NISM Series XXI-A · Unit 7 of 12 · about 10% of the paper
Role of portfolio managers: NISM Series XXI-A notes and practice questions
What a portfolio manager does and the three types of service.
What to know in Unit 7
- Discretionary, non-discretionary and advisory.
- Investment approach.
- Role of distributors.
Key terms, examples and exam traps
Portfolio manager
A portfolio manager is a SEBI-registered body corporate that manages or administers a client's securities or funds under a contract.
Example. A registered firm invests a client's money under a signed agreement.
Exam trap. This statement is false: A portfolio manager can be an unregistered individual.
Discretionary PMS
In discretionary PMS the manager takes investment decisions independently on behalf of the client, without asking approval for each trade.
Example. A manager buys and sells for the client based on the strategy without consent.
Exam trap. This statement is false: In discretionary PMS the client approves every trade.
Non-discretionary PMS
In non-discretionary PMS the manager advises and executes only after the client's prior approval for each decision.
Example. A manager proposes a trade and executes it after the client agrees.
Exam trap. This statement is false: The manager decides without consulting the client.
Advisory PMS
In advisory PMS the manager only advises; the client decides and executes.
Example. The client acts on the manager's recommendation herself.
Exam trap. This statement is false: The advisory manager executes trades for the client.
Minimum investment
A client's minimum investment with a portfolio manager is ₹50 lakh, in funds or securities, with a lower threshold for accredited investors.
Example. A client must commit at least ₹50 lakh.
Exam trap. This statement is false: PMS accepts investments of ₹5 lakh from retail clients.
Investment approach
An investment approach is a distinct style or strategy offered by a portfolio manager, such as large-cap growth or multi-cap value, with defined objectives and risks.
Example. A manager offers a quality-focused multi-cap approach.
Exam trap. This statement is false: An investment approach is a promise of returns.
Client's own account
Securities in a PMS are held in a separate demat account in the client's name, giving ownership and transparency.
Example. A client's shares appear in her own demat account.
Exam trap. This statement is false: PMS pools all client money into one demat account.
Distributor's role
A PMS distributor introduces the service to clients, explains the product, assesses suitability and receives commission as per regulations.
Example. A certified distributor evaluates whether a client fits a PMS.
Exam trap. This statement is false: A distributor manages the client's portfolio.
Direct onboarding
Clients have the option to be onboarded directly with the portfolio manager without a distributor, and the manager must offer a direct plan.
Example. A client approaches the manager directly and avoids distribution commission.
Exam trap. This statement is false: Clients can invest in PMS only through distributors.
Registration of portfolio managers
Portfolio managers must be registered with SEBI and meet net-worth requirements; the minimum net worth is ₹5 crore.
Example. A firm with insufficient net worth cannot be registered.
Exam trap. This statement is false: Portfolio managers need no minimum net worth.
Investor charter
Portfolio managers must provide an investor charter explaining the rights and obligations of clients and the grievance process.
Example. A client receives a document describing her rights.
Exam trap. This statement is false: Investor charters are optional.
Segregation of client assets
Client assets must be kept separate from the manager's own assets, with a custodian required for safekeeping.
Example. A custodian holds the securities of PMS clients separately.
Exam trap. This statement is false: A manager may hold client assets alongside its own.
Limits on pooling
A portfolio manager cannot pool client funds the way a mutual fund does; each client's portfolio is managed individually.
Example. Each client's holdings are separate in a PMS account.
Exam trap. This statement is false: PMS invests all client money in a single pool.
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 “Investor charter”?
- Portfolio managers must provide an investor charter explaining the rights and obligations of clients and the grievance process.
- Large caps are generally more stable and liquid; small caps offer higher growth potential with more volatility and lower liquidity.
- Maximum drawdown is the largest peak-to-trough decline in portfolio value, showing worst-case loss experienced.
- Value investing buys stocks trading below estimated intrinsic value, expecting the price to converge.
Q2. Which statement best describes “Non-discretionary PMS”?
- An option gives the buyer the right, but not the obligation, to buy or sell at a fixed price for a premium.
- Quality investing favours companies with high returns on capital, stable earnings and strong governance.
- In non-discretionary PMS the manager advises and executes only after the client's prior approval for each decision.
- ROE is net profit divided by shareholders' equity and measures how effectively equity is used.
Q3. Which term is described here? Portfolio managers must be registered with SEBI and meet net-worth requirements; the minimum net worth is ₹5 crore.
- Mutual fund
- Registration of portfolio managers
- Government security
- Termination
Q4. Which term is described here? Securities in a PMS are held in a separate demat account in the client's name, giving ownership and transparency.
- Benchmark
- Price-to-book ratio
- Investment horizon
- Client's own account
Q5. Which term is described here? An investment approach is a distinct style or strategy offered by a portfolio manager, such as large-cap growth or multi-cap value, with defined objectives and risks.
- Asset class
- Strategic asset allocation
- Investment approach
- Code of conduct for distributors
Q6. Which term is described here? A portfolio manager is a SEBI-registered body corporate that manages or administers a client's securities or funds under a contract.
- Annualised return
- Portfolio manager
- Leverage risk
- Equity risks
Frequently asked questions
How much of NISM Series XXI-A comes from Unit 7?
Unit 7 (Role of portfolio managers) 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 XXI-A Unit 7?
Discretionary, non-discretionary and advisory. Investment approach. Role of distributors.
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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