NISM Series V-D Ch.2: Concept & Role of a Mutual Fund — Practice Questions

Q: Which of the following is generally NOT considered an advantage of investing in mutual funds?

Guaranteed returns. Mutual funds invest in market-linked securities, and therefore, returns are subject to market risks and are not guaranteed. This is a fundamental principle and a key disclosure requirement for all mutual fund products.

Q: Which of the following is the primary benefit for small investors investing through a mutual fund, often difficult to achieve individually?

Professional diversification across various asset classes. Mutual funds allow small investors to achieve professional diversification across various asset classes, which would be challenging and costly to implement individually. This reduces unsystematic risk. Direct control and guaranteed returns are not features of mutual funds, and while liquidity is generally high, it's not always 'instant' for all underlying assets.

Multiple Choice Questions (25)

Q1MCQEasyAdvantages and Disadvantages of Mutual Funds

Which of the following is generally NOT considered an advantage of investing in mutual funds?

AProfessional fund management.

BDiversification of investments.

✓Guaranteed returns.

DLiquidity of investments.

💡 Mutual funds invest in market-linked securities, and therefore, returns are subject to market risks and are not guaranteed. This is a fundamental principle and a key disclosure requirement for all mutual fund products.

Q2MCQEasyAdvantages of Mutual Funds

Which of the following is the primary benefit for small investors investing through a mutual fund, often difficult to achieve individually?

ADirect control over stock selection.

BGuaranteed returns on investment.

CInstant liquidity for all underlying assets.

✓Professional diversification across various asset classes.

💡 Mutual funds allow small investors to achieve professional diversification across various asset classes, which would be challenging and costly to implement individually. This reduces unsystematic risk. Direct control and guaranteed returns are not features of mutual funds, and while liquidity is generally high, it's not always 'instant' for all underlying assets.

Q3MCQHardAMFI's Role

Which of the following is a key function of the Association of Mutual Funds in India (AMFI) related to distributor conduct?

AApproving the launch of new mutual fund schemes.

BIssuing the Asset Management Company (AMC) license.

✓Registering and issuing ARN (AMFI Registration Number) to mutual fund distributors.

DMandating the specific investment portfolio of mutual fund schemes.

💡 AMFI is responsible for registering and issuing the AMFI Registration Number (ARN) to mutual fund distributors, which is mandatory for them to sell mutual fund products in India. This ensures standardized conduct and accountability among distributors. SEBI approves scheme launches and issues AMC licenses, while investment portfolios are decided by the AMC within SEBI guidelines.

Q4MCQEasyBasic concept of Mutual Fund

What is the primary function of a mutual fund from an investor's perspective?

ATo provide direct loans to corporations.

✓To pool money from multiple investors and invest in a diversified portfolio.

CTo offer insurance coverage against market risks.

DTo act as a direct lender in the interbank market.

💡 A mutual fund primarily pools money from a large number of investors and invests it across a diversified portfolio of securities (e.g., stocks, bonds, money market instruments), managed by professional fund managers. This allows investors to achieve diversification and professional management with smaller investment amounts.

Q5MCQHardConcept of Mutual Fund Trust and Scheme

In the context of a mutual fund in India, what accurately describes the relationship between a 'Mutual Fund Trust' and a 'Mutual Fund Scheme'?

AA Mutual Fund Trust can only launch a single Mutual Fund Scheme throughout its existence.

BA Mutual Fund Scheme is a separate legal entity that operates independently of the Mutual Fund Trust.

✓The Mutual Fund Trust is the legal entity, and a Mutual Fund Scheme is a specific investment plan or product operating under that Trust.

DA Mutual Fund Scheme directly appoints the Board of Trustees to oversee its day-to-day operations.

💡 In India, a mutual fund is constituted as a Trust, which is the legal entity. This Trust, through its AMC, can launch multiple 'Mutual Fund Schemes' (e.g., an equity fund, a debt fund, a balanced fund, etc.). Each scheme represents a distinct investment objective and portfolio, but all schemes operate under the umbrella and legal framework of the single Mutual Fund Trust. The Sponsor establishes the Trust and appoints Trustees, not the scheme.

Q6MCQEasyDefinition of Mutual Fund

A mutual fund primarily pools money from various investors to invest in which of the following?

ASolely in real estate properties for rental income.

✓A diversified portfolio of various securities like stocks, bonds, and money market instruments.

CExclusive private equity ventures and unlisted companies.

DOnly in the shares of a single large-cap company.

💡 A mutual fund is a professionally managed investment vehicle that pools money from multiple investors to invest in a diversified portfolio of securities such as stocks, bonds, money market instruments, and other assets, aiming to achieve specific investment objectives.

Q7MCQMediumDisadvantages of Mutual Funds / Role of Regulation

Despite being highly regulated by SEBI, mutual funds are inherently subject to which of the following risks that cannot be eliminated by regulation?

AOperational risk due to human error or system failures.

✓Market risk associated with the underlying securities.

CLiquidity risk for specific unlisted assets held by the fund.

DRegulatory non-compliance risk by the Asset Management Company (AMC).

💡 SEBI regulations aim to mitigate operational risks, ensure compliance, and manage liquidity, but they cannot eliminate market risk. Market risk (or systematic risk) is inherent in all investments in financial markets and is beyond the control of any regulation or fund management.

Q8MCQMediumDisadvantages/Risks of Mutual Funds

Which of the following represents a fundamental risk or disadvantage associated with investing in a mutual fund?

ALack of diversification across assets

BGuaranteed fixed returns on investment

✓Exposure to market risk and no guarantee of capital preservation

DExtremely high minimum investment requirement for all funds

💡 Mutual funds are subject to market risks, meaning the value of investments can fluctuate with market conditions. Unlike fixed deposits, mutual funds do not offer guaranteed returns, and investors may lose money. While diversification helps mitigate risks, it does not eliminate market risk or guarantee capital preservation.

Q9MCQHardEligibility criteria for Sponsor

As per SEBI (Mutual Funds) Regulations, 1996, for a sponsor to be eligible to establish a mutual fund, it must have a sound financial track record, including having a positive net worth for at least the immediately preceding _____ years.

ATwo

BThree

CFour

✓Five

💡 SEBI (Mutual Funds) Regulations, 1996, Chapter II, Regulation 7(b), specifies that a sponsor must have a sound track record and general reputation of fairness and integrity, and its net worth must be positive for the immediately preceding five years.

Q10MCQEasyIntroduction to Mutual Funds and SEBI's Role

Which of the following statements best describes a key difference in the typical investment focus between a mutual fund and a Collective Investment Scheme (CIS) in India, both regulated by SEBI?

AMutual funds primarily invest in real estate, while CIS invest in equities.

✓Mutual funds invest in capital market instruments, while CIS typically invest in real estate or agriculture.

CMutual funds are regulated by AMFI, while CIS are regulated by SEBI.

DMutual funds offer guaranteed returns, while CIS do not.

💡 While both are collective investment vehicles regulated by SEBI, mutual funds (under SEBI (Mutual Funds) Regulations, 1996) specifically invest in capital market instruments like stocks, bonds, and money market instruments. Collective Investment Schemes (CIS), under SEBI (Collective Investment Schemes) Regulations, 1999, typically focus on assets like real estate, plantation schemes, or agriculture. Neither offers guaranteed returns, and both are regulated by SEBI.

Q11MCQEasyKey Constituents and their Roles - Trustee

The primary duty of the Board of Trustees of a mutual fund is to act in the best interests of the:

ASponsor

BAsset Management Company

✓Unit holders

DCustodian

💡 The Board of Trustees acts as a fiduciary and holds the assets of the mutual fund in trust for the benefit of the unit holders. Their primary responsibility is to protect the interests of the unit holders.

Q12MCQMediumKey Participants and their Roles - Custodian

Which of the following statements most accurately describes the primary role of a Custodian in the mutual fund structure?

ATo make investment decisions and manage the fund's portfolio of securities.

BTo maintain records of unitholders and process their transactions like purchases and redemptions.

✓To hold the securities and other assets of the fund in safe custody and facilitate their transfer and settlement.

DTo provide personalized investment advice to individual unitholders.

💡 The primary role of the Custodian is to hold the securities and other assets of the mutual fund in safe custody, ensuring their physical safety and facilitating the settlement of transactions (buying and selling of securities) on behalf of the fund. The AMC manages investments, and the RTA handles unitholder records.

Q13MCQEasyLegal Structure of Mutual Funds

What is the most common legal structure mandated for mutual funds in India as per SEBI (Mutual Funds) Regulations, 1996?

AA company registered under the Companies Act, 2013

BA partnership firm registered under the Indian Partnership Act, 1932

✓A trust registered under the Indian Trusts Act, 1882

DA cooperative society registered under the Cooperative Societies Act

💡 As per SEBI (Mutual Funds) Regulations, 1996, a mutual fund must be constituted in the form of a trust under the Indian Trusts Act, 1882. This structure ensures that the assets are held by trustees for the benefit of the unitholders.

Q14MCQMediumParticipants in a Mutual Fund - Registrar and Transfer Agent

Beyond maintaining investor records, what is another crucial function performed by the Registrar and Transfer Agent (R&T Agent) for a mutual fund?

AExecuting buy/sell orders on the stock exchange.

BCalculating the Net Asset Value (NAV) of the schemes.

✓Processing dividend payouts and redemption proceeds to unit holders.

DAppointing the fund's auditors.

💡 The Registrar and Transfer Agent (R&T Agent) is responsible for a wide range of investor servicing functions, which include processing dividend payouts, handling redemption requests, and dispatching redemption proceeds to unit holders, in addition to maintaining accurate investor records.

Q15MCQEasyRegulation of Mutual Funds

Which regulatory body is primarily responsible for framing and enforcing regulations governing the establishment and operations of mutual funds in India?

AReserve Bank of India (RBI)

BMinistry of Finance, Government of India

✓Securities and Exchange Board of India (SEBI)

DAssociation of Mutual Funds in India (AMFI)

💡 The Securities and Exchange Board of India (SEBI) is the apex regulatory body for the securities market in India. It is responsible for framing and enforcing the SEBI (Mutual Funds) Regulations, 1996, which govern all aspects of mutual fund operations, including their establishment, management, and investor protection.

Q16MCQHardRegulatory Framework

Which specific set of regulations primarily governs the establishment, operation, and disclosure norms for mutual funds in India?

ASEBI (Issue of Capital and Disclosure Requirements) Regulations, 2018

BSEBI (Portfolio Managers) Regulations, 1993

✓SEBI (Mutual Funds) Regulations, 1996

DSEBI (Investment Advisers) Regulations, 2013

💡 The SEBI (Mutual Funds) Regulations, 1996, is the comprehensive legal framework that governs all aspects of mutual funds in India, from their structure and responsibilities of key entities to their operational conduct and investor protection.

Q17MCQHardRegulatory requirements for AMC

According to SEBI (Mutual Funds) Regulations, 1996, what is the minimum net worth requirement for an Asset Management Company (AMC) at all times?

A₹25 crore

✓₹50 crore

C₹100 crore

D₹5 crore

💡 As per SEBI (Mutual Funds) Regulations, 1996, the Asset Management Company (AMC) must have a minimum net worth of not less than ₹50 crore at all times. This ensures the financial stability of the entity responsible for managing the fund (Chapter III, Regulation 21(f)).

Q18MCQHardRelationship between AMC and Custodian

Which of the following statements accurately describes the relationship between a mutual fund's Asset Management Company (AMC) and its Custodian?

AThe AMC is solely responsible for custody of the fund's assets.

BThe Custodian is appointed by the AMC and reports directly to it.

✓The Custodian acts independently of the AMC, appointed by the Trustees, to hold the securities and assets of the fund.

DThe Custodian also manages the investment decisions of the fund alongside the AMC.

💡 The Custodian is appointed by the Trustees (with SEBI approval) and operates independently of the AMC. Its role is to hold the securities and assets of the mutual fund in safekeeping, ensuring segregation from the AMC's own assets and providing an additional layer of investor protection, as per Chapter III, Regulation 26 of SEBI (Mutual Funds) Regulations, 1996.

Q19MCQMediumRole of Sponsor and Eligibility Criteria

As per SEBI (Mutual Funds) Regulations, 1996, what is one of the key eligibility criteria for an entity to act as a Sponsor for a mutual fund?

AThe Sponsor must have a minimum net worth of INR 50 crore for the immediately preceding financial year.

BThe Sponsor must have a positive net worth in all immediately preceding five financial years.

✓The Sponsor must have a sound track record and general reputation of fairness and integrity, including profitability in at least three of the immediately preceding five years.

DThe Sponsor must have been actively involved in the financial services sector for a minimum period of 10 years.

💡 SEBI (Mutual Funds) Regulations, 1996, specify that a Sponsor must have a sound track record and general reputation of fairness and integrity. A key financial criterion is that the Sponsor must have profitability in at least three of the immediately preceding five years, including the immediately preceding year. A minimum net worth of INR 50 crore is typically an AMC requirement, not the sponsor's direct eligibility for initiating the trust.

Q20MCQHardRoles of Constituents (AMC vs. RTA)

Beyond managing the investment portfolio, the Asset Management Company (AMC) also has responsibilities towards unit holders. Which of the following is NOT a direct responsibility of the AMC, but rather falls under a different constituent or outsourced entity?

AEnsuring compliance with SEBI (Mutual Funds) Regulations.

BAppointing the Custodian and Registrar & Transfer Agent (RTA).

✓Maintaining unit holder records and processing redemption requests.

DFormulating new scheme offers and launching them.

💡 Maintaining unit holder records and processing transactions like subscriptions, redemptions, and switches is the primary responsibility of the Registrar and Transfer Agent (RTA), which is appointed by the AMC. While the AMC oversees the RTA, it is not the AMC's direct function. The other options are direct responsibilities of the AMC.

Q21MCQHardSEBI (Mutual Funds) Regulations, 1996 - Specific requirements

According to SEBI (Mutual Funds) Regulations, 1996, what is the minimum net worth requirement for an Asset Management Company (AMC) at all times?

A₹5 crore

B₹10 crore

C₹25 crore

✓₹50 crore

💡 As per SEBI (Mutual Funds) Regulations, 1996, an Asset Management Company (AMC) is required to have a minimum net worth of ₹50 crore at all times. This ensures financial stability and capability to manage investor funds effectively.

Q22MCQHardSEBI Regulations for AMCs

As per SEBI (Mutual Funds) Regulations, 1996, what is the minimum net worth requirement for an Asset Management Company (AMC) to be eligible to manage a mutual fund?

A₹10 crore

B₹25 crore

✓₹50 crore

D₹100 crore

💡 As per SEBI (Mutual Funds) Regulations, 1996, Regulation 15(2)(f), an Asset Management Company (AMC) must have a minimum net worth of ₹50 crore at all times. This ensures the financial soundness and stability of the entity managing investor funds.

Q23MCQMediumStructure and Role of Constituents - Custodian

Which of the following entities in a mutual fund structure is responsible for holding the securities and other assets of the various schemes in safekeeping?

AAsset Management Company (AMC)

BTrustee

CRegistrar and Transfer Agent (RTA)

✓Custodian

💡 As per SEBI (Mutual Funds) Regulations, 1996, the Custodian is an independent entity responsible for the safekeeping of the securities and other assets of the mutual fund schemes. The AMC manages investments, Trustees oversee the AMC, and RTA handles investor records.

Q24MCQEasyStructure of a Mutual Fund - Custodian

Which entity in the mutual fund structure is primarily responsible for the safekeeping of the securities and other assets of the mutual fund scheme?

AAsset Management Company (AMC)

BSponsor

✓Custodian

DRegistrar and Transfer Agent (RTA)

💡 The Custodian is responsible for the physical custody and safekeeping of the mutual fund's assets (securities, gold, etc.). The AMC manages the investments, the Sponsor establishes the fund, and the RTA handles investor records.

Q25MCQMediumTypes of Mutual Fund Structures - Interval Funds

Which type of mutual fund scheme combines features of both open-ended and close-ended schemes, allowing subscriptions and redemptions only during pre-specified transaction intervals?

AOpen-ended fund

BClose-ended fund

✓Interval fund

DExchange Traded Fund (ETF)

💡 Interval funds are a hybrid structure. They are open for subscriptions and redemptions only during pre-specified transaction periods (intervals), similar to a close-ended fund in terms of limited liquidity, but they can issue new units or redeem existing ones during these intervals, unlike a purely close-ended fund which only trades on exchanges after NFO.

About this content: These practice questions are based on the NISM-Series-VD: Mutual Fund - Specialised Investment Fund Distributors Certification Examination Workbook published by the National Institute of Securities Markets (NISM), Mumbai (March 2026 edition). NISM is a SEBI-established institution. Questions cover Chapter 2: Concept & Role of a Mutual Fund with verified answers and explanations. BullWiser is an independent exam preparation platform — not affiliated with NISM, SEBI or AMFI. Last updated: July 24, 2026.

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Ch.2: Concept & Role of a Mutual Fund

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Multiple Choice Questions (25)

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