Chapter 2 — All 120 Questions
Q1MediumRole of Registrar and Transfer Agent (RTA)
Which entity within the mutual fund structure is primarily responsible for processing investor applications, redemptions, switches, maintaining investor records, and dispatching statements of account?
AThe Asset Management Company (AMC)
BThe Board of Trustees
✓The Registrar and Transfer Agent (RTA)
DThe Custodian
💡 The Registrar and Transfer Agent (RTA) is responsible for all investor-facing administrative functions, including processing transactions (purchases, redemptions, switches), maintaining a complete record of unit holders, and sending out account statements and other communications to investors.
Q2HardDisadvantages of Mutual Funds
A key disadvantage of investing in mutual funds, particularly for an investor who prefers to actively select individual securities, is that:
AMutual funds generally offer lower returns than bank fixed deposits.
✓Investors have no direct control over the specific securities bought or sold by the fund manager.
CAll mutual funds are subject to lock-in periods, restricting liquidity.
DMutual funds are not regulated by any financial authority in India.
💡 While mutual funds offer professional management, investors delegate investment decisions to the fund manager and therefore lose direct control over individual stock/bond selections, unlike direct equity or bond investing. Options A, C, and D are incorrect as mutual funds can offer higher returns (though subject to market risk), many are open-ended and offer high liquidity, and they are strictly regulated by SEBI.
Q3EasyConcept of Mutual Fund - Pooling
What is the primary benefit for a large number of small investors when their money is 'pooled' together in a mutual fund?
AIt guarantees a fixed rate of return on their investments.
BIt allows each investor to have direct control over individual stock selection.
✓It provides access to professional fund management and diversification that might otherwise be unavailable to them.
DIt eliminates all market risks associated with equity investments.
💡 Pooling money in a mutual fund allows small investors to collectively gain access to professional fund management expertise and achieve diversification across various asset classes or securities, which would be difficult or expensive to achieve individually. It does not guarantee returns or eliminate market risk, nor does it provide direct control over individual stock selection.
Q4MediumStructure of Mutual Funds - Sponsor's Role
What is the minimum net worth a sponsor of a mutual fund must have for at least 5 years preceding the application to SEBI?
A₹50 crore
✓₹100 crore
C₹25 crore
D₹75 crore
💡 As per SEBI (Mutual Funds) Regulations, 1996, a sponsor must have a sound track record and a minimum net worth of ₹100 crore for at least 5 years preceding the application to SEBI for establishing a mutual fund.
Q5MediumDisadvantages of Mutual Funds
Which of the following is considered a potential disadvantage of investing in mutual funds, particularly if not chosen carefully?
ALack of professional management.
BGuaranteed returns.
✓Over-diversification leading to diluted returns.
DHigh illiquidity compared to direct equity.
💡 While diversification is generally an advantage, excessive diversification (over-diversification) in a mutual fund can sometimes dilute the potential high returns from a few stellar performers, leading to returns that closely track the market average rather than significantly outperforming it. Mutual funds offer professional management (not lack thereof), do not guarantee returns, and generally offer high liquidity (especially open-ended schemes).
Q6EasyKey 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.
Q7MediumDisadvantages of Mutual Funds
While mutual funds offer professional management, one inherent aspect that investors give up by investing in them, compared to direct stock investments, is:
AThe benefit of diversification across various asset classes.
✓The ability to choose specific individual securities for investment.
CThe option to redeem their investments at Net Asset Value (NAV).
DProtection from market volatility and capital loss.
💡 When investing in a mutual fund, investors delegate investment decisions to the fund manager and thus do not have direct control over the selection of individual stocks or bonds in the portfolio. Diversification and redemption at NAV are advantages, and protection from market volatility is not guaranteed.
Q8EasyAdvantages of Mutual Funds
Which of the following advantages of mutual funds primarily enables investors with relatively small sums of money to gain access to a professionally managed and diversified portfolio?
AHigh liquidity
BProfessional management
✓Affordability and convenience
DRegulatory oversight by SEBI
💡 Affordability and convenience is a key advantage of mutual funds, allowing investors to start with small amounts (e.g., via SIPs) and access a diversified portfolio that would otherwise be out of reach for individual small investors. While professional management is also a benefit, affordability specifically addresses the entry barrier for small sums.
Q9HardRegulatory Framework - Role of AMFI
Which of the following is a specific initiative undertaken by the Association of Mutual Funds in India (AMFI) to promote transparency and ethical practices among mutual fund distributors?
ADirectly regulating mutual funds and their operations.
BMandating the minimum Net Asset Value (NAV) for all mutual fund schemes.
✓Issuing Unique Employee Identification Numbers (EUINs) to individual distributors and employees of distribution companies.
DApproving all new mutual fund scheme launches before they are filed with SEBI.
💡 AMFI plays a crucial role in promoting ethical conduct and investor awareness. The issuance of EUINs (Employee Unique Identification Numbers) is a key AMFI initiative, mandated by SEBI through AMFI, to ensure that the advice provided by distributors can be tracked to a specific individual, thereby increasing accountability and transparency in distribution practices.
Q10EasyDefinition 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.
Q11MediumStructure 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.
Q12MediumTypes of Mutual Fund Products
An 'Interval Fund' is a type of mutual fund scheme that combines features of both open-ended and close-ended schemes. Which of the following best describes its key characteristic?
AIt allows subscriptions and redemptions only on a continuous basis, like an open-ended fund.
BIt has a fixed maturity period and its units are always traded on a stock exchange, like a close-ended fund.
✓It allows subscriptions and redemptions only during pre-specified transaction periods at NAV-related prices.
DIt invests solely in money market instruments for short durations.
💡 Interval funds permit subscriptions and redemptions only during specific, pre-determined intervals at prices related to the Net Asset Value (NAV). This makes them distinct from both continuous open-ended funds and exchange-traded close-ended funds.
Q13HardRole of Various Entities
In the structure of a mutual fund, which independent entity is primarily responsible for the safekeeping of the fund's securities and other assets?
AThe Sponsor
BThe Asset Management Company (AMC)
✓The Custodian
DThe Registrar and Transfer Agent (RTA)
💡 As per SEBI (Mutual Funds) Regulations, 1996, the Custodian is an independent entity appointed by the Board of Trustees (with SEBI's approval) whose primary role is the physical safekeeping of the securities and other assets of the mutual fund schemes. This segregation of duties enhances investor protection.
Q14MediumDisadvantages of Mutual Funds - Costs
Which of the following is NOT typically considered a direct component of the expense ratio charged by a mutual fund to its investors?
AFund management fees.
BTrustee fees.
CBrokerage and transaction costs related to portfolio trades.
✓Income tax on capital gains realized by the individual investor.
💡 The expense ratio includes various operational costs such as fund management fees, trustee fees, registrar and transfer agent fees, audit fees, and brokerage/transaction costs incurred by the fund. Income tax on capital gains is a personal tax liability of the individual investor, not a direct expense charged within the fund's expense ratio.
Q15HardStructure of Mutual Funds - Trustee's Fiduciary Duty
The Trustees of a mutual fund are mandated to act in a 'fiduciary capacity' towards the unitholders. This implies that their primary obligation is to:
AEnsure the Asset Management Company (AMC) maximizes its revenue and market share.
BApprove all marketing and advertising campaigns before they are released to the public.
✓Exercise utmost loyalty, care, and good faith, prioritizing the interests of the unitholders above all other considerations.
DGuarantee a minimum return on investment for all mutual fund schemes.
💡 A fiduciary duty means that the Trustees have a legal and ethical obligation to act solely in the best interests of the unitholders. This involves exercising diligence, care, and loyalty, and ensuring that all decisions and actions are taken with the unitholders' welfare as the paramount consideration. (SEBI (Mutual Funds) Regulations, 1996, Fourth Schedule, Part I, Clause 2)
Q16EasyStructure of a Mutual Fund - Sponsor's Role
As per SEBI (Mutual Funds) Regulations, 1996, what is the minimum percentage of the Asset Management Company (AMC)'s net worth that the sponsor(s) must contribute?
💡 Regulation 7 of SEBI (Mutual Funds) Regulations, 1996, mandates that the sponsor(s) must have a sound track record and contribute at least 40% of the net worth of the Asset Management Company (AMC).
Q17HardStructure of a Mutual Fund - Custodian's Role
Which of the following best describes the primary role of the Custodian in the mutual fund structure?
ATo maintain investor records and process transaction requests like purchases and redemptions.
BTo manage the investment portfolio and make investment decisions.
✓To hold the fund's securities and assets in safe custody and ensure their segregation.
DTo ensure compliance with SEBI regulations and review the AMC's operations.
💡 The Custodian's primary role is the safekeeping of the mutual fund's assets and securities. This includes holding securities, collecting dividends/interest, and ensuring the segregation of the fund's assets from the AMC's assets. Maintaining investor records is the RTA's role, managing investments is the AMC's role, and ensuring compliance/reviewing AMC is the Trustee's role.
Q18HardAMFI'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.
Q19EasyRole of Trustees
The primary responsibility of the Board of Trustees in a mutual fund structure is to:
AManage the day-to-day investment operations of the fund.
BEnsure the safekeeping of the fund's physical assets.
✓Act in the best interests of the unit holders and ensure compliance.
DMarket and distribute the mutual fund schemes.
💡 The Board of Trustees holds the assets of the mutual fund in trust for the benefit of the unit holders. Their primary role is to protect the interests of the unit holders and ensure that the Asset Management Company (AMC) and the fund operate in accordance with the Trust Deed and SEBI (Mutual Funds) Regulations.
Q20MediumDisadvantages/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.
Q21MediumParticipants 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.
Q22MediumStructure of Mutual Funds - Trustees
As per SEBI (Mutual Funds) Regulations, 1996, what proportion of the board of trustees of a mutual fund must be independent trustees?
AAt least one-third.
BAt least one-half.
✓At least two-thirds.
DAll trustees must be independent.
💡 As per SEBI (Mutual Funds) Regulations, 1996, at least two-thirds of the trustees of a mutual fund must be independent trustees. This ensures independence and protection of unitholder interests from the sponsor or its associates.
Q23MediumStructure of a Mutual Fund - Trustee Board Composition
As per SEBI (Mutual Funds) Regulations, 1996, what is the minimum proportion of independent trustees required on the board of trustees of a mutual fund?
AAt least one-third of the board members.
BAt least half of the board members.
✓At least two-thirds of the board members.
DAll board members must be independent.
💡 SEBI (Mutual Funds) Regulations, 1996, mandate that at least two-thirds of the trustees on the board of trustees must be independent persons to ensure unbiased decision-making and protection of unitholders' interests.
Q24MediumTypes of Mutual Fund Structures - Liquidity
An investor wants to invest in a mutual fund scheme where they can buy and sell units on any business day at the prevailing Net Asset Value (NAV). Which type of mutual fund structure primarily offers this feature?
AClose-ended fund
BInterval fund
✓Open-ended fund
DExchange Traded Fund (ETF)
💡 Open-ended funds offer continuous liquidity by allowing investors to subscribe to and redeem units directly with the fund on any business day at the NAV. Close-ended funds trade on exchanges, interval funds open for transactions only during specified intervals, and ETFs trade on exchanges like stocks.
Q25HardStructure of a Mutual Fund - AMC Requirements
As per SEBI (Mutual Funds) Regulations, 1996, what is the minimum net worth an Asset Management Company (AMC) is required to maintain at all times?
A₹10 crore
B₹25 crore
✓₹50 crore
D₹100 crore
💡 SEBI (Mutual Funds) Regulations, 1996, stipulate that an Asset Management Company (AMC) must have a minimum net worth of ₹50 crore at all times to ensure its financial stability and capacity to manage investor funds effectively.
Q26EasyAdvantages of Mutual Funds
For a small investor, what is the primary advantage offered by mutual funds that would otherwise be difficult to achieve independently with limited capital?
AGuaranteed returns on investment.
✓Access to professional fund management and diversification across various securities.
CComplete control over individual stock selection.
DExemption from all capital gains taxes.
💡 Mutual funds pool money from many investors, allowing even small investors to gain access to a professionally managed and diversified portfolio of securities, which would be challenging to build with limited individual capital. Returns are not guaranteed, investors do not have direct control over stock selection, and only specific tax benefits exist, not full exemption.
Q27EasyConcept of Mutual Funds
A mutual fund primarily functions as an investment vehicle that:
AGuarantees fixed returns on investments similar to bank deposits.
✓Pools money from multiple investors to invest in a diversified portfolio of securities.
CAllows direct trading in individual stocks without any intermediary.
DOffers insurance coverage along with investment growth.
💡 The core concept of a mutual fund is to pool money from numerous investors and collectively invest it in a diversified portfolio of securities (like stocks, bonds, money market instruments) based on a stated investment objective. This provides professional management and diversification.
Q28HardRegulatory Framework and AMC Requirements
As per SEBI (Mutual Funds) Regulations, 1996, what is the minimum net worth requirement for an Asset Management Company (AMC) at all times?
A₹10 crore
B₹25 crore
✓₹50 crore
D₹100 crore
💡 Regulation 21(f) of SEBI (Mutual Funds) Regulations, 1996, mandates that an Asset Management Company (AMC) must have a minimum net worth of not less than ₹50 crore at all times. This ensures financial stability and capability to manage investor funds.
Q29MediumLegal Structure of a Mutual Fund
In India, a mutual fund is constituted in which legal form?
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 Co-operative Society registered under the Co-operative Societies Act, 1912.
💡 As per SEBI (Mutual Funds) Regulations, 1996, a mutual fund in India is established as a 'Trust' under the Indian Trusts Act, 1882. This trust is then managed by a Board of Trustees for the benefit of the unitholders.
Q30EasyAdvantages of Mutual Funds
Which advantage of mutual funds specifically addresses the ability of small investors to invest in a diversified portfolio of high-value securities that would otherwise be inaccessible?
AProfessional Management
BLiquidity
✓Affordability and Small Ticket Size
DTransparency
💡 Affordability and small ticket size is a key advantage of mutual funds, allowing investors with modest capital to gain exposure to a diversified portfolio of securities by pooling their money with others. This provides access to investments that might be too expensive or complex to purchase individually.
Q31HardStructure of Mutual Funds - Role of Trustees
The structure of a mutual fund in India is mandated to be set up as a 'Trust'. Who among the following is primarily responsible for holding the assets of the mutual fund on behalf of the unitholders and ensuring compliance with regulations?
AThe Sponsor.
BThe Asset Management Company (AMC).
✓The Board of Trustees.
DThe Custodian.
💡 The mutual fund is structured as a trust, and the Board of Trustees holds the assets of the fund for the benefit of the unitholders. They are the fiduciaries responsible for protecting unitholder interests and ensuring the AMC operates within the regulations and the fund's objectives. While the Custodian physically safeguards the assets, the legal ownership and oversight responsibility rest with the Trustees.
Q32MediumStructure and Role of Trustees
Which of the following best describes the primary responsibility of the Trustees of a mutual fund, beyond holding the assets of the fund in trust for the unitholders?
AManaging the day-to-day investment decisions of the schemes.
BMarketing and selling the mutual fund schemes to investors.
✓Ensuring the Asset Management Company (AMC) acts in the best interest of unitholders and in accordance with SEBI Regulations.
DCalculating and declaring the Net Asset Value (NAV) of the schemes.
💡 The Trustees are the guardians of the unitholders' interests. Their primary responsibility is to oversee the operations of the AMC and ensure that it acts in the best interest of the unitholders and in compliance with the SEBI (Mutual Funds) Regulations, 1996, and the trust deed. They do not manage investments, market schemes, or calculate NAV.
Q33EasyConcept of Mutual Fund
What is the primary mechanism through which a mutual fund allows investors to participate in a diversified portfolio?
ADirect investment into individual stocks by the investor
BLending money to the fund manager directly
✓Pooling money from multiple investors to invest collectively
DIssuing bonds to the public to raise capital
💡 Mutual funds operate on the principle of pooling money from a large number of investors, which is then collectively invested in a diversified portfolio of securities. This allows individual investors to access diversification and professional management with smaller investment amounts.
Q34MediumRole of Trustees
Which of the following is the primary responsibility of the Board of Trustees of a mutual fund?
AManaging the investment portfolio of the scheme.
BMarketing and distributing mutual fund units.
✓Safeguarding the interests of the unitholders.
DMaintaining the books of accounts for the schemes.
💡 The Board of Trustees acts as a guardian of the unitholders' money and has a fiduciary responsibility to ensure that the AMC operates in the best interest of the unitholders and in accordance with the trust deed and SEBI regulations. This is outlined in Chapter III, Regulation 18 of SEBI (Mutual Funds) Regulations, 1996.
Q35MediumRegulatory Framework - Investor Protection
SEBI (Mutual Funds) Regulations, 1996, impose limits on the Total Expense Ratio (TER) that can be charged by a mutual fund scheme. This regulatory measure is primarily intended to:
AIncrease the revenue for mutual fund distributors.
BEnsure that Asset Management Companies (AMCs) achieve higher profit margins.
✓Protect investors from excessive costs and ensure that a larger portion of their investment contributes to returns.
DEncourage mutual funds to invest more in high-risk, high-return assets.
💡 SEBI's regulation of the Total Expense Ratio (TER) is a key investor protection measure. By capping the expenses, SEBI aims to ensure that investors are not burdened with disproportionately high costs, thereby maximizing the potential for their investments to generate fair returns. (SEBI (Mutual Funds) Regulations, 1996, Chapter VI, Regulation 52)
Q36MediumDisadvantages of Mutual Funds
Which of the following describes a key disadvantage of investing in a mutual fund compared to direct stock investing?
ALack of diversification, leading to higher idiosyncratic risk.
✓Inability to monitor individual stock performance directly or influence specific buy/sell decisions.
CGuaranteed lower returns than a carefully selected individual stock portfolio.
DHigher transaction costs for small investment amounts compared to direct investing.
💡 In a mutual fund, investors pool money, and a professional fund manager makes investment decisions. Consequently, individual investors do not have direct control over or the ability to monitor the performance of specific stocks within the fund's portfolio, nor can they influence individual buy/sell decisions. Diversification is typically an advantage, and returns are not guaranteed to be lower.
Q37HardStructure of Mutual Funds - AMC Requirements
What is the minimum net worth requirement for an Asset Management Company (AMC) as per SEBI (Mutual Funds) Regulations, 1996, at all times?
A₹10 crore.
B₹25 crore.
✓₹50 crore.
D₹100 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 the financial stability and capability of the AMC to manage investor funds effectively.
Q38EasyAdvantages of Mutual Funds - Diversification
One of the key advantages of investing in a mutual fund is 'diversification'. What does this primarily mean for an investor?
AThe ability to invest in only one type of asset.
✓Spreading investments across various securities and sectors to reduce risk.
CGuaranteeing higher returns compared to direct equity.
DThe option to withdraw money instantly without any charges.
💡 Diversification in mutual funds means spreading investments across a wide range of securities (e.g., different stocks, bonds, industries, and asset classes). This strategy aims to reduce the overall risk of the portfolio, as the poor performance of one security or sector may be offset by the better performance of others.
Q39MediumStructure and Role of Sponsor
As per SEBI (Mutual Funds) Regulations, 1996, what is the minimum net worth required for a sponsor to be eligible to establish a mutual fund in India, for each of the immediately preceding five years?
A₹20 crores
✓₹50 crores
C₹100 crores
D₹200 crores
💡 According to SEBI (Mutual Funds) Regulations, 1996, a sponsor must have a sound track record and a minimum net worth of not less than ₹50 crores for each of the immediately preceding five years, including the period of application.
Q40HardRole of Trustees and Regulatory Compliance
The Trustees of a mutual fund are mandated to inform SEBI about any change in the controlling interest of the Asset Management Company (AMC). What is the stipulated timeframe for this intimation?
AWithin 7 days of such a change
✓Within 15 days of such a change
CWithin 30 days of such a change
DWithin 45 days of such a change
💡 As per SEBI (Mutual Funds) Regulations, 1996, the Trustees are required to inform SEBI of any change in the controlling interest of the AMC within 15 days of such a change. This ensures regulatory oversight and transparency in the ownership structure of the AMC.
Q41HardSEBI (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.
Q42MediumStructure and Role of Constituents - Trustee
In the mutual fund structure, which entity is primarily tasked with ensuring that the Asset Management Company (AMC) operates in the best interest of the unitholders and in accordance with the trust deed and SEBI regulations?
AThe Sponsor
BThe Auditor
✓The Board of Trustees
DThe Registrar and Transfer Agent (RTA)
💡 The Board of Trustees (or Trustee Company) holds the assets of the mutual fund in trust for the unitholders. Their primary responsibility is to oversee the operations of the AMC, ensuring compliance with SEBI regulations and the trust deed, always acting in the unitholders' best interest.
Q43MediumDisadvantages of Mutual Funds - Over-diversification
Which of the following scenarios best describes 'over-diversification' as a potential disadvantage of mutual funds?
AA fund manager investing only in a single sector or industry.
✓A fund holding an excessive number of securities, causing its performance to closely mirror the overall market.
CAn investor spreading their investments across too many different mutual fund schemes from various AMCs.
DA fund investing only in a very limited number of high-conviction stocks.
💡 Over-diversification within a mutual fund occurs when the fund holds an excessively large number of securities. This can lead to a situation where the fund's performance closely tracks the broader market, making it difficult for the fund manager to add value (generate alpha) and potentially negating the benefits of active management.
Q44HardRegulatory 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)).
Q45EasyStructure of a Mutual Fund - Sponsor
In the structure of an Indian mutual fund, which entity is primarily responsible for establishing the mutual fund and contributing the initial capital to the Trustee for the fund's operations?
AAsset Management Company (AMC)
BCustodian
✓Sponsor
DRegistrar and Transfer Agent (RTA)
💡 The Sponsor is the entity that establishes the mutual fund and contributes the initial capital to the Trustee. The AMC manages the fund's investments, the Custodian holds the assets, and the RTA handles unit holder records.
Q46MediumDisadvantages/Risks of Mutual Funds
Which of the following statements accurately describes a fundamental risk associated with mutual fund investments?
AMutual funds guarantee capital protection and assured returns.
BMutual funds are immune to market volatility due to diversification.
✓The Net Asset Value (NAV) of mutual fund units can fluctuate based on the performance of the underlying securities.
DMutual funds offer unlimited liquidity at any time without any potential loss in value.
💡 Mutual fund investments are subject to market risks. The value of the underlying securities held by the fund can go up or down due to market forces, which directly impacts the fund's Net Asset Value (NAV). There is no guarantee of returns or capital protection.
Q47HardStructure of a Mutual Fund - AMC Regulatory Requirements
As per SEBI regulations, what is the minimum net worth an Asset Management Company (AMC) is required to maintain at all times?
A₹10 crore
B₹25 crore
✓₹50 crore
D₹100 crore
💡 SEBI (Mutual Funds) Regulations, 1996, require an Asset Management Company (AMC) to have a minimum net worth of not less than ₹50 crore at all times. This ensures the financial stability and capability of the AMC.
Q48HardRole of AMFI
Which of the following activities is a key function of the Association of Mutual Funds in India (AMFI) in its role as a self-regulatory organization for the mutual fund industry?
AApproving new mutual fund schemes for launch.
BSetting the Net Asset Value (NAV) of all mutual fund schemes.
✓Prescribing and enforcing a code of conduct for distributors and Asset Management Companies (AMCs).
DRegistering new Asset Management Companies (AMCs) with SEBI.
💡 AMFI plays a crucial role as a self-regulatory organization. One of its key functions is to prescribe and enforce a code of conduct for all intermediaries, including distributors and AMCs, to ensure ethical and professional standards in the industry. SEBI approves schemes and registers AMCs, while AMCs calculate NAVs.
Q49EasyAdvantages of Mutual Funds
One of the key advantages of investing in a mutual fund is professional management. What does this primarily imply for the investor?
AInvestors can directly choose the specific stocks for their portfolio
✓The fund is managed by experienced fund managers and research teams
CThe fund guarantees a fixed return on investment regardless of market conditions
DInvestors have direct control over the fund's day-to-day investment decisions
💡 Professional management means that the fund is managed by a team of experienced and qualified fund managers, supported by research analysts, who make investment decisions on behalf of the investors. This expertise aims to optimize returns within the defined investment objective, relieving individual investors of the burden of constant market tracking.
Q50MediumStructure and Role of Custodian
Which entity in the mutual fund structure is primarily responsible for the safe-keeping of the securities and other assets of the fund, ensuring their physical and electronic security?
AAsset Management Company (AMC)
BTrustee
CRegistrar & Transfer Agent (RTA)
✓Custodian
💡 The Custodian is responsible for the safe-keeping of the securities and other assets of the mutual fund. They hold the assets in trust for the unitholders and ensure proper delivery and receipt of securities when transactions occur. The AMC manages investments, Trustees oversee the AMC, and RTAs handle investor records.
Q51EasyLegal structure of a mutual fund
In India, as per SEBI (Mutual Funds) Regulations, 1996, a mutual fund is mandatorily constituted as a _____
ACompany
BPartnership firm
✓Trust
DCooperative society
💡 As per SEBI (Mutual Funds) Regulations, 1996, a mutual fund in India must be constituted in the form of a Trust. The Trust Deed, registered under the Indian Trusts Act, 1882, defines the rights and obligations of the Sponsor, Trustee, and AMC.
Q52MediumDisadvantages 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.
Q53MediumStructure of Mutual Funds - AMC
Beyond managing the investment portfolio, a crucial responsibility of the Asset Management Company (AMC) is to ensure:
AThat the mutual fund is registered as a 'trust' with the Registrar of Companies.
✓Compliance with SEBI (Mutual Funds) Regulations, 1996, and other applicable laws in all its operations.
CThe appointment of independent trustees for the mutual fund.
DThe physical safekeeping of all securities and assets of the mutual fund.
💡 While the AMC's primary role is investment management, it is also responsible for the overall operations of the mutual fund, including ensuring strict compliance with the SEBI (Mutual Funds) Regulations, 1996, and other relevant legal frameworks. The Sponsor appoints trustees, and the Custodian is responsible for physical safekeeping.
Q54EasyAdvantages of Mutual Funds
Which of the following is a primary benefit for an investor choosing a mutual fund over direct equity investments?
AGuaranteed returns regardless of market conditions.
BLower overall investment costs compared to direct investing for all investment sizes.
✓Professional management of the investment portfolio.
DComplete control over individual stock selection and timing.
💡 Mutual funds provide professional fund management, where experienced fund managers make investment decisions on behalf of investors, which is a key advantage over direct equity investments. Options a, b, and d are incorrect; mutual funds do not guarantee returns, may not always have lower costs for all sizes, and investors do not have direct control over individual stock selection.
Q55EasyIntroduction 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.
Q56EasyStructure of Mutual Fund - Trustees
According to SEBI (Mutual Funds) Regulations, 1996, what is the minimum proportion of independent trustees required on the Board of Trustees for a mutual fund?
AOne-third
BHalf
✓Two-thirds
DThree-fourths
💡 SEBI (Mutual Funds) Regulations, 1996, mandates that at least two-thirds of the trustees on the Board of Trustees must be independent trustees. This ensures robust oversight and protects unit holders' interests.
Q57EasyBasic 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.
Q58EasyAdvantages 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.
Q59MediumKey Constituents and their Roles - AMC
As per SEBI (Mutual Funds) Regulations, 1996, at least what proportion of the directors of the Asset Management Company (AMC) must be independent directors?
AOne-third
✓One-half
CTwo-thirds
DThree-fourths
💡 SEBI (Mutual Funds) Regulations, 1996, mandate that at least 50% (one-half) of the directors of the Asset Management Company (AMC) must be independent directors. This ensures good corporate governance and safeguards the interests of the unit holders.
Q60MediumRole of Entities - Sponsor
While the Asset Management Company (AMC) manages the investments of a mutual fund, what is the primary role of the Sponsor in the mutual fund structure?
ATo hold the assets of the mutual fund in custody.
✓To provide the initial capital and establish the mutual fund as a trust.
CTo process investor transactions and maintain records.
DTo oversee the compliance of the AMC with regulations.
💡 The Sponsor is the entity that establishes the mutual fund, typically by contributing the initial capital and appointing the Board of Trustees. It acts like the promoter of a company. Custodians hold assets, RTAs process transactions, and Trustees oversee compliance.
Q61EasyLegal 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.
Q62MediumStructure and Role of Trustees
The primary role of the Board of Trustees in a mutual fund structure is to:
AAct as the investment manager, making day-to-day investment decisions for the fund.
BHandle the administrative tasks like record-keeping and processing transactions for investors.
✓Safeguard the interests of the unitholders and ensure compliance with SEBI regulations.
DAct as the marketing arm, promoting the mutual fund schemes to potential investors.
💡 The Trustees are fiduciaries to the unitholders and their primary duty is to protect the unitholders' interests and ensure that the Asset Management Company (AMC) operates within the framework of SEBI regulations and the scheme's objectives.
Q63EasyLegal structure of a Mutual Fund
What is the fundamental legal structure under which a mutual fund operates in India?
ACompany
BPartnership
✓Trust
DCooperative Society
💡 Mutual funds in India are structured as trusts, with the sponsor establishing the trust and appointing trustees to oversee its operations for the benefit of unitholders, as per SEBI (Mutual Funds) Regulations, 1996.
Q64HardRegulatory 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.
Q65MediumStructure of Mutual Fund - Role of Trustee
Which entity in the mutual fund structure holds the assets of the fund in trust for the benefit of the unit holders and ensures compliance with regulations?
AAsset Management Company (AMC)
BSponsor
CCustodian
✓Trustee
💡 The Trustee is responsible for holding the assets of the mutual fund in trust for the benefit of the unit holders. They exercise oversight functions to ensure that the fund is managed in accordance with the SEBI (Mutual Funds) Regulations, 1996 and the provisions of the Trust Deed, acting in the best interest of the unit holders.
Q66MediumRole of Custodian
Besides the safekeeping of securities and other assets, which of the following is a key operational responsibility of the Custodian in a mutual fund structure?
ADetermining the investment strategy for various schemes
✓Ensuring the settlement of all trades executed by the AMC
CCalculating and declaring the Net Asset Value (NAV) daily
DMarketing and selling units of the mutual fund schemes
💡 The Custodian's primary role includes the safekeeping of the fund's assets and ensuring the smooth and timely settlement of all purchase and sale transactions of securities executed by the AMC on behalf of the mutual fund. This is crucial for the operational efficiency of the fund.
Q67EasyRole of Trustees
Which of the following is a primary duty of the Board of Trustees of a mutual fund, acting in a fiduciary capacity?
AManaging the day-to-day investment portfolio decisions for all schemes.
BMarketing and distributing the mutual fund schemes to investors.
✓Ensuring that the mutual fund's operations are in accordance with the Trust Deed and SEBI (Mutual Funds) Regulations, 1996.
DActing as the Registrar and Transfer Agent (RTA) for processing investor transactions.
💡 The Board of Trustees acts as a fiduciary to the unitholders. Their primary duty is to safeguard the interests of the unitholders and ensure that the fund's operations, including those of the AMC, adhere strictly to the provisions of the Trust Deed and the SEBI (Mutual Funds) Regulations, 1996. Investment management is the AMC's role, marketing is for distributors, and RTA manages transactions.
Q68EasyLegal Structure of a Mutual Fund
In India, a mutual fund is legally constituted as a:
ACompany
BPartnership firm
✓Trust
DCooperative society
💡 Mutual funds in India are legally constituted as a trust under the Indian Trusts Act, 1882. This structure ensures that the assets of the mutual fund are held by trustees for the benefit of the unit holders.
Q69HardParticipants in a Mutual Fund - Asset Management Company (AMC)
According to SEBI (Mutual Funds) Regulations, 1996, what is the minimum net worth an Asset Management Company (AMC) is required to maintain at all times?
AINR 25 crore
✓INR 50 crore
CINR 100 crore
DINR 500 crore
💡 SEBI (Mutual Funds) Regulations, 1996, requires an Asset Management Company (AMC) to have a minimum net worth of INR 50 crore at all times. This ensures the financial stability and credibility of the AMC.
Q70EasyAdvantages of Mutual Funds
Which of the following best describes the 'affordability' advantage offered by mutual funds?
AMutual funds charge very low expense ratios compared to direct stock investments.
✓Investors can participate in a diversified portfolio with relatively small investment amounts.
CMutual funds guarantee positive returns, making them affordable for all.
DThe entry load for mutual funds is always zero, reducing initial costs.
💡 Mutual funds allow investors to gain exposure to a diversified portfolio of securities (stocks, bonds, etc.) by investing relatively small amounts, making professional money management and diversification accessible and affordable for common investors.
Q71MediumRole of the Asset Management Company (AMC)
Which of the following is a primary operational responsibility of the Asset Management Company (AMC) of a mutual fund?
ARegistering the mutual fund as a trust with SEBI.
BAppointing the Custodian and the Registrar & Transfer Agent (RTA).
✓Managing the investment portfolio of the schemes and ensuring compliance with SEBI regulations.
DHolding the assets of the mutual fund in safekeeping.
💡 The AMC is primarily responsible for managing the investment portfolio of the various schemes, making investment decisions, and ensuring that all operations are in compliance with SEBI (Mutual Funds) Regulations, 1996, and the scheme's objectives. The Sponsor registers the fund and appoints the Trustee and AMC, the Trustee appoints Custodian and RTA, and the Custodian holds the assets.
Q72EasyAdvantages of Mutual Funds
Which of the following is a significant benefit of mutual funds for investors with limited capital?
AGuaranteed returns regardless of market performance.
BDirect control over the selection of individual stocks and bonds.
✓Access to professional fund management and portfolio diversification.
DComplete exemption from all forms of market risk.
💡 Mutual funds allow investors with limited capital to benefit from professional fund management and portfolio diversification, which might otherwise be inaccessible or too expensive for individual direct investments. Returns are not guaranteed, and market risks are always present.
Q73MediumStructure of a Mutual Fund - Trustee's role
The Trustees of a mutual fund in India are primarily mandated to act in the interest of which group, as per SEBI (Mutual Funds) Regulations, 1996?
AThe Asset Management Company (AMC)
BThe Sponsor of the fund
✓The Unit Holders
DThe Registrar and Transfer Agent (RTA)
💡 As per SEBI (Mutual Funds) Regulations, 1996, the Trustees are fiduciaries and have a primary responsibility to protect the interests of the unit holders. They oversee the AMC's activities to ensure compliance and investor protection.
Q74MediumRole of AMFI
The Association of Mutual Funds in India (AMFI) primarily functions as:
AThe principal regulator for mutual funds in India.
BAn organization that manages mutual fund schemes for investors.
✓A self-regulatory organization (SRO) promoting ethical standards and best practices in the mutual fund industry.
DA body that guarantees the returns of mutual fund investments.
💡 AMFI is a self-regulatory organization (SRO) that works towards developing the Indian mutual fund industry on professional, healthy, and ethical lines, and enhancing public awareness of mutual funds. SEBI is the principal regulator.
Q75HardConcept 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.
Q76EasyAdvantages of Mutual Funds
One of the key advantages of investing in mutual funds, particularly for small investors, is 'affordability'. What does this term primarily signify in the context of mutual funds?
✓The ability to invest in a professionally managed and diversified portfolio with relatively small amounts.
BThe guarantee of capital protection for all investments, regardless of size.
CThe absence of any charges or fees, making it cheaper than direct stock investments.
DThe option to redeem investments at any time without incurring any penalty or exit load.
💡 Affordability in mutual funds means that investors can participate in a diversified portfolio of securities, managed by professionals, even with small investment amounts, which would otherwise be difficult or expensive to achieve directly.
Q77MediumKey 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.
Q78HardRole of Custodian
The primary role of a Custodian in a mutual fund structure is to hold the securities and assets of the fund. Which of the following best describes the nature of assets typically held by a Custodian on behalf of the mutual fund?
AOnly physical share certificates and bonds, as dematerialized securities are held electronically by depositories.
BAll assets, including real estate holdings, cash balances, and bank deposits of the mutual fund.
✓Dematerialized securities, physical securities (if any), and other permissible assets like gold or silver if the scheme invests in them.
DOnly debt instruments and money market instruments, as equities are managed directly by the AMC.
💡 A Custodian's role is to hold all investible assets of the mutual fund. This includes dematerialized securities (held through depositories but under the custodian's oversight), any physical securities, and other assets like gold or silver if the scheme's investment objective allows for it. Cash balances are typically held with a bank designated by the AMC and Trustees, and real estate is not a common investment for mutual funds, and if held, its custody would be complex and specific.
Q79EasyDisadvantages of Mutual Funds
Which of the following is considered a common disadvantage of investing in a mutual fund from an investor's perspective?
AThe lack of diversification across various securities.
BThe absence of professional fund management.
✓The investor has no direct control over the selection of individual securities within the fund's portfolio.
DUnits are generally illiquid and difficult to redeem.
💡 While mutual funds offer professional management and diversification, a key disadvantage for some investors is the lack of direct control over the specific securities bought or sold by the fund manager. Liquidity is generally high, and diversification is an advantage, not a disadvantage.
Q80EasyRole of AMFI
One of the key functions of the Association of Mutual Funds in India (AMFI) is to:
ARegulate the investment decisions of Asset Management Companies (AMCs).
BAct as a direct investment advisor for individual mutual fund investors.
✓Promote ethical and professional standards in the mutual fund industry and conduct investor awareness programs.
DGuarantee the returns generated by mutual fund schemes.
💡 AMFI is a self-regulatory organization that works towards developing the Indian mutual fund industry on professional, healthy, and ethical lines. This includes promoting investor awareness and educating the public about mutual funds, and ensuring fair practices among intermediaries. It does not regulate investment decisions or guarantee returns.
Q81MediumLegal Structure of a Mutual Fund
A mutual fund in India is legally constituted as a Trust. What is the primary reason for adopting this specific legal structure?
ATo provide a direct pass-through status for taxation purposes, avoiding double taxation.
✓To ensure a clear separation between the ownership of the fund's assets and the management of those assets.
CTo allow for easier listing of mutual fund units on stock exchanges for trading.
DTo enable the mutual fund to engage in a broader range of financial activities beyond just investment management.
💡 The primary reason for constituting a mutual fund as a Trust is to establish a fiduciary relationship. The Trust holds the assets for the benefit of the unitholders (beneficiaries), while the Asset Management Company (AMC) is appointed by the Trustees to manage these assets. This structure ensures a clear separation of ownership (by unitholders via the Trust) from management (by the AMC), safeguarding investor interests.
Q82MediumAdvantages of Mutual Funds - Affordability
One of the key advantages of investing through mutual funds is 'Affordability'. This advantage primarily refers to the ability of investors to:
AAvoid all market risks by investing small amounts.
✓Invest in a diversified portfolio of high-value securities with relatively small sums.
CReceive guaranteed returns even with minimal capital investment.
DOnly invest in government-backed securities at a low entry point.
💡 Affordability means that mutual funds allow investors to participate in a diversified portfolio of securities, including potentially expensive stocks or bonds, with relatively small sums of money (e.g., through Systematic Investment Plans (SIPs) starting from as low as ₹100 or ₹500).
Q83EasyAdvantages of Mutual Funds
Which characteristic of mutual funds makes them particularly suitable for investors with limited capital, allowing them to participate in diversified portfolios?
AHigh liquidity, enabling easy entry and exit.
BProfessional management by experienced fund managers.
✓Affordability and accessibility, with low minimum investment amounts.
DTransparency through regular disclosure of portfolio and NAV.
💡 Mutual funds are highly affordable and accessible, allowing investors to start with relatively small amounts, often as low as ₹500 for Systematic Investment Plans (SIPs) or ₹5,000 for lump sums. This makes them suitable for a wide range of investors, including those with limited capital, to gain exposure to diversified portfolios.
Q84MediumRole 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.
Q85EasyConcept of Mutual Fund
What is the fundamental concept behind a mutual fund?
ALending money directly to corporations for their expansion projects.
BDirectly purchasing and holding physical assets like gold or real estate for individual investors.
✓Pooling money from multiple investors to invest in a diversified portfolio of securities.
DProviding insurance coverage against market risks for individual investments.
💡 Mutual funds operate on the principle of pooling money from numerous investors to collectively invest in a diversified portfolio of securities, thereby allowing investors to gain exposure to various assets with professional management.
Q86EasyStructure and Roles of Constituents
Which of the following entities in the structure of a mutual fund in India is primarily responsible for holding the securities and assets of the fund in safe custody?
AThe Sponsor
BThe Trustee
CThe Asset Management Company (AMC)
✓The Custodian
💡 The Custodian is responsible for the safekeeping of the mutual fund's securities and assets. The Sponsor establishes the fund, the Trustee oversees the AMC and protects unit holders' interests, and the AMC manages the investments.
Q87HardRelationship 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.
Q88MediumStructure and Regulatory Framework
As per SEBI (Mutual Funds) Regulations, 1996, what is the minimum percentage of the Asset Management Company's (AMC) net worth that the sponsor(s) of a mutual fund must contribute?
💡 SEBI (Mutual Funds) Regulations, 1996, mandate that the sponsor(s) must have a minimum shareholding of 40% in the Asset Management Company (AMC). This ensures significant commitment from the sponsor.
Q89MediumRole of Trustees
According to SEBI (Mutual Funds) Regulations, 1996, which of the following is a specific responsibility of the Board of Trustees of a mutual fund?
ATo manage the day-to-day investment decisions and portfolio allocation of the schemes.
BTo market and distribute the units of the mutual fund schemes to investors.
✓To ensure that the Asset Management Company (AMC) acts in the best interest of the unitholders and in accordance with the trust deed and SEBI regulations.
DTo provide the initial capital (seed money) for the establishment of the mutual fund.
💡 The Board of Trustees acts as the guardian of the unitholders' interests. Their specific responsibility includes ensuring that the AMC operates in conformity with the trust deed, SEBI (Mutual Funds) Regulations, 1996, and acts in the best interest of the unitholders. Day-to-day investment decisions are the AMC's role, marketing is also an AMC function, and providing seed capital is the Sponsor's role.
Q90MediumRole of the Sponsor
As per SEBI regulations, what is a key ongoing responsibility of the Sponsor of a mutual fund, besides establishing the fund?
ATo manage the day-to-day investment decisions of the schemes.
✓To ensure the AMC maintains a minimum net worth of INR 50 crore at all times.
CTo directly hold all assets of the mutual fund on behalf of unitholders.
DTo approve the annual financial statements of the mutual fund before submission to SEBI.
💡 The Sponsor is responsible for ensuring that the Asset Management Company (AMC) maintains a minimum net worth of INR 50 crore at all times, as stipulated by SEBI (Mutual Funds) Regulations, 1996. The AMC manages investments, the Custodian holds assets, and Trustees approve financial statements.
Q91MediumDisadvantages of Mutual Funds
The 'expense ratio' is often cited as a potential disadvantage of mutual funds. What does the expense ratio represent?
AThe percentage of the fund's assets that are invested in high-risk securities.
✓The total annual operating costs of the fund, expressed as a percentage of its average net assets.
CThe commission paid by the fund to distributors for selling its units to investors.
DThe tax levied on the capital gains generated by the fund's investment activities.
💡 The expense ratio represents the total annual operating costs of a mutual fund, including management fees, administrative expenses, RTA fees, custodian fees, etc., expressed as a percentage of the fund's average net assets. These costs are borne by the investors and reduce the fund's overall returns.
Q92HardStructure of a Mutual Fund - Custodian's role
Which of the following statements most accurately describes the primary and most distinct role of a Custodian in the Indian mutual fund structure?
ATo manage the investment portfolio and make buy/sell decisions for the fund.
BTo maintain records of unit holder transactions and disseminate Net Asset Value (NAV).
✓To hold the securities and other assets of the fund in safe custody and ensure their segregation.
DTo ensure compliance with SEBI regulations and oversee the Asset Management Company's operations.
💡 The primary role of a Custodian, as per SEBI (Mutual Funds) Regulations, 1996, is to hold the securities and other assets of the fund in safe custody and ensure their segregation from the assets of the AMC or other clients. Options a, b, and d describe the roles of the AMC, RTA, and Trustees, respectively.
Q93EasyLegal Structure of a Mutual Fund
In India, a mutual fund is legally constituted as which of the following entities?
AA private limited company
BA public limited company
✓A trust
DA partnership firm
💡 In India, as per SEBI (Mutual Funds) Regulations, 1996, a mutual fund is typically constituted as a 'trust' under the Indian Trusts Act, 1882. The trust holds the assets for the benefit of the unitholders.
Q94HardRoles 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.
Q95EasyStructure of a Mutual Fund
What is the legal structure typically mandated for a mutual fund in India as per SEBI regulations?
AA company registered under the Companies Act, 2013
BA partnership firm registered under the Indian Partnership Act, 1932
✓A trust established under the Indian Trusts Act, 1882
DA cooperative society registered under the Cooperative Societies Act, 1912
💡 As per the SEBI (Mutual Funds) Regulations, 1996, a mutual fund in India must be constituted as a Trust under the Indian Trusts Act, 1882. This structure ensures that the assets of the mutual fund are held in trust for the benefit of the unitholders.
Q96EasyRole of AMC and Restrictions
Which of the following activities is the Asset Management Company (AMC) of a mutual fund generally NOT permitted to undertake as per SEBI regulations, to avoid conflicts of interest?
AManaging the investment portfolio of the mutual fund schemes.
✓Providing investment advisory or consultancy services to institutional investors for a separate fee.
CLaunching new mutual fund schemes after obtaining necessary approvals from SEBI.
DAppointing and overseeing distributors for selling mutual fund units.
💡 SEBI (Mutual Funds) Regulations, 1996, restrict AMCs from engaging in activities that could lead to conflicts of interest with their primary role of managing mutual fund assets. Providing separate investment advisory or consultancy services to other clients for a fee is generally prohibited or heavily restricted to ensure the AMC's focus remains solely on the mutual fund unitholders' interests. Managing portfolios, launching schemes, and appointing distributors are core functions of an AMC.
Q97MediumStructure of a Mutual Fund - Trustee's Role
Which of the following is a primary and exclusive power vested with the Board of Trustees of a mutual fund, acting in the interest of unitholders?
ATo approve the scheme information document (SID) before filing with SEBI.
BTo decide on the daily investment decisions for the fund's portfolio.
✓To appoint or remove the Asset Management Company (AMC) with SEBI's prior approval.
DTo determine the expense ratio and various fees charged by the fund.
💡 The Board of Trustees is entrusted with the oversight responsibility to protect unitholders' interests. A key power is the ability to appoint or remove the AMC, subject to SEBI's prior approval, if they deem it necessary for the unitholders' benefit. Approving SID is also their role but removing AMC is a more exclusive and critical power highlighting their oversight function. Investment decisions are made by the AMC, and expense ratios are subject to SEBI limits and AMC's discretion within those limits.
Q98EasyRegulation 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.
Q99HardParticipants in a Mutual Fund - Sponsor
The primary role of the Sponsor in the mutual fund structure is to:
AManage the day-to-day investment decisions of the fund.
✓Contribute the initial capital to establish the mutual fund and appoint the trustees.
CEnsure guaranteed returns to the unit holders.
DProvide ongoing financial support to cover any losses incurred by the fund.
💡 The Sponsor is the entity that promotes and establishes the mutual fund. Their primary role involves contributing the initial capital (seed capital) to form the trust and appointing the Board of Trustees and the Asset Management Company (AMC). Their liability is generally limited once the fund is established and operational.
Q100MediumRole of Trustees
Which of the following is a primary responsibility of the Board of Trustees of a mutual fund in India, distinct from the Asset Management Company (AMC)?
AManaging the day-to-day investment portfolio of the schemes
BAppointing the fund managers and analysts for the schemes
✓Approving the Scheme Information Document (SID) and Statement of Additional Information (SAI)
DMarketing and distributing mutual fund schemes to investors
💡 The Board of Trustees acts as a guardian of the unitholders' interests. A key fiduciary responsibility, as per SEBI (Mutual Funds) Regulations, 1996, is to approve the Scheme Information Document (SID) and Statement of Additional Information (SAI) to ensure that all disclosures are accurate, complete, and in the best interest of investors, before they are filed with SEBI.
Q101MediumRole of Trustees and Fund Structure
Who among the following is primarily responsible for appointing the Custodian and the Registrar and Transfer Agent (RTA) for a mutual fund?
AThe Sponsor of the mutual fund.
BThe Asset Management Company (AMC).
✓The Board of Trustees.
DThe Securities and Exchange Board of India (SEBI).
💡 The Board of Trustees, acting as the guardian of unitholders' interests, is responsible for appointing key service providers such as the Custodian and the Registrar and Transfer Agent (RTA) for the mutual fund, ensuring they meet the necessary criteria and perform their duties diligently. While the AMC works with them, the appointment authority lies with the Trustees.
Q102EasyAdvantages of Mutual Funds
One of the key advantages of investing in a mutual fund is 'professional management'. What does this primarily imply for an individual investor?
AThe investor has direct control over the fund's day-to-day investment decisions.
✓The fund is managed by experienced and qualified professionals who make investment decisions on behalf of investors.
CThe investor is guaranteed a fixed return on their investment due to expert handling.
DThe investor pays no fees for the management of their investments.
💡 Professional management means that the fund's assets are managed by a team of experienced and qualified fund managers and research analysts. They conduct in-depth research, monitor markets, and make investment decisions to achieve the fund's objectives, relieving individual investors of this responsibility.
Q103MediumStructure of Mutual Fund - Role of Custodian
Which of the following entities is primarily responsible for holding the securities of a mutual fund in physical or dematerialized form and providing safekeeping services, distinct from maintaining investor records?
ARegistrar and Transfer Agent (RTA)
BTrustee
✓Custodian
DSponsor
💡 The Custodian is responsible for the safekeeping of the mutual fund's securities and other assets, ensuring their physical or dematerialized existence and security. The Registrar and Transfer Agent (RTA), on the other hand, is responsible for maintaining investor records, processing transactions (subscriptions, redemptions), and communicating with unit holders.
Q104HardConcept of Mutual Fund - Legal Structure and Tax
Mutual funds in India are typically structured as a 'trust' and are often referred to as 'pass-through' vehicles for tax purposes. What does this 'pass-through' status primarily imply for the mutual fund entity itself?
AThe mutual fund trust is subject to corporate income tax on all its earnings before distribution.
✓The income earned by the fund (e.g., dividends, interest, capital gains) is generally not taxed at the fund level, but at the unitholder's level upon distribution or redemption.
CThe mutual fund is completely exempt from all forms of direct and indirect taxation.
DThe fund can directly claim tax deductions for all its operational expenses against the unitholders' taxable income.
💡 Under the Indian Income Tax Act, mutual funds structured as trusts are generally treated as 'pass-through' entities. This means that the income generated by the fund is typically not taxed at the fund's level. Instead, the tax liability shifts to the unitholders when they receive distributions (dividends/capital gains) or redeem their units. (Income Tax Act, 1961, Section 10(23D) for mutual funds).
Q105HardStructure of Mutual Fund - AMC and Trust separation
The Asset Management Company (AMC) is a separate legal entity from the mutual fund trust. This structural separation primarily ensures that:
AThe AMC can manage funds for multiple different trusts simultaneously.
✓The assets of the mutual fund are legally distinct and ring-fenced from the AMC's own assets and liabilities.
CThe AMC is not held responsible for any losses incurred by the mutual fund due to market fluctuations.
DThe mutual fund can continue to operate even if the AMC faces financial difficulties or liquidation.
💡 The mutual fund is constituted as a trust, and its assets are held by the trustees for the benefit of unit holders. The AMC is a company appointed by the trustee to manage these assets. This legal separation ensures that the fund's assets are protected from the creditors or liabilities of the AMC, enhancing investor protection by ring-fencing the fund's assets.
Q106HardEligibility 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.
💡 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.
Q107MediumTypes 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.
Q108HardDisadvantages of Mutual Funds
One of the often-cited disadvantages of investing in a professionally managed, diversified mutual fund scheme is the lack of direct control over:
AThe fund's expense ratio and other charges.
✓The selection of individual securities within the portfolio.
CThe fund's overall investment objective and strategy.
DThe frequency and amount of dividend payouts from the fund.
💡 When investing in a mutual fund, investors delegate investment decisions to the fund manager. This means they do not have direct control over which specific stocks or bonds are bought or sold within the fund's portfolio, which is a common disadvantage for investors who prefer active participation in security selection. Investors can choose funds based on expense ratios, investment objectives, and dividend policies, but not individual security selection.
Q109EasyStructure of Mutual Funds - Trustee
Which entity in the mutual fund structure is primarily responsible for holding the assets of the fund in trust for the benefit of the unitholders, and supervises the overall operations of the mutual fund?
AAsset Management Company (AMC)
BSponsor
✓Trustee
DCustodian
💡 As per SEBI (Mutual Funds) Regulations, 1996, the Trustee holds the assets of the mutual fund in trust for the benefit of the unitholders and has the responsibility of supervising the activities of the AMC to ensure compliance with regulations and protect unitholder interests. The Custodian physically holds the securities, but under the direction and supervision of the Trustee.
Q110EasyAdvantages 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.
Q111MediumStructure of a Mutual Fund - Trustees
As per SEBI (Mutual Funds) Regulations, 1996, what is the minimum proportion of independent directors required on the board of trustees for a mutual fund?
AAt least one-third of the total number of trustees.
BAt least half of the total number of trustees.
✓At least two-thirds of the total number of trustees.
DAll trustees must be independent.
💡 SEBI (Mutual Funds) Regulations, 1996, mandate that at least two-thirds of the trustees of a mutual fund must be independent trustees. This ensures robust oversight and protects unitholders' interests.
Q112HardLegal structure of a Mutual Fund
Under SEBI (Mutual Funds) Regulations, 1996, what is the primary legal form through which a mutual fund is constituted in India?
AA company incorporated under the Companies Act, 2013
✓A trust registered under the Indian Trusts Act, 1882
CA partnership firm registered under the Indian Partnership Act, 1932
DA cooperative society registered under the Cooperative Societies Act, 1912
💡 SEBI (Mutual Funds) Regulations, 1996 mandate that a mutual fund in India must be constituted as a trust under the Indian Trusts Act, 1882. This trust is then managed by an Asset Management Company (AMC) appointed by the Trustee.
Q113EasyStructure 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.
Q114MediumRole of the Trustee
Beyond general oversight, which specific action requires the prior approval of the Trustees of a mutual fund?
ADaily buying and selling of securities by the fund manager.
✓Changes in the fundamental attributes of a scheme.
CProcessing of redemption requests from unitholders.
DCalculation of the Net Asset Value (NAV) of a scheme.
💡 As per SEBI (Mutual Funds) Regulations, 1996, any change in the fundamental attributes of a mutual fund scheme (e.g., investment objective, asset allocation pattern, type of scheme) requires prior approval from the Trustees and also unitholders. Daily trading, redemption processing, and NAV calculation are operational functions of the AMC and RTA.
Q115HardSEBI 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.
Q116EasyRole of AMFI
What is the primary objective of the Association of Mutual Funds in India (AMFI)?
ATo manage mutual fund schemes and generate returns for investors.
BTo regulate mutual fund operations and enforce compliance in India.
✓To protect investor interests and promote ethical practices in the mutual fund industry.
DTo act as a custodian for mutual fund assets and securities.
💡 AMFI's primary objective is to protect and promote the interests of mutual fund investors and the mutual fund industry in India, including promoting ethical and professional standards among its members. SEBI is the regulator, and AMCs manage schemes.
Q117HardStructure of a Mutual Fund - Sponsor's Contribution
As per SEBI (Mutual Funds) Regulations, 1996, what is the minimum percentage of the Net Worth of the Asset Management Company (AMC) that the sponsor of a mutual fund is required to contribute?
💡 SEBI (Mutual Funds) Regulations, 1996, stipulate that the sponsor must contribute a minimum of 40% to the net worth of the Asset Management Company (AMC). This ensures the sponsor's significant financial commitment and alignment of interest with the fund's operations.
Q118EasyDisadvantages of Mutual Funds
One of the disadvantages of investing in a mutual fund is the lack of direct control over the investment decisions. This means unitholders typically cannot:
ARedeem their units at the prevailing Net Asset Value (NAV).
✓Choose specific individual securities that the fund should buy or sell.
CTransfer their units to another investor.
DReceive periodic dividends or capital gains distributions.
💡 Investors in a mutual fund delegate investment decisions to professional fund managers. Therefore, they do not have direct control over which specific securities are bought or sold within the fund's portfolio. The other options are rights typically available to mutual fund unitholders.
Q119HardStructure and Governance of Mutual Funds
The 'arm's length' principle, as applied to the mutual fund industry in India, primarily aims to achieve which of the following?
ATo ensure that the fund's investment portfolio is diversified across various asset classes.
✓To maintain operational independence between the Sponsor, Trustee, and Asset Management Company to prevent conflicts of interest.
CTo ensure that distributors are compensated fairly for their services.
DTo provide unitholders with direct voting rights on investment decisions.
💡 The 'arm's length' principle mandates that the Sponsor, Trustee, and Asset Management Company (AMC) operate independently from each other, despite often being related entities. This separation is crucial to prevent conflicts of interest and ensure that all decisions are made in the best interest of the unitholders, as stipulated by SEBI (Mutual Funds) Regulations.
Q120MediumParticipants in a Mutual Fund - Custodian
Which of the following best describes the primary responsibility of a Custodian in a mutual fund structure?
AManaging the investment portfolio of the scheme.
BMaintaining investor records and processing transactions.
✓Holding the securities and assets of the mutual fund in safekeeping.
DProviding investment advice to unit holders.
💡 The primary responsibility of a Custodian in a mutual fund structure is to hold the securities and other assets of the mutual fund in safekeeping. They are also responsible for collecting dividends and interest and informing the AMC.
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