Category III Alternative Investment Fund Managers

Syllabus and chapter weightage

Weightages are taken from the official syllabus table published in the NISM workbook, so you can see exactly where the marks are.

Every chapter can be read free, no account needed — tap a chapter to open its plain-English Foundation lesson.

Sample questions

5 questions from the chapter tests, one per chapter. Pick your answer before you open the explanation.

1. Question 1 · Chapter 1: Investments Landscape

   The additional return required by the investor over and above the normal rate of return, when the investment is risky, is called:

   1. A.Alpha
   2. B.Risk free rate of return
   3. C.Risk premium
   4. D.Real rate of return
   Show the answer

   Answer: C. Risk premium

   The nominal risk-free rate of return is the rate an investor is CERTAIN of receiving on the due date - certain as to both the amount and the timing. But the returns from most investment opportunities do not have certainty of the amount and the timing of cashflows, and the uncertainty varies amongst investments.

   So investors would require compensation for the uncertainty associated with future cashflows. This ADDITIONAL COMPENSATION OVER THE NOMINAL RISK-FREE RATE is called the RISK PREMIUM. And it scales: if investors perceive higher risk, they would demand a higher risk premium.

   The complete build-up is worth carrying: Real risk-free rate + inflation adjustment + risk premium adjustment = Required rate of return.

   Why the distractors are wrong. Alpha is excess return actually achieved against a benchmark - measured afterwards, not demanded in advance. The risk-free rate is the base the premium sits on top of, not the premium itself. The real rate of return is the compensation for postponing consumption alone, before both inflation and risk.

2. Question 2 · Chapter 2: Types of Investments

   Which of the following represents ownership in a company that entitles its holders to participate in its profits and the right to vote on the company's affairs?

   1. A.Bonds
   2. B.Commercial Papers
   3. C.Equity Shares
   4. D.Treasury Bills
   Show the answer

   Answer: C. Equity Shares

   Equity shares represent OWNERSHIP in a company that entitles its holders a SHARE IN PROFITS and the RIGHT TO VOTE on the company's affairs.

   Two further features define the equity holder's position: equity shareholders are RESIDUAL OWNERS of the firm's profit AFTER other contractual claims on the firm are satisfied, and they have the ULTIMATE CONTROL over how the firm is operated. Last in the payment queue, first in the decision.

   They are rewarded in two ways: DIVIDEND and CAPITAL APPRECIATION.

   Bonds are debt - contracts containing a promise to pay a stream of cashflows during the term of the contract, conferring no ownership and no vote. Commercial papers and treasury bills are money market instruments used for periods of one day up to one year, all issued at a discount, redeemed at par, and zero coupon in structure, regulated by the RBI.

   On the long-run case for equity: investments in equities have proven TIME DIVERSIFICATION benefits - fluctuation in investment returns tend to cancel out through time, thus more risk is diversified away over longer holding periods - so equities offer better risk-adjusted return if held for long time periods.

3. Question 3 · Chapter 3: Introduction to Modern Portfolio Theory and Capital Market Theory

   If a portfolio comprises two stocks and the correlation coefficient between them were to decrease over time, everything else remaining constant, the portfolio's risk would:

   1. A.Decrease
   2. B.Remain constant
   3. C.Increase
   4. D.Fluctuate positively and negatively
   Show the answer

   Answer: A. Decrease

   Decrease. Portfolio variance contains a covariance term built from the correlation: Cov(ij) = r(ij) x sigma(i) x sigma(j). Lower the correlation and that term shrinks; make the correlation negative and the term turns negative, actually subtracting from total variance.

   This is exactly why the workbook lists three variables which affect portfolio risk: (1) weights of investments, (2) risk of investments, and (3) CO-MOVEMENT between investments. The third is Markowitz's contribution, and it is the only one that can work in the investor's favour.

   The workbook's own Table 3.4 demonstrates it numerically. Two securities, each with a standard deviation of 5 per cent, correlated at 0.50, combine in equal weights into a portfolio with a standard deviation of 4.33 per cent - with no loss of return, since both return 15 per cent.

   Had the correlation been +1.0, the portfolio standard deviation would have been exactly 5 per cent - no benefit at all. Perfectly correlated assets are, for risk purposes, the same asset.

   And it is the same fact that shapes the geometry: when the correlation between them is LESS THAN PERFECT 1, the various combinations get plotted on a CURVE rather than a straight line.

4. Question 4 · Chapter 4: Alternative Investment Funds in India and its Suitability

   An AIF that seeks to invest in securities listed on the stock exchange and in stock options belongs to which category?

   1. A.Category I
   2. B.Category II
   3. C.Category III
   4. D.None - such a fund cannot be an AIF
   Show the answer

   Answer: C. Category III

   Category III AIF is an AIF that employs diverse or complex trading strategies and may employ leverage, including through investment in LISTED or UNLISTED DERIVATIVES. Stock options are derivatives, and trading listed securities is a secondary-market strategy.

   Category III funds explore opportunities in primary and secondary markets through all types of securities including derivatives.

   Why not the others: Category I invests in start-ups, early-stage ventures, social ventures, SMEs, infrastructure and similar desirable sectors, primarily in unlisted companies. Category II seeks later-stage opportunities, primarily in unlisted investee companies, and does not use leverage at fund level or indulge in complex trading.

5. Question 5 · Chapter 5: Alternative Investment Fund Ecosystem

   Under the AIF Regulations, what is the minimum corpus of each scheme and the maximum number of investors in a single scheme?

   1. A.INR 10 crore corpus; 200 investors
   2. B.INR 20 crore corpus; 1,000 investors
   3. C.INR 20 crore corpus; 49 investors
   4. D.INR 1 crore corpus; 1,000 investors
   Show the answer

   Answer: B. INR 20 crore corpus; 1,000 investors

   The minimum corpus in each scheme shall be INR 20 crore and the maximum number of investors in a single scheme shall not exceed 1,000. And the minimum investment of each investor is INR 1 crore.

   Option 4 mixes up the investor minimum (INR 1 crore) with the scheme corpus minimum (INR 20 crore). Option 1's "200" is the private placement limit for a company (chapter 6), not the AIF limit.

   Also remember: AIFs may raise their corpus only through private placement, and SEBI's Accredited Investor concept gives flexibility in minimum investment for eligible investors.

Frequently asked questions

What is the passing mark for NISM Series XIX-E?

You need 60% to pass NISM-Series-XIX-E: Category III Alternative Investment Fund Managers. On a 100-mark paper that is 60 marks.

Is there negative marking in NISM Series XIX-E?

There is negative marking of 25% of the marks for that question, so a wrong answer costs you 0.25 marks on a 1-mark question. Guess only when you can eliminate at least two options.

How long is the NISM Series XIX-E exam?

The exam runs for 120 minutes and carries 100 marks in total.

How long is the NISM Series XIX-E certificate valid?

NISM certifications are generally valid for 3 years from the date of passing, after which they must be renewed. Confirm the current position on nism.ac.in before your certificate lapses.