Mutual Fund Scheme Selection for NISM certification
With thousands of schemes, choosing well needs a method. This chapter goes step by step from the investor's needs to a category, then to a specific scheme, plan and option, with different checks for equity, debt, hybrid and passive schemes, and ends with when to sell.
Mutual FundsSeries V-A60 MCQs5 lessons14 flashcards4 memory tricks
Practise Mutual Fund Scheme Selection free
What you'll learn
- A step-by-step selection process
Follow a repeatable process from needs to a scheme. - Selecting an equity scheme
Compare equity schemes on the factors that matter. - Selecting a debt scheme
Match a debt fund's duration and credit quality to the investor's need. - Hybrid, passive and other schemes; plans and options
Choose among hybrid, index, ETF and FoF options, and pick the right plan and option. - When to sell or switch
Recognise good and bad reasons to exit a scheme.
Key formulas
| Expected return (rough) | Portfolio YTM − expense ratio (if yields don't change and no defaults) |
|---|
Concepts explained
Scheme selection funnel
Select in order: investor profile → asset allocation → category → scheme → plan and option → review.
What it means
- Category choice matters more than picking between good schemes in one category.
- Horizon decides the category first.
- Goal in 2 years, low risk
- Debt-heavy allocation
- Short duration / banking & PSU
- Pick a high-quality, low-cost scheme
Answer: Short duration debt fund
Matching duration to horizon
Choosing a debt fund whose duration is close to or below the investment horizon reduces the risk of losses from rate changes.
What it means
- Longer duration than horizon → rate risk.
- Use liquid/overnight for very short needs.
- Horizon 1 year; fund modified duration 8
- Rates rise 1%
- NAV falls ≈ 8%
Answer: A 1-year YTM of 7% can't cover an 8% fall
Core and satellite
A core of diversified, low-cost schemes holds most of the money; smaller satellites add specific bets.
What it means
- Core: index, flexi/large cap, short duration debt.
- Satellite: mid/small cap, sectoral, international.
SWP vs IDCW for income
For regular income, an SWP from the growth option is predictable and usually more tax-efficient than IDCW.
What it means
- IDCW is taxed fully at slab and varies.
- SWP taxes only the gain portion of each withdrawal.
- IDCW at 30%
- ₹6,000 tax
- SWP with ₹4,000 gain part, LTCG 12.5%
- ₹500 tax
Answer: SWP is lighter on tax (illustrative)
Memory tricks
Investor goal → asset allocation → category → scheme.
For debt funds, check duration, credit quality and liquidity.
Don't select or switch funds only on last year's top returns.
Most money in diversified core funds; small amounts in satellite themes.
Try 3 NISM-style questions
Q1. In selecting a debt fund, the PRC cell helps to
- Know the exit load and its period
- Find out the fund manager's age, experience and tenure
- See the maximum credit and interest rate risk the fund may take
- See daily NAV
Show answer
Answer: (3) See the maximum credit and interest rate risk the fund may take
PRC shows the ceiling of risk.
Q2. Which product can complement mutual funds in a retiree's income plan?
- A small cap equity fund
- A thematic infrastructure fund
- A credit risk fund
- Senior Citizens' Savings Scheme
Show answer
Answer: (4) Senior Citizens' Savings Scheme
SCSS gives guaranteed quarterly income for seniors.
Q3. Which is a good reason to exit a scheme?
- It underperformed its benchmark for one quarter
- The scheme changed its mandate in a way that no longer fits the investor
- A new NFO in the same category is being advertised widely
- The market fell 10%
Show answer
Answer: (2) The scheme changed its mandate in a way that no longer fits the investor
A mandate change can make a scheme unsuitable.
Practise all 60 questions Free · explanations for every option · see where you go wrong