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Workbook for
NISM-Series-V-A: Mutual Fund Distributors Certification Examination
National Institute of Securities Markets
www.nism.ac.in
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This workbook has been developed to assist candidates in preparing for the National Institute
of Securities Markets (NISM) Certification Examination for Mutual Fund Distributors.
Workbook Version: August 20231
Published by:
National Institute of Securities Markets
© National Institute of Securities Markets, 2020
NISM Registered Office
5th floor, NCL Cooperative Society,
Plot No. C-6, E-Block, Bandra Kurla Complex,
Bandra East, Mumbai, 400051
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Patalganga Campus
Plot IS-1 & IS-2, Patalganga Industrial Area
Village Mohopada (Wasambe)
Taluka-Khalapur
District Raigad-410222
Website: www.nism.ac.in
All rights reserved. Reproduction of this publication in any form without prior permission of
the publishers is strictly prohibited.
1 This version of the workbook is for candidates appearing for NISM Series VA: Mutual Fund Distributors Certification Examination
on or after 20th October 2023.
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Foreword
NISM is a leading provider of high-end professional education, certifications, training and
research in financial markets. NISM engages in capacity building among stakeholders in the
securities markets through professional education, financial literacy, enhancing governance
standards and fostering policy research. NISM works closely with all financial sector
regulators in the area of financial education.
NISM Certification programs aim to enhance the quality and standards of professionals
employed in various segments of the financial services sector. NISM’s School for Certification
of Intermediaries (SCI) develops and conducts certification examinations and Continuing
Professional Education (CPE) programs that aim to ensure that professionals meet the defined
minimum common knowledge benchmark for various critical market functions.
NISM certification examinations and educational programs cater to different segments of
intermediaries focusing on varied product lines and functional areas. NISM Certifications have
established knowledge benchmarks for various market products and functions such as
Equities, Mutual Funds, Derivatives, Compliance, Operations, Advisory and Research.
NISM certification examinations and training programs provide a structured learning plan and
career path to students and job aspirants who wish to make a professional career in the
Securities markets. Till March 2023, NISM has issued more than 17 lakh certificates through
its Certification Examinations and CPE Programs.
NISM supports candidates by providing lucid and focused workbooks that assist them in
understanding the subject and preparing for NISM Examinations. The book covers all
important topics to enhance the quality of sales, distribution and related support services in
the mutual fund industry. It covers topics related to the basics of mutual funds, their role and
structure, different kinds of mutual fund schemes and their features, accounting, valuation
and taxation aspects underlying mutual funds and their distribution. The book also discusses
the concept of scheme evaluation, services to investors and prospective investors. It will be
immensely useful to all those who want to have a better understanding of Indian mutual fund
industry.
Dr. C.K.G. Nair
Director
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Disclaimer
The contents of this publication do not necessarily constitute or imply its endorsement,
recommendation, or favoring by the National Institute of Securities Markets (NISM) or the
Securities and Exchange Board of India (SEBI). This publication is meant for general reading
and educational purpose only.
The statements/explanations/concepts are of general nature and may not have taken into
account the particular objective/ move/ aim/ need/ circumstances of individual user/ reader/
organization/ institute. Thus, NISM and SEBI do not assume any responsibility for any wrong
move or action taken based on the information available in this publication.
Therefore, before acting on or following the steps suggested on any theme or before following
any recommendation given in this publication user/reader should consider/seek professional
advice.
The publication contains information, statements, opinions, statistics and materials that have
been obtained from sources believed to be reliable and the publishers of this title have made
best efforts to avoid any errors. However, publishers of this material offer no guarantees and
warranties of any kind to the readers/users of the information contained in this publication.
Since the work and research is still going on in all these knowledge streams, NISM and SEBI
do not warrant the totality and absolute accuracy, adequacy or completeness of this
information and material and expressly disclaim any liability for errors or omissions in this
information and material herein. NISM and SEBI do not accept any legal liability whatsoever
based on any information contained herein.
While the NISM Certification examination will be largely based on material in this workbook,
NISM does not guarantee that all questions in the examination will be from material covered
herein.
Acknowledgement
This workbook has been developed jointly by the Certification Team of National Institute of
Securities Markets (NISM), NISM Resource Persons—Mr. Sundar Sankaran, Ms. Sunita
Abraham, Mr. Amit Trivedi and reviewed by Mr. Joydeep Sen. NISM gratefully acknowledges
the contribution of the Examination Committee for NISM-Series-V-A: Mutual Fund
Distributors Certification Examination consisting of industry experts.
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About NISM Certifications
The School for Certification of Intermediaries (SCI) at NISM is engaged in developing and
administering Certification Examinations and CPE Programs for professionals employed in
various segments of the Indian securities markets. These Certifications and CPE Programs are
being developed and administered by NISM as mandated under Securities and Exchange
Board of India (Certification of Associated Persons in the Securities Markets) Regulations,
2007.
The skills, expertise and ethics of professionals in the securities markets are crucial in
providing effective intermediation to investors and in increasing the investor confidence in
market systems and processes. The School for Certification of Intermediaries (SCI) seeks to
ensure that market intermediaries meet defined minimum common benchmark of required
functional knowledge through Certification Examinations and Continuing Professional
Education Programmes on Mutual Funds, Equities, Derivatives Securities Operations,
Compliance, Research Analysis, Investment Advice and many more.
Certification creates quality market professionals and catalyzes greater investor participation
in the markets. Certification also provides structured career paths to students and job
aspirants in the securities markets.
About the Certification Examination for Mutual Fund Distributors
The examination seeks to create a common minimum knowledge benchmark for all persons
involved in selling and distributing mutual funds including:
• Individual Mutual Fund Distributors
• Employees of organizations engaged in sales and distribution of Mutual Funds
• Employees of Asset Management Companies especially persons engaged in sales
and distribution of Mutual Funds
The certification aims to enhance the quality of sales, distribution and related support
services in the mutual fund industry.
Examination Objectives
On successful completion of the examination, the candidate should:
• Know the basics of mutual funds, their role and structure, different kinds of mutual
fund schemes and their features.
• Understand how mutual funds are distributed in the market-place, how schemes are
to be evaluated, and how suitable products and services can be recommended to
investors and prospective investors in the market.
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• Get oriented to the legalities, accounting, valuation and taxation aspects
underlying mutual funds and their distribution.
Assessment Structure
The examination consists of 100 questions of 1 mark each and should be completed in 2
hours. The passing score for the examination is 50 percent. There shall be no negative
marking.
How to register and take the examination
To find out more and register for the examination please visit www.nism.ac.in
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CONTENTS
Contents
CHAPTER 1: INVESTMENT LANDSCAPE ............................................................................................... 13
1.1 Investors and their Financial Goals....................................................................................................... 13
1.2 Savings or Investments? ....................................................................................................................... 17
1.3 Different Asset Classes ......................................................................................................................... 19
1.4 Investment Risks ................................................................................................................................... 23
1.5 Risk Measures and Management Strategies ........................................................................................ 27
1.6 Behavioural Biases in Investment Decision Making ............................................................................. 28
1.7 Risk Profiling ……………………………………………………………………………………………………………………………………30
1.8 Understanding Asset Allocation ........................................................................................................... 30
1.9 Do-it-yourself versus Taking Professional Help .................................................................................... 32
CHAPTER 2: CONCEPT AND ROLE OF A MUTUAL FUND ....................................................................... 36
2.1 Concept of a Mutual fund ..................................................................................................................... 36
2.2 Classification of Mutual Funds.............................................................................................................. 44
2.3 Growth of the mutual fund industry in India ........................................................................................ 56
CHAPTER 3: LEGAL STRUCTURE OF MUTUAL FUNDS IN INDIA ............................................................. 58
3.1 Structure of Mutual Funds in India ....................................................................................................... 58
3.2 Key Constituents of a Mutual Fund ...................................................................................................... 59
3.3 Organization Structure of Asset Management Company .................................................................... 64
3.4 Role and Support function of Service Providers .................................................................................... 66
3.5 Role and Function of AMFI ................................................................................................................... 70
CHAPTER 4: LEGAL AND REGULATORY FRAMEWORK.......................................................................... 73
4.1 Role of Regulators in India.................................................................................................................... 73
4.2 Role of Securities and Exchange Board of India ................................................................................... 73
4.3 Due Diligence Process by AMCs for Distributors of Mutual Funds ....................................................... 88
4.4 Investor Grievance Redress Mechanism ............................................................................................... 88
4.5 AMFI Code of Conduct for Intermediaries ............................................................................................ 89
CHAPTER 5: SCHEME RELATED INFORMATION ................................................................................... 92
5.1 Mandatory Documents......................................................................................................................... 92
5.2 Non-Mandatory Disclosures ............................................................................................................... 109
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CHAPTER 6: FUND DISTRIBUTION AND CHANNEL MANAGEMENT PRACTICES ................................... 112
6.1 The role and importance of mutual fund distributors ........................................................................ 112
6.2 Different kinds of mutual fund distributors ........................................................................................ 113
6.3 Modes of distribution ......................................................................................................................... 115
6.4 Pre-requisites to become Distributor of a Mutual Fund ..................................................................... 118
6.5 Revenue for a mutual fund distributor ............................................................................................... 121
6.6 Commission Disclosure mandated by SEBI ......................................................................................... 128
6.7 Due Diligence Process by AMCs for Distributors of Mutual Funds ..................................................... 128
6.8 Difference between distributors and Investment Advisors ................................................................ 129
6.9 Nomination facilities to Agents/Distributors and Payment of Commission to Nominee ................... 131
6.10 Change of distributor .......................................................................................................................... 133
CHAPTER 7: NET ASSET VALUE, TOTAL EXPENSE RATIO AND PRICING OF UNITS................................ 136
7.1 Fair Valuation Principles ..................................................................................................................... 136
7.2 Computation of Net Assets of Mutual Fund Scheme and NAV ........................................................... 140
7.3 Dividends & Distributable Reserves .................................................................................................... 149
7.4 Concept of Entry and Exit Load and its impact on NAV ...................................................................... 150
7.5 Key Accounting and Reporting Requirements .................................................................................... 151
7.6 NAV, Total expense ratio and pricing of units for the Segregated Portfolio ...................................... 152
CHAPTER :8 TAXATION .................................................................................................................... 154
8.1 Applicability of taxes in respect of mutual funds................................................................................ 154
8.2 Capital Gains ...................................................................................................................................... 155
8.3 Dividend income (IDCW option) ......................................................................................................... 160
8.4 Stamp Duty on Mutual Fund Units ..................................................................................................... 161
8.5 Setting off of Capital Gains and Losses under Income Tax Act ........................................................... 162
8.6 Securities Transaction Tax .................................................................................................................. 162
8.7 Tax benefit under Section 80C of the Income Tax Act ........................................................................ 163
8.8 Tax Deducted at Source ...................................................................................................................... 164
8.9 Applicability of GST ............................................................................................................................. 164
CHAPTER 9: INVESTOR SERVICES ...................................................................................................... 166
9.1 The NFO process ................................................................................................................................. 166
9.2 New Fund Offer Price/On-going Offer Price for subscription.............................................................. 167
9.3 Investment Plans and Services ........................................................................................................... 168
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9.4 Allotment of Units to the Investor ...................................................................................................... 172
9.5 Account statements for investments .................................................................................................. 173
9.6 Mutual Fund Investors........................................................................................................................ 174
9.7 Filling the Application Form for Mutual Funds ................................................................................... 176
9.8 Financial Transactions with Mutual Funds ......................................................................................... 181
9.9 Cut-off Time and Time Stamping ........................................................................................................ 192
9.10 KYC Requirements for Mutual Fund Investors .................................................................................... 195
9.11 Systematic Transactions ..................................................................................................................... 203
9.12 Operational aspects of Systematic Transactions................................................................................ 207
9.13 Non-Financial Transactions in Mutual Funds ..................................................................................... 210
9.14 Change in Status of Special Investor Categories................................................................................. 216
9.15 Investor transactions – turnaround times .......................................................................................... 219
CHAPTER 10: RISK, RETURN AND PERFORMANCE OF FUNDS ............................................................ 223
10.1 General and Specific Risk Factors ....................................................................................................... 223
10.2 Factors that affect mutual fund performance .................................................................................... 235
10.3 Drivers of Returns and Risk in a Scheme ............................................................................................ 237
10.4 Measures of Returns........................................................................................................................... 246
10.5 SEBI Norms regarding Representation of Returns by Mutual Funds in India .................................... 251
10.6 Risks in fund investing with a focus on investors ................................................................................ 251
10.7 Measures of Risk................................................................................................................................. 254
10.8 Certain Provisions with respect to Credit risk ..................................................................................... 258
CHAPTER 11: MUTUAL FUND SCHEME PERFORMANCE ..................................................................... 266
11.1 Benchmarks and Performance ........................................................................................................... 266
11.2 Price Return Index or Total Return Index ........................................................................................... 267
11.3 Basis of Choosing an appropriate performance benchmark .............................................................. 267
11.4 Benchmarks for equity schemes ......................................................................................................... 268
11.5 Benchmarks for Debt Schemes ........................................................................................................... 269
11.6 Benchmarks for Other Schemes.......................................................................................................... 270
11.7 Quantitative Measures of Fund Manager Performance .................................................................... 272
11.8 Tracking Error ..................................................................................................................................... 274
11.9 Scheme Performance Disclosure......................................................................................................... 275
CHAPTER 12: MUTUAL FUND SCHEME SELECTION ............................................................................ 280
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