Noesis
Level 4 — ApplicationFunds, ETFs & Pooled Vehicles

Funds, ETFs & Pooled Vehicles

50 marksprintable — key stays hidden on paper

Level 4 — Application (novel problems, no hints) Time: 60 minutes | Total Marks: 50

Q1. NAV & fund mechanics (10 marks)

An open-ended equity mutual fund reports the following at the close of a trading day:

  • Market value of all portfolio securities: ₹ 486.0 crore
  • Cash and receivables: ₹ 9.2 crore
  • Accrued liabilities (payables, unpaid fees): ₹ 3.7 crore
  • Units outstanding: 24.5 crore

(a) Compute the NAV per unit. (3) (b) An investor places a purchase order of ₹ 50,000 at this NAV with an entry-load-free direct plan. How many units are allotted (round to 3 decimals)? (3) (c) The next day the portfolio securities rise 2.5% in value while cash, liabilities and units outstanding are unchanged. Compute the new NAV and the investor's one-day gain in ₹. (4)

Q2. Expense ratio & tracking error (12 marks)

Two index funds track the same benchmark index which returned 12.00% over a year.

Fund Gross return (before expenses) Expense ratio
A (Direct) 12.05% 0.20%
B (Regular) 12.05% 1.10%

(a) Compute the net investor return for each fund. (3) (b) Compute the tracking error (defined here as |net return − benchmark return|) for each fund. Which fund tracks better and why? (4) (c) An investor holds ₹ 8,00,000 in Fund B. If they switch to Fund A and returns/expense ratios stay constant, quantify the additional annual return in rupees purely from the lower expense ratio. (3) (d) State one reason (other than expense ratio) that could cause a positive tracking error even in a well-run index fund. (2)

Q3. SIP vs Lumpsum (12 marks)

An investor puts ₹ 10,000 into an equity fund on the 1st of each month for 4 months. The fund NAV on the four purchase dates is: ₹ 100, ₹ 80, ₹ 125, ₹ 100.

(a) Compute total units accumulated and the average cost per unit under the SIP. (4) (b) Compute the simple average of the four NAVs and explain why the SIP average cost differs from it. (3) (c) Suppose instead the investor deployed the full ₹ 40,000 as a lumpsum on day 1 (NAV ₹ 100). At the end of the period, NAV is ₹ 100. Compare the ending portfolio value of the SIP vs the lumpsum and state which won and by how much. (5)

Q4. Fund selection & ELSS (8 marks)

An investor in the 30% tax bracket invests ₹ 1,50,000 in an ELSS fund at the start of the financial year (assume the full amount is deductible under the relevant section, and ignore surcharge/cess).

(a) Compute the immediate income-tax saving from this investment. (2) (b) State the lock-in period of ELSS and contrast it with the lock-in/liquidity of an ordinary open-ended equity fund. (3) (c) The ELSS grows to ₹ 2,10,000 at the end of 3 years. If long-term capital gains above ₹ 1,00,000 are taxed at 10%, compute the LTCG tax payable on redemption. (3)

Q5. Vehicle matching & reasoning (8 marks)

For each client scenario, name the single most appropriate pooled vehicle from the chapter and justify in one line.

(a) A conservative investor wants exposure to commercial rental income from Grade-A office buildings without buying property directly. (2) (b) An investor wants gold exposure held in demat form, priced continuously through the trading day, avoiding making-charges and storage. (2) (c) An Indian investor wants US technology-stock exposure but does not have an overseas brokerage account. (2) (d) An investor wants a single product that automatically allocates across several other mutual fund schemes managed under one wrapper. (2)

Answer keyMark scheme & solutions

Q1 (10)

(a) Net assets = securities + cash − liabilities = 486.0 + 9.2 − 3.7 = ₹ 491.5 crore. (1) NAV = Net assets / units = 491.5 / 24.5 = ₹ 20.0612 per unit (2) (491.5/24.5 = 20.06122...)

(b) Units = 50,000 / 20.0612 = 2492.377 units (3) (50000 / 20.06122 = 2492.38)

(c) New securities value = 486.0 × 1.025 = 498.15 crore. (1) New net assets = 498.15 + 9.2 − 3.7 = 503.65 crore. New NAV = 503.65 / 24.5 = ₹ 20.5571 (2) Gain per unit = 20.5571 − 20.0612 = 0.4959; total gain = 0.4959 × 2492.377 ≈ ₹ 1236 (1) (Alternatively: value grows because only securities rose, so NAV gain < 2.5% of total NAV.)

Q2 (12)

(a) Net = gross − expense ratio. Fund A: 12.05 − 0.20 = 11.85%; Fund B: 12.05 − 1.10 = 10.95%. (3)

(b) TE = |net − 12.00|. Fund A: |11.85 − 12.00| = 0.15%; Fund B: |10.95 − 12.00| = 1.05%. (2) Fund A tracks better — lower tracking error because its low expense ratio leaves net return closest to the benchmark. (2)

(c) Difference in expense ratio = 1.10 − 0.20 = 0.90%. Extra return = 0.90% × 8,00,000 = ₹ 7,200 per year. (3)

(d) Any one: cash drag (uninvested cash for redemptions), transaction/rebalancing costs, sampling/optimisation not full replication, timing of dividend reinvestment, index changes/corporate actions. (2)

Q3 (12)

(a) Units bought each month = 10,000 / NAV:

  • 10000/100 = 100
  • 10000/80 = 125
  • 10000/125 = 80
  • 10000/100 = 100

Total units = 100+125+80+100 = 405 units. (2) Total invested = ₹ 40,000. Average cost = 40,000 / 405 = ₹ 98.765 per unit. (2)

(b) Simple average NAV = (100+80+125+100)/4 = 405/4 = ₹ 101.25. (1) SIP average cost (98.765) < simple average (101.25) because fixed-rupee investing buys more units when NAV is low and fewer when high (rupee-cost averaging), pulling average cost below the arithmetic mean of prices. (2)

(c) SIP ending value = 405 units × ₹ 100 = ₹ 40,500. (2) Lumpsum: units = 40,000/100 = 400; ending value = 400 × 100 = ₹ 40,000. (2) SIP wins by ₹ 500 — it benefited from cheaper units bought during the dip to ₹ 80. (1)

Q4 (8)

(a) Tax saving = 30% × 1,50,000 = ₹ 45,000. (2)

(b) ELSS lock-in = 3 years (shortest among tax-saving instruments). (1.5) An ordinary open-ended equity fund has no lock-in — redeemable any business day at NAV (possibly subject to short exit load), so it is more liquid but offers no 80C deduction. (1.5)

(c) Capital gain = 2,10,000 − 1,50,000 = ₹ 60,000. (1) Since gain (₹ 60,000) < ₹ 1,00,000 exemption threshold, taxable LTCG = 0 → LTCG tax = ₹ 0. (2)

Q5 (8)

(a) REIT — pools capital to own income-generating commercial real estate; distributes rental income; listed/liquid. (2) (b) Gold ETF — demat, intraday-priced, no making charges/storage. (2) (c) International fund / feeder fund (fund-of-funds investing abroad) — gives US tech exposure via a domestic scheme, no overseas account needed. (2) (d) Fund of Funds (FoF) — single scheme investing in a portfolio of other funds. (2)

[
  {"claim":"Q1a NAV = 20.0612","code":"nav=(486.0+9.2-3.7)/24.5; result = abs(nav-20.0612)<0.001"},
  {"claim":"Q1b units allotted approx 2492.377","code":"nav=(486.0+9.2-3.7)/24.5; u=50000/nav; result = abs(u-2492.377)<0.01"},
  {"claim":"Q1c one-day gain approx 1236","code":"nav0=(486.0+9.2-3.7)/24.5; nav1=(486.0*1.025+9.2-3.7)/24.5; u=50000/nav0; gain=(nav1-nav0)*u; result = abs(gain-1236)<3"},
  {"claim":"Q2 net returns 11.85 and 10.95","code":"result = (12.05-0.20==11.85) and (12.05-1.10==10.95)"},
  {"claim":"Q2c extra return 7200","code":"result = (1.10-0.20)/100*800000==7200"},
  {"claim":"Q3a total units 405 and avg cost 98.765","code":"u=10000/100+10000/80+10000/125+10000/100; avg=40000/u; result = (u==405) and abs(avg-98.765)<0.01"},
  {"claim":"Q3c SIP beats lumpsum by 500","code":"u=10000/100+10000/80+10000/125+10000/100; sip=u*100; lump=(40000/100)*100; result = sip-lump==500"},
  {"claim":"Q4a tax saving 45000 and Q4c LTCG tax 0","code":"save=0.30*150000; gain=210000-150000; tax=0.10*max(gain-100000,0); result = (save==45000) and (tax==0)"}
]