NISM Series XXI-A: Portfolio Management (PMS) Mock Test-1

As per the SEBI (Prohibition of Insider Trading) Regulations: The code of conduct shall specify the period, which in any event shall not be less than six months, within which a designated person who is a connected person of the listed company and is permitted to trade in the securities of such listed company, shall not execute a contra trade.

Therefore, the period to enter into a contra trade is greater than 6 months. Contra Trade (opposite trade: i.e., if you buy, then you cannot sell).

JANUARY EFFECT: In the US market, it is observed that investors tend to engage in tax selling toward the end of the year to book losses on stocks that have declined and buy back the same stocks or similar stocks after the new year.

This leads to downward pressure on stock prices towards the end of November and December and positive pressure in early January.

Information Coefficient is the measure of a manager’s skill in terms of accurately predicting the future outcome. This can be for any of the variables such as the financial performance of the company, macroeconomic data prediction, stock price movement, P/E expansion or contraction, business cycles, etc.

Information Coefficient is obtained by finding the correlation between expected and actual outcomes of strategies. So, the information coefficient is essentially a correlation coefficient, which like any other correlation ranges from -1 to +1.

While futures contracts and forward contracts share similarities as derivatives, their payoff structures are not identical due to differences in settlement methods and margining:

• Futures contracts are marked-to-market daily, meaning gains or losses are settled daily.
• Forward contracts, on the other hand, settle only at maturity, leading to a single payoff.

Thus, the statement that a futures contract has the same payoffs as a forward contract is false.

As per the SEBI circular, Portfolio Managers shall provide an option to clients to be onboarded directly, without intermediation of persons engaged in distribution services.

Portfolio Managers shall prominently disclose in its disclosure documents, marketing material, and on its website, about the option for direct on-boarding. At the time of onboarding of clients directly, no charges except statutory charges shall be levied.

A portfolio manager can invest in units of mutual funds through the direct plan. The portfolio manager cannot deploy the clients’ funds in bill discounting, badla financing, or for the purpose of lending or placement with corporate or non-corporate bodies.

Non-residents who are eligible to avail of the benefits of the relevant Double Taxation Avoidance Agreements (DTAA) may opt to be taxed as per such DTAA on their income earned in India to the extent that they are more benefiicial than the provisions of the ITA.

The non-residents, however, will be required to obtain a Tax Residency Certificate and also submit a duly completed Form No. 10-F along with supporting documents, to the extent applicable.

A Trust can invest in PMS with a minimum investment of Rs. 50 lacs.

The portfolio manager is required to preserve the books of account and other records and documents for the preceding five accounting years and furnish them to SEBI as and when required.

Open-ended funds allow the investors to enter or exit at any time, after the NFO. The scheme does not have a maturity. Investors can buy additional units in the scheme any time after the scheme opens for ongoing transactions.

Prospective investors can also buy units. At any time, the existing investors can redeem their investments, that is, they can sell the units back to the scheme to get their money back. Close-ended funds have a fixed maturity. Interval funds combine features of both open-ended and close-ended schemes. They are largely close-ended but become open-ended at pre-specified intervals.

The trades executed on the exchange are settled through a clearing corporation, which acts as a counterparty and guarantees the settlement of the trades to both buyers and sellers. The clearing corporation provides full novation of contracts between buyers and sellers, which means it acts as buyer to every seller and seller to every buyer. As a result, the operational risk of the transaction is substantially reduced to a trading investor.

A callable bond gives the issuer the right to redeem all or part of the outstanding bonds before the specified maturity date. Callable bonds are advantageous to the issuer of the security. In other words, callable bonds present investors with a higher level of reinvestment risk than noncallable bonds. The issuer will call the bond before its maturity only when the interest rates for similar bonds fall in the market. The investor will receive the face value of the bond before the maturity.

The agreement between the portfolio manager and the client includes the investment approach. An investment approach is a broad outlay of the type of securities and permissible instruments to be invested in by the portfolio manager for the customer, taking into account factors specific to clients and securities.

A cyclical industry is a type of industry that is sensitive to the business cycle, such that revenues generally are higher in periods of economic prosperity and expansion and are lower in periods of economic downturn and contraction.

Cyclical industries are attractive investments during the early stages of an economic recovery. During the phase of recovery, consumer durable sectors such as producers of cars, personal computers, refrigerators, tractors, etc. become attractive investments.

All of the above are included in the agreement.

The SEBI (Mutual Funds) Regulations came in the year 1996.

Non-discretionary portfolio manager manages the funds in accordance with the directions of the client. The portfolio manager does not exercise his/her discretion for the buy or sell decisions. (Discretionary portfolio managers individually and independently manage the funds of each investor as per the contract.)

Information has to be submitted for the Capital Structure: Paid-up capital & Free Reserves for the Year before the preceding year of the current year, the Preceding year, Current Year.

As per SEBI’s Do’s and Don’ts for the portfolio managers – The portfolio manager shall not deploy the clients’ funds in bill discounting, financing, or for lending or placement with corporate or non-corporate bodies.

The KYC process also requires verification of the PAN card. It is mandatory for all investors who wish to invest in PMS to complete KYC formalities.

The disclosure document contains details concerning –

1. Risk arising from the investment approach, investment objective, investment strategy, and asset allocation

2. Risk arising out of non-diversification, if any

3. Statement to the effect that securities investments are subject to market risks etc

(Details of the business risk of group companies are not required to be mentioned in the disclosure document)

Savings is the difference between money earned and money spent. The money in the savings account is the savings of the investor. It cannot be called an investment as an investment is the process of making the savings work to generate a return – eg. Investing in a Mutual fund etc. It is common to use the terms Savings and Investment interchangeably.

However, they are not the same.

Saving is just the difference between money earned and money spent. Investment is the current commitment of savings with an expectation of receiving a higher amount of committed savings. Investment involves some specific period. It is the process of making the savings work to generate a return.

For calculating net worth, all the assets the investor owns, i.e. the house, the car, the investments in stocks, bonds & mutual funds, balance in the savings accounts, etc. are to be recorded at the estimated market value. Then all the liabilities need to be subtracted from the assets. Liabilities may include the outstanding car loan amount, credit card loans, home, etc., The difference between the value of assets and the liability is Net worth.

The fixed amount paid by a bond issuer to the bondholder at regular intervals until maturity is called the coupon. It represents the interest income earned by the investor on the bond’s face value. This payment is usually made annually or semi-annually, depending on the bond’s terms. The coupon rate is set at the time of issuance and remains fixed throughout the bond’s life.

As per SEBI rules – Every Portfolio Manager shall appoint a compliance officer who shall be responsible for monitoring the compliance of the Act, rules and regulations, notifications, guidelines, instructions, etc., issued by SEBI or the Central Government and for redressal of investors’ grievances. The compliance officer shall immediately and independently report to SEBI any non-compliance observed.

Statutory Charges means any charge imposed by state or federal government legislation.

Notary fees are payable to the notary public at a local court / Sub-registrar office to get a deed/documents notarised.

Past performance or beating the benchmark should not be the only criteria as selecting a portfolio manager is a complex process. It involves analyzing a lot more than just returns. Investors are expected to carry out a detailed due diligence process before selecting their portfolio managers.

The due diligence involves thorough quantitative and qualitative analysis of the portfolio manager’s reputation, key personnel, and operations. Investors should understand the investment process, investment strategies, and investing styles to appreciate how the investment returns are generated and gauge the likelihood of the performance persisting in the future for the given investment process.

Portfolio Managers can be evaluated on the basis of their investment philosophy, investment approach, investment process, strategies, styles, and past performance compared against a benchmark or managers’ universe.

Portfolio management services can be classified on the basis of product class such as – 1. Equity-based PMS 2. Fixed Income-based PMS 3. Commodity PMS 4. Mutual Fund PMS 5. Multi Asset-based PMS There is no product class such as Forex PMS.

As per SEBI (Portfolio Managers) Regulations – Obligation and Responsibilities of Eligible Fund Managers: An eligible fund manager shall be required to keep the funds of eligible investment funds in scheduled commercial banks – Provided the requirement of compliance with this sub-regulation would not arise in case an eligible investment fund does not intend to invest in Indian securities.