Mutual Fund Scheme Selection carries 15 marks in NISM Series V-A — joint-largest with Investor Services. It is also the most memorisable chapter in the syllabus, because a large share of it is four hierarchies you either know or you don't.
The four hierarchies to memorise
The workbook sets out risk-return orderings. Learn them in order and a meaningful block of marks becomes automatic.
1. Across categories
Liquid funds → Debt funds → Hybrid funds → Equity funds
Risk and potential return both rise from left to right.
2. Debt funds, by interest-rate risk
Overnight → Liquid → Ultra short duration → Low duration → Short duration → Medium duration → Medium to long duration → Long duration
The longer the duration, the greater the interest-rate risk. Bond prices move inversely to rates, and longer portfolios move more.
3. Debt funds, by credit risk
Gilt → Banking and PSU → Corporate bond → Credit risk fund
Gilt funds hold government securities and carry effectively no credit risk. The name of the last one tells you where it sits.
4. Equity funds, by risk
Small cap → Mid cap → Multi cap → Large and mid-cap → Large cap
Risk decreases from left to right here — smaller companies are riskier than larger ones. Read the direction carefully, because the exam will phrase it either way.
And a fifth, on concentration:
Diversified → Focused → Thematic → Sector
The narrower the portfolio, the higher the risk.
Practise all of these free on ScoreSetu — 43 questions with explanations.
Risk appetite has three parts
The workbook is specific: an investor's risk appetite is a function of the need to take risk, the ability to take risk and the willingness to take it.
That three-part split is directly examinable. An investor with a long horizon and a strong financial position has the ability to take equity risk; if they cannot sleep through a fall, they lack the willingness, and the recommendation must respect that.
Age is a poor proxy
It is popularly believed that younger investors can take more risk. The workbook pushes back: investors of the same age may have entirely different goals and financial situations, and many goals belong to a whole family rather than one person.
The better guide is the time horizon to the specific goal. The longer the horizon, the greater the ability to take risk; the nearer the goal, the more risk should be avoided.
Core and satellite
A portfolio should be split:
- The core is invested for the investor's long-term needs and goals — diversified equity, large cap, mid-cap. It broadly tracks the market.
- The satellite holds tactical positions taken when conditions favour them: sector funds when the sector's drivers are positive, long-term gilt funds when rates are expected to fall, gold when inflation or uncertainty is high.
A moderate investor might run roughly 80% core and 20% satellite. A conservative investor keeps the tactical portion very small; one comfortable with more risk may run a larger one.
Selecting between two similar schemes
Once the category is right, the workbook's parameters are:
- Performance, compared against the right benchmark and a peer group over the same period. Comparing across categories or periods measures the market, not the manager.
- Portfolio and strategy — the objective, the strategy devised to meet it, and the portfolio actually constructed.
- Fund age and size. A very small corpus spreads fixed costs thinly and struggles to absorb large redemptions; a very large one struggles to deploy in less liquid stocks.
- Portfolio turnover. A high ratio means frequent churn, and the transaction costs are borne by the scheme.
- Expenses. The TER is charged inside the NAV, so between two similar schemes the cheaper one starts each year ahead.
The one thing not to do
Do not select on last year's return. It ignores whether the scheme suits the investor and whether the performance came from a market phase that has passed. Selection starts from need, horizon and risk profile; performance is one input among several.
Practise Scheme Selection free, then sit a timed mock to see whether the hierarchies stick under pressure.