NISM Series XXI-B · Unit 5 of 12 · about 12% of the paper
Role, registration and operations of portfolio managers: NISM Series XXI-B notes and practice questions
PMS service types, SEBI registration, client onboarding, fees, custody and reporting.
What to know in Unit 5
- Discretionary, non-discretionary and advisory.
- Net worth and minimum investment.
- Fees.
- Reports and disclosures.
Key terms, examples and exam traps
Portfolio manager defined
A portfolio manager is a person who, under a contract with a client, advises, directs or manages the client's securities or funds.
Example. A registered firm manages a client's equity portfolio.
Exam trap. This statement is false: A portfolio manager manages only its own money.
Discretionary service
In a discretionary service, the manager has independent authority over the choice of investments and decisions, in the client's name, under the agreement.
Example. The manager buys and sells without asking each time.
Exam trap. This statement is false: A discretionary manager must take client approval for each trade.
Non-discretionary service
A non-discretionary manager makes investment decisions only with the client's prior consent for each decision.
Example. The manager calls the client before every trade.
Exam trap. This statement is false: The manager acts without client approval.
Advisory service
In an advisory service, the manager only advises on investments and the client takes the decision and executes it.
Example. The client places the orders on the manager's advice.
Exam trap. This statement is false: The advisory manager executes trades without the client.
Registration
A portfolio manager must be registered with SEBI and must meet the eligibility, capital and fit and proper requirements.
Example. A firm obtains a certificate before starting PMS.
Exam trap. This statement is false: Any company may offer PMS without registration.
Net worth
A portfolio manager must maintain a net worth of at least ₹5 crore, where net worth is paid-up capital and free reserves less accumulated losses and deferred expenditure not written off.
Example. A new applicant shows capital of ₹5 crore.
Exam trap. This statement is false: The required net worth is ₹1 crore.
Minimum client investment
A client must invest at least ₹50 lakh in funds or securities with a portfolio manager, subject to exceptions such as for accredited investors.
Example. A client opens an account with ₹60 lakh.
Exam trap. This statement is false: The minimum investment is ₹5 lakh.
Accredited investors
Accredited investors are investors recognised under the SEBI framework who may get relaxation from certain requirements, such as the minimum investment, based on their capacity.
Example. An accredited investor invests with a lower minimum.
Exam trap. This statement is false: Every retail investor is an accredited investor.
Upfront fees
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.
Example. A manager takes no fee on the day an account is opened.
Exam trap. This statement is false: Managers may collect an upfront fee when the client joins.
Segregation of client assets
Client funds and securities must be kept separate from the manager's own, with separate bank and demat accounts for clients.
Example. Each client holds securities in an account in her name.
Exam trap. This statement is false: Client holdings may be mixed with the manager's holdings.
No guaranteed returns
A portfolio manager must not offer or imply a guaranteed return on a service.
Example. A manager refuses to promise a return.
Exam trap. This statement is false: Managers may guarantee a minimum return.
Performance reporting
Managers must send periodic reports to clients with portfolio composition, transactions, fees and other details, at least once a quarter.
Example. A client receives a quarterly statement.
Exam trap. This statement is false: Clients receive reports once in two years.
Disclosure document
The disclosure document gives clients the manager's investment approach, fees, risks, performance and other facts, and is filed with SEBI.
Example. A client reads the document before signing.
Exam trap. This statement is false: A disclosure document is optional.
Principal officer
The principal officer must have the prescribed qualification, experience and a NISM certification relevant to portfolio management.
Example. The firm names a certified principal officer.
Exam trap. This statement is false: Any employee may be principal officer without qualification.
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? In an advisory service, the manager only advises on investments and the client takes the decision and executes it.
- Price and yield
- Risk management process
- Advisory service
- Front running
Q2. Which statement best describes “Principal officer”?
- A covered call is a long stock holding with a call sold against it, earning premium but capping upside.
- Active bond managers use views on rates, curve shape and credit spreads to earn more than the benchmark.
- Reinvestment risk is the chance that coupons are reinvested at lower rates than the original yield.
- The principal officer must have the prescribed qualification, experience and a NISM certification relevant to portfolio management.
Q3. Which term is described here? 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.
- Upfront fees
- Valuation of securities
- Derivative overlay
- Costs of rebalancing
Q4. Which term is described here? A portfolio manager must maintain a net worth of at least ₹5 crore, where net worth is paid-up capital and free reserves less accumulated losses and deferred expenditure not written off.
- Net worth
- Investment policy statement
- Derivative
- Active bond management
Q5. Which term is described here? A portfolio manager must not offer or imply a guaranteed return on a service.
- Price-earnings ratio
- Performance attribution
- Principal officer
- No guaranteed returns
Q6. Which term is described here? In a discretionary service, the manager has independent authority over the choice of investments and decisions, in the client's name, under the agreement.
- Discretionary service
- Secondary market
- Portfolio management process
- Security market line
Frequently asked questions
How much of NISM Series XXI-B comes from Unit 5?
Unit 5 (Role, registration and operations of portfolio managers) usually carries about 12% 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 5?
Discretionary, non-discretionary and advisory. Net worth and minimum investment. Fees. Reports and disclosures.
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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