Study guide
13.5 Selecting Options in Mutual Fund Schemes and Do's and Don'ts
NISM-Series-V-A: Mutual Fund Distributors Certification Examination Exam
Track your progress as you read
Finished sections get a check mark.
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
13.5 Selecting Options in Mutual Fund Schemes and Do's and Don'ts
Key Takeaways Explain This Topic AI
The plan decision is regular versus direct; the option decision is growth versus IDCW.
Growth is generally preferable for accumulation because gains compound and tax is deferred.
IDCW reinvestment is the least efficient sub-option, incurring tax and stamp duty with no cash received.
Do not select schemes on last year's ranking or on a low NAV.
Do document the goal, risk profile and reason for every recommendation.
Last updated: August 2026
- Two Independent Choices Plan -> Regular or Direct -> determines COST
- Option -> Growth or IDCW -> determines whether income is DISTRIBUTED
All four combinations exist, and the two decisions are made independently.
Choosing the Plan
- Regular Direct
- Distributor Yes No
- Expense ratio Higher Lower
- Portfolio and manager Identical Identical
The honest framing: the direct plan's saving is real and compounds; it is also frequently smaller than the cost of one badly timed exit or one mismatched allocation. The comparison is the cost of the regular plan against the value of what the distributor does .
For an investor with time, knowledge and demonstrated temperament, direct plans are rational and a distributor should say so. For most investors, professional support is worth its cost provided the professional actually delivers it — quantified goals, a documented allocation and risk profile, scheduled rebalancing and availability when markets fall.
Choosing the Option
- Investor need Option
- Accumulation, no cash requirement Growth
- Regular cash from the portfolio Growth with a systematic withdrawal plan
- Genuine income need, low tax slab IDCW payout is defensible
- Accumulation, currently in IDCW reinvestment Switch to growth
Why growth generally wins:
- Gains compound within the scheme rather than being distributed and taxed
- Tax is deferred until redemption
Capital gains rates are usually lower than slab rates — for a 30%-slab investor in an equity-oriented scheme, 12.5% long-term against 30% on distributions
The investor controls the timing and amount of any withdrawal
Why IDCW reinvestment is the worst combination: no cash is received, the distribution is taxable at slab rates, and stamp duty of 0.005% is charged on the units issued. The growth option accumulates the same amounts with neither charge. An investor found in IDCW reinvestment for an accumulation goal should be moved to growth.
Do's
Do begin with the goal, horizon and risk profile. Category follows from these; scheme follows from category.
Do quantify the goal in future-value terms. INR 15 lakh today at 8% inflation is roughly INR 37.8 lakh in twelve years, and the plan must be sized against the second figure.
Do check the tax regime before recommending ELSS. Under the new regime the section 80C deduction is unavailable, and the lock-in buys nothing.
Do review the investor's existing portfolio before adding to it.
Do compare like with like — same category, same periods, Tier 1 benchmark on a TRI basis.
Do weigh cost heavily , since it is the only factor whose effect is certain.
Do read the portfolio, not only the return — capitalisation split, rating profile, duration, turnover, overlap.
Do prefer rolling returns over trailing returns.
Do disclose commission , including on the competing schemes considered, and mention that direct plans exist.
Do explain the risk-o-meter and the scheme-specific risk factors.
Do ensure nomination is registered on every folio, or the opt-out declaration signed.
Do document the goal, profile and reason for each recommendation, dated.
Do review annually and rebalance on a schedule.
Don'ts
Don't select on last year's ranking. Category leadership rotates, and buying the previous year's leader often means buying a strategy as its favourable conditions end.
Don't say a low NAV is cheap. NAV per unit reflects a scheme's age and distribution history, not the valuation of its portfolio. This applies with equal force to an NFO at INR 10.
Don't guarantee or project returns. Mutual funds carry no assurance of return, and saying otherwise is a conduct breach as well as a misrepresentation.
Don't describe a debt scheme as a fixed deposit substitute. Debt schemes are marked to market and carry interest-rate and credit risk.
Don't churn. Switching to generate commission costs the investor tax and load, and is an express breach of the AMFI Code.
Don't over-diversify within a category. Five large cap funds hold substantially the same companies.
Don't ignore the horizon. Equity for a short goal and cash for a long one are both errors.
Don't recommend a switch without stating the tax consequence. A switch is a redemption.
Don't rebate commission or offer inducements. Expressly prohibited.
Don't create your own performance material. Use AMC-approved material; self-made charts almost never satisfy the period, benchmark, TRI and caution requirements simultaneously.
Don't accept forms signed in blank.
Don't promise a particular day's NAV. Applicable NAV depends on receipt at an Official Point of Acceptance and, for purchases, on realisation of funds.
The Test to Apply
Before finalising any recommendation, ask one question:
If this investor's file were reviewed in five years by someone entirely neutral, would the reasoning recorded today explain why this scheme was suitable for this goal?
If the answer is yes, the recommendation is sound. If the only available explanation is that the scheme was highly ranked at the time, it is not — and that is precisely the file that fails an AMC due-diligence review.