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NISM Certifications · NISM-Series-V-A: Mutual Fund Distributors · Mutual Fund Scheme Selection

A distributor recommends an index fund to a client who wants low-cost market exposure. Which feature of index funds best supports this recommendation?

Index funds passively replicate a chosen index rather than picking stocks, so research and trading costs are low and expense ratios are generally lower than for active funds. They do not guarantee index returns, as tracking error can arise.

  1. AActive stock picking by the fund manager to beat the index
  2. BPassive replication of an index, resulting in generally lower expense ratiosCorrect
  3. CGuaranteed returns equal to the index
  4. DInvestment only in debt instruments

Explanation

Index funds replicate a benchmark passively, so they need less research and trading, leading to lower costs. They face tracking error and do not guarantee returns, and they hold equities or bonds mirroring the index rather than being picked actively.

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