NISM V-A Chapter 2: Concept and Role of a Mutual Fund — Practice Questions
Chapter 2 establishes the foundational framework of mutual funds within India's regulatory ecosystem. This chapter covers the definition of mutual funds as pooled investment vehicles, the structure of fund management companies, and their operational mechanics under SEBI guidelines. You must understand that a mutual fund collects money from multiple investors to create a diversified portfolio managed by professional fund managers, distributing returns proportionally based on investor holdings. Critical concepts include recognizing mutual funds as distinct legal entities separate from their sponsors, understanding the role of trustees in protecting investor interests, and grasping how the NAV (Net Asset Value) functions as the pricing mechanism for fund units. The chapter emphasizes SEBI's regulatory mandate ensuring transparency and investor protection in India's mutual fund industry. Test-takers must distinguish between open-ended and closed-ended funds, comprehend the fiduciary responsibilities of asset management companies, and recognize mutual funds' advantages over direct stock investing, including diversification, professional management, and accessibility. Mastering this chapter provides the essential groundwork for understanding fund categories, operations, and compliance requirements tested throughout Series V-A.
Q1. As per SEBI categorisation, what is the minimum allocation to equity for a scheme to qualify as an equity fund?
ANSWER
Option C
EXPLANATION
As per SEBI categorisation, an equity scheme must invest at least 65% of its total assets in equity and equity-related instruments to qualify as an equity fund. This threshold also determines the tax treatment applicable to the scheme.
Q2. A liquid fund invests in debt and money market instruments with a maximum maturity of:
ANSWER
Option C
EXPLANATION
As per SEBI categorisation, a liquid fund invests in debt and money market instruments with a maturity of up to 91 days. It is designed for parking short-term surplus cash and provides better returns than savings accounts with high liquidity.
Q3. Which of the following correctly describes rupee cost averaging in SIP investments?
ANSWER
Option B
EXPLANATION
Rupee cost averaging works through SIP: a fixed amount invested each month buys more units when NAV is low (market down) and fewer units when NAV is high (market up). Over time this averages out the purchase cost per unit, reducing the impact of market volatility.
Q4. What is an interval fund?
ANSWER
Option B
EXPLANATION
An interval fund is a hybrid between open-ended and close-ended funds. It allows purchases and redemptions only during specified transaction periods at pre-defined intervals (e.g., monthly or quarterly). Between transaction periods, it behaves like a close-ended scheme.
Q5. What is the pass-through nature of a mutual fund?
ANSWER
Option B
EXPLANATION
Mutual funds have a pass-through nature — all income (dividends, interest) and capital gains earned by the scheme flow through to unit holders in proportion to their holdings. The fund itself is not a taxpaying entity; tax incidence falls on unit holders.
Q6. Which of the following statements about mutual fund liquidity is correct?
ANSWER
Option B
EXPLANATION
Open-ended schemes offer high liquidity — investors can redeem their units on any business day at the prevailing NAV. Close-ended schemes have lower liquidity (only via stock exchange). ELSS has a mandatory 3-year lock-in and cannot be redeemed before that.
Q7. Which of the following is classified as an equity fund category under SEBI's 2017 categorisation circular?
ANSWER
Option C
EXPLANATION
Flexi Cap Fund is an equity fund category under SEBI's 2017 circular — it must invest minimum 65% in equity across large, mid, and small cap stocks with no cap-wise restriction. Balanced Advantage and Conservative Hybrid are hybrid categories; Multi Asset is also hybrid.
Q8. What is a Large Cap fund as defined by SEBI?
ANSWER
Option B
EXPLANATION
As per SEBI categorisation, a Large Cap fund must invest a minimum of 80% of total assets in equity and equity-related instruments of large cap companies — defined as the top 100 companies by full market capitalisation. AMFI publishes this list every 6 months.