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Level 2 — RecallFunds, ETFs & Pooled Vehicles

Funds, ETFs & Pooled Vehicles

⏱ 30 minutes40 marksprintable — key stays hidden on paper

Level: 2 (Recall & Standard Problems) Time Limit: 30 minutes Total Marks: 40

Q1. Define Net Asset Value (NAV) of a mutual fund and write the formula used to compute it. (4 marks)

Q2. State any three differences between actively managed funds and passively managed (index) funds. (3 marks)

Q3. An investor buys units in a fund. The fund has total assets worth \50{,}000{,}000,liabilitiesof, liabilities of $2{,}000{,}000,and, and 4{,}000{,}000$ units outstanding. Calculate the NAV per unit. (4 marks)

Q4. Define expense ratio and tracking error. Briefly explain how a high expense ratio may contribute to tracking error in an index fund. (4 marks)

Q5. Distinguish between SIP (Systematic Investment Plan) and lumpsum investing. State one advantage of each. (4 marks)

Q6. Classify mutual funds by asset class into equity, debt, and hybrid funds. Give a one-line description of each. (6 marks)

Q7. What is an ELSS fund? State its lock-in period and the tax benefit it provides under the Indian Income Tax Act. (4 marks)

Q8. A fund charges an exit load of 1%1\% if redeemed within one year. An investor redeems units worth \20{,}000$ after 6 months. Calculate the exit load payable and the net amount received. (4 marks)

Q9. Define a REIT and an InvIT. State one key difference between them. (4 marks)

Q10. Explain the difference between a direct plan and a regular plan of a mutual fund, and state which typically has a lower expense ratio and why. (3 marks)

End of Paper

Answer keyMark scheme & solutions

Q1. (4 marks)

  • NAV is the per-unit market value of a mutual fund's assets after deducting liabilities. (2)
  • Formula: NAV=Total Assets−Total LiabilitiesNumber of Units Outstanding\text{NAV} = \frac{\text{Total Assets} - \text{Total Liabilities}}{\text{Number of Units Outstanding}} (2) Why: NAV reflects what each unit is worth on a given day; it is the price at which units are bought/sold.

Q2. (3 marks) — 1 mark each (any three):

  • Management: Active = fund manager picks securities to beat a benchmark; Passive = replicates an index.
  • Cost: Active has higher expense ratios; Passive has lower.
  • Goal: Active aims to outperform; Passive aims to match index returns.
  • Tracking error: Passive minimizes it; Active does not target it.

Q3. (4 marks)

  • Net Assets = 50,000,000−2,000,000=48,000,00050{,}000{,}000 - 2{,}000{,}000 = 48{,}000{,}000 (2)
  • NAV = \dfrac{48{,}000{,}000}{4{,}000{,}000} = \12$ per unit (2) Why: Liabilities are subtracted before dividing by units outstanding.

Q4. (4 marks)

  • Expense ratio: annual fee charged by a fund as a percentage of assets under management, covering management and operating costs. (1.5)
  • Tracking error: the standard deviation of the difference between the fund's returns and its benchmark index's returns. (1.5)
  • Link: A higher expense ratio reduces net returns delivered to investors, causing the fund to lag the index, thereby widening tracking error. (1)

Q5. (4 marks)

  • SIP: invest a fixed amount at regular intervals (e.g., monthly). (1)
  • Lumpsum: invest the entire amount at once. (1)
  • SIP advantage: rupee-cost averaging; reduces timing risk. (1)
  • Lumpsum advantage: full capital deployed immediately, benefiting from long-term compounding if market rises. (1)

Q6. (6 marks) — 2 marks each:

  • Equity funds: invest primarily in stocks; higher risk, higher return potential. (2)
  • Debt funds: invest in fixed-income securities (bonds, treasury bills); lower risk, stable returns. (2)
  • Hybrid funds: invest in a mix of equity and debt; balance risk and return. (2)

Q7. (4 marks)

  • ELSS (Equity Linked Savings Scheme) is a tax-saving equity mutual fund. (2)
  • Lock-in period: 3 years. (1)
  • Tax benefit: deduction up to \150{,}000$ (₹1.5 lakh) under Section 80C. (1)

Q8. (4 marks)

  • Exit load = 1\% \times 20{,}000 = \200$ (2)
  • Net amount = 20{,}000 - 200 = \19{,}800$ (2) Why: Exit load within holding period is deducted from redemption value.

Q9. (4 marks)

  • REIT (Real Estate Investment Trust): pooled vehicle that owns/operates income-generating real estate (offices, malls). (1.5)
  • InvIT (Infrastructure Investment Trust): pooled vehicle that owns income-generating infrastructure assets (roads, power lines). (1.5)
  • Difference: REITs invest in real estate; InvITs invest in infrastructure projects. (1)

Q10. (3 marks)

  • Regular plan: bought through a distributor/broker who earns commission. (1)
  • Direct plan: bought directly from the AMC with no distributor commission. (1)
  • Direct plans have a lower expense ratio because no distribution commission is charged, giving higher net returns. (1)
[
  {"claim":"Q3 NAV per unit = 12","code":"total_assets=50000000; liabilities=2000000; units=4000000; nav=(total_assets-liabilities)/units; result = nav==12"},
  {"claim":"Q8 exit load = 200 and net = 19800","code":"amt=20000; load=0.01*amt; net=amt-load; result = (load==200) and (net==19800)"},
  {"claim":"ELSS lock-in is 3 years","code":"lock_in=3; result = lock_in==3"}
]