NISM V-A Chapter 12: Selecting the Right Scheme — Practice Questions
Chapter 12 focuses on matching investor profiles with appropriate mutual fund schemes based on risk tolerance, investment horizon, and financial objectives. This chapter is critical for exam success as it directly assesses your ability to make sound fund recommendations. Key concepts include understanding scheme classification—equity, debt, and hybrid categories—and how each serves different investor needs within the Indian regulatory framework. You must grasp the relationship between NAV fluctuations, portfolio composition, and investor suitability. The chapter emphasizes SEBI's guidelines on categorization of mutual funds, requiring you to distinguish between large-cap, mid-cap, small-cap, balanced, liquid, and other specialized schemes. Understanding expense ratios, exit loads, and lock-in periods is essential for comparative analysis. Finally, candidates must recognize how life-stage investing and goal-based planning inform scheme selection. Examiners frequently test your capacity to reject unsuitable recommendations and justify appropriate ones using regulatory standards. Mastery here ensures competent advisory practice and regulatory compliance in real-world operations.
Q1. Which of the following factors does NOT typically form part of a standard risk profiling questionnaire?
ANSWER
Option C
EXPLANATION
Risk profiling questionnaires assess investment objective, time horizon, income, liabilities, dependants, and behavioural responses to market scenarios. AMC brand preference is a marketing bias and is not a factor in objective risk profiling — the goal is to identify the investor's risk profile, not their brand loyalty.
Q2. Which of the following best describes a 'medium-term' investment horizon for goal-based planning?
ANSWER
Option A
EXPLANATION
Medium-term investment horizon is generally defined as 3 to 7 years. Short-term is under 3 years (debt/hybrid appropriate); medium-term suits balanced/hybrid or large-cap equity with some debt; long-term (7+ years) is best suited for pure equity exposure.
Q3. An investor has two goals: (1) child's college admission in 2 years and (2) retirement in 20 years. How should they approach fund selection?
ANSWER
Option B
EXPLANATION
Each goal requires a different fund type based on its horizon. The 2-year goal requires capital preservation — a short-duration debt fund. The 20-year retirement goal benefits from equity's long-term compounding. Treating both goals with the same fund ignores their fundamentally different risk requirements.
Q4. Which of the following fund categories is MOST suitable for an investor with a 4-5 year horizon who wants equity participation but with lower volatility than a pure equity fund?
ANSWER
Option B
EXPLANATION
Aggressive hybrid funds invest 65-80% in equity and 20-35% in debt, providing equity growth potential while the debt component cushions downside. This makes them suitable for medium-term goals (3-5 years) where an investor wants equity exposure without pure equity volatility.
Q5. A retired investor aged 65 needs regular monthly income and cannot afford to lose principal. Which fund combination is MOST appropriate?
ANSWER
Option B
EXPLANATION
A retired investor with low risk tolerance should prioritise capital preservation and income. Short-duration debt funds offer stability with low interest rate risk. An SWP provides regular cash flow without requiring the fund to be in IDCW mode. Long-duration or equity funds are inappropriate given the capital preservation requirement.
Q6. An investor with a 10-year horizon wants to build a corpus for a child's higher education. Which of the following approaches is MOST appropriate?
ANSWER
Option C
EXPLANATION
For a 10-year goal, equity via SIP is optimal for wealth creation. The gradual shift to debt 2-3 years before the goal date (a glide path approach) protects the accumulated corpus from a sudden equity market crash close to the redemption date.
Q7. Why is it important to match the fund's investment horizon with the investor's goal timeline?
ANSWER
Option C
EXPLANATION
Investing short-term money in equity risks a market downturn forcing redemption at a loss. Investing long-term money in debt sacrifices the inflation-beating growth equity provides. Proper horizon matching is fundamental to achieving financial goals without unnecessary risk or opportunity cost.
Q8. A 28-year-old investor wants to accumulate ₹2 crore by age 55 (27 years). What is the MOST impactful lever for achieving this goal?
ANSWER
Option D
EXPLANATION
For long-term wealth creation, time in the market is the most powerful lever due to compounding. Starting a SIP early — even at a modest amount — and staying invested for 27 years will outperform a larger SIP started 5-10 years later. Frequent fund switching disrupts compounding and triggers exit loads and taxes.