise transaction authority that the investor has not provided.

Questions 26-50

Question 26

Topic: Net Asset Value, Total Expense Ratio and Pricing of Units

A scheme’s fund accountant must retain a calculation workpaper supporting the net assets reported at valuation close. The verified records show:

• Investments at fair value: ₹48.0 crore
• Receivables: ₹2.4 crore
• Cash and bank balances: ₹1.6 crore
• Accrued income: ₹0.5 crore
• Liabilities: ₹1.9 crore

Which workpaper extract correctly supports the scheme’s net assets?

• A. ₹48.0 crore + ₹2.4 crore + ₹1.6 crore + ₹0.5 crore + ₹1.9 crore = ₹54.4 crore
• B. ₹48.0 crore + ₹2.4 crore - ₹1.6 crore + ₹0.5 crore - ₹1.9 crore = ₹47.4 crore
• C. ₹48.0 crore + ₹2.4 crore + ₹1.6 crore - ₹0.5 crore - ₹1.9 crore = ₹49.6 crore
• D. ₹48.0 crore + ₹2.4 crore + ₹1.6 crore + ₹0.5 crore - ₹1.9 crore = ₹50.6 crore

Best answer: D

What this tests: Net Asset Value, Total Expense Ratio and Pricing of Units

Explanation: Scheme net assets are calculated by adding the value of investments and all other assets, then deducting liabilities. Receivables, cash and bank balances, and accrued income are assets because they represent amounts held by or due to the scheme. Their total with investments is ₹52.5 crore. Liabilities represent obligations of the scheme and must be deducted, not added. Deducting ₹1.9 crore from ₹52.5 crore gives net assets of ₹50.6 crore. This net-assets amount forms the numerator when NAV per unit is subsequently calculated using the applicable number of outstanding units.

• Treating accrued income as a deduction understates assets by ₹1.0 crore relative to its correct treatment.
• Deducting cash incorrectly treats an existing scheme asset as an obligation.
• Adding liabilities overstates net assets because scheme obligations must be deducted.

Net assets equal all investment and other asset balances, including accrued income, less liabilities.

Question 27

Topic: Scheme Related Information

A distributor wants to verify detailed information about a mutual fund’s sponsor, trustees, AMC, custodian, and other organisational matters that generally apply across its schemes. Which document should the distributor primarily examine?

• A. The current KIM of a specific scheme
• B. The latest portfolio disclosure of a scheme
• C. The current SAI of the mutual fund
• D. The current SID of a specific scheme

Best answer: C

What this tests: Scheme Related Information

Explanation: The Statement of Additional Information (SAI) provides statutory and organisational information about the mutual fund, including details concerning the sponsor, trustees, AMC, custodian, and other service providers. This information generally applies across the mutual fund’s schemes. In contrast, the Scheme Information Document (SID) contains detailed information specific to a particular scheme, such as its investment objective, asset allocation, risks, and fees. The Key Information Memorandum (KIM) is a concise summary of important scheme information for investors. A portfolio disclosure reports the scheme’s investments for the relevant reporting period rather than the mutual fund’s organisational structure.

• A scheme’s SID primarily establishes detailed scheme-specific features rather than fund-wide organisational information.
• A scheme’s KIM provides a concise summary and is not the primary source for detailed statutory information.
• A portfolio disclosure identifies scheme investments, not the mutual fund’s organisational arrangements.

The SAI contains statutory and organisational information about the mutual fund that generally applies across its schemes.

Question 28

Topic: Mutual Fund Scheme Selection

Raj, a mutual fund distributor, is reviewing an investment request from Meera.

• Documented risk profile: Moderate, with no subsequent change in her circumstances
• Scheme’s current Riskometer: Very High
• Third-party platform category label: Moderate
• Investor’s request: Meera offers to sign a risk acknowledgement and asks Raj to classify her as Very High risk

The distributor’s suitability process requires recommendations to use the investor’s documented risk profile and the scheme’s current disclosed Riskometer. A profile may be changed only through a fresh assessment supported by updated investor information.

Which action should Raj take before making any recommendation?

• A. Revise the profile to Very High based on Meera’s request, and make the recommendation after recording her written consent.
• B. Retain the Moderate profile, use the scheme’s Very High rating, and withhold the recommendation unless reassessment supports a change.
• C. Retain the Moderate profile, use the platform’s Moderate category label, and make the recommendation because those two ratings match.
• D. Retain the Moderate profile, use Meera’s written risk acknowledgement, and make the recommendation because she accepts the disclosed risk.

Best answer: B

What this tests: Mutual Fund Scheme Selection

Explanation: A distributor should compare the investor’s documented risk profile with the particular scheme’s current disclosed Riskometer. Meera is classified as Moderate risk, while the scheme is classified as Very High risk, creating a clear mismatch. A third-party category label does not replace the scheme-specific Riskometer. Similarly, an investor’s acknowledgement of risk does not by itself establish suitability or change the underlying risk profile. Raj may conduct a fresh assessment if updated information indicates that Meera’s risk capacity or tolerance has genuinely changed. He should not alter the profile merely to accommodate a desired product. Unless a supported reassessment changes the documented profile, Raj should not recommend the Very High risk scheme.

• A platform’s category label is not a substitute for the scheme’s current disclosed Riskometer.
• Written acceptance of risk does not resolve a mismatch between the documented profile and scheme risk.
• A product request and consent do not support changing an investor’s risk classification without fresh information.

The documented Moderate profile conflicts with the scheme’s Very High Riskometer, so consent or unsupported relabelling cannot make the recommendation suitable.

Question 29

Topic: Mutual Fund Scheme Performance

An MFD is reviewing an actively managed equity scheme.

Research sheet:

• Three-year CAGR: 13.20%
• Alpha: 1.40%
• Sharpe ratio: 0.72
• Tracking error: 4.80%

The investor wants to know how much excess return over the risk-free rate the scheme earned per unit of total volatility. Which supplied metric should the MFD use?

• A. Use the reported three-year CAGR of 13.20%.
• B. Use the reported tracking error of 4.80%.
• C. Use the reported alpha of 1.40%.
• D. Use the reported Sharpe ratio of 0.72.

Best answer: D

What this tests: Mutual Fund Scheme Performance

Explanation: The Sharpe ratio evaluates risk-adjusted performance by relating the scheme’s return above the risk-free rate to its standard deviation, which represents total volatility. A higher Sharpe ratio generally indicates that the scheme generated more excess return for each unit of total risk taken. Alpha instead measures return above the return expected for the scheme’s market exposure. Tracking error measures how widely the scheme’s returns deviate from its benchmark returns. CAGR shows the compounded annual growth rate over a period but does not account for volatility or the risk-free rate.

• Alpha measures performance relative to an expected benchmark-based return, not excess return per unit of total volatility.
• Tracking error measures variability of active returns against a benchmark, not reward per unit of total risk.
• Three-year CAGR measures compounded growth without adjusting for volatility or the risk-free rate.

The Sharpe ratio measures excess return over the risk-free rate per unit of total volatility.

Question 30

Topic: Fund Distribution and Channel Management Practices

An RTA receives a fresh purchase application for an existing folio in a regular plan.

• The application is signed by the sole holder, is otherwise valid, and names an AMC-empanelled distributor’s ARN and salesperson’s EUIN.
• The investor states that these new distributor details apply only to the fresh purchase. No change is requested for existing units.
• The distributor associated with the existing units asks the RTA to hold the purchase until it provides consent.

What is the best action for the RTA?

• A. Hold the purchase for the existing distributor’s consent and leave the existing unit coding unchanged.
• B. Process the purchase with the existing distributor details and leave the existing unit coding unchanged.
• C. Process the purchase with the new distributor details and leave the existing unit coding unchanged.
• D. Process the purchase with the new distributor details and recode all existing units accordingly.

Best answer: C

What this tests: Fund Distribution and Channel Management Practices

Explanation: Distributor association must follow the investor’s valid instruction and the scope stated in that instruction. A fresh purchase can specify an ARN and EUIN different from the distributor details associated with earlier units in the same folio. Because the investor limited the change to the fresh purchase, the RTA should use the new details for that transaction while leaving the coding of existing units unchanged. The distributor associated with the earlier units does not have a veto over the investor’s instruction, so its consent or no-objection certificate is not required. Processing the purchase under the old distributor details would disregard the signed application, while recoding earlier units would exceed the authority given by the investor.

• Recoding all existing units exceeds the investor’s transaction-specific instruction.
• Using the existing distributor details disregards the valid purchase application.
• Waiting for distributor consent improperly gives the existing distributor control over the investor’s decision.

The valid instruction controls the fresh purchase without requiring the existing distributor’s consent or recoding prior units.

Question 31

Topic: Legal and Regulatory Framework

The SEBI social-media identity disclosure requirement applies to relevant securities-market content posted on or after May 1, 2026.

On June 10, 2026, Arjun Mehta posts a mutual-fund promotional reel as an agent of Prerna Mutual Fund.

• Principal: Prerna Mutual Fund, registration number MF/099/26
• MFD: Arjun Mehta, ARN ARN-12345
• Employee identifier: EUIN E123456
• Registration status: Each party has a single relevant registration

Which disclosure action complies with the requirement?

• A. Show the MFD’s name and ARN first, then the principal’s name and number, in both required locations.
• B. Show the principal’s name and number first, then the MFD’s name and ARN, in both required locations.
• C. Show the principal’s name and number first, then the MFD’s name and EUIN, in both required locations.
• D. Show the principal’s name and number first, then the MFD’s name and ARN, on the home page only.

Best answer: B

What this tests: Legal and Regulatory Framework

Explanation: For relevant social-media content posted on or after May 1, 2026, a single-registration agent must make the prescribed identity disclosure on the social-media home page and at the beginning of each relevant content item. Because Arjun Mehta is acting as an MFD agent, the relevant principal regulated entity’s registered name and registration number must appear first. The agent’s registered name and registration number must follow. For an MFD, the ARN serves as the supplied agent registration number. The EUIN identifies the employee involved in the transaction or sale; it does not replace the MFD’s ARN for this social-media disclosure.

• Placing the MFD before the principal uses the wrong disclosure order for an agent.
• Limiting the disclosure to the home page omits the required disclosure at the beginning of the reel.
• Using the EUIN instead of the ARN confuses an employee identifier with the MFD’s registration number.

A single-registration agent must show the principal’s details first and the agent’s registered name and ARN on the home page and at the beginning of the content.

Question 32

Topic: Legal Structure of Mutual Funds in India

In India’s mutual fund framework, which statement correctly distinguishes the role of AMFI from that of SEBI?

• A. AMFI is a statutory body regulating mutual fund distributors under law, whereas SEBI voluntarily guides asset management companies through industry standards.
• B. AMFI is an industry association administering distributor registration and promoting industry practices, whereas SEBI is the statutory securities-market regulator.
• C. AMFI is an adjudicatory authority imposing statutory penalties on mutual funds, whereas SEBI primarily promotes voluntary practices among industry members.
• D. AMFI is the statutory regulator authorising mutual fund schemes and distributor conduct, whereas SEBI is the industry association administering registration.

Best answer: B

What this tests: Legal Structure of Mutual Funds in India

Explanation: AMFI is the mutual fund industry’s association. Its activities include promoting industry practices, administering ARN registration for mutual fund distributors, disseminating information, and maintaining the AMFI Code of Conduct for Mutual Fund Distributors. These functions do not give AMFI statutory regulatory authority. SEBI is the securities-market regulator established under law. It regulates mutual funds and relevant intermediaries, prescribes binding requirements, supervises compliance, and can take regulatory action. AMFI’s industry standards and administrative functions support the mutual fund ecosystem, but they do not replace SEBI’s legal authority. The decisive distinction is therefore the source and nature of each body’s authority.

• Treating AMFI as the authority that regulates schemes reverses the respective roles of AMFI and SEBI.
• Describing AMFI as statutory and SEBI’s role as voluntary incorrectly assigns their sources of authority.
• Assigning statutory penalties to AMFI confuses an industry association with the securities-market regulator.

AMFI performs industry-association functions such as ARN administration, while SEBI has statutory authority to regulate mutual funds.

Question 33

Topic: Mutual Fund Scheme Selection

Meera’s agreed long-term asset allocation is 60% equity, 30% debt, and 10% gold. After an equity-market rise, her portfolio is 70% equity, 20% debt, and 10% gold. Her goals, time horizon, risk profile, and liquidity needs have not changed.

She plans to invest a new lump sum as the first step in rebalancing. Which function should the selected mutual fund scheme primarily serve?

• A. Broaden equity manager diversification while retaining current asset weights.
• B. Increase gold exposure to strengthen diversification across asset classes.
• C. Add sector equity exposure to improve near-term return potential.
• D. Move the portfolio toward its target by increasing debt exposure.

Best answer: D

What this tests: Mutual Fund Scheme Selection

Explanation: Asset allocation determines how much of a portfolio should be invested across asset classes based on the investor’s goals, horizon, liquidity needs, and risk profile. Diversification should support that allocation rather than merely increase the number of schemes held. Meera’s equity exposure is above target, debt is below target, and gold is already at target. Since her circumstances have not changed, the new investment should increase debt exposure and move the portfolio closer to its agreed mix. Selecting another equity scheme could diversify fund managers or sectors, but it would not correct the asset-class imbalance.

• Adding another equity manager may diversify within equity, but it does not correct the equity overweight.
• Increasing gold would move that asset class above its agreed allocation while debt remains underweight.
• Adding sector equity would increase concentration and further worsen the existing equity overweight.

Debt exposure addresses the underweight asset class while reducing the portfolio’s excessive equity weight.

Question 34

Topic: Mutual Fund Scheme Selection

An MFD has documented an investor’s risk profile as Moderate after assessing the investor’s willingness and capacity to bear losses. The investor proposes to place the entire amount set aside for an eight-year goal in a scheme whose current Riskometer level is Very High. The investor’s circumstances have not changed since the risk profiling.

Which action best reflects the comparison of the investor’s profile with the scheme’s disclosed risk?

• A. Proceed with selection of the proposed scheme after reviewing its recent returns.
• B. Proceed with selection of the proposed scheme based on the eight-year horizon.
• C. Proceed with selection of the proposed scheme by using an SIP investment.
• D. Reconsider selection of the proposed scheme due to the documented risk mismatch.

Best answer: D

What this tests: Mutual Fund Scheme Selection

Explanation: A risk profile reflects an investor’s willingness and capacity to bear investment losses, while the Riskometer communicates the risk level of a mutual fund scheme. Scheme selection should compare these two assessments. Here, a Very High risk scheme does not align with the investor’s documented Moderate profile, particularly when the entire amount for the goal would be invested in that scheme. The eight-year horizon is relevant but does not override the investor’s ability and willingness to bear risk. Similarly, investing through an SIP changes the timing of purchases but not the scheme’s disclosed risk level. Recent returns also do not remove the underlying risk mismatch.

• Relying on the eight-year horizon ignores the documented willingness and capacity to bear losses.
• Using an SIP does not reduce the scheme’s Riskometer classification or underlying portfolio risk.
• Reviewing recent returns does not establish suitability or correct the disclosed risk mismatch.

The scheme’s Very High risk level exceeds the investor’s documented Moderate risk profile.

Question 35

Topic: Fund Distribution and Channel Management Practices

An AMC is reviewing the empanelment file of Sahyadri Fund Services. The file contains these records:

• AMFI ARN registration record: Registered applicant - Sahyadri Fund Services Private Limited; Constitution - Company
• NISM certificate: Holder - Meera Joshi, principal officer
• EUIN confirmation: Holder - Arjun Shah, sales employee
• Commission disclosure: Trail commission may be received from the AMC

Which record best supports classifying Sahyadri Fund Services as a non-individual mutual fund distributor?

• A. The EUIN confirmation showing the sales employee’s identifier
• B. The AMFI ARN record showing the applicant’s company constitution
• C. The commission disclosure showing the distributor’s remuneration arrangement
• D. The NISM certificate showing the principal officer’s qualification

Best answer: B

What this tests: Fund Distribution and Channel Management Practices

Explanation: An MFD’s classification as individual or non-individual depends on the identity and legal constitution of the entity holding the ARN. A private limited company is a non-individual entity even though its principal officer and sales employees are natural persons. The AMFI ARN registration record directly identifies both the registered applicant and its constitution, making it the relevant evidence for classification. A principal officer’s NISM certificate establishes the person’s required qualification, while an EUIN identifies an employee involved in sales activity. A commission disclosure communicates the distributor’s remuneration arrangement. None of these other records determines the legal constitution of the ARN holder.

• The principal officer’s certificate establishes examination qualification, not the ARN holder’s constitution.
• The EUIN confirmation identifies a sales employee, not the registered distributor’s classification.
• The commission disclosure addresses remuneration, not whether the ARN holder is individual or non-individual.

The ARN record identifies the registered applicant as a company, establishing its non-individual status.

Question 36

Topic: Investment Landscape

Ananya has completed KYC on an execution-only mutual-fund platform but has not submitted a purchase. She has limited investment knowledge and little time to monitor investments. She also has irregular income, a three-year home-purchase goal, and a 15-year retirement goal. She wants help with asset allocation, scheme selection, and periodic reviews while retaining final decision authority.

What is the most appropriate next step in her mutual-fund purchase process?

• A. Meet an MFD for a needs and risk assessment before reviewing recommendations and authorising any purchase.
• B. Permit an MFD to select schemes and execute transactions independently, then assess the choices at quarterly meetings.
• C. Ask an MFD to start a diversified SIP immediately and provide goal and risk details during a later review.
• D. Select a top-performing scheme, make the first purchase, and then ask an MFD to review its suitability.

Best answer: A

What this tests: Investment Landscape

Explanation: A do-it-yourself approach is more suitable when an investor has enough knowledge and time to assess products, determine asset allocation, complete transactions, and monitor the portfolio. Ananya has multiple goals with different horizons, irregular income, uncertainty about suitable allocation, and limited time. These facts support seeking professional help before investing.

Completing KYC establishes eligibility to transact but does not determine investment suitability. An MFD can discuss her goals, liquidity needs, risk profile, and mutual-fund alternatives, and can provide ongoing service within the distributor role. Ananya should understand the recommendations and retain authority over each investment decision. The MFD should not make discretionary transactions on her behalf.

• Buying a recent top performer before assessing suitability places the transaction before goal and risk analysis.
• Starting an SIP before collecting goal and risk information reverses the appropriate sequence.
• Allowing independent execution removes investor authorisation and exceeds the non-discretionary distributor role.

Her limited knowledge, time constraints, multiple goals, and support needs justify professional assistance before she authorises an investment.

Question 37

Topic: Concept and Role of a Mutual Fund

Which statement specifically describes a mismatch with investor needs as a limitation of a mutual fund investment?

• A. The scheme’s risk, horizon, and liquidity features may not fit the investor’s needs.
• B. The scheme’s future returns may vary and are not guaranteed to the investor.
• C. The scheme’s recurring expenses may reduce the net return received by the investor.
• D. The scheme’s NAV may decline when prices of its portfolio securities fall.

Best answer: A

What this tests: Concept and Role of a Mutual Fund

Explanation: Investor-need mismatch concerns suitability. A mutual fund can be properly managed and operate according to its stated investment objective but still be inappropriate for a particular investor. The investor’s goals, time horizon, risk tolerance, risk capacity, and liquidity requirements should align with the scheme’s features. Market risk is the possibility that changes in portfolio security prices will reduce NAV. Costs lower the net return available to investors. Lack of guaranteed returns means that the investment outcome is uncertain. Professional management and diversification do not remove these limitations or ensure that every scheme is suitable for every investor.

• A decline in NAV caused by falling security prices describes market risk.
• A reduction in net return caused by recurring expenses describes the impact of costs.
• Variation in future returns describes the absence of guaranteed investment outcomes.

A mutual fund may be unsuitable when its features do not align with the investor’s goals, time horizon, risk tolerance, or liquidity needs.

Question 38

Topic: Risk, Return and Performance of Funds

An open-ended debt scheme receives redemption requests equal to 18% of its NAV after trading is suspended in a material segment of its portfolio. Immediately available cash and readily realisable assets cover only 4% of NAV. The AMC documents that unrestricted redemptions would require distressed sales and unfairly transfer losses to remaining investors.

The applicable framework permits a temporary redemption restriction only when:

• An exceptional liquidity event and investor-protection need are documented.
• The AMC board and trustees approve the restriction.
• A notice stating its scope and duration is issued before activation.
• The restriction is applied uniformly and liquidity is reviewed daily.

The AMC board has approved the restriction, but the trustees have not considered it and no notice has been issued. What should the operations team do next?

• A. Activate the restriction uniformly, seek trustee approval, then issue the notice and review liquidity daily.
• B. Obtain trustee approval, issue the notice, then activate the restriction uniformly and review liquidity daily.
• C. Obtain trustee approval, activate the restriction by channel, then issue the notice and review liquidity daily.
• D. Issue the notice, activate the restriction uniformly, then seek trustee approval and review liquidity daily.

Best answer: B

What this tests: Risk, Return and Performance of Funds

Explanation: Redemption gating is an exceptional liquidity-management measure, not a routine response to large redemption requests. Here, the severe liquidity constraint and risk of distressed sales establish the permitted liquidity basis for considering a restriction. However, satisfying the liquidity trigger does not remove the regulatory safeguards. Both required approvals must be obtained, and investors must receive the prescribed notice before activation. The restriction must also treat comparable redemption requests uniformly and remain subject to daily liquidity review. These conditions protect redeeming and remaining investors from arbitrary or discriminatory treatment. Activating the restriction before trustee approval or notice would be premature, while applying it differently across transaction channels would violate the stated fair-treatment requirement.

• Immediate activation reverses the required sequence because trustee approval and prior notice are still pending.
• Issuing notice does not permit activation while the required trustee approval remains outstanding.
• Channel-based activation violates uniform treatment and also begins before the required notice.

The liquidity trigger is documented, but trustee approval and pre-activation notice remain mandatory before a uniform restriction can begin.

Question 39

Topic: Investment Landscape

An investor wants one investment to provide maximum capital safety, immediate access to money, and the highest expected return. Which statement best explains the relevant investment trade-off?

• A. Greater capital safety generally provides higher returns while preserving immediate liquidity.
• B. Higher return potential generally provides greater safety and liquidity when held for longer.
• C. Higher return potential generally requires accepting lower safety, lower liquidity, or both.
• D. Greater liquidity generally provides higher returns while maintaining complete capital safety.

Best answer: C

What this tests: Investment Landscape

Explanation: Safety, liquidity, and return are competing investment attributes. Investments offering greater safety and ready access to money generally provide lower return potential. Investments offering higher return potential commonly involve greater risk of loss, restrictions on quick access, or both. A longer holding period may help an investor tolerate market fluctuations, but it does not automatically make a higher-return investment safe or immediately liquid. Therefore, an investor should prioritise these attributes according to goals, time horizon, liquidity needs, and capacity to bear risk rather than expect one investment to maximise all three.

• A longer holding period does not automatically increase the safety or liquidity of a higher-return investment.
• Greater capital safety commonly involves accepting lower return potential rather than receiving higher returns.
• Greater liquidity does not by itself produce higher returns or ensure complete protection of capital.

Investors generally cannot maximise safety, liquidity, and return simultaneously in a single investment.

Question 40

Topic: Fund Distribution and Channel Management Practices

Riya holds mutual fund units from four participating AMCs in statement-of-account mode. She wants a common industry facility with a single account registration for eligible purchases, redemptions, and switches across these mutual funds. She does not want an exchange-based order route or a distributor-owned interface.

Which transaction channel best matches Riya’s requirement?

• A. A distributor app for transactions across the distributor’s empanelled fund houses
• B. MF Utility for common transactions across participating mutual fund houses
• C. An AMC online portal for transactions in that fund house’s schemes
• D. A stock-exchange platform for exchange-based mutual fund order routing

Best answer: B

What this tests: Fund Distribution and Channel Management Practices

Explanation: MF Utility is a shared transaction aggregation facility for participating mutual funds. It supports common account-based access for eligible transactions across multiple fund houses and can accommodate statement-of-account holdings. This matches Riya’s need for a common industry facility rather than separate fund-house portals.

An AMC portal primarily provides access to schemes managed by that AMC. A stock-exchange platform routes mutual fund orders through exchange infrastructure. A distributor app may provide access to several empanelled AMCs, but transactions occur through the distributor’s interface. The decisive feature is Riya’s preference for a common mutual fund industry facility with a single account registration.

• An AMC portal does not provide a common transaction facility covering other fund houses.
• A stock-exchange platform uses exchange-based order-routing infrastructure, which Riya does not want.
• A distributor app is controlled by the distributor and depends on its AMC empanelment arrangements.

MF Utility provides common account-based transaction access across participating mutual fund houses.

Question 41

Topic: Fund Distribution and Channel Management Practices

After individual mutual fund distributor Arjun Mehta dies, an AMC reviews whether Kavya Mehta was designated to receive commission receivables arising under his ARN.

The file contains:

• A distributor nomination acknowledgement naming Kavya, identifying Arjun’s ARN, and specifying commission receivables after death.
• A personal folio nomination confirmation naming Kavya for all units in Arjun’s investment folio.
• An AMC empanelment record showing Arjun’s ARN and registered commission payout account.
• An EUIN record identifying an employee associated with Arjun’s distribution activity.

Which record best supports the conclusion that Kavya was nominated for Arjun’s distributor commission receivables?

• A. The current AMC empanelment record linked to Arjun’s ARN and payout account
• B. The active EUIN registration record linked to Arjun’s ARN and sales activity
• C. The acknowledged distributor nomination linked to Arjun’s ARN and commission receivables
• D. The confirmed investor nomination linked to Arjun’s folio and mutual fund units

Best answer: C

What this tests: Fund Distribution and Channel Management Practices

Explanation: A nomination must be interpreted according to the capacity and asset identified in the record. The distributor nomination acknowledgement expressly covers commission receivables arising under Arjun’s ARN after his death. It therefore establishes Kavya’s designation for that purpose. The nomination in Arjun’s personal mutual fund folio concerns the units held in that folio, not income receivable in his capacity as a distributor. An AMC empanelment record establishes the distribution relationship and payout details, while an EUIN record identifies a person involved in sales activity. Neither constitutes a nomination for commission receivables. Investor-unit nomination and distributor commission nomination are separate arrangements even when they name the same person.

• The personal folio nomination applies to Arjun’s mutual fund units, not his distributor commission receivables.
• The empanelment record confirms the AMC relationship and payout account but does not designate a nominee.
• The EUIN record identifies sales personnel but does not establish rights relating to commission receivables.

It expressly links Kavya’s designation to commission receivables arising under Arjun’s ARN after his death.

Question 42

Topic: Fund Distribution and Channel Management Practices

An AMC is reviewing applications for distributor empanelment. Which applicant should be classified as an individual mutual fund distributor?

• A. Nivesh Private Limited, applying for an ARN in the company’s registered legal name
• B. Sahyog Partnership Firm, applying for an ARN in the firm’s registered legal name
• C. ClearPath LLP, applying for an ARN in the LLP’s registered legal name
• D. Ananya Rao, applying in her personal capacity for an ARN in her own name

Best answer: D

What this tests: Fund Distribution and Channel Management Practices

Explanation: The classification depends on the legal constitution of the entity holding or applying for the ARN. A natural person who applies in a personal capacity and distributes under an ARN issued in that person’s name is an individual mutual fund distributor. An LLP, private limited company, or partnership firm is a separate organisational form and is therefore classified as a non-individual mutual fund distributor. Individuals working for a non-individual distributor may interact with investors and may require an EUIN, but their involvement does not change the classification of the ARN-holding entity.

• An LLP is an organisational legal form and is classified as a non-individual distributor.
• A private limited company is a corporate entity and is classified as a non-individual distributor.
• A partnership firm is an organisational entity and is classified as a non-individual distributor.

A natural person applying for an ARN in her own name is classified as an individual mutual fund distributor.

Question 43

Topic: Investor Services

Rohan has invested ₹12 lakh in a liquid scheme and wants to deploy ₹1 lakh each month into an equity scheme of the same mutual fund. He wants the undeployed balance to remain invested in the liquid scheme, with no periodic payment to his bank account. Transfers must not depend on an IDCW declaration or a market-level trigger.

Which facility should Rohan use?

• A. Register a fixed-amount Systematic Investment Plan into the equity scheme from his bank account.
• B. Register a fixed-amount Systematic Withdrawal Plan from the liquid scheme to his bank account.
• C. Register a fixed-amount Systematic Transfer Plan from the liquid scheme to the equity scheme.
• D. Register an IDCW Transfer Plan from the liquid scheme to the equity scheme.

Best answer: C

What this tests: Investor Services

Explanation: A Systematic Transfer Plan (STP) periodically redeems a specified amount from a source scheme and invests it in a target scheme of the same mutual fund. It suits Rohan because he wants gradual deployment from his existing liquid-scheme investment while the remaining amount stays invested. A Systematic Investment Plan normally brings periodic money from the investor’s bank account into a scheme. A Systematic Withdrawal Plan creates periodic withdrawals from a scheme, commonly for cash-flow needs. An IDCW Transfer Plan transfers eligible IDCW declared by a source scheme, so its amount and timing depend on the discretionary IDCW declaration rather than a predetermined monthly amount.

• A SIP would use periodic funding from the bank rather than transfer the existing liquid-scheme balance.
• An SWP would withdraw money from the source scheme instead of investing it in another scheme.
• An IDCW Transfer Plan would depend on eligible IDCW being declared rather than transfer a fixed monthly amount.

An STP periodically transfers the specified amount from one scheme to another scheme of the same mutual fund.

Question 44

Topic: Taxation

A GST-registered mutual fund distributor receives taxable commission from an AMC for distribution services. Separately, an investor redeems mutual fund units at a gain. Ignoring income-tax treatment and scheme expense effects, which statement correctly distinguishes the application of GST?

• A. GST applies to the investor’s investment gain, not to the distributor’s service remuneration.
• B. GST applies to the distributor’s taxable service remuneration, not to the investor’s investment gain.
• C. GST applies to neither the distributor’s service remuneration nor the investor’s investment gain.
• D. GST applies to both the distributor’s service remuneration and the investor’s investment gain.

Best answer: B

What this tests: Taxation

Explanation: GST is an indirect tax on taxable supplies of goods or services. A distributor’s commission is consideration for providing distribution services and can therefore attract GST when the applicable registration and taxability conditions are met. By contrast, an investor’s appreciation or gain on redeeming mutual fund units is an investment outcome, not payment for a service supplied by the investor. GST is therefore not imposed on that gain merely because the investment generated a return. Any income-tax consequences of the redemption are determined separately under income-tax rules. Service-related GST may affect remuneration or relevant costs, but it should not be confused with a tax charged directly on the investor’s investment return.

• Treating only the investment gain as subject to GST reverses the distinction between service consideration and investment return.
• Applying GST to both amounts incorrectly treats the investor’s gain as consideration for a taxable service.
• Excluding both amounts overlooks that taxable distribution commission is remuneration for a supplied service.

The commission is consideration for a taxable distribution service, whereas the investment gain is not itself consideration for a service.

Question 45

Topic: Investor Services

Meera has ₹6 lakh invested in an open-ended overnight scheme of Pragati Mutual Fund.

• She wants to deploy the amount gradually into an equity scheme of the same mutual fund through 12 fixed monthly transfers.
• She does not want the transfers linked to market levels or funded from her bank account.
• The mutual fund offers systematic facilities between the two schemes.
• She understands that each transfer may have applicable tax and exit-load consequences.

Which facility should her distributor recommend?

• A. Register a monthly STP from the overnight scheme to the equity scheme for 12 scheduled transfers.
• B. Register a market-level trigger switch from the overnight scheme when the specified threshold is reached.
• C. Register a monthly SIP into the equity scheme from her bank while retaining the overnight-scheme investment.
• D. Register a monthly SWP from the overnight scheme to her bank and manually reinvest the proceeds.

Best answer: A

What this tests: Investor Services

Explanation: A Systematic Transfer Plan (STP) is appropriate when an investor wants to move money periodically from one scheme to another scheme of the same mutual fund. It supports Meera’s objective of gradually deploying an existing lump sum through fixed monthly transfers without requiring fresh debits from her bank account. Each installment is treated as a redemption from the overnight scheme and a subscription to the equity scheme, so applicable taxation and exit load must still be considered. A trigger-based switch would depend on a specified event or market level rather than Meera’s fixed schedule.

• A bank-funded SIP would use fresh cash flows instead of deploying the existing overnight-scheme investment.
• An SWP would pay the proceeds to the investor rather than directly transfer them between schemes.
• A market-level trigger would make the transfer event-dependent rather than follow the required monthly schedule.

An STP provides scheduled transfers through redemption from the source scheme and subscription to the target scheme.

Question 46

Topic: Investor Services

Meera tells an AMC service desk that her investment in a newly launched open-ended scheme was made during its NFO. The team must verify whether her instruction was received during the NFO period or after the scheme opened for ongoing transactions, when purchases and redemptions are processed at the applicable NAV.

Which file record provides the best evidence for classifying Meera’s transaction?

• A. The ARN validity letter matched with the EUIN declaration showing the distributor details and employee identity
• B. The KYC acknowledgement matched with Meera’s PAN record showing the verification status and registration reference
• C. The time-stamped transaction receipt matched with the KIM or addendum showing the NFO opening and closing dates
• D. The bank debit confirmation matched with Meera’s account statement showing the paid amount and payment reference

Best answer: C

What this tests: Investor Services

Explanation: An NFO subscription is identified by comparing the transaction receipt’s date and time with the scheme’s officially disclosed NFO opening and closing dates. A valid subscription received during that period is processed under the NFO terms. After an open-ended scheme reopens for ongoing transactions, purchases and redemptions are processed at the applicable NAV under the relevant transaction rules. Payment records may confirm that money moved, but they do not establish the applicable offer period. Similarly, KYC records establish investor verification, while ARN and EUIN records establish distributor-related details. None of these independently determines whether the transaction occurred during the NFO or the ongoing offer.

• Bank and payment records establish the amount transferred, not whether the instruction fell within the NFO period.
• KYC and PAN records establish investor verification, not the scheme’s transaction phase.
• ARN and EUIN records establish distributor identification, not the timing applicable to the investment.

This pairing establishes when the instruction was received and whether that time fell within the disclosed NFO period.

Question 47

Topic: Investor Services

A valid purchase application for ₹2,00,000 in an open-ended mutual fund scheme was time-stamped on Monday at 2:20 p.m. The payment failed to reach the scheme account on Monday but became available for utilisation on Tuesday at 10:30 a.m. Both days were business days.

The supplied rule states that the applicable NAV is the NAV of the business day on which both the valid application and funds available for utilisation are received before the 3:00 p.m. cut-off.

What should the AMC or RTA do next?

• A. Allot units using Wednesday’s NAV, after one full business day.
• B. Return the application and require a fresh purchase request on Tuesday.
• C. Allot units using Tuesday’s NAV, when the funds became available.
• D. Allot units using Monday’s NAV, based on the application timestamp.

Best answer: C

What this tests: Investor Services

Explanation: For a purchase, time-stamping the application before the cut-off is not sufficient when the supplied rule also requires funds to be available for utilisation. Although the valid application was received before 3:00 p.m. on Monday, the scheme could not use the money that day. The funds became available at 10:30 a.m. on Tuesday, before Tuesday’s cut-off. Since the application was already valid and both conditions were satisfied by the Tuesday cut-off, units should be allotted using Tuesday’s NAV. No additional waiting day or fresh purchase application is required.

• Monday’s NAV ignores the requirement that funds must also be available for utilisation before that day’s cut-off.
• Wednesday’s NAV adds an unnecessary waiting day after both conditions were satisfied on Tuesday.
• A fresh purchase request is unnecessary because the existing application was valid and remained available for processing.

Both the valid application and usable funds were available before Tuesday’s cut-off, making Tuesday’s NAV applicable.

Question 48

Topic: Investment Landscape

Kavya plans to fund a postgraduate course exactly seven years from now.

• Current course cost: ₹8 lakh
• Education inflation: 6% annually, compounded
• Expected portfolio return: 8% annually
• Liquidity need: No withdrawals before the goal date
• Risk capacity: Moderate

Which distributor response best establishes the goal amount before assessing scheme suitability?

• A. Set the target at about ₹11.36 lakh, using 6% simple inflation for seven years.
• B. Set the target at about ₹12.03 lakh, using 6% compounded inflation for seven years.
• C. Set the target at about ₹8.00 lakh, using the current course cost after seven years.
• D. Set the target at about ₹13.71 lakh, using 8% portfolio return for seven years.

Best answer: B

What this tests: Investment Landscape

Explanation: A future financial goal should be estimated by compounding its current cost at the relevant inflation rate over the full time horizon. Here, ₹8 lakh growing at 6% annually for seven years becomes approximately ₹12.03 lakh. A longer horizon allows inflation to compound for more periods, increasing the amount required. The assumed 8% portfolio return does not determine the future course cost; it helps estimate the investment needed today or through periodic contributions. Kavya’s risk capacity and lack of interim liquidity needs will affect subsequent scheme selection, but they do not change the inflation-adjusted goal amount.

• ₹13.71 lakh incorrectly uses the assumed portfolio return instead of education inflation to project the goal cost.
• ₹11.36 lakh applies simple inflation rather than annual compounding over the seven-year horizon.
• ₹8.00 lakh ignores the increase in education costs caused by inflation.

The inflation-adjusted cost is ₹8 lakh x 1.06^7, which is approximately ₹12.03 lakh.

Question 49

Topic: Legal Structure of Mutual Funds in India

Meera seeks help from her mutual fund distributor regarding a scheme advertisement.

• She believes the advertisement omitted a mandatory risk disclosure.
• She has complained to the AMC but is dissatisfied with its response.
• She asks whether AMFI can levy a statutory penalty on the AMC.

What is the distributor’s best response?

• A. Tell her AMFI is the statutory regulator, and direct the unresolved complaint to AMFI because it can penalise the AMC under mutual fund regulations.
• B. Tell her AMFI is an industry body, and direct the unresolved complaint to RBI’s grievance mechanism because RBI holds statutory regulatory authority.
• C. Tell her the trustees hold statutory authority, and direct the unresolved complaint to them because they can penalise the AMC under mutual fund regulations.
• D. Tell her AMFI is an industry body, and direct the unresolved complaint to SEBI’s grievance mechanism because SEBI holds statutory regulatory authority.

Best answer: D

What this tests: Legal Structure of Mutual Funds in India

Explanation: AMFI is the mutual fund industry’s association. Its functions include promoting industry standards, supporting distributor registration processes such as ARN and EUIN, and prescribing the AMFI Code of Conduct for Mutual Fund Distributors. These functions do not make AMFI a statutory regulator.

SEBI is the statutory regulator for mutual funds in India. It issues and enforces mutual fund regulations, supervises regulated entities, and may take regulatory action where warranted. Because Meera has already approached the AMC and remains dissatisfied, the distributor should guide her to SEBI’s prescribed investor grievance mechanism. Trustees oversee the AMC and protect unitholder interests, but they do not replace SEBI’s statutory authority.

• RBI regulates banking and certain financial-system matters, but it is not the statutory regulator for mutual fund schemes.
• AMFI cannot levy statutory penalties on an AMC under mutual fund regulations.
• Trustees perform scheme oversight but do not possess SEBI’s statutory enforcement authority.

AMFI performs industry functions, while SEBI has statutory authority over mutual funds and provides the appropriate escalation mechanism.

Question 50

Topic: Legal and Regulatory Framework

Meera submitted a complaint to the grievance officer of a mutual fund AMC after her redemption request was rejected without a satisfactory explanation. The AMC’s response did not address the transaction record, and she now wants to use SEBI’s online grievance mechanism.

Which action best reflects the purpose of escalation and the SCORES platform?

• A. Escalate through AMFI’s distributor channel, track the distributor’s ARN status, and seek compulsory reversal of the AMC’s redemption rejection.
• B. Escalate through RBI’s complaint system, track the linked bank transfer, and seek regulatory review of the AMC’s redemption rejection.
• C. Lodge the grievance on SCORES, request SEBI to adjudicate the loss, and seek a binding compensation award from the AMC.
• D. Lodge the grievance on SCORES, track the AMC’s response, and seek review escalation if the recorded resolution remains unsatisfactory.

Best answer: D

What this tests: Legal and Regulatory Framework

Explanation: The SEBI Complaints Redress System (SCORES) provides an online mechanism for investors to lodge securities-market grievances, monitor action taken by the regulated entity, and pursue review escalation when the recorded resolution is unsatisfactory. Meera has already approached the AMC, so escalation through SCORES is appropriate for obtaining monitored grievance redress. Escalation moves an unresolved complaint to a higher level of review and accountability; it does not itself guarantee that the investor’s claim will be accepted. SCORES facilitates redress and regulatory oversight, but it is not a court or arbitral forum that awards binding damages or compensation.

• Requesting a binding compensation award misstates SCORES as an adjudication forum.
• RBI’s complaint mechanism does not govern an AMC’s rejection merely because a bank account is linked to the redemption.
• AMFI’s distributor registration channel does not compel an AMC to reverse a transaction decision.

SCORES enables an investor to lodge and track a securities-market grievance and seek further review when the entity’s resolution is unsatisfactory.

Questions 51-75

Question 51

Topic: Investor Services

An investor submits a redemption request for all units in a mutual fund folio.

• Purchased units: 1,200
• IDCW-reinvestment units: 300
• Applicable NAV: ₹25 per unit
• Exit load on purchased units: 1% of redemption value
• Exit load on IDCW-reinvestment units: Nil
• Ignore taxes and other deductions.

What redemption proceeds should the investor receive?

• A. ₹37,125
• B. ₹37,425
• C. ₹37,500
• D. ₹37,200

Best answer: D

What this tests: Investor Services

Explanation: The purchased units have a redemption value of 1,200 x ₹25 = ₹30,000. The 1% exit load on these units is ₹300, leaving ₹29,700. The 300 IDCW-reinvestment units have a value of 300 x ₹25 = ₹7,500. Because no exit load applies to IDCW-reinvestment units, their full value is included. Total redemption proceeds are therefore ₹29,700 + ₹7,500 = ₹37,200. Exit load must be calculated only on units to which the scheme’s load provision applies, rather than on the entire redemption value.

• ₹37,125 incorrectly applies the 1% exit load to all 1,500 units.
• ₹37,425 incorrectly applies the exit load only to the IDCW-reinvestment units.
• ₹37,500 ignores the exit load applicable to the purchased units.

The proceeds are ₹30,000 less ₹300 exit load on purchased units, plus ₹7,500 from IDCW-reinvestment units.

Question 52

Topic: Risk, Return and Performance of Funds

Meera has completed KYC and risk profiling with a mutual fund distributor and is considering purchasing an equity scheme. The distributor confirms from the scheme factsheet that its beta is 1.20 against the stated market benchmark for the disclosed period. No purchase instruction has been accepted. Beta must be presented as a historical sensitivity estimate, not a guaranteed forecast.

What should the distributor do next before accepting Meera’s purchase instruction?

• A. Explain that the scheme has tended to outperform the benchmark by 1.20 percentage points for each 1% benchmark move, then seek Meera’s purchase decision.
• B. Explain that the scheme has tended to move about 1.20% opposite to the benchmark for each 1% benchmark move, then seek Meera’s purchase decision.
• C. Explain that the scheme has tended to move about 1.20% in the benchmark’s direction for each 1% benchmark move, then seek Meera’s purchase decision.
• D. Explain that the benchmark has tended to move about 1.20% in the scheme’s direction for each 1% scheme move, then seek Meera’s purchase decision.

Best answer: C

What this tests: Risk, Return and Performance of Funds

Explanation: Beta measures a scheme’s sensitivity to movements in its stated market benchmark. A beta of 1.00 indicates benchmark-level sensitivity, while a beta of 1.20 indicates that the scheme has historically tended to move about 1.20% in the same direction when the benchmark moves by 1%. Thus, the scheme has shown approximately 20% greater benchmark-related sensitivity. Beta does not measure guaranteed return, excess return, or all sources of risk. It is an estimate based on historical return relationships and may change over time. Before accepting the purchase instruction, the distributor should explain this interpretation and allow Meera to decide whether the scheme’s sensitivity is consistent with her risk profile.

• An opposite-direction relationship would be indicated by a negative beta, not a positive beta of 1.20.
• Reversing the scheme and benchmark movements misstates which return is being measured for sensitivity.
• Treating beta as benchmark outperformance confuses market sensitivity with alpha or excess return.

A positive beta of 1.20 indicates that the scheme has historically been about 20% more sensitive than its stated benchmark.

Question 53

Topic: Investor Services

On May 15, 2027, after amount-based standing instructions for demat-held mutual fund units have become operational, Kavita instructs an AMC to withdraw ₹10,000 monthly from an open-ended scheme. Her units are held in demat form, and the proceeds will be credited to her bank account.

Which statement best explains how this systematic withdrawal plan operates?

• A. Units worth ₹10,000 are transferred each month to another scheme; source units fall, while corresponding target-scheme units are allotted.
• B. ₹10,000 is paid each month as IDCW without redeeming units; the unit balance remains intact, subject to available distributable surplus.
• C. Units worth ₹10,000 are redeemed each month at the applicable NAV; the unit balance falls, and continued withdrawals may erode capital.
• D. A fixed number of units are redeemed each month at the applicable NAV; cash proceeds vary, and continued withdrawals may erode capital.

Best answer: C

What this tests: Investor Services

Explanation: A systematic withdrawal plan is a standing instruction for periodic redemptions. Under an amount-based instruction, the AMC redeems enough units at the applicable NAV to generate the specified withdrawal amount. Consequently, the number of units redeemed can vary as the NAV changes, while the remaining unit balance declines after each withdrawal. An SWP is not an assured income distribution. Redemption proceeds may include investment gains and a return of the investor’s capital. If withdrawals exceed the scheme’s growth over time, the remaining corpus may be depleted. For demat-held units, standing-instruction availability depends on the phased implementation schedule; the stated date permits an amount-based mandate.

• A fixed number of units with variable proceeds describes a unit-based mandate, not the stated amount-based instruction.
• IDCW depends on declaration and distributable surplus rather than scheduled unit redemptions.
• A transfer from one scheme to another describes an STP rather than a withdrawal to a bank account.

An amount-based SWP periodically redeems units needed to provide the stated amount, reducing the remaining units and potentially the invested capital.

Question 54

Topic: Scheme Related Information

Meera holds 8,000 units in the Regular Plan - Growth option of an open-ended mutual fund scheme. After disclosures for June 18 become available, she wants to estimate the value of her holding using the scheme’s per-unit value for that date.

Which visible scheme record best supports her calculation?

• A. The half-yearly financial results showing the scheme’s income and expenses for the period
• B. The current KIM showing the scheme’s objectives, risks, and key operating features
• C. The daily NAV disclosure showing the Regular Plan - Growth value for June 18
• D. The monthly portfolio disclosure showing the scheme’s securities and asset allocations for June

Best answer: C

What this tests: Scheme Related Information

Explanation: Daily NAV disclosure enables an investor to identify the current per-unit value of a specific plan and option. Meera can multiply her 8,000 units by the disclosed Regular Plan - Growth NAV for June 18 to estimate the value of her holding on that valuation date. Other ongoing disclosures provide useful information about scheme features, portfolio composition, income, and expenses, but they do not directly provide the required date-specific per-unit value. Daily NAV therefore supports regular monitoring of an investor’s mutual fund holding.

• The KIM explains scheme features and risks but does not provide the per-unit value for June 18.
• The monthly portfolio identifies investments and allocations but does not establish the required daily NAV.
• The half-yearly results summarise financial performance for a period rather than the date-specific per-unit value.

The disclosed daily NAV provides the date-specific per-unit value needed to estimate the holding’s value.

Question 55

Topic: Net Asset Value, Total Expense Ratio and Pricing of Units

On June 30, 2026, an open-ended mutual fund scheme accrues a permissible recurring expense of ₹5 lakh. The expense is within the applicable TER limit, is chargeable to the scheme, and has not yet been paid. Scheme expenses must be accrued daily and deducted when determining net assets.

NAV data:

• Assets less all other liabilities: ₹101 crore
• Units outstanding: 10 crore
• Investor’s holding: 10,000 units
• No other NAV movement occurred
• Round NAV to three decimal places

Which treatment complies with the requirement and correctly shows the expense’s effect?

• A. Allocate ₹5 lakh to the AMC outside the scheme; report NAV ₹10.100 and holding value ₹101,000.
• B. Charge ₹5 lakh directly to investors; report NAV ₹10.100 and holding value ₹100,950.
• C. Accrue ₹5 lakh against scheme net assets; report NAV ₹10.095 and holding value ₹100,950.
• D. Defer ₹5 lakh until its cash payment; report NAV ₹10.100 and holding value ₹101,000.

Best answer: C

What this tests: Net Asset Value, Total Expense Ratio and Pricing of Units

Explanation: Permissible scheme expenses within the applicable TER are accrued to the scheme and reduce its net assets, even when payment has not yet occurred. Before the expense, NAV is ₹101 crore divided by 10 crore units, or ₹10.100 per unit. The ₹5 lakh expense equals ₹0.005 per outstanding unit. Therefore, the expense-adjusted NAV is ₹10.095. An investor holding 10,000 units has a value of ₹100,950, which is ₹50 below the pre-expense value. This illustrates how scheme expenses reduce NAV and consequently reduce investor return, rather than being separately deducted from each investor’s units or account.

• Deferring recognition until payment ignores the requirement to accrue scheme expenses daily.
• Charging investors separately incorrectly leaves the scheme NAV unaffected by an expense borne by the scheme.
• Allocating the amount to the AMC contradicts the fact that the permissible expense is chargeable to the scheme.

The daily expense accrual reduces net assets by ₹5 lakh, lowering NAV by ₹0.005 per unit.

Question 56

Topic: Mutual Fund Scheme Selection

An MFD has completed Kavya’s KYC, goal discussion, and risk profiling.

Investor facts:

• Kavya needs ₹600,000 for tuition in 15 months.
• Her risk profile permits limited NAV movement but not material interest-rate volatility.
• She has not yet given a transaction instruction.

Scheme comparison:

Both are open-ended debt schemes with similar credit quality and no exit load after 12 months. What should the MFD do next?

• A. Retain Scheme L in the shortlist, explain its duration risk and TER, and obtain Kavya’s instruction before submitting the purchase.
• B. Purchase Scheme S using the documented risk profile, disclose its TER, and obtain Kavya’s confirmation after the units are allotted.
• C. Retain both schemes as equivalent choices, compare their TERs, and obtain Kavya’s instruction before submitting the purchase.
• D. Retain Scheme S in the shortlist, explain its duration risk and TER, and obtain Kavya’s instruction before submitting the purchase.

Best answer: D

What this tests: Mutual Fund Scheme Selection

Explanation: Scheme costs affect investor returns, but costs should be compared after confirming that the schemes are suitable for the investor’s objective, horizon, and risk profile. Modified duration indicates a debt portfolio’s sensitivity to interest-rate changes. Scheme L’s substantially higher duration creates greater potential NAV volatility, which conflicts with Kavya’s 15-month goal and limited tolerance for such volatility. Its lower TER does not compensate for that mismatch. Scheme S is better aligned, although its risks and higher TER must still be explained. As the MFD provides a non-discretionary distribution service, Kavya must decide and give a transaction instruction before the purchase is submitted.

• Scheme L’s lower TER does not outweigh its materially higher duration risk for the stated goal.
• Similar credit quality and liquidity do not make the schemes equivalent because their interest-rate sensitivity differs substantially.
• A documented risk profile does not authorise the MFD to purchase units before receiving the investor’s instruction.

Scheme S’s lower duration aligns better with Kavya’s horizon and limited tolerance for interest-rate volatility despite its higher TER.

Question 57

Topic: Concept and Role of a Mutual Fund

Meera invests ₹50,000 in a mutual fund scheme and receives units. She then asks the distributor:

Is my money managed as a separate portfolio, or combined with other investors’ money, and what governs its investment?

Which record best supports the distributor’s explanation that her contribution forms part of a common scheme corpus managed under a stated mandate?

• A. The transaction confirmation showing the application amount, applicable NAV, and units allotted to the investor
• B. The consolidated account statement showing the investor’s folio holdings, current value, and transaction history
• C. The latest portfolio disclosure showing the scheme’s securities, sector exposures, and portfolio weights
• D. The Scheme Information Document showing the scheme’s nature, investment objective, and asset-allocation policy

Best answer: D

What this tests: Concept and Role of a Mutual Fund

Explanation: A mutual fund combines money received from multiple investors into a common scheme corpus. Investors receive units representing their proportionate interest rather than individually managed portfolios. The AMC manages this corpus for all unitholders according to the scheme’s stated investment objective and investment policy.

The Scheme Information Document is the governing scheme disclosure because it describes the scheme’s nature, investment objective, asset-allocation pattern, and investment strategy. It therefore explains the mandate under which pooled money is managed. The objective guides investment decisions but does not guarantee that the scheme will achieve its intended result.

• A transaction confirmation establishes the amount invested and units allotted, but not the scheme’s investment mandate.
• A consolidated account statement establishes an investor’s holdings and transactions, but not how the corpus may be invested.
• A portfolio disclosure shows actual holdings at a particular time, but it does not define the governing investment policy.

The Scheme Information Document defines the scheme-level mandate governing how the pooled corpus is to be invested.

Question 58

Topic: Mutual Fund Scheme Selection

Meera asks her mutual fund distributor to recommend a scheme because of its strong recent returns.

• Documented risk profile: Moderate, assessed recently with no material change since then.
• Investment horizon: Eight years, with no near-term liquidity need.
• Scheme disclosure: The latest Riskometer labels the scheme as Very High risk.

What is the distributor’s best action?

• A. Obtain her written acknowledgment of the mismatch, then recommend the scheme.
• B. Revise her profile to Very High based on her interest, then recommend the scheme.
• C. Rely on the eight-year horizon despite the mismatch, then recommend the scheme.
• D. Explain the mismatch, then discuss schemes whose disclosed risk level fits her documented profile.

Best answer: D

What this tests: Mutual Fund Scheme Selection

Explanation: A distributor should compare the investor’s documented risk profile with the scheme’s current Riskometer disclosure before making a recommendation. Meera’s long investment horizon and lack of an immediate liquidity need are relevant, but they do not automatically make a Very High risk scheme suitable for an investor assessed as Moderate. Strong recent returns also do not resolve the risk mismatch. The distributor should explain the inconsistency and discuss schemes with disclosed risk levels compatible with her documented profile. A fresh risk assessment may be appropriate if her circumstances or genuine risk preferences have changed, but the profile should not be altered merely to justify a preferred product.

• A long horizon may increase risk capacity, but it does not by itself override the documented Moderate profile.
• Changing the profile merely to fit a preferred scheme reverses the proper suitability process.
• Written acknowledgment confirms disclosure but does not make a mismatched recommendation suitable.

A recommendation should align the scheme’s disclosed risk with Meera’s current documented risk profile.

Question 59

Topic: Mutual Fund Scheme Selection

A fictional equity scheme’s documents contain these statements:

• Statement 1: The scheme seeks long-term capital appreciation.
• Statement 2: The scheme will invest predominantly in equities and select companies through bottom-up analysis.

Which interpretation correctly classifies the two statements?

• A. Statement 1 is the investment strategy, and Statement 2 is the investment objective.
• B. Statement 1 is the investment objective, and Statement 2 is the investment strategy.
• C. Statement 1 is the investor suitability note, and Statement 2 is the investment strategy.
• D. Statement 1 is the investment objective, and Statement 2 is the Riskometer assessment.

Best answer: B

What this tests: Mutual Fund Scheme Selection

Explanation: An investment objective states the outcome that a scheme seeks to achieve, such as long-term capital appreciation or income generation. An investment strategy describes how the fund manager intends to pursue that outcome, including the asset classes, portfolio construction method, and security-selection approach. Here, capital appreciation is the desired outcome, while predominant equity investment and bottom-up analysis are the methods used. The Riskometer separately indicates the scheme’s assessed risk level, while an investor suitability note describes the type of investor for whom the scheme may be appropriate. Schemes with similar objectives can use different strategies and therefore may have different risks and performance patterns.

• Reversing the classifications confuses the desired outcome with the methods used to pursue it.
• Equity allocation and bottom-up analysis describe portfolio management, not a Riskometer assessment.
• Seeking capital appreciation describes a scheme outcome, not the profile of a suitable investor.

Long-term capital appreciation is the intended outcome, while equity allocation and bottom-up selection describe how it will be pursued.

Question 60

Topic: Investor Services

On February 15, 2027, Kavita holds units of a source scheme in demat form. The unit-based standing-instruction facility for demat holdings has been implemented, while the amount-based facility has not yet been implemented.

Kavita submits an authenticated instruction to transfer 120 units monthly from the source scheme to a target scheme of the same mutual fund. The instruction is accepted, and sufficient units are available.

On the first scheduled transfer date, what should occur next?

• A. Redeem 120 source-scheme units and apply the resulting value to a target-scheme subscription.
• B. Redeem 120 source-scheme units and remit the resulting value to the investor’s bank account.
• C. Move 120 source-scheme units to the target scheme without recording redemption and subscription transactions.
• D. Redeem ₹12,000 of source-scheme value and apply the resulting value to a target-scheme subscription.

Best answer: A

What this tests: Investor Services

Explanation: An STP periodically transfers value between two schemes of the same mutual fund. Each instalment involves a redemption from the source scheme and a corresponding subscription into the target scheme; units are not simply moved between schemes. Because Kavita’s holdings are in demat form and the unit-based facility has been implemented, her valid instruction for 120 units can be executed. The absence of an amount-based facility does not prevent execution because her mandate specifies units, not a rupee amount. The redemption value generated from the 120 source-scheme units is applied toward purchasing units of the target scheme under the accepted standing instruction.

• Redeeming ₹12,000 would substitute an unauthorised amount-based mandate for the accepted unit-based instruction.
• Crediting the proceeds to the bank account would complete a redemption but omit the target-scheme subscription.
• Moving units directly between schemes would fail to record the required redemption and subscription transactions.

A unit-based STP redeems the instructed source units and uses the resulting value for a corresponding subscription in the target scheme.

Question 61

Topic: Mutual Fund Scheme Selection

A distributor has determined that a flexi-cap equity fund category suits Riya’s goal, time horizon, and risk profile. The distributor proposes Scheme P solely because its trailing one-year return ranks first and exceeds the category average.

Schemes in the category differ materially in expense ratio, portfolio concentration, downside volatility, and performance consistency. Which statement best assesses the proposed selection?

• A. The comparison is sufficient because category classification makes scheme-level risk, consistency, portfolio, and costs equivalent.
• B. The comparison is insufficient only when the scheme also trails its benchmark over the same one-year period.
• C. The comparison is sufficient because a first-place one-year rank confirms persistent performance across different market cycles.
• D. The comparison is insufficient because it omits scheme-level risk, consistency, portfolio, and cost differences.

Best answer: D

What this tests: Mutual Fund Scheme Selection

Explanation: Category averages and peer rankings help screen and compare schemes, but they do not by themselves justify selecting a particular scheme. A one-year ranking is a historical snapshot and may reflect temporary market conditions, concentrated positions, or higher risk. Even schemes within the same category can differ materially in portfolio construction, volatility, consistency, expense ratio, and investment approach. After deciding that a category suits the investor, the distributor should evaluate these scheme-specific characteristics and their relevance to the investor’s needs. Benchmark performance is also useful, but it is only one part of the assessment rather than the sole test of selection quality.

• Category classification does not make all schemes equivalent in risk, portfolio construction, consistency, or costs.
• A leading one-year return does not demonstrate persistence across market cycles.
• Benchmark comparison is relevant, but benchmark underperformance is not the only reason category data may be insufficient.

Category-relative return alone does not establish that Scheme P is the most suitable scheme within the category.

Question 62

Topic: Investment Landscape

Ananya has ₹3 lakh set aside solely as an emergency reserve and asks a mutual fund distributor where to keep it.

• She may need the entire amount within 24 hours at any time during the next six months.
• She has no other emergency reserve and cannot accept market-linked loss.
• Her savings account permits immediate withdrawal without principal fluctuation.
• Premature closure of a fixed deposit takes two working days.
• Mutual fund redemptions are not immediate, and their NAVs may fluctuate.
• Tax differences are immaterial, and return is a secondary priority.

Which distributor response best fits Ananya’s requirements?

• A. Invest the full amount in an equity fund for growth potential, despite its substantial market volatility.
• B. Retain the full amount in the savings account for immediate access, despite its lower expected return.
• C. Place the full amount in a fixed deposit for higher return, despite the delayed premature closure.
• D. Invest the full amount in an overnight fund for higher return, despite its market-linked value.

Best answer: B

What this tests: Investment Landscape

Explanation: Safety, liquidity, and return generally involve trade-offs. Investments offering greater return potential may expose the investor to price fluctuation, restricted access, or both. Ananya’s emergency reserve could be required in full within 24 hours, and she has no backup reserve. Therefore, immediate liquidity and principal stability are more important than earning a higher return. The savings account satisfies these priorities under the stated facts. A fixed deposit preserves principal but fails the access requirement because premature closure takes two working days. Mutual funds may offer better return potential, but their market-linked values conflict with her inability to accept any loss, and their redemption proceeds are not immediately available.

• The fixed deposit prioritises higher return and principal stability but cannot provide the required access within 24 hours.
• The overnight fund has relatively low volatility but still exposes the emergency corpus to NAV fluctuation and non-immediate redemption.
• The equity fund pursues long-term growth while conflicting with both the short horizon and need for capital stability.

The savings account meets both decisive requirements: principal stability and access within 24 hours.

Question 63

Topic: Mutual Fund Scheme Selection

An investor is selecting a strategy for the core equity portion of a portfolio.

• Investment horizon: 12 years
• Risk tolerance: Comfortable with schemes displaying a Very High Riskometer level
• Portfolio role: Broad, long-term equity exposure
• Preference: Avoid sector or thematic bets and reduce dependence on an active fund manager

Which strategy characteristic best aligns with these requirements?

• A. Passive replication of a single-sector equity index with concentrated exposure
• B. Active selection of a diversified equity portfolio with flexible style discretion
• C. Active rotation across thematic equity portfolios with tactical style shifts
• D. Passive replication of a broad-market equity index with diversified exposure

Best answer: D

What this tests: Mutual Fund Scheme Selection

Explanation: A long investment horizon and willingness to accept a Very High Riskometer level can support equity exposure, but the intended portfolio role determines the appropriate equity strategy. A core holding should generally provide broad and diversified market participation rather than depend on one sector, theme, or tactical view. Passive replication of a broad-market index also reduces reliance on an active manager’s security selection and style decisions. Sector and thematic strategies create concentrated exposures and are generally better suited to limited satellite allocations when appropriate. A diversified active strategy may serve as a core holding, but it does not meet the investor’s stated preference to reduce dependence on active management.

• A single-sector index remains concentrated despite using a passive approach, so it does not provide broad core exposure.
• Diversified active selection may suit a long horizon, but it retains fund-manager and style-selection dependence.
• Tactical thematic rotation introduces concentrated bets and timing decisions that conflict with the intended core role.

A broad-market passive strategy provides diversified core equity exposure while reducing active-manager and style-selection dependence.

Question 64

Topic: Investor Services

A mutual-fund folio has the following records:

• Ownership: Kavya and Nikhil jointly
• Holder sequence: Kavya first, Nikhil second
• Operating instruction: Anyone or Survivor

The AMC’s terms permit either holder to sign transaction requests independently while both are alive. Nikhil alone signs a redemption request, and all other requirements are met.

Which interpretation correctly separates ownership, holder sequence, and operating authority?

• A. The units remain jointly owned, Kavya remains first holder, and both holders must sign despite the operating instruction.
• B. The units remain jointly owned, Nikhil becomes first holder, and Nikhil may sign alone under the operating instruction.
• C. The units remain jointly owned, Kavya remains first holder, and Nikhil may sign alone under the operating instruction.
• D. The units are owned only by Kavya, Kavya remains first holder, and Nikhil may sign alone under the operating instruction.

Best answer: C

What this tests: Investor Services

Explanation: Joint ownership, holder sequence, and operating authority are distinct concepts. Kavya and Nikhil continue to own the folio jointly. Kavya’s position as first holder identifies the registered sequence but does not make her the sole owner. The Anyone or Survivor instruction authorises either holder to sign an eligible transaction request independently while both are alive. Therefore, Nikhil’s sole signature can satisfy the operating requirement because the AMC’s stated terms expressly permit it. Initiating the redemption does not move Nikhil into the first-holder position or otherwise alter the folio’s ownership records.

• Treating Kavya as sole owner confuses first-holder status with ownership and disregards Nikhil’s joint holding.
• Moving Nikhil to first position incorrectly treats transaction initiation as a change in holder sequence.
• Requiring both signatures ignores the independent authority granted by the Anyone or Survivor instruction.

Anyone or Survivor permits Nikhil to operate independently without changing joint ownership or the registered holder sequence.

Question 65

Topic: Risk, Return and Performance of Funds

A mutual fund scheme had a beginning NAV of ₹20.00 per unit and an ending NAV of ₹21.20 per unit. During the period, it paid IDCW of ₹0.80 per unit in cash. Ignore taxes and loads.

What is the scheme’s simple point-to-point total return for the period?

• A. 6.00%
• B. 10.00%
• C. 4.00%
• D. 9.43%

Best answer: B

What this tests: Risk, Return and Performance of Funds

Explanation: A simple point-to-point total return includes both the change in NAV and any distribution received during the measurement period. The calculation is: (ending NAV - beginning NAV + IDCW) / beginning NAV x 100. Here, the NAV gain is ₹1.20 per unit and the IDCW is ₹0.80 per unit, giving a total gain of ₹2.00 per unit. Dividing ₹2.00 by the beginning NAV of ₹20.00 gives 0.10, or 10.00%. Using only the NAV change measures price return rather than total return, while using only the IDCW measures the distribution yield.

• 9.43% incorrectly uses the ending NAV as the denominator.
• 6.00% includes only the increase in NAV and excludes the IDCW.
• 4.00% includes only the IDCW and excludes the increase in NAV.

The ₹1.20 NAV increase plus ₹0.80 IDCW equals a ₹2.00 gain on the ₹20.00 beginning NAV.

Question 66

Topic: Risk, Return and Performance of Funds

A fictional AMC is reviewing a performance advertisement for a scheme launched nine months ago.

• The scheme’s absolute return since launch is 8%, while its benchmark’s absolute return is 6% for the same period.
• The draft presents the scheme return as 10.8% annualised, the benchmark return as 6% absolute, and includes the mandatory past-performance disclaimer.
• The supplied SEBI requirements state that returns for periods under one year must be shown as absolute returns without annualisation.
• Scheme and benchmark returns must use the same period and basis, and the benchmark and disclaimer must accompany the scheme performance.

What is the most appropriate action before releasing the advertisement?

• A. Show the scheme at 8% absolute, omit the benchmark performance, and retain the disclaimer.
• B. Show the scheme at 8% absolute and benchmark at 6% absolute, and remove the disclaimer.
• C. Show the scheme at 8% absolute and benchmark at 6% absolute, and retain the disclaimer.
• D. Show the scheme at 10.8% annualised and benchmark similarly annualised, and retain the disclaimer.

Best answer: C

What this tests: Risk, Return and Performance of Funds

Explanation: A performance period shorter than one year must be represented using absolute returns rather than an annualised figure. Because both the scheme and its benchmark have nine months of performance history, their returns should be shown for that same period and on the same absolute-return basis. The scheme’s 8% absolute return should therefore be compared with the benchmark’s 6% absolute return. Annualising both figures would create a consistent comparison but would still violate the supplied rule for periods under one year. The benchmark cannot be omitted when scheme performance is presented, and the mandatory past-performance disclaimer remains necessary despite the scheme’s limited history.

• Annualising both returns creates a common basis but violates the requirement not to annualise periods under one year.
• Omitting benchmark performance prevents the required like-for-like comparison with the scheme.
• Removing the disclaimer fails the mandatory disclosure requirement for a performance presentation.

This presentation uses absolute returns for the nine-month period, provides a comparable benchmark, and retains the required disclaimer.

Question 67

Topic: Fund Distribution and Channel Management Practices

Ananya holds mutual fund units in a regular plan through a folio associated with a distributor holding ARN-111. She gives the AMC’s RTA a duly authenticated instruction to replace ARN-111 with ARN-222 for the folio and future transactions. ARN-222 is valid and empanelled with the AMC. She requests no plan change, redemption, or switch. The outgoing distributor refuses to provide a no-objection certificate.

What should the RTA do?

• A. Process the replacement only after the incoming distributor submits separate authority to override the existing ARN association.
• B. Process the replacement based on Ananya’s authenticated instruction, without requiring consent from the outgoing distributor.
• C. Decline the replacement and require Ananya to close the folio before selecting the incoming distributor.
• D. Process the replacement only after the outgoing distributor provides a no-objection certificate supporting Ananya’s instruction.

Best answer: B

What this tests: Fund Distribution and Channel Management Practices

Explanation: An investor may change the distributor associated with a folio by submitting a valid instruction through the prescribed process. The outgoing distributor does not have a veto and need not provide a no-objection certificate. Here, Ananya’s instruction is authenticated, its scope is clear, and the requested incoming ARN is valid and empanelled with the AMC. The RTA should therefore implement the requested replacement. Changing the distributor association does not by itself require redemption, closure of the folio, or conversion from a regular plan to a direct plan. Those actions would require separate investor instructions and should not be inferred from the distributor-change request.

• Requiring a no-objection certificate would improperly give the outgoing distributor control over the investor’s decision.
• Separate authority from the incoming distributor is not a substitute for, or an additional condition to, the investor’s valid instruction.
• Folio closure is unnecessary because the distributor association can be changed without redeeming the existing units.

The investor’s valid instruction controls the distributor association, and the outgoing distributor’s consent is not required.

Question 68

Topic: Scheme Related Information

A mutual fund distributor is explaining the purpose of different scheme-related documents. Which description best states the purpose and principal content of the Statement of Additional Information (SAI)?

• A. It provides fund-wide statutory information covering the constitution, sponsor, trustees, AMC, service providers, general policies, and unitholder rights.
• B. It provides a concise application-time summary covering key scheme features, risk indicators, expenses, plans, options, and transaction information.
• C. It provides formal document updates covering material changes in scheme features, service arrangements, disclosures, and other notified terms.
• D. It provides scheme-specific information covering the investment objective, asset allocation, risks, benchmark, fees, loads, and transaction terms.

Best answer: A

What this tests: Scheme Related Information

Explanation: The SAI contains information that generally applies to the mutual fund as an organisation rather than to one particular scheme. Its principal content includes the fund’s constitution, sponsor, trustees, AMC, service providers, general policies, legal information, and unitholder rights. It complements the Scheme Information Document (SID), which contains scheme-specific details such as investment objectives, asset allocation, risks, expenses, and transaction provisions. The Key Information Memorandum (KIM) is a concise summary of important information for investors and accompanies the application form. Material changes to existing documents are communicated through an addendum.

• Scheme-specific investment and transaction details are principally contained in the SID.
• A concise application-time summary describes the purpose of the KIM.
• Formal updates communicating material changes are issued through an addendum.

The SAI provides statutory and organisational information that generally applies across the mutual fund’s schemes.

Question 69

Topic: Concept and Role of a Mutual Fund

Meera is considering investing ₹50,000 in an open-ended international mutual fund. Her distributor wants to verify that one investment currently provides exposure to multiple overseas issuers and markets, rather than merely confirming ownership, management arrangements, or redemption processing.

Which visible document best supports that conclusion?

• A. The latest account statement listing units held, purchase NAV, folio number, and value
• B. The latest portfolio disclosure listing securities, issuers, countries, and percentage weights
• C. The latest redemption confirmation listing units redeemed, applicable NAV, proceeds, and payment date
• D. The latest KIM listing the investment objective, fund manager, benchmark, and riskometer

Best answer: B

What this tests: Concept and Role of a Mutual Fund

Explanation: A mutual fund can pool investors’ money to build a portfolio across numerous securities, issuers, sectors, or markets. This can provide diversification and market access that may be difficult for an individual investor to achieve directly. The latest portfolio disclosure provides direct evidence of the scheme’s actual investments and their weights on the disclosure date. Other records may demonstrate professional management, an investor’s ownership, or the processing of liquidity through redemption, but they do not establish the scheme’s current spread across overseas issuers and markets.

• The KIM describes key scheme features and management details but does not establish the current portfolio composition.
• The account statement confirms Meera’s holding and its value but not the underlying market exposures.
• The redemption confirmation evidences transaction processing and payout, not diversification across overseas investments.

The portfolio disclosure directly shows whether scheme assets are spread across multiple overseas securities, issuers, and markets.

Question 70

Topic: Risk, Return and Performance of Funds

Arjun has ₹6 lakh in an open-ended debt scheme and needs the entire amount within three working days for a contractual home payment. He has no backup source of funds and cannot tolerate a delay.

Market event:

• An exchange closure has caused market-wide illiquidity affecting almost all debt securities.
• The AMC has announced that part of each redemption may be deferred for five working days.
• The AMC board and trustees specifically approved the restriction, and SEBI was informed immediately.

Applicable conditions: A redemption restriction may be imposed only for specified exceptional events such as market-wide illiquidity or an exchange closure, with the required approvals and SEBI intimation. It cannot exceed 10 working days in any 90-day period.

Which distributor response best fits Arjun’s liquidity need and the applicable conditions?

• A. Explain that open-ended status prevents the restriction, and assure receipt of the full redemption within three working days.
• B. Recommend changing to the IDCW option before redemption, and treat a possible distribution as resolving the three-day cash-flow need.
• C. Recommend switching to the direct plan before redemption, and treat its lower TER as resolving the three-day cash-flow need.
• D. Explain that the temporary restriction is permitted, and do not assure receipt of the full redemption within three working days.

Best answer: D

What this tests: Risk, Return and Performance of Funds

Explanation: A redemption restriction is an exceptional liquidity-management measure, not a routine feature of an open-ended scheme. It may help prevent disorderly asset sales when a market-wide disruption makes fair liquidation difficult. Regulatory conditions, including specified triggering events, approvals, intimation, and duration limits, prevent its use merely to manage ordinary redemptions or an issuer-specific problem.

Here, the exchange closure and broad debt-market illiquidity satisfy the stated event condition. The required approvals and SEBI intimation have also occurred, and the five-working-day period is within the stated limit. Arjun therefore cannot rely on receiving all redemption proceeds within his three-working-day deadline. His inflexible payment and lack of backup liquidity make an assurance of timely full proceeds inappropriate.

• Open-ended status does not override a properly imposed exceptional redemption restriction.
• A lower TER affects scheme expenses but does not remove a temporary liquidity restriction.
• IDCW is discretionary and cannot assure either the amount or timing required for the payment.

The exceptional market-wide event, required approvals, SEBI intimation, and permitted duration support the restriction, so timely full liquidity cannot be assured.

Question 71

Topic: Mutual Fund Scheme Performance

An AMC’s performance team is preparing a scheme factsheet.

• Completed: The scheme’s return data and evaluation period have been validated.
• Scheme mandate: The actively managed scheme invests predominantly in diversified Indian mid-cap equities, without a sector or thematic focus.
• Disclosure basis: Relative performance must reflect reinvested distributions.

No benchmark has yet been selected. What should the performance analyst do next?

• A. Select a broad Indian investment-grade bond total return index, document its fit, and calculate relative performance.
• B. Select a broad Indian mid-cap equity price return index, document its fit, and calculate relative performance.
• C. Select a broad Indian large-cap equity total return index, document its fit, and calculate relative performance.
• D. Select a broad Indian mid-cap equity total return index, document its fit, and calculate relative performance.

Best answer: D

What this tests: Mutual Fund Scheme Performance

Explanation: A suitable benchmark should represent the scheme’s asset class, market segment, and investment universe. This scheme invests predominantly in diversified Indian mid-cap equities, so a broad mid-cap equity index provides the relevant market comparison. The scheme’s active management does not require a benchmark that follows its individual security selections; the benchmark should instead represent the opportunity set available under its mandate. A total return index is appropriate because it includes both price movements and reinvested distributions, placing the scheme and benchmark on a comparable return basis. The benchmark should be selected and its suitability documented before relative performance is calculated and disclosed.

• A large-cap equity index matches the equity asset class but not the scheme’s mid-cap market segment.
• A mid-cap price return index matches the investment universe but excludes reinvested distributions.
• An investment-grade bond index represents a different asset class and risk-return profile.

A mid-cap equity total return index matches the scheme’s investment universe and measures returns including reinvested distributions.

Question 72

Topic: Mutual Fund Scheme Performance

An MFD is preparing a comparative performance note for an investor. The MFD has confirmed that both schemes are in the same category, the figures cover the same three-year period, and the Sharpe ratios use the same risk-free-rate assumption.

The investor asks which scheme generated more excess return over the risk-free return for each unit of total volatility. What should the MFD do next?

• A. Compare the CAGR values, using the higher CAGR for the requested comparison.
• B. Compare the Sharpe ratios, using the higher ratio for the requested comparison.
• C. Compare the tracking errors, using the lower value for the requested comparison.
• D. Compare the alpha values, using the higher alpha for the requested comparison.

Best answer: B

What this tests: Mutual Fund Scheme Performance

Explanation: The Sharpe ratio directly addresses risk-adjusted performance when risk is defined as total volatility. It compares a scheme’s return above the risk-free return with the variability of its returns. A higher Sharpe ratio indicates more excess return for each unit of total volatility. Scheme Q’s Sharpe ratio of 0.82 exceeds Scheme P’s 0.74, so Scheme Q performed better on the investor’s stated measure. The other metrics answer different questions: CAGR measures compounded return without adjusting for risk, alpha evaluates performance relative to expected benchmark-linked return, and tracking error measures how closely returns follow a benchmark.

• Alpha does not measure excess return per unit of total volatility.
• CAGR measures compounded return but does not incorporate the risk taken.
• Tracking error measures benchmark deviation rather than reward for total volatility.

The Sharpe ratio measures excess return per unit of total volatility, and Scheme Q has the higher ratio.

Question 73

Topic: Net Asset Value, Total Expense Ratio and Pricing of Units

An open-ended debt scheme holds a thinly traded bond. Since its last trade, the issuer’s credit quality has materially worsened, so the old quoted price no longer reasonably reflects the bond’s realisable value. The AMC applies a fair-value estimate when calculating the NAV used for subscriptions and redemptions.

How does fair valuation support equitable treatment of entering, exiting, and continuing investors?

• A. It equalises realised returns among investor groups by applying one transaction NAV throughout the bond’s holding period.
• B. It protects exiting investors from market losses by maintaining the bond’s value until an actual sale occurs.
• C. It protects entering investors from market volatility by valuing the bond at its original acquisition cost.
• D. It limits value transfers among investor groups by basing transaction NAVs on the bond’s current fair value.

Best answer: D

What this tests: Net Asset Value, Total Expense Ratio and Pricing of Units

Explanation: A scheme’s NAV should reflect a reasonable current value of its portfolio. If a stale bond price is too high, an exiting investor may receive more than a fair share, leaving continuing investors to bear the later write-down; an entering investor may also overpay. If the stale value is too low, an exiting investor may receive too little, while an entering investor may acquire units too cheaply and dilute continuing investors. Fair valuation reduces these unintended transfers by incorporating relevant information into the transaction NAV. It promotes equitable allocation of the scheme’s economic value, but it does not guarantee liquidity, prevent market losses, or ensure equal returns for investors entering and exiting at different times.

• Applying one NAV throughout the holding period would ignore changes in portfolio value and would not equalise investor returns.
• Retaining the old value until sale would preserve the stale valuation and could shift losses to continuing investors.
• Using acquisition cost would ignore the issuer’s credit deterioration and could misprice incoming units.

Using a current fair-value estimate reduces dilution or wealth transfer caused by subscriptions or redemptions at a stale bond value.

Question 74

Topic: Legal and Regulatory Framework

On August 10, 2026, Prakash Mutual Fund sends written communication to unitholders and publishes a notice proposing a change to the investment objective of an open-ended scheme. The investment objective is identified in the SID as a fundamental attribute. Meera’s units would ordinarily attract a 1% exit load if redeemed now.

Which investor right applies before the change takes effect?

• A. An exit window of at least 30 calendar days at the original purchase NAV without exit load.
• B. An exit window of at least 30 calendar days at the applicable NAV without exit load.
• C. Automatic redemption at the applicable NAV after 30 calendar days unless she gives written consent.
• D. An exit window of at least 30 calendar days at the applicable NAV after the 1% exit load.

Best answer: B

What this tests: Legal and Regulatory Framework

Explanation: A change to a scheme’s investment objective is a change in its fundamental attributes. Existing unitholders must be informed and given at least 30 calendar days to decide whether to continue or exit. During this special exit window, redemption is processed at the applicable NAV without charging an exit load, even when the scheme’s normal load schedule would otherwise impose one. The applicable NAV is determined under the transaction rules; the investor is not entitled to the original purchase NAV. Units are also not redeemed automatically if the investor remains silent. A unitholder who does not exercise the exit right continues in the scheme after the revised fundamental attribute takes effect.

• Applying the normal 1% exit load ignores the special no-load exit right for a fundamental-attribute change.
• Using the original purchase NAV incorrectly treats the investment as capital protected.
• Automatic redemption removes the unitholder’s right to choose whether to exit or remain invested.

A fundamental-attribute change requires at least 30 calendar days for existing unitholders to exit at the applicable NAV without exit load.

Question 75

Topic: Net Asset Value, Total Expense Ratio and Pricing of Units

On May 15, 2026, an open-ended debt scheme receives both purchase and redemption requests.

Valuation facts:

• The scheme holds a material privately placed bond.
• Its last quoted price predates a significant issuer downgrade, and no reliable market quotation is available today.
• The applicable valuation policy requires a documented fair-value method using current credit spreads and issuer-specific information when reliable quotations are unavailable.

Which valuation response best complies with the policy and supports equitable investor treatment?

• A. Use the last quoted price until trading resumes, because a verified historical NAV reduces valuation subjectivity for entering, exiting, and continuing investors.
• B. Use the documented fair-value method with current credit inputs, because a current NAV reduces value transfers among entering, exiting, and continuing investors.
• C. Use an immediate distressed-sale recovery estimate, because a conservative NAV reduces overvaluation risk for entering, exiting, and continuing investors.
• D. Use acquisition cost until the next coupon date, because a stable NAV reduces short-term volatility for entering, exiting, and continuing investors.

Best answer: B

What this tests: Net Asset Value, Total Expense Ratio and Pricing of Units

Explanation: Fair valuation seeks a reasonable current value when reliable market quotations are unavailable. Here, the last quote predates a significant downgrade, so it may no longer represent the bond’s economic value. Using the documented methodology and current credit information produces a more appropriate NAV for purchases and redemptions. If an asset is overstated, exiting investors may receive more than their fair share, leaving the loss with continuing investors. If it is understated, entering investors may obtain excessive units and dilute existing investors. Fair valuation therefore limits unintended wealth transfers among investors. Its purpose is not to keep NAV stable or automatically adopt the most conservative estimate; the methodology must be consistent, documented, and based on relevant current information.

• The historical quotation is unreliable because it predates the material credit event.
• Acquisition cost ignores changed credit conditions; NAV stability does not establish fairness.
• A distressed-sale estimate is not the required documented method and may unnecessarily understate value.

Current fair valuation makes the transaction NAV reasonably reflect portfolio value, limiting gains or losses transferred between investor groups.

Questions 76-100

Question 76

Topic: Mutual Fund Scheme Selection

A mutual fund distributor is conducting due diligence on an AMC before moving to scheme-level selection. Which review approach best combines relevant qualitative and quantitative factors for assessing the AMC itself?

• A. Review investor risk capacity and liquidity needs, together with the goal amount and planned horizon.
• B. Review portfolio strategy and benchmark suitability, together with return history and the scheme’s tracking error.
• C. Review investment-team stability and risk controls, together with AUM trends and the AMC’s financial results.
• D. Review distributor service quality and conflict controls, together with client count and annual trail income.

Best answer: C

What this tests: Mutual Fund Scheme Selection

Explanation: An AMC assessment should consider both the quality of its organisation and measurable evidence about its business. Qualitative factors include the stability and experience of the investment team, investment philosophy, governance, risk controls, research capability, and consistency of processes. Quantitative factors include trends in assets under management, financial results, capital strength, and other measurable indicators of scale and stability. These factors help a distributor judge the AMC as an institution before comparing individual schemes. Scheme returns and tracking error belong mainly to scheme-level analysis, while an investor’s goals and risk capacity belong to suitability assessment. Distributor business measures evaluate the intermediary rather than the AMC.

• Portfolio strategy, benchmark suitability, returns, and tracking error primarily assess an individual scheme.
• Risk capacity, liquidity needs, goal amount, and horizon assess the investor’s suitability profile.
• Service quality, conflict controls, client count, and trail income assess the distributor’s business.

Team stability and risk controls are qualitative AMC characteristics, while AUM trends and financial results provide quantitative AMC-level evidence.

Question 77

Topic: Concept and Role of a Mutual Fund

A distributor reviews a scheme’s portfolio process:

• A model ranks stocks using valuation, profitability, and price-momentum data.
• Portfolio weights are recalculated monthly under predefined rules.
• The scheme does not replicate an index, and the fund manager does not make case-by-case stock selections.

An investor asks how this investment approach should be described. What is the distributor’s best response?

• A. Classify it as a technical approach based on discretionary interpretation of price and volume charts.
• B. Classify it as a fundamental approach based on analyst-led estimates of company intrinsic value.
• C. Classify it as a passive approach based on replication of a specified market index.
• D. Classify it as a quantitative approach based on systematic, model-generated portfolio rules.

Best answer: D

What this tests: Concept and Role of a Mutual Fund

Explanation: A quantitative investment approach applies predefined rules or mathematical models to data when selecting securities, assigning weights, or rebalancing a portfolio. Here, the model combines valuation, profitability, and momentum data, then recalculates portfolio weights according to established monthly rules. The presence of valuation data does not by itself make the process a traditional fundamental approach, because analysts are not making case-by-case judgments. Similarly, using momentum data does not make the process discretionary technical analysis. The scheme is also not passive because it does not seek to replicate a specified market index.

• Fundamental investing generally relies on analyst judgment about businesses and intrinsic value, which is absent here.
• Technical investing may use market data, but discretionary chart interpretation does not describe the stated rule-based model.
• Passive investing seeks to replicate an index, while the scheme independently ranks and weights securities.

Defined data inputs and model-based decision rules are the identifying features of a quantitative investment approach.

Question 78

Topic: Legal and Regulatory Framework

On June 12, 2026, NavPrabha Distribution is registered both as a mutual fund distributor and as an investment adviser and acts for multiple principals. Its social-media profile links to the complete prescribed list of principal and agent registrations. It posts a Reel in its mutual fund distributor capacity for NavPrabha Mutual Fund, but the Reel begins only with the brand name NavPrabha.

Which identity line must begin this content?

• A. NavPrabha Mutual Fund’s registered name and SEBI registration number, followed by NavPrabha Distribution’s registered name and ARN
• B. NavPrabha Distribution’s registered name and investment-adviser registration number, without the principal’s identity
• C. NavPrabha Mutual Fund’s registered name and SEBI registration number, without the distributor’s MFD identity
• D. A link to the complete profile registration list, without any registration details in the Reel

Best answer: A

What this tests: Legal and Regulatory Framework

Explanation: An agent with multiple registrations may use the prescribed profile link to its complete registration list, but the link does not replace the content-level disclosure. Each relevant content item must begin with the registration details applicable to that content: the relevant principal regulated entity’s registered name and registration number followed by the agent’s registered name and registration number in the capacity used. Because this Reel promotes a mutual fund in the MFD capacity, the agent’s ARN is relevant; its investment-adviser registration is not.

• A profile link does not replace the required identity line at the beginning of each content item.
• Principal-only disclosure omits the agent and its relevant capacity.
• The investment-adviser registration is not the agent registration relevant to this mutual-fund distribution content.

The content must show the principal and agent registration details relevant to the distributor capacity used for that Reel.

Question 79

Topic: Taxation

On July 15, 2026, a mutual fund is processing an IDCW payment to a resident individual.

Payment facts:

• IDCW already paid during financial year 2026-27: ₹7,000
• Current IDCW payment: ₹6,000
• Section 194K annual threshold from April 1, 2025: ₹10,000
• TDS rate: 10%
• The investor has provided a valid PAN but no Form 15G, Form 15H, or lower-deduction certificate.
• Once aggregate IDCW exceeds the threshold, TDS applies to the full current payment, not merely the amount above the threshold.

How much TDS should the mutual fund deduct from the current payment, and what net amount should it pay?

• A. Deduct no TDS and pay ₹6,000
• B. Deduct ₹300 and pay ₹5,700
• C. Deduct ₹600 and pay ₹5,400
• D. Deduct ₹1,300 and pay ₹4,700

Best answer: C

What this tests: Taxation

Explanation: Section 194K withholding is determined using the investor’s aggregate IDCW for the financial year. The earlier payment of ₹7,000 and current payment of ₹6,000 produce aggregate IDCW of ₹13,000, which exceeds the supplied annual threshold of ₹10,000. Under the stated rule, tax is deducted from the full current payment rather than only the ₹3,000 by which the aggregate exceeds the threshold. At the supplied rate of 10%, TDS is ₹600. The investor therefore receives ₹5,400. The valid PAN supports use of the stated rate, while the absence of an eligible declaration or lower-deduction certificate means no withholding relief applies.

• Deducting ₹300 incorrectly applies the rate only to the amount exceeding the annual threshold.
• Deducting ₹1,300 incorrectly applies the rate to aggregate IDCW, including the earlier payment.
• Deducting nothing incorrectly evaluates the current payment separately instead of considering aggregate IDCW.

Aggregate IDCW exceeds ₹10,000, so 10% TDS applies to the full current payment of ₹6,000.

Question 80

Topic: Scheme Related Information

Kavya, a mutual fund distributor, is helping an investor evaluate a scheme. The investor wants detailed, scheme-specific evidence of its investment objective, asset allocation pattern, investment strategy, principal risks, recurring expenses, and load structure before investing.

Which record set should Kavya use as the primary source?

• A. The current SAI together with the AMC’s statutory disclosures
• B. The latest annual report together with the portfolio disclosure
• C. The latest KIM together with the scheme application form
• D. The current SID together with all applicable scheme addenda

Best answer: D

What this tests: Scheme Related Information

Explanation: A Scheme Information Document (SID) is the principal detailed disclosure document for a particular mutual fund scheme. It describes matters such as the scheme’s investment objective, asset allocation pattern, investment strategy, risk factors, plans and options, expenses, loads, and other scheme-specific terms. Applicable addenda must also be reviewed because they may update the SID. The Statement of Additional Information mainly contains information common to the mutual fund, while the Key Information Memorandum provides an abridged summary. Annual reports and portfolio disclosures provide financial, operational, and holding information but do not replace the SID as the primary source of the scheme’s governing features.

• The SAI mainly provides fund-level information rather than the complete scheme-specific terms requested.
• The KIM summarises key information and does not provide the SID’s full level of detail.
• Annual reports and portfolio disclosures show results and holdings rather than all governing scheme features.

The SID provides the detailed scheme-specific disclosures requested, while applicable addenda incorporate subsequent changes.

Question 81

Topic: Concept and Role of a Mutual Fund

On August 30, 2026, a distributor reviews a proposed open-ended scheme with these features:

• It invests only in units of equity, debt, and gold schemes.
• It does not directly hold shares, debt securities, or physical gold.
• The fund manager actively changes allocations among the underlying schemes.
• It neither tracks an index nor follows a target-date glide path.

Under the current SEBI scheme categorisation framework, how should the scheme be classified?

• A. Classify it under hybrid schemes.
• B. Classify it under fund-of-funds schemes.
• C. Classify it under passive schemes.
• D. Classify it under life-cycle schemes.

Best answer: B

What this tests: Concept and Role of a Mutual Fund

Explanation: A fund-of-funds scheme invests primarily through units of other mutual fund schemes. The economic exposure of the underlying schemes may include equity, debt, gold, or other permitted assets, but that exposure does not convert the investing scheme into a hybrid scheme. The immediate portfolio holdings remain units of other schemes. A life-cycle scheme would follow an asset-allocation path linked to a target date or life stage. A passive scheme would seek to track or replicate a specified index or benchmark. Here, the fund manager actively allocates among underlying schemes without an index-tracking mandate or target-date glide path, so the fund-of-funds classification applies.

• Hybrid classification does not apply merely because the underlying schemes provide exposure to multiple asset classes.
• Life-cycle classification requires a target-date or life-stage allocation approach, which is absent.
• Passive classification requires an index-tracking or replication mandate, which is absent.

Its portfolio consists of units of other mutual fund schemes rather than direct holdings in the underlying asset classes.

Question 82

Topic: Legal and Regulatory Framework

An AMC compliance manager reviews a debt scheme and notes:

• The Scheme Information Document caps exposure to any single corporate issuer at 10% of net assets.
• A fresh purchase increased one issuer’s exposure from 9% to 13%; the excess was not caused by market movement.
• No approved policy change or exception applies, and the matter has not been reported to the trustees.

What is the single best next action?

• A. Escalate the active breach to the trustees, prevent further exposure increases, and implement a documented remediation plan through the compliance process.
• B. Report the excess to the trustees as passive market drift, maintain the position, and omit an active-breach remediation plan.
• C. Prevent further exposure increases, publish an addendum raising the cap, and treat the existing excess as cured without trustee escalation.
• D. Prevent further exposure increases, but defer trustee escalation until the excess remains outstanding at the next monthly portfolio review.

Best answer: A

What this tests: Legal and Regulatory Framework

Explanation: The Scheme Information Document defines the scheme’s disclosed investment mandate. Because a fresh purchase raised the issuer exposure above the stated cap, the departure is an active breach rather than passive drift caused by market movements. With no approved policy change or applicable exception, compliance should promptly escalate the matter to the trustees, prevent the exposure from increasing further, and ensure that the AMC documents and implements remediation. Waiting for another review delays governance oversight. A prospective disclosure change cannot retrospectively cure activity that exceeded the mandate, and incorrectly classifying the breach as passive would result in an inadequate response.

• Delaying escalation until the next monthly review fails to address an identified active breach promptly.
• Raising the disclosed cap prospectively does not cure the existing breach or remove trustee oversight.
• Classifying a purchase-driven excess as passive drift misstates its cause and avoids necessary remediation.

The fresh purchase actively breached the disclosed limit and therefore requires prompt trustee oversight and documented remediation.

Question 83

Topic: Mutual Fund Scheme Selection

Kavya plans to invest ₹4 lakh for an eight-year goal and can accept equity-market volatility.

Investor requirements:

• Passive equity exposure spanning large-, mid-, and small-cap segments
• No lock-in because partial redemption may be needed after two years
• Latest disclosed one-year tracking error <= 0.40%

All four schemes accept new subscriptions and offer a regular plan with a growth option.

Which scheme satisfies all of Kavya’s stated requirements?

• A. Nirmaan Large-Cap Index Fund
• B. Unnati Tax Saver Index Fund
• C. Sarthak Broad Market Index Fund
• D. Arohan Broad Market Index Fund

Best answer: D

What this tests: Mutual Fund Scheme Selection

Explanation: Scheme selection should begin by treating the investor’s stated requirements as mandatory filters. The selected scheme must provide passive exposure across large-, mid-, and small-cap segments, permit redemption after two years, and have disclosed tracking error no higher than 0.40%. Arohan meets all three conditions: its benchmark covers the required market-cap segments, it has no lock-in, and its tracking error is 0.34%. A lower tracking error alone does not compensate for an unsuitable benchmark or an unacceptable lock-in. Similarly, broad benchmark exposure does not qualify a scheme if its tracking error exceeds the investor’s limit.

• The large-cap scheme does not provide the required mid-cap and small-cap exposure.
• The broad-market scheme with 0.57% tracking error exceeds the stated maximum.
• The tax-saver scheme prevents redemption after two years because of its three-year lock-in.

It provides the required market-cap exposure without a lock-in and has tracking error below the stated maximum.

Question 84

Topic: Investor Services

On 10 June 2026, Meera asks Arjun, an ARN-holding mutual fund distributor, to recommend a scheme, submit her purchase using his ARN, and provide ongoing transaction support. She wants the purchase recorded under the Direct Plan to obtain its lower TER, while expecting the AMC to pay Arjun a distribution commission.

The scheme offers Direct and Regular Plans with the same portfolio but separate NAVs. What should Arjun explain and do?

• A. The Regular Plan includes distributor involvement but may apply Direct Plan expenses, so Meera may use Arjun’s ARN at lower cost; both plans maintain a common NAV.
• B. The Direct Plan excludes distributor involvement and commission, so Meera must use a direct channel and take responsibility; Arjun’s distributor-assisted service belongs under the higher-cost Regular Plan.
• C. The Direct Plan excludes commission but permits distributor involvement, so Meera may use Arjun’s ARN and rely on his service; only commission-paying cases belong under the Regular Plan.
• D. The Direct Plan permits distributor involvement and commission with Meera’s consent, so Arjun may use his ARN for service; investor responsibility remains identical under both plans.

Best answer: B

What this tests: Investor Services

Explanation: Direct and Regular Plans are variants of the same mutual fund scheme and generally share the same investment portfolio. Their distribution and cost structures differ. A Direct Plan is not routed through a mutual fund distributor and does not bear distributor commission, resulting in a lower TER. The investor takes responsibility for selecting the plan and completing transactions through a direct channel. A Regular Plan accommodates distributor involvement under an ARN and bears the applicable distribution expenses, resulting in a higher TER. The difference in expenses causes the plans to maintain separate NAVs. Meera cannot combine Arjun’s ARN-based distribution service and AMC-paid commission with a Direct Plan merely by requesting that designation.

• Waiving commission alone does not make ARN-based distributor involvement a Direct Plan transaction.
• A Regular Plan cannot apply the Direct Plan’s expense structure, and the two plans have separate NAVs.
• Investor consent cannot permit distribution commission or distributor routing under a Direct Plan.

Meera must either transact independently under Direct or use Arjun’s ARN-based distribution service under Regular.

Question 85

Topic: Legal Structure of Mutual Funds in India

An investor completed KYC through a SEBI-registered securities-market intermediary. Another registered intermediary wants to retrieve and verify the investor’s existing KYC record under the securities-market KRA framework. Which entity maintains and makes this record available?

• A. Depository participant (DP)
• B. KYC Registration Agency (KRA)
• C. Mutual fund transaction platform
• D. Securities depository

Best answer: B

What this tests: Legal Structure of Mutual Funds in India

Explanation: A KYC Registration Agency maintains KYC records collected through securities-market intermediaries and supports their retrieval by other registered intermediaries. This promotes consistent KYC verification and reduces unnecessary repetition of the full process. A depository maintains securities in electronic form and facilitates their transfer, while a depository participant acts as the investor-facing agent of the depository. A mutual fund transaction platform provides facilities for submitting or processing mutual fund transactions, but it does not perform the central record-maintenance function assigned to a KRA.

• A depository participant provides demat-related services as an agent of a depository, rather than centrally maintaining securities-market KYC records.
• A securities depository holds securities electronically and records ownership transfers, not KYC records under the KRA framework.
• A mutual fund transaction platform facilitates purchases, redemptions, switches, or related transactions rather than maintaining the central KYC database.

A KRA centrally maintains securities-market KYC records and enables registered intermediaries to access them.

Question 86

Topic: Investor Services

Meera is the sole beneficial owner of 8,000 mutual fund units held in dematerialised form through her depository participant (DP). She wants to pledge the units to a bank as loan security without transferring ownership.

The bank sends a signed lien request directly to the scheme’s registrar and transfer agent (RTA), and Meera confirms her consent by email. No pledge instruction has been initiated or confirmed through the depository system.

Which action should the distributor advise to create the pledge correctly?

• A. Have Meera initiate the pledge through her DP and have the bank confirm it through the depository.
• B. Have the RTA record the lien from the bank’s letter and have it notify the depository afterward.
• C. Have Meera transfer the units to the bank’s demat account and have the bank hold them as security.
• D. Have the bank initiate the pledge through its DP and have Meera confirm it to the RTA by email.

Best answer: A

What this tests: Investor Services

Explanation: An encumbrance over dematerialised mutual fund units must be created through the depository mechanism. As the beneficial owner and pledgor, Meera initiates the pledge through her DP. The bank, as pledgee, then confirms it through the depository system. The bank’s letter and Meera’s email do not create a pledge in the depository records, so the RTA should not independently mark a lien. An outright transfer to the bank is also inappropriate because it changes the registered beneficial ownership instead of recording a security interest over Meera’s units. The demat pledge process allows the units to remain in Meera’s account while being marked as pledged in favour of the bank.

• Bank initiation reverses the required roles of pledgor and pledgee, while email confirmation does not complete the depository process.
• An RTA cannot bypass the depository and create a lien over dematerialised units from off-system correspondence.
• Transferring units to the bank changes beneficial ownership rather than creating a pledge over Meera’s holding.

Because Meera holds dematerialised units as pledgor, she must initiate the pledge through her DP for the bank to confirm through the depository.

Question 87

Topic: Mutual Fund Scheme Selection

An investor’s existing equity allocation is entirely in a scheme tracking a domestic top-50 large-cap index. She wants an additional domestic equity scheme that diversifies both company and market-cap exposure.

Which proposed scheme most clearly complements, rather than duplicates, her existing equity exposure?

• A. Disha Fund of Funds Scheme
• B. Bharat Large Cap Equity Scheme
• C. Crest Top-50 Index Scheme
• D. Aruna Mid Cap Equity Scheme

Best answer: D

What this tests: Mutual Fund Scheme Selection

Explanation: Portfolio fit should be assessed from the scheme’s underlying exposure rather than its name, management style, or investment structure. The investor already has concentrated exposure to the companies in a domestic top-50 large-cap index. A predominantly mid-cap portfolio with only 8% holding overlap adds exposure to different companies and another market-cap segment, so it complements the existing equity allocation. A large-cap scheme with substantial overlap would mostly repeat the same exposure. Similarly, another scheme tracking the same index would directly duplicate it. Investing through a fund of funds does not create diversification when the underlying scheme tracks the index already held. Complementary exposure supports diversification, although a separate suitability assessment should still consider the investor’s risk profile, horizon, and goals.

• The large-cap scheme has substantial overlap with the investor’s current large-cap holdings.
• The top-50 index scheme directly reproduces the index exposure already held.
• The fund of funds changes the investment structure but retains nearly the same underlying exposure.

Its predominantly mid-cap portfolio and low holding overlap add distinct company and market-cap exposure.

Question 88

Topic: Scheme Related Information

Ananya holds 4,000 units of an open-ended equity scheme.

• The AMC publishes the scheme’s NAV daily.
• She is considering redemption but has not submitted a request.
• An exit load may apply based on her holding period.

She asks her distributor how the daily NAV disclosure should help her. Which response is best?

• A. Explain that daily NAV is a comparative affordability measure used to identify the cheapest scheme from its quoted per-unit amount.
• B. Explain that daily NAV is a fixed redemption quotation used to determine her final proceeds before the redemption request is processed.
• C. Explain that daily NAV is a transparent, regularly updated per-unit valuation used to monitor her holding and estimate its gross value.
• D. Explain that daily NAV is a complete performance measure used to assess the manager’s long-term results from the latest one-day movement.

Best answer: C

What this tests: Scheme Related Information

Explanation: Daily NAV disclosure gives investors a transparent, regularly updated view of the value per scheme unit. Ananya can multiply her units by the latest disclosed NAV to estimate the current gross value of her holding. However, the displayed NAV does not lock the price for a future redemption. The applicable NAV depends on transaction-processing rules, and an exit load may reduce the final proceeds. A lower NAV also does not make one scheme cheaper or better than another because schemes can have different unit structures. Similarly, a single day’s NAV movement is not a complete measure of long-term performance. Daily NAV primarily supports valuation transparency, investment monitoring, and informed transaction decisions.

• Comparing quoted NAVs does not identify the cheapest scheme because a lower per-unit NAV does not imply better value.
• A one-day NAV movement cannot by itself establish the manager’s long-term performance.
• The latest disclosed NAV does not fix future redemption proceeds because the applicable NAV and exit load must be considered.

The latest disclosed NAV helps Ananya monitor the scheme’s per-unit value and estimate her holding’s gross value before transaction-specific adjustments.

Question 89

Topic: Investor Services

Meera holds units in two schemes of Narmada Mutual Fund. She submits one valid instruction:

Move ₹75,000 from Narmada Equity Fund to Narmada Short Duration Fund.

On processing, units in the equity scheme are cancelled and the proceeds are directly applied to allot units in the short duration scheme. No amount is paid to Meera’s bank account.

Which transaction should the mutual fund record?

• A. A systematic transfer plan from the equity scheme to the short duration scheme
• B. A fresh purchase in the short duration scheme using Meera’s bank payment
• C. A one-time switch from the equity scheme to the short duration scheme
• D. A one-time redemption from the equity scheme into Meera’s registered bank account

Best answer: C

What this tests: Investor Services

Explanation: A purchase brings fresh money into a scheme and results in the allotment of units. A redemption cancels units and pays the proceeds according to the investor’s payout instruction. A switch uses one instruction to move value from one scheme or plan to another within the same mutual fund. Operationally, its source leg is a redemption and its target leg is a purchase. Here, Meera neither provides fresh money nor requests payment to her bank account. The value of the cancelled equity-scheme units is applied directly toward units of the short duration scheme. Because the instruction is one-time rather than recurring, it is not a systematic transfer plan.

• A redemption payout is not applicable because Meera did not ask for proceeds to be credited to her bank account.
• A fresh purchase is not applicable because the target units are funded from the source-scheme proceeds, not new money.
• A systematic transfer plan requires recurring transfers under a standing instruction, whereas Meera gave a one-time instruction.

The single instruction moves value between schemes through a source redemption and target purchase without a bank payout.

Question 90

Topic: Concept and Role of a Mutual Fund

A mutual fund distributor is reviewing three fictional schemes before describing their structures to investors.

• Scheme Arka: It has no fixed maturity and accepts purchases and redemptions directly with the fund on every business day.
• Scheme Bhumi: It issued units during its NFO, has a fixed five-year term, and provides exchange listing during that term before redemption at maturity.
• Scheme Chetan: It permits purchases and redemptions directly with the fund only during predetermined transaction windows and remains closed between those windows.

How should the distributor classify these schemes?

• A. Arka as open-ended, Bhumi as interval, and Chetan as close-ended
• B. Arka as interval, Bhumi as close-ended, and Chetan as open-ended
• C. Arka as close-ended, Bhumi as open-ended, and Chetan as interval
• D. Arka as open-ended, Bhumi as close-ended, and Chetan as interval

Best answer: D

What this tests: Concept and Role of a Mutual Fund

Explanation: An open-ended scheme has no fixed maturity and generally permits ongoing purchases and redemptions directly with the fund at applicable NAV-based prices. A close-ended scheme has a fixed tenure; units are ordinarily issued during the NFO and may be traded through an exchange during the scheme term, with redemption occurring at maturity. An interval scheme combines structural features of open-ended and close-ended schemes. It permits direct purchases and redemptions only during predetermined transaction periods and remains closed for such transactions between those periods. Therefore, the decisive factors are whether transactions are continuously available, restricted to specified windows, or linked to a fixed-term structure.

• Treating Arka as interval ignores its continuous business-day transaction availability, while treating Chetan as open-ended ignores its restricted windows.
• Treating Bhumi as interval overlooks its fixed five-year term and exchange listing, while Chetan’s periodic windows indicate an interval structure.
• Treating Arka as close-ended and Bhumi as open-ended reverses their defining maturity and transaction features.

Arka offers continuous transactions, Bhumi has a fixed term, and Chetan permits transactions only at specified intervals.

Question 91

Topic: Net Asset Value, Total Expense Ratio and Pricing of Units

A mutual-fund scheme holds physical silver. While calculating its NAV on June 30, 2026, the fund accountant must apply the valuation framework effective from April 1, 2026. Which valuation source should the accountant use?

• A. The polled silver spot price published by a recognised stock exchange for settling physically delivered silver derivatives.
• B. The average silver spot quotation obtained from bullion dealers approved by the scheme’s appointed custodian.
• C. The London silver benchmark price converted into rupees using the applicable reference foreign-exchange rate.
• D. The closing price of the most-liquid silver futures contract published by a recognised commodity derivatives exchange.

Best answer: A

What this tests: Net Asset Value, Total Expense Ratio and Pricing of Units

Explanation: From April 1, 2026, physical gold or silver held by a mutual-fund scheme is valued using the polled spot price published by a recognised stock exchange and used for settlement of physically delivered gold or silver derivatives. This source reflects the prescribed domestic valuation basis for calculating scheme NAV. A futures closing price represents a derivative contract rather than the required polled spot price. The historical international benchmark approach is not the current prescribed basis, even if converted into rupees. Dealer quotations obtained through the custodian also do not replace the specified exchange-published source.

• A futures contract’s closing price is not the prescribed polled spot settlement price.
• The London benchmark conversion reflects the superseded valuation basis.
• Custodian-approved dealer quotations do not replace the specified recognised-exchange source.

The current framework prescribes the recognised exchange’s polled spot price used to settle physically delivered silver derivatives.

Question 92

Topic: Mutual Fund Scheme Performance

A distributor is comparing diversified equity schemes. The performance question is: “How much return above the risk-free rate did each scheme earn per unit of total risk, measured by standard deviation?”

Which reported metric best answers this question?

• A. The scheme’s tracking error
• B. The scheme’s Jensen alpha
• C. The scheme’s Sharpe ratio
• D. The scheme’s Treynor ratio

Best answer: C

What this tests: Mutual Fund Scheme Performance

Explanation: The Sharpe ratio evaluates risk-adjusted performance by comparing a scheme’s return above the risk-free rate with its standard deviation. Standard deviation represents total variability in returns, including both market-related and scheme-specific risk. A higher Sharpe ratio generally indicates that the scheme generated more excess return for each unit of total risk taken. This makes it appropriate when comparing the risk-adjusted performance of diversified schemes. The Treynor ratio instead uses beta, which measures systematic market risk. Jensen alpha estimates performance relative to the return expected for the scheme’s beta. Tracking error measures how closely a scheme follows its benchmark.

• The Treynor ratio uses beta rather than standard deviation as the risk measure.
• Jensen alpha measures return relative to a beta-based expected return, not excess return per unit of total risk.
• Tracking error measures variability in returns relative to a benchmark, not reward per unit of total risk.

The Sharpe ratio measures return above the risk-free rate per unit of total risk measured by standard deviation.

Question 93

Topic: Investment Landscape

Meera is deciding whether to manage her investments herself or seek professional help.

• Knowledge: She has limited understanding of risk profiling and asset allocation.
• Time: Her work leaves little time to monitor investments.
• Complexity: She has irregular income and several goals with different time horizons.
• Support: She wants explanations and periodic reviews.
• Control: She wants to approve each investment decision.

Which approach is most appropriate for Meera?

• A. Use a DIY model allocation, reviewing it when time permits while learning from online resources.
• B. Seek professional help only for transactions, independently handling risk profiling, asset allocation, and reviews.
• C. Seek professional help for risk profiling, asset allocation, and reviews while retaining final investment approval.
• D. Transfer all investment decisions to a professional while participating only when personal information is requested.

Best answer: C

What this tests: Investment Landscape

Explanation: A do-it-yourself approach is more suitable when an investor has adequate knowledge, sufficient time, relatively straightforward needs, and the ability to monitor and review the portfolio. Meera lacks time and relevant knowledge, while her irregular income and multiple goal horizons make planning more complex. Professional help can support risk profiling, asset allocation, implementation, and periodic review. However, seeking help does not require the investor to disengage or surrender control. Meera can receive informed recommendations and explanations while retaining responsibility for approving investment decisions.

• A model allocation reviewed only when convenient does not adequately address limited time, knowledge, or multiple goals.
• Transaction-only assistance provides execution support but leaves the complex planning and review work unresolved.
• Complete transfer of decision-making conflicts with Meera’s wish to approve investments and remain involved.

Professional support addresses Meera’s limited knowledge, time, complex goals, and review needs without removing her decision-making control.

Question 94

Topic: Scheme Related Information

A mutual fund distributor is reviewing a marketing presentation for an open-ended scheme. It states:

“The scheme may use derivatives as part of its investment strategy, subject to a scheme-specific exposure limit.”

Before discussing the scheme with investors, the distributor wants to verify the detailed investment strategy, permitted exposure and associated scheme-specific risks. Which document should the distributor consult?

• A. The current SID together with applicable scheme addenda
• B. The current KIM together with applicable scheme addenda
• C. The current SAI together with applicable fund addenda
• D. The latest portfolio disclosure together with its reporting notes

Best answer: A

What this tests: Scheme Related Information

Explanation: The Scheme Information Document (SID) is the principal source for detailed information specific to a scheme. It covers matters such as the investment objective, asset allocation pattern, investment strategy, scheme-specific risks, fees, loads and operational provisions. Applicable addenda must also be considered because they may modify the SID. The Statement of Additional Information (SAI) mainly contains information common to the mutual fund’s schemes, including organisational and legal details. The Key Information Memorandum (KIM) is an abridged summary intended to present key information concisely. Portfolio disclosures show investments actually held on a reporting date, not the full range of investments or strategies permitted under the scheme.

• The SAI primarily provides fund-level legal, organisational and common operational information.
• The KIM summarises key scheme features but is not the complete source for detailed strategy and risk provisions.
• A portfolio disclosure reports actual holdings at a particular date rather than the scheme’s permitted investment strategy.

The SID provides the detailed scheme-specific investment strategy, exposure limits and associated risks.

Question 95

Topic: Risk, Return and Performance of Funds

An investor is comparing two debt schemes and wants the scheme with lower sensitivity to interest-rate movements. All available records cover the same month-end.

The distributor proposes the following conclusion:

If market yields rise in parallel by 1 percentage point, Scheme B’s NAV may decline by approximately 2.1%, compared with 4.8% for Scheme A, before other effects.

Which record most directly supports this conclusion?

• A. Credit profiles reporting AAA exposures of 82% for Scheme A and 91% for Scheme B
• B. Portfolio disclosures reporting weighted average maturities of 5.4 years for Scheme A and 2.8 years for Scheme B
• C. NAV histories reporting one-month returns of 0.6% for Scheme A and 0.7% for Scheme B
• D. Scheme factsheets reporting modified durations of 4.8 years for Scheme A and 2.1 years for Scheme B

Best answer: D

What this tests: Risk, Return and Performance of Funds

Explanation: Modified duration estimates a debt portfolio’s price or NAV sensitivity to a change in market yields. The approximate percentage change equals negative modified duration multiplied by the yield change expressed as a decimal. For a 1 percentage point rise, Scheme A’s estimated change is about -4.8%, while Scheme B’s is about -2.1%. Scheme B therefore has lower estimated interest-rate sensitivity. This is an approximation because actual NAV movement may also be affected by convexity, credit spreads, portfolio transactions, and other market factors.

• Weighted average maturity indicates the average time to portfolio cash flows but does not directly produce the stated percentage NAV changes.
• Credit-quality exposure primarily supports an assessment of default and downgrade risk, not interest-rate sensitivity.
• Recent NAV returns reflect realised market conditions and do not isolate sensitivity to a standardised yield change.

Modified duration directly estimates the approximate percentage NAV change for a given change in market yields.

Question 96

Topic: Mutual Fund Scheme Performance

An MFD is reviewing two open-ended equity schemes with the same broad-market mandate.

Available data:

• One-year and three-year returns ending December 31, 2026
• Direct and regular plans
• Growth and IDCW options
• IDCW treated as either reinvested or retained as cash
• Broad Equity TRI and Broad Equity Price Return Index figures

Both schemes identify Broad Equity TRI as their appropriate benchmark. Which comparison principle should the distributor apply before drawing a performance conclusion?

• A. Use the same period and Broad Equity TRI, but mix direct and regular plans or growth and IDCW options, since these labels do not alter returns.
• B. Use matching plans and options with one reinvestment assumption, but mix one-year and three-year periods and benchmark bases, since annualisation makes them comparable.
• C. Use the same period, Broad Equity TRI, and matching plans and options, but mix IDCW reinvestment treatments, since payout treatment does not alter total return.
• D. Use the same period, Broad Equity TRI, matching plans and options, and a consistent IDCW reinvestment assumption, since each dimension can alter the performance comparison.

Best answer: D

What this tests: Mutual Fund Scheme Performance

Explanation: A meaningful performance comparison holds the measurement basis constant. One-year and three-year figures cover different market conditions and do not become directly comparable merely through annualisation. Direct and regular plans have different expense structures, while growth and IDCW options differ in cash-flow treatment. For IDCW, assuming reinvestment rather than retaining distributions as cash changes terminal value. Benchmark comparison also depends on benchmark suitability and return basis; here, Broad Equity TRI is appropriate for both schemes. Using the same period, benchmark, plan, option, and reinvestment treatment helps ensure that an observed performance difference reflects the schemes rather than inconsistent measurement choices.

• Mixing direct and regular plans or growth and IDCW options ignores differences in expenses and cash-flow treatment.
• Annualisation does not correct mismatched performance periods or inconsistent benchmark bases.
• Inconsistent IDCW reinvestment treatment changes terminal value and prevents a like-for-like total-return comparison.

Periods, benchmark basis, plan expenses, option cash flows, and reinvestment treatment can each change measured performance.

Question 97

Topic: Investor Services

Meera submitted an accepted purchase application to a distributor. The entire ₹50,000 was available for allotment, with no deduction. The distributor compares the application acknowledgment with the allotment confirmation:

Meera has not authorised a switch, redemption, or second purchase. What should the distributor advise her to do next?

• A. Initiate a switch to Regular Plan-Growth at the applicable NAV without first reporting the mismatch.
• B. Place another ₹50,000 purchase in Regular Plan-Growth and request cancellation of the completed allotment.
• C. Report the mismatch to the AMC/RTA with both records and seek verification before any further transaction.
• D. Accept the allotment because the amount, NAV, units, and successful status reconcile despite the label mismatch.

Best answer: C

What this tests: Investor Services

Explanation: An allotment confirmation should be checked against the accepted transaction instruction for the amount, applicable NAV, allotted units, plan, option, and status. Here, 4,950.495 units at ₹10.10 correspond to approximately ₹50,000, so the numerical details reconcile after rounding. The successful status confirms that allotment occurred. However, the Direct Plan-IDCW entry conflicts with the documented Regular Plan-Growth instruction. A successful status does not validate incorrect plan or option details. The discrepancy should therefore be reported to the AMC or RTA with supporting records for verification before Meera undertakes another transaction.

• A switch would create a new transaction without first resolving the apparent servicing discrepancy.
• Accepting the allotment overlooks the material conflict in the plan and option details.
• A second purchase could create unintended additional exposure, while cancellation of a completed allotment cannot be presumed.

The units reconcile with the amount and NAV, but the confirmed plan and option conflict with Meera’s documented instruction.

Question 98

Topic: Legal and Regulatory Framework

A scheme’s Scheme Information Document states that it will maintain 65%-80% of its portfolio in equity and 20%-35% in debt. During a portfolio review, the trustees find that the AMC made fresh equity purchases that increased equity exposure to 86%. The exposure remained above 85% for three weeks and was not caused by market movements, investor flows, or a valuation error.

What is the primary governance concern?

• A. An investment-policy breach requiring trustee oversight and corrective action
• B. A valuation-control exception requiring fund-accounting review and NAV correction
• C. A distribution-suitability concern requiring investor profiling and sales review
• D. A benchmark-selection concern requiring performance review and benchmark replacement

Best answer: A

What this tests: Legal and Regulatory Framework

Explanation: A scheme must operate within the investment policy and asset-allocation ranges disclosed in its Scheme Information Document. Here, fresh purchases initiated by the AMC caused equity exposure to exceed the disclosed maximum, and the departure continued for three weeks. Because market movements, investor flows, and valuation errors are excluded, the excess cannot be treated as an incidental portfolio fluctuation or an accounting problem. It is an investment-policy compliance matter requiring trustee oversight, review of the AMC’s conduct, and appropriate corrective action. Benchmark performance and investor suitability are separate concerns and do not resolve whether the scheme portfolio complies with its disclosed mandate.

• A valuation-control exception is not indicated because the exposure figures were not caused by a valuation or NAV error.
• Benchmark selection concerns performance comparison, not compliance with the scheme’s disclosed allocation limits.
• Distribution suitability concerns matching a scheme to an investor, not governing the AMC’s portfolio activity.

The AMC’s deliberate purchases caused a sustained departure from the asset-allocation limits disclosed in the scheme document.

Question 99

Topic: Scheme Related Information

An AMC reviewer is checking a draft scheme factsheet dated August 30, 2026.

• The scheme’s benchmark changed from Nexa Large Cap TRI to Nexa Broad Market TRI effective July 1, 2026, as disclosed through an addendum.
• The draft still identifies Nexa Large Cap TRI as the current benchmark and shows a one-year comparison without mentioning the change.
• The NAV, portfolio and riskometer information is current.

What is the best action before the factsheet is released?

• A. Remove the benchmark section, retain the scheme’s one-year return, and refer investors to the July 1 addendum for details.
• B. Name Nexa Broad Market TRI, omit the change date, and compare its two-month return with the scheme’s one-year return.
• C. Revise the section to name Nexa Broad Market TRI, disclose July 1 as the effective date, and use matched comparison periods.
• D. Retain Nexa Large Cap TRI as the current benchmark, add a past-performance disclaimer, and keep the one-year comparison.

Best answer: C

What this tests: Scheme Related Information

Explanation: An ongoing scheme disclosure should reflect material changes already made effective and should not create misleading performance comparisons. Because the benchmark changed on July 1, the August factsheet cannot continue describing the former benchmark as current. The revised disclosure should identify the current benchmark, state the effective date of the change and compare scheme and benchmark returns over matching periods. A general past-performance disclaimer does not correct stale benchmark information. Similarly, comparing returns measured over different periods would distort the relationship between scheme and benchmark performance. Referring investors to a separate addendum also does not make an incomplete performance presentation sufficiently clear.

• A past-performance disclaimer does not cure the incorrect identification of the former benchmark as current.
• Omitting the effective date and using unmatched return periods would make the comparison potentially misleading.
• Removing the benchmark comparison leaves the displayed scheme performance without the relevant investor-facing comparator.

This corrects the stale benchmark identification and prevents a misleading comparison by disclosing the change date and aligning return periods.

Question 100

Topic: Mutual Fund Scheme Performance

A distributor is comparing an equity mutual fund with its stated benchmark over the same three-year period. The following measures were calculated from monthly returns:

Which supplied metric most directly indicates how consistently the scheme’s returns stayed close to its benchmark returns?

• A. The scheme’s standard deviation of 15.0%
• B. The scheme’s Sharpe ratio of 0.62
• C. The scheme’s tracking error of 1.8%
• D. The scheme’s beta coefficient of 0.95

Best answer: C

What this tests: Mutual Fund Scheme Performance

Explanation: Tracking error measures how consistently a scheme performs relative to its benchmark. It is based on the variability of active returns, meaning the differences between the scheme’s returns and benchmark returns across periods. A lower tracking error indicates that these return differences have been more stable and that the scheme has tracked its benchmark more closely. Tracking error does not show whether the scheme outperformed the benchmark or whether its absolute return was attractive. It specifically addresses the consistency of benchmark-relative performance.

• Standard deviation measures variability in the scheme’s own returns rather than variability relative to its benchmark.
• Beta measures sensitivity to benchmark movements rather than the consistency of return differences.
• Sharpe ratio measures return relative to total risk and the risk-free rate, not benchmark-tracking consistency.

Tracking error measures the variability of the difference between the scheme’s returns and its benchmark returns.

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