NISM Series XXI-A · Unit 8 of 12 · about 13% of the paper
Operational aspects of portfolio managers: NISM Series XXI-A notes and practice questions
How a PMS actually operates: agreements, onboarding, fees, custody and reporting.
What to know in Unit 8
- Portfolio management agreement.
- Fees and exit load.
- Custodian, reporting and disclosure.
Key terms, examples and exam traps
Portfolio management agreement
The agreement between manager and client sets out services, fees, rights, risks, and termination terms, and is mandatory.
Example. A client signs a detailed contract before investing.
Exam trap. This statement is false: A PMS can start without a written agreement.
Disclosure document
The disclosure document gives the client full information about the manager, investment approach, fees, risks and litigation before signing.
Example. A client receives a document describing the manager and charges before investing.
Exam trap. This statement is false: The disclosure document is given after the first year.
Fixed fee
A fixed management fee is charged as a percentage of assets irrespective of performance.
Example. A manager charges 2% of assets every year.
Exam trap. This statement is false: A fixed fee depends on profits.
Return-based fee
A return-based fee is charged only on profits above a hurdle rate, subject to a high-water mark.
Example. The manager earns a share only of returns above 10%.
Exam trap. This statement is false: A return-based fee is charged even if the portfolio loses money.
Hybrid fee
A hybrid fee combines a lower fixed fee with a performance fee.
Example. A manager charges 1% of assets plus 10% of profits above a hurdle.
Exam trap. This statement is false: A hybrid fee has no fixed component.
Hurdle rate
A hurdle rate is the minimum return the portfolio must earn before a performance fee is charged.
Example. The manager earns a fee only when returns exceed 8%.
Exam trap. This statement is false: A hurdle rate is the maximum fee permitted.
High-water mark
The high-water mark is the highest value of the portfolio on which a performance fee was last paid; a new fee is charged only on gains above it.
Example. After a loss, no performance fee is charged until the value exceeds the previous peak.
Exam trap. This statement is false: A high-water mark resets every month.
Exit load
Exit load is a charge on withdrawal in the early years: at most 3% in the first year, 2% in the second and 1% in the third, with none thereafter.
Example. A client who exits early pays a decreasing charge.
Exam trap. This statement is false: Exit load is the same in every year.
Custodian
A custodian safekeeps the securities of PMS clients independent of the manager, and settles trades.
Example. An independent institution holds client assets.
Exam trap. This statement is false: The portfolio manager acts as the sole custodian.
Client reporting
Managers must give clients periodic reports showing portfolio holdings, transactions, performance and charges.
Example. A client receives a quarterly report on holdings and returns.
Exam trap. This statement is false: Managers need not report to clients.
Contribution of securities
Clients may contribute securities instead of cash, and the manager may hold them or realign the portfolio, with tax consequences.
Example. A client transfers existing shares to start a PMS.
Exam trap. This statement is false: Clients can contribute only cash.
Termination
Either party may terminate the agreement as per its terms, usually with notice; assets are returned in the form specified.
Example. A client withdraws from the service as the contract allows.
Exam trap. This statement is false: A client cannot leave the PMS before 10 years.
Withdrawals and partial redemptions
Clients may withdraw funds or securities as per the agreement, with notice and exit load as applicable.
Example. A client takes out part of the portfolio and bears any exit load.
Exam trap. This statement is false: Partial withdrawals are never allowed.
Brokerage and expenses
Brokerage and other expenses on transactions, such as custodian and audit fees, are charged to the client as disclosed.
Example. A client's statement shows brokerage and custodian charges.
Exam trap. This statement is false: Costs are not passed to PMS clients.
Audit and compliance
Portfolio managers are subject to annual audits and reporting to SEBI, and must have compliance officers.
Example. A firm's compliance is audited each year.
Exam trap. This statement is false: Portfolio managers are never audited.
Conflict of interest
Managers must avoid and disclose conflicts, such as trading in the same securities for own account ahead of clients.
Example. A manager discloses related-party trades.
Exam trap. This statement is false: Conflicts need not be disclosed.
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? Brokerage and other expenses on transactions, such as custodian and audit fees, are charged to the client as disclosed.
- Value investing
- Mutual fund
- Brokerage and expenses
- Diversification
Q2. Which statement best describes “Conflict of interest”?
- An asset class is a group of investments with similar characteristics, such as equity, fixed income, gold and real estate.
- A portfolio manager cannot pool client funds the way a mutual fund does; each client's portfolio is managed individually.
- Managers must avoid and disclose conflicts, such as trading in the same securities for own account ahead of clients.
- Because each trade is taxed in the client's hands, managers consider holding period and tax impact when trading.
Q3. Which term is described here? Managers must give clients periodic reports showing portfolio holdings, transactions, performance and charges.
- Client reporting
- Time value of money
- Standardised reporting
- Risk-adjusted evaluation
Q4. Which term is described here? Clients may contribute securities instead of cash, and the manager may hold them or realign the portfolio, with tax consequences.
- Fixed fee
- Alpha
- PMS versus mutual fund
- Contribution of securities
Q5. Which statement best describes “Return-based fee”?
- Diversification spreads investments across securities and asset classes to reduce specific risk.
- Growth investing seeks companies with above-average earnings growth, often at higher valuations.
- Portfolio managers and distributors cannot assure or guarantee returns on a PMS.
- A return-based fee is charged only on profits above a hurdle rate, subject to a high-water mark.
Q6. Which statement best describes “Fixed fee”?
- A portfolio manager must maintain minimum net worth of ₹5 crore.
- A fixed management fee is charged as a percentage of assets irrespective of performance.
- Holding cash gives liquidity and flexibility but can drag returns in rising markets.
- Clients can complain to the manager, then to SEBI's complaint system, and use online dispute resolution.
Frequently asked questions
How much of NISM Series XXI-A comes from Unit 8?
Unit 8 (Operational aspects of portfolio managers) usually carries about 13% 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 8?
Portfolio management agreement. Fees and exit load. Custodian, reporting and disclosure.
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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