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. 031Tell me what happened at Franklin Templeton India in April 2020 and what the industry learned from it.Risk, liquidity and disclosureHardsuperdayIndian AMCsRisk and compliance

   Say this

   On 23 April 2020 Franklin Templeton wound up six open-ended debt schemes holding roughly 26,000 crore, froze redemptions overnight and told investors they would get their money back as the underlying bonds matured or could be sold. It was a liquidity failure, not primarily a credit failure, and it is the single most important case in Indian mutual funds.

   Then walk it

   1. The schemes — Low Duration, Ultra Short Bond, Short Term Income, Credit Risk, Dynamic Accrual and Income Opportunities — had reached for yield in lower-rated, often unlisted and structured paper, in a market where such bonds barely trade at the best of times.
   2. Then Covid hit. Redemptions accelerated, the secondary market for sub-AAA corporate paper effectively stopped, and the funds had already borrowed to meet earlier redemptions. With nothing left to sell at any reasonable price, the AMC chose to wind up rather than keep selling the best assets and leave the remaining investors with the worst.
   3. The regulatory sequel: SEBI found violations of the regulations, barred the AMC from launching new debt schemes for two years and ordered repayment of over 500 crore of investment management fees with interest. The Supreme Court required unitholder consent for the wind-up, and SBI Mutual Fund was appointed to monetise the portfolios.
   4. Investors did get their money back — in aggregate more than the 23 April NAV — but over roughly two and a half years, in instalments, with no ability to plan around it. That gap between eventual recovery and immediate access is the definition of liquidity risk.
   5. What changed as a result: minimum liquid asset buffers of 10 percent for open-ended debt schemes and 20 percent for liquid funds, full mark to market on the debt book, the swing pricing framework, tighter caps on unlisted and structured paper, and the Potential Risk Class matrix.
   6. The lesson I would give an interviewer in one line: in debt funds the yield you can see is small and the liquidity you cannot see is the whole risk. A 60 basis point yield pickup never compensates for a portfolio you cannot exit.

   Where candidates lose it

   Calling it a default or a fraud. Most of the paper eventually paid. The failure was the mismatch between daily redemption promises and a portfolio of bonds nobody would bid for. Getting that distinction wrong on a fixed income or risk interview is fatal, because the whole post-2020 rulebook follows from it.

   Expect next

   • Could it happen again under the current rules?
   • What is the liquid asset requirement now?
   • How would you have spotted the risk in those portfolios beforehand?
2. 032What is side pocketing, and when is an AMC allowed to do it?Risk, liquidity and disclosureHardtechnicalIndian AMCsRisk and compliance

   Say this

   Side pocketing means carving the distressed security out of the main portfolio into a segregated portfolio, so the good assets stay liquid and the bad asset's recovery is shared only by the investors who were there when it went bad. SEBI permits it on a credit event, with trustee approval, and only if the scheme's SID enabled it in advance.

   Then walk it

   1. The trigger is a credit event: a downgrade to below investment grade, a further downgrade of already sub-investment-grade paper, or an actual default on interest or principal. SEBI later extended it to credit events on unrated debt.
   2. Mechanically, every existing unitholder gets units in the segregated portfolio in the same proportion as their main-scheme holding, on the day of the event. The main scheme's NAV drops by the written-down value of the bad asset.
   3. The segregated portfolio is closed. No subscriptions, no redemptions, no exit load. Recovery, whenever it comes, is paid out to those unitholders. It must be listed so there is at least a theoretical exit.
   4. No management fee may be charged on the segregated portfolio, only actual legal and recovery costs. That removes the perverse incentive to sit on a bad asset for years.
   5. The problem it solves is first-mover advantage. Without it, informed investors redeem at a stale NAV before the write-down and the loss falls entirely on whoever is slow — usually retail. Side pocketing freezes the loss at the date of the event and distributes it fairly.
   6. The limitation: it only works for a discrete credit event on an identifiable security. It does nothing for a portfolio-wide liquidity freeze, which is exactly what happened at Franklin Templeton. Side pocketing is the answer to a bad bond, not to a bad portfolio.

   Where candidates lose it

   Describing it as a way for the AMC to hide a loss. It is the opposite — it forces the loss to be taken on a fixed date and shared by the right set of investors. The more important nuance is that it must be enabled in the SID before the event, so an AMC cannot invent it mid-crisis.

   Expect next

   • Who bears the loss if side pocketing is not used?
   • Can the AMC charge a fee on the segregated portfolio?
   • Why did it not solve the Franklin Templeton problem?
3. 033What did SEBI change about debt fund liquidity after 2020, and what is swing pricing?Risk, liquidity and disclosureHardtechnicalIndian AMCsRisk and compliance

   Say this

   Four big things: a mandatory liquid asset buffer, full mark to market on debt, tighter limits on illiquid and structured paper, and a swing pricing framework. Swing pricing adjusts the NAV downward for redeeming investors during a market dislocation, so the cost of selling assets in a stressed market falls on the people leaving rather than on those who stay.

   Then walk it

   1. Liquid asset buffer: liquid funds must hold at least 20 percent in cash, government securities, treasury bills and repo on government securities. Other open-ended debt schemes, except overnight and gilt funds, must hold at least 10 percent.
   2. Valuation: the whole debt book moved to mark to market, so a liquid fund's NAV can fall. Amortisation, which had let short-dated paper pretend it had no price risk, is gone.
   3. Portfolio limits tightened: caps on unlisted debt, restrictions on structured obligations and credit enhancements, a lower single-sector cap, and graded exit loads on liquid fund redemptions inside seven days.
   4. Swing pricing, effective from March 2022: partial swing is voluntary in normal times, and a mandatory swing kicks in for high-risk open-ended debt schemes during a market dislocation declared by SEBI, with a minimum swing factor. Small redemptions up to two lakh are exempt so retail investors are not penalised.
   5. The economics of swing pricing is worth stating clearly: in a stressed market, selling assets to fund redemptions costs the fund a real spread. Without a swing, that cost is borne by the remaining unitholders, which is an incentive to run first. With it, the redeemer pays their own exit cost.
   6. The candid assessment: the buffers and mark to market were the substantive fixes. Swing pricing has barely been used in India because it requires SEBI to declare a dislocation, which itself would signal panic. Useful in principle, untested in practice — say that, because it shows judgement rather than recall.

   Where candidates lose it

   Listing the rules without explaining the first-mover problem they exist to solve. Every one of these measures is about the same thing: stopping an investor who exits early from imposing costs on those who stay. If you cannot say that sentence, you have memorised circulars.

   Expect next

   • Has swing pricing ever actually been triggered in India?
   • Why are redemptions under two lakh exempt?
   • What counts as a market dislocation?
4. 034How would you assess liquidity risk in a debt fund's portfolio before recommending it?Risk, liquidity and disclosureHardcase studyIndian AMCsRisk and compliance

   Say this

   Pull the monthly portfolio and ask one question of every line: who would buy this from me next Tuesday, and at what price? Then look at the other side of the balance sheet — who owns the units. Liquidity risk is the interaction of an illiquid asset book with a concentrated investor base.

   Then walk it

   1. Asset side, in order: how much is in cash, treasury bills, government securities and repo, against the 10 or 20 percent minimum. How much is unlisted. How much is rated below AA. How much sits in structured obligations or credit-enhanced paper.
   2. Then issuer and group concentration. A 9 percent position in one mid-sized NBFC is a bigger liquidity problem than a 20 percent position in government securities, because the exit is a single phone call to a market that may not answer.
   3. Then maturity profile against the fund's own category. A short duration fund holding three-year unlisted paper has reached for yield by taking illiquidity, and the yield pickup is the tell — if the portfolio YTM is 150 basis points above the equivalent gilt, something in there does not trade.
   4. Liability side: the top-10 investor concentration disclosed in the fact sheet. If a handful of institutions hold half the AUM, a single quarter-end redemption forces the sale, and retail unitholders eat the impact cost.
   5. Then the stress question I would actually run: if 20 percent of AUM redeemed on Monday, what would the manager have to sell, and would the printed NAV survive it? That is the Franklin Templeton question asked in advance.
   6. And check AUM trend. A fund shrinking steadily is concentrating its illiquid tail, because the liquid assets are the first to go out of the door. A shrinking credit fund is a warning, not a bargain.

   Where candidates lose it

   Assessing credit quality and calling it liquidity analysis. AAA paper from a small issuer can be untradeable. The two things candidates miss entirely are the top-10 investor concentration on the liability side and the AUM trend, and both are printed in the monthly fact sheet.

   Expect next

   • Where would you find the top-10 investor concentration?
   • Is a shrinking debt fund safer or riskier?
   • What yield spread over gilts would make you suspicious?
5. 035A client calls, angry. His debt fund's NAV has fallen and he was told debt funds are safe. What do you say?Risk, liquidity and disclosureIntermediatecase studyDistribution and salesWealth and advisory

   Say this

   Establish which of the two causes it is before saying anything reassuring. If it is rates, the loss reverses over time and the fund's yield has actually improved. If it is a credit write-down, the loss is permanent and the conversation is completely different. Never blend them.

   Then walk it

   1. Diagnose first: check whether the fall is broad across the category and matches a move in bond yields, or whether it is a single-day drop specific to this scheme, which almost always means a downgrade or a default.
   2. If it is rates, explain the mechanism in his language. Bond prices fall when yields rise. A fund with a modified duration of 3 loses about 3 percent when yields move up a percentage point, and it earns that back through higher accrual over roughly the duration period if he stays.
   3. If it is credit, say so plainly, tell him whether a segregated portfolio has been created, what the written-down value is, and that the recovery timeline is not in the AMC's control. Do not describe a permanent loss as temporary volatility.
   4. Then the honest part about the original advice. Debt funds are lower risk than equity, not risk-free. Since the move to full mark to market, even liquid fund NAVs move. If he was sold 'safe', he was sold badly, and admitting that protects the relationship better than defending it.
   5. Then match the product to the horizon properly. Money needed within a year belongs in liquid or money market. One to three years in short duration. Anything with duration or credit exposure requires the ability to sit through a drawdown.
   6. And a number to anchor it: over the last two decades, a short duration fund's worst twelve-month period has been a small negative, while the same period in an equity fund has been minus 40 percent. The relative claim is defensible; the absolute one never was.

   Where candidates lose it

   Reassuring first and diagnosing later. If the fall is a default and you have told him it will recover, you have destroyed your credibility and possibly created a compliance issue. Diagnose, then explain, then fix the product fit.

   Expect next

   • How would you explain duration to a 70-year-old client?
   • What if a segregated portfolio has been created?
   • How should he have been positioned in the first place?
6. 036What do the stress test disclosures for mid and small cap funds tell you?Risk, liquidity and disclosureIntermediatetechnicalIndian AMCsRisk and compliance

   Say this

   They tell you how many days the fund would need to liquidate 25 percent and 50 percent of its portfolio pro rata in normal market conditions. AMFI made this a monthly disclosure from March 2024, after SEBI got worried about froth and flows in small caps.

   Then walk it

   1. The calculation excludes the least liquid 20 percent of the portfolio and uses recent traded volumes, then asks how many trading days it would take to sell a quarter and a half of the rest without dominating the market.
   2. The results were eye-opening. Some large small cap funds showed more than 20 trading days to liquidate half the portfolio, and a month is not a reassuring number for an open-ended daily-dealing fund.
   3. The disclosure comes with four other numbers worth as much: portfolio valuation on a price-to-earnings basis against the benchmark, volatility, the share of large caps and cash held as a liquidity cushion, and the top-10 investor concentration.
   4. What to do with it is comparative. Two small cap funds of similar size with liquidation times of 8 days and 28 days are running very different risks for the same headline category and a similar expense ratio.
   5. It also explains manager behaviour you would otherwise find odd: small cap funds soft-closing lump sum inflows, or capping SIP amounts. That is a manager who has read his own stress test and decided the next 5,000 crore cannot be deployed responsibly.
   6. The limitation to state: it assumes normal volumes. In a real drawdown the volumes that make the calculation work are precisely what disappears, so treat the published number as a best case and roughly double it in your head.

   Where candidates lose it

   Not knowing this exists. It is the most India-specific risk disclosure in the industry and a favourite question at AMCs in 2025 and 2026. The second trap is quoting the number as though it holds in a crisis — it is computed on normal-market volumes.

   Expect next

   • Why did SEBI ask for this in March 2024 specifically?
   • What does it mean when a small cap fund stops accepting lump sums?
   • Would you trust the number in a falling market?
7. 037What's the difference between an ETF and a mutual fund?Index funds and ETFsCorephone / first roundVanguardGeneralist · Malvern · 2026PIMCOCompliance · Los Angeles · 2024

   Say this

   An ETF is a mutual fund whose units trade on an exchange. You buy it from another investor at a market price during market hours; with a regular open-ended fund you transact with the AMC at end-of-day NAV. That one structural difference drives everything else — cost, tax, minimum size and how liquidity actually works.

   Then walk it

   1. Dealing: ETF units trade intraday at whatever the market pays, which can be above or below the underlying value. A mutual fund transacts at one NAV struck after the close, the same price for everybody that day.
   2. You need a demat account and a broker for an ETF. That is a real barrier in India and the main reason index funds, not ETFs, dominate retail passive money here while the reverse is true in the US.
   3. Creation and redemption happens only in large blocks with authorised participants, so the AMC never has to sell portfolio securities to fund a retail exit. In an open-ended fund, a redemption wave forces the manager to sell.
   4. Cost: ETFs are usually cheaper because there is no registrar servicing individual folios, but the investor pays brokerage, the bid-ask spread and any premium or discount to fair value. The headline TER understates the true cost of owning a thinly traded ETF.
   5. In the US, the in-kind redemption mechanism also gives ETFs a real capital gains advantage. In India that advantage does not exist, because the fund itself is a pass-through either way — worth saying, as it separates someone who understands the structures from someone repeating a US article.
   6. Which I would recommend depends entirely on the investor: an SIP investor should use an index fund, and an institution putting 50 crore to work in one day should use the ETF.

   Where candidates lose it

   Saying an ETF is passive and a mutual fund is active. That is a common conflation and it is wrong — the difference is the trading wrapper, not the strategy. There are active ETFs and passive index mutual funds. Lead with the exchange-traded structure.

   Expect next

   • Why do Indian retail investors use index funds rather than ETFs?
   • Explain the creation and redemption mechanism.
   • When would an ETF trade at a discount to its fair value?

   Reported by candidates at Vanguard (Generalist, Malvern, 2026); PIMCO (Compliance, Los Angeles, 2024). Source: Wall Street Oasis.

8. 038Explain what an ETF is and how creation and redemption works.Index funds and ETFsIntermediatetechnicalFTFranklin TempletonRisk Management · San Mateo · 2017

   Say this

   An exchange traded fund is a listed scheme that tracks an index, and its price stays near fair value because of an arbitrage loop. Authorised participants can always exchange a defined basket of the underlying securities for new ETF units with the AMC, or the reverse, so any gap between the market price and the underlying value is a trade.

   Then walk it

   1. The primary market is wholesale. An authorised participant delivers the index basket in creation-unit size to the AMC and receives ETF units, or delivers units back and receives the basket. In India SEBI has cut creation unit sizes to make this easier, and large investors above a threshold can go direct to the AMC.
   2. The secondary market is where everyone else trades, on the exchange, against other investors and against market makers.
   3. The arbitrage is the whole mechanism. If the ETF trades above the value of its basket, an AP buys the basket, creates units and sells them into the market, pushing the price down. If it trades below, it does the reverse. The loop is what keeps price anchored to value.
   4. To let that work, the AMC publishes an indicative NAV through the day — every fifteen seconds for equity ETFs — so market makers and investors can see fair value in real time.
   5. The creation-redemption design also protects existing holders. Retail selling happens between investors on the exchange and never touches the portfolio, so there is no forced selling and no dilution of the ongoing holders.
   6. Where it breaks is when the arbitrage loop fails. If the underlying market is shut or illiquid — Indian gold ETFs on a day the bullion market is disrupted, or debt ETFs in a stressed bond market — APs cannot price the basket, so premiums and discounts widen and stay wide. An ETF is only as liquid as what it holds.

   Where candidates lose it

   Describing the exchange trading and never mentioning authorised participants. The creation-redemption mechanism is the entire answer to why an ETF tracks its index, and leaving it out means you have described a listed closed-end fund. Then name a case where the arbitrage fails — that is the risk management version of the answer.

   Expect next

   • What is iNAV, and how often must it be published?
   • What happens when the underlying market is closed?
   • Who bears the cost of an ETF's premium or discount?

   Reported by candidates at Franklin Templeton (Risk Management, San Mateo, 2017). Source: Wall Street Oasis.

9. 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?
10. 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?

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.