NISM Series XXI-A · Unit 1 of 12 · about 7% of the paper
Investments: NISM Series XXI-A notes and practice questions
The language of investing: asset classes, risk, return and the time value of money. Foundation for every later unit.
What to know in Unit 1
- Asset classes and risk-return.
- Time value and compounding.
- Inflation and real return.
Key terms, examples and exam traps
Asset class
An asset class is a group of investments with similar characteristics, such as equity, fixed income, gold and real estate.
Example. An investor splits money between shares, bonds and gold.
Exam trap. This statement is false: Equity and debt are the same asset class.
Risk and return
Higher expected return generally requires acceptance of higher risk; investors are paid for bearing risk.
Example. A client chasing higher returns must accept larger swings.
Exam trap. This statement is false: High return can be earned without any added risk.
Time value of money
Money received sooner is worth more than the same sum later because it can earn a return.
Example. ₹1 crore today is worth more than ₹1 crore in five years.
Exam trap. This statement is false: The time value of money is the interest on a loan.
Compounding
Compounding generates returns on past returns, growing wealth faster over long horizons.
Example. Reinvested gains themselves earn further gains.
Exam trap. This statement is false: Compounding means returns on the initial sum only.
Inflation
Inflation reduces the purchasing power of money; real return is nominal return minus inflation, approximately.
Example. A 10% return with 6% inflation yields about 4% real return.
Exam trap. This statement is false: Inflation raises the real return of cash.
Risk types
Investment risks include market, credit, liquidity, interest-rate and concentration risks.
Example. A concentrated portfolio suffers when its top holding falls.
Exam trap. This statement is false: Concentration risk applies only to bonds.
Risk profile
A client's risk profile combines willingness and ability to bear loss and guides the portfolio mix.
Example. A client with a short horizon and low tolerance has a conservative profile.
Exam trap. This statement is false: Risk profile is irrelevant to PMS.
Diversification
Diversification spreads investments across securities and asset classes to reduce specific risk.
Example. A portfolio holding 25 stocks across sectors.
Exam trap. This statement is false: Diversification removes all risk.
Investment horizon
The investment horizon is the period for which funds can remain invested, affecting what assets are suitable.
Example. A client who needs funds in 6 months has a short horizon.
Exam trap. This statement is false: Horizon has no effect on asset choice.
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? Diversification spreads investments across securities and asset classes to reduce specific risk.
- Equity risks
- Code of conduct for distributors
- Tactical asset allocation
- Diversification
Q2. Which statement best describes “Inflation”?
- In PMS, securities are held in the client's own account and each trade is tax-relevant for the client; in mutual funds, investors hold pooled units.
- A return-based fee is charged only on profits above a hurdle rate, subject to a high-water mark.
- Inflation reduces the purchasing power of money; real return is nominal return minus inflation, approximately.
- Strategic allocation sets long-term target weights across asset classes, based on objectives and risk profile.
Q3. Which term is described here? An asset class is a group of investments with similar characteristics, such as equity, fixed income, gold and real estate.
- Tactical asset allocation
- Behavioural biases
- Asset class
- Expense versus fee
Q4. Which term is described here? The investment horizon is the period for which funds can remain invested, affecting what assets are suitable.
- Annualised return
- Settlement
- Grievance redressal
- Investment horizon
Q5. Which term is described here? Investment risks include market, credit, liquidity, interest-rate and concentration risks.
- Diversification
- Distributor's role
- Risk types
- Portfolio management agreement
Q6. Which statement best describes “Risk profile”?
- A client's risk profile combines willingness and ability to bear loss and guides the portfolio mix.
- The agreement between manager and client sets out services, fees, rights, risks, and termination terms, and is mandatory.
- The top-down approach starts with economy and sector views and then selects stocks within favoured sectors.
- The money-weighted return (IRR) reflects the size and timing of cash flows and captures the client's actual experience.
Frequently asked questions
How much of NISM Series XXI-A comes from Unit 1?
Unit 1 (Investments) 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 XXI-A Unit 1?
Asset classes and risk-return. Time value and compounding. Inflation and real return.
Are these NISM Series XXI-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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