NISM X-A Investment Adviser Level 1 flashcards

33 cards. Read the term and the definition here. The deck at the top of this page is optional.

Investment advice definition

Advice relating to investing in, purchasing, selling or otherwise dealing in securities or investment products, given for consideration, in written, oral or electronic form, as part of the adviser's business.

Investment adviser registration

A person engaged in the business of giving investment advice for consideration must register with SEBI under the SEBI (Investment Advisers) Regulations, 2013, unless a specific exemption applies.

Advisory fee limits

Individual advisers may charge up to INR 1,25,000 per client per annum; non-individual advisers up to INR 1,50,000 per client per annum, subject to the prescribed caps linked to assets under advice.

SEBI mandate

SEBI is the statutory regulator of India's securities market under the SEBI Act, 1992, empowered to regulate intermediaries, protect investors and enforce securities laws.

T+1 settlement

Indian equity trades settle on the next working day after the trade date, with the clearing corporation ensuring delivery of securities and payment of funds.

Depository role

NSDL and CDSL hold securities in electronic (dematerialised) form, enabling book-entry transfer of shares between investors without physical certificates.

Primary versus secondary market

The primary market is where issuers raise capital through new securities; the secondary market is where existing securities are traded among investors on exchanges or over the counter.

Equity share characteristics

An equity share represents ownership, carries voting rights and a residual claim on profits and assets, and offers dividends and capital appreciation with higher volatility.

Net Asset Value formula

NAV = (Total Assets − Total Liabilities) / Number of Units Outstanding; it is the per-unit value used for purchases and redemptions of open-ended mutual fund schemes.

ELSS features

Equity Linked Savings Scheme is a tax-saving mutual fund with a mandatory three-year lock-in and eligibility for deduction under Section 80C, investing primarily in equity.

ULIP features

A Unit Linked Insurance Plan combines life insurance cover with market-linked investment, has a lock-in period, and its fund value varies with the performance of the chosen funds.

Holding period return

HPR = (P1 − P0 + D1) / P0, where P1 is the ending price, P0 the beginning price and D1 the income or dividend received during the period.

Standard deviation

A measure of total risk equal to the square root of variance; it quantifies the dispersion of returns around the expected return, including both systematic and unsystematic risk.

Beta meaning

Beta measures a security's sensitivity to market movements; a beta above 1 indicates greater volatility than the market, below 1 indicates lower volatility.

CAPM formula

E(Ri) = Rf + βi × (E(Rm) − Rf), where Rf is the risk-free rate, βi the asset's beta and E(Rm) the expected market return.

Sharpe ratio

Sharpe ratio = (Portfolio return − Risk-free rate) / Standard deviation of portfolio; it measures excess return earned per unit of total risk taken.

Diversification effect

Combining assets with correlation less than +1 reduces portfolio risk below the weighted average of individual risks; unsystematic risk can be diversified away, systematic risk cannot.

Risk tolerance versus capacity

Risk tolerance is the client's willingness to accept return variability; risk capacity is the financial ability to absorb losses without jeopardising goals. The lower of the two governs advice.

Risk profiling inputs

Age, income stability, net worth, liabilities, dependants, insurance cover, liquidity needs, investment horizon, experience and behavioural traits are assessed to determine a client's risk profile.

Suitability rule

Recommendations must be appropriate to the client's risk profile, objectives and financial situation; unsuitable high-risk products require documented justification and informed client consent.

Behavioural biases in profiling

Loss aversion, overconfidence, herding, anchoring and recency bias can distort client risk perception and must be identified and corrected during risk profiling and advice.

Strategic asset allocation

Long-term target weights across asset classes such as equity, debt, gold and cash, set according to the client's risk profile, goals and investment horizon.

Rebalancing rule

Restoring target asset weights after market drift, either on a fixed calendar schedule or when deviations exceed a set threshold, to maintain the intended risk level.

Portfolio expected return

The weighted average of asset-class expected returns: portfolio return = Σ (weight of asset class × expected return of that asset class), before costs and taxes.

Goal-based investing

Mapping separate portfolios to specific financial goals with matching horizons, so that short-term goals use low-volatility debt and long-term goals can use equity.

Core-satellite construction

A diversified core holding (index funds, large-cap, debt) combined with smaller satellite positions (sectoral, thematic, mid- or small-cap) sized to the client's risk capacity.

Net worth requirement

Individual investment advisers need net worth of at least INR 2.5 lakh; non-individual advisers need at least INR 50 lakh, or a bank deposit as an alternative.

Continuing education requirement

Certified investment advisers must complete at least 10 hours of continuing education per year, including at least 2 hours on ethics, to maintain their NISM certification.

KYC obligation

Advisers must complete Know Your Client procedures for every client, verifying identity and address, and record financial details and risk profile before providing advice.

Record retention

Advisers must maintain records of advice, client communications, KYC documents and fee details for at least five years, and produce them to SEBI on request.

Advisory-distribution segregation

Advisers must keep advisory and distribution activities separate, cannot charge advisory fees and accept commissions on the same product, and must disclose any commissions received.

Fiduciary duty

The adviser must act in the client's best interest, place client interests ahead of their own, and avoid, disclose or manage conflicts of interest transparently.

Churning prohibition

Excessive trading or switching of client portfolios to generate commissions is prohibited; recommendations must be justified by the client's objectives and documented rationale.