NISM Series XII · Unit 7 of 7 · about 10% of the paper
Financial planning and securities markets: NISM Series XII notes and practice questions
Markets are a means to meet goals. This chapter links securities to planning: goals, risk profile, asset allocation, tax, insurance and avoiding frauds.
What to know in Unit 7
- Financial planning steps and life stages.
- Risk profile and asset allocation.
- Time value of money and inflation.
- Investor rights, grievance routes and frauds.
Key terms, examples and exam traps
Financial planning
Financial planning is the process of setting goals and arranging income, savings, investments, insurance and tax to meet them.
Example. A family plans funds for a house, education and retirement.
Exam trap. This statement is false: Financial planning means only buying shares.
Financial goal
A financial goal is a specific need with an amount and a time frame, such as a child's education in 12 years.
Example. A couple wants ₹30 lakh for education in ten years.
Exam trap. This statement is false: Goals need no amount or deadline.
Risk profile
A risk profile combines a person's ability and willingness to take risk, guiding the choice of investments.
Example. An investor who cannot sleep after a small loss has a low willingness to take risk.
Exam trap. This statement is false: All investors have the same risk profile.
Asset allocation
Asset allocation divides investments among asset classes like equity, debt and gold, according to goals, horizon and risk profile.
Example. A saver holds 60% equity, 30% debt and 10% gold.
Exam trap. This statement is false: Asset allocation means putting everything into one stock.
Time value of money
A rupee today is worth more than a rupee tomorrow because it can be invested to earn a return.
Example. ₹1 lakh invested today grows, so it is worth more than ₹1 lakh in five years.
Exam trap. This statement is false: Money has the same value at any time.
Compounding
Compounding means earning returns on both the original amount and the returns accumulated earlier, which accelerates growth over long periods.
Example. Reinvested gains themselves earn further gains.
Exam trap. This statement is false: Compounding means earning returns only on the original amount.
Inflation
Inflation is the sustained rise in the general price level, reducing the purchasing power of money.
Example. A basket of goods costing ₹100 last year costs ₹106 now.
Exam trap. This statement is false: Inflation raises the value of cash.
Emergency fund
An emergency fund is a reserve of liquid funds covering three to six months of expenses for unexpected needs.
Example. A family keeps six months of expenses in a savings account.
Exam trap. This statement is false: An emergency fund should be invested in small-cap stocks.
Insurance and investment
Term insurance gives protection against loss of life; it should be separated from investment, which aims at building wealth.
Example. A person buys a term plan for cover and invests separately for growth.
Exam trap. This statement is false: A mutual fund gives life cover.
Life-cycle stages
Different stages of life, such as starting a career, family and retirement, change goals, income and the right mix of assets.
Example. A 25-year-old can usually hold more equity than a 60-year-old.
Exam trap. This statement is false: Life stage has no bearing on investments.
Diversification
Diversification spreads money across assets and securities to reduce the impact of any one loss.
Example. An investor holds many companies across sectors instead of one.
Exam trap. This statement is false: Diversification guarantees no loss.
Investor grievance redressal
Investors can complain first to the intermediary, then to the exchange or SEBI's SCORES platform, and use the online dispute resolution route.
Example. A client with an unresolved complaint files it on the regulator's portal.
Exam trap. This statement is false: Investors have no route for complaints.
Ponzi scheme
A Ponzi scheme pays earlier investors with the money of newer ones and promises unusually high, assured returns, and it collapses when new money dries up.
Example. A scheme promises 4% a month and pays old investors from new deposits.
Exam trap. This statement is false: A scheme promising very high assured returns is safe.
Red flags in advice
Promises of guaranteed returns, pressure to invest quickly and unregistered advisers are warning signs of fraud.
Example. A caller promises double returns in three months and asks for urgent payment.
Exam trap. This statement is false: Registered advisers promise assured returns.
Registered intermediary
Investors should deal only with SEBI-registered brokers, advisers and distributors, whose registration can be checked on the regulator's site.
Example. An investor checks an adviser's registration number before engaging.
Exam trap. This statement is false: Registration of intermediaries is unnecessary.
Tax on investments
Tax treatment differs across securities and holding periods, so after-tax returns matter in planning.
Example. Two investments with the same gain leave different amounts after tax.
Exam trap. This statement is false: All gains are taxed in the same way.
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 “Financial planning”?
- Insider trading is dealing in securities based on unpublished price-sensitive information, and it is prohibited by SEBI.
- The Net Asset Value is the per-unit value of a mutual fund scheme, calculated as total assets less liabilities divided by the units outstanding.
- Tax treatment differs across securities and holding periods, so after-tax returns matter in planning.
- Financial planning is the process of setting goals and arranging income, savings, investments, insurance and tax to meet them.
Q2. Which statement best describes “Tax on investments”?
- Term insurance gives protection against loss of life; it should be separated from investment, which aims at building wealth.
- Tax treatment differs across securities and holding periods, so after-tax returns matter in planning.
- An IPO is the first offer of shares by an unlisted company to the public, after which the company's shares are listed on an exchange.
- A rupee today is worth more than a rupee tomorrow because it can be invested to earn a return.
Q3. Which statement best describes “Ponzi scheme”?
- A Ponzi scheme pays earlier investors with the money of newer ones and promises unusually high, assured returns, and it collapses when new money dries up.
- Promises of guaranteed returns, pressure to invest quickly and unregistered advisers are warning signs of fraud.
- The Securities and Exchange Board of India regulates the securities market, protects investors and promotes market development.
- Short selling means selling a security you do not own, planning to buy it back later at a lower price; deliveries are managed through securities lending and borrowing.
Q4. Which statement best describes “Asset allocation”?
- Asset allocation divides investments among asset classes like equity, debt and gold, according to goals, horizon and risk profile.
- Face value is the nominal value of a security stated on the certificate; dividends are declared as a percentage of it.
- Application Supported by Blocked Amount means the application money stays blocked in the investor's bank account until allotment, and is debited only for allotted shares.
- Arbitrage involves buying and selling related instruments at the same time to profit from price differences, with little risk.
Q5. Which statement best describes “Emergency fund”?
- Investors should deal only with SEBI-registered brokers, advisers and distributors, whose registration can be checked on the regulator's site.
- A hybrid fund invests in a mix of equity and debt to balance growth and stability.
- An emergency fund is a reserve of liquid funds covering three to six months of expenses for unexpected needs.
- A demat account holds securities in electronic form and is opened with a depository participant.
Q6. Which term is described here? A rupee today is worth more than a rupee tomorrow because it can be invested to earn a return.
- Bond
- Time value of money
- Call auction
- Market order
Frequently asked questions
How much of NISM Series XII comes from Unit 7?
Unit 7 (Financial planning and securities markets) usually carries about 10% of the questions. The whole exam has 100 questions and the pass mark is 60%.
What should I study in NISM Series XII Unit 7?
Financial planning steps and life stages. Risk profile and asset allocation. Time value of money and inflation. Investor rights, grievance routes and frauds.
Are these NISM Series XII practice questions free?
Yes. Take the full free mocks to see the correct answer and the reason for every question.
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