NISM V-A Mutual Fund Scheme Performance — Practice Questions
Practise comparing schemes properly: benchmark selection, point-to-point versus rolling returns, the limits of past performance, and how a scheme's returns should and should not be presented to an investor.
45 questions on Scheme Performance in the ScoreSetu bank — each with a detailed explanation and, where useful, a memory hook.
What this topic covers
- Choosing the right benchmark
- Point-to-point vs rolling returns
- Comparing like with like
- Presenting performance fairly
Free sample questions
1. Identify the false statement(s) regarding benchmarks used for mutual fund schemes.
- A. Asset Management Companies (AMCs) are permitted to select a sectoral index as the benchmark for a multi-cap mutual fund
- B. The BSE Sensex is the most appropriate benchmark for a multi-cap fund because it includes leading large-cap companies
- C. Both of the above are false ✅
- D. None of the above
Answer: C — Both of the above are false
Why: A sector index represents only one industry or sector, whereas a multi-cap fund invests across multiple sectors and market capitalizations. Therefore, a sector index would NOT properly reflect the fund’s diversified investment universe. BSE Sensex contains only 30 large-cap companies and is therefore NOT the most appropriate benchmark for a multi-cap mutual fund, which invests across large-cap, mid-cap, and small-cap stocks. A broader index like the Nifty 500 is usually more suitable.
💡 Multi-cap needs a BROAD benchmark (Nifty 500); a sector index or 30-stock Sensex won't fit.
2. Identify the TRUE statement with respect to 'Tracking Error'. A. Tracking error is calculated as the standard deviation of the excess returns generated by the fund B. While comparing different index funds, one should invest in a fund with high tracking error
- A. Only A is true ✅
- B. Only B is true
- C. Both A and B are true
Answer: A — Only A is true
Why: Tracking error measures how closely a fund follows its benchmark index. The tracking error has to be low for a consistently out-performing fund. While investing in an Index Fund, one should invest in a fund with the lowest tracking error.
💡 Tracking Error = SD of excess returns; pick fund with LOWEST TE (only A true).
3. Identify the TRUE statement/s -
- A. Rolling return are the average annualized returns calculated for alternate holding period
- B. Holding period returns (HPR) do not provide an accurate picture of returns of fund if its initial value is too high or low.
- C. Both 1 and 2 ✅
- D. None of the above
Answer: C — Both 1 and 2
Why: Rolling Returns: These are indeed the average annualized returns calculated for overlapping or alternate holding periods. They provide a better perspective on fund performance over time as they smooth out short-term volatility. Holding Period Returns (HPR): HPR might not always give an accurate picture of a fund's performance when the initial value is significantly too high or too low. This is because HPR is sensitive to the start and end points of the measurement period.
💡 Rolling returns = avg annualized over overlapping periods; HPR skewed by high/low start value (both).
Practise all 45 Scheme Performance questions
Plus the full 743-question NISM V-A bank and real-feel mock exams.