Study guide
2.4 Investment Risks
NISM-Series-V-A: Mutual Fund Distributors Certification Examination Exam
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1 Chapter 1: Introduction & Exam Overview
1.1 About the NISM-Series-V-A Examination 1.2 The 12-Unit Curriculum Map and a Study Plan
2 Chapter 2: Investment Landscape
2.1 Investors and Their Financial Goals 2.2 Savings or Investments? 2.3 Different Asset Classes 2.4 Investment Risks 2.5 Risk Measures and Management Strategies 2.6 Behavioural Biases in Investment Decision Making 2.7 Risk Profiling 2.8 Asset Allocation and Do-It-Yourself versus Professional Help
3 Chapter 3: Concept and Role of a Mutual Fund
3.1 Concept of a Mutual Fund 3.2 Classification of Mutual Funds 3.3 Growth of the Mutual Fund Industry in India
4 Chapter 4: Legal Structure of Mutual Funds in India
4.1 Structure of Mutual Funds in India 4.2 Key Constituents of a Mutual Fund 4.3 AMC Organisation Structure and Service Providers 4.4 Role and Function of AMFI
5 Chapter 5: Legal and Regulatory Framework
5.1 Role of Regulators in India 5.2 Role of SEBI and the Mutual Fund Regulations 5.3 Due Diligence Process by AMCs for Distributors 5.4 Investor Grievance Redress Mechanism 5.5 AMFI Code of Conduct for Intermediaries
6 Chapter 6: Scheme Related Information
6.1 Mandatory Documents I: Scheme Information Document and Statement of Additional Information 6.2 Mandatory Documents II: Key Information Memorandum and the Advertisement Code 6.3 Non-Mandatory Disclosures
7 Chapter 7: Fund Distribution and Channel Management Practices
7.1 The Role and Importance of Mutual Fund Distributors 7.2 Different Kinds of Mutual Fund Distributors 7.3 Modes of Distribution 7.4 Pre-requisites to Become a Distributor of a Mutual Fund 7.5 Revenue for a Mutual Fund Distributor 7.6 Commission Disclosure Mandated by SEBI 7.7 Distributors versus Investment Advisers, Nomination Facilities and Change of Distributor
8 Chapter 8: Net Asset Value, Total Expense Ratio and Pricing of Units
8.1 Fair Valuation Principles 8.2 Computation of Net Assets of a Scheme and NAV 8.3 Dividends and Distributable Reserves 8.4 Entry and Exit Load and Its Impact on NAV 8.5 The Expense Ratio Framework: Base Expense Ratio, Brokerage and Statutory Levies 8.6 Key Accounting and Reporting Requirements 8.7 NAV, Total Expense Ratio and Pricing of Units for the Segregated Portfolio
9 Chapter 9: Taxation
9.1 Applicability of Taxes in Respect of Mutual Funds 9.2 Capital Gains on Mutual Fund Units 9.3 Dividend (IDCW) Income and Tax Deducted at Source 9.4 Stamp Duty and Securities Transaction Tax on Mutual Fund Units 9.5 Setting Off Capital Gains and Losses under the Income Tax Act 9.6 Tax Benefit under Section 80C and Applicability of GST
10 Chapter 10: Investor Services
10.1 The New Fund Offer Process 10.2 New Fund Offer Price and Ongoing Offer Price for Subscription 10.3 Investment Plans and Services 10.4 Allotment of Units and Account Statements 10.5 Mutual Fund Investors: Who Can Invest 10.6 Filling the Application Form for Mutual Funds 10.7 Financial Transactions with Mutual Funds 10.8 Cut-Off Time and Time Stamping 10.9 KYC Requirements for Mutual Fund Investors 10.10 Systematic Transactions and Their Operational Aspects 10.11 Non-Financial Transactions, Special Investor Categories and Turnaround Times
11 Chapter 11: Risk, Return and Performance of Funds
11.1 General and Specific Risk Factors 11.2 Factors That Affect Mutual Fund Performance 11.3 Drivers of Returns and Risk in a Scheme 11.4 Measures of Returns 11.5 SEBI Norms Regarding Representation of Returns 11.6 Risks in Fund Investing: The Investor's Perspective 11.7 Measures of Risk and Provisions Relating to Credit Risk
12 Chapter 12: Mutual Fund Scheme Performance
12.1 Benchmarks and Performance 12.2 Price Return Index or Total Return Index 12.3 Basis of Choosing an Appropriate Performance Benchmark 12.4 Benchmarks for Equity Schemes 12.5 Benchmarks for Debt Schemes and Other Schemes 12.6 Quantitative Measures of Fund Manager Performance 12.7 Tracking Error and Scheme Performance Disclosure
13 Chapter 13: Mutual Fund Scheme Selection
13.1 Scheme Selection Based on Investor Needs, Preference and Risk Profile 13.2 Risk Levels in Mutual Fund Schemes 13.3 Scheme Selection Based on Investment Strategy 13.4 Selecting a Scheme Across AMCs or Within a Scheme Category 13.5 Selecting Options in Mutual Fund Schemes and Do's and Don'ts
2.4 Investment Risks
Key Takeaways Explain This Topic AI
Inflation risk is the erosion of purchasing power and dominates over long horizons.
Interest-rate risk moves bond prices inversely to yields and increases with duration.
Credit or default risk is the borrower failing to meet interest or principal obligations.
Liquidity risk is the inability to exit at a fair price, and it worsens exactly when markets are stressed.
Concentration risk arises from over-exposure to a single security, sector, issuer or asset class.
Last updated: August 2026
Risk Is Plural
Investors use "risk" to mean "the chance I lose money". The syllabus requires something more precise, because different risks have different causes, affect different asset classes, and call for different responses. Naming the right risk is routinely the whole content of an exam question.
Inflation Risk
Inflation risk , also called purchasing power risk, is the possibility that the return earned fails to keep pace with the rise in prices, so the money buys less at the end than at the start.
It is the risk that most investors ignore entirely, because the account balance never falls. A deposit compounding at 4% while inflation runs at 6% loses roughly 2% of purchasing power annually. It affects cash and debt most severely , and is the specific risk that equity exposure is intended to address over long horizons. Over a 20-year goal, inflation risk is larger than volatility risk — a conclusion many investors find counter-intuitive and which the syllabus asks you to defend.
Interest-Rate Risk
Bond prices move inversely to market yields. When yields rise, the fixed coupon on an existing bond becomes less attractive, so its price falls until its yield matches the market. The magnitude depends on duration : the longer the duration, the larger the price move for a given yield change. Approximate price change ~ - Modified Duration x change in yield
A fund with modified duration of 6 years facing a 1% rise in yields loses approximately 6% of value from that effect. This is why an overnight fund barely moves when rates change while a long-duration gilt fund moves a great deal. Interest-rate risk applies to all debt, including sovereign debt with no credit risk whatsoever.
Credit or Default Risk
Credit risk is the risk that a borrower fails to pay interest or repay principal when due. It also covers the intermediate case: a downgrade in the issuer's credit rating lowers the market price of its bonds even though no payment has been missed.
Credit risk rises as one moves down the rating scale from sovereign and AAA paper towards AA and A rated issuers. It is compensated by a higher yield, and the exam expects you to recognise that an unusually high yield on a debt scheme is a statement about its credit risk , not evidence of manager skill.
Liquidity Risk
Liquidity risk is the inability to buy or sell an asset in reasonable size at a fair price within a reasonable time. It has a cruel property: it is lowest when it is least needed and highest when it matters most. In calm markets almost everything trades; in stressed markets the buyers for lower-rated corporate paper disappear precisely when funds need to sell to meet redemptions.
It affects small-cap equity, lower-rated corporate debt and real estate most acutely. SEBI's stress-testing and liquidity-disclosure requirements for mid- and small-cap schemes exist specifically because of this asymmetry.
Concentration Risk
Concentration risk arises when too much of a portfolio depends on a single outcome — one stock, one sector, one issuer, one asset class, or in a debt fund one borrower group. A sector fund is concentrated by design; an investor with a single employer's stock, an employee stock option plan and a job at the same company is concentrated by accident and far more dangerously, because the income and the portfolio fail together.
Diversification is the direct mitigation, and it is the structural reason mutual funds exist at all.
Other Named Risks
Market or systematic risk — the risk affecting the entire market, which diversification cannot remove.
Currency risk — for schemes with overseas assets, the effect of exchange-rate movements on rupee returns.
Reinvestment risk — the risk that maturing coupons or principal must be redeployed at lower prevailing rates.
Business risk — the risk specific to one company's operations, which diversification does remove.
Regulatory or political risk — changes in law, tax or policy altering an investment's economics.
Mapping Risk to Asset Class
- Risk Most affected Principal mitigation
- Inflation Cash, deposits, long-held debt Equity exposure over long horizons
- Interest-rate Long-duration debt Shorten duration; match to horizon
- Credit Lower-rated corporate debt Higher rating quality; issuer diversification
- Liquidity Small caps, low-rated debt, real estate Size limits; quality; staying within listed markets
- Concentration Single-stock and sector exposure Diversification across issuers and sectors
- Market All equity Cannot be diversified away; managed by horizon and allocation
The final row carries a distinction the examination returns to repeatedly: business risk is diversifiable, market risk is not. Holding fifty stocks removes the risk that one company fails; it does nothing about a broad market decline. That difference is what beta measures, and it is why a well-diversified fund still falls in a bear market.