Level 1 — RecognitionFunds, ETFs & Pooled Vehicles

Funds, ETFs & Pooled Vehicles

⏱ 20 minutes30 marksprintable — key stays hidden on paper

Level 1 — Recognition Test

Time Limit: 20 minutes
Total Marks: 30

Section A — Multiple Choice Questions (1 mark each)

Choose the single best answer.

Q1. The NAV of a mutual fund is calculated as:

(a) Total assets ÷ number of investors
(b) (Total assets − Total liabilities) ÷ Total outstanding units
(c) Market price ÷ face value
(d) Total income ÷ expense ratio

Q2. Which fund type aims to replicate, not beat, a benchmark index?

(a) Actively managed fund
(b) Passive index fund
(c) Arbitrage fund
(d) Sector fund

Q3. An ETF differs from a traditional index mutual fund primarily because ETFs:

(a) Have no expense ratio
(b) Trade on an exchange throughout the day like a stock
(c) Guarantee returns
(d) Cannot track an index

Q4. "Tracking error" of an index fund measures:

(a) The manager's stock-picking skill
(b) The deviation of the fund's returns from the benchmark index's returns
(c) The exit load charged
(d) The dividend yield

Q5. Which statement about SIP (Systematic Investment Plan) is correct?

(a) It invests a fixed sum at regular intervals, benefiting from rupee-cost averaging
(b) It invests the entire amount at once
(c) It only works for gold ETFs
(d) It guarantees higher returns than lumpsum always

Q6. ELSS funds are attractive mainly because they:

(a) Have no market risk
(b) Offer a tax deduction under Section 80C with a 3-year lock-in
(c) Are guaranteed by the government
(d) Have no lock-in period

Q7. A Direct plan of a mutual fund typically has a lower expense ratio than a Regular plan because:

(a) It gives higher returns by law
(b) It excludes distributor/agent commission
(c) It invests only in bonds
(d) It has no fund manager

Q8. A REIT (Real Estate Investment Trust) primarily allows investors to:

(a) Buy physical land directly
(b) Invest in income-generating real estate and receive rental-based distributions
(c) Trade currencies
(d) Avoid all taxes

Q9. A "Fund of Funds" invests primarily in:

(a) Individual company stocks
(b) Units of other mutual funds
(c) Government treasury bills only
(d) Physical gold bars

Q10. Which of the following is a hybrid fund?

(a) A fund holding only equities
(b) A fund holding only bonds
(c) A fund holding a mix of equity and debt
(d) A pure gold ETF

Section B — Matching (1 mark each, 5 marks)

Q11. Match each vehicle in Column A with its correct description in Column B.

Column A	Column B
(i) Gold ETF	(P) Invests in units of other funds
(ii) InvIT	(Q) Tracks the price of physical gold
(iii) Closed-end fund	(R) Pools money to invest in infrastructure assets
(iv) Fund of Funds	(S) Fixed number of units; traded on exchange, no ongoing new subscriptions
(v) International fund	(T) Invests in overseas equities/markets

Section C — True/False with Justification (2 marks each: 1 for T/F, 1 for reason)

Q12. An actively managed fund generally charges a higher expense ratio than a passive index fund. (True/False + justify)

Q13. NAV of an open-ended fund is fixed and never changes daily. (True/False + justify)

Q14. An exit load is a fee charged when you sell/redeem units within a specified period. (True/False + justify)

Q15. A lumpsum investment removes all timing risk compared to a SIP. (True/False + justify)

Q16. ETFs typically have higher expense ratios than actively managed equity funds. (True/False + justify)

Q17. REITs and InvITs are required to distribute a large share of their income to unitholders. (True/False + justify)

Q18. Higher tracking error is generally desirable for an index fund. (True/False + justify)

END OF PAPER

Answer keyMark scheme & solutions

Section A (10 marks)

Q1 — (b) NAV = (Total Assets − Total Liabilities) ÷ Units outstanding. It is the per-unit value of the fund's net assets. (1)

Q2 — (b) Passive index funds replicate a benchmark; they do not try to outperform it. (1)

Q3 — (b) ETFs are listed and trade intraday at market prices; mutual funds transact only at end-of-day NAV. (1)

Q4 — (b) Tracking error = deviation of fund returns from index returns; a passive fund seeks to minimise it. (1)

Q5 — (a) SIP invests fixed amounts periodically, averaging the purchase cost (rupee-cost averaging). (1)

Q6 — (b) ELSS qualifies for 80C deduction (up to ₹1.5 lakh) and has a 3-year lock-in (shortest among 80C options). (1)

Q7 — (b) Direct plans exclude distributor commission, lowering the expense ratio and slightly boosting returns. (1)

Q8 — (b) REITs invest in income-producing real estate and pass rental income to unitholders. (1)

Q9 — (b) A Fund of Funds holds units of other mutual funds rather than direct securities. (1)

Q10 — (c) Hybrid funds hold a mix of asset classes (equity + debt). (1)

Section B (5 marks)

Q11:

(i) → Q (Gold ETF tracks gold price)
(ii) → R (InvIT invests in infrastructure)
(iii) → S (Closed-end: fixed units, exchange-traded)
(iv) → P (FoF invests in other funds)
(v) → T (International fund → overseas markets)

1 mark per correct pair (5).

Section C (14 marks)

Q12 — True. Active management involves research, analysts, and higher turnover, so fees are higher than low-cost passive funds. (T=1, reason=1)

Q13 — False. Open-ended NAV is recalculated daily based on the market value of underlying holdings, so it changes each business day. (F=1, reason=1)

Q14 — True. An exit load penalises early redemption within a defined holding period to discourage short-term churn. (T=1, reason=1)

Q15 — False. A lumpsum invests everything at one price point, so it carries more timing risk; SIP spreads entry across time to reduce timing risk. (F=1, reason=1)

Q16 — False. ETFs (mostly passive) usually have lower expense ratios than actively managed equity funds. (F=1, reason=1)

Q17 — True. Regulations require REITs/InvITs to distribute a high proportion (e.g., ~90%) of net distributable cash flow to unitholders. (T=1, reason=1)

Q18 — False. Lower tracking error is desirable; it means the fund closely follows its index. (F=1, reason=1)

Worked numeric illustration (for NAV concept, Q1)

If a fund has assets ₹1,050 crore, liabilities ₹50 crore, and 10 crore units: NAV = (1050 − 50) ÷ 10 = ₹100 per unit.

[
  {"claim":"NAV = (assets - liabilities)/units = (1050-50)/10 = 100","code":"assets=1050; liabilities=50; units=10; nav=(assets-liabilities)/units; result = nav==100"},
  {"claim":"Direct plan return exceeds regular by the commission saved: 12% - 1% = 11%","code":"gross=12; commission=1; direct=gross; regular=gross-commission; result = (regular==11 and direct>regular)"},
  {"claim":"Correct matching count in Q11 is 5","code":"pairs={'i':'Q','ii':'R','iii':'S','iv':'P','v':'T'}; result = len(pairs)==5"},
  {"claim":"REIT payout ratio of 90% of 200 crore distributable income = 180 crore","code":"income=200; payout=0.90; dist=income*payout; result = dist==180"}
]