NISM-Series-XA-Investment Adviser

338 Pages·2014·2.8 MB·English

NISM-Series-X-A:
Investment Adviser (Level 1)
Certification Examination
NISM-Series-X-A: Investment Adviser (Level 1) Certification Examination

Workbook for
NISM-Series-X-A: Investment Adviser (Level 1)
Certification Examination

National Institute of Securities Markets
www.nism.ac.in
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NISM-Series-X-A: Investment Adviser (Level 1) Certification Examination

This workbook has been developed to assist candidates in preparing for the National
Institute of Securities Markets (NISM) Level 1 Certification Examination for Investment
Advisers.

Workbook Version: August 2014

Published by:
National Institute of Securities Markets
© National Institute of Securities Markets, 2014
Plot 82, Sector 17, Vashi
Navi Mumbai – 400 703, India

All rights reserved. Reproduction of this publication in any form without prior permission of
the publishers is strictly prohibited.

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NISM-Series-X-A: Investment Adviser (Level 1) Certification Examination

Disclaimer
The contents of this publication do not necessarily constitute or imply its endorsement,
recommendation, or favoring by the National Institute of Securities Market (NISM) or the
Securities and Exchange Board of India (SEBI). This publication is meant for general reading
and educational purpose only.
The statements/explanations/concepts are of general nature and may not have taken into
account the particular objective/ move/ aim/ need/ circumstances of individual user/
reader/ organization/ institute. Thus NISM and SEBI do not assume any responsibility for any
wrong move or action taken based on the information available in this publication.
Therefore before acting on or following the steps suggested on any theme or before
following any recommendation given in this publication user/reader should consider/seek
professional advice.
The publication contains information, statements, opinions, statistics and materials that
have been obtained from sources believed to be reliable and the publishers of this title have
made best efforts to avoid any errors. However, publishers of this material offer no
guarantees and warranties of any kind to the readers/users of the information contained in
this publication.
Since the work and research is still going on in all these knowledge streams, NISM and SEBI
do not warrant the totality and absolute accuracy, adequacy or completeness of this
information and material and expressly disclaim any liability for errors or omissions in this
information and material herein. NISM and SEBI do not accept any legal liability what so
ever based on any information contained herein.
While the NISM Certification examination will be largely based on material in this workbook,
NISM does not guarantee that all questions in the examination will be from material
covered herein.
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NISM-Series-X-A: Investment Adviser (Level 1) Certification Examination

About NISM
In pursuance of the announcement made by the Finance Minister in his Budget Speech in
February 2005, Securities and Exchange Board of India (SEBI) has established the National
Institute of Securities Markets (NISM) in Mumbai.
SEBI, by establishing NISM, has articulated the desire expressed by the Indian government
to promote securities market education and research.
Towards accomplishing the desire of Government of India and vision of SEBI, NISM has
launched an effort to deliver financial and securities education at various levels and across
various segments in India and abroad. To implement its objectives, NISM has established six
distinct schools to cater the educational needs of various constituencies such as investor,
issuers, intermediaries, regulatory staff, policy makers, academia and future professionals of
securities markets.
NISM brings out various publications on securities markets with a view to enhance
knowledge levels of participants in the securities industry.
NISM is mandated to implement certification examinations for professionals employed in
various segments of the Indian securities markets.

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NISM-Series-X-A: Investment Adviser (Level 1) Certification Examination

Acknowledgement
This workbook has been developed by NISM in consultation with the Examination
Committee for NISM-Series-X-A: Investment Adviser (Level 1) Certification Examination
consisting of industry participants, educators, trainers and SEBI officials. NISM gratefully
acknowledges the contribution of the committee members.

About the Author
This workbook has been developed by the Ms. Uma Shashikant of the Centre for Investment
Education and Learning and has been reviewed by Ms. Sunita Abraham, Consultant in co-
ordination with the Certification Team of NISM.

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NISM-Series-X-A: Investment Adviser (Level 1) Certification Examination

About the Level 1 Certification Examination for Investment Adviser
The examination seeks to create a common minimum knowledge benchmark for all
associated persons registered as an investment adviser and partners and representatives of
investment advisers under SEBI (Investment Advisers) Regulations, 2013 and offering
investment advisory services.
NISM-Series-X-A: Investment Adviser (Level 1) Certification Examination is the level 1
examination and NISM has also launched the NISM-Series-X-B: Investment Adviser (Level 2)
Certification Examination.
An associated person is required to pass both the levels (i.e. NISM-Series-X-A: Investment
Adviser (Level 1) Certification Examination and NISM-Series-X-B: Investment Adviser (Level
2) Certification Examination) to fulfill the requirements under Regulation 7(2) of the SEBI
(Investment Advisers) Regulations, 2013.
The certification aims to enhance the quality of investment advisory and related services in
the financial services industry.

Examination Objectives
On successful completion of the examination, the candidate should:
Know the basics of investment advisory, steps in the advisory process, making and
implementation of financial plan.
Understand how to evaluate different products, their suitability and how the
recommendation of the same can impact investment risks, returns and strategies in a
personal finance environment for investors and prospective investors in the market.
Get oriented to the Income tax, Wealth tax and legalities of Estate planning in personal
finance, and regulatory aspects underlying advisory.
Get acquainted with financial planning as an approach to investing, insurance,
retirement planning and an aid for advisers to develop long term relationships with their
clients.

Assessment Structure
The examination consists of 100 questions of 1 mark each and should be completed in 2
hours. The passing score on the examination is 60%. There shall be negative marking of 25%
of the marks assigned to a question.

How to register and take the examination
To find out more and register for the examination please visit www.nism.ac.in
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NISM-Series-X-A: Investment Adviser (Level 1) Certification Examination

CONTENTS
CHAPTER 1: INTRODUCTION TO INDIAN FINANCIAL MARKET ............................................... 11
1.1 The Indian Economy ....................................................................................................... 11
1.2 The Indian Financial Markets ......................................................................................... 11
1.3 Structure of Financial Markets in India .......................................................................... 13
1.4 Role of Participants in the Financial Markets ................................................................ 20
1.5 Regulators of Financial Markets ..................................................................................... 22
CHAPTER 2: SECURITIES MARKET SEGMENTS ....................................................................... 31
2.1 Nature and Definition of Primary Markets .................................................................... 31
2.2 Role and Function of the Secondary Market ................................................................. 45
2.3 Corporate Actions .......................................................................................................... 56
CHAPTER 3: MUTUAL FUNDS ............................................................................................... 65
3.1 Meaning and features of Mutual Fund .......................................................................... 65
3.2 Concepts and Terms Related to Mutual Funds .............................................................. 66
3.3 Regulatory Framework of Mutual Funds ....................................................................... 69
3.4 Mutual Fund Products .................................................................................................... 70
3.5 Taxation of Mutual Fund Products ................................................................................. 81
3.6 Mutual Fund Investment Options .................................................................................. 83
3.7 Process associated with Investment in Mutual Funds ................................................... 84
3.8 Systematic Transactions ................................................................................................. 94
3.9 Benefits of Investing in Mutual Funds ........................................................................... 98
CHAPTER 4: INVESTMENT PRODUCTS ................................................................................. 107
4.1. Small Saving Instruments ............................................................................................. 107
4.2. Fixed Income Instruments ............................................................................................ 112
4.3. Alternate Investments .................................................................................................. 117
4.4. Direct Equity ................................................................................................................. 129
CHAPTER 5: MANAGING INVESTMENT RISK ........................................................................ 141
5.1. Risk ............................................................................................................................... 141
5.2. Common Types of Risk ................................................................................................. 142
5.3. Measuring Risk ............................................................................................................. 147
CHAPTER 6: MEASURING INVESTMENT RETURNS ................................................................ 155
6.1. Understanding Return .................................................................................................. 155
6.2. Understanding Return Concepts .................................................................................. 156
6.3. The Concept of Compounding ..................................................................................... 160
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NISM-Series-X-A: Investment Adviser (Level 1) Certification Examination

6.4. Real Rate of Return vs. Nominal Rate of Return .......................................................... 174
6.5. Tax Adjusted Return ..................................................................................................... 175
6.6. Risk Adjusted Returns .................................................................................................. 177
CHAPTER 7: CONCEPT OF FINANCIAL PLANNING ................................................................. 181
7.1. Financial Planning ......................................................................................................... 181
7.2. Need for Financial Advisory Services ........................................................................... 182
7.3. Scope of Financial Planning Services ............................................................................ 183
7.4. Financial Advisory and Execution ................................................................................. 186
7.5. Assets, Liabilities and Networth ................................................................................... 188
7.6. Preparation of Budget .................................................................................................. 190
7.7. Financial Planning Delivery Process ............................................................................. 191
CHAPTER 8: ASSET ALLOCATION AND INVESTMENT STRATEGIES ......................................... 205
8.1. Asset Classes................................................................................................................. 205
8.2. Portfolio Construction .................................................................................................. 208
8.3. Practical Asset Allocation and Rebalancing Strategies ................................................ 213
8.4. Portfolio Monitoring and Re-balancing ........................................................................ 217
CHAPTER 9: INSURANCE PLANNING .................................................................................... 223
9.1. Need for Insurance ....................................................................................................... 223
9.2. Requirements of an Insurable risk ............................................................................... 223
9.3. Role of Insurance in Personal Finance ......................................................................... 224
9.4. Steps in Insurance Planning ......................................................................................... 225
9.5. Insurance Products ....................................................................................................... 226
9.6. Life Insurance Products ................................................................................................ 227
9.7. Non- Life Insurance ...................................................................................................... 233
9.8. Life Insurance Needs Analysis ...................................................................................... 235
CHAPTER 10: RETIREMENT PLANNING ................................................................................ 245
10.1. Introduction to retirement planning process .............................................................. 245
10.2. Estimating the Retirement Corpus ............................................................................... 247
10.3. Determining the Retirement Corpus ............................................................................ 250
10.4. Retirement Products .................................................................................................... 257
CHAPTER 11: TAX AND ESTATE PLANNING .......................................................................... 277
11.1. Understand Income tax principles ............................................................................... 277
11.2. Tax aspects of investment products ............................................................................ 287
11.3. Wealth Tax Act and its implication for clients ............................................................. 295
11.4. Estate Planning ............................................................................................................. 297
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NISM-Series-X-A: Investment Adviser (Level 1) Certification Examination

CHAPTER 12: REGULATORY ENVIRONMENT AND ETHICAL ISSUES ....................................... 309
12.1. Regulation for Investment Advisers ............................................................................. 309
12.2. Regulatory System and Environment ........................................................................... 316
12.3. Role of Regulators ........................................................................................................ 317
12.4. Role of Self-Regulatory Organizations (SRO) ............................................................... 323
12.5. Prevention of Money-Laundering Act, 2002 ................................................................ 323
12.6. Code of Conduct and Ethics ......................................................................................... 325
12.7. Ethical Issues in providing Financial Advice ................................................................. 330
12.8. Investor Complaint redressal systems ......................................................................... 331

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