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NISM Series XXI-A study materials
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NISM Series XXI-A practice questions

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Question 1Portfolio Management Services (PMS) distribution - products, processes and investor servicing

Under SEBI's Portfolio Managers Regulations, what is the minimum investment amount a client must commit to a portfolio management service?

  1. ₹10 lakh
  2. ₹5 lakh
  3. ₹50 lakh Correct answer.
  4. ₹25 lakh

Explanation

SEBI prescribes a minimum investment of ₹50 lakh per client for portfolio management services, though the portfolio manager may accept a lower amount only in specified circumstances such as an existing client topping up. The threshold is designed to ensure PMS is offered to investors who can bear the associated risks.

Question 2Portfolio Management Services (PMS) distribution - products, processes and investor servicing

A distributor explains PMS to a prospective client. Which feature most clearly distinguishes a discretionary portfolio manager from a non-discretionary one?

  1. The discretionary manager invests exclusively in debt instruments
  2. The discretionary manager charges only a fixed fee with no performance component
  3. The discretionary manager decides and executes trades without seeking client consent for each transaction Correct answer.
  4. The discretionary manager guarantees a minimum annual return to the client

Explanation

In a discretionary service the portfolio manager has authority to make investment decisions and execute them on the client's behalf without prior consent for individual trades. Non-discretionary and advisory services require client approval before acting on recommendations.

Question 3Portfolio Management Services (PMS) distribution - products, processes and investor servicing

A client asks how the portfolio manager's fee is typically structured. Which description best reflects a common SEBI-permitted arrangement?

  1. A flat fee charged only when the portfolio beats the Nifty 50 index
  2. A fixed management fee plus a performance-linked fee subject to regulatory conditions Correct answer.
  3. A one-time entry load deducted at the time of account opening
  4. A commission paid by the underlying broker to the client

Explanation

Portfolio managers commonly charge a fixed management fee and may also charge a performance-based fee, provided it complies with SEBI's conditions on benchmarking and disclosure. The fee is disclosed upfront in the disclosure document and client agreement.

Question 4Portfolio Management Services (PMS) distribution - products, processes and investor servicing

Before onboarding a client, a portfolio manager must provide which document that sets out the investment approach, risks, and fee details?

  1. A prospectus registered with the Registrar of Companies
  2. A disclosure document along with the client agreement Correct answer.
  3. A key information memorandum identical to a mutual fund's
  4. A scheme information document filed with SEBI

Explanation

SEBI requires the portfolio manager to furnish a disclosure document covering the investment objectives, strategy, risks, fees, and performance, together with a written client agreement. These are PMS-specific documents distinct from mutual fund scheme documents.

Question 5Portfolio Management Services (PMS) distribution - products, processes and investor servicing

A portfolio manager holds client securities. In whose name are the demat accounts for a discretionary portfolio generally maintained?

  1. In the name of the custodian as beneficial owner
  2. In the name of the distributor who introduced the client
  3. In the portfolio manager's own proprietary name
  4. In the client's name, with the manager holding a power of attorney or limited authority Correct answer.

Explanation

Client securities are held in demat accounts in the client's name, and the portfolio manager operates them under a power of attorney or similar authority. This segregation protects client assets and prevents commingling with the manager's own holdings.

Question 6Portfolio Management Services (PMS) distribution - products, processes and investor servicing

Which activity is a PMS distributor generally permitted to perform?

  1. Discretionarily managing the client's portfolio after onboarding
  2. Guaranteeing a fixed return to persuade the client to invest
  3. Signing the client agreement on the client's behalf
  4. Explaining the product features and facilitating the client's onboarding with the portfolio manager Correct answer.

Explanation

A distributor's role is to explain the product, assess suitability, and facilitate onboarding; investment decisions and the client agreement remain with the client and the registered portfolio manager. Distributors cannot guarantee returns or manage portfolios.

Question 7Portfolio Management Services (PMS) distribution - products, processes and investor servicing

A client wants to exit a PMS account mid-term. How does SEBI's framework generally treat exit load on PMS?

  1. Exit load, if any, must be disclosed in the disclosure document and client agreement Correct answer.
  2. Exit loads are mandatory and fixed by SEBI at 2%
  3. Exit load is charged only on the profit portion of the portfolio
  4. Exit loads are prohibited entirely for all PMS accounts

Explanation

SEBI does not fix a uniform exit load for PMS; any exit load the portfolio manager intends to charge must be transparently disclosed in the disclosure document and the client agreement. This allows clients to know exit costs before committing.

Question 8Portfolio Management Services (PMS) distribution - products, processes and investor servicing

In a PMS performance report, which benchmark comparison is most appropriate to present to a client?

  1. Comparison against the portfolio manager's own proprietary trading account
  2. Comparison against the highest-returning fund in the market
  3. Comparison against a benchmark aligned with the portfolio's stated strategy and asset class Correct answer.
  4. Comparison against the Sensex regardless of the client's mandate

Explanation

Performance should be measured against a benchmark that reflects the portfolio's stated mandate and asset allocation, so the comparison is meaningful. Presenting an unrelated or cherry-picked benchmark misleads the client.

Question 9Portfolio Management Services (PMS) distribution - products, processes and investor servicing

A prospective client asks whether a PMS can assure a 15% annual return. What is the accurate distributor response?

  1. Yes, if the portfolio manager has a strong track record
  2. Yes, but only for discretionary accounts
  3. No, assured or guaranteed returns cannot be offered in PMS Correct answer.
  4. No, unless the client invests above ₹1 crore

Explanation

SEBI prohibits portfolio managers from assuring or guaranteeing returns on client portfolios. Past performance may be shown with proper disclosures but cannot be presented as a promise of future returns.

Question 10Portfolio Management Services (PMS) distribution - products, processes and investor servicing

Which client is most suitable for a PMS product pitched by a distributor?

  1. A high-net-worth investor with a long horizon who can bear market volatility Correct answer.
  2. A first-time investor with ₹1 lakh in savings
  3. A retiree seeking assured monthly income with capital protection
  4. A client who needs daily liquidity for emergency expenses

Explanation

PMS suits investors who meet the minimum investment threshold, have a longer horizon, and can tolerate market fluctuations. Clients needing assured income, capital protection, or daily liquidity are better served by other products.

Question 11Portfolio Management Services (PMS) distribution - products, processes and investor servicing

How is the portfolio manager typically compensated in a performance-linked fee arrangement?

  1. A share of profits above a hurdle rate, subject to disclosed terms Correct answer.
  2. A commission on every trade executed in the client's account
  3. A fixed percentage of the client's gross salary
  4. A rebate received from the broker for order flow

Explanation

Performance-linked fees are usually structured as a share of returns above a specified hurdle, with the exact terms disclosed in the agreement. Trade-based commissions and broker rebates are not legitimate forms of client compensation for the manager.

Question 12Portfolio Management Services (PMS) distribution - products, processes and investor servicing

A client's PMS account shows a loss in the first year. Which statement about the performance-linked fee is generally correct?

  1. The performance fee should not be charged where returns fall below the agreed hurdle or benchmark Correct answer.
  2. The manager may recover the loss from the client's other accounts
  3. The loss must be made good by the distributor
  4. The manager can still charge the performance fee because a loss occurred

Explanation

Performance-linked fees are contingent on achieving the agreed hurdle or benchmark; if returns fall below it, the performance fee is generally not charged under the disclosed terms. The manager cannot recover losses from other accounts or shift them to the distributor.

Question 13Portfolio Management Services (PMS) distribution - products, processes and investor servicing

What is the primary purpose of the client agreement in a PMS relationship?

  1. To appoint the distributor as the decision-maker for the account
  2. To transfer ownership of client securities to the portfolio manager
  3. To record the investment mandate, fees, rights, and obligations of both parties Correct answer.
  4. To guarantee the client a specified return over the term

Explanation

The client agreement documents the mandate, fee terms, risk disclosures, and the rights and obligations of the client and the portfolio manager. It does not create return guarantees or transfer asset ownership.

Question 14Portfolio Management Services (PMS) distribution - products, processes and investor servicing

A distributor is comparing PMS with mutual funds for a client. Which point is accurate?

  1. PMS typically offers a customised portfolio aligned to the client's mandate, unlike a pooled mutual fund scheme Correct answer.
  2. PMS returns are guaranteed while mutual fund returns are not
  3. PMS is regulated by SEBI while mutual funds are unregulated
  4. PMS units are freely transferable like mutual fund units

Explanation

PMS generally provides a customised portfolio managed to the client's mandate, whereas mutual funds pool money into a common scheme. Both are SEBI-regulated, and neither guarantees returns.

Question 15Portfolio Management Services (PMS) distribution - products, processes and investor servicing

Which record must a portfolio manager maintain and report to clients on a periodic basis?

  1. Portfolio holdings and performance statements at agreed intervals Correct answer.
  2. The manager's own salary details
  3. Only the client's PAN card copy
  4. The distributor's personal investment history

Explanation

Portfolio managers must provide clients with periodic statements of holdings and performance so clients can monitor their portfolios. These reports are part of the servicing and transparency obligations.

Question 16Portfolio Management Services (PMS) distribution - products, processes and investor servicing

A client wants to change the investment mandate mid-term from equity to debt. What is the correct process?

  1. The change is impossible once the account is opened
  2. The change requires a documented request and the portfolio manager's acceptance, consistent with the agreement Correct answer.
  3. The distributor can unilaterally alter the mandate on the client's behalf
  4. The change takes effect only at the next financial year

Explanation

A mandate change requires a documented client request and the portfolio manager's agreement, reflecting the revised terms in the client agreement. It is not something a distributor can do unilaterally, nor is it barred or tied to the fiscal year.

Question 17Portfolio Management Services (PMS) distribution - products, processes and investor servicing

What does the term 'high-water mark' mean in a performance-linked PMS fee?

  1. The peak portfolio value that must be exceeded before a performance fee is charged again Correct answer.
  2. The highest return any client has earned in the scheme
  3. The highest NAV a mutual fund scheme has ever reached
  4. The maximum fee a portfolio manager may charge

Explanation

A high-water mark ensures the manager earns a performance fee only on gains above the previous peak portfolio value, so clients do not pay twice for recovering prior losses. It is a fairness mechanism in performance fee design.

Question 18Portfolio Management Services (PMS) distribution - products, processes and investor servicing

A client is unhappy with the portfolio manager's service. Which escalation route is most appropriate?

  1. Ask the custodian to refund the management fee
  2. Approach the distributor to reverse the trades
  3. Write directly to the stock exchange to cancel the account
  4. File a complaint through SEBI's SCORES platform or the portfolio manager's grievance redressal mechanism Correct answer.

Explanation

Investor grievances in PMS can be raised through the portfolio manager's grievance redressal process and, if unresolved, through SEBI's SCORES platform. Trades cannot be reversed by the distributor, and the custodian does not handle fee refunds.

Question 19Portfolio Management Services (PMS) distribution - products, processes and investor servicing

Which statement about the risk disclosure in a PMS agreement is accurate?

  1. Risk disclosure must clearly state that investments are subject to market risk and past performance is not indicative of future results Correct answer.
  2. Risk disclosure can be replaced by a verbal assurance from the distributor
  3. Risk disclosure is optional if the client is experienced
  4. Risk disclosure applies only to debt portfolios

Explanation

PMS documentation must clearly disclose that investments carry market risk and that past performance does not guarantee future results. This disclosure is mandatory and applies to all portfolio types, regardless of client experience.

Question 20Portfolio Management Services (PMS) distribution - products, processes and investor servicing

A distributor learns that a portfolio manager's advertised past performance was selectively presented, showing only the best-performing accounts. How should the distributor respond?

  1. Avoid presenting misleading selective performance and rely on complete, disclosed performance data Correct answer.
  2. Present only the best account as representative of all clients
  3. Repeat the selective performance to close the sale quickly
  4. Add a verbal guarantee to make the selective data more persuasive

Explanation

Selective presentation of only top-performing accounts is misleading; performance should be presented completely and as disclosed, in line with SEBI requirements. A distributor must not amplify misleading claims or add guarantees.

Question 21Portfolio Management Services (PMS) distribution - products, processes and investor servicing

What is the role of a custodian in a PMS arrangement?

  1. To market the PMS product to new clients
  2. To set the performance fee charged to clients
  3. To safekeep client securities and process settlements independently of the manager Correct answer.
  4. To make investment decisions for the client

Explanation

A custodian safekeeps client assets and handles settlement and corporate actions, providing independent control over client securities. Investment decisions, marketing, and fee-setting are not custodian functions.

Question 22Portfolio Management Services (PMS) distribution - products, processes and investor servicing

A prospective client asks how often PMS fees are typically debited. Which answer is most accurate?

  1. Fees are debited only at the time of account closure
  2. Fees are charged once every five years
  3. Fees are typically charged periodically, such as monthly or quarterly, as specified in the agreement Correct answer.
  4. Fees are deducted only when the portfolio makes a profit

Explanation

Management fees are usually charged periodically (for example monthly or quarterly) based on the agreed terms and disclosed in the client agreement. They are not deferred to closure, charged once in five years, or conditional solely on profit.

Question 23Portfolio Management Services (PMS) distribution - products, processes and investor servicing

Which situation best illustrates a conflict of interest that a PMS distributor should disclose to a client?

  1. The portfolio manager rebalances the portfolio quarterly
  2. The client receives a periodic performance statement
  3. The client's portfolio holds a diversified mix of large-cap stocks
  4. The distributor receives a higher commission for recommending one portfolio manager over another Correct answer.

Explanation

A distributor receiving differential commissions creates an incentive that may bias recommendations, and this conflict should be disclosed so the client can judge the advice. Diversification, rebalancing, and reporting are normal service features, not conflicts.

Question 24Portfolio Management Services (PMS) distribution - products, processes and investor servicing

A client's portfolio manager proposes to invest in unlisted securities under the agreed mandate. Which consideration is most relevant for the distributor to flag?

  1. Unlisted securities are always risk-free
  2. The distributor must personally guarantee their value
  3. Unlisted securities are prohibited in every PMS
  4. Such investments may carry higher liquidity and valuation risks that must be within the disclosed mandate Correct answer.

Explanation

Unlisted securities can carry greater liquidity and valuation risk, and their inclusion must be consistent with the disclosed mandate and risk profile. The distributor should ensure the client understands these risks rather than asserting they are risk-free or banned.

Question 25Portfolio Management Services (PMS) distribution - products, processes and investor servicing

Which document typically records the client's risk profile and investment objectives at onboarding?

  1. The portfolio manager's SEBI registration certificate
  2. The client onboarding or know-your-client documentation, including a risk profiling form Correct answer.
  3. The custodian agreement
  4. The distributor's commission invoice

Explanation

Onboarding documentation, including KYC and a risk profiling form, captures the client's objectives and risk tolerance so the mandate can be matched appropriately. The custodian agreement, registration certificate, and invoices serve different purposes.

Question 26Portfolio Management Services (PMS) distribution - products, processes and investor servicing

Under the SEBI (Portfolio Managers) Regulations, what is the minimum investment amount a client must commit to a portfolio management service?

  1. Twenty-five lakh rupees
  2. Ten lakh rupees
  3. Fifty lakh rupees Correct answer.
  4. Five lakh rupees

Explanation

SEBI prescribes a minimum client investment of fifty lakh rupees for portfolio management services. This threshold is designed to ensure that PMS products are offered only to investors with substantial investible surplus. Distributors must confirm eligibility before onboarding a client.

Question 27Portfolio Management Services (PMS) distribution - products, processes and investor servicing

A PMS distributor is explaining the fee structure to a prospective client. Which fee is charged by the portfolio manager as a fixed percentage of the average assets under management?

  1. Brokerage
  2. Custodian charge
  3. Management fee Correct answer.
  4. Exit load

Explanation

The management fee is the fixed component charged as a percentage of average AUM, independent of performance. Exit loads, custodian charges and brokerage are separate cost heads disclosed in the agreement. Distributors should clarify that management fee accrues even in loss-making periods.

Question 28Portfolio Management Services (PMS) distribution - products, processes and investor servicing

Which entity is responsible for the safe custody of securities held in a PMS client's demat account?

  1. The distributor
  2. The performance auditor
  3. The custodian Correct answer.
  4. The registrar and transfer agent

Explanation

The custodian holds securities in the client's demat account and settles trades, providing independent safekeeping. The distributor only markets and services the relationship. Registrars handle mutual fund unit records, not PMS custody.

Question 29Portfolio Management Services (PMS) distribution - products, processes and investor servicing

A client onboarding into a PMS is asked to complete a risk profiling exercise. What is the primary purpose of this exercise?

  1. To verify the client's income tax slab
  2. To satisfy KYC requirements for opening a demat account
  3. To determine the maximum fee the client can be charged
  4. To match the investment approach with the client's objectives and risk tolerance Correct answer.

Explanation

Risk profiling aligns the chosen strategy with the client's return expectations, time horizon and tolerance for drawdown. It protects both client and manager by documenting suitability. KYC and tax verification are separate compliance steps.

Question 30Portfolio Management Services (PMS) distribution - products, processes and investor servicing

Which document must a client sign to formally appoint a portfolio manager and record the agreed investment approach?

  1. The account opening form of a mutual fund
  2. The key information memorandum
  3. The client agreement Correct answer.
  4. The scheme information document

Explanation

The client agreement is the contractual document that appoints the portfolio manager and records the mandate, fees and disclosures. Scheme information documents and key information memoranda belong to mutual fund products. For PMS, the agreement is the governing contract.

Question 31Portfolio Management Services (PMS) distribution - products, processes and investor servicing

A distributor is describing how PMS performance is typically reported. Which practice is consistent with SEBI's disclosure expectations?

  1. Reporting returns without any benchmark comparison
  2. Reporting returns net of taxes only
  3. Reporting the aggregate performance of all discretionary portfolios in a comparable composite Correct answer.
  4. Reporting only the best-performing client portfolio

Explanation

SEBI requires performance to be disclosed on a composite basis for comparable discretionary portfolios so that selective cherry-picking is prevented. Reporting only the best portfolio would mislead investors. Benchmark comparisons and net-of-fee disclosures are also expected.

Question 32Portfolio Management Services (PMS) distribution - products, processes and investor servicing

Which of the following best describes a 'discretionary' portfolio management service?

  1. The portfolio manager makes investment decisions within the agreed mandate without prior client consent Correct answer.
  2. The client approves every individual trade before execution
  3. The manager only advises and the client executes trades in their own account
  4. The client directs the manager on a specific list of stocks only

Explanation

In discretionary PMS, the manager exercises investment discretion within the agreed mandate without seeking consent for each trade. Non-discretionary service requires client approval for each transaction, and advisory service leaves execution with the client.

Question 33Portfolio Management Services (PMS) distribution - products, processes and investor servicing

What is the role of a performance auditor in a PMS arrangement?

  1. To collect fees from the client on behalf of the manager
  2. To manage the client's KYC records
  3. To approve each trade before execution
  4. To certify the portfolio manager's reported performance and fee computation Correct answer.

Explanation

An independent performance auditor verifies the reported returns and fee calculations, adding credibility to disclosures. The auditor does not approve trades, collect fees or handle KYC. This independence protects clients from overstated performance claims.

Question 34Portfolio Management Services (PMS) distribution - products, processes and investor servicing

A distributor is preparing a pitch for a prospective PMS client. Which disclosure is required regarding the distributor's own remuneration?

  1. The distributor must disclose remuneration only if the client asks in writing
  2. The distributor must disclose the nature and basis of its remuneration to the client Correct answer.
  3. The distributor may keep its commission confidential as a trade secret
  4. The distributor must disclose remuneration only after the account is funded

Explanation

Transparency requires the distributor to disclose the nature and basis of its remuneration so the client understands potential conflicts. Concealing commission can create an undisclosed conflict of interest. Disclosure is expected at the point of sale, not only on request.

Question 35Portfolio Management Services (PMS) distribution - products, processes and investor servicing

A client with a three-month horizon and a need for liquidity approaches a distributor for a PMS product. What is the most appropriate distributor response?

  1. Recommend a PMS with a lock-in to improve discipline
  2. Recommend an aggressive equity PMS to maximise short-term returns
  3. Explain that PMS is generally unsuitable for very short horizons and suggest more liquid alternatives Correct answer.
  4. Recommend a PMS with the highest historical return regardless of horizon

Explanation

PMS strategies are typically designed for longer horizons and may carry exit loads or illiquid positions. A three-month liquidity need makes PMS generally unsuitable, and the distributor should steer the client to more liquid products. Recommending an aggressive strategy for a short horizon would be a suitability failure.

Question 36Portfolio Management Services (PMS) distribution - products, processes and investor servicing

A client's PMS account has a performance-linked fee with a hurdle rate of 8% and a high-water mark. In a year when the portfolio returns 6%, what fee outcome is consistent with this structure?

  1. No performance fee is payable because the hurdle is not crossed Correct answer.
  2. Performance fee is payable but recovered in the next year
  3. Performance fee is payable at half the normal rate
  4. Performance fee is payable on the full 6% return

Explanation

A hurdle rate means the performance fee applies only to returns above the specified threshold. With a 6% return against an 8% hurdle, no performance fee accrues. The high-water mark further ensures fees are not charged again on recovered losses.

Question 37Portfolio Management Services (PMS) distribution - products, processes and investor servicing

A client wants to add a second portfolio manager to manage a portion of the same PMS corpus. What is the standard regulatory position on multiple portfolio managers for one client?

  1. Multiple managers are allowed only if all use the same custodian
  2. A client may appoint only one portfolio manager at any time
  3. A client may appoint multiple portfolio managers for different portions of the corpus with proper disclosure Correct answer.
  4. Multiple managers are allowed only for corporate clients

Explanation

SEBI permits a client to engage more than one portfolio manager for distinct portions of the corpus, provided the arrangements are properly documented and disclosed. Each manager's mandate and reporting must remain clear. There is no blanket prohibition or corporate-only restriction.

Question 38Portfolio Management Services (PMS) distribution - products, processes and investor servicing

During onboarding, a client insists on a mandate that permits investment in unrated corporate bonds. Which action by the distributor is most appropriate?

  1. Refuse to onboard the client entirely
  2. Ensure the associated risks are explained and the mandate is documented with the client's informed consent Correct answer.
  3. Promise that unrated bonds carry the same risk as government securities
  4. Accept the mandate without any additional documentation

Explanation

Where a mandate permits higher-risk instruments such as unrated bonds, the distributor should ensure the risks are clearly explained and documented. Informed consent protects both parties and supports suitability. Refusing outright or misrepresenting risk would be inappropriate.

Question 39Portfolio Management Services (PMS) distribution - products, processes and investor servicing

A client asks how frequently they should expect to receive portfolio statements from the portfolio manager. Which statement is most accurate?

  1. Statements are provided only once at account closure
  2. Statements are provided at least monthly, with additional disclosures on request Correct answer.
  3. Statements are provided only when a loss occurs
  4. Statements are provided only annually

Explanation

SEBI requires portfolio managers to provide periodic statements, generally at least monthly, covering holdings, transactions and performance. Clients may also request additional information. Annual or closure-only reporting would fall short of the disclosure framework.

Question 40Portfolio Management Services (PMS) distribution - products, processes and investor servicing

A distributor notices that a portfolio manager's marketing material shows returns for a period shorter than the minimum track record SEBI expects. What is the appropriate distributor action?

  1. Add a disclaimer that past performance is not indicative of future results and proceed
  2. Present the short-period return alongside a mutual fund benchmark
  3. Use the material as given since the manager approved it
  4. Avoid presenting the selective short-period return and ask the manager for compliant composite performance Correct answer.

Explanation

Performance advertising must present compliant, composite track records over the prescribed periods. A distributor should not circulate selective short-period returns even if the manager approved them. Requesting compliant data protects the client and the distributor's own conduct obligations.

Question 41Portfolio Management Services (PMS) distribution - products, processes and investor servicing

A client's PMS agreement includes a clause allowing the manager to charge expenses beyond the stated fee. Which principle should guide the distributor's explanation?

  1. All expenses are included in the management fee and no additional charges apply
  2. Additional expenses require only verbal intimation to the client
  3. Only expenses disclosed in the agreement and permitted by regulation may be charged, with proper reporting Correct answer.
  4. The manager may charge any expense deemed necessary for performance

Explanation

Only expenses specifically disclosed in the client agreement and permitted under the regulations may be charged. The client must be able to see these costs in periodic reporting. Undisclosed or vaguely justified charges are not permissible.

Question 42Portfolio Management Services (PMS) distribution - products, processes and investor servicing

A distributor is onboarding a non-resident client for a PMS product. Which additional consideration is most relevant?

  1. Non-resident clients must invest only in debt strategies
  2. Non-resident clients are exempt from KYC requirements
  3. Non-resident clients are barred from PMS altogether
  4. Foreign exchange, tax treaty and repatriation rules may affect suitability and documentation Correct answer.

Explanation

Non-resident investors face additional considerations such as FEMA compliance, repatriation rules and tax treaty implications. These affect suitability and documentation but do not bar participation. KYC requirements apply to all clients.

Question 43Portfolio Management Services (PMS) distribution - products, processes and investor servicing

A client asks whether a PMS account can be jointly held with a spouse. What is the accurate position?

  1. Joint holding is generally not permitted, and the account is held in a single client's name Correct answer.
  2. Joint holding is permitted only if both spouses are non-residents
  3. Joint holding is permitted only for debt strategies
  4. Joint holding is permitted for all PMS accounts without restriction

Explanation

PMS accounts are generally opened in a single client's name, and joint holding is not a standard feature of the PMS framework. A distributor should clarify this at onboarding to avoid later misunderstanding. Any nomination or succession aspects should be handled separately.

Question 44Portfolio Management Services (PMS) distribution - products, processes and investor servicing

A client is comparing two PMS strategies with similar returns but different portfolio concentration. Which analysis should the distributor encourage?

  1. Compare only the headline returns since risk is irrelevant
  2. Compare risk-adjusted measures such as volatility and drawdown alongside returns Correct answer.
  3. Compare only the management fee percentage
  4. Compare only the number of stocks held

Explanation

Returns alone do not reveal the risk taken to achieve them. Comparing volatility, drawdown and concentration helps the client understand the risk-return trade-off. Fee and stock count are useful but insufficient on their own.

Question 45Portfolio Management Services (PMS) distribution - products, processes and investor servicing

A distributor receives a client complaint about delayed portfolio statements. Which escalation route is most appropriate?

  1. Ask the client to close the account immediately
  2. Ignore the complaint if statements are delayed by less than a month
  3. Advise the client to approach SEBI directly as the first step
  4. Raise the issue with the portfolio manager's compliance or grievance redressal channel first Correct answer.

Explanation

Client grievances should first be raised through the portfolio manager's designated grievance redressal mechanism. If unresolved, the client can escalate to SEBI's SCORES platform. Immediate regulatory escalation or account closure is premature.

Question 46Portfolio Management Services (PMS) distribution - products, processes and investor servicing

A portfolio manager proposes to invest client funds in a scheme managed by an associate of the manager. What is the key compliance consideration for the distributor to highlight?

  1. Related-party investments are permitted only with verbal client consent
  2. Related-party investments are permitted freely if returns are attractive
  3. Related-party investments are permitted only in non-discretionary accounts
  4. Such investments require disclosure and must comply with regulatory limits on related-party exposure Correct answer.

Explanation

Investments in associates or related parties raise conflict-of-interest concerns and are subject to disclosure and regulatory limits. The client should understand these exposures. Verbal consent alone would not satisfy documentation requirements.

Question 47Portfolio Management Services (PMS) distribution - products, processes and investor servicing

A client's PMS portfolio holds a significant position in a stock that is subject to a pending regulatory investigation disclosed publicly. Which action by the distributor is most appropriate?

  1. Advise the client to sell immediately based on the distributor's judgment
  2. Inform the client of the publicly disclosed information and direct them to the portfolio manager for the investment decision Correct answer.
  3. Recommend that the client switch to a different portfolio manager without explanation
  4. Keep the information confidential since the distributor is not the decision-maker

Explanation

The distributor should ensure the client is aware of material publicly available information and route the investment decision to the portfolio manager. Giving a direct buy or sell instruction exceeds the distributor's role. Withholding material information would be inconsistent with fair treatment.

Question 48Portfolio Management Services (PMS) distribution - products, processes and investor servicing

A portfolio manager's fee schedule offers a lower management fee with a higher performance fee. A client with a moderate risk profile asks how this affects them. Which analysis is most accurate?

  1. The structure is always cheaper for the client regardless of performance
  2. The structure shifts more of the manager's compensation to performance, increasing alignment but also volatility of fees Correct answer.
  3. The structure eliminates the manager's incentive to take risk
  4. The structure is prohibited for moderate-risk clients

Explanation

A lower fixed fee with a higher performance fee increases the manager's incentive alignment but makes the client's total cost more variable. The client should weigh this against their risk tolerance and return expectations. The structure is not prohibited and does not eliminate risk-taking incentives.

Question 49Portfolio Management Services (PMS) distribution - products, processes and investor servicing

A client wants to redeem a portion of their PMS corpus after one year. Which consideration is most relevant to explain the process?

  1. Partial withdrawal is permitted only at the end of the financial year
  2. Partial withdrawal requires the portfolio manager's discretionary approval only
  3. Partial withdrawal is generally permitted subject to the notice period and exit load terms in the agreement Correct answer.
  4. Partial withdrawals are never permitted in PMS

Explanation

Partial withdrawals are generally allowed under the terms of the client agreement, which specify notice periods and any applicable exit load. The distributor should direct the client to those terms. Withdrawals are not restricted to year-end or to discretionary approval alone.

Question 50Portfolio Management Services (PMS) distribution - products, processes and investor servicing

A distributor is reviewing a portfolio manager's disclosure document and finds that the stated investment approach differs from the actual portfolio holdings. What is the most appropriate action?

  1. Proceed with the sale since the disclosure document is legally approved
  2. Adjust the disclosure document personally to match the holdings
  3. Inform only the clients who ask about the discrepancy
  4. Raise the discrepancy with the portfolio manager's compliance team and refrain from presenting the product until clarified Correct answer.

Explanation

A mismatch between the disclosed approach and actual holdings is a material governance issue. The distributor should escalate to compliance and avoid presenting the product until the discrepancy is resolved. Amending the document personally or selective disclosure would be improper.