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. 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.

2. 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?
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?
5. 043Walk me through the hybrid categories, and tell me what a balanced advantage fund actually does.Hybrid and solution schemesIntermediatetechnicalIndian AMCsProduct and strategy roles

   Say this

   Six categories: conservative hybrid, balanced hybrid, aggressive hybrid, dynamic asset allocation or balanced advantage, multi asset allocation, and arbitrage, with equity savings sitting alongside. A balanced advantage fund is the one with no fixed allocation — it can run zero to a hundred percent equity, usually driven by a valuation model.

   Then walk it

   1. The allocation grid: conservative hybrid 10 to 25 percent equity, balanced hybrid 40 to 60 with no arbitrage allowed, aggressive hybrid 65 to 80 percent equity with 20 to 35 in debt, multi asset in at least three asset classes with a minimum 10 percent in each, arbitrage at least 65 percent in equity for hedged positions.
   2. Aggressive hybrid is the volume category, and the reason is tax: at 65 percent equity it qualifies as an equity-oriented fund, so it gets equity taxation while running a third of the book in bonds.
   3. Balanced advantage funds use a model — usually price to earnings, price to book, or a yield gap between equities and bonds — to set net equity mechanically, and they hedge the rest with derivatives so gross equity stays above 65 percent for tax purposes.
   4. That last point is the real answer to what a BAF does. Net equity might be 40 percent while gross equity is 70, because the difference is hedged. The investor gets a lower-volatility equity experience with equity taxation.
   5. Where they earn their keep is behaviour. The fund de-risks at expensive valuations without the investor having to make the decision, and it rebalances without triggering a taxable event for the investor.
   6. The honest critiques: the models are opaque and differ wildly between AMCs, so two balanced advantage funds can have net equity of 35 and 75 at the same moment. And in a long bull market they structurally lag a plain equity fund. Sell them as volatility management, never as a return enhancer.

   Where candidates lose it

   Describing aggressive hybrid as a moderate-risk product and stopping. The 65 percent floor exists because of the tax definition, not because of risk science — saying that shows you understand why the category is shaped as it is. On BAFs, if you cannot distinguish gross from net equity you have missed the product.

   Expect next

   • Why is 65 percent the magic number?
   • How would you compare two balanced advantage funds?
   • Where does an equity savings fund sit in this list?
6. 044What is an arbitrage fund, where does the return come from, and when does it dry up?Hybrid and solution schemesHardtechnicalIndian AMCsCorporate treasury desks

   Say this

   It buys a stock in the cash market and simultaneously sells the same stock's futures, locking in the spread between the two. The return is the cost of carry, not a market view — which means it behaves like a short-term debt fund but is taxed as equity, and that tax arbitrage is the real product.

   Then walk it

   1. The mechanism: if a stock is 100 in cash and the one-month future is 100.60, buying cash and selling the future locks 60 basis points regardless of where the stock goes, realised when the two converge at expiry.
   2. It is fully hedged, so equity market direction is irrelevant. At least 65 percent of the book must be in these hedged equity positions, which is what makes it an equity-oriented scheme for tax.
   3. The tax point is the whole commercial case. A corporate or a high-bracket individual parking money for three to six months pays 12.5 percent on long-term equity gains, or 20 percent short-term, against slab rates on a debt fund after the 2023 change. That gap is why arbitrage fund AUM exploded.
   4. Returns track the cost of carry, which tracks short-term rates and market activity. Historically 4 to 7 percent, so think of it as a liquid fund equivalent with better tax rather than as an equity product.
   5. When it dries up: when futures premiums compress. That happens when rates fall, when market participation and leverage are low, and — importantly — when too much arbitrage money chases the same spread. A category that doubles in AUM competes away its own return.
   6. The risks people ignore: the spread can go negative in a sharp fall so rollover costs money, there is execution and roll risk each expiry, and the fund still has an unhedged residual and a debt sleeve. It is low risk, not no risk, and the exit load window is typically 15 to 30 days.

   Where candidates lose it

   Calling it a low-risk equity fund. It is a rates product wearing an equity tax wrapper. The second trap is not knowing why the category grew: the April 2023 debt fund tax change pushed treasury money into it. If you cannot connect the product to that tax event you are missing the commercial story.

   Expect next

   • What happens to the spread in a sharp market fall?
   • Why did arbitrage fund AUM grow so fast after 2023?
   • Would you recommend it over a liquid fund for a six-month horizon?
7. 045What are solution-oriented schemes, and are retirement and children's funds worth recommending?Hybrid and solution schemesIntermediatetechnicalIndian AMCsDistribution and sales

   Say this

   Two categories SEBI created in 2017: retirement funds and children's funds, each with a five-year lock-in or until the goal, whichever is earlier. Structurally they are ordinary hybrid or equity funds with a lock-in and a label, and in most cases I would not recommend them over a plain equity fund plus discipline.

   Then walk it

   1. The mandate: a retirement fund locks money in for five years or until retirement age, a children's fund until the child turns eighteen, whichever comes first.
   2. What you get: the lock-in removes the investor's ability to panic-sell, and it lets the manager stay fully invested through a drawdown without redemption pressure. Those are genuine, if modest, advantages.
   3. What you give up: liquidity, and the ability to change manager. If the fund underperforms for three years you are stuck, which is the opposite of what good practice demands.
   4. There is no tax advantage. Unlike the National Pension System, which carries its own deduction, a retirement mutual fund gets no special treatment. Some schemes were notified under 80C historically, but for most investors today there is nothing.
   5. And the label does nothing for asset allocation. A retirement fund does not glide down its equity exposure as the investor ages unless the SID says it does, and most do not. The name implies a lifecycle product that the mandate does not deliver.
   6. So my recommendation: use a flexi cap or an index fund for the retirement corpus with an explicit written allocation plan, and reserve the solution-oriented category for a client who has demonstrated that he will redeem at the first 20 percent drawdown. For him, the lock-in is worth the cost.

   Where candidates lose it

   Assuming a retirement fund is a target-date or lifecycle product. In India it almost never is. The other trap is implying a tax benefit — there generally is not one, and claiming otherwise in a distribution role is mis-selling.

   Expect next

   • How does this compare with the National Pension System?
   • Does the equity allocation glide down as the investor ages?
   • When would the lock-in actually help an investor?
8. 046What is the total expense ratio and what sits inside it?Costs, plans and commissionsCorephone / first roundIndian AMCsDistribution and sales

   Say this

   The TER is every recurring cost the scheme charges its unitholders, expressed as a percentage of daily net assets, and it is accrued daily so the NAV you see is already net of it. It includes the management fee, distributor commission in a regular plan, RTA and custody fees, audit, marketing and GST on the management fee.

   Then walk it

   1. Line items: investment management and advisory fee, trustee fee, registrar and transfer agent charges, custodian fees, audit fees, marketing and selling expenses including distributor commission, listing fees where applicable, and GST on the management fee.
   2. It is charged daily, roughly one basis point a day for a 2 percent TER, which is why there is never a separate fee debit in your account statement.
   3. What is outside it and therefore additional: brokerage and transaction costs on securities trades, up to a small permitted limit, and securities transaction tax. Those reduce NAV without appearing in the TER number.
   4. Exit load is also outside the TER, and since 2012 the exit load collected goes into the scheme, not to the AMC. So it is a transfer between investors, not a cost to the fund.
   5. The one number that matters in practice is the difference between the direct and regular plan of the same scheme, because that gap is almost entirely distributor commission. In Indian equity funds it is commonly 50 to 120 basis points.
   6. The reason to care: 1 percent a year compounds to roughly 20 percent of the final corpus over 25 years. That is not a rounding error, it is the difference between retiring on 1 crore and on 80 lakh.

   Where candidates lose it

   Not knowing that brokerage and STT sit outside the TER, or that exit load goes to the scheme rather than the AMC. Both are standard follow-ups. And always convert the percentage into a compounded rupee figure — a candidate who can quantify the drag sounds like someone who has advised a client.

   Expect next

   • What is excluded from the TER?
   • Who keeps the exit load?
   • How much does 1 percent cost over 25 years?
9. 047Walk me through SEBI's TER slabs and why they are structured that way.Costs, plans and commissionsHardtechnicalIndian AMCsProduct and strategy roles

   Say this

   The cap falls as the scheme's assets grow. For open-ended equity schemes it starts at 2.25 percent on the first 500 crore and steps down through the slabs to about 1.05 percent once assets exceed 50,000 crore. Debt schemes get a cap 25 basis points lower at each slab, and index funds and ETFs are capped at 1 percent.

   Then walk it

   1. Equity slabs, in shape: 2.25 percent on the first 500 crore, 2.00 on the next 250, 1.75 on the next 1,250, then 1.60, then 1.50, then a taper of 5 basis points for every additional 5,000 crore, with a floor around 1.05 percent above 50,000 crore.
   2. The logic is scale economies. Running a 40,000 crore fund does not cost twenty times what a 2,000 crore fund costs, so SEBI forces the saving to be passed to unitholders instead of kept as margin.
   3. It is a marginal-slab cap, applied on assets in each band, not a single rate on the whole AUM. Candidates get this wrong constantly. A 2,000 crore equity fund's blended cap works out well below 2.25 percent.
   4. Passive is capped separately and far lower, at 1 percent for index funds and ETFs, and competition has driven actual charges to 2 to 20 basis points. Fund of funds have their own caps.
   5. There is also a permitted additional charge for inflows sourced from beyond the top 30 cities, subject to conditions, designed to pay for distribution reach into smaller towns. It has been repeatedly tightened because it was gamed by routing city money through upcountry ARNs.
   6. The honest assessment of the whole regime: it has compressed headline costs, but it also means an AMC's economics improve with size, which is why the industry consolidates and why the largest fund houses fight so hard for scale. Regulation set the price; competition in passive is what is now actually moving it.

   Where candidates lose it

   Quoting 2.25 percent as if it applies to the whole AUM. It is a marginal slab structure. If you cannot remember every number, say the shape — starts around 2.25, steps down with size, floor around 1.05, passive capped at 1 — and you will sound better than someone who recites four numbers wrongly.

   Expect next

   • What is the blended cap for a 3,000 crore equity fund?
   • What is the additional TER for inflows from smaller cities?
   • Why are passive funds capped separately?
10. 048What is the difference between a direct and a regular plan, and how big is the gap over twenty years?Costs, plans and commissionsCorephone / first roundIndian AMCsDistribution and sales

    Say this

    Same portfolio, same fund manager, same scheme — the only difference is that a regular plan pays distributor commission out of the scheme and a direct plan does not. In Indian equity funds the gap is typically 50 to 120 basis points a year, and over twenty years that compounds to roughly 15 to 20 percent of the final corpus.

    Then walk it

    1. Both plans have been mandatory since January 2013 and carry separate NAVs. The direct plan's NAV is always higher for the same scheme launched on the same day, and the divergence widens every year.
    2. Put numbers on it: a 20,000 rupee monthly SIP for twenty years at 12 percent gross builds about 1.83 crore. Take 1 percent more in fees and you land closer to 1.62 crore. That 21 lakh is the commission, compounded.
    3. The distributor's defence is that they earn it — goal setting, asset allocation, keeping the client invested in a crash. For many investors that is genuinely worth more than 1 percent, because the behavioural mistake costs far more than the fee.
    4. The counter is that the commission is paid whether or not any advice happens, it is invisible in the NAV, and it is paid on the whole corpus every year rather than on the advice given once.
    5. Practical route for a direct investor: the AMC's own site or app, the MF Central and RTA platforms, or a flat-fee registered investment adviser who recommends direct plans and charges separately — which is the cleanest structure, because the cost is visible and the incentive is not tied to the product.
    6. How I would answer it in an AMC interview: state the arithmetic honestly, then say the choice is between paying for behaviour management inside the product or buying it separately at a visible price.

    Where candidates lose it

    Either trashing regular plans or defending commissions reflexively. Both signal a script. Give the compounded rupee number, then concede the behavioural value of a good distributor. That balance is what a distribution-side interviewer is actually listening for.

    Expect next

    • If direct is cheaper, why do most investors still hold regular plans?
    • What is the RIA model and how is it different?
    • Can an investor switch from regular to direct without tax?

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.