NISM Series V-A · Unit 12 of 12 · about 8% of the paper
Recommending model portfolios and financial plans: NISM Series V-A notes and practice questions
The final unit brings it together: building asset allocations for typical clients, using model portfolios, rebalancing and documenting advice responsibly.
What to know in Unit 12
- Strategic and tactical asset allocation.
- Model portfolios by risk profile.
- Rebalancing and documentation.
Key terms, examples and exam traps
Asset allocation
Asset allocation is the division of a portfolio among asset classes such as equity, debt and gold, and is the main driver of risk and return over time.
Example. A client's portfolio is split 60% equity, 30% debt and 10% gold.
Exam trap. This statement is false: Asset allocation matters less than picking the best fund.
Strategic asset allocation
Strategic asset allocation sets long-term target weights based on the client's profile, which are maintained by periodic rebalancing.
Example. A client's plan says 60% equity for the next ten years, whatever the news.
Exam trap. This statement is false: Strategic allocation changes with every market move.
Tactical asset allocation
Tactical allocation makes short-term deviations from the strategic weights to take advantage of market conditions.
Example. A manager temporarily raises debt above target because equities look expensive.
Exam trap. This statement is false: Tactical allocation means never deviating from target.
Rebalancing
Rebalancing means bringing the portfolio back to its target allocation by selling what has grown too large and buying what has fallen behind.
Example. Equity has risen to 70% of the portfolio against a 60% target, so some is sold.
Exam trap. This statement is false: Rebalancing means adding only to the best performer.
Core and satellite
A core and satellite approach holds the bulk of the portfolio in stable, low-cost funds and a smaller satellite part in higher-conviction ideas.
Example. A portfolio holds 70% in index funds and 30% in a thematic fund.
Exam trap. This statement is false: Core and satellite means holding only satellite ideas.
Age-based rule of thumb
A rough guide sets equity at 100 minus the investor's age, adjusting for risk profile; it is a starting point, not a rule.
Example. A 40-year-old starts discussing about 60% equity.
Exam trap. This statement is false: The rule fixes the exact equity percentage for everyone of a given age.
Glide path
A glide path gradually reduces equity and raises safer assets as a goal date approaches, to protect accumulated gains.
Example. As a child's education nears, a family shifts from equity to debt funds.
Exam trap. This statement is false: A glide path raises equity as the goal date approaches.
Documenting advice
The distributor should record the client's profile, the recommendation and the reasons, and obtain the client's acknowledgement to show suitability.
Example. A distributor files a signed risk profile and rationale for the recommended funds.
Exam trap. This statement is false: No written record of advice is needed.
Model portfolio
A model portfolio is a pre-defined allocation for a risk profile, used as a template and customised for the client.
Example. A distributor shows a typical moderate-risk allocation as a starting point.
Exam trap. This statement is false: A model portfolio guarantees returns.
Conflict of interest
A conflict of interest arises when the distributor's earnings could bias the advice; it must be disclosed and managed in the client's favour.
Example. A distributor discloses that one scheme pays him more but recommends the better fit for the client.
Exam trap. This statement is false: Conflicts of interest need not be disclosed.
6 practice questions
Read each question and choose your answer before opening the free mock, which shows the correct answer and the reason.
Q1. Which term is described here? A model portfolio is a pre-defined allocation for a risk profile, used as a template and customised for the client.
- Model portfolio
- Financial plan
- PPF
- Glide path
Q2. Which term is described here? Strategic asset allocation sets long-term target weights based on the client's profile, which are maintained by periodic rebalancing.
- Stamp duty on units
- Rebalancing
- Step-up SIP
- Strategic asset allocation
Q3. Which term is described here? Tactical allocation makes short-term deviations from the strategic weights to take advantage of market conditions.
- New Fund Offer (NFO)
- Tactical asset allocation
- Documenting advice
- Glide path
Q4. Which statement best describes “Age-based rule of thumb”?
- A switch is moving investment from one scheme to another, or between plans or options in the same scheme; it is treated as redemption and fresh purchase.
- YTM is the annualised return earned if a bond is held to maturity and all coupons are reinvested at the same rate.
- Mutual fund units can be held in dematerialised form with a depository participant, in addition to a statement of account from the AMC.
- A rough guide sets equity at 100 minus the investor's age, adjusting for risk profile; it is a starting point, not a rule.
Q5. Which statement best describes “Asset allocation”?
- In 'anyone or survivor' mode, any holder can operate the folio; in 'joint', all must sign. On a holder's death the units go to the survivors.
- AMCs carry out due diligence on distributors and check that their ARN, certification and code compliance are valid before accepting business.
- Gains on equity-oriented funds held over 12 months are taxed at 12.5% on the amount above ₹1.25 lakh in a financial year.
- Asset allocation is the division of a portfolio among asset classes such as equity, debt and gold, and is the main driver of risk and return over time.
Q6. Which statement best describes “Core and satellite”?
- Mutual fund investments are subject to market risk. The value of units can rise and fall, and past performance does not assure future results.
- A core and satellite approach holds the bulk of the portfolio in stable, low-cost funds and a smaller satellite part in higher-conviction ideas.
- Redemption proceeds must generally be paid within three working days of the transaction date for most schemes; liquid funds may be quicker.
- A client's life stage, such as starting a career, raising a family or nearing retirement, shapes goals, risk capacity and asset allocation.
Frequently asked questions
How much of NISM Series V-A comes from Unit 12?
Unit 12 (Recommending model portfolios and financial plans) usually carries about 8% of the questions. The whole exam has 100 questions and the pass mark is 50%.
What should I study in NISM Series V-A Unit 12?
Strategic and tactical asset allocation. Model portfolios by risk profile. Rebalancing and documentation.
Are these NISM Series V-A practice questions free?
Yes. Take the full free mocks to see the correct answer and the reason for every question.
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