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Series V-B · Practice Set 1

NISM Series V-B: Mutual Fund Foundation Certification — Practice Set 1 Practice Questions

Original practice set for NISM Series V-B: Mutual Fund Foundation Certification. Every question below shows the correct answer and a full explanation, so you can read through this set as a study page or attempt it as a timed mock test.

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Practice questions

All 40 questions in Practice Set 1

Read each question, think through your answer, then expand it to check the correct option and explanation.

Introduction to Mutual Funds

Q1. A mutual fund pools money from many investors and invests it in:

  1. A. Only fixed deposits
  2. B. A diversified portfolio of securities like stocks and bonds
  3. C. Only government schemes
  4. D. Only real estate
Show correct answer & explanation

Correct answer: B. A diversified portfolio of securities like stocks and bonds

A mutual fund is a professionally managed investment vehicle that pools money from many investors and invests it in a diversified portfolio of securities including stocks, bonds, and money market instruments.
Introduction to Mutual Funds

Q2. NAV of a mutual fund scheme is published:

  1. A. Every hour
  2. B. Every business day
  3. C. Every week
  4. D. Every month
Show correct answer & explanation

Correct answer: B. Every business day

NAV (Net Asset Value) is calculated and published at the end of every business day based on the closing market prices of the securities held in the portfolio.
Introduction to Mutual Funds

Q3. Who is called a unit holder in a mutual fund?

  1. A. The fund manager
  2. B. The AMC
  3. C. An investor who holds units of a mutual fund scheme
  4. D. The trustee
Show correct answer & explanation

Correct answer: C. An investor who holds units of a mutual fund scheme

A unit holder is an investor who has invested money in a mutual fund scheme and holds units of that scheme. Unit holders are the beneficial owners of the fund's assets.
Introduction to Mutual Funds

Q4. The primary benefit of mutual funds over direct stock investing is:

  1. A. Guaranteed returns
  2. B. Professional management and diversification
  3. C. No taxes
  4. D. Higher returns always
Show correct answer & explanation

Correct answer: B. Professional management and diversification

Mutual funds offer professional management and automatic diversification across many securities, reducing concentration risk — which is difficult for individual investors to achieve directly.
Introduction to Mutual Funds

Q5. Diversification in a mutual fund helps to:

  1. A. Maximise returns always
  2. B. Reduce concentration risk by spreading investments across securities
  3. C. Guarantee no loss
  4. D. Eliminate all risk
Show correct answer & explanation

Correct answer: B. Reduce concentration risk by spreading investments across securities

Diversification reduces the impact of any single security's poor performance on the overall portfolio. By spreading investments across many securities and sectors, mutual funds lower concentration risk.
Types of Mutual Funds

Q6. Which mutual fund scheme has a fixed maturity date and is listed on exchanges?

  1. A. Open-ended fund
  2. B. Close-ended fund
  3. C. Liquid fund
  4. D. Index fund
Show correct answer & explanation

Correct answer: B. Close-ended fund

Close-ended mutual fund schemes have a fixed maturity period and are mandatorily listed on stock exchanges for liquidity. They are open for investment only during the NFO period.
Types of Mutual Funds

Q7. A liquid fund is best suited for which investment horizon?

  1. A. 10+ years
  2. B. 5 to 7 years
  3. C. 3 to 6 months
  4. D. Less than 91 days
Show correct answer & explanation

Correct answer: D. Less than 91 days

Liquid funds invest in instruments maturing in up to 91 days. They offer high liquidity, stable returns, and very low risk, making them ideal for parking surplus funds for very short durations.
Types of Mutual Funds

Q8. As per SEBI, large-cap funds must invest at least 80% in top how many companies by market cap?

  1. A. 50
  2. B. 100
  3. C. 150
  4. D. 200
Show correct answer & explanation

Correct answer: B. 100

As per SEBI's categorisation circular, large-cap funds must invest at least 80% of assets in the top 100 companies by market capitalisation as defined by AMFI.
Types of Mutual Funds

Q9. Mid-cap funds invest primarily in the:

  1. A. Top 50 by market cap
  2. B. 101st to 250th companies by market capitalisation
  3. C. 251st company onwards
  4. D. Any company the fund manager selects
Show correct answer & explanation

Correct answer: B. 101st to 250th companies by market capitalisation

As per SEBI, mid-cap funds must invest at least 65% of assets in the 101st to 250th companies by market capitalisation. They offer higher growth potential than large-caps with moderate additional risk.
Types of Mutual Funds

Q10. A hybrid fund invests in:

  1. A. Only equity
  2. B. Only debt
  3. C. Combination of equity and debt
  4. D. Only gold
Show correct answer & explanation

Correct answer: C. Combination of equity and debt

Hybrid funds invest in a combination of asset classes — typically equity and debt — in varying proportions depending on the sub-category (aggressive, balanced, conservative, dynamic).
Types of Mutual Funds

Q11. ELSS fund has a mandatory lock-in period of:

  1. A. 1 year
  2. B. 2 years
  3. C. 3 years
  4. D. 5 years
Show correct answer & explanation

Correct answer: C. 3 years

ELSS (Equity Linked Savings Scheme) has a mandatory lock-in period of 3 years — the shortest among all tax-saving instruments under Section 80C of the Income Tax Act.
Types of Mutual Funds

Q12. Gilt funds invest primarily in:

  1. A. Corporate bonds
  2. B. Gold
  3. C. Government securities
  4. D. International bonds
Show correct answer & explanation

Correct answer: C. Government securities

Gilt funds invest primarily in government securities (G-Secs) issued by central or state governments. They carry no credit risk since government bonds are backed by the government.
Types of Mutual Funds

Q13. A sectoral fund differs from a diversified equity fund because it:

  1. A. Invests across all sectors
  2. B. Invests at least 80% in one specific sector like IT or pharma
  3. C. Invests only in large-cap stocks
  4. D. Has lower risk
Show correct answer & explanation

Correct answer: B. Invests at least 80% in one specific sector like IT or pharma

Sectoral funds must invest at least 80% in a specific sector (e.g., banking, pharma, IT). They carry higher concentration risk than diversified equity funds but offer focused exposure to sector growth.
Investment Process

Q14. A New Fund Offer (NFO) is:

  1. A. A scheme running for years
  2. B. The initial subscription period when a new mutual fund scheme is launched
  3. C. A dividend declared by an existing fund
  4. D. A switch between fund schemes
Show correct answer & explanation

Correct answer: B. The initial subscription period when a new mutual fund scheme is launched

An NFO is the initial subscription period during which a new mutual fund scheme is offered to investors for the first time. NFO units are typically offered at Rs. 10 per unit.
Investment Process

Q15. In a Growth option of a mutual fund:

  1. A. Fixed dividends are paid
  2. B. All profits are reinvested; NAV grows over time
  3. C. Returns are paid as interest monthly
  4. D. Units are redeemed automatically
Show correct answer & explanation

Correct answer: B. All profits are reinvested; NAV grows over time

Under the Growth option, all profits and income are retained within the scheme and reinvested. This leads to NAV appreciation over time and is suitable for long-term wealth creation through compounding.
Investment Process

Q16. IDCW (Income Distribution cum Capital Withdrawal) option means:

  1. A. Higher NAV always
  2. B. The fund periodically distributes income reducing the NAV by distribution amount
  3. C. Guaranteed income of 10% p.a.
  4. D. Units are doubled annually
Show correct answer & explanation

Correct answer: B. The fund periodically distributes income reducing the NAV by distribution amount

Under the IDCW (formerly Dividend) option, the fund periodically distributes income to unit holders. This distribution reduces the NAV by the amount distributed. It is not a guaranteed income.
Investment Process

Q17. A switch in mutual funds means:

  1. A. Changing the bank account linked to folio
  2. B. Moving investment from one scheme to another within the same AMC
  3. C. Changing the distributor
  4. D. Changing nominee
Show correct answer & explanation

Correct answer: B. Moving investment from one scheme to another within the same AMC

A switch allows investors to move their investment from one mutual fund scheme to another within the same AMC. It is treated as a redemption and fresh investment for tax purposes.
Investment Process

Q18. Exit load in a mutual fund is charged when:

  1. A. Investing in the fund
  2. B. Redeeming units before the specified holding period
  3. C. Declaring dividend
  4. D. Switching to direct plan
Show correct answer & explanation

Correct answer: B. Redeeming units before the specified holding period

Exit load is deducted from redemption proceeds if units are sold before a specified holding period. For example, 1% exit load if redeemed within 1 year. It discourages short-term redemptions.
Investment Process

Q19. A Direct Plan of a mutual fund scheme has a lower expense ratio because:

  1. A. It invests in lower-risk securities
  2. B. No distributor commission is paid — investor invests directly with AMC
  3. C. It has fewer investors
  4. D. It only invests in government bonds
Show correct answer & explanation

Correct answer: B. No distributor commission is paid — investor invests directly with AMC

Direct Plans have a lower Total Expense Ratio (TER) because no distributor commission is included. Investors invest directly with the AMC, resulting in higher NAV and better long-term returns versus Regular Plans.
Investment Process

Q20. A folio number in mutual funds is:

  1. A. Investor's PAN number
  2. B. Unique identification number assigned by AMC to investor's account
  3. C. The fund scheme's ISIN number
  4. D. The distributor's ARN number
Show correct answer & explanation

Correct answer: B. Unique identification number assigned by AMC to investor's account

A folio number is a unique identification number assigned by the AMC to an investor's account. One investor can hold multiple schemes under a single folio or have separate folios for different schemes.
Regulatory Framework

Q21. SEBI regulates mutual funds under which regulation?

  1. A. SEBI (Brokers) Regulations, 1992
  2. B. SEBI (Mutual Funds) Regulations, 1996
  3. C. SEBI (Insider Trading) Regulations
  4. D. SEBI (Takeover) Regulations
Show correct answer & explanation

Correct answer: B. SEBI (Mutual Funds) Regulations, 1996

SEBI regulates mutual funds in India under the SEBI (Mutual Funds) Regulations, 1996. These regulations govern the registration, operation, and winding up of mutual funds.
Regulatory Framework

Q22. The three-tier structure of a mutual fund is:

  1. A. SEBI, RBI, AMFI
  2. B. Sponsor, Trustee, and AMC
  3. C. Investor, Distributor, Fund Manager
  4. D. Fund Manager, Custodian, Registrar
Show correct answer & explanation

Correct answer: B. Sponsor, Trustee, and AMC

The three-tier structure consists of: (1) Sponsor — who establishes the fund, (2) Trustee — who oversees it in unit holders' interest, and (3) AMC — which manages day-to-day operations and investments.
Regulatory Framework

Q23. AMFI's primary role in the mutual fund ecosystem is:

  1. A. Regulating mutual funds like SEBI does
  2. B. Industry body that promotes mutual funds and issues ARN to distributors
  3. C. Custodian of mutual fund assets
  4. D. Setting interest rates for debt funds
Show correct answer & explanation

Correct answer: B. Industry body that promotes mutual funds and issues ARN to distributors

AMFI (Association of Mutual Funds in India) is the industry body of all SEBI-registered AMCs. It promotes investor education, issues ARN numbers to distributors, and maintains self-regulatory standards.
Regulatory Framework

Q24. CAMS and KFintech are the two major:

  1. A. AMCs in India
  2. B. Registrar and Transfer Agents (RTAs) handling back-office operations for AMCs
  3. C. Stock exchanges for mutual fund trading
  4. D. SEBI-registered rating agencies
Show correct answer & explanation

Correct answer: B. Registrar and Transfer Agents (RTAs) handling back-office operations for AMCs

CAMS (Computer Age Management Services) and KFintech are the two major Registrar and Transfer Agents (RTAs) in India. They handle investor records, account statements, and transaction processing for multiple AMCs.
Investor Rights

Q25. SCORES portal operated by SEBI is used for:

  1. A. Buying mutual funds online
  2. B. Registering and tracking investor complaints against SEBI-registered entities
  3. C. Checking stock prices
  4. D. Filing income tax returns
Show correct answer & explanation

Correct answer: B. Registering and tracking investor complaints against SEBI-registered entities

SCORES (SEBI Complaint Redressal System) is SEBI's online platform where investors can register and track complaints against any SEBI-registered entity including mutual funds, brokers, and companies.
Investor Rights

Q26. An investor who is unhappy with AMC's response to a complaint can escalate to:

  1. A. Prime Minister's office
  2. B. RBI
  3. C. SEBI via SCORES portal
  4. D. Stock exchange only
Show correct answer & explanation

Correct answer: C. SEBI via SCORES portal

If an AMC fails to resolve a complaint within 30 days or the investor is unsatisfied, they can escalate to SEBI through the SCORES portal. SEBI then intervenes to ensure resolution.
Investor Rights

Q27. A Statement of Account (SOA) in mutual funds shows:

  1. A. Only the current NAV
  2. B. All transactions, unit balances, and current value of the investor's holdings
  3. C. Only the profit or loss
  4. D. Only the dividend history
Show correct answer & explanation

Correct answer: B. All transactions, unit balances, and current value of the investor's holdings

A Statement of Account (SOA) is provided by the AMC or RTA showing all transactions (purchases, redemptions, switches), unit balances, NAV, and current value of the investor's mutual fund holdings.
Basics of Financial Planning

Q28. The Rule of 72 helps estimate:

  1. A. Maximum loss in equity funds
  2. B. Number of years to double an investment at a given rate of return
  3. C. Minimum investment needed
  4. D. Optimal asset allocation
Show correct answer & explanation

Correct answer: B. Number of years to double an investment at a given rate of return

Rule of 72: Years to double = 72 / Rate of Return. At 12% annual return, investment doubles in 72/12 = 6 years. It is a quick mental calculation tool for understanding the power of compounding.
Basics of Financial Planning

Q29. An investor with low risk tolerance and short investment horizon should prefer:

  1. A. Small-cap equity fund
  2. B. Sectoral fund
  3. C. Conservative hybrid or short-term debt fund
  4. D. ELSS fund
Show correct answer & explanation

Correct answer: C. Conservative hybrid or short-term debt fund

Investors with low risk tolerance and short horizon should prefer conservative hybrid funds (mostly debt) or short-term debt funds. These offer stability and capital protection with modest returns.
Basics of Financial Planning

Q30. Portfolio rebalancing means:

  1. A. Switching to highest performing fund
  2. B. Adjusting portfolio back to original target asset allocation after market movements
  3. C. Adding more money to equity only
  4. D. Withdrawing from all funds simultaneously
Show correct answer & explanation

Correct answer: B. Adjusting portfolio back to original target asset allocation after market movements

Portfolio rebalancing is periodically adjusting the portfolio back to the original target asset allocation. If equity grows from 60% to 75%, selling some equity and buying debt restores the original 60:40 balance.
Basics of Financial Planning

Q31. Inflation risk means:

  1. A. Loss of money due to market crash
  2. B. Returns not keeping pace with inflation, reducing purchasing power over time
  3. C. Risk that interest rates will rise
  4. D. Risk that the AMC will shut down
Show correct answer & explanation

Correct answer: B. Returns not keeping pace with inflation, reducing purchasing power over time

Inflation risk (purchasing power risk) means investment returns may not keep pace with inflation, resulting in reduced purchasing power over time. Equity funds historically beat inflation better than traditional fixed-return instruments.
Basics of Financial Planning

Q32. The concept of compounding in mutual funds means:

  1. A. Paying compound interest on loans taken
  2. B. Returns earned are reinvested to earn further returns, accelerating wealth growth
  3. C. Investing in multiple AMCs
  4. D. Switching funds twice a year
Show correct answer & explanation

Correct answer: B. Returns earned are reinvested to earn further returns, accelerating wealth growth

Compounding means returns earned on an investment are reinvested to earn additional returns. In mutual funds (growth option), NAV appreciation includes returns on both the original investment and previously accumulated returns.
Types of Mutual Funds

Q33. Gold ETFs (Exchange Traded Funds) invest in:

  1. A. Gold mining company stocks only
  2. B. Physical gold or gold-equivalent instruments; traded on stock exchanges
  3. C. Government gold bonds only
  4. D. Foreign gold funds only
Show correct answer & explanation

Correct answer: B. Physical gold or gold-equivalent instruments; traded on stock exchanges

Gold ETFs invest in physical gold or gold-equivalent financial instruments. Each unit represents a specific quantity of gold (typically 1 gram). They are traded on stock exchanges like equity shares.
Types of Mutual Funds

Q34. An international or overseas fund of fund gives Indian investors:

  1. A. Access only to Indian stocks
  2. B. Access to global companies and geographical diversification
  3. C. Fixed returns in foreign currency
  4. D. Access to only US stocks
Show correct answer & explanation

Correct answer: B. Access to global companies and geographical diversification

International funds or overseas FoFs invest in securities or funds from foreign markets, giving Indian investors access to global companies, geographies, and currencies — providing international diversification.
Investment Process

Q35. SIP (Systematic Investment Plan) is beneficial because:

  1. A. It guarantees high returns
  2. B. It builds discipline, enables rupee cost averaging, and benefits from compounding
  3. C. It avoids all market risk
  4. D. It provides insurance cover
Show correct answer & explanation

Correct answer: B. It builds discipline, enables rupee cost averaging, and benefits from compounding

SIP encourages investment discipline by investing a fixed amount regularly. It enables rupee cost averaging (buying more units when prices are low), benefits from long-term compounding, and removes the need to time the market.
Regulatory Framework

Q36. The minimum net worth required for an AMC to operate is:

  1. A. Rs. 5 crore
  2. B. Rs. 10 crore
  3. C. Rs. 50 crore
  4. D. Rs. 100 crore
Show correct answer & explanation

Correct answer: B. Rs. 10 crore

As per SEBI (Mutual Funds) Regulations, an AMC must maintain a minimum net worth of Rs. 10 crore at all times to ensure financial stability and ability to manage the fund effectively.
Investor Rights

Q37. KYC (Know Your Customer) in mutual funds is:

  1. A. Optional for investments below Rs. 50,000
  2. B. Mandatory for all investors regardless of investment amount
  3. C. Only required for NRI investors
  4. D. Required only for equity fund investors
Show correct answer & explanation

Correct answer: B. Mandatory for all investors regardless of investment amount

KYC is mandatory for all mutual fund investors regardless of the investment amount. Once KYC is completed with a SEBI-registered KYC Registration Agency (KRA), it is valid across all SEBI-regulated entities.
Types of Mutual Funds

Q38. A debt mutual fund carries which primary risks?

  1. A. Market risk (equity price risk)
  2. B. Credit risk and interest rate risk
  3. C. Currency risk
  4. D. Geopolitical risk
Show correct answer & explanation

Correct answer: B. Credit risk and interest rate risk

Debt mutual funds primarily carry credit risk (risk of bond issuer defaulting) and interest rate risk (bond prices fall when interest rates rise). They do not carry equity market risk like equity funds.
Introduction to Mutual Funds

Q39. Mutual fund investments are subject to market risks. This statutory disclaimer means:

  1. A. Investors will definitely lose money
  2. B. Returns and NAV can fluctuate based on market conditions and are not guaranteed
  3. C. Only equity funds have risks
  4. D. The AMC guarantees capital protection
Show correct answer & explanation

Correct answer: B. Returns and NAV can fluctuate based on market conditions and are not guaranteed

This disclaimer means that all mutual fund investments carry risk — the NAV can go up or down based on market conditions. Past performance is not a guarantee of future returns, and capital is not protected.
Regulatory Framework

Q40. Mutual fund trustees are appointed by:

  1. A. SEBI directly
  2. B. The Sponsor of the mutual fund
  3. C. The AMC
  4. D. AMFI
Show correct answer & explanation

Correct answer: B. The Sponsor of the mutual fund

Trustees are appointed by the Sponsor of the mutual fund. They act as the custodians of the investors' interests and oversee the functioning of the AMC to ensure compliance with SEBI regulations and the trust deed.

How to use this set

Work through the questions in order without expanding the answers first, exactly as you would in the real Series V-B exam. Once you have picked an option, expand the answer to confirm whether you were right and read the explanation, even for questions you answered correctly, since the reasoning behind each option is where most of the learning happens.

If you get a question wrong, note the topic tag above the question and revisit that topic in the Series V-B exam page before your next attempt. When you are ready for exam-condition practice, use the timed mock test above; it shuffles these questions, applies the negative marking rule, and gives you a scored review at the end.