Home
Examinations▾
Live now
NISM Series V-A
Mutual Fund Distributor · 2,000+ questions
Available
NISM Series VII
Securities Operations & Risk Mgmt
Available
Coming soon
NISM Series X-A
Investment Adviser Level 1
IC-38 Insurance
Insurance Agent Certification
Mock TestsBlogPricing
2,000+ questions
Start free →
Examinations
NISM Series V-A
Mutual Fund Distributor · 2,000+ questions
NISM Series VII
Securities Operations
NISM Series X-A
Investment Adviser Level 1
IC-38 Insurance
Insurance Agent Certification
Platform
Home
›
Mock Tests
›
Blog
›
Pricing
›
Legal
Refund PolicyPrivacy PolicyTerms
Start free →

NISM V-A Chapter 10: Risk, Return and Performance of Funds — Practice Questions

Chapter 10 examines the fundamental relationship between risk and return in mutual funds, critical for NISM Series V-A candidates assessing fund performance accurately. This chapter establishes how fund managers generate returns while managing portfolio risk, directly relevant to advisor recommendations under SEBI regulations. Key concepts include understanding risk metrics—standard deviation, beta, and Sharpe ratio—which quantify fund volatility relative to benchmarks. Candidates must grasp how these measures help classify funds across risk profiles, essential for client suitability assessments. Performance evaluation frameworks, including absolute returns, relative returns, and risk-adjusted returns, form the second pillar. Understanding alpha and tracking error enables advisors to identify genuine outperformance versus benchmark replication. The third critical area covers attribution analysis, explaining whether returns derive from asset allocation decisions or security selection. Indian fund advisors particularly need proficiency in comparing funds against appropriate benchmarks like Nifty 50 or Sensex. This chapter equips candidates to move beyond simple return figures, enabling sophisticated performance discussions with clients and regulatory compliance with SEBI's disclosure requirements for fund comparisons and performance presentations.

Q1. What is 'reinvestment risk' in debt mutual funds?
A. The risk of investing in the wrong debt fund
B. The risk that interim cash flows (coupons) will have to be reinvested at lower interest rates when rates fall
C. The risk of not reinvesting dividends from debt funds
D. The risk of reinvesting in equity after exiting a debt fund

ANSWER

Option B

EXPLANATION

Reinvestment risk is the risk that coupon payments received from bonds will be reinvested at lower rates when interest rates decline. This affects the total return of the debt portfolio since the compounding effect is lower than expected. It is particularly relevant for long-term bonds that pay periodic coupons over many years.

Q2. What is 'currency risk' (exchange rate risk) in mutual funds?
A. The risk of the Indian rupee becoming a non-convertible currency
B. The risk that changes in exchange rates will affect the value of foreign investments held in the portfolio
C. The risk of counterfeiting of currency notes used for SIP payments
D. The risk of currency denomination mismatch in fund accounting

ANSWER

Option B

EXPLANATION

Currency risk affects international and overseas funds. When an Indian fund invests in US stocks, returns depend on both stock performance and USD/INR exchange rate movements. If the rupee appreciates against the dollar, the INR value of the US investment falls even if the US stocks perform well. Funds may hedge currency risk using derivatives.

Q3. What is 'inflation risk' (purchasing power risk) in the context of investments?
A. The risk that the government will increase GST on mutual fund returns
B. The risk that investment returns will not keep pace with inflation, eroding the real value of wealth over time
C. The risk that inflation data published by the government is incorrect
D. The risk that the AMC will increase its TER due to inflation

ANSWER

Option B

EXPLANATION

Inflation risk is the risk that investment returns fail to outpace inflation, causing a loss in real (inflation-adjusted) purchasing power. For example, a 5% return when inflation is 6% means real wealth decreases by 1%. Equity funds historically provide inflation-beating returns over long periods, making them important for long-term wealth preservation.

Q4. What is 'regulatory risk' in mutual fund investments?
A. The risk that SEBI will shut down the AMC
B. The risk that changes in regulations, tax laws, or government policies will adversely affect the value of investments
C. The risk of the fund manager violating regulations
D. The risk of delays in SEBI approving new scheme launches

ANSWER

Option B

EXPLANATION

Regulatory risk is the risk of adverse changes in laws, regulations, or government policies affecting investment values. Examples include: changes in LTCG tax rates on equity (as happened in 2018), sector-specific regulatory changes (pharma pricing controls, banking regulations), or tax treatment changes for debt funds (2023 indexation removal).

Q5. What is CAGR (Compound Annual Growth Rate) and when is it used?
A. A method of measuring daily NAV changes in mutual funds
B. The year-on-year growth rate that, if compounded, would produce the same result as the actual investment — used for returns over periods greater than 1 year
C. The average of annual returns over a period
D. The return guaranteed by the AMC at a fixed rate per year

ANSWER

Option B

EXPLANATION

CAGR is the smoothed annualised growth rate that would produce the same end result as the actual investment if compounded at a constant rate. Formula: CAGR = (End Value / Start Value)^(1/n) - 1, where n = years. It is the standard measure for mutual fund returns over periods greater than 1 year as it accounts for compounding.

Q6. What is 'annualised return' and how does it differ from 'absolute return'?
A. Annualised return is the return in the current financial year; absolute return is the lifetime return
B. Annualised return expresses total return as a per-year equivalent rate; absolute return is the total return over the actual holding period without annualising
C. Annualised return is after tax; absolute return is before tax
D. They are the same concept with different names

ANSWER

Option B

EXPLANATION

Absolute return measures total gain over the actual period (e.g., 50% over 4 years). Annualised return (CAGR) expresses this as an equivalent per-year rate (50% over 4 years ≈ 10.67% CAGR). Annualised returns allow meaningful comparison between investments held for different periods.

Q7. What is 'standard deviation' as a measure of risk in mutual funds?
A. The difference between the highest and lowest NAV in a year
B. A statistical measure of the dispersion of returns around the average return — higher standard deviation means higher volatility
C. The standard deviation of the fund manager's investment decisions from the benchmark
D. The deviation of actual TER from the maximum permitted TER

ANSWER

Option B

EXPLANATION

Standard deviation measures how much a scheme's returns vary from its average return over a period. A higher standard deviation means returns are more volatile (spread widely above and below the average), indicating higher risk. For example, a fund with 15% average return and 20% standard deviation has experienced returns between -5% and 35% frequently.

Q8. What is 'beta' as a risk measure for mutual funds?
A. The second letter of the Greek alphabet used to name debt fund categories
B. A measure of a fund's sensitivity to market movements relative to its benchmark — beta of 1 means the fund moves in line with the market
C. The minimum return a fund is expected to generate
D. A measure of the fund manager's experience in years

ANSWER

Option B

EXPLANATION

Beta measures a fund's price movement relative to its benchmark. Beta = 1: fund moves in line with the market. Beta > 1: fund is more volatile than the market (amplifies market moves). Beta < 1: fund is less volatile than the market. Beta = 1.2 means when the market rises 10%, the fund typically rises 12%, and vice versa.

Sign in to practise all questions