NISM Series V-A Chapter 7: Net Asset Value, Total Expense Ratio and Pricing of Units Practice Questions

Question 1

The Net Asset Value (NAV) of an open-ended mutual fund scheme is calculated by dividing the net assets of the scheme by:

Accepted Answer

The total number of outstanding units of the scheme.. The fundamental formula for calculating the Net Asset Value (NAV) of a mutual fund is: NAV = (Market Value of Assets - Liabilities) / Total Number of Outstanding Units. It represents the per-unit market value of the scheme's holdings.

Question 2

When a mutual fund scheme declares and pays out a dividend, how does it typically affect the scheme's Net Asset Value (NAV)?

Accepted Answer

The NAV decreases proportionately to the dividend amount.. A dividend payout reduces the assets of the fund by the amount paid out. Since NAV is calculated as (Assets - Liabilities) / Units Outstanding, a reduction in assets directly leads to a proportionate decrease in the NAV per unit on the record date of the dividend.

Question 3

How is Goods and Services Tax (GST) on investment management fees treated in the calculation of Total Expense Ratio (TER) for a mutual fund scheme?

Accepted Answer

It is charged over and above the prescribed TER limits.. As per SEBI guidelines, GST on investment management fees is not included within the prescribed Total Expense Ratio (TER) limits. Instead, it is charged to the scheme over and above the TER, meaning it is an additional cost borne by the investors of the scheme.

Question 4

A debt fund has a portfolio of securities with an average maturity of 180 days. What is the cut-off time for receiving applications for purchase and redemption to be eligible for the same day's NAV?

Accepted Answer

3:00 PM. For debt schemes (other than liquid and overnight funds) where the funds' portfolio has an average maturity greater than 91 days, the cut-off time for same-day NAV applicability for both purchases and redemptions is 3:00 PM. Liquid and Overnight funds have a 1:30 PM cut-off.

Question 5

An investor holds 100 units of an equity-oriented mutual fund scheme. The current NAV is ₹80. The scheme has an exit load structure of 1% if units are redeemed within 1 year, and 0% thereafter. If the investor redeems all units after 8 months, what is the total amount the investor will receive?

Accepted Answer

₹7,920. Total value of units = 100 units * ₹80/unit = ₹8,000. Since the redemption is within 1 year (after 8 months), an exit load of 1% applies. Exit load amount = 1% of ₹8,000 = ₹80. Amount received by investor = ₹8,000 - ₹80 = ₹7,920.

Question 6

Some mutual funds may implement a mechanism known as 'swing pricing' or 'dilution adjustment' for their NAV calculation. What is the primary purpose of this mechanism?

Accepted Answer

To adjust the NAV to protect long-term investors from costs incurred due to large inflows or outflows.. Swing pricing (or dilution adjustment) is a mechanism used to adjust the NAV of a fund to mitigate the impact of transaction costs arising from large subscriptions or redemptions. It ensures that the costs associated with buying or selling underlying securities to accommodate large inflows or outflows are borne by the transacting investors, thereby protecting the existing long-term unitholders from dilution of their holdings' value.

Question 7

Which of the following statements accurately describes the Total Expense Ratio (TER) for Direct Plans compared to Regular Plans of the same mutual fund scheme?

Accepted Answer

Direct Plans typically have a lower TER than Regular Plans.. Direct Plans have a lower Total Expense Ratio (TER) compared to Regular Plans because they do not include distributor commissions. The distributor commission component is part of the TER in Regular Plans, which is absent in Direct Plans, making them cheaper for investors who invest directly with the AMC. (SEBI Circular SEBI/HO/IMD/DF2/CIR/P/2018/137 dated October 22, 2018).

Question 8

An investor submits a purchase application for a non-liquid mutual fund scheme at 2:30 PM on a business day. The funds are realized and credited to the mutual fund's designated bank account at 3:10 PM on the same day. Assuming the investment amount is ₹50,000, which NAV will be applicable for this transaction?

Accepted Answer

The NAV of the next business day.. For non-liquid schemes (other than liquid and overnight funds), if the funds are realized after the cut-off time (which is 3:00 PM for purchases), the NAV of the next business day will be applicable, irrespective of the investment amount. SEBI regulations mandate that for NAV applicability, both the application and funds must be received before the cut-off time.

Question 9

An investor submits a purchase application for an equity-oriented mutual fund for ₹1,90,000 at 2:45 PM on a business day, and the funds are realized by the AMC on the *next* business day. Which NAV will be applicable for this transaction?

Accepted Answer

The NAV of the next business day when the funds were realized.. For purchase applications in equity schemes (including hybrid schemes investing at least 65% in equity) for an amount less than ₹2,00,000, the NAV of the day on which the funds are available for utilization by the AMC (i.e., realized) is applicable, irrespective of the application submission time. Since the funds were realized on the next business day, that day's NAV will apply. (SEBI Circular CIR/IMD/DF/21/2012)

Question 10

When a mutual fund scheme incurs an expense, such as audit fees or legal charges, how does this typically impact the scheme's Net Asset Value (NAV)?

Accepted Answer

It decreases the NAV as it reduces the net assets of the scheme.. NAV is calculated as (Market Value of Assets - Liabilities) / Number of Units Outstanding. Any expense incurred by the fund is a liability that reduces the net assets, thereby decreasing the NAV.

Question 11

What is the primary purpose of an Exit Load in a mutual fund scheme?

Accepted Answer

To deter short-term investors and protect long-term unitholders.. Exit loads are primarily levied to discourage short-term redemptions from the fund. This helps in maintaining portfolio stability and protecting the interests of long-term investors by reducing the impact of frequent entries and exits on the fund's portfolio management and associated transaction costs.

Question 12

Beyond the standard TER limits, what additional percentage of average annual net assets can a mutual fund scheme charge for expenses incurred towards investor services and distribution in B-30 cities?

Accepted Answer

0.30%. SEBI allows an additional 30 basis points (0.30%) of the average annual net assets for expenses towards investor services and distribution in B-30 cities, provided the inflows from such cities are at least 30% of gross new inflows in the scheme or 15% of the average AUM (whichever is higher).

Question 13

Which of the following mutual fund plans typically has a lower Total Expense Ratio (TER) compared to the others?

Accepted Answer

Direct Plan. Direct Plans do not involve distributor commissions, as investors invest directly with the AMC. This absence of distribution costs results in a lower expense ratio (TER) compared to Regular Plans, which include distributor commissions.

Question 14

As per SEBI regulations, what is the maximum permissible Total Expense Ratio (TER) for an equity-oriented mutual fund scheme for the first INR 500 crore of average weekly net assets?

Accepted Answer

2.25%. As per SEBI regulations, the maximum TER for equity-oriented schemes is 2.25% for the first INR 500 crore of average weekly net assets. This limit decreases for higher slabs of Assets Under Management (AUM). For debt and other schemes, the limit for the first INR 500 crore is 2.00%.

Question 15

Which of the following events would directly lead to a decrease in a mutual fund's Net Asset Value (NAV) per unit, assuming all other factors remain constant?

Accepted Answer

Increase in the scheme's total liabilities. The NAV is calculated as (Total Assets - Total Liabilities) / Total Number of Units Outstanding. An increase in the scheme's total liabilities (e.g., accrued expenses) would reduce the net assets, thereby decreasing the NAV per unit. Appreciation in securities value and dividend income would increase assets and thus NAV. Issuance of new units at a premium would typically increase assets proportionally to units, maintaining or slightly increasing NAV, not decreasing it.

Question 16

For an investment in a liquid fund, what is the cut-off time for an application to be eligible for the Net Asset Value (NAV) of the same business day?

Accepted Answer

2:00 PM. As per SEBI regulations, for liquid and overnight funds, the cut-off time for applications (both purchase and redemption) to be eligible for the same business day's NAV is 2:00 PM, provided the funds are realized by the AMC. For other schemes, the cut-off time is generally 3:00 PM.

Question 17

Which of the following is explicitly excluded from the Total Expense Ratio (TER) calculation of a mutual fund scheme and is charged separately?

Accepted Answer

Brokerage and Securities Transaction Tax (STT). Brokerage and Securities Transaction Tax (STT) are expenses that are charged over and above the Total Expense Ratio (TER) limits. All other options are components typically included within TER.

Question 18

Which of the following best describes the Net Asset Value (NAV) of a mutual fund unit?

Accepted Answer

The total value of assets less total liabilities, divided by the number of units outstanding.. The Net Asset Value (NAV) represents the per-unit market value of a mutual fund's assets. It is calculated by taking the total market value of the fund's investments, adding other assets (like cash), subtracting liabilities (like expenses payable), and then dividing the result by the total number of units outstanding.

Question 19

For open-ended mutual fund schemes, how often is the Net Asset Value (NAV) generally required to be declared?

Accepted Answer

Daily (on all business days). Open-ended mutual fund schemes are required to declare their NAV on every business day. This ensures transparency and allows investors to track the performance of their investments regularly.

Question 20

Which of the following best defines the Net Asset Value (NAV) of a mutual fund scheme?

Accepted Answer

The market value of the scheme's assets minus its liabilities, divided by the number of outstanding units.. NAV is calculated as the market value of the scheme's assets minus its liabilities, divided by the number of units outstanding on a particular date. This represents the per-unit value of the scheme's net assets.

Question 21

How frequently are mutual funds mandated to disclose their Net Asset Value (NAV) for all schemes?

Accepted Answer

Daily (on all business days). As per SEBI regulations, Asset Management Companies (AMCs) are required to compute and disclose the Net Asset Value (NAV) for all their schemes on every business day. This ensures transparency and provides investors with up-to-date pricing information.

Question 22

Which of the following, when incurred by a mutual fund scheme, would directly lead to a reduction in its Net Asset Value (NAV)?

Accepted Answer

Payment of management fees to the Asset Management Company (AMC).. Management fees are an expense incurred by the mutual fund scheme. Expenses reduce the net assets of the fund, thereby directly leading to a reduction in the scheme's Net Asset Value (NAV). Accrued income, receipt of dividends, and appreciation in asset values generally increase NAV.

Question 23

For investments in Liquid and Overnight Funds, if an application is received before the cut-off time of 1:30 PM on a business day and funds are realized on the same day, what NAV will typically be applicable?

Accepted Answer

The NAV of the same business day.. As per SEBI regulations, for Liquid and Overnight Funds, if the application is received before 1:30 PM and funds are realized on the same day, the NAV of the same business day is applicable.

Question 24

For open-ended equity schemes, what is the minimum frequency at which the Net Asset Value (NAV) must be calculated and declared?

Accepted Answer

Daily. SEBI regulations mandate that NAV for all open-ended schemes, except for Liquid and Overnight funds (which declare NAV for all business days), must be calculated and declared on every business day.

Question 25

What is the primary purpose of an 'exit load' charged by a mutual fund scheme?

Accepted Answer

To deter short-term redemption and protect long-term investors.. Exit loads are primarily designed to discourage short-term trading or premature redemptions by investors. By doing so, they aim to protect long-term investors from the dilution effect on the NAV caused by frequent large redemptions and the associated transaction costs incurred by the fund.

Question 26

Which of the following expenses is NOT typically included in the Total Expense Ratio (TER) of a mutual fund scheme?

Accepted Answer

Brokerage and transaction costs for portfolio churn. Brokerage and transaction costs incurred for portfolio churn are generally charged to the scheme directly and are permitted over and above the TER, up to a certain limit (e.g., 0.12% for equity and 0.05% for debt). TER primarily covers recurring operating expenses like management fees, RTA fees, marketing expenses, and audit fees.

Question 27

What is 'swing pricing' or 'dilution adjustment' in the context of mutual funds?

Accepted Answer

An adjustment to the NAV to protect long-term investors from transaction costs incurred due to large inflows/outflows.. Swing pricing (or dilution adjustment) is a mechanism used by some mutual funds, particularly in international markets, to adjust the NAV per unit to pass on the transaction costs incurred by the fund due to large inflows or outflows directly to the transacting investors. This protects the existing long-term investors from the dilution of their holdings' value caused by such trading activity.

Question 28

When an investor makes a purchase in a mutual fund scheme, how does the applicable Stamp Duty affect the unit allocation?

Accepted Answer

It is deducted from the investment amount, reducing the units allotted.. As per SEBI circular dated June 30, 2020, stamp duty is levied on mutual fund transactions. For purchases, the stamp duty is debited from the investment amount, meaning the actual amount available for unit allotment is reduced by the stamp duty amount, thereby reducing the number of units allotted.

Question 29

What is the maximum additional Total Expense Ratio (TER) that a mutual fund scheme can charge for new inflows from beyond 30 (B-30) cities, subject to certain conditions?

Accepted Answer

0.30%. SEBI permits an additional TER of up to 0.30% (of daily net assets) for new inflows from beyond 30 (B-30) cities. This is an incentive for AMCs to penetrate smaller cities, provided that the new inflows from B-30 cities are at least 30% of gross new inflows or 15% of the average assets under management (AAUM) of the scheme, whichever is higher.

Question 30

For an investment of ₹8,000 in a mutual fund scheme, what is the transaction charge applicable for a new investor investing through a distributor?

Accepted Answer

₹0. As per SEBI regulations, transaction charges are applicable only for purchases of ₹10,000 and above. For investments below ₹10,000, no transaction charges are levied. For new investors investing ₹10,000 or more, the charge is ₹150.

Question 31

What is the current status of entry loads charged by mutual funds in India?

Accepted Answer

Entry loads are prohibited for all mutual fund schemes.. Effective August 1, 2009, SEBI banned the charging of entry loads by all mutual fund schemes in India. Investors no longer pay any entry load when purchasing mutual fund units.

Question 32

Securities Transaction Tax (STT) is applicable on which of the following mutual fund transactions?

Accepted Answer

Redemption of units in an equity-oriented mutual fund scheme.. Securities Transaction Tax (STT) is currently applicable on the redemption of units in equity-oriented mutual fund schemes. It is not applicable on purchases or switches into equity funds, nor on any transactions in debt mutual funds. (Income Tax Act, 1961, Section 98 and relevant notifications).

Question 33

An investor redeems 1,000 units from a mutual fund scheme at an NAV of Rs. 25.00. The scheme has an exit load of 0.5% if units are redeemed within 180 days. If the investor redeems after 100 days, what is the net amount received by the investor?

Accepted Answer

Rs. 24,875. The total value of units redeemed is 1,000 units * Rs. 25.00/unit = Rs. 25,000. Since the redemption is within 180 days, an exit load of 0.5% is applicable. Exit load = 0.5% of Rs. 25,000 = Rs. 125. The net amount received by the investor is Rs. 25,000 - Rs. 125 = Rs. 24,875.

Question 34

An investor opts for dividend reinvestment in a growth option scheme. On the record date, the scheme declares a dividend of ₹2 per unit. If the NAV before dividend declaration was ₹50 and the investor held 100 units, what will be the approximate number of units held by the investor *immediately after* the dividend reinvestment, assuming the ex-dividend NAV is ₹48?

Accepted Answer

104.16 units.. Total dividend payable to the investor = Number of units * Dividend per unit = 100 units * ₹2/unit = ₹200. In a dividend reinvestment option, this dividend amount is used to purchase additional units at the ex-dividend NAV. Additional units purchased = Total dividend / Ex-dividend NAV = ₹200 / ₹48 = 4.1666... units. Total units after reinvestment = Original units + Additional units = 100 + 4.1666... = 104.16 units (approximately).

Question 35

What is the primary reason for charging an exit load in a mutual fund scheme?

Accepted Answer

To deter short-term redemptions and encourage long-term investing. Exit loads are primarily charged to discourage investors from redeeming their units too quickly, especially in equity funds, where frequent redemptions can disrupt portfolio management. It encourages a longer-term investment horizon.

Question 36

For equity-oriented schemes, what is the maximum permissible Total Expense Ratio (TER) for the first Rs. 500 crores of average weekly net assets as per SEBI regulations?

Accepted Answer

2.25%. As per SEBI regulations on TER, for equity-oriented schemes, the maximum permissible TER is 2.25% for the first Rs. 500 crores of average weekly net assets. The TER then decreases in a slab-wise manner for higher AUMs.

Question 37

Which of the following is typically NOT considered a liability when calculating the Net Asset Value (NAV) of a mutual fund scheme?

Accepted Answer

Unrealized gains on investments. Unrealized gains on investments are part of the scheme's assets, not its liabilities. Liabilities include all outstanding payables, accrued expenses, and provisions.

Question 38

A mutual fund scheme declares a dividend. How does this dividend declaration typically affect the scheme's Net Asset Value (NAV) on the record date?

Accepted Answer

The NAV decreases by the amount of the dividend declared.. When a mutual fund scheme declares a dividend, the amount of the dividend is paid out of the scheme's distributable surplus. On the record date, the NAV of the scheme is reduced by the dividend amount per unit, reflecting the payout to investors. This is similar to how a stock's price drops by the dividend amount on its ex-dividend date.

Question 39

If a mutual fund scheme declares a dividend, what is the immediate impact on its Net Asset Value (NAV) per unit?

Accepted Answer

NAV decreases by the dividend amount. When a mutual fund scheme declares a dividend, the dividend amount is paid out from the fund's assets. This reduces the total assets of the fund, and consequently, the NAV per unit drops by the exact amount of the dividend declared (ex-dividend NAV).

Question 40

For liquid and overnight mutual fund schemes, what is the cut-off time for receiving applications to be eligible for the same day's NAV, provided funds are realized and available for utilization on the same day?

Accepted Answer

1:00 PM. As per SEBI regulations, for liquid and overnight schemes, applications received up to 1:00 PM on a business day, and where funds are available for utilization on the same day, are eligible for the same day's NAV. For other schemes (equity, debt, etc.), the cut-off time is typically 3:00 PM.

Question 41

During the New Fund Offer (NFO) period, at what price are units of an open-ended mutual fund scheme typically offered to investors?

Accepted Answer

At a fixed price of INR 10 per unit.. During the NFO period, units of an open-ended mutual fund scheme are typically offered at their face value, which is usually INR 10 per unit. This is before the scheme begins investing and generating a fluctuating NAV based on market performance of its portfolio.

Question 42

An investor submits a purchase application for an equity-oriented mutual fund scheme worth ₹1,50,000 at 1:30 PM on a Tuesday. The funds are realized by the AMC's designated bank account at 3:30 PM on Wednesday. Assuming both days are business days and the cut-off time for non-liquid funds is 3:00 PM, which NAV will be applicable for this transaction?

Accepted Answer

Thursday's closing NAV.. For purchases in schemes other than liquid and overnight funds, if the application is received before the cut-off time (3:00 PM) but the funds are realized after the cut-off time or on a subsequent business day, the NAV of the business day on which the funds become available for utilization by the AMC will be applicable. Since funds were realized at 3:30 PM on Wednesday (after Wednesday's cut-off), they would be available for utilization on Thursday. Hence, Thursday's closing NAV will be applicable. (SEBI Circular SEBI/HO/IMD/DF2/CIR/P/2020/175 dated September 23, 2020).

Question 43

What is the additional expense ratio that AMCs are permitted to charge for inflows from beyond 30 (B30) cities, subject to certain conditions?

Accepted Answer

Up to 0.30% of daily net assets. SEBI allows AMCs to charge an additional expense ratio of up to 0.30% of daily net assets for new inflows from beyond 30 (B30) cities. This is subject to the condition that at least 30% of the new inflows come from B30 cities or 15% of the AUM is from B30 cities.

Question 44

What is the maximum permissible Total Expense Ratio (TER) for an equity-oriented Fund of Funds (FoF) scheme, *including* the expenses of the underlying schemes it invests in?

Accepted Answer

2.25%. As per SEBI (Mutual Funds) Regulations, for equity-oriented Fund of Funds (FoF) schemes, the total expense ratio (including the TER of the underlying schemes) shall not exceed 2.25%. For other FoFs, this limit is 2.00%. Additionally, the TER for the FoF scheme itself (excluding the expenses of the underlying schemes) shall not exceed 0.75%.

Question 45

How do accrued expenses, such as audit fees or trustee fees, impact the Net Asset Value (NAV) of a mutual fund scheme?

Accepted Answer

They reduce the NAV as they are treated as liabilities.. Accrued expenses are expenses incurred but not yet paid. They are recorded as liabilities in the fund's books. Since NAV is calculated as (Assets - Liabilities) / Units Outstanding, an increase in liabilities (accrued expenses) will reduce the NAV.

Question 46

Which of the following is considered an asset while calculating the Net Asset Value (NAV) of a mutual fund scheme?

Accepted Answer

Investments at market value. Investments held by the scheme, valued at their current market value, are the primary component of the scheme's assets. Accrued expenses and dividend payable are liabilities, while units allotted but not yet paid for would typically not be considered an asset until the funds are realized. The NAV is calculated as (Market value of investments + Other assets - Liabilities) / Number of outstanding units. (NISM V-A Study Material, Chapter 7, Components of NAV)

Question 47

What is the minimum frequency for Mutual Fund AMCs to disclose the Net Asset Value (NAV) for all their schemes?

Accepted Answer

Daily, for all business days.. As per SEBI regulations, Mutual Fund AMCs are required to declare the Net Asset Value (NAV) of their schemes on a daily basis for all business days. This ensures transparency and provides investors with up-to-date information on their investments.

Question 48

What is the maximum Total Expense Ratio (TER) allowed for an equity-oriented mutual fund scheme with an Average Assets Under Management (AAUM) exceeding ₹50,000 crores?

Accepted Answer

1.05%. SEBI regulations specify a tiered structure for TER limits. For equity schemes, the maximum TER for AUM exceeding ₹50,000 crores is 1.05%. The TER decreases as the AUM increases.

Question 49

As per SEBI regulations, what is the maximum Total Expense Ratio (TER) allowed for the portion of an equity-oriented mutual fund scheme's Average Assets Under Management (AAUM) that falls between INR 500 crores and INR 750 crores?

Accepted Answer

2.00%. For equity-oriented mutual fund schemes, SEBI prescribes a tiered structure for TER limits. For the first INR 500 crores of AAUM, the limit is 2.25%. For the next INR 250 crores (i.e., AAUM between INR 500 crores and INR 750 crores), the limit is 2.00%.

Question 50

An investor submits an application for an equity-oriented mutual fund scheme on a business day at 2:30 PM with a cheque. The cheque is realized and credited to the scheme's account the next business day at 10:00 AM. Which NAV will be applicable for this investment?

Accepted Answer

NAV of the next business day (when the funds were realized).. For equity-oriented schemes, if the application is received before the cut-off time (3:00 PM) but the funds are realized on the next business day, the NAV of the next business day (i.e., the day funds are realized) will be applicable. This rule applies regardless of the investment amount if the funds are not realized on the same day as the application.

Ch.7: Net Asset Value, Total Expense Ratio and Pricing of Units

What You Will Learn in This Chapter

Multiple Choice Questions (160)

Most candidates guess their way through V-A.
BullWiser makes you prove it.

Ch.7: Net Asset Value, Total Expense Ratio and Pricing of Units

What You Will Learn in This Chapter

Multiple Choice Questions (160)

Most candidates guess their way through V-A.BullWiser makes you prove it.

Most candidates guess their way through V-A.
BullWiser makes you prove it.