Ch.12 · Selecting the Right Scheme

Model Portfolios and Asset Allocation

25 practice questions on this topic

An investor says: 'I want high returns but I cannot sleep at night when my portfolio falls even 5%.' What does this indicate?

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EXPLANATION

This is a classic case of high return aspiration conflicting with low risk tolerance. The investor wants equity-level returns but cannot handle equity volatility. The distributor's role is to educate the investor on the risk-return trade-off and recommend a product that matches their actual (not aspirational) risk profile.

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A young investor with high income, zero debt, and a 20-year horizon for retirement states they have a 'conservative' risk tolerance. How should a distributor respond?

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EXPLANATION

When risk capacity (high) and stated risk tolerance (conservative) conflict, the distributor's responsibility is to educate — not override. The investor must understand that a very conservative allocation over 20 years may fail to meet their retirement goals due to inflation erosion. Education enables informed decision-making.

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An investor needs ₹5 lakh in 6 months for a planned vacation. Which fund type is MOST suitable?

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EXPLANATION

For a 6-month horizon, capital preservation is paramount. Ultra short duration or low duration debt funds invest in short-term instruments with minimal interest rate risk, making them appropriate for near-term goals. Equity funds are entirely unsuitable for such short horizons due to market volatility.

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What does 'loss aversion' mean in the context of investor psychology and risk profiling?

A.The investor's strategy to avoid any investment that could generate a loss

B.A risk profiling score that classifies investors as loss-averse or risk-seeking

C.The psychological tendency to feel the pain of losses more acutely than the pleasure of equivalent gains, leading to suboptimal investment decisions

D.The practice of exiting investments whenever they show a loss

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What is the significance of an investor's 'investment horizon' in determining their risk profile?

A.Longer horizon means lower risk capacity as the investor has more time to lose money

B.Investment horizon has no bearing on risk profile — only income determines risk capacity

C.Longer horizon increases risk capacity as short-term market volatility can be ridden out, and equity markets have historically rewarded long-term investors

D.Longer horizon means the investor must choose more conservative funds to protect accumulated gains

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What does SEBI's mandate on 'suitability' require of a mutual fund distributor?

A.The distributor must recommend only the AMC's highest AUM schemes

B.The distributor must recommend schemes that are suitable for the investor's risk profile, financial situation, and investment objectives

C.The distributor must ensure the investor is invested in at least 5 different AMCs

D.The distributor must recommend only direct plans to all investors

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Why is diversification across mutual fund schemes important in portfolio construction?

A.Diversification reduces the impact of underperformance in any single scheme or asset class on the overall portfolio

B.Holding more schemes always results in higher returns

C.Diversification across schemes eliminates all investment risk

D.SEBI mandates that investors hold a minimum of 5 schemes at all times

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A 35-year-old investor plans to retire at 60. For retirement savings, which asset allocation is most appropriate at this stage?

A.Predominantly equity (70-80%) with some debt allocation for stability

B.100% in liquid funds for capital safety

C.100% in long-duration debt funds

D.Equal split between gold and overnight funds

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What does 'required rate of return' mean in the context of goal-based financial planning?

A.The minimum return mandated by SEBI for each mutual fund category

B.The guaranteed return promised by the AMC at the time of investment

C.The post-tax return required to beat inflation in the current year

D.The annual return an investor's portfolio must generate to reach the target corpus by the goal date given current savings and investment amount

Q10

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A retired investor aged 65 needs regular monthly income and cannot afford to lose principal. Which fund combination is MOST appropriate?

A.100% small-cap equity fund with monthly dividend option

B.Predominantly short-duration debt funds with an SWP for regular income

C.Long-duration gilt fund for higher yield

D.Sectoral technology fund for high growth

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