NISM Series V-A cheat sheet

Primary market issues new securities (IPO, FPO, rights issue, preferential allotment); the secondary market trades already-issued securities between investors on exchanges.

SEBI was set up in 1988 and became statutory under the SEBI Act, 1992; its mandate is investor protection, market development and market regulation.

Regulator map: SEBI regulates securities; RBI regulates the money market, government securities and forex; IRDAI regulates insurance; PFRDA regulates pensions.

Capital market instruments have original maturity above one year; money market instruments have maturity of up to one year.

NSDL (1996) and CDSL (1999) are the two depositories under the Depositories Act, 1996 and hold securities in dematerialised form.

Indian equities settle on a rolling T+1 cycle; the SCRA, 1956 governs trading while the Companies Act, 2013 governs issue and transfer of securities.

Intermediaries needing SEBI registration include stock brokers, merchant bankers, depository participants, registrars and transfer agents, and mutual funds/AMCs.

Market participants fall into three groups: issuers, investors and intermediaries.

A mutual fund pools money from many investors into a trust, invests per a stated objective and issues units, so gains and losses are shared pro-rata.

NAV per unit = (total assets minus total liabilities) divided by units outstanding; AUM = NAV multiplied by units outstanding.

Core benefits are diversification, professional management, liquidity, low ticket size, transparency and regulation - never a guaranteed return.

Mutual funds are pass-through vehicles: income is taxed in the unit holder's hands rather than at the scheme level.

Units are not deposits: their value changes daily with the value of the underlying portfolio.

Direct and regular plans of the same scheme hold an identical portfolio; the direct plan has a lower expense ratio and therefore a higher NAV over time.

Open-ended schemes allow continuous purchase and redemption at NAV; close-ended schemes have a fixed maturity and are listed on an exchange.

SIP, STP and SWP are transaction facilities, not separate scheme categories.

Three-tier structure: the sponsor establishes the trust, the trustees hold assets and supervise, and the AMC manages the schemes.

Sponsor must have net worth of at least Rs. 50 crore, a five-year track record, and must contribute at least 40% of the AMC's net worth (can fall to 26% after five years subject to conditions).

Trustees must be at least two-thirds independent, must not be employees of the AMC, and hold the fund's assets in trust for unit holders.

AMC is a SEBI-registered company under the Companies Act, 2013 with minimum net worth of Rs. 50 crore, appointed with trustee and SEBI approval.

The trust is created by the sponsor under the Indian Trusts Act, 1882; the trust deed is registered and the trust cannot be dissolved without SEBI and unit holder approval.

Governing regulation is the SEBI (Mutual Funds) Regulations, 1996; AMFI, set up in 1995, is the industry body with a self-regulatory Code of Conduct.

At least 50% of AMC directors must be independent of the sponsor, and the AMC cannot hold shares of the trustee company.

Scheme-related expenses are charged to the scheme within TER limits; the AMC's own running costs are borne by the AMC.

An equity scheme must hold at least 65% of total assets in domestic equity shares; this 65% test also drives equity taxation and STT applicability.

SEBI equity categories: large cap (top 100 by market capitalisation), mid cap (101-250), small cap (251 onwards), multi cap (minimum 25% each in large/mid/small), flexi cap, focused (maximum 30 stocks), ELSS (3-year lock-in), sectoral/thematic, value/contra, dividend yield, index and ETF.

Debt schemes carry interest-rate risk and credit risk; liquid scheme residual maturity is up to 91 days, overnight up to 1 day, and gilt schemes invest only in government securities.

Hybrid categories: conservative (equity 10-25%), balanced (40-60%), aggressive (65-80%), arbitrage (minimum 65% in arbitrage), equity savings, multi-asset (minimum 10% in each of three asset classes) and dynamic asset allocation.

Solution-oriented schemes are retirement funds and children's funds, with a lock-in of five years or until retirement/age 18 as applicable.

Index funds and ETFs must invest at least 95% of value in the securities of the index they track.

A fund of funds invests at least 95% of its assets in the units of other mutual fund schemes.

The riskometer has six levels: low, low to moderate, moderate, moderately high, high and very high.

A distributor must clear NISM V-A certification, hold a valid AMFI ARN and quote the ARN in all investor-facing communication.

Distributor commission is paid by the AMC out of the scheme's total expense ratio; it is never separately charged to the investor.

Entry load is prohibited for new investors since 1 August 2009; any exit load collected is credited back to the scheme.

Upfront commission is paid at the time of investment; trail commission accrues as a percentage of assets over the holding period and rewards retention.

AMCs are responsible for the acts of their distributors, must conduct due diligence and register them, and rebating commission to investors is prohibited.

Channel types: individual IFAs, national distributors, banks, brokers, online platforms, and direct plans that pay no distributor commission and carry a lower TER.

Distributors must disclose commission and scheme details when the investor asks; churning a portfolio to earn commission is an unfair practice.

Distributors must follow the AMFI Code of Conduct and SEBI's distributor responsibility circular, including client KYC.

Investor profiling captures age, income, net worth, investment objective, time horizon, risk tolerance, liquidity needs and tax status.

Match the investor's risk tolerance to the scheme's riskometer level and to the asset category (equity, debt or hybrid).

Horizon rule used in the syllabus: a longer horizon supports higher equity exposure, while short-term money belongs in liquid or short-duration debt schemes.

Shortlist schemes within the same SEBI category and compare them with category peers and the scheme's own benchmark; cross-category return comparison is misleading.

Evaluate risk-adjusted and rolling returns, consistency across market cycles, expense ratio, portfolio concentration, portfolio turnover, AUM size and fund manager tenure.

Document the suitability rationale; the recommendation must follow from the investor's profile, not from commission or recent top-quartile performance.

Direct plans suit cost-sensitive self-directed investors; regular plans suit investors who need continuing advisory support.

Review the portfolio periodically and rebalance; a single year's return is not evidence of scheme quality.

Total risk is the standard deviation of returns and splits into systematic (market, non-diversifiable) and unsystematic (diversifiable) risk.

Beta measures sensitivity of scheme returns to market returns: beta above 1 is more volatile than the market, below 1 less volatile.

Sharpe ratio = (portfolio return - risk-free return) / standard deviation; Treynor ratio = (portfolio return - risk-free return) / beta.

Jensen's alpha = Rp - [Rf + beta x (Rm - Rf)]; a positive alpha is outperformance after adjusting for beta risk.

R-squared is the proportion of scheme variance explained by the benchmark; a low value shows that diversification diluted benchmark resemblance.

Sortino ratio uses downside deviation instead of total standard deviation; information ratio = (portfolio return - benchmark return) / tracking error.

In debt, modified duration measures price sensitivity to a change in yield; credit risk, liquidity risk and reinvestment risk are separate exposures.

Concentration limits: 10% of NAV in one company's equity (and 10% of its paid-up voting capital); 10% of NAV in one issuer's debt, extendable to 12% with trustee approval; group debt exposure 20%, extendable to 25%.

Point-to-point simple return = (ending NAV - beginning NAV) / beginning NAV x 100; report absolute return for holding periods under one year.

CAGR = [(ending value / beginning value) raised to (1 / number of years)] - 1, used for lumpsum returns over more than one year; do not annualise periods shorter than a year.

SIP returns are best measured with XIRR because investments occur at irregular intervals and amounts.

Total return assumes reinvestment of distributions; growth-option NAV already reflects reinvested income.

Compare scheme returns with the designated benchmark and category peers; alpha is the excess return over the risk-adjusted benchmark return.

Tracking error (standard deviation of return differences) and tracking difference measure how closely an index fund or ETF follows its index; both should be low for passive funds.

Expense ratio is a direct drag on return: at the same gross return, a lower TER produces a higher NAV and higher net return.

Use rolling returns across full market cycles; past performance does not guarantee future results.

PAN and KYC through a KYC Registration Agency are mandatory for mutual fund investments; one KYC is valid across all AMCs and folios.

Cut-off time is 3:00 p.m. for most schemes and 1:30 p.m. for liquid and overnight schemes.

Same-day NAV applies to purchases below Rs. 2 lakh received before cut-off; for Rs. 2 lakh and above, the NAV of the day the funds are realised applies.

Redemption proceeds must be paid within 3 working days for non-liquid schemes and within 1 working day for liquid schemes from acceptance.

A Consolidated Account Statement consolidates an investor's holdings across AMCs and folios; investors also receive transaction confirmations and annual reports.

Nomination, transmission, change of bank mandate, address and signature are routine service requests handled by the RTA or AMC.

Escalation path for complaints: the AMC grievance cell first, then SEBI SCORES; AMFI also runs a complaints redressal mechanism.

Operations must comply with PMLA/anti-money-laundering norms, FATCA reporting, the AMFI Code of Conduct and SEBI inspection requirements.

NAV is computed daily after valuing all securities: total assets minus liabilities divided by units outstanding, with income and expenses recorded on an accrual basis.

Debt securities with residual maturity up to 60 days are valued on the amortisation (cost plus accrual) basis.

Debt securities with residual maturity above 60 days follow the fair value waterfall: traded price, then polled price, then AMFI price, then the valuation committee.

Listed equity is valued at the last traded price on the exchange where the security is primarily traded; unlisted securities follow SEBI-prescribed fair valuation.

TER caps run on declining slabs, starting at 2.25% of daily net assets for the first Rs. 500 crore of an equity scheme, with lower slabs for debt schemes; GST is charged over and above.

Exit load collected is credited to the scheme; the AMC cannot retain it.

Securities transaction tax applies only to equity-oriented units (at least 65% in domestic equity), at 0.001% on both purchase and sale.

Dividends may be paid only out of distributable surplus (realised gains and income); dividend distribution tax was abolished from 1 April 2020 and dividend income is taxed in the investor's hands.