Mutual Fund Mastery interview preparation

Questions

100

Traced to a firm

32

Firms

19

Updated

September 2026

Asked at

All firmsVanguard5BLBlackRock3FTFranklin Templeton3Invesco3PIMCO3Fidelity Investments2J.P. Morgan2Morningstar2Neuberger Berman2SCSchroders2T. Rowe Price2Amundi1BMBNY Mellon1Goldman Sachs1Man Group1Northern Trust1SSState Street1Sycamore Partners1WMWellington Management1

Topic

All topicsFund structure and regulation7NAV and operations6Scheme categorisation4Equity schemes5Debt schemes7Risk, liquidity and disclosure7Index funds and ETFs6Hybrid and solution schemes3Costs, plans and commissions6SIP and investor mechanics5Performance measurement6Taxation5Distribution, compliance and NISM5Portfolio construction and advice5Estimation and numeracy5Markets and industry6Career and fit12

Level

AnyCoreIntermediateHard

Type

AnyTechnicalCaseFitBrainteaserMarket view

1. 039What is the difference between tracking error and tracking difference?Index funds and ETFsHardtechnicalIndian AMCsProduct and strategy roles

   Say this

   Tracking difference is the gap in return: fund return minus index return, and it is almost always negative because of costs. Tracking error is the volatility of that gap — the annualised standard deviation of the daily return differences. One tells you how much you lost, the other how consistently you lost it.

   Then walk it

   1. Tracking difference is the number an investor actually feels. If the Nifty 50 returned 12.0 percent and the fund returned 11.6, the tracking difference is minus 40 basis points.
   2. Tracking error says nothing about direction. A fund could beat the index on half the days and lag on the other half, average out flat, and still show high tracking error. It measures replication noise, not cost.
   3. Sources of tracking difference: the expense ratio, cash drag from uninvested inflows, dividends received and reinvested at a different time from the index's assumption, securities transaction tax and brokerage on rebalancing, and any sampling instead of full replication.
   4. Sources of tracking error specifically: timing mismatches on flows, rebalancing on a different day from the index, futures used as a proxy for cash, and in debt index funds the fact that the underlying bonds do not trade daily.
   5. The regulatory hook in India: SEBI caps annualised tracking error for debt index funds and ETFs at 2 percent, and requires passive funds to disclose both tracking error and tracking difference over one, three, five and ten years and since launch. Knowing that both are mandatory disclosures is the India-specific bit.
   6. Which I would use to pick a fund: tracking difference, every time, because it is the net of cost and skill. Then look at tracking error as a check on operational quality — a fund with low difference and high error got lucky rather than good.

   Where candidates lose it

   Using the two terms interchangeably, which is extremely common. Tracking error is a standard deviation and cannot tell you whether you underperformed. If you choose an index fund on tracking error alone you will pick the wrong one, and interviewers on a passive desk ask this precisely to catch that.

   Expect next

   • Which would you use to choose between two index funds?
   • Why does an index fund almost never beat its index?
   • What is SEBI's tracking error limit for debt index funds?
2. 040An index fund charges a 0.10 percent expense ratio but lagged its index by 0.35 percent last year. Where did the other 25 basis points go?Index funds and ETFsHardtechnicalPassive and index teamsIndian AMCs

   Say this

   Costs that sit outside the expense ratio. In order of likely size: cash drag from flows, transaction costs and securities transaction tax on rebalancing, dividend timing, and the fact that the index is a theoretical portfolio with no settlement cycle and no taxes.

   Then walk it

   1. Cash drag first. Money arriving through the day cannot be invested until it is available, and a fund holding even half a percent in cash in a year the index rose 15 percent gives up around 7 basis points.
   2. Rebalancing costs. When the index changes constituents the fund must trade, paying brokerage, securities transaction tax and market impact. Impact is the expensive part, because every index fund is trading the same name on the same day at the same close.
   3. Dividend treatment. A total return index assumes dividends are reinvested instantly on the ex-date. A real fund receives the cash days later and may pay tax on it, so it is out of the market in between.
   4. Then the small ones: creation and redemption frictions, corporate action handling, and any sampling if the fund does not fully replicate.
   5. A useful sanity number: for a large cap Indian index fund, a well-run product lands around 15 to 30 basis points of tracking difference on a 10 basis point TER. If it is more like 60 to 80, the cause is usually persistent cash drag or a small AUM that makes rebalancing expensive per unit.
   6. And the diagnostic question I would ask the AMC: is the gap stable year on year or lumpy? Stable means structural cost, which you can price in. Lumpy means operational quality, and that is the reason to avoid the fund.

   Where candidates lose it

   Answering 'the expense ratio' when the question has already told you the expense ratio. The interviewer wants the costs outside TER. Missing cash drag is the specific failure — it is usually the biggest single component and the one nobody names.

   Expect next

   • How would you reduce cash drag?
   • Why is index rebalancing expensive for everybody at once?
   • What tracking difference would you accept before switching funds?
3. 041Why do Indian ETFs sometimes trade well away from their fair value?Index funds and ETFsHardtechnicalPassive and index teamsIndian AMCs

   Say this

   Because the arbitrage that is supposed to close the gap needs a market maker willing to trade and an underlying basket he can price and buy. When either fails, the ETF price drifts from the indicative NAV and stays there, sometimes for the whole session.

   Then walk it

   1. The normal state is a tight spread: the AMC publishes iNAV every fifteen seconds for an equity ETF, market makers quote around it, and authorised participants create or redeem when the gap is worth more than their costs.
   2. Cause one is thin volumes. Many Indian ETFs outside the Nifty and Sensex products trade a few lakh rupees a day. With no natural flow, the market maker's quote is the only price, and his spread widens to cover his risk.
   3. Cause two is the underlying being shut or illiquid. An international ETF tracking US equities trades in Indian hours while the US market is closed, so the price is a forecast, not an arbitrage — which is why Indian Nasdaq ETFs have traded at large premiums, made worse when overseas investment limits stopped fresh creation entirely.
   4. Cause three is a regulatory cap on creation. When the industry's overseas investment headroom was exhausted, AMCs had to suspend subscriptions, the arbitrage loop broke and premiums of 5 to 20 percent persisted. Buyers then paid for units worth substantially less.
   5. Cause four is corporate actions and gold. On a day the bullion market is disrupted, a gold ETF's basket cannot be priced or delivered, and the loop stalls again.
   6. So the practical advice: check the iNAV before you trade, use limit orders never market orders, avoid the first and last fifteen minutes, and for anything other than the largest ETFs prefer the index fund. That advice is what an interviewer wants to hear — it shows you know the theory and still respect the order book.

   Where candidates lose it

   Asserting that arbitrage keeps ETF prices at fair value, full stop. That is the textbook claim and the Indian international ETF premium episode is the standing counterexample. Naming a case where the mechanism broke is what distinguishes a real answer.

   Expect next

   • What happens to the premium when the AMC reopens subscriptions?
   • How would you execute a 20 crore ETF order?
   • Why is iNAV published every fifteen seconds?
4. 042How does a fund of funds or a feeder fund differ from investing directly, on cost and on tax?Index funds and ETFsHardtechnicalIndian AMCsProduct and strategy roles

   Say this

   You pay two layers of expenses and you often get worse tax treatment. A fund of funds charges its own TER on top of the underlying schemes' costs, and because it holds units rather than Indian equity directly it usually fails the 65 percent equity test that gives equity taxation.

   Then walk it

   1. Cost: SEBI caps the fund of funds TER, and the overall cost including the underlying schemes is capped too, but the total is still materially above holding the underlying directly. A feeder into an offshore fund can end up 100 to 150 basis points all-in.
   2. Tax is the bigger issue in India. A scheme qualifies for equity taxation only if it holds at least 65 percent in domestic company equity. A FoF holds mutual fund units, so historically it did not qualify, and international feeders never do.
   3. That put international feeders and gold funds through a rough period after April 2023, when the specified mutual fund rules taxed them at slab rates with no long-term benefit. The law has since restored a 24-month long-term holding taxed at 12.5 percent for funds that are not predominantly debt, so read the current definition before you advise anyone.
   4. What you get in exchange is access and operational simplicity. A feeder is how an Indian investor buys a US or global strategy through a normal folio, with rupee investment, no LRS paperwork and no foreign brokerage account.
   5. There is also a currency layer that people forget. A rupee investor in a US feeder earns the underlying return plus or minus the rupee-dollar move, which has historically added a few percent a year and can just as easily subtract.
   6. So my rule: use a feeder when there is no domestic alternative and the access is the point. Never use a domestic FoF to buy schemes you could buy directly, because you are paying a second fee for a rebalancing decision you could make yourself.

   Where candidates lose it

   Discussing only the double expense ratio. In India the tax treatment is the decisive factor, and it has changed twice in three years. Saying 'check the current definition of a specified mutual fund' is a better answer than confidently quoting a rule that may already be superseded.

   Expect next

   • Why does a fund of funds not get equity taxation?
   • What is the LRS alternative and when is it better?
   • How do overseas investment limits affect these funds?

Firm tags come from public, anonymous candidate reports on Wall Street Oasis: strong signal, not sworn testimony. Firms are named as the places a question was reported, not as partners of Fin Maverick. Answers are written for this page to show how to think out loud; they are not scripts to recite.