NISM Series XXI-B · Unit 12 of 12 · about 6% of the paper
Rebalancing, taxation, regulation and ethics: NISM Series XXI-B notes and practice questions
Why and how portfolios are rebalanced, tax in the client's hands, and the conduct and legal obligations of managers.
What to know in Unit 12
- Rebalancing rules.
- Tax.
- Insider trading and AML.
- Code of conduct.
Key terms, examples and exam traps
Need for rebalancing
Rebalancing restores target weights when market moves cause drift, keeping risk in line with the policy.
Example. Equity rises to 70% against a 60% target and is trimmed.
Exam trap. This statement is false: Rebalancing is needed only if returns are negative.
Calendar and threshold rebalancing
Calendar rebalancing occurs at set times, while threshold rebalancing occurs when weights drift beyond set limits.
Example. A manager rebalances when weight exceeds a 5% band.
Exam trap. This statement is false: Both methods use the same trigger.
Costs of rebalancing
Rebalancing creates transaction costs and may create tax, which must be weighed against the benefit of risk control.
Example. A small drift is left to avoid costs.
Exam trap. This statement is false: Rebalancing has no cost.
Constant mix and buy-and-hold
A constant mix strategy keeps fixed weights by selling winners and buying losers, while buy-and-hold lets weights drift.
Example. A manager sells equity after a rally to restore 60%.
Exam trap. This statement is false: Buy-and-hold keeps weights fixed.
CPPI
Constant proportion portfolio insurance moves money between a risky and a safe asset based on a floor, raising risk as the cushion grows.
Example. A manager sells equity as value nears the floor.
Exam trap. This statement is false: CPPI buys more risk as the cushion shrinks.
Taxation in client's hands
Because PMS holdings are in the client's name, gains, dividends and losses are taxed in the client's hands.
Example. A client reports gains from sales by the manager.
Exam trap. This statement is false: The manager pays tax on behalf of all clients.
Section 9A
Section 9A provides that an eligible offshore fund is not treated as having a business connection in India just because its fund manager operates here, if conditions are met.
Example. A fund manager in India manages an offshore fund.
Exam trap. This statement is false: Section 9A applies to every domestic client.
Insider trading
Trading on unpublished price-sensitive information is prohibited, and managers must have policies to prevent misuse.
Example. A manager does not trade on confidential results.
Exam trap. This statement is false: Insider trading rules do not apply to managers.
Front running
Front running is trading ahead of a client's large order for the manager's own benefit and is a prohibited practice.
Example. A dealer buys before a client's block order.
Exam trap. This statement is false: Front running is acceptable if disclosed in a note.
Anti-money laundering
Managers must follow know-your-client and anti-money laundering norms, verify identity and report suspicious transactions.
Example. A firm collects KYC before onboarding.
Exam trap. This statement is false: AML norms apply only to banks.
Fiduciary duty and conflicts
The manager must act in clients' best interest, disclose conflicts and treat clients fairly in allocating trades.
Example. A manager allocates a trade fairly across accounts.
Exam trap. This statement is false: A manager may favour its own proprietary account.
Investor charter and grievances
Clients have rights under the investor charter and can seek redress from the manager, then SEBI's complaint platform and online dispute resolution.
Example. An unhappy client escalates to the regulator's portal.
Exam trap. This statement is false: Clients have no recourse beyond the manager.
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 “Front running”?
- SEBI requires portfolio manager performance to be reported on a uniform basis, with returns computed using TWRR through a central platform.
- Front running is trading ahead of a client's large order for the manager's own benefit and is a prohibited practice.
- Anomalies, such as size and value effects, are patterns that appear to contradict market efficiency.
- A portfolio manager may charge a fee that is fixed, return-based or a mix of both, but cannot charge an upfront fee directly or indirectly from clients.
Q2. Which term is described here? Section 9A provides that an eligible offshore fund is not treated as having a business connection in India just because its fund manager operates here, if conditions are met.
- Efficient market hypothesis
- Yield curve
- Upfront fees
- Section 9A
Q3. Which term is described here? A constant mix strategy keeps fixed weights by selling winners and buying losers, while buy-and-hold lets weights drift.
- Active bond management
- Option
- Diversification
- Constant mix and buy-and-hold
Q4. Which term is described here? Constant proportion portfolio insurance moves money between a risky and a safe asset based on a floor, raising risk as the cushion grows.
- Risk limits
- CPPI
- Weak form
- Duration
Q5. Which statement best describes “Anti-money laundering”?
- Top-down analysis begins with the economy, moves to industries and then selects companies.
- Managers must follow know-your-client and anti-money laundering norms, verify identity and report suspicious transactions.
- Operational risk is the risk of loss from failed processes, people, systems or external events, including errors and fraud.
- Strategic allocation sets long-term target weights across asset classes, based on objectives and risk, and is reviewed infrequently.
Q6. Which statement best describes “Investor charter and grievances”?
- Clients have rights under the investor charter and can seek redress from the manager, then SEBI's complaint platform and online dispute resolution.
- The Sharpe ratio is excess return over the risk-free rate divided by standard deviation, showing return per unit of total risk.
- Stress testing evaluates portfolio losses under extreme but plausible scenarios, complementing statistical measures.
- Investing commits capital for an expected return after analysis of value, while speculation takes a short-term bet mainly on price movement.
Frequently asked questions
How much of NISM Series XXI-B comes from Unit 12?
Unit 12 (Rebalancing, taxation, regulation and ethics) usually carries about 6% of the questions. The whole exam has 120 questions and the pass mark is 60%.
What should I study in NISM Series XXI-B Unit 12?
Rebalancing rules. Tax. Insider trading and AML. Code of conduct.
Are these NISM Series XXI-B practice questions free?
Yes. Take the full free mocks to see the correct answer and the reason for every question.
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