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Investment Adviser Level1 Study Notes

Modelexam.in provides study material and online mock tests to help students prepare for the NISM Series V-A: Investment Adviser Level 1 Exam. The document outlines the exam structure, syllabus, and YouTube videos covering various topics to help students study. It also provides information on the financial markets in India and the roles of various market participants like stock exchanges, depository participants, and investment banks.

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0% found this document useful (0 votes)

144 views39 pages

Investment Adviser Level1 Study Notes

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P R Chandan

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Available Formats

Download as PDF, TXT or read online on Scribd

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www.modelexam.

in - Online Mock Tests - NISM, IIBF, IRDA, UGC, NEET, UPSC, CTET, TNPSC, ICSI, ICAI
___________________________________________________________________________

Study Notes for

NISM Series V – A:
Investment Adviser Level 1 Exam
Version – April 2021
Prepared By
modelexam.in
YouTube Training Video Link

modelexam.in provides with basic information, study material & online model exams to
help you succeed in NISM exams. (NISM – National Institute of Securities Markets – A SEBI
Institute)
Both Premium (Paid) & Demo (Free) Versions are available in the website.
HARDCOPY / SOFTCOPY of the tests will NOT be provided

Scan the following QR code for NISM Investment Adviser Exam Training Videos

NISM-Series-X-A: Investment Adviser (Level 1) Certification Examination –

IACE 1
Assessment Structure: 100 Questions. 2 hours. 25% negative marks for wrong
answers. 60% required to pass. Validity for the certificate is 3 years.

Syllabus Outline with Weightages

Unit No. Unit Name Weightage

Unit 1 Introduction to Indian Financial Market 8%
____________________________________________________________________________
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www.modelexam.in - Online Mock Tests - NISM, IIBF, IRDA, UGC, NEET, UPSC, CTET, TNPSC, ICSI, ICAI
___________________________________________________________________________

Unit 2 Securities Market Segments 10%

Unit 3 Mutual Funds 9%
Unit 4 Investment Products 12%
Unit 5 Managing Investment Risk 7%
Unit 6 Measuring Investment Returns 7%
Unit 7 Concept of Financial Planning 4%
Unit 8 Asset Allocation and Investment Strategies 5%
Unit 9 Insurance Planning 10%
Unit 10 Retirement Planning 10%
Unit 11 Tax and Estate Planning 10%
Unit 12 Regulatory Environment and Ethical Issues 8%

Useful YouTube videos – Topic wise

1. Capital Market Legislations - SEBI, SCRA, DP, COMPANIES ACT
2. Capital Market - Primary & Secondary Markets
3. Secondary Market – Segments
4. Securities Market – Functions
5. Primary Market - IPO Grading
6. Primary Market - Issue Pricing
7. Primary Market Issues - Allotment Basis
8. Primary Market Issues - Types of Investors
9. New Category of Equity Mutual Funds Explained
10. Insurance Concepts - Principle of indemnity
11. Insurance - Uberrima Fides - Utmost Good Faith
12. Insurance - Principle of Insurable Interest
13. Insurance - Paid Up Value - Formula & Calculation
14. Prevention of Money Laundering Act 2002 - Part 1
15. Prevention of Money Laundering Act 2002 - Part 2
16. Put Option Explained with an Example in 2 minutes
17. Call Option Explained with an Example in 5 minutes
18. What is the difference between Hedging, Speculation and Arbitraging?

____________________________________________________________________________
Telegram Group - https://t.me/modelexam
www.modelexam.in - Online Mock Tests - NISM, IIBF, IRDA, UGC, NEET, UPSC, CTET, TNPSC, ICSI, ICAI
___________________________________________________________________________

19. What is a Mutual Fund?

20. Terminologies used in Mutual Fund Industry
21. Open and Closed end funds
22. Types of Equity Funds
23. Types of Debt Mutual Funds
24. Types of Hybrid Schemes, Balanced Schemes
25. Tax Saving Scheme – ELSS
26. Gold Exchange Traded Fund
27. Passive Funds and Fixed Maturity Plans
28. Index Funds
29. Tracking Error - Index Funds
30. Mutual Fund Structure and Constituents
31. Grandfather Clause introduced in Budget and Taxation changes
32. Capital Gain Tax
33. Calculation of Long term capital gain tax using Indexation
34. Tax Deducted at Source and Securities Transaction Tax
35. Cut off timing – NAV
36. Liquid Funds Cut off timing
37. Liquid Funds – Redemption
38. Who can Invest in Mutual Funds?
39. Micro SIP and PAN Exempt Cases
40. Risk Adjusted Performance - Sharpe Ratio
41. Risk Adjusted Performance - Treynor ratio and Alpha
42. Mutual Fund Offer Document
43. Statement of Additional Information
44. NAV, Sale Price, Repurchase Price
45. NAV Calculation – Part 1

46. NAV Calculation – Part 2

47. Asset Allocation, Strategic Asset Allocation
48. Fixed and Flexible Asset Allocation
49. SIP and STP
50. SWP, Dividend Pay-out, Dividend Reinvestment and Growth Options
51. Systematic Risk and Unsystematic Risk
52. Beta - measure of Market risk
53. Upfront Commission, Trail Commission, Transaction Charges

Chapter 1 – Introduction to Indian Financial Markets

The financial market comprises of the money markets that deal with the short-term
lending and borrowing of funds and the securities or capital markets that enable longer
term transfer of funds using debt and equity instruments.
The banking system acts as the intermediary to channel funds to economic enterprises.
Banks also provide a secure system for settling financial transactions. RBI is the
regulator of the banking sector. It is the bank licensing and note-issuing authority. It
also controls the credit and monetary activities in the economy.
Payment banks - to encourage financial inclusion to low income households, small
business and others by providing small savings accounts and payment/remittance
services. Their activities include accepting current and savings deposits not exceeding
Rs.100,000/- issuing ATM/Debit cards but not credit cards and providing payment and
remittance services. The bank cannot undertake any lending activities.
Small Finance Banks - to provide a savings vehicle, banking facilities and to supply
credit to small businesses, marginal farmers, micro and small industries and other
entities in the unorganized sector.
The securities market provides the structure for businesses to raise funds through the
issue of securities. The primary market, also called the new issue market, is where
issuers raise capital by issuing securities to investors. The secondary market, also called
the stock exchange, facilitates trade in already-issued securities.
Commodity transactions can be done in the cash market for immediate payment and
delivery, or in the forward and futures market for settlement at a future point in time.
An exchange traded futures contract standardizes the quality, quantity and terms of
settlement of the underlying and reduces counter-party risk in the trade. Investors in the
commodity markets include producers and consumers who want to hedge their

exposure, investors who want to take advantage of arbitrage opportunities and

speculators who want to benefit from an expected price movement.
The foreign exchange market determines the value of one currency relative to another
(called ‘currency pairs’) to enable settling trades in goods and services. There is a spot
market and forward market in currency. The forward market currency deals have to be
supported by an exposure to currency from trade that requires hedging. Future trades in
currency are done on the exchanges.
Insurance products may provide pure risk cover (term insurance) or may combine
insurance and investment on a traditional platform (endowment, whole life) or unit
linked platform.
PFRDA regulates the pension market in India. NPS is a defined contribution pension
schemes that covers government employees who joined service after a specified date. It
is also available for other citizens.
Stock exchanges provide a regulated platform for trading in securities at current values
so that investors have liquidity in the securities held by them.
Depository participants are empanelled members of a depository who enable investors
to hold and trade in securities in dematerialized form.
Custodians hold and manage the operational aspects of trading in securities on behalf of
institutional investors.
Stock brokers are registered members of a stock exchange who enable investors to put
through transactions on a stock exchange for a brokerage.
Investment banks help issuers make decisions on capital structure and assist in fund
raising activities.
Commercial banks provide banking services of taking deposits, providing credit and
enable payment services.
Insurance companies provide service of insuring life, property and income against
unexpected and large loss or expense.
Pension Funds are intermediaries who are authorized to take contributions from eligible
individuals and invest these funds to create a retirement corpus.
Asset management companies and portfolio managers are investment specialists who
offer their services in selecting and managing a portfolio of securities.
Investment advisers and distributors work with investors to help them make a choice of
securities that they can buy, based on an assessment of their needs, time horizon, return
expectation and ability to bear risk.
The Ministry of Finance through its departments regulates and overseas the activities of
the banking system, insurance and pension sectors, the capital markets and its
participants.
The Registrar of Companies (RoC) is the authority appointed under the Companies Act
to register companies and to ensure that they comply with the provisions of the law.

The Reserve Bank of India regulates the money market segment of securities market
and acts as the manager of the government’s borrowing program. RBI is also the
regulator of the Indian banking system and conducts the monetary, forex and credit
policies.
The Securities and Exchange Board of India (SEBI) is the chief regulator of securities
markets in India. It facilitates the growth and development of the capital markets and
ensures that the interests of investors are protected.
IRDA is the licensing authority for insurance companies. It ensures the adherence of
insurance products to the rules laid down and regulates the distribution of insurance
products.
The PFRDA has been assigned the responsibility of designing the structure of funds and
constituents in the National Pension System (NPS).
Department of Economic Affairs - formulate and monitor India’s macroeconomic
policies, covering monetary and fiscal policy as well as the functioning of the capital
market including stock exchanges.
Department of Expenditure - various financial rules and regulations including service
conditions of all Central Government employees, financial assistance to states and
borrowings by states.
Department of Revenue - direct and indirect taxes of the Central Government
Department of Financial Services - government policies relating to:
• Public sector banks.
• Term-lending financial institutions.
• Life Insurance and General Insurance.
• Pension Reforms.
Department of Investment and Public Asset Management - oversees matters relating to
disinvestment of Central Government equity from Central Public Sector undertakings.

Chapter 2 : Securities Markets Segments

Primary market is the market where securities are first issued by a company,
government, banks and financial institutions, mutual fund and others. A primary issue
of securities may be a public issue, where securities are issued to public investors, or a
private placement where securities are issued to a select group of individual and
institutional investors.
A private placement by a listed company is called a preferential allotment. A preferential
allotment to qualified institutional buyers is called a qualified institutional placement.
A primary market enables wider participation in the capital of the issuer, diversifies
ownership and thus improves liquidity, enables better pricing of securities issued,
provides a platform for information of the issue & the issuer to be disseminated &

evaluated and a means for early investors to exit. The primary market issuances are
regulated in terms of who can make an issue, who can invest, quantum of issue,
disclosures and procedures to be followed and timelines to be adhered to and usage of
funds.
The first public offer of shares made by a company is called an Initial Public Offer
(IPO). An IPO may be through a fresh issue of shares or an offer for sale. In an offer for
sale, existing shareholders such as promoters or financial institutions offer a part of their
holding to the public investors. The share capital of the company does not change since
the company is not making a new issue of shares.
A follow-on public offer is made by an issuer that has already made an IPO in the past
and now makes a further issue of securities to the public.
In a fixed price issue of shares to the public, the company in consultation with the lead
manager would decide on the price at which the shares will be issued.
In a book building process, the issue price is determined based on the offers received
for subscription at prices within a specified band or floor price. The cut-off price is the
price at which the issue is subscribed from the bids received.
Retail investors can subscribe to a book built offer by bidding at the cut-off. They will
be allotted shares at the cut-off price once it is discovered. Bidding at the cut-off ensures
that the investor’s application is always accepted.
A public issue will be open for a minimum of three working days and a maximum of 10
working days in the case of fixed price issues. For book built issues, the offer will be
open for a period between 3 to 7 days extendable by 3 days in case of a revision in price
band. Companies making a public offer of shares are required to get the IPO graded by
a SEBI registered credit rating agency. Investors can apply for an issue when it is open
based on the information provided in the prospectus. Applications can be made
physically or through the online bidding facility provided by stock exchanges. In a book
built offer investors must place bids for the minimum bid lot specified by the issuer so
that the minimum application value adheres to the SEBI prescribed range of Rs. 10,000
to Rs. 15,000. Investors who bid a price can revise their bid at any time before the issue
closing date. Payment for applications made in a public issue must be made only using
the ASBA (application supported by blocked amount) facility. ASBA is an application
for subscription to an issue containing an authorization to the investors’ bank to block
the application money in the bank account and release funds only on allotment. In an
over-subscribed issue, the shares will be allotted to an investor on a proportionate basis.

A company can make a public issue of debt securities, such as, debentures by making
an offer through a prospectus. Debt instruments issued to the public has to be
mandatorily credit rated, security has to be created and it must be in dematerialized
form.

Green Debt Securities are those where the funds raised from the issue are used for
defined projects or assets such as renewable and sustainable energy, clean
transportation, sustainable water management, waste management etc.
Secondary market is the market to trade in securities already issued. Trades happen
between investors and there is no impact on the capital of the company. Secondary
markets provide liquidity for investors; enable price discovery, information signalling
and a barometer of economic growth.
Secondary markets are regulated under the provisions of the Securities Contract
Regulations Act, 1956 and SCR (Rules), 1957. SEBI is authorised by law to implement
the provisions of this act and its rules.
The stock exchange provides the trading platform for trading by investors through
member of the stock exchange. The trades are settled through the clearing and settlement
agency of the stock exchange. Issuers get their securities admitted to the depositories,
where they are held as electronic entries against investor names. Market capitalisation
(or market cap) of a company is the number of shares outstanding multiplied by the
market price per share.
Large cap stocks represent established companies with stable earnings and prices. Mid
and small cap stocks represent companies with high potential for growth but also greater
risks to performance and prices.
Market turnover of a stock indicates how much trading activity took place in it on a
given business day. A market index tracks the market movement by using the prices of
a small number of shares chosen as a representative sample.
The risks in secondary markets are managed by prescribing capital adequacy norms for
members, margins, circuit breakers and penalties. The clearing house is the counterparty
to all trades in the stock exchange. A company announces a record date or book closure
period and investors whose names appear on the records on this date are eligible to
benefit from the corporate action.
The rights shares are offered to the existing investors in a proportion as approved by the
board of a company. Investors can also choose to decline the offer or sell their
entitlement to another.
A bonus issue of shares is made to the existing shareholders of a company without any
consideration from them. Dividends are the share of the profits of the company received
by its shareholders. A company may declare interim dividends during the financial year
and final dividend at the end of the year.
A stock split is a corporate action where the face value of the existing shares is reduced
in a defined ratio. A company may buy back its shares listed on a stock exchange from
the investors out of the reserves and surplus available with the company. Delisting of
shares refers to the permanent removal of the shares of a company from being listed on
a stock exchange.

Delisting of shares refers to the permanent removal of the shares of a company from
being listed on a stock exchange. Delisting may be compulsory or voluntary.

Circuit Breakers and Price Bands

The index-based market-wide circuit breaker system applies at 3 stages of the index
movement, either way viz. at 10%, 15% and 20%. The market-wide circuit breakers are
triggered by movement of either the BSE Sensex or the Nifty 50, whichever is breached
earlier.
Trigger Trigger time Market halt Pre-open call
limit duration auction session
post market halt
10% Before 1:00 pm. 45 Minutes 15 Minutes
At or after 1:00 pm 15 Minutes 15 Minutes
upto 2.30 pm
At or after 2.30 pm No halt Not applicable
15% Before 1 pm 1 hour 45 minutes 15 Minutes
At or after 1:00 pm 45 Minutes 15 Minutes
before 2:00 pm
On or after 2:00 pm Remainder of the Not applicable
day
20% Any time during Remainder of the Not applicable
market hours day

Exchanges compute the Index circuit breaker limits for 10%, 15% and 20% levels on a
daily basis based on the previous day's closing level of the index rounded off to the
nearest tick size.
Daily price bands on 2%, 5% or 10% either way on securities as specified by the
exchange. No price bands are applicable on scrips on which derivatives products are
available or scrips included in indices on which derivatives products are available. In
order to prevent members from entering orders at non-genuine prices in such securities,
the exchange may fix operating range of 10% for such securities.

Chapter 3: Mutual Funds

TYPES OF MUTUALFUND SCHEMES

https://www.youtube.com/watch?v=xlCsRC3cqzI&list=PLCZvkZJiAVK56z_al_5b4
WMMRUXMWydc&index=4

(A) By Structure

Open-Ended Schemes do not have a fixed maturity. You deal with the Mutual Fund
for your investments & Redemptions. The key feature is liquidity. You can conveniently
buy and sell your units at Net Asset Value (NAV) related prices, at any point of time.
Investors can sell their units to the scheme through a re-purchase transaction at re-
purchase price, which is linked to NAV.
Close-Ended Schemes have a stipulated maturity period are called close ended
schemes. You can invest in the scheme at the time of the initial issue and thereafter you
can buy or sell the units of the scheme on the stock exchanges where they are listed.
Interval Schemes combine the features of open-ended and close-ended schemes. The
periods when an interval scheme becomes open-ended, are called ‘transaction periods’;
the period between the close of a transaction period, and the opening of the next
transaction period is called ‘interval period’. Minimum duration of transaction period is
2 days, and minimum duration of interval period is 15 days. No redemption/repurchase
of units is allowed except during the specified transaction period (during which both
subscription and redemption may be made to and from the scheme). Scheme should be
compulsorily listed in Stock Exchange during the interval period.

SEBI - Categorization and Rationalization of Mutual Fund Schemes

5 types – Equity, Debt, Hybrid, Solution Oriented & Other Schemes

https://www.youtube.com/watch?v=eSQnv0e9awQ

Equity Schemes
SEBI has defined large cap, mid cap and small cap companies as follows:
a. Large Cap: 1st -100th company in terms of full market capitalization
b. Mid Cap: 101st -250th company in terms of full market capitalization
c. Small Cap: 251st company onwards in terms of full market capitalization
Also an Equity scheme should invest minimum 65% of its assets in Equity and Equity
related instruments.

Multi Cap Fund: Minimum 25% each in Large cap, mid cap, small cap stocks.

Flexi Cap Fund – Large cap, Midcap, Small cap stocks – 65% minimum.

Large Cap Fund: Investing in large cap stocks – minimum 80% of total assets.

Mid Cap Fund: Investing in mid cap stocks – minimum 65 % of total assets.

Large & Mid-Cap Fund: Minimum 35% each in Large and Midcap stocks

Dividend Yield Fund: Predominantly investing in dividend yielding stocks.

Value Fund & Contra Fund: A value fund follows a value investment strategy.
Minimum investment in equity & equity related instruments shall be 65 percent of total
assets. Value Schemes invest in Undervalued Companies. Investments in value funds
yield benefits over longer holding periods. A contra fund follows contrarian investment
strategy. Mutual Funds will be permitted to offer either Value fund or Contra fund.

Focused Fund: Investing in maximum 30 stocks (the scheme needs to mention where
it intends to focus, viz., multi cap, large cap, mid cap, small cap).

Sectoral/ Thematic: Investing in a specific sector such as Pharma, FMCG is a sectoral

fund. The minimum investment in equity & equity related instruments of a particular
sector/ particular theme shall be 80 percent of total assets. Sectoral fund schemes are
ideal for investors who have decided to invest in a particular sector. Thematic funds
invest in line with an investment theme. The investment is more broad-based than a
sector fund; but narrower than a diversified equity fund.

Equity Linked Savings Scheme (ELSS): Tax saving scheme with a statutory lock in
of 3 years. Minimum investment in equity and equity related instruments shall be 80 %
of total assets (in accordance with Equity Linked Saving Scheme, 2005 notified by the
Ministry of Finance).
https://www.youtube.com/watch?v=Ne1k-
BrcI9E&index=9&list=PLCZvkZJiAVK56z_al_5b4WMMRUXMWydc

Equity Index Fund schemes are ideal for investors who are satisfied with a return
approximately equal to that of an index. These schemes attempt to replicate the
performance of a particular index such as the BSE Sensex, the NSE 50 (NIFTY). Invests
in Index Stocks as per the Weightage. Fund Manager has no role in deciding on
investments. These funds are not designed to outperform the Index and have Low
Running Cost. An Index Fund with Low Tracking Error is a Good Fund. Index fund is
an example of Passive style of Fund management.

Training Video for Index or Passive Funds:

https://www.youtube.com/watch?v=uq7ICqOk4bw

DEBT Funds
https://www.youtube.com/watch?v=3w_Ta-
iUJzc&index=7&list=PLCZvkZJiAVK56z_al_5b4WMMRUXMWydc
Overnight Fund: The investment is in overnight securities having maturity of 1 day.
Liquid Fund: Investment is into debt & money market securities with maturity of upto
91 days

Ultra Short Duration Fund: Investing in debt and money market instruments with
Macaulay duration between 3 months and 6 months.

Low Duration Fund: Investing in debt and money market instruments with Macaulay
duration between 6 months and 12 months.

Money Market Fund: Investing in money market instruments - maturity upto 1 year.

Short Duration Fund: Investing in debt and money market instruments with Macaulay
duration between 1 year and 3 years.

Medium Duration Fund: Investing in debt and money market instruments with
Macaulay duration of the portfolio being between 3 years and 4 years. Portfolio
Macaulay duration under anticipated adverse situation is 1 year to 4 years.

Medium to Long Duration Fund: Investing in debt and money market instruments
with Macaulay duration between 4 years and 7 years. Portfolio Macaulay duration under
anticipated adverse situation is 1 year to 7 years.

Long Duration Fund: Investing in debt and money market instruments with Macaulay
duration greater than 7 years.

Dynamic Bond: An open ended dynamic debt scheme investing across duration.

Corporate Bond Fund: An open ended debt scheme predominantly investing in AA+
and above rated corporate bonds. The minimum investment in corporate bonds shall be
80 percent of total assets (only in AA+ and above rated corporate bonds)

Credit Risk Fund: Investing in below highest rated corporate bonds. The minimum
investment in corporate bonds shall be 65 percent of total assets only in AA and below
rated corporate bonds (excludes AA+ rated corporate bonds).

Banking and PSU Fund: Investing in debt instruments of banks, Public Sector
Undertakings, Public Financial Institutions and Municipal Bonds. The minimum
investment in such instruments should be 80 percent of total assets.
Gilt Fund: Investing in government securities across maturity. The minimum
investment in Gsecs is defined to be 80 percent of total assets (across maturity).

Floater Fund: An open ended debt scheme predominantly investing in floating rate
instruments. Minimum investment in floating rate instruments shall be 65 percent of
total assets.

Fixed Maturity Plans - Fixed Maturity Plans (FMPs) are investment schemes floated
by mutual funds and are close ended with a fixed tenure, the maturity period ranging
from one month to three/five years. Fixed maturity plans are a kind of debt fund where
the investment portfolio is closely aligned to the maturity of the scheme. The objective
of such a scheme is to generate steady returns over a fixed-maturity period and protect
the investor against Interest rate fluctuations.

Hybrid Funds – Investing in two or more asset class

https://www.youtube.com/watch?v=AXHEbVFHrpQ&index=8&list=PLCZvkZJiAV
K56z_al_5b4WMMRUXMWydc
Conservative Hybrid Fund: Investment in debt instruments 75 % and 90 % of total
assets while investment in Equity shall be between 10 % and 25 % of total assets.

Balanced Hybrid Fund: Investment in equity 40% to 60%, investment in debt 40% to
60%. Arbitraging is not permitted in this scheme.

Aggressive Hybrid Fund: Investment in equity 65 % to 80 % of total assets while

investment in debt instruments shall be between 20 % and 35 % of total assets.
Mutual funds in India are permitted to offer either Aggressive Hybrid Fund or Balanced
Fund.
Dynamic Asset Allocation or Balanced Advantage: It is an open ended dynamic asset
allocation fund with investment in equity/debt that is managed dynamically.

Multi Asset Allocation: An open ended scheme investing in at least three asset classes
with a minimum allocation of at least 10 percent each in all three asset classes. Foreign
securities are not treated as a separate asset class in this kind of scheme.

Arbitrage Fund: Investing in arbitrage opportunities. The minimum investment in

equity and equity related instruments shall be 65 percent of total assets. They
simultaneously buy and sell securities in different markets to take advantage of the price
difference. Returns are more in line with money market returns, rather than equity
market returns. Moderately Low Risk Category. Arbitrage funds are not meant for
equity risk exposure, but to lock into a better risk-return relationship than liquid funds
and ride on the tax benefits that equity schemes offer.

Equity Savings: An open ended scheme investing in equity, arbitrage and debt.
Hedging is also allowed. The minimum investment in equity is 65 % of total assets and
minimum investment in debt is 10 % of total assets. Minimum hedged & unhedged
investment needs to be stated in the SID. Asset Allocation under defensive
considerations may also be stated in the Offer Document.

Solution Oriented Schemes:

Retirement Fund: An open ended retirement solution oriented scheme having a lock-
in of 5 years or till retirement age (whichever is earlier).

Children’s Fund: An open ended fund for investment for children having a lock-in for
at least 5 years or till the child attains age of majority (whichever is earlier).

Other Schemes

Exchange Traded Funds (ETF) are also passive funds whose portfolio replicates an
index or benchmark such as an equity market index or a debt index. The units are issued
to the investors in a new fund offer (NFO) after which they are available for sale and
purchase on a stock exchange. Units are credited to the investor’s demat account and
the transactions post-NFO is done through the trading and settlement platforms of the
stock exchange. The units of the ETF are traded at real time prices that are linked to the
changes in the underlying index.

Gold Exchange Traded Funds (GETFs) –

https://www.youtube.com/watch?v=VOzaJ55IM5o&index=10&list=PLCZvkZJiAVK
56z_al_5b4WMMRUXMWydc
Gold Exchange Traded Funds offer investors an innovative, cost-efficient and secure
way to access the gold market. Gold ETFs are intended to offer investors a means of
participating in the gold bullion market by buying and selling units on the Stock
Exchanges, without taking physical delivery of gold. GOLD ETF invests in 99.99%

pure GOLD. NAV of GOLD ETF depends on Real Prices of GOLD Bullion. Gold funds
invest in gold and gold-related securities.

Actively managed funds are funds where the fund manager has the flexibility to choose
the investment portfolio, within the broad parameters of the investment objective of the
scheme. Passive funds invest on the basis of a specified index, whose performance it
seeks to track.

Capital Protected Schemes are close-ended schemes, which are structured to ensure that
investors get their principal back, irrespective of what happens to the market.
Real estate funds invest in real estate.

Fund of Funds (FOFs) - Fund of Funds are schemes that invest in other mutual fund
schemes. Minimum investment in the underlying fund - 95% of total assets.

WHY SHOULD YOU INVEST IN MUTUAL FUNDS?

Portfolio Diversification, Professional Management, Diversification of Risk, Liquidity,

Convenience and Flexibility, Low Cost and Transparency and Well Regulated

Chapter 4 : INVESTMENT Products

Public Provident Fund (PPF) - Account can be opened by an individual for

himself/herself, & or on behalf of a minor of whom he/she is a guardian. HUF, AOP
(Association of persons), BOI (Body of individuals) and NRI are not eligible to open an
account under the PPF Scheme.

Persons who opened PPF and subsequently become NRI can continue till maturity on
Non Repatriation basis. Joint account cannot be opened. Nomination facility is
available.

Account matures after expiry of 15 years from the end of financial year in which the
account was opened. Minimum Investment amount is Rs.500/- and maximum amount
in a financial year is Rs.1,50, 000/. Subscription can be paid in one lump sum or in
installments.

Eligible for SEC 80C deduction. Interest is tax exempt. Interest is paid on the lowest
balance between the close of the fifth day & the end of the month and shall be credited
to the account at the end of each year.

A subscriber can take 1 withdrawal during a financial after five years excluding year of
account opening. Maximum withdrawal can be 50% of balance at the end of the fourth
year or the immediate preceding year, whichever is lower. The account can be continued
for a block of 5 years after maturity. The continuation can be with or without
contribution. Once an account is continued without contribution for more than a year,
the option cannot be changed.

Premature closure of the PPF is allowed in cases such as serious ailment, education of
children and such. This shall be permitted with a penalty of a 1% reduction in the interest
payable on the whole deposit and only for deposits that have completed 5 years from
the date of opening.
A PPF account is not subject to attachment (seizure of the account by Court order).
However income tax authorities can attach PPF accounts to recover tax dues. A person
can have only one account in his name. Two accounts even at different places anywhere
in India are not permitted.

National Saving Certificates

Maturity period of five years, tax benefits under section 80-C, Minimum investment is
Rs.1000/- without any maximum limit. It can be bought by an individual or jointly by
two adults. Nomination even with joint holders is possible. NRI, HUF, Companies,
trusts, societies, or any other institutions are not allowed to purchase the National Saving
Certificates.
Premature encashment is allowed only in case of death of the holder, forfeiture by a
pledgee, or under orders of court of Law. Accrued interest is taxable, but is it deemed
to be reinvested and therefore the interest becomes eligible for Section 80C benefits.

Senior Citizen Savings Scheme

Eligibility is 60 years of age or above
NRIs, PIOs and HUF are not eligible to invest in this scheme.
Minimum is Rs 1000 and Maximum limit is Rs.15, 00,000/-
The benefit of section 80C is available on investment but interest is fully taxable.
Term is 5 years. One time extension of 3 years is allowed, if applied within one year of
its maturity. Nomination facility is available even in case of joint account
Premature closure after expiry of one year but before 2 years, 1.50 % of deposit shall be
deducted.
Premature closure after expiry of 2 years, 1% of the deposit shall be deducted.
No deduction is made in case of closure of account due to the death.
Nomination facility is available.

National Savings Monthly Income Account / Post Office Monthly Income Scheme
(POMIS)
Term of 5 years, Minimum amount of investment is Rs.1000/-, maximum amount in
case of single account is Rs.4, 50,000/-, and in case of joint account is Rs.9, 00,000/-.
No bonus on maturity. Nomination facility is available.
If the account is closed between 1 and 3 years of opening, 2% of the deposited amount
is deducted If it is closed after 3 years of opening, 1% of the deposited amount is charged
as penalty.
National Savings Time Deposit Account / Post Office Time Deposits (POTD)
Terms of one year, two years, three years and five years. Single and Joint holding
The minimum deposit amount is Rs.1000. There is no maximum limit
The five year term deposit is eligible for tax benefits under Section 80C
National Savings Recurring Deposit Account / Post Office Recurring Deposit
Accounts can be opened by resident individuals. Single and Joint modes. Either or
survivor option available. Minimum INR 100/- per month or any amount in multiples
of INR 10/-. No maximum limit. Interest is taxable.
Kisan Vikas Patra (KVP)
NRIs, HUFs are not eligible to invest in the KVP. Minimum of Rs. 1000/- and in
multiples of Rs. 100/- No Maximum Limit. KVP can be prematurely encashed 2 ½ years
from the date of issue. There is no tax incentive and the interest earned is taxed on
accrual basis.
Sukanya Samriddhi Account Scheme
Scheme launched for the benefit of girl children. The account has to be opened in the
name of the girl child by a natural or legal guardian. Only one account can be opened in
the name of a child and a guardian can open a maximum of two accounts in the name
of two different girl children. The age of the child cannot be more than 10 years at the
time of opening the account. The minimum investment is Rs.250 in a FY and a
maximum is Rs.1,50,000. The account can be transferred to any place in India. The
account will mature on the completion of 21 years from the date of opening the account.
If the girl child gets married before the completion of 21 years then the account is closed.
Partial withdrawal is allowed after the holder attains 18 years of age, to the extent of
50% of the amount in balance at the end of the preceding financial year. Any amount
deposited in the account is eligible for deduction under section 80C.

Sovereign Gold Bond Scheme, 2015 - SGBs are government securities denominated
in grams of gold. The bonds are issued in denomination of one gram of gold and in
denominations thereof. The tenor of the bond is 8 years. The value of the bond will
reflect the price of gold. On maturity the value of the bond may be higher or lower

depending upon the prevailing price of gold. The bonds bear an interest rate of 2.50%
per annum on the initial investment and is paid semi-annually. Can be bought through
the designated banks or post-offices and the NSE and BSE. The bonds can be held in
physical form or in dematerialized form. Early redemption is allowed after the fifth year.
The minimum investment is 1 gm and the maximum is 4 kg for individuals and HuFs
and 20kgs for trusts. Capital gains on redemption of the bonds earned by an individual
is exempt and capital gains on transfer of a bond before maturity will be eligible for
indexation benefits. Joint holding, nomination and the facility of marking lien is
available on these bonds. The bonds are available for investment by resident individuals,
HUFs, Trusts, Universities, Charitable Trusts and others.

Earnings per Share (EPS): (Net Profit - dividend paid for preference shares) / no. of
equity shares.

Dividend Yield: (Dividend per share / Current Market Price of the share) *100 %.

Price-Earnings Ratio (P/E Ratio): (Market price of share / EPS). In other words it
indicates the number of times the earning per share, the market is valuing the share.

Book Value: - The book value is the accounting value per share, in the books of the
company. It represents the net worth (capital plus reserves) per share. Whenever the
book value of a company is higher than the market price of the company, it indicates
the share of the company is available at a discount.

Price to Book Value (PBV) = (Market price of share / Book Value per share)

Value investors, who look for the opportunity to buy a stock at a price lower than its
fundamental or intrinsic value, prefer a combination of low PE, low PBV and high
dividend yield.
Derivatives are risk management leveraged instruments, which derive their value form
the underlying assets. Futures, Forwards, Options etc are examples.

1. A futures is a contract for buying or selling a specific underlying, on a future date,

at a price specified today, and entered into through a formal mechanism on an
exchange
2. Hedging is basically protecting your assets from losses; and not for maximizing
the profits.
3. Arbitraging is taking advantage of price difference in two different markets for
risk-free gains.

4. Speculators often take positions in futures markets based on their expectations

regarding the price movements of the underlying assets without having a position
in cash markets.
5. Buyer of CALL OPTION has the right but not the obligation to buy the
underlying asset at a predefined price on a predefined date.
6. Buyer of PUT OPTION has the right but not the obligation to Sell the underlying
asset at a predefined price on a predefined date.
7. Strike Price/ Exercise Price: It’s the price at which an option is exercised.
8. Expiry Day/Date: Day/date on which option expires & contract ceases to exist.
9. Exercise Day/Date: The day/date on which option is exercised.
10.Spot Price > Strike Price for CALL Option → In The Money Option (ITM)
11.Spot Price < Strike Price for CALL Option → Out of The Money Option (OTM)
12.Strike Price > Spot Price for PUT Option → In The Money Option (ITM)
13.Strike Price < Sport Price for PUT Option → Out of The Money Option (OTM)
14.Option Premium: Price an option buyer pays to the seller to buy this option/right.

Chapter 5 – MANAGING INVESTMENT RISK

Systematic Risk is the risk which impacts the entire market/universe. These risks are
not diversifiable i.e. they cannot be avoided. Not under the control of any investor and
cannot be mitigated to a large extent, e.g. Change in Government policies.

Unsystematic Risk or Diversifiable Risk is the risk that is unique to a firm or an

industry. This risk is related to particular Investment and not related to overall market.
This risk can be reduced by diversifying the portfolio, i.e. spreading the investment of
the portfolio across asset classes and across number of securities within a particular asset
class.

Total Risk = Systematic Risk + Unsystematic Risk

Interest rate Risk is a risk caused by change in Interest rate. This risk is faced by
investor when they invest in fixed rate coupon bonds. When interest rate rises for other
similar bonds or in the economy, Bond price falls, Fixed Income Investor suffers Loss.
When Interest rate falls, Bond prices rise, Fixed Income Investor makes Gains

Re-investment Risk is the risk that the proceeds received in the form of interest and
principal from fixed income securities may or may not be able to earn the same interest
as the original interest rate. If Interest rate rises, Reinvestment risk reduces. If Interest
rate falls, Re-investment risk increases.

Default risk or Credit Risk is defined as the risk that the issuer will default with respect
to periodic payment of coupon and/or principal on maturity. Credit risk is measured by
Credit Rating. Higher Credit Rating, Low Default Risk. Lower Credit Rating, Higher
Default Risk

Liquidity risk is the risk that the investor may not be able to sell his investment when
desired, or has to be sold below its intrinsic value/indicative value. Higher Bid and Ask
Spread means Higher the Liquidity Risk. Lower Bid and Ask Spread means Lower
Liquidity Risk. Bid is the price at which the buyer will buy the security and Ask is the
price at which the seller will sell the security.

Exchange rate risk is incurred due to change in value of domestic currency relative to
foreign country currency. If foreign currency depreciates against domestic currency, the
value of foreign asset goes down in terms of domestic currency. If foreign currency
appreciates against domestic currency, the value of foreign asset goes up in terms of
domestic currency.

Inflation Risk - Purchasing power risk reduces purchasing power of the investors.

Business risk is the risk inherent in the operations of a company. It is also known as
operating risk, because this risk is caused by factors that affect the operations of the
company. Common sources of business risk include cost of raw materials, employee
costs, introduction and position of competing products, marketing and distribution costs.

VARIANCE AND STANDARD DEVIATION measure Fluctuation around Mean

Returns, Measures Total Risk (Volatility). The function STDEV returns the standard
deviation of a selected series of data. The function VAR estimates the variance of the
selected values. The variance is simply the square of the standard deviation.

CO – VARIANCE
It measures nature of relationship between two variables.
It could be relationship between return on a security and the return on Market portfolio
or the relationship between two securities.
CORRELATION COEFFICIENT - Measure of the relationship between two
variables.
The value ranges from –1.00 to +1.00
+1 – Both securities move proportionally in the same direction.
-1- Both Securities move proportionally in the opposite direction

0 - No relationship in movement between two securities

As the correlation between the two assets decreases, the benefits of diversification
increase. That’s because, as the correlation decreases, there is less of a tendency for
stock returns to move together.

BETA Measures Systematic or Market Risk

Beta >1 – Aggressive Portfolio (Higher Returns in a BULL Market and Greater LOSS
in a Bear Market)
Beta < 1 – Conservative Portfolio (Returns and Risk will be less when compared to
Market)
Beta is 1 for Index or Index Fund (Returns and Risk will be same as that of the Market)
Beta as a measure of risk is applicable only for Equity Schemes

Chapter 6 – MEASURING INVESTMENT RETURNS

1. Absolute return = (End Value – Beginning Value)/Beginning Value) x 100

2. Absolute returns are not appropriate for comparing the performance of
investments made for different periods of time. That is because the computation
of absolute return does not take into account the holding period of investment
3. Annualized return is a standardized measure of return on investments in which
the return is computed as percent per annum (% p.a.).
4. To annualize, the absolute rate of return is multiplied by a factor such as:
➢ 365/number of days the investment was held
➢ 12/number of months the investment was held
➢ 1/number of years the investment was held
5. Total return is the return computed by comparing all forms of return earned on
the investment with the principal amount. Thus total return is the annualized
return calculated after including all benefits from the investment like Dividend,
interest income etc. Total return can be positive as well as negative
6. An investment option that provides most of the return in the form of periodic
returns is an income-oriented investment.
7. An investment option that provides most of its return from the growth in its value
over time is a growth-oriented investment
8. Compound return is earned when the interest earned in one period is added back
to the principal amount to generate a new principal on which interest is computed
for the next period. As a result, interest is reinvested in the asset so that interest
is earned on interest.
9. Future Value of a Single Cash Flow → FV = PV (1+R) ^N

10.FV → is the Future Value; PV → is the Present Value or Investment or Expenses

today;
11.R → Rate of Interest and N→ Number of Periods (Months, Year etc)
12.Present Value of a Single Cash Flow → PV = FV / (1+R) ^N
13.FV IN EXCEL → =FV (RATE, NPER, PMT, PV, TYPE)
14.PV In EXCEL → =PV (RATE, NPER, PMT, FV, TYPE)
15.EMI Calculation in EXCEL → =PMT (RATE, NPER, PV, FV, TYPE)
16.SIP AMOUNT CALCULATION IN EXCEL  USE EMI CALCULATION
FORMULAE
17.PMT = 0 and TYPE = 0 in case of Single Cash Flow.
18.PMT = Regular Investment Amount or can be EMI amount; Type = 1 for
Investments and ZERO for EMI calculations.
19.Loan Value is entered in PV for calculation of EMI
20.In case of Half yearly Compounding, enter RATE as RATE/2 and NPER as
NPER*2
21.Similarly for quarterly and monthly compounding use 4 and 12 as Factors.
22.Nominal rate of return: Rate at which money invested grows.
23.Real rate of return: Rate at which the purchasing power of an investment
increases.
24.Inflation adjusted → [(1+NOMINAL RATE) / (1+ INFLATION RATE)] – 1
25.Inflation Adjusted return is also known as Real Rate of Return
26.Tax Adjusted returns - Nominal Rate * (1-Tax Rate)
27.IRR is the discount rate at which the investment’s NPV equals zero.
28.At least one negative cash flow and one positive cash flow are necessary for IRR.
29.NPV is an absolute number. IRR is expressed in % terms
30.IRR reflects investment performance as well as cash flows
31.IRR cannot be used if cash flows are not uniformly spread over time.
32.XIRR is used for if Cash flows / Time period is not uniformly spread.
33.NPV and IRR both are discounted cash flow models
34.XIRR & IRR function is particularly useful when CAGR has to be computed for
a series of cash flows, rather than with just a beginning and ending value of the
investment.
35.If the IRR is greater than or equal to a minimum hurdle rate, the investment is
considered to be financially worthwhile. This hurdle rate may be a benchmark, or
the investor’s cost of funds.
36.If an investment involves only one cash outflow/inflow and a series of future
inflows/outflows at periodic regular intervals, IRR can be used (bonds or loans
for example)

37.If an investment involves multiple inflows and outflows, coming in at uneven

time intervals, CAGR can be used (equity shares, mutual funds)
38.Sharpe Ratio measures Risk Adjusted Returns. Also known as Reward to
Variability ratio. It measures Returns per Unit of Risk.
39.The Net Present Value (NPV)uses the idea of time value of money to evaluate
the viability of an investment option
40.A positive NPV implies that the investment is worthwhile and a negative NPV
indicates that the investment should be avoided.
Sharpe Ratio measures the excess returns that an investment/portfolio has earned, per
unit of risk taken.
Sharpe Ratio = (Portfolio Return – Risk-free Return) ÷ Standard Deviation
The portfolio with the highest Sharpe Ratio has given the best return per unit of risk
(standard deviation).
Sortino Ratio = (Portfolio Return – Risk-free Return) ÷ Downside Deviation
Higher Sortino Ratio - Higher return per unit of risk.
Treynor Ratio = (Portfolio Return – Risk-free Return) ÷ Beta.
ALPHA is a measure of out-performance. Measures Fund Manager Performance.

Chapter 7 – CONCEPT OF FINANCIAL PLANNING

Need for Financial Advisory Services

1. Estimating financial goals, finding suitable products and arriving at suitable

allocations to various assets
2. Selecting the right investment products, choosing the right service providers and
managers, selecting insurance products, evaluating borrowing options and such other
financial decisions
3. Personal financial management requires time and attention to recognize income and
expense patterns, estimates of future goals, management of assets and liabilities, and
review of the finances of the household. Many clients may not find time from their
professional tasks
Goals described in terms of the money required to meet it at a point of time in future, is
called a financial goal. Each financial goal contains two important components: (a)
value of the goal and (b) time to goal.
Future value of a goal = Current Value x (1+ Rate of Inflation) ^ (Years to Goal)

Financial Planning Delivery Process - Establish and define the client-planner

relationship, Gather client data, including goals, Analyse and evaluate financial status,

Develop and present financial planning recommendations, Implement the financial

planning recommendations, Monitor the financial planning recommendations.

Investment Objective Suitable Investment

Growth and appreciation in value Equity shares and equity funds, Real
estate, Gold
Regular income Deposits, Debt instruments and debt
funds, Real estate
Liquidity Cash, Bank deposits, Short-term
mutual fund schemes
Capital preservation Cash, bank deposits, Ultra-short term
funds

The risk profile questionnaire helps in understanding the risk tolerance levels of a client.
Risk tolerance is the assumed level of risk that a client is willing to accept. Risk
tolerance is typically measured using questionnaires that estimate the ability and
willingness to take risks.
Financial risk tolerance can be split into two parts: (1) Risk Capacity, (2) Risk Attitude
Risk capacity: the ability to take risk. This relates to the client’s financial circumstances
and their investment goals.
Risk attitude: the willingness to take risk. Risk attitude has more to do with the
individual's psychology than with their financial circumstances.

Conservative Investors
Do not like to take risk with their investments. Typically new to risky instruments.
Prefer to keep their money in the bank or in safe income yielding instruments.
May be willing to invest a small portion in risky assets if it is likely to be better for
longer term.

Moderate Investors
May have some experience of investment, including investing in risky assets such as
equities Understand that they have to take investment risk in order to meet their long-
term goals.
Are likely to be willing to take risk with a part of their available assets.

Aggressive Investors
Are experienced investors, who have used a range of investment products in the past,
and who may take an active approach to managing their investments?
Willing to take on investment risk & understand that this is crucial to generating long-
term return.
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Willing to take risk with a significant portion of their assets.

Risk preferences of the investor are taken into account while constructing an investment
portfolio.
Chapter 8 – ASSET ALLOCATION & INVESTMENT STRATEGIES

ASSET ALLOCATION - Distribution of the investor’s wealth between different asset

classes
Asset Allocation helps in Risk Management
Risk Profiling – Finding Risk appetite of investors through Questionnaire.
Equity, Gold, Debt, Real Estate are Asset Classes

STRATEGIC ASSET ALLOCATION

It is based on Risk Profiling. Risk Profiling is the method of assessing risk appetite of
an Investor through Questionnaire. As the age of the Investor increases the Debt
component in the portfolio also increases. This is a portfolio strategy that involves
sticking to long-term asset allocation. Optimal Asset Allocation - best strategy to
achieve the investors financial goals considering all factors like time to goal, value of
the financial goal, the investor’s current and future resources, Life stage, wealth stage,
dependants, risk appetite, etc. Strategic asset allocation is also known as Optimal Asset
Allocation.

TACTICAL ASSET ALLOCATION

Tweaking Strategic Asset Allocation based on Market Conditions is known as Tactical
Allocation. An element of prediction of the markets behavior is always involved in
Tactical allocation.
It is a better idea as there is a possibility to exploit various opportunities available if one
has the ability to identify and exploit those. An active portfolio management strategy
that rebalances the percentage of assets held in various categories in order to take
advantage of market pricing anomalies or strong market sectors.
The major difference between the two is that strategic asset allocation ignores the
anomalies in the stock or bond or other markets and focuses only on the investor’s needs.
Tactical asset allocation believes that the various markets keep offering opportunities
that can be exploited to enhance the portfolio returns.
Dynamic asset allocation (DAA) works on the basis of a pre-specified model which
does a mechanical rebalancing between asset classes. The allocation to each asset class
is not a fixed percentage but varies depending on the performance of chosen asset class
variables. Several mathematical models have been proposed and used in DAA.

Ways to rebalance a Portfolio

Sell off investments from over-weighted asset categories and use the proceeds to
purchase investments of under-weighted asset categories. A review or a rebalancing of
the portfolio is required based on the investment objectives of the client. Change in the
investment products performance and changing goals, change in the earning and the
expense pattern, change in the assets and liabilities structure of the client makes
rebalancing necessary.

An Overview of different asset classes

Cash or Liquid asset - Generally required for meeting day to day and emergency
requirements. Bonds are debt securities in which an issuer owes the holder of the
security a debt. It has different terms attached to it including interest and repayment of
principal on maturity.

Government bonds provide returns which are fixed and backed by central or state
governments. Those issued by Central Government are considered to be risk-free as it
is believed that a Government will not default on its obligations towards its own citizens.
Risk and return characteristics of bond are relatively lower than equity and hence
suitable for an investor seeking regular income flows with minimal risk. Risk Tolerance
is about how much risk a person can take before the same can impact his decision.
Some of the external factors which need to be considered for effecting changes in an
individual’s financial plan are: Inflation, Interest rates, Stock Markets, Regulations, and
New Products

A stock represents ownership in a company. Volatility is higher in this asset class than
cash and bonds as an asset class.

Chapter 9 – INSURANCE PLANNING

What is an asset? - Anything of monetary value that is owned by a person.

Assets can include bank accounts, stocks, mutual funds, personal property. Assets are
classified into Financial & Physical. Assets may get damaged due to accidental
occurrences called as PERIL.

Risk – Events with uncertain outcome. Risk implies a condition where there is a
possibility of an adverse deviation from a desired outcome that is expected or hoped for.

Insurance
• Loss of Few Shared by Many. Transferring risk from an individual to a group.
• It is a contract between the insurer & the insured.
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• The insurer agrees to pay the insured for financial losses arising out of any
unforeseen events in return for a regular payment known as “premium”.
• Insurance is called a risk cover. It financially compensates for losses.

Need for Insurance and its advantages

• Sense of security against Risk & uncertainties
• Protection against Financial loss to dependants
• Insurance financially compensates. Indemnity - Insured is restored to his or her
approximate financial position prior to the occurrence of the loss.

Requirements of an Insurable Risk

• The proposer should have Insurable Interest in the subject matter of Insurance.
the person insuring must be the one who will suffer should the loss occur.
• There must be a large number of similar risks which need not be identical and
are subject to the same peril or group of perils.
• Risk to be insured against should be Accidental or unintentional - Fortuitous
losses.
• Determinable & measurable and not catastrophic. Chance of loss must be
calculable.
• Premium must be economically feasible.
• Does not involve any prospect of profit and is not against public policy.

Endowment Insurance is a Level Premium Plan. Here Sum assured and Bonus will be
given either at the time of death or at maturity. More expensive when compared to whole
life plans. Term ranges from 5 – 30 years. Non-participating Endowment Plan (no
profits) is also available with cheaper premium.

Whole Life insurance: Life insurance cover for the entire life. Same premium amount
throughout the lifetime.

Double sum assured rider, which provides twice the amount insured in case the death
happens due to the specific reason such as accidental death while the policy is in force.

Critical illness rider, which provides a sum that could be double the sum assured on
diagnosis of a life-threatening illness.

Accident or disability rider, which enables the insured to receive a periodic payout if
temporarily disabled, for a limited period of time.

Waiver of premium rider, which is triggered if there is a disability or loss of income

that makes it difficult to pay the premium.

Guaranteed insurability option rider, which enables enhancing the insurance cover
without further medical examination

The premium paid for all health and critical illness riders in case of a term or group
policy should not exceed 100% of the premium paid on the base policy.
In case of all other riders it should not exceed 30% of the premium paid on the base
policy. The benefit from each rider cannot exceed the basic sum assured.

IMPORTANT TERMINOLOGIES IN INSURANCE

Premium – Amount to be paid to an insurance company for transferring the risk.

Term – The tenure for which an insurance policy is taken. This will be the period for
which the risk cover will be provided by the policy.
Nomination – The process of selection a person by the insured who has the right to
receive the policy money in the event of death of the life assured. The nominee does not
have the right on the money received out the insurance claim. Nominee only has the
right of valid discharge.
Sum Assured – This is the amount of money that the insurance company guarantees to
pay. This is also referred to as cover or coverage and is the total amount the individual
is insured for.
Death Benefit – The amount that is payable by the insurance company to the nominee
of the policy on death of the insured.
Maturity Benefit – The amount that the insurance company pays to the policy holder
at the end of term of the policy or policy maturity.
Survival Benefit – The amount payable at the end of pre-specified periods during the
term of the policy. The amount paid is usually a percentage of the sum assured and the
percentage is predetermined as well. Survival benefits typically do not reduce the death
benefit in the policy. Example is Money Back Plans.
Bonus – A share of the profits made by the company is passed on to the policy holders
in the form of bonuses. Bonuses may be paid every year (reversionary bonus), in
between a policy year (interim bonus) and at the end of the term of the policy (terminal
bonus).
No claim bonus is the benefit of lower premiums enjoyed in subsequent years for each
year of no claims being made.

Lapse – A policy is said to lapse when premiums are not paid when due. A policy lapse
means that the contract between the insurer and the insured is terminated. There will be
no risk cover for a lapsed policy.
Surrender Value – The amount that is paid to the policy holder when the policy is
surrendered or discontinued. The policy ceases to exist once this amount is paid.
Paid Up Value – The value that the policy acquires when premium payment is stopped
after 3 full years are paid. No further premiums can be paid into a paid up policy and no
further benefits will be payable as well.
Paid Up Value = (Sum Assured * No of Premiums Paid) / No. of Premiums payable
Foreclosure – A policy will be foreclosed if premiums are not being paid and the value
of the policy is not sufficient to carry the charges in the same.
Revival – Revival is the process by which the lapsed benefits of a policy are revived by
paying the dues within a specified period of time.
Assignment – This is the act of transferring the rights of the property in the policy from
one person to another. On assignment, the benefits of the policy becomes payable only
to the assignee, the owner of the policy.
Loan – An owner of an insurance policy which has a cash value may be able to borrow
against it for quick cash at very low interest.
Riders – Riders are add-on benefits that can be attached to policies in case of
eventualities. These options allow for enhancement of risk cover and extra protection
against death, illnesses, etc.
Claim is a demand on the insurer to redeem its obligation or promise made in the
contract.
Participating Policy – A policy which participates in the ‘profits’ of the insurance
company and earns a part of the profits.
Non-participating Policy neither participates in the ‘profits’ of the insurance company
nor gets any of the profits.
Reinsurance is transferring portions of risk to other insurers by the Insurance Company.
Deductible is a term used to denote the portion of the claim that is met by the insured

Chapter 10 – RETIREMENT PLANNING

Task of deciding how much money one would require upon retirement. Retirement
Corpus can be calculated using Income Replacement method or Expense method.
Inflation, Life Style and Life Expectancy, Risk Profile, Time to retirement are the
factors which affect retirement planning.

DEFINED BENEFIT PLAN

• Benefit to be paid to the employee is defined or fixed at the beginning of the plan
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• The employer funds the plan and the employee reaps the rewards upon retirement.
• The investment risk is borne by the employer in the defined benefit plan. e.g. final
year’s salary multiply by number of years of service.

DEFINED CONTRIBUTION PLAN

• Contribution to the pension plan by the employee is fixed. Contribution by the
Employer also.
• The investment risk is borne by the employee in the defined contribution plan.
e.g. 12% of salary as contribution. Contribution to PF is an example.

GRATUITY - Gratuity is a Defined Benefit Plan.

Gratuity is paid when an employee completes 5 or more years of continuous service.
• The period of 5 years is not necessary if the termination of the employee is
because of death or disablement. In the case of death the amount is paid to the
legal heirs
• For government employees, all retirement and gratuity benefits received is
exempt from tax u/s 10(10)(I). For non-government employees, any gratuity
received by such employees is exempt from tax to the extent of the least of the
following:
a. Half month’s average salary for each completed year of service.
b. Rs. 20,00,000/-
c. Actual Gratuity received

Annuities
1. An annuity is a contract between the insurer & an individual whereby the insurer
agrees to pay a specified amount in future in exchange for the money now paid
by the individual. Annuities are also popularly known as ‘pension plans’.
2. Investing Period is known as Accumulation phase.
3. Period when the annuitant receives the payments is known as the ‘distribution
phase’.

Deferred Annuity – Money is invested for a specified period of time until an annuitant
starts taking withdrawals, typically upon retirement. A deferred annuity accumulates
money. Also, they accumulate interest on the investment. Period during which
investments are made is known as accumulation period or Deferment period. The age
at which the annuitant starts receiving pension is known as Vesting period.

Immediate Annuity – ANNUITANT begin to receive payments from the insurer

immediately. For example, upon retirement, an individual can purchase an immediate
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annuity with his accumulated retirement corpus. Payment will start as immediately at
end of the month.

Fixed annuity where the pay-out is a fixed sum or fixed amount. Fixed annuities are
essentially debt instruments issued by the insurer. High surrender charges and returns
not being able to keep pace with inflation are the major drawbacks.

Variable annuity –Pay-out is based on underlying investment which could be stocks

or gold etc. The value of annuity depends on the performance of the underlying product.
• Annuity payable for remainder of life
• Annuity payable for a guaranteed period (5/10/15/20 years) and life after that
• Joint life and last survivor annuity to the annuitant and spouse under which
annuity payable to the spouse on death of the purchaser will be either 100% or
some other fixed percentage of the annuity payable to the annuitant.
• Life annuity with a return of purchase price on death of the annuitant
• Life annuity increasing at a specified simple rate every year.
IRDAI requires the minimum pay out in an annuity to be Rs.1000 per month.

National Pension System

PFRDA – Pension Fund Regulatory & Development Authority is the regulator. It is a
Defined Contribution Scheme. Investment in NPS is to be maintained until the age of
sixty. National Pension System applies to an individual who has joined Central Gov
Service on or after Jan 2004.

Who are not covered?

Employees already covered under PF act.
An individual who has joined Central Government service before 01 January 2004, or
Employees of the Indian Armed Forces

Features of National Pension Scheme

1. Tier I A/c known as Pension A/c is Non Withdrawable
2. Tier II A/c known as Savings A/c is withdrawable
3. Tier I account is a pre-requisite for opening a Tier II account
4. PRAN – Permanent Retirement Account Number
5. Investors can invest through Points of Presence (POP).
6. Contributions in Tier II A/c will not enjoy any tax advantages.
7. ACTIVE CHOICE – 3 PORTFOLIO OPTIONS
8. E: High return, High risk – Investments predominantly in Equity market
9. C: Medium return, Medium risk- Predominantly in fixed income instruments
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10.G: Low return, Low risk- Investments purely in fixed investment products
11.A:Alternative Investment Schemes including instruments such as REITs,
Alternative Investment Funds, Mortgage Backed Securities and other approved
investments.
12.A subscriber can choose to invest the entire corpus in C or G.
13.Investment in E is capped at 75 % and upto a maximum of 5% in asset class A.
14.Auto choice also known as Lifecycle Fund is based on the Age of the Investor.
15.LC75 - Aggressive Lifecycle Fund. Exposure to equity 75% till age 35 and then
gradually reduces as per the age of the subscriber
16.LC50 - Moderate Lifecycle Fund. Exposure to equity 50% till age 35 and then
gradually reduces as per the age of the subscriber.
17.LC25 - Conservative Lifecycle Fund. Exposure to equity 25% till age 35 and then
gradually reduces as per the age of the subscriber.
18.The default option - Moderate Lifecycle Fund.
19.Minimum amount per contribution - Rs 500. Minimum contribution per year - Rs
1,000. Minimum number of contributions - 01 per year.
20.Central Recordkeeping Agency (CRA) would recover charges for maintenance
of your accounts, at the same time PFM(s) (Pension Fund Managers) would be
paid for managing the savings. The fees and charges by the CRA and Portfolio
Managers will be regulated by the PFRDA.

REVERSE MORTGAGE
Reverse Mortgage is Opposite to Mortgage where the payment stream is reversed, that
is instead of the borrower making monthly payments to the lender, the lender makes
payments to the borrower.

1. Senior Citizens aged 60 or above are eligible for Reverse Mortgage Scheme.
2. The amount of loan available under RML depends on the age of the borrower,
appraised value of the house and the prevalent interest rates of the lending
institution.
3. Joint Loan facility is available. In this case at least one should be aged 60.
4. Residual Life of the property should be Minimum 20 years. No minimum period
of Ownership is required.
5. The residence should be permanent primary residence & not commercial
premises.
6. Maximum monthly payment is capped at Rs 50,000. The maximum lump sum
payment shall be restricted to 50% of the total eligible amount of loan subject to
a cap of Rs.15 lakh, to be used for medical treatment for self, spouse and

dependants, if any. The balance loan amount would be eligible for periodic
payments.
7. The property should be self-acquired, self-occupied and having clear title in favor
of the borrower.
8. All receipts under RML shall be exempt from income tax under Section 10(43)
of the
9. Any transfer of a capital asset in a transaction of reverse mortgage shall not be
regarded as a transfer.
10.Capital Gains are applicable to borrower only on alienation of the mortgaged
property.
11.The maximum tenure of an RML will be 20 years.
12.Revaluation of property shall be done at least once in 5 years.
13.Payment options – Monthly, Quarterly, Half Yearly, Annual
14.The Reverse Mortgage loan can be prepaid at any time during the term of the
loan. On clearance of all the dues, all the title deeds will be returned by the lender.
15.Rate of interest and the nature of interest (fixed or floating) will be decided by
the lender.
16.An RML will become due and payable only when the last surviving borrower
dies or permanently moves out of the house.
17.Costs to be paid by the client to the Housing Finance Company include loan
processing charges, documentation charges, commitment fees on undrawn loan
amount etc.

Chapter 11 – TAXATION

Previous Year and Assessment Year: The year in which income is earned is known
as the previous year and the next year in which income is taxable is known as the
assessment year.

Resident Status - Resident Individuals

1. In India for a period of 182 days or more in the relevant previous year
2. In India during relevant previous year for 60 days or more & presence in India
for 365 days or more during 4 years immediately preceding the relevant previous
year.

An Indian citizen or a person of Indian origin, who is not a resident as defined

above, is called an NRI (Non-Resident Indian) for the purpose of taxation.

PIO Person of Indian Origin as per Indian Income Tax Act if he or she:

• Has held an Indian passport at any time, or

• Is a grandchild of citizens of India, or
• Is a spouse of an Indian citizen, or
• Is a spouse of a person covered under the first two points above

Sources of Income – Salary, Income from house property, Profits and gains of business
or profession, Capital gains, Income from other sources

Section 80C - Individual / HUF - 100% of the amount invested or Rs. 1,50,000/-
whichever is less is available as Income Tax Deduction.

The marginal rate of tax refers to the rate applicable at the highest slab, given the taxable
income of the investor.

Effective Rates of Tax - The actual income tax to be payable may be increased by
imposing a surcharge or a cess. The effective rate of Income Tax goes up when such
charges are imposed.

Signing of Income Tax Return - Section 140 of the IT Act

Individual’s return - by the individual himself/ herself/by some person duly authorized
in this behalf.
HUF - by the karta and in his absence by any other adult member.
Partnership Firm – Managing Partner / Any other partner who is not a minor
Company – Managing Director / Any other director

Capital Gains
• Capital Gain arises when a property in nature like plot, house, Jewellery etc or
shares/MF units/Bonds are sold for a profit.
• Capital Asset doesn’t include Stock in trade, Raw materials held in Business,
Rural Agricultural Land, personal assets like furniture, Car, Agricultural land.

Asset Long Term Capital Asset Short Term Asset

Equity After 12 months Less than or Equal to 1 Year
Non Equity After 36 months Less than or Equal to 3 years.
Land/Building After 24 months Less than or Equal to 24 months

GAINS EQUITY NON EQUITY

LTCG 10% for gains exceeding Rs 1 20% after INDEXATION
Lakh (if STT is Paid)
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STCG 15% (if STT is paid) Added to income & taxed as per
the slab
Long Term Capital Gain in case of Indexation is calculated as follows
LTCG = Sale Price – Indexed Cost of Acquisition
Indexed Cost of acquisition is as follows
(Cost of Acquisition * Cost Inflation Index of Year Sold) / Inflation Index of Year
bought

In case the return is not filed within due date, a belated return can be filed at any time
before the expiry of 1 year from the end of the relevant assessment year.

SET OFF & CARRY FORWARD OF LOSSES

Loss INCOME HEADS
Salary House Business Capital Other
Property Speculative Non Gains Sources
Speculative
House Yes Yes Yes Yes Yes Yes
Property
Speculative No No Yes No No No
Business
Non No Yes Yes Yes Yes Yes
Speculative
Business
Capital No No No No Yes No
Loss

Capital Loss Set Off Against

Short Term Long Term / Short Term Gain
Long Term (Debt) Long Term Gain (Debt), Long term Equity
Long Term Equity Long Term Gain (Debt), Long term Equity

1. Unabsorbed Loss can be Carry Forwarded for a Period of 8 years.

2. Unabsorbed Speculative Loss can be carry forwarded only for 4 years.
3. Unabsorbed depreciations in Business can be forwarded without any limitation
of time.
4. Loss can be Carry Forwarded only if returns has been filed with in due date
(except Loss from House Property and Depreciation).

Income from House Property

Net Annual Value = Gross Annual Value of the property Less Municipal Taxes and
Unrealized rent
Income from House Property = Net Annual Value Less Standard deductions and/or
interest payable
For Self Occupied Property - the interest paid subject to a maximum of Rs 2 lakhs is
allowed as Deduction from Net Annual Value.

Gifts
A gift is a transfer of movable or immovable property made voluntarily and without
consideration. The person making the gift is called donor; the person receiving a gift is
called the donee. Any income earned from the gift after such transfer will be subject to
tax routinely in the hands of the donee.
Gifts are taxable as income from other source, subject to exemptions provided under
Income Tax Act. This includes gifts received from relatives such as spouse, siblings of
self and spouse, parents, grandparents, children, grandchildren, among others. Any gift
received on the occasion of marriage or inherited under a will is exempt from tax.

Wills
A will is explained as a legal declaration made in writing by a person who clearly sets
out the manner in which he/she would like his or her property (movable or immovable)
wherever situated to be distributed after his death.
Codicil - A testator can change the contents of the will any number of times, before his
death. Such changes to the will are called ‘Codicils’. A will can also be revoked by the
testator at any time before his death.
Testator is the person who makes the will. Testatrix is used to refer to a female.
Probate is a copy of the will certified under the seal of a component Court.
Beneficiary is a person who inherits the property under a will.
Legatee The person who is named in a will to receive a portion of the deceased person’s
estate is known as a legatee.
Executor is the legal representative for all purposes of the deceased person and all
property under the will vests in him. The person named in the will to administer the
estate of the deceased person.
Oral Wills are wills that are not documented and is made orally. Such wills are mostly
prevalent in the armed forces. A will has to be written and signed in the presence of two
witnesses except oral wills. A registered will cannot ordinarily be tampered with,
destroyed, mutilated, lost or stolen. If a will is registered, no person can examine the
will and copy the contents without an express permission in writing of the testator.

General POA – Enables the donee to act on all matters for the donor. The general list
of matters covered in this category includes management of bank accounts, sale of
property, attending dealings in court, etc.
Specific POA – restricts the donee’s authority to act only on a specific transaction, e.g.
POA granted to a person to deal with the renting out of an apartment only.

Chapter 12: REGULATORY ENVIRONMENT AND ETHICAL ISSUES

Investment Advisor – Criteria and Obligations

1. Any person who proposes to provide investment advice shall be required to obtain
a registration certificate from SEBI in order to continue to do this activity.
2. The certificate of registration granted under SEBI (Investment Adviser)
Regulations, 2013 shall be valid till it is suspended or cancelled by SEBI.
3. An investment adviser needs to apply for renewal of his registration certificate,
three months before expiry of the original certificate of registration.
4. Investment advisers who are non-individuals shall have a net worth of not less
than fifty lakh rupees.
5. Investment advisers who are individuals shall have net tangible assets of value
not less than five lakh rupees.
6. The investment adviser should not carry out transaction contrary to his advice to
clients on his own account unless 15 days have passed from the date of providing
the advice.
7. An investment adviser is required to maintain records in physical or electronic
format for a minimum period of five years:
8. An individual investment adviser shall not provide distribution services
9. The family of an individual investment adviser shall not provide distribution
services to the client advised by the individual investment adviser and no
individual investment adviser shall provide advice to a client who is receiving
distribution services from other family members.
10.Investment advisers cannot provide free trial for any products/services to
prospective clients.
11.IAs shall accept fees strictly by account payee crossed cheques / demand draft or
by way of direct credit into their bank account through NEFT/ RTGS/IMPS/UPI.
IAs cannot accept cash deposits.
12.if an investment adviser fails to comply with the regulations penalty which shall
not be less than Rs.1 lakh but which may extend to Rs. 1 lakh for each day during
which such failure continues subject to a maximum of Rs.1 crore
13.An investment adviser which is a body corporate or a partnership firm shall
appoint a compliance officer

Exemptions
1. General comments on financial trends, economic situation which is not
stock/product specific.
2. Insurance agents or brokers providing investment advice only in insurance
products,
3. Pension advisors offering investment advice only on pension products,
4. MF distributor, providing investment advice incidental to distribution of mutual
fund products.
5. Advocates, Solicitors, member of ICAI, ICSI, ICWA, Actuarial Society of India
or any other professional body providing investment advice incidental to their
professional service.
6. Stock broker or sub-broker, Portfolio manager registered with SEBI, Merchant
bankers providing investment advice incidental to their primary activity.
7. Fund managers of mutual funds, alternative investment funds.
8. A person providing investment advice only to clients based out of India, not being
Non Resident Indians or Persons of Indian Origin.

Investment advice given through newspaper, magazines, any electronic or broadcasting

or telecommunications medium, which is widely available to the public shall not be
considered as investment advice for the purpose of these regulations.

Section 12 of PMLA stipulates that every reporting entity (i.e. a banking company,
financial institution, intermediary or a person carrying on a designated business or
profession) shall maintain a record of all transactions for a period of five years from
the date of transaction between a client and the reporting entity.

The main problems/investor grievance areas in the advisory business

1. Advisor’s lack of focus on understanding client specific situations.
2. Advisors lack of understanding of the financial product which he/she is selling
3. Advisors lack of information about overall market and other financial products
4. Adopting wrong practices like frequent switching from one product to another to
increase earnings from commissions.
5. Not educating/informing the investor about risks; uncertainties about financial
products that are sold, while highlighting only the good features of the product.
6. Poor after sales service

BFS - Board for Financial Supervision

The Prevention of Money-Laundering Act, 2002 (PMLA)
SCORES (SEBI Complaint Redress System).

Integrated Grievance Management System (IGMS).

Central Grievance Management System (CGMS)
International Financial Services Centres (IFSC)
Anti-Money Laundering (AML)
Combating the Financing of Terrorism (CFT)
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