NISM Series X-A · Unit 6 of 12 · about 7% of the paper
Measuring investment returns: NISM Series X-A notes and practice questions
Formulas matter here: holding period return, CAGR, IRR, real return and the effect of tax and costs.
What to know in Unit 6
- Absolute and annualised return.
- IRR and XIRR.
- Real and post-tax return.
Key terms, examples and exam traps
Holding period return
Holding period return is the total return over the period an investment is held, including income and price change, as a percentage of the initial value.
Example. An investment of ₹100 returns ₹115 including dividends.
Exam trap. This statement is false: Holding period return is the annual yield.
CAGR
CAGR is the constant annual rate at which an investment grows over a period longer than a year, assuming compounding.
Example. ₹1 lakh becomes ₹1.44 lakh in three years, about 13% a year.
Exam trap. This statement is false: CAGR is the simple average of yearly returns.
IRR
The internal rate of return is the rate that makes the present value of cash inflows equal to the outflows, used for irregular cash flows.
Example. A series of deposits and withdrawals is summarised in one annual rate.
Exam trap. This statement is false: IRR ignores the timing of cash flows.
XIRR
XIRR computes the annualised return for investments made on specific dates, such as monthly SIPs.
Example. An adviser wants the true return on a three-year SIP.
Exam trap. This statement is false: XIRR cannot be used for SIPs.
Real return
Real return is nominal return adjusted for inflation; it shows the growth in purchasing power.
Example. A 9% return with 6% inflation gives about 3% in real terms.
Exam trap. This statement is false: Real return equals nominal return.
Post-tax return
Post-tax return is the return after deducting tax, and is the figure that matters to the client.
Example. An investor compares products after tax.
Exam trap. This statement is false: Pre-tax return is the final return.
Time value of money
Money available now is worth more than the same amount in the future, because it can be invested to earn a return.
Example. ₹1 lakh today beats ₹1 lakh received in five years.
Exam trap. This statement is false: A rupee today and tomorrow are equal.
Present value
Present value is the current worth of a future sum, discounted at a given rate.
Example. ₹1.1 lakh receivable in a year at 10% is worth ₹1 lakh today.
Exam trap. This statement is false: Present value is always more than future value.
Future value
Future value is the amount an investment will grow to after earning a given return over a period.
Example. ₹1 lakh at 10% for two years grows to ₹1.21 lakh.
Exam trap. This statement is false: Future value is the value today of future cash flow.
Annuity versus perpetuity
An annuity pays a fixed amount for a fixed number of periods, while a perpetuity pays forever.
Example. A pension that continues for life with no end date is like a perpetuity.
Exam trap. This statement is false: A perpetuity stops after ten years.
Rule of 72
The Rule of 72 estimates the years for money to double by dividing 72 by the annual return in percent.
Example. At 8% an investment doubles in about nine years.
Exam trap. This statement is false: The Rule of 72 gives the tax payable.
Impact of costs
Fees and expense ratios reduce net returns, and the effect compounds over long periods.
Example. A 1% yearly cost on a 12% return reduces ending wealth materially over twenty years.
Exam trap. This statement is false: Costs have no effect on long-term returns.
Benchmarking
Comparing a portfolio's return with a relevant benchmark shows whether the manager added value after adjusting for risk.
Example. A fund's return is compared with its category index.
Exam trap. This statement is false: Any index can be used as a benchmark for any fund.
Time-weighted versus money-weighted
Time-weighted return removes the effect of cash flows, judging a manager; money-weighted return, like IRR, reflects the investor's own timing of flows.
Example. A manager's skill is judged ignoring the investor's deposits and withdrawals.
Exam trap. This statement is false: Both measures are always the same.
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 statement best describes “Impact of costs”?
- PPF is a government-backed small savings scheme with a 15-year tenure, tax benefits on deposit and interest, and limited premature withdrawal.
- The process involves establishing the client relationship, gathering information, analysing, recommending, implementing and monitoring.
- Fees and expense ratios reduce net returns, and the effect compounds over long periods.
- Strategic allocation sets long-term target weights across asset classes based on goals and risk profile, with periodic rebalancing.
Q2. Which statement best describes “Benchmarking”?
- The riskometer shows a scheme's risk on six levels from low to very high, and should match the client's risk profile.
- A rider is an optional benefit added to a base policy for an extra premium, such as accidental death or critical illness.
- A plan should be reviewed at least annually and whenever there is a major life event such as marriage, a child or job change.
- Comparing a portfolio's return with a relevant benchmark shows whether the manager added value after adjusting for risk.
Q3. Which statement best describes “CAGR”?
- A family floater covers the whole family under one sum insured shared among members.
- A will is a legal document by which a person decides how her property is to be distributed after death, and it takes effect only on death.
- A nominee receives the policy proceeds on the insured's death, while assignment transfers rights in the policy to another person, such as a lender.
- CAGR is the constant annual rate at which an investment grows over a period longer than a year, assuming compounding.
Q4. Which term is described here? Post-tax return is the return after deducting tax, and is the figure that matters to the client.
- HUF
- Post-tax return
- Money supply and liquidity
- IRR
Q5. Which term is described here? An annuity pays a fixed amount for a fixed number of periods, while a perpetuity pays forever.
- NPS as a product
- Time-weighted versus money-weighted
- Annuity versus perpetuity
- Gold ETF
Q6. Which statement best describes “Time value of money”?
- Longevity risk is the risk of outliving one's savings because life expectancy is increasing.
- Fees and expense ratios reduce net returns, and the effect compounds over long periods.
- A defined-benefit pension promises a fixed pension based on salary and service, while defined-contribution plans depend on contributions and returns.
- Money available now is worth more than the same amount in the future, because it can be invested to earn a return.
Frequently asked questions
How much of NISM Series X-A comes from Unit 6?
Unit 6 (Measuring investment returns) usually carries about 7% of the questions. The whole exam has 100 questions and the pass mark is 60%.
What should I study in NISM Series X-A Unit 6?
Absolute and annualised return. IRR and XIRR. Real and post-tax return.
Are these NISM Series X-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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