BlogInvestment Adviser Level 117. Operational Aspects of Inv...

17. Operational Aspects of Investment Management

Investors and the Investing Process:

Who can Invest?

Investors eligible to invest in securities markets include individual investors and institutional investors.
Individual investors can be residents, minors, HUF, NRIs and FPIs.
Institutional investors include companies, trusts, charitable organizations, financial institutions, pension funds, insurance funds and banks.
Institutional investors follow a formal process for making and executing investment decisions.
Investment decisions must adhere to the approved pattern and be executed by authorized signatories.

2. Client Onboarding Process

Investors must fulfill mandatory requirements to be eligible to invest in various investment products.
Pre-requisites may be imposed by regulations or specific to investing in a particular product.
Specific conditions with respect to the instrument must be completed, such as making an application during a specific period.
Payment for applications made in a public issue must be made using the ASBA facility.
SEBI has introduced the use of UPI with the ASBA facility as a new payment mechanism for retail investor applications submitted through intermediaries.

3. Terms of Offer

The offer document of a financial product specifies the conditions to be fulfilled by a prospective investor and the documentation needed to support this.
Conditions may be laid down in terms of who can invest and how much can be invested in the scheme.
Some products may exclude a certain category of investors from investing.
A product may also be launched for a specific category of investors, and investment instruments may have a certain minimum threshold amount for investment.

4. Regulatory Requirements

Investors must have a PAN issued by the Income Tax Authorities to be eligible to invest in most financial products in India.
Capital market investments made through a demat account or in physical mode require PAN card details to be provided.
Investments in deposits with the Post Office Savings Bank, Post Office Savings Schemes and Savings Certificates have to be classified as medium and high risk, with balance in all other schemes not exceeding Rs. 10 lakhs.

5. Mandatory Investor Information:

When an investor applies to buy a financial product or service, there are certain mandatory fields that must be completed in the application form, without which the application may be deemed invalid and rejected. This note explains the different mandatory fields in the application form.

Name:
The financial product or service is held in the name of the investor who is identified by name. In case of mutual funds, shares and bonds, demat account, post office savings bank accounts and most company deposits a purchase application can be made by a maximum of 3 joint holders. In others, such as a fixed deposit with a bank or the senior citizens savings scheme and the NSC, there can be a maximum of two holders.
Signature:
The signature of the investor is the identity of the investor in the records of the issuer. It is verified for every transaction. In case of a joint application, the form must provide for signatures of all joint holders irrespective of the holding pattern.
Address:
The address of the first holder is mandatory in order to enable physical identification of the investor’s location. Address of the investor must match with the address and proof of address provided while completing the KYC formalities.
Bank Account Information:
The application form may require the investors to provide bank account details of the sole or first holder at the time of purchase. Account number, bank and branch details, type of account, IFSC code, and MICR code has to be provided. This is the account in which the interest, dividends and redemption proceeds will be credited.
Permanent Account Number (PAN):
PAN has been notified as the single identification number for all capital market transactions. Barring some exempted small value transactions, it is compulsory for all categories of investors to quote PAN in the application form.
KYC Compliance:
KYC completion status of the applicant must be provided in the application form, and proof of being KYC compliant also needs to be provided at the time of making the investment.
Risk Profiling:
It is mandatory for an investment adviser to undertake the process of risk profiling of the investor. This gives an idea about the position of the investor and the kind of risk that they are able to take.

6. Investor Folio or Account:

A folio number or account number, customer identity number or certificate number is allotted to the investor at the time of the initial purchase or investment or account opening. It is created by the investment product or service provider or their agent, such as the registrar and transfer agent, on receipt of a valid application. The information provided in the application form is captured to create a unique customer record.

The investor folio or account number is used to record all transactions pertaining to the investment, financial or non-financial. The identity number assigned to the investor must be quoted at the time of initiating any transaction pertaining to the investment.

Information of the investor used to create the account or folio includes name, status, contact details and bank account information if it is mandatory for the particular product or service. The mode of holding and operating the account, in case of joint holders, is also recorded. The nomination of persons entitled to receive the investment in the event of the death of the holders is also recorded.

PAN and KYC Process:

Permanent Account Number (PAN):

Issued by Income Tax authorities for identification purposes
Form 49A is the prescribed form to apply for a PAN, which requires proof of identity and proof of address
Mandatory for most financial market transactions
Attested copy of PAN card is maintained by Registrar and Transfer agent
Certain micro investments and exempt from PAN requirement

Know Your Customer (KYC) Process:

KYC norms ensure illegal funds are not routed into Indian markets
Applies to opening bank, trading, demat accounts, and various financial transactions
Involves verification of proof of identity and proof of residence of the customer
Mandatory for all investors wishing to invest in mutual funds to complete KYC formalities with a KRA
E-KYC services of the UIDAI have also been recognized as valid process for KYC verification.

Centralised KYC Registration Agencies (KRA)

Introduction: Centralised KYC Registration Agencies (KRA) are entities authorized by the government to maintain and manage KYC records of customers. In India, CERSAI is the Central KYC Record Registry that performs the functions of KRA under PML Rules 2005.

Key Functions:

Electronic storage, safeguarding, and retrieval of KYC records.
Dissemination of updated customer information to reporting entities.
Issuance of a unique KYC Identifier to each client.
De-duplication of KYC records received from reporting entities.
Availability of services on payment of a prescribed fee.
Minimizing duplication of customer information submission.

KYC Template: The KYC template for individuals has been finalized by CERSAI and must be used by registered intermediaries for all individual accounts opened on or after August 1, 2016, where KYC is required to be carried out.

KYC Identifier: Each client is issued a unique KYC Identifier, which can be submitted to reporting entities for accessing KYC records from the Central KYC Registry. Reporting entities can download KYC records using the KYC Identifier and not require customers to submit documents again unless there is a change in customer information, current address verification is required, or enhanced due diligence is necessary.

Dematerialisation and Re-materialisation of Securities

Introduction:

Depository is an institution that holds securities of investors in electronic form
The Depositories Act passed in 1996 allows companies and investors to issue, hold and transact in securities through a depository
Securities can be dematerialised at the time of issue or subsequently
Currently, there are two depositories in India, National Securities Depository Ltd. (NSDL) and Central Depository Services (I) Ltd. (CDSL)

Dematerialisation:

Dematerialisation is the process of converting physical securities into electronic form
Steps involved are: investor hands over the securities along with Dematerialisation Request Form (DRF) to the DP, DP sends the request through the electronic system to the issuer/R&T agent and the depository, and R&T agent mutilates the physical certificates once the process of dematerialisation is complete
Dematerialised securities are fungible, i.e., once a share is dematerialised, it does not have a distinctive identity in terms of share certificate number or distinctive numbers or folio numbers
Categories of securities eligible for dematerialisation are shares, scrips, stocks, bonds, debentures, debenture stock or other marketable security of any incorporated company or other body corporate, units of a mutual fund, rights under a collective investment scheme, venture capital funds, certificates of deposit, commercial paper, money market instruments, government securities and unlisted securities

Re-materialisation:

Re-materialisation is the process of converting electronic securities into physical form
The process is similar to dematerialisation but involves the investor requesting the DP to convert electronic securities into physical securities
The DP sends a request to the depository, and the R&T agent issues physical certificates after verifying the request

Power of Attorney: Easy-to-Understand Notes

Introduction
Individual investors can empower someone they trust to do transactions on their behalf by granting and executing a Power of Attorney (PoA).

What is a Power of Attorney?
A Power of Attorney has two parties: the grantor and the attorney. The grantor grants the rights, and the attorney is authorized to execute an agreed set of actions on behalf of the grantor.

Who uses Power of Attorney?
This facility is generally used by non-resident investors who stay in a foreign country and are thus unable to manage their financial transactions, or by investors who like their brokers or advisors to manage their investments on their behalf.

What can the attorney do?
The attorney can do normal transactions such as purchase, payment for purchase, sale, settlement of transactions, and redemptions. The rights of the holder depend on what the grantor is willing to delegate under the power of attorney and what is allowed for PoA transactions by the investment or service provider.

How to Make a Power of Attorney Valid?
To be valid, the PoA must be typed on a non-judicial stamp paper, stamped according to the rules applicable in the state in which it is executed, signed by the grantor on all pages, signed by the grantor and the holder of the power of attorney on the last page, and notarized by a notary public.

General Power of Attorney
A General Power of Attorney gives the agent the authority to handle all the affairs during a period of time when the investor is unable to do so. General Power of Attorney is typically very broad, giving the agent extensive powers and responsibilities.

Specific Limited Power of Attorney
A Specific Power of Attorney gives the agent the authority to conduct a specific act or acts on the investor. Because this type of Power of Attorney is limited to the act or acts designated in the document, it is especially important to be very clear about the powers one wishes to give to the agent.

Account Opening Process for Non-Residents-

I. Introduction

A non-resident Indian (NRI) is an Indian citizen or person of Indian origin who is not a resident of India.
The residential status of an individual is determined under Section 6 of the Income Tax Act.
NRIs can invest in India, but repatriation norms vary depending on the source of the funds.

II. Definition of NRI

An NRI is a person who is a citizen of India but resides outside of India.
A PIO (Person of Indian Origin) can also be considered an NRI if he or she has held an Indian passport, is a grandchild of Indian citizens, or is the spouse of an Indian citizen.

III. Repatriation of Investment Proceeds

NRIs can earn income in rupees or foreign currency.
Investment proceeds from NRI investment depend on the source of funds.
Rupee investment proceeds are non-repatriable because the rupee is not fully convertible on capital account.
Funds remitted from abroad into the Non Resident External (NRE) Account or Foreign Currency Non Resident (FCNR) Account can be freely repatriated back.

IV. KYC for NRIs

NRIs must be KYC compliant to invest in India.
The KYC form is widely available online and must be submitted along with necessary documents to a point of service (PoS).
NRIs must submit additional documentation, including a certified true copy of their passport, overseas address, permanent address, and PIO Card (for PIOs).
All documents must be submitted in English and can be attested by the Consulate office or overseas branches of scheduled commercial banks registered in India.

Process of Consolidating, reorganising and folio keeping/Maintenance of Investments-

Investor accounts and folios require maintenance for changes to the details provided at the time of opening an account. The following are the steps involved in the process of consolidating, reorganizing, and folio keeping/maintenance of investments:

Change of Address and Contact Details

KYC process establishes the identity and address of the investor.
Change of these details must be carried out in the KYC records.
Uniform KYC process is done through the KRA for capital market transactions.
KYC details change form can be used to carry out such changes.
The KRA will update the records and communicate the change of address to all the entities with which the investor has holdings.
In case of other financial products and services, the change in address has to be intimated to the provider for updation in the records.
Self-attested documentary proof of the new address such as passport, current utilities bill, and ration card must be provided.

2. Change in Name

The letter requesting the change in name should be supported by the name change certificate issued by a regulatory authority, an official gazette copy announcing the new name and a copy of marriage certificate, if applicable.
A form specified for this purpose can be used, such as the form S2 prescribed by the NPS or the KYC details change form specified by KRAs or a form specified by the concerned bank, insurance company or other intermediaries.

3. Change in Status

A change in status can be recorded with the capital market companies and intermediaries by using the KYC details change form to register these changes in the records of the KRA.
Insurance companies have to be intimated of the change and the new address and mode of premium payment details provided in an NRI questionnaire that is prescribed by the company.
Bank accounts held as resident should be re-designated to NRO account through an application signed by all the holders.
New bank account details have to be provided.

Marking a Lien:

Investors pledge their investments as collateral to borrow money from banks, financial institutions, or NBFCs.
The lender creates a lien or charge on the securities pledged and informs the investment provider of the lien through a letter.
The lien or pledge is recorded by the investment provider in the investor’s records and can be for all or part of the securities in a folio.
An investor cannot redeem or transfer the securities under lien until the lien holder provides a written authorization to revoke the lien or pledge.
Once the investor repays the loan, the securities become free from lien and are unmarked.
The lien holder can invoke the lien, which means redeeming or selling the pledged securities, and receives the proceeds by selling/redeeming the securities.
Dividends and other benefits from the securities under lien will go to the investor unless specifically barred by the lien holder.

5. Transmission:

Transmission means passing on investments on the death of the investor to another person.
The investment provider does not take responsibility for the equitable distribution of the investments among the heirs of the deceased investor.
The eligibility of claimants to get the investments transmitted in their name on the death of the first holder will depend upon the way the investment account was held.
If the investment account was held jointly and did not have nominations, then the investments are transmitted to the joint holders in the same order.
If the folio was held jointly and had nominations, the right of the joint holders to transmission supersedes the right of the nominee.
If the investment account was held singly and had a nomination, then the investments will be transmitted to the nominee.
If the investment account was held singly and there was no nomination, then it would be transmitted to legal heirs or other claimants where there are documents to establish succession.
Transmission is completed by removing the name of the investor from the investment records and transferring the investment to persons entitled to receive them.

Notes on Change in Status of Special Investor Categories

Introduction

Minors, NRIs, and investors investing through a constituted attorney are special categories of investors.
Additional documentation and process are required due to their differential status with respect to taxation, mode of operation of investments, or restrictions on certain components of investment activity.

Minors as Investors

Minors are investors who are less than 18 years of age.
Financial transactions are conducted by adults on their behalf, and those transacting on behalf of the minor child are called guardians.
When investments are made on behalf of minors, additional documents need to be submitted with the application form.
The guardian has to provide all details and complete the KYC formalities.
The guardian signs the application and payment instruments on behalf of minors.
The new guardian could be a natural guardian or a court-appointed legal guardian.
The signature of the new guardian in the bank account of the minor attested by the bank as such needs to be submitted.

2. Minor Turned Major

Once the minor becomes major, financial transactions are disallowed in their account.
KYC process has to be completed by submitting proof of identity and address.
Banks will ask for proof of age and an application to attest the signature of the minor-turned-major.
The PAN issued to a minor will have to be resubmitted to the Income Tax authorities for issuance of a new card.
Demat accounts of minors can be held only on a single-name basis, and a new demat account has to be opened.
Securities held in the old demat account with minor status are transferred to the new demat account.
In the case of mutual fund investments, notification to the registrars with a copy of the banker’s attestation of the signature is adequate.

NRI to Resident Indian (RI)

A returning NRI needs to carry out certain procedures regarding investments and bank accounts
NRO/NRE/FCNR(B) accounts cannot be operated anymore
Inform the bank about the change of status to resident Indian and open a Resident Rupee Account
Open a Resident Foreign Currency (RFC) account to transfer balances from NRE/FCNR(B) accounts
Inform the DP with whom he/she has opened a demat account to transfer all the balances held in the NRI demat account to the new ‘Resident’ demat account
Inform the broker about the change if the NRI was operating an online trading account
Send KYC change form to respective AMC with whom the NRI holds mutual fund investments to change status, address, and bank details

4. Resident Indian to NRI

Different rules apply to a Resident Indian when the status changes to an NRI
Resident savings account cannot be operated anymore
Open an NRE/NRO account with the bank and route investments only through NRE/NRO account
Convert bank fixed deposits to NRO fixed deposits and submit original fixed deposit receipt for a new deposit confirmation advice
Open a new depository account with NRI status and transfer all balances held in the account with ‘Resident’ status
Regularize physical securities by submitting a letter addressed to the issuing company along with the Demat Request Form
Open a new trading account for future investments with higher brokerage rates compared to resident investors
Inform relevant AMCs about the change of status, address, and bank details with respect to mutual fund investments
Send KYC change form to the KYC registration agency for change of status, address, and bank details

5. Addition or deletion of name in an account

Add or delete a name from the bank account by applying for the purpose of either the addition or the deletion
Collect necessary documents from the person being added and complete KYC
Update specimen signature card with new account holders
Mutual funds do not usually allow for the addition of a name as it amounts to a transfer of the units being held
Open a new folio with the desired holdings and get the units in that folio after closing out the existing holding

6. Addition or deletion of a bank mandate

Bank mandate consists of authorization given by an account holder to operate a bank account
Add or delete a bank mandate by making a request to the bank with necessary documents
In case of joint accounts, all account holders need to sign the new mandate form
In case of death of the account holder, the legal heir can submit the necessary documents and request a change in mandate

Payment Instruments:

I. Traditional Modes of Payment

All payments for capital market transactions should be routed through the first holder’s bank account.
Cheques, demand drafts, and electronic payment modes are accepted.
For mutual funds, cheque payment is the most common mode of payment.
Local cheques and At-Par cheques are accepted, but outstation cheques and post-dated cheques (except for SIPs) are not.
Demand draft is accepted for applications from centres where the producer does not have an office or collection centre.
Systematic Investment Plan (SIP) allows investors to accumulate a target investment sum through periodic recurring investments.
Payment for purchase of units through an SIP can be through post-dated cheques or through an ACH mandate.

II. Digital Payment Systems

ACH (Automated Clearing House) mandate form should be filled up and submitted by the investor.
ACH facility is available only in select cities as given by the AMC.
ASBA (Applications Supported by Blocked Amount) is a facility extended to investors subscribing to securities.
ASBA is an application containing an authorization to block the application money in the investor’s bank account for subscribing to a primary market issue.
Only funds to the extent required for allotment of units are debited from the bank account.
NEFT (National Electronic Funds Transfer) and RTGS (Real Time Gross Settlement) are electronic fund transfer modes.
NEFT and RTGS are settled in batches at times defined by the RBI.
RTGS is for transactions of Rs. 2 lakhs and above, while there is no minimum amount for NEFT transactions.
Indian Financial System Code (IFSC) is necessary for performing NEFT or RTGS transactions.
Debit cards issued by selected banks can also be used to make payments.
NEFT/RTGS facilities benefit investors who do not have internet banking accounts with the designated banks specified.

Prevention of Money Laundering Act

Introduction:
Prevention of Money Laundering Act, 2002 is a law passed by the Government of India to prevent money laundering and other financial crimes. SEBI has permitted cash investments in mutual funds to increase the reach of mutual fund products among small investors. However, these cash investments should be in compliance with the Prevention of Money Laundering Act, 2002.

Key Points:

Cash investments in mutual funds are permitted up to Rs. 50,000 per investor per mutual fund per financial year.
The asset management company should have sufficient systems and procedures in place for accepting cash transactions.
Repayment in the form of redemptions and dividends is only permitted through banking channels.
Third party payments or payments made through an instrument issued from a bank account other than that of the investor mentioned as the first holder in the application form will not be accepted for payment for investing in capital markets.
Exceptions on the third party payment rule are made for grandparents/parents making payments not exceeding Rs. 50,000 (per transaction) on behalf of a minor, employer making payments on behalf of employees through payroll deductions and custodians making payments on behalf of FPIs.
A third party declaration form must be provided stating the relationship with the beneficiary and details of the bank account through which payment will be made.
The person making the third party payment must be compliant with the PAN and KYC requirements.

4. Prevention of Frauds

Introduction:
Prevention of frauds is a critical aspect of the investment process. There have been instances where investors gave cheques for investment in a fund, but the cheques went into the account of someone else who then encashed the amount and disappeared. To prevent such frauds, various measures have been taken.

Key Points:

The amount being invested should come from the investor’s own account and not a third party.
A bank account linked with the investment ensures that dividends and redemption proceeds go to the right place.
Cheques are printed with the account number to prevent them from being deposited into the wrong account.
Electronic modes of payment reduce the risk of fraud by minimizing physical handling of money.
Collection of various documents and matching the names of the investment holding and bank accounts while processing payment mode helps to reduce fraud.

Documentation for Financial Advice:

Introduction

The process of providing financial advice involves collecting information from the client, evaluating the investor’s situation, determining a realistic saving and investment plan, and executing the plan.
Clear documentation of the entire process is important to exclude chances of information being misinterpreted and to avoid giving unsuitable advice.

Agreement with Client

The financial adviser must enter into an agreement with the client laying out the roles and responsibilities of each party.
The agreement should include the scope of work, agreed remuneration, and an undertaking to act in good faith.
The adviser must take the client through all the clauses and make sure they understand the implications.
A signed copy of the agreement must be available with both parties.

Information Collection

The adviser must collect essential information on the client, including age, income, asset details, existing borrowings and liabilities, and needs and goals for which they wish to save and invest.
This information is fundamental to making a financial plan, and it should be recorded and verified by the client before use.

Risk Profiling

Risk profiling tools such as questionnaires can be used to assess the risk tolerance of the investor.
The adviser must ensure that the investor understands the questions clearly, interpret the responses correctly, and see them in conjunction with the financial and personal situation of the client to arrive at the appropriate risk tolerance.
The risk profile arrived at should be communicated and explained to the client, and all information should be maintained in records and periodically updated.

Investment Product Selection

The investment adviser must document the process by which they short-list investment products for the client.
The products recommended should be those that are suitable for the client’s goals and risk profile and their ability to understand the risk and performance of the investment.
The reasons for the selection must be explained to the client and documented, and the key features of the investment product must be clearly laid out and explained.

Investment Advice and Pre-Investment Requisites

The investment advice given on saving and investing for the goals must be recorded and maintained.
The adviser must communicate it clearly and ensure that the implications are understood.
There are pre-investment requisites that have to be met by the client, such as undergoing the KYC process and having a specific type of bank account and investment account.
The documentation associated with all these must be maintained.

Records Maintenance

Once the investments are made, documents such as proof of investments and account statements have to be maintained for which a system has to be in place.
Regulations allow records to be maintained physically or in electronic form, and if maintained electronically, they must be digitally signed.
All records must be maintained for a period of five years, and the regulatory requirements for maintenance of records and documents are discussed in detail in chapter 6.

Investing in Mutual Funds through Stock Exchange Platforms:

What are Stock Exchange Platforms for Mutual Funds?

Stock exchanges offer investors the facility to buy and sell mutual fund units through their platform.
SEBI allows mutual fund distributors registered with AMFI to use the infrastructure for their clients.
Investors can transact in a seamless manner and get units in their demat account.
The BSE Star MF Platform and NSE NMF (II) platform are two examples of such platforms.
The process, including pay in and pay out of money as well as the units, takes place through the stock exchange infrastructure, eliminating counterparty risk.
Investors can undertake SIP, STP, SWP, and switch transactions.

2. What is the Role of Investment Adviser?

Investment advisers can advise investors on using the online platform for mutual fund investments.
The adviser guides the investor on the manner of investment and the process to follow.
Advisers can construct portfolios and suggest the route for making the investment.

3. What Transaction Feed is Available to Investment Advisers?

Investment advisers can see their clients’ entire mutual fund portfolio at a single place.
The stock exchange provides details of holdings and transactions, making decision-making easier.
The adviser can take an independent view of the portfolio and make decisions based on available information.
There is almost no paperwork involved in the entire process, making the process smoother and allowing advisers to undertake more business and serve clients better.

Mock Test:-

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Investment Advisor Level 1

CHAPTER 17: OPERATIONAL ASPECTS OF INVESTMENT MANAGEMENT

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1. What is ethical investing?

a. Investing in high-risk assets

b. Investing in socially conscious companies

c. Investing based on personal views

d. Investing in sin industries

2 / 125

2. What does correlation measure?

a. The average return of a portfolio

b. The liquidity of an investment

c. The strength and direction of relationship between two variables

d. The risk and return relationship of an asset

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3. What should be considered while selecting debt instruments for a portfolio?

a. All of the above

b. Need to generate steady cash flow

c. Short-term investment goals

d. Credit risk tolerance

4 / 125

4. What are some factors considered under governance in sustainable investing?

a. Board independence, board diversity, and executive compensation

b. Workplace safety, community development, and human rights

c. High-risk, high-return opportunities

d. Pollution control, water use, and clean technology adoption

5 / 125

5. What is the process of portfolio optimization?

a. Estimating the standard deviation of each asset's expected returns

b. All of the above

c. Estimating the correlation coefficient among different assets

d. Estimating the expected return of each asset class

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6. What can exposure limits to different sectors, entities, and asset classes help mitigate?

a. Tax liabilities

b. Concentration risk

c. Personal preferences and beliefs

d. Liquidity needs

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7. Under the advisory model of PMS, the execution has to be done by the

a. None of the above

b. Advisor

c. PMS fund manager

d. Client

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8. What is liquidity risk?

a. The risk associated with the ease of converting an asset into cash at its economic value

b. The risk associated with interest rate changes and exchange rate fluctuations

c. The risk associated with fluctuations in the prices of equity shares

d. The risk associated with the default of a borrower

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9. What are investment constraints?

a. Limitations on investors to take exposure to certain investment opportunities

b. Requirements to maintain a specific level of liquidity

c. Tax considerations in portfolio management

d. Regulations that restrict investment choices

10 / 125

10. Utility curves in Modern Portfolio Theory demonstrate

a. Increasing marginal utility of wealth

b. Diminishing marginal utility of wealth

c. Fluctuating marginal utility of wealth

d. Constant marginal utility of wealth

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11. What is market risk?

a. Risk arising from changes in interest rates and exchange rates

b. Risk arising from fluctuations in equity prices due to market dynamics

c. Risk arising from the dispersion in return and variance

d. Risk arising from sector-specific factors and company-specific factors

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12. What is sustainable investing?

a. Investing in high-risk, high-return opportunities

b. Focusing on tax-efficient investment strategies

c. Limiting exposure to specific sectors, entities, and asset classes

d. Considering environmental, social, and governance (ESG) criteria while selecting investments

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13. How does correlation impact asset allocation decision?

a. Investments within the same asset class have high correlation, while different asset classes have low correlation

b. Investments within the same asset class have high correlation, and different asset classes have high correlation

c. Investments within the same asset class have low correlation, while different asset classes have high correlation

d. Investments within the same asset class have low correlation, and different asset classes have low correlation

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14. What is the formula for calculating the Treynor Ratio?

a. Rp / (Rf - Bp)

b. (Rp - Rf) / (Bp - Rf)

c. (Rp - Rf) / Bp

d. Rp / Bp

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15. Modern Portfolio Theory assumes that investors maximize

a. Long-term financial goals

b. Market share

c. One-period expected utility

d. Wealth accumulation

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16. In portfolio optimization, what is the purpose of specifying investment constraints?

a. To define the maximum allowable risk

b. To restrict the expected returns of assets

c. To ensure compliance with regulatory requirements

d. To limit the number of securities in the portfolio

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17. What is the rate of return generated during the period of five years in the given example?

a. 1300.00%

b. 115.00%

c. 2.00%

d. 15.00%

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18. What can be included in the Investment Policy Statement (IPS) regarding unique needs and preferences?

a. Personal, social, ethical, and cultural preferences

b. Emergency cash, near term goals, and investment flexibility

c. Exposure limits to specific sectors, entities, and asset classes

d. Tax considerations and regulatory constraints

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19. How is the Information Ratio calculated?

a. Rp / (Stdev (p- - Stdev (p+)

b. Rp / Rb

c. (Rp - R / Stdev (p+

d. (Rp - R / Stdev (p-

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20. What is the formula for calculating AMR?

a. AMR = (Sum of returns) / (Number of returns)

b. AMR = (Sum of returns) * (Number of years)

c. AMR = (Sum of returns) / (Number of years)

d. AMR = (Sum of returns) - (Number of years)

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21. What phase of the life cycle of investing is characterized by income exceeding expenses?

a. Gifting

b. Spending

c. Consolidation

d. Accumulation

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22. What is CAGR?

a. Cumulative Annual Growth Rate

b. Constant Annual Growth Rate

c. Current Annual Growth Rate

d. Compounded Annual Growth Rate

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23. What is the Sharpe ratio?

a. The ratio of portfolio's return to the market's return

b. The ratio of portfolio's return to the risk-free return

c. The ratio of portfolio's return in excess of the risk-free return to the market's standard deviation

d. The ratio of portfolio's return in excess of the risk-free return to the portfolio's standard deviation

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24. Which quadrant of the BB&K framework represents adventurous investors?

a. Lower-right

b. Lower-left

c. Upper-right

d. Upper-left

25 / 125

25. What does annualized return represent?

a. The average annual return of the investment

b. The compound average annual return of the investment

c. The total return of the investment over the evaluation period

d. The return earned in a single year of the investment

26 / 125

26. Which factor determines the extent of equity exposure in a portfolio?

a. Investor's time period available to achieve goals

b. Investor's liquidity needs

c. Investor's goals

d. Investor's risk-taking ability

27 / 125

27. True or False: Portfolio optimization using the MPT framework requires accurate estimation of statistical inputs.

a. False

b. True

28 / 125

28. How can an investor analyze their financial position?

a. By reviewing investment portfolios

b. By assessing income and expenses

c. By calculating net worth

d. By preparing personal financial statements

29 / 125

29. Why is it important to review and update the Investment Policy Statement (IPS) periodically?

a. To evaluate the performance of portfolio managers

b. To adjust the IPS based on historical performance

c. Investor requirements and market conditions change over time

d. To align the IPS with regulatory requirements

30 / 125

30. What is the difference between pre-tax and post-tax return?

a. Pre-tax return is higher than post-tax return

b. Pre-tax return is lower than post-tax return

c. Pre-tax return cannot be calculated

d. Pre-tax return is equal to post-tax return

31 / 125

31. The following reason is not an objective of the Investment Policy Statement (IPS)...

a. It allows for the investor to raise their return expectations from the portfolio.

b. It provides proper evaluation of the portfolio manager

c. It provides clear guidance to the portfolio manager

d. It protects against unethical behavior of the portfolio manager

32 / 125

32. When does the gifting phase of investing typically occur?

a. When an individual has excess assets

b. During the consolidation phase

c. In the early career phase

d. At retirement

33 / 125

33. What are the costs associated with portfolio rebalancing?

a. Research costs and brokerage costs

b. All of the above

c. Illiquidity costs and tax costs

d. Transaction costs and tax costs

34 / 125

34. What falls under the category of liquidity constraints?

a. Emergency cash, near term goals, and investment flexibility

b. Exposure limits to different sectors, entities, and asset classes

c. Tax liabilities and regulatory limitations

d. Personal, social, ethical, and cultural preferences

35 / 125

35. The PMS provider has to appoint a ____________ compulsorily

a. Technological officer

b. Expert

c. Committee

d. Compliance Officer

36 / 125

36. What serves as a benchmark for evaluating the performance of a portfolio by comparing it with a similar composition portfolio?

a. Bond index

b. NIFTY 50

c. Mid-cap index

d. BSE 30

37 / 125

37. Risk averse investors in Modern Portfolio Theory prefer

a. Higher risk and lower expected return

b. Lower risk and lower expected return

c. Higher risk and higher expected return

d. Lower risk and higher expected return

38 / 125

38. What is unsystematic risk?

a. Risk due to interest rate changes and exchange rate fluctuations

b. Risk due to common risk factors affecting all investments

c. Risk due to changes in market sentiment

d. Risk due to sector-specific or company-specific factors

39 / 125

39. What does the holding-period return (HPR) measure?

a. Income generated by an investment

b. Risk involved in the investment

c. Change in value of the investment during the holding period

d. Both income and change in value of the investment

40 / 125

40. The measure of performance that divides the portfolio's risk premium by the portfolio's beta is the...

a. Fama measure

b. Jensen measure

c. Sharpe measure

d. Treynor measure

41 / 125

41. What is the Time Weighted Rate of Return (TWRR) in the given example?

a. 100.00%

b. 40.00%

c. 2.00%

d. 165.00%

42 / 125

42. Modern Portfolio Theory (MPT) provides a framework for constructing and selecting portfolios based on

a. Geographical location and political stability

b. Expected performance of investments and risk appetite of the investor

c. Historical performance of investments and market trends

d. Expected volatility and market liquidity

43 / 125

43. Which statistic is considered the most vital in measuring the performance of a portfolio?

a. Rate of return

b. Sharpe ratio

c. Risk measure

d. Volatility measure

44 / 125

44. What are the steps involved in the portfolio construction process?

a. Planning, execution, feedback

b. Development of policy statement, study of financial conditions, portfolio construction, performance measurement

c. Risk assessment, asset selection, monitoring

d. Investment analysis, decision-making, performance evaluation

45 / 125

45. How many correlation estimates are required for a portfolio of 50 securities?

a. 2,450

b. 50

c. 1,225

d. 12,250

46 / 125

46. What is the difference between strategic asset allocation (SA and tactical asset allocation (TA?

a. SAA is the target policy portfolio, while TAA is the dynamic component

b. SAA is designed to beat the markets, while TAA is designed to meet long-term goals

c. SAA is the long-term allocation decision, while TAA is the short-term allocation decision

d. SAA involves timing the markets, while TAA involves time in the markets

47 / 125

47. How can you calculate the annualized return?

a. Take the average of the individual yearly returns

b. Multiply the individual yearly returns

c. Add the individual yearly returns

d. Multiply the product of individual yearly returns by the reciprocal of the number of years

48 / 125

48. What should be considered when preparing an Investment Policy Statement (IPS)?

a. Investor's financial situation, goals, risk profile, and preferred asset classes

b. Historical performance of various asset classes

c. Forecast of future financial market trends

d. Portfolio manager's investment preferences and strategies

49 / 125

49. What type of investments are usually preferred for near-term high priority goals?

a. Aggressive investment approaches

b. Cash equivalents and fixed-income instruments

c. Socially conscious companies

d. Diversified approach

50 / 125

50. Which of the following statements is true regarding the Modern Portfolio Theory (MPT) framework?

a. It emphasizes diversification across different asset classes

b. It balances risk and return for optimal portfolio selection

c. It aims to maximize returns without considering risk

d. It considers risk only and ignores returns

51 / 125

51. How is Beta calculated?

a. Variance in the portfolio return divided by the covariance between the portfolio return and the risk-free rate of return

b. Variance in the portfolio return divided by the covariance between the market's return and the portfolio return

c. Covariance between the portfolio return and the risk-free rate of return divided by the variance in the market return

d. Covariance between the market's return and the portfolio return divided by the variance in the market return

52 / 125

52. How does tax constraint impact investment decisions?

a. Consideration of environmental, social, and governance (ESG) criteria

b. Exposure limits to specific sectors, entities, and asset classes

c. Personal preferences and beliefs

d. Different investments and income types are taxed differently

53 / 125

53. In the CAGR formula, what does 'P' represent?

a. Annual growth rate

b. Opening wealth

c. Time period in years

d. Closing wealth

54 / 125

54. What is estimation risk in portfolio management?

a. The potential loss due to inaccurate estimation of returns

b. The potential loss due to inaccurate estimation of risk

c. The potential loss due to inaccurate estimation of correlations

d. The potential loss due to inaccurate estimation of investment constraints

55 / 125

55. What role does psychographic analysis play in investor risk profile?

a. It considers behavioural traits and personality characteristics

b. It determines investment returns

c. It evaluates investment volatility

d. It categorizes investors by age

56 / 125

56. What are the purposes served by an Investment Policy Statement (IPS)?

a. Realistic return expectations, effective investment decisions, evaluation framework, investor protection

b. Financial forecasting, market analysis, policy formulation, performance measurement

c. Portfolio diversification, risk reduction, liquidity management, return optimization

d. Capital preservation, regular income, capital appreciation, systematic review

57 / 125

57. A hedge fund classifies as a ____________

a. Category 1 fund

b. None of the above

c. Category 2 fund

d. Category 3 fund

58 / 125

58. What is the concept of the Efficient Frontier in portfolio optimization?

a. It represents the set of portfolios with the highest risk and lowest return combination

b. It represents the set of portfolios with minimum risk for every level of return

c. It represents the set of portfolios with the highest risk and return combination

d. It represents the set of portfolios with maximum return for a given level of risk

59 / 125

59. What is the key factor that determines the selection of an optimum portfolio from feasible combinations?

a. Expected return of each asset class

b. Risk tolerance of the investor

c. Standard deviation of each asset's expected returns

d. Investment objectives of the investor

60 / 125

60. An investment achieves a pre-tax rate of return of 8% and is subject to a tax rate of 20%. What is the post-tax rate of return?

a. 40.00%

b. 60.00%

c. 8%

d. 10%

61 / 125

61. What is cash drag adjusted return?

a. The return generated by the equity investment

b. The return generated by the cash component of the portfolio

c. The return generated by the liquid funds

d. The return generated by the portfolio after adjusting for the cash component

62 / 125

62. How is stability in investment portfolios emphasized during the spending phase of the life cycle?

a. Short-term investment strategies

b. Focus on high-risk assets

c. Preference for investments generating dividend, interest, and rental income

d. Active trading and speculation

63 / 125

63. How does exposure to specific sectors, entities, and asset classes impact investment risk?

a. It can reduce concentration risk and diversify the portfolio

b. It aligns with personal preferences and beliefs

c. It decreases tax liabilities

d. It increases liquidity needs and flexibility

64 / 125

64. Investors withdrawing a fixed sum of money each month are using the

a. Systematic Investment Plan

b. Dividend Transfer Plan

c. Systematic Withdrawal Plan

d. Systematic Transfer Plan

65 / 125

65. A private equity fund invests in ____________

a. Early stage financing

b. Later stage financing

c. IPO financing

d. All of the above

66 / 125

66. The Certainty Equivalent Rate (CER) is the rate that a risk-free investment has to offer to be equally attractive with

a. Growth investment

b. Defensive investment

c. Risky investment

d. Speculative investment

67 / 125

67. What is the average annual geometric return based on?

a. The average of initial and final portfolio values

b. The percentage gain in portfolio value

c. The sum of individual yearly returns

d. Compounding and reinvesting dividends and capital gains

68 / 125

68. What does GMR stand for?

a. Geometric Method Return

b. Growth Mean Ratio

c. Geometric Mean Return

d. Gross Mean Return

69 / 125

69. What is systematic risk?

a. Risk due to common risk factors affecting all investments

b. Risk due to interest rate changes and exchange rate fluctuations

c. Risk specific to a particular sector or company

d. Risk due to the dispersion of returns and variance

70 / 125

70. What are hybrid portfolios primarily used for?

a. Achieving long-term goals

b. Achieving stability and potential upside

c. Achieving short-term goals

d. Achieving maximum returns

71 / 125

71. What does the Sortino Ratio measure?

a. Downside risk-adjusted return.

b. Portfolio turnover.

c. Total risk.

d. Upside potential.

72 / 125

72. What is the key difference between ethical investing and sustainable investing?

a. Ethical investing focuses on long-term returns

b. Ethical investing considers ESG criteria

c. Ethical investing is personalized

d. Ethical investing is high-risk

73 / 125

73. A portfolio is considered to be efficient if:

a. Choices a and b

b. No other portfolio offers lower risk with the same expected return

c. There is no portfolio with a higher return

d. No other portfolio offers higher expected returns with the same risk

74 / 125

74. Exchange Traded Funds (ETFs) are ____________ investments

a. Alternative

b. Traditional

c. New age

d. General

75 / 125

75. In the CAGR formula, what does 't' represent?

a. Opening wealth

b. Time period in years

c. Annual growth rate

d. Closing wealth

76 / 125

76. What does standard deviation measure?

a. The average return of a security or portfolio

b. The dispersion of returns around their average

c. The risk-free return available in the market

d. The excess return of a security or portfolio over the market return

77 / 125

77. What does the Money Weighted Rate of Return (MWRR) depend on?

a. Holding period of investments

b. Investment amount

c. Portfolio diversification

d. Timing of cash flow

78 / 125

78. Given a portfolio of stocks, the envelope curve containing the set of best possible combinations is known as the

a. Utility curve

b. Efficient portfolio

c. SML (Security Market Line)

d. CML (Capital Market Line)

79 / 125

79. Which method calculates the simple average of a series of returns?

a. Geometric Mean Return (GMR)

b. Sharpe Ratio

c. Arithmetic Mean Return (AMR)

d. Standard Deviation

80 / 125

80. What does tracking error measure?

a. The standard deviation of the difference between a portfolio's total return and its target benchmark portfolio's total return

b. The deviation of a security's return from its average return

c. The deviation of a portfolio's return from the market return

d. The difference between a portfolio's total return and the risk-free rate of return

81 / 125

81. If a portfolio has a holding-period rate of return of -50% in the first year and 100% in the second year, what is the AMR?

a. 50%

b. 100%

c. 25%

d. 75%

82 / 125

82. What is asset allocation in investment?

a. The process of analyzing financial markets and trends

b. The process of evaluating investment performance

c. The process of selecting individual securities for investment

d. The process of distributing wealth into different asset classes for investment purposes

83 / 125

83. How are investment objectives related to asset allocation decisions?

a. Investment objectives determine the appropriate asset allocation based on risk, return, and liquidity needs

b. Investment objectives determine the expected return of investments

c. Investment objectives determine the preferred asset classes for investment

d. Investment objectives determine the timing of portfolio rebalancing

84 / 125

84. How can the holding-period return (HPR) be calculated using the given equation?

a. HPR = (I + (E - ) / B

b. HPR = (E-/E

c. HPR = (E - I) / B

d. HPR = (E-/B

85 / 125

85. The hurdle rate is the rate which has to be crossed in order to charge

a. Administration charges

b. Brokerage

c. Depository charges

d. Profit sharing fees

86 / 125

86. True or False: The portfolio variance formula considers the weighted averages of individual variances and covariances between assets in the portfolio.

a. False

b. True

87 / 125

87. What is benchmarking in performance evaluation?

a. Evaluating performance based on risk-adjusted returns.

b. Comparing performance with peer portfolios.

c. Evaluating performance based on absolute returns.

d. Evaluating performance against a standard or point of reference.

88 / 125

88. What are the typical investment objectives of investors?

a. High-risk investments with high returns

b. Maximum diversification across all asset classes

c. Short-term speculative trading

d. Preservation of capital, regular income, and capital appreciation

89 / 125

89. Which goals are considered near-term high priority goals?

a. Retirement goals

b. Goals to be achieved in a few years

c. Low priority goals

d. Goals with aggressive investment approaches

90 / 125

90. What does empirical evidence suggest about the importance of asset allocation?

a. Asset allocation explains 90% of the variation in fund returns over time

b. Asset allocation is the most important investment decision

c. All of the above

d. Asset allocation explains the majority of a portfolio's return variability over time

91 / 125

91. What is the formula to calculate CAGR?

a. (A / P)^(1 / t) - 1

b. (A - P)^(1 / t) - 1

c. (A * P)^(1 / t) - 1

d. (A + P)^(1 / t) - 1

92 / 125

92. What does CAGR represent?

a. Average growth rate

b. Annual growth rate with compounding

c. Annual growth rate without compounding

d. Instantaneous growth rate

93 / 125

93. A risk-seeking investor in Modern Portfolio Theory is willing to engage in

a. Diversification strategies

b. Fair game opportunities

c. Risk-free investments

d. High-risk investments

94 / 125

94. What is the purpose of an Investment Policy Statement (IPS) in portfolio management?

a. To identify the preferred asset classes for investment

b. To specify the expected return of investments

c. To guide the investment process and provide a framework for decision-making

d. To evaluate the performance of portfolio managers

95 / 125

95. Why is the selection of benchmarks crucial in evaluating portfolio performance?

a. It helps in identifying the nature of investments made

b. It prevents wrong investment decisions

c. It provides a framework for comparison

d. It ensures a stable asset allocation mix

96 / 125

96. An AIF consists of ____________ funds

a. Lumpsum

b. Mass market

c. Limited

d. Privately pooled

97 / 125

97. What does the Cumulative Wealth Relative represent?

a. Ending value of one unit of money

b. Relative risk measure

c. Compound annual return

d. Cumulative return of the portfolio

98 / 125

98. What does the portfolio return represent?

a. The weighted average return of the individual securities in the portfolio

b. The return of the market benchmark for the same period

c. The average return of the individual securities in the portfolio

d. The total return of the individual securities in the portfolio

99 / 125

99. In the CAGR formula, what does 'A' represent?

a. Time period in years

b. Annual growth rate

c. Closing wealth

d. Opening wealth

100 / 125

100. How can the Time Weighted Rate of Return (TWRR) be calculated?

a. By annualizing the return

b. By calculating the internal rate of return (IRR)

c. By linking the sub period returns together

d. By calculating the cumulative wealth relative

101 / 125

101. What is semi variance used to measure?

a. Dispersion of returns above the mean return

b. Dispersion of returns during periods of high market volatility

c. Dispersion of returns relative to a target return

d. Dispersion of returns below the mean return

102 / 125

102. What is credit risk?

a. The risk associated with the default of a borrower

b. The risk that the borrower will be unable to repay the amounts on time

c. The risk associated with interest rate changes and exchange rate fluctuations

d. The risk associated with fluctuations in the prices of equity shares

103 / 125

103. Why is portfolio rebalancing necessary?

a. To generate higher returns

b. To minimize tax liability

c. To reduce transaction costs

d. To maintain the portfolio's original risk-and-return characteristics

104 / 125

104. If a portfolio is comprised of two stocks, and if the correlation coefficient between two stocks were to decrease over time, everything else remaining constant, the portfolio's risk would

a. Fluctuate positively and negatively

b. Decrease

c. Remain constant

d. Increase

105 / 125

105. What is the Capital Asset Pricing Model (CAPM) used for?

a. Measuring the unsystematic risk of a security or portfolio

b. Pricing investments based on their market risk

c. Decomposing the portfolio return into alpha and beta return

d. Calculating the required return on a security or portfolio

106 / 125

106. Sustainable investing will consider...

a. Environmental factors

b. All of the above

c. Governance factors

d. Social factors

107 / 125

107. Sharpe's performance measure divides the portfolio's risk premium by...

a. Variance of the rate of return

b. Slope of the fund's characteristic line

c. Risk-free rate

d. Standard deviation of the rate of return

108 / 125

108. What is the holding-period return (HPR) also known as?

a. Compound annual growth rate (CAGR)

b. Total return

c. Geometric return

d. Money-weighted rate of return (MWRR)

109 / 125

109. How can you decompose portfolio returns into alpha and beta return?

a. By dividing the portfolio return by the market benchmark return

b. By subtracting the market return from the portfolio return

c. By using the Capital Asset Pricing Model (CAPM)

d. By calculating the difference between the actual return and the risk-free rate

110 / 125

110. What is the process of integrating investment objectives, goals, and requirements with capital market forecasts?

a. Forecasting risk and return of various asset classes

b. Benchmarking the client’s portfolio

c. Asset allocation decision

d. Portfolio Construction Principles

111 / 125

111. How is the Treynor Ratio different from the Sharpe Ratio?

a. It uses beta as the measure of risk instead of standard deviation.

b. It includes both systematic and unsystematic risk.

c. It uses standard deviation as the measure of risk instead of beta.

d. It is only applicable to well-diversified portfolios.

112 / 125

112. Which method of calculating returns is more important for analyzing the long-run return on assets?

a. Sharpe Ratio

b. Geometric Mean Return (GMR)

c. Arithmetic Mean Return (AMR)

d. Standard Deviation

113 / 125

113. What is an example of a regulatory constraint?

a. Maintenance of exposure limits to specific sectors, entities, and asset classes

b. Consideration of environmental, social, and governance (ESG) criteria

c. Personal preferences and beliefs

d. Limit on overseas investments per year

114 / 125

114. A positive relationship between expected return and expected risk is consistent with investors being

a. Risk averse

b. Risk neutral

c. All of the above

d. Risk seekers

115 / 125

115. What is the main issue in performance measurement and evaluation?

a. Focusing only on return

b. Considering risk and return equally

c. Ignoring the risk involved in achieving the return

d. Overemphasis on risk rather than return

116 / 125

116. According to Modern Portfolio Theory, investors want to maximize the return for a given level of

a. Time horizon

b. Capital

c. Risk

d. Income

117 / 125

117. Risk-neutral investors evaluate investment opportunities solely based on

a. Expected return with no regard to risk

b. Historical return with no regard to risk

c. Expected return and risk simultaneously

d. Volatility of the market with no regard to return

118 / 125

118. Rebalancing the portfolio has to be done...

a. At regular intervals

b. Daily

c. Never

d. Every decade

119 / 125

119. How can you calculate post-tax return based on the pre-tax return and tax rate?

a. Post-tax return = Pre-tax return + tax rate

b. Post-tax return = Pre-tax return - tax rate

c. Post-tax return = Pre-tax return x (1 - tax rate)

d. Post-tax return = Pre-tax return / (1 + tax rate)

120 / 125

120. What is the calculation involved in portfolio risk comprising more than two securities?

a. Risk tolerance assessment

b. Correlation coefficient estimation

c. Expected return estimation

d. Variance-covariance matrix calculation

121 / 125

121. Strategic asset allocation does not involve the following...

a. It provides target allocation to different assets

b. It is a long-term asset allocation decision

c. It is meant to take advantage of the situation in the financial markets

d. It is meant to meet the goals of the investor

122 / 125

122. How does sustainable investing impact investment decisions?

a. It focuses on tax efficiency in portfolio management

b. It determines exposure limits to different sectors, entities, and asset classes

c. It considers environmental, social, and governance (ESG) criteria for investment selection

d. It prioritizes short-term speculative trading

123 / 125

123. What does the Modigliani and Modigliani Ratio measure?

a. Portfolio's over or underperformance compared to the market portfolio.

b. Portfolio's diversification.

c. Portfolio's total risk.

d. Portfolio's market value.

124 / 125

124. In Modern Portfolio Theory, investors estimate the risk of a portfolio based on

a. Industry sector allocation

b. Historical returns of the portfolio

c. Market capitalization of the assets

d. Variability of expected returns of constituent assets

125 / 125

125. Given the following yearly returns of an investment: Year Return
2015 -00%
2016 -120%
2017 10%
2018 30.75%
2019 165% Calculate the CAGR for this investment.

a. 60.00%

b. 30.00%

c. 20.00%

d. 50.00%

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