Concept of financial planning: NISM Series X-A notes and practice questions

Q1. Which statement best describes “Fiduciary duty”?

1. The Insurance Regulatory and Development Authority of India regulates insurers and intermediaries and protects policyholders.
2. An emergency fund is three to six months of expenses held in liquid, safe assets.
3. Healthcare costs usually rise faster than general inflation, so retirement planning should include adequate health insurance.
4. An adviser acts as a fiduciary, putting the client's interests ahead of her own and avoiding conflicts of interest.

Q2. Which statement best describes “Goal prioritisation”?

1. An adviser must enter into a written agreement with each client stating fees, services, and the rights and obligations of both.
2. Goals are ranked by importance and urgency, such as emergency fund, protection, education and retirement, so funds go where they matter most.
3. Risk-adjusted measures such as the Sharpe ratio show return earned per unit of risk taken.
4. Personal accident insurance pays on death or disability caused by accident, and may pay for temporary disablement.

Q3. Which statement best describes “Financial ratios”?

1. Ratios such as savings ratio, liquidity ratio and debt-service ratio show the client's financial health.
2. Biases such as overconfidence, loss aversion and herding lead investors to make poor decisions; advisers help counter them.
3. The retirement corpus is the accumulated sum needed to fund expenses after retirement, estimated using expenses, inflation, years in retirement and returns.
4. Health insurance covers hospitalisation and related costs up to the sum insured; features include waiting periods, co-payment and exclusions.

Q4. Which statement best describes “Planning scope”?

1. The financial system consists of institutions, markets, instruments and regulators that move savings to productive uses.
2. Inflation risk is the risk that returns will not keep pace with price rises, eroding purchasing power.
3. A comprehensive plan covers cash flow, risk management, investments, tax, retirement and estate planning.
4. Advice must be suitable for the client's risk profile, goals, horizon and financial position, and the reasons must be recorded.

Q5. Which statement about “Financial planning process” is correct?

1. The process involves establishing the client relationship, gathering information, analysing, recommending, implementing and monitoring.
2. Financial planning starts with product recommendation.
3. An SWP buys more units every month.
4. Claim ratio is the premium refunded.

Q6. Which statement about “Financial plan review” is correct?

1. The satellite is the main holding.
2. Starting late gives the same result at the same SIP.
3. A plan once made is never revisited.
4. A plan should be reviewed at least annually and whenever there is a major life event such as marriage, a child or job change.