NISM V-A Chapter 11: Scheme Performance — Practice Questions
Chapter 11 – Scheme Performance covers the critical framework for evaluating and reporting mutual fund scheme returns in India's regulatory environment. This chapter equips candidates with tools to assess fund performance objectively and communicate results to investors transparently. The SEBI guidelines mandate standardized performance reporting, ensuring comparability across schemes and prevention of misleading claims. Key concepts include absolute returns, measuring cumulative gains from investment inception; annualized returns, expressing performance on a standardized yearly basis for fair comparison across different time periods; and benchmark comparison, evaluating scheme performance against appropriate indices like Nifty 50 or BSE Sensex. Candidates must understand rolling returns, which show performance across multiple overlapping periods to eliminate timing bias. The chapter emphasizes risk-adjusted metrics including Sharpe ratio and standard deviation, essential for holistic performance evaluation beyond raw returns. Candidates should master CAGR calculations, understand time-weighted versus money-weighted returns, and recognize SEBI's fact sheet requirements. Proficiency in this chapter directly impacts client advisory quality and regulatory compliance in fund performance communication.
Q1. A mutual fund fact sheet shows a scheme's 3-year return as 14% and its benchmark's 3-year return as 11%. What does this indicate?
ANSWER
Option A
EXPLANATION
When a scheme outperforms its benchmark, the excess return is called 'alpha'. A 14% scheme return vs 11% benchmark = 3% alpha. This suggests the fund manager's stock selection and active decisions have added value over simply tracking the index.
Q2. What is 'portfolio turnover ratio' as shown in a mutual fund fact sheet?
ANSWER
Option B
EXPLANATION
Portfolio turnover ratio measures how frequently a fund manager trades the portfolio. A ratio of 100% means the entire portfolio was replaced once during the year. High turnover implies higher transaction costs and may indicate frequent active trading.
Q3. In a debt fund fact sheet, what does 'average maturity' indicate?
ANSWER
Option C
EXPLANATION
Average maturity is the weighted average time to maturity of all debt securities in the portfolio. A longer average maturity implies greater sensitivity to interest rate changes (higher duration risk). It is a key metric for assessing a debt fund's interest rate risk.
Q4. What is 'YTM' (Yield to Maturity) as shown in a debt mutual fund fact sheet?
ANSWER
Option A
EXPLANATION
YTM in a debt fund fact sheet is the weighted average yield to maturity of all bonds/instruments in the portfolio, assuming they are held till maturity and all coupon payments are reinvested. It indicates the expected return of the portfolio before expenses.
Q5. In the context of a mutual fund fact sheet, what does 'Standard Deviation' measure?
ANSWER
Option B
EXPLANATION
Standard deviation measures the dispersion of a fund's returns around its average return. A higher standard deviation indicates greater volatility (risk). For example, a fund with 18% SD has historically shown wider swings in returns than one with 12% SD.
Q6. What does 'Beta' in a mutual fund fact sheet indicate?
ANSWER
Option D
EXPLANATION
Beta measures a fund's sensitivity to benchmark movements. A beta of 1.2 means the fund tends to rise/fall 1.2% for every 1% rise/fall in the benchmark. Beta > 1 = more volatile than benchmark; Beta < 1 = less volatile. Beta = 1 means the fund moves in line with the benchmark.
Q7. SEBI mandates that mutual fund performance be disclosed for which standard periods?
ANSWER
Option D
EXPLANATION
SEBI requires mutual funds to disclose scheme performance for standard periods: 1 year, 3 years, 5 years, and since inception — both for the scheme and its benchmark. This standardisation allows investors to compare funds fairly across AMCs.
Q8. Which of the following is a SEBI requirement regarding benchmarks for mutual fund schemes?
ANSWER
Option B
EXPLANATION
SEBI mandates that each scheme use an appropriate benchmark that reflects its category and investment universe. For example, a large-cap fund should benchmark against Nifty 100 or S&P BSE 100, not a broader mid-cap index. Performance against the benchmark must be disclosed in all statutory documents and communications.