NISM VA Chapter 2: Concept And Role Of A Mutual Fund Questions and Answers

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NISM VA Series 5A Questions and Answers 2026: Chapter 2

Important MCQs on 2.1.1, 2.1.2, 2.1.3

1.What is a mutual fund?
A) A professionally managed investment vehicle
B) A traditional instrument of investment
C) A way of investing in different markets
D) A portfolio diversification strategy

2. What does it mean to invest through a mutual fund?
A) To compete with traditional instruments of investment
B) To get access to equities, bonds, money market instruments and/or other securities
C) To get a different product
D) To get a different way of investing

3. What is the primary role of mutual funds?
A) To help investors in earning an income or building their wealth
B) To offer a different way of investing
C) To diversify an investor’s portfolio
D) To provide professional fund management services

4. What is the difference between a fund and a scheme?
A) They are interchangeable terms
B) A fund is a type of scheme
C) A scheme is a type of fund
D) They have different investment objectives

5. How does investing in mutual funds promote economic development?
A) It benefits governments, companies, and other entities
B) It supports projects of goods and services companies
C) It boosts the revenue collection of the government through taxes
D) All of the above

6. How can mutual funds act as a market stabilizer?
A) By investing in foreign markets
B) By countering large inflows or outflows from foreign investors
C) By investing in high-risk securities
D) By providing low-interest loans to companies

7. What is the investment objective of an overnight fund?
A) To generate long-term capital appreciation
B) To generate regular income
C) To provide reasonable income along with high liquidity
D) To invest predominantly in equity and equity-related instrument

8. What is the investment objective of an equity fund?
A) To generate long-term capital appreciation
B) To generate regular income
C) To provide reasonable income along with high liquidity
D) To invest predominantly in equity and equity-related instruments

9. What is the investment objective of a hybrid fund?
A) To generate long-term capital appreciation
B) To generate regular income
C) To provide reasonable income along with high liquidity
D) To invest predominantly in equity and equity-related instruments

10. What is the investment objective of a long duration fund?
A) To generate long-term capital appreciation
B) To generate regular income
C) To provide reasonable income along with high liquidity
D) To invest predominantly in equity and equity-related instruments

11. What is the difference between investing in a mutual fund and investing in traditional instruments?
A) Mutual fund investments are professionally managed
B) Traditional instruments offer better returns
C) Mutual fund investments are more risky
D) Traditional instruments offer greater liquidity

12. What is a mutual fund scheme?
A) A type of investment vehicle
B) A pool of money with a pre-announced investment objective
C) A professional fund management service
D) A diversified portfolio of securities

13. What is the role of a mutual fund distributor?
A) To invest in mutual funds on behalf of investors
B) To understand the difference between investing in mutual funds and investing through mutual funds
C) To manage a mutual fund scheme
D) To offer financial advice to investors

14. What are the benefits of investing in a mutual fund?
a) Professional way of investing, portfolio diversification, and a regulated vehicle
b) Tax benefits, guaranteed returns, and lower risk
c) Higher interest rates and easier access to loans
d) All of the above

15. Who manages a mutual fund?
a) Asset management company
b) Government agency
c) Bank
d) Individual investors

16. What is the difference between a mutual fund and its schemes?
a) There is no difference
b) A mutual fund is an investment vehicle while a scheme is a type of investment
c) A mutual fund is a type of investment while a scheme is an investment vehicle
d) A mutual fund invests in securities markets while a scheme invests in traditional instruments of investment

Answers

  1. Answer: A) A professionally managed investment vehicle
  2. Answer: B) To get access to equities, bonds, money market instruments and/or other securities
  3. Answer: A) To help investors in earning an income or building their wealth
  4. Answer: A) They are interchangeable terms
  5. Answer: D) All of the above
  6. Answer: B) By countering large inflows or outflows from foreign investors
  7. Answer: C) To provide reasonable income along with high liquidity
  8. Answer: A) To generate long-term capital appreciation
  9. Answer: A) To generate long-term capital appreciation
  10. Answer: B) To generate regular income
  11. Answer: A) Mutual fund investments are professionally managed
  12. Answer: B) A pool of money with a pre-announced investment objective
  13. Answer: B) To understand the difference between investing in mutual funds and investing through mutual funds
  14. Answer: a) Professional way of investing, portfolio diversification, and a regulated vehicle
  15. Answer: a) Asset management company
  16. Answer: b) A mutual fund is an investment vehicle while a scheme is a type of investment

practice these MCQs

NISM Series V-A | Chapter 2: Concept and Role of a Mutual Fund
NISM Series V-A · Chapter 2

Concept and Role of a Mutual Fund

Section-wise MCQs at Mutual Fund Distributor Exam level with detailed explanations

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2.1 Concept of a Mutual Fund
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Q1A mutual fund is best described as a vehicle that allows investors to invest:
A Directly in physical assets like gold and real estate
B Through a professionally managed pool into securities like equities and bonds
C Only in government bonds through a SEBI-registered platform
D In fixed deposits at preferential interest rates
Explanation: A mutual fund is a professionally managed investment vehicle (trust) that pools money from investors and invests it in securities like equities, bonds, and money market instruments. Investors invest through a mutual fund — not directly in a different product, but a different way of investing with professional management and portfolio diversification.
Q2When SEBI circular refers to a mutual fund being set up as a “trust”, it means the mutual fund:
A Is operated as a private limited company registered with the ROC
B Is a vehicle to mobilize investor money and invest it in markets per stated objectives
C Has a fixed maturity and must return principal at the end
D Cannot invest in equity instruments
Explanation: A mutual fund is structured as a “trust” — it is a vehicle (in the form of a trust) to mobilize money from investors and invest in different markets and securities in line with stated investment objectives. The trust structure is legally distinct from a company.
Q3Which of the following is a primary role of mutual funds in the Indian economy?
A Acting as market stabilizers by countering large FPI inflows/outflows
B Providing insurance cover to all unitholders
C Guaranteeing returns superior to fixed deposits
D Acting as lenders to SME businesses
Explanation: Mutual funds act as market stabilizers by countering large inflows/outflows from foreign portfolio investors (FPIs). In 2022, when FPIs sold heavily in equity markets, the mutual fund industry provided a counterforce through fresh inflows into equity schemes. This is one of their macro-economic roles alongside wealth creation, capital formation, and employment generation.
Q4Every mutual fund scheme has a pre-announced investment objective. The primary objectives of schemes stem from the basic needs of investors. Which set correctly represents these basic needs?
A Safety, Liquidity, and Returns
B Capital growth, Tax savings, and Insurance
C Diversification, Safety, and Guaranteed income
D Liquidity, Short-term gains, and Speculation
Explanation: The primary objective of various mutual fund schemes stems from the three basic needs of investors: Safety, Liquidity, and Returns. These three factors guide how schemes are structured — e.g., overnight funds prioritize liquidity and safety, while equity funds focus on returns (capital appreciation).
Q5In a mutual fund scheme, who participates in the profits or losses of the scheme?
A The Asset Management Company (AMC) as it manages the fund
B The Trustees and sponsors equally
C Only the investors/unitholders
D All entities involved in the mutual fund proportionally
Explanation: Profits or losses belong exclusively to the investors (unitholders). No other entity involved in the mutual fund — AMC, trustees, custodians, registrars — participates in the scheme’s profits or losses. They are all paid a fee or commission for their services.
Q6The face value of a mutual fund unit is typically:
A Equal to the current NAV of the scheme
B Rs. 10, relevant mainly for accounting purposes
C Rs. 100, fixed by SEBI regulation
D Determined by the AMC at the time of NFO
Explanation: Typically, every unit has a face value of Rs. 10. The face value is relevant from an accounting perspective. The Unit Capital of a scheme is calculated as: Number of units issued × Face value (Rs. 10). The NAV, however, reflects the true worth of a unit which changes with market performance.
Q7Mark-to-Market (MTM) valuation in mutual funds refers to:
A Valuing units at face value plus accrued interest
B Valuing each security in the portfolio at its current market value on a daily basis
C Adjusting the NAV only at month-end to reduce volatility
D Marking exit loads based on redemption date
Explanation: Mark-to-Market (MTM) is the process of valuing each security in the investment portfolio at its current market value. MTM is done on a daily basis for calculating daily NAV of a mutual fund scheme. This results in daily fluctuations in NAVs of all schemes, reflecting real-time market movements.
Q8Which of the following statements about Assets Under Management (AUM) is CORRECT?
A AUM = Number of units outstanding × Face value
B AUM = Current NAV × Total units outstanding
C AUM is fixed at the NFO amount and does not change
D AUM only increases with fresh investor subscriptions
Explanation: AUM = Current NAV × Total units outstanding. AUM changes due to (a) fresh subscriptions increasing it, (b) redemptions/IDCW payouts decreasing it, and (c) market performance affecting the NAV. It does not remain fixed at the NFO amount.
Q9Recurring expenses in a mutual fund scheme are:
A One-time charges paid at the time of NFO by sponsors
B Fees/commissions charged as a percentage of AUM, deducted while calculating NAV
C Exit loads collected from investors at the time of redemption
D Penalties levied by SEBI for non-compliance
Explanation: Recurring expenses are fees/commissions paid to mutual fund constituents (AMC, distributors, etc.) charged as a percentage of AUM. They are deducted while calculating the NAV — higher expenses → lower NAV → lower investor returns. SEBI has imposed strict limits on these expenses.
Q10Which of the following is NOT listed as an advantage of mutual funds for investors?
A Professional management
B Guaranteed returns
C Liquidity
D Affordable portfolio diversification
Explanation: Guaranteed Returns is NOT an advantage of mutual funds. In fact, it is listed as a limitation — mutual funds are pass-through vehicles and cannot guarantee returns. The advantages include professional management, affordable diversification, economies of scale, transparency, liquidity, tax deferral, tax benefits (ELSS), and regulatory comfort.
Q11Under which section of the Old Tax Regime does an ELSS scheme provide a deduction benefit, and what is the annual limit?
A Section 80D up to Rs. 50,000
B Section 80C up to Rs. 1,50,000
C Section 10(10D) up to Rs. 2,00,000
D Section 54EC up to Rs. 50,000
Explanation: Equity Linked Savings Schemes (ELSS) give investors the benefit of deduction under Section 80C of the Old Tax Regime, up to Rs. 1,50,000 in a financial year. This reduces taxable income and hence tax liability, making ELSS a tax-saving investment avenue.
Q12Which of the following is a limitation of mutual funds?
A Lack of professional management
B High minimum investment requirement
C Lack of portfolio customization for individual investors
D No regulatory oversight
Explanation: Lack of portfolio customization is a key limitation of mutual funds. A unit-holder cannot influence which securities the scheme invests in — that is left to the fund manager. In contrast, Portfolio Management Services (PMS) offer customized portfolios for large investors. Other limitations include choice overload and no control over costs.
Q13Tax Deferral benefit in mutual funds means:
A Mutual funds are permanently exempt from all taxes
B Investors can avoid tax permanently by staying invested
C The tax liability is deferred — money can grow in the scheme for years before tax is paid
D AMCs pay the taxes on behalf of unit-holders
Explanation: Tax Deferral means that mutual funds are not liable to pay tax on the income they earn. By selecting growth options and staying invested, investors can defer the tax liability — money grows in the scheme for several years before tax is triggered. This allows faster wealth building compared to paying tax on income each year.
Q14Systematic Investment Plan (SIP), Systematic Withdrawal Plan (SWP), and Systematic Transfer Plan (STP) are offered by mutual funds to promote:
A Speculative trading in mutual fund units
B A systematic approach to investments for long-term wealth creation
C Tax avoidance through frequent switching between schemes
D Guaranteed income to all investors
Explanation: SIP (regular investing), SWP (regular withdrawals), and STP (systematic transfers between schemes) promote investment discipline and a systematic approach to investments, which is useful for long-term wealth creation and protection. These facilities help investors avoid emotional/timing-based investment decisions.
Q15The “Dividend” option in mutual fund schemes is now officially called:
A Regular Income Option (RIO)
B Payout Distribution Option (PDO)
C Income Distribution cum Capital Withdrawal (IDCW) option
D Profit Sharing Option (PSO)
Explanation: As per a SEBI directive, the “Dividend” option of mutual fund schemes has been renamed to Income Distribution cum Capital Withdrawal (IDCW) option. This name more accurately describes what happens — the payout may be from income as well as capital of the scheme. The IDCW payout reduces the scheme’s AUM and NAV accordingly.
Q16The investment policy of a mutual fund scheme discloses which two key aspects?
A NAV calculation method and expense ratio limits
B Asset allocation and investment style
C Fund manager’s track record and benchmark index
D Exit load structure and dividend history
Explanation: A scheme’s investment policy discloses two key aspects: (1) Asset allocation — where and how much is invested across asset classes, and (2) Investment style — e.g., growth vs value investing, focused vs diversified portfolio. Both are disclosed in the Scheme Information Document (SID).
2.2 Classification of Mutual Funds
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Q17In an open-ended mutual fund, what happens to the unit capital when investors redeem their units?
A It remains stable as new investors always replace redeeming investors
B It decreases as redeemed units are cancelled
C It increases as the NAV adjusts upward
D It is unaffected because only market movements change unit capital
Explanation: In an open-ended fund, when an investor redeems, the units are cancelled (not transferred to another investor), reducing the unit capital. Conversely, when new investors invest, new units are created, increasing unit capital. Therefore, unit capital in open-ended funds keeps changing on a regular basis.
Q18Close-ended funds are COMPULSORILY listed on a stock exchange because:
A SEBI mandates transparency reporting for all large schemes
B To provide investors an exit route since they cannot redeem directly from the fund post-NFO
C To enable the AMC to raise additional capital from markets
D So that the NAV is reflected in real time throughout the trading day
Explanation: Close-ended funds are compulsorily listed on a stock exchange to provide liquidity to investors. Since investors cannot transact with the fund post-NFO (the scheme only matures on the pre-fixed date), the stock exchange listing gives them an exit route by selling units to other investors in the secondary market.
Q19In a close-ended fund, the market price of units on the stock exchange is typically:
A Always equal to the NAV due to arbitrage
B Always higher than NAV as demand for units remains strong
C Often at a discount to NAV due to demand-supply dynamics
D Fixed by the AMC based on the scheme’s performance
Explanation: Experience shows that close-ended fund units mostly trade at a discount to NAV. This is because buyers have many investment options (strong bargaining position) while sellers have only those specific units — putting buyers in a better bargaining position and pushing market price below NAV.
Q20What is the minimum duration of the “transaction period” in an interval fund?
A 1 day
B 2 days
C 7 days
D 15 days
Explanation: For interval funds, the minimum duration of the transaction period is 2 days, and the maximum duration of the interval period (between two transaction periods) is 15 days. No redemption/repurchase is allowed except during the specified transaction period.
Q21Which of the following CORRECTLY describes an Exchange Traded Fund (ETF)?
A An ETF has a single NAV calculated at end of day, like all other mutual fund schemes
B An ETF is actively managed to beat the benchmark index
C An ETF is traded on a stock exchange and usually tracks an index passively, with prices throughout the day
D ETFs can only be bought during the NFO period
Explanation: ETFs are mutual fund schemes traded on stock exchanges throughout the day (giving multiple prices, unlike other MF schemes with one end-of-day NAV). They usually track an index passively. They require a demat account. Both Gold ETF and Silver ETF are available in India. Their key advantage is intraday liquidity.
Q22In passively managed index funds, why are running costs lower compared to actively managed funds?
A They invest in fewer securities, reducing transaction costs
B The fund manager has no role in deciding investments as the portfolio mirrors the index
C SEBI waives expense ratio for passive funds
D They only invest in large-cap stocks which have lower brokerage
Explanation: In passive/index funds, the portfolio is determined by the index composition itself — the fund manager has no discretionary role in selecting securities. This eliminates the cost of investment research, active portfolio management, and frequent trading, resulting in significantly lower running costs (Total Expense Ratio).
Q23As per SEBI’s definition, which category of company is classified as “Mid Cap”?
A 51st to 150th company in terms of full market capitalization
B 101st to 250th company in terms of full market capitalization
C 201st to 350th company in terms of full market capitalization
D Companies with market cap between Rs. 500 crore and Rs. 5,000 crore
Explanation: SEBI defines: Large Cap = 1st–100th company by full market cap; Mid Cap = 101st–250th company by full market cap; Small Cap = 251st company onwards. This definition applies across all equity scheme categories.
Q24A Multi Cap Fund must maintain a minimum equity allocation of 75% of total assets. What is the minimum allocation to EACH of large cap, mid cap, and small cap stocks?
A 10% each
B 20% each
C 25% each
D 30% each
Explanation: A Multi Cap Fund requires minimum 25% each in large cap, mid cap, and small cap equity instruments (totaling 75% minimum in equity). This ensures genuine diversification across market capitalizations, differentiating it from Flexi Cap Fund (which has no such mandated split).
Q25What is the maximum number of stocks a Focused Fund can hold in its portfolio?
A 15 stocks
B 20 stocks
C 30 stocks
D 50 stocks
Explanation: A Focused Fund can invest in a maximum of 30 stocks. It must specify its intended focus (multi cap, large cap, mid cap, or small cap) and maintain minimum 65% in equity and equity related instruments. The concentrated portfolio aims to generate higher returns through high-conviction bets.
Q26ELSS (Equity Linked Savings Scheme) has a statutory lock-in of:
A 1 year
B 3 years
C 5 years
D 7 years
Explanation: ELSS has a statutory lock-in of 3 years (shortest among all tax-saving instruments under Section 80C). It must maintain minimum 80% in equity and equity related instruments. Among 80C instruments (PPF, NSC, etc.), ELSS has the shortest lock-in and offers equity market participation.
Q27Which of the following debt fund categories invests in securities with a Macaulay duration of more than 7 years?
A Medium to Long Duration Fund
B Long Duration Fund
C Gilt Fund with 10-year constant duration
D Dynamic Bond Fund
Explanation: Long Duration Fund has a Macaulay duration greater than 7 years. Medium to Long Duration Fund has 4-7 years duration. Gilt Fund with 10-year constant duration specifically targets a Macaulay duration equal to 10 years. Dynamic Bond invests across durations without a fixed range constraint.
Q28An Aggressive Hybrid Fund must maintain equity exposure between:
A 40% to 60% of total assets
B 10% to 25% of total assets
C 65% to 80% of total assets
D 75% to 90% of total assets
Explanation: Aggressive Hybrid Fund: equity 65–80%, debt 20–35%. Conservative Hybrid Fund: debt 75–90%, equity 10–25%. Balanced Hybrid Fund: equity 40–60%, debt 40–60% (no arbitrage). Mutual funds can offer either Aggressive Hybrid or Balanced Hybrid — not both.
Q29A Retirement Fund (solution-oriented scheme) has a lock-in of:
A 3 years
B 5 years or till retirement age, whichever is earlier
C 5 years or till retirement age, whichever is later
D 10 years or till age 60, whichever is earlier
Explanation: Retirement Fund lock-in = 5 years or till retirement age, whichever is EARLIER. Children’s Fund lock-in = 5 years or till the child attains majority (age 18), whichever is earlier. These solution-oriented schemes are designed for specific life goals.
Q30Capital Protection Oriented Funds are structured to protect principal by:
A Investing only in AAA-rated corporate bonds
B Taking insurance cover on the principal amount
C Investing a portion in debt instruments to grow to principal at maturity, and the rest in equity derivatives
D Investing 100% in government securities throughout the tenure
Explanation: Capital Protection Oriented Funds are closed-end hybrid funds. A portion of the principal (e.g., Rs. 90) is invested in debt so it grows back to Rs. 100 at maturity — protecting the capital. The remaining portion (Rs. 10) is invested in equity derivatives to earn additional returns. They do NOT guarantee capital protection.
Q31Which of the following is true about the MF Lite framework introduced by SEBI (December 2024)?
A MF Lite is for actively managed equity funds with lower minimum capital requirements
B MF Lite refers to a mutual fund having only passively managed schemes (index funds, ETFs, FoFs)
C MF Lite schemes are exempted from SEBI categorization norms
D MF Lite allows smaller AMCs to offer unlimited actively managed schemes
Explanation: As of December 31, 2024, SEBI introduced the MF Lite framework for passively managed schemes. MF Lite is defined as a mutual fund having only index funds, ETFs, fund of funds, or other schemes specified by SEBI from time to time. This lighter regulatory framework applies specifically to passive investing entities.
Q32In a Liquid Fund, investments are made in debt and money market securities with maturity up to:
A 30 days
B 60 days
C 91 days
D 182 days
Explanation: Liquid Fund invests in debt and money market securities with maturity of up to 91 days only. Overnight Fund invests in securities with maturity of just 1 business day. Ultra-Short Duration Fund has a Macaulay duration of 3–6 months. These distinctions are frequently tested in NISM exams.
Q33In a Specialized Investment Fund (SIF), what is the minimum investment amount required from investors?
A Rs. 1 lakh
B Rs. 5 lakhs
C Rs. 10 lakhs
D Rs. 25 lakhs
Explanation: The Specialized Investment Fund (SIF) requires a minimum investment of Rs. 10 lakhs across all investment strategies. SIF bridges the gap between mutual funds and PMS, offering long-short equity, debt long-short, and hybrid strategies with more flexibility than regular mutual fund schemes.
Q34A Credit Risk Fund must invest minimum 65% of total assets in corporate bonds rated:
A AA+ and above
B AA and below (excluding AA+ rated bonds)
C Only AAA rated bonds
D Below investment grade (BB and below)
Explanation: Credit Risk Fund invests minimum 65% in AA and below rated corporate bonds (excluding AA+ rated bonds). Corporate Bond Fund, in contrast, invests minimum 80% in AA+ and above rated bonds. Credit Risk Funds carry higher credit risk but potentially higher yields, hence the “credit risk” designation.
Q35Which of the following categories allows a mutual fund to offer TWO different schemes?
A Large Cap Fund and Mid Cap Fund
B Sectoral/Thematic funds investing in different sectors/themes
C Aggressive Hybrid Fund and Balanced Hybrid Fund
D ELSS schemes with different lock-in periods
Explanation: SEBI’s categorization mandates only one scheme per category, except for: (1) Index funds/ETFs tracking different indices, (2) Fund of Funds with different underlying schemes, and (3) Sectoral/Thematic funds investing in different sectors or themes. So a fund house can have multiple sectoral schemes (banking, pharma, IT etc.) as they cover different themes.
Q36Target Maturity Date Funds (TMFs) are designed to:
A Provide guaranteed returns equal to the yield at the time of investment
B Mature on a specific date by investing in bonds with matching maturities, minimizing reinvestment risk
C Automatically switch between equity and debt as the maturity date approaches
D Protect capital by taking short positions in bond derivatives
Explanation: TMFs are debt mutual funds designed to mature on a specific date (2–10 years), investing in bonds with matching maturities to minimize reinvestment risk and provide predictable returns. They are listed on exchanges for liquidity. Ideal for investors with defined financial goals like retirement or education planning.
Q37In a Real Estate Mutual Fund, what percentage of net assets must be held in real estate assets and related instruments?
A Not less than 50%
B Not less than 65%
C Not less than 75%
D Not less than 90%
Explanation: In a Real Estate Mutual Fund, not less than 75% of net assets must be in real estate assets (or mortgage-backed securities, equity/debentures of real estate companies). Additionally, at least 35% of the portfolio must be in physical assets. Assets are valued every 90 days by two accredited valuers, with the lower value used for NAV calculation.
Q38REITs and InvITs differ from mutual fund schemes because:
A They are regulated by RBI instead of SEBI
B They are not mutual fund schemes but separate investment trust structures regulated by SEBI
C They cannot be listed on stock exchanges
D They only invest in debt instruments
Explanation: Real Estate Investment Trusts (REITs) and Infrastructure Investment Trusts (InvITs) are SEBI-regulated investment vehicles but they are NOT mutual fund schemes. They are separate trust structures. Both are listed on stock exchanges, with minimum subscription now reduced to Rs. 10,000–15,000 and traded lot of one unit.
2.3 Growth of the Mutual Fund Industry in India
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Q39The mutual fund industry AUM grew from Rs. 11.89 lakh crore (March 2015) to Rs. 66.70 lakh crore (March 2025). The approximate compounded annual growth rate (CAGR) for this 10-year period is:
A 10.5% p.a.
B 14.2% p.a.
C 18.82% p.a.
D 22.5% p.a.
Explanation: As per AMFI data, the MF industry AUM grew at 18.82% per annum compounded over the 10-year period from March 2015 to March 2025 (from Rs. 11.89 lakh crore to Rs. 66.70 lakh crore). This is a frequently tested data point in the NISM exam.
Q40The number of mutual fund folios crossed what milestone as of March 2025?
A 10 crore folios
B 15 crore folios
C 20 crore folios
D 23.45 crore folios
Explanation: The number of mutual fund folios crossed 23.45 crore as of March 2025, up from about 4.80 crore in March 2010 — a growth of over 11% per year. This shows the growing retail participation in mutual funds in India.
Q41SIP contributions grew from Rs. 8,055 crore (March 2019) to Rs. 26,400 crore (January 2025). This growth in SIP contributions is indicative of:
A Declining one-time lump sum investments in mutual funds
B Rising popularity of systematic and disciplined investing among retail investors
C That most SIP investors are in the high net worth investor category
D Regulatory mandate requiring all new investors to use SIP route
Explanation: The phenomenal growth in SIP contributions (from Rs. 8,055 crore to Rs. 26,400 crore) reflects the rising popularity of systematic investing among retail investors. SIPs promote investment discipline and allow investors of all income levels to participate in the equity market without timing risk.
Q42The share of mutual funds in overall financial investments in India compared to bank deposits showed which trend from March 2016 to March 2018?
A MF share decreased while bank deposits share increased
B Both MF share and bank deposits share increased simultaneously
C MF share rose from 10% to 14% while bank deposits share fell from 71% to 65%
D Both remained constant as new investment categories absorbed additional savings
Explanation: From March 2016 to March 2018: MF share in overall financial investments grew from 10% → 12% → 14%, while bank deposits fell from 71% → 69% → 65%. This shows a structural shift in Indian household savings from traditional bank deposits towards capital market instruments via mutual funds.
Q43Why did SEBI introduce Categorization and Rationalization of Mutual Fund Schemes in 2017?
A To limit the number of AMCs operating in India
B To bring uniformity so investors can objectively evaluate and compare similar schemes across fund houses
C To mandate minimum guaranteed returns for investors
D To eliminate debt fund categories to reduce credit risk
Explanation: SEBI’s 2017 categorization circular aimed to bring standardization and uniformity in the characteristics of similar types of schemes across fund houses. This enables investors to objectively compare schemes within the same category and make informed investment decisions — also addressing the “choice overload” limitation of mutual funds.
Q44The Indian mutual fund industry’s global share increased from 0.33% (2008) to 0.60% (2018). This is significant because it indicates:
A India’s MF industry is now the largest in the world
B The Indian MF industry grew faster than global MF industry, nearly doubling its share
C India’s global share fell as the number of fund houses reduced
D Indian MFs are mainly driven by foreign institutional investment
Explanation: India’s MF industry grew from 0.33% to 0.60% of global MF AUM from 2008 to 2018 — nearly doubling its share. This is described as “stupendous growth” compared to the world, indicating that India’s MF industry grew significantly faster than the global MF industry as a whole during this period.
Q45In a Smart Beta Fund, how does the portfolio construction differ from a traditional index fund?
A Smart beta funds take concentrated positions in top 10 stocks only
B Smart beta uses alternative strategies like equal weighting instead of pure market-cap weighting
C Smart beta funds are actively managed and do not track any index
D Smart beta funds can only invest in large-cap stocks
Explanation: Smart Beta funds are an extension of ETFs/index funds. Traditional index funds weight stocks by market capitalization. Smart Beta uses alternative weighting strategies (e.g., equal weighting, factor-based like low volatility, quality, momentum) to potentially improve returns, increase diversification, and reduce risk compared to pure market-cap weighted indices.
★ Integrated & Higher-Order Questions
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Q46An investor redeems 500 units from an open-ended fund when NAV is Rs. 45. Later, another investor buys 1,000 units in a new subscription. What is the net change in unit capital of the scheme?
A +500 units (net increase)
B –500 units (net decrease)
C +500 units — 500 redeemed are cancelled, 1,000 new are created
D No change since NAV adjusts to compensate
Explanation: In open-ended funds, redemption = 500 units cancelled (unit capital decreases by 500). New subscription = 1,000 new units created (unit capital increases by 1,000). Net change = +500 units. The NAV does not change due to subscriptions/redemptions — it changes only due to market performance of the underlying portfolio.
Q47Investor A wants safety and regular income. Investor B wants long-term capital growth. Based on mutual fund investment objectives, which combination is most appropriate?
A A: Sectoral Fund; B: Liquid Fund
B A: Long Duration Debt Fund; B: Multi Cap Equity Fund
C A: Overnight Fund / Liquid Fund; B: Long Duration Debt Fund
D A: Credit Risk Fund; B: Arbitrage Fund
Explanation: For safety and regular income → Long Duration Debt Fund (invests in fixed income securities for steady income stream). For long-term capital growth → Multi Cap Equity Fund (invests across market capitalizations in equity for capital appreciation). This aligns investment objectives with investor needs — a core distributor competency.
Q48Which statement about the difference between a Flexi Cap Fund and a Multi Cap Fund is CORRECT?
A Both require minimum 25% each in large, mid, and small cap stocks
B Flexi Cap has minimum 65% equity with no mandated split across market caps; Multi Cap mandates 25% each in large, mid, and small cap
C Multi Cap invests freely across caps with no restrictions; Flexi Cap must maintain 75% in equity
D Flexi Cap can invest in overseas equities; Multi Cap cannot
Explanation: Flexi Cap Fund: minimum 65% in equity, no mandated split — fund manager has full discretion across large/mid/small cap. Multi Cap Fund: minimum 75% in equity with mandatory 25% each in large, mid, and small cap. This distinction ensures Multi Cap funds have genuine small and mid cap exposure unlike earlier “multi cap” funds that were largely large-cap.
Q49A distributor’s client has a close-ended fund investment that is about to mature. The client asks whether it will automatically roll over. The correct response is:
A Yes, it will auto-renew for the same period
B No — the scheme is wound up at maturity, units are cancelled, and money is returned to investors
C It depends on whether the AMC decides to extend the scheme
D The scheme converts to open-ended format after maturity
Explanation: Close-ended funds have a fixed maturity. At the end of the maturity period, the scheme is wound up, units are cancelled, and money is returned to investors. There is no automatic rollover. Investors who wish to continue investing must invest in a new scheme. This is a key fact distributors must clearly communicate to clients.
Q50Mr. Sharma, a mutual fund distributor, is explaining why mutual fund expenses matter to a client. Which of the following is the most accurate explanation?
A Higher expenses improve fund performance as they pay for better fund managers
B Expenses are deducted from NAV — higher expenses mean lower NAV and hence lower investor returns
C Expense ratios are uniform across all schemes as mandated by SEBI
D Expenses are charged at the time of redemption and do not affect daily NAV
Explanation: Recurring expenses are deducted while calculating the NAV — higher expenses → lower NAV → lower investor returns. This is why expense ratio matters significantly for long-term wealth creation. SEBI imposes limits (varying by AUM size and scheme type) but does not set uniform rates. Market forces also push costs down, with many schemes operating well below SEBI limits.

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