Practice Test (Mutual Fund)

A no-load mutual fund does not charge any sales commission or load to investors when buying or selling fund units. The fund house absorbs the initial issue expenses and other costs associated with creating and managing the fund rather than passing them on to investors through entry or exit loads.

CDSC stands for Contingent Deferred Sales Charge, a type of back-end load fee charged by some mutual funds when shares are sold within a specified time period. The charge decreases over time and eventually disappears, designed to encourage long-term investment and discourage early redemption.

CDSC (Contingent Deferred Sales Charge) is an exit load that decreases as the holding period increases, incentivizing long-term investments. Entry loads are charged at purchase, not at redemption.

All listed options (A, B, C) are actual advantages of mutual funds: professional management provides expertise at scale, diversification spreads risk, and liquidity allows easy redemption. Since the question asks what is NOT an advantage, and none of these qualify as disadvantages, 'None of the above' is correct.

Option A is false (open-ended funds are NOT sold in secondary market - they're bought/sold directly from the AMC). Option B is false (closed-ended funds DO have fixed tenure). Option C is false (open-ended funds MUST calculate NAV daily). Only D is true - SEBI mandates closed-ended funds calculate NAV at least weekly, making it 'not false'.

Custodians are the primary guardians of unit holders' funds as they hold the securities and assets in safekeeping. While Trustees protect investor interests and AMCs manage investments, Custodians physically safeguard the assets.

 A mutual fund can benefit from economies of scale because of large volumes of trade

The Board of Trustees acts as a protector of investor interests by supervising the AMC. They can dismiss the AMC and supervise its working, but they do NOT directly manage portfolios - that's the AMC's job.

Custodians are appointed specifically for safekeeping of securities. They must be independent of sponsors (so B is false), registered with SEBI (C is false), and handle deliveries of physical securities (D is false).

When schemes are taken over, offer documents must be updated (A), the AMC changes (B), and the sponsor may change (C). However, schemes do NOT need to be wound up - they continue under the new mutual fund.

Dividend payout does not give compounding benefits because dividends are paid out to the investor. Growth (A) and dividend reinvestment (C) both compound - growth keeps funds invested, reinvestment uses dividends to buy more units.

Transfer agents handle administrative tasks like issuing/redeeming units (A), updating records (B), and preparing transfer documents (C). They do NOT invest funds in securities - that's the AMC's job.

AMCs can provide advisory services (A), invest in government paper (B), and invest in listed securities (D). They CANNOT indulge in activities unrelated to financial services - their mandate is restricted to financial activities.

In India, mutual funds are established as trusts under the Indian Trusts Act, 1882. They are not formed as companies (public or private limited) or societies.

The board of trustees is appointed by the sponsor of the mutual fund. The sponsor sets up the mutual fund and appoints the initial trustees to oversee investor interests.

SEBI regulations require fund sponsors to hold at least 40% of the Asset Management Company's (AMC) net worth. This ensures the sponsor has significant financial commitment and skin in the game, aligning their interests with those of investors. The 40% threshold is a minimum requirement, not an exact figure like 50%.

The Securities and Exchange Board of India (SEBI) is the primary regulatory authority that establishes the structure and operational framework for mutual funds in India. SEBI (Mutual Funds) Regulations, 1996 lay down comprehensive guidelines covering registration, constitution, custody, and investment restrictions. The Finance Ministry, Fund Sponsors, and AMFI play different roles but do not define the regulatory structure.

The Registrar and Transfer Agent (RTA) is responsible for all administrative functions related to unit issuance, redemption, and record-keeping for mutual funds. RTAs maintain investor records, process transactions, and handle KYC compliance. Custodians safekeep securities, trustees oversee fund operations, and bankers handle banking transactions - none of these handle unit issuance/redemption.

SEBI mandates that an Asset Management Company (AMC) must maintain a minimum net worth of Rs. 10 crores at all times. This capital adequacy requirement ensures financial stability and operational capacity. The requirement is continuous - not just at inception - and Rs. 10 crores is the regulatory floor, not Rs. 100 crores or a variable amount.

Fund sponsors must demonstrate a sound financial track record of 5 years to establish their credibility and capability to support the AMC. This requirement ensures sponsors have proven financial stability and experience before being permitted to sponsor mutual funds. The 5-year period balances the need for experience without being excessively restrictive like 7 years, or too short like 1-3 years.

The SEBI (Mutual Funds) Regulations, 1996 is the comprehensive legal framework specifically governing the working, registration, constitution, and operation of mutual funds in India. While other acts like SEBI Act 1992, Companies Act 1956, and Income Tax Act 1961 may have peripheral applicability, they are not the primary regulations governing mutual fund operations.

The Ministry of Finance is the highest authority among the options listed, as it is the ultimate policymaking body at the central government level. While SEBI regulates mutual funds, RBI oversees monetary policy, and Company Law Board handles corporate matters, all these bodies operate under the broader framework established by the Ministry of Finance. The Ministry has overriding authority on financial sector policy.

Index funds ARE inherently diversified because they invest in all securities constituting a particular index, which typically includes 30-50 different stocks (e.g., Nifty has 50 stocks). Saying index funds are 'not diversified' is factually incorrect. The other statements about index funds - that they invest in index shares, in the same proportion as the index, and aim to minimize tracking error - are all true characteristics. Option D correctly identifies the false statement.

This question asks which statement is NOT true. Options A, B, and D are all true statements about mutual funds - they ARE owned by all investors, they DO provide diversified portfolios, and they DON'T invest in real estate (they invest in securities). Option C claims investor objectives are diverse, which is FALSE - mutual funds are designed for investors with SIMILAR objectives (growth, income, etc.) as stated in the scheme's mandate. Therefore, C correctly identifies the statement that is 'not true'.