NISM Certifications · NISM-Series-X-A: Investment Adviser (Level 1)

Evaluating the Financial Position of Clients: formula sheet

Full chapter guide

Key formulas

Net worth: Net worth = Total assets − Total liabilities; Measured on a single date. It can be negative if liabilities exceed assets.
Accounting identity: Total assets = Total liabilities + Net worth; Use it to find a missing figure.
Annual surplus or deficit: Surplus (or deficit) = Total inflows − Total outflows; Outflows include living expenses, EMIs, insurance premiums and taxes. Positive means surplus, negative means deficit.
Savings rate: Savings rate = Annual savings ÷ Gross income × 100; State clearly whether the base is gross or net income, as given in the question.
Statement basis: Balance sheet = point in time; Cash flow = period of time; This is the core difference tested in the exam.
Net worth: Net worth = Total assets − Total liabilities; Use current market values for assets and outstanding principal for liabilities.
Liquid asset grouping: Liquid assets = cash + bank balances + liquid funds + other near-cash holdings; Items that can be converted to cash quickly with little loss of value.
Investible assets: Investment assets = total assets − liquid assets − personal use assets; Personal use assets are normally excluded from the pool meant for goals.
Current portion of a long-term loan: Principal repayable within 12 months → short-term liability; rest → long-term; A single loan is split across two groups.
Basic liquidity ratio (emergency fund ratio): Liquid assets ÷ Monthly non-discretionary (essential) expenses; Answer is in months. Benchmark about 3 to 6 months. Liquid assets are cash, bank balance, liquid funds.
Current ratio: Liquid (current) assets ÷ Current liabilities; Current liabilities are dues payable within one year. A value of 1 or more means short-term dues are covered.
Savings ratio: Annual savings ÷ Gross annual income × 100; Use the same basis (gross or net) for both parts as the question states. Benchmark about 10% or more.
Debt service ratio: Total annual debt repayments (EMIs) ÷ Gross annual income × 100; Benchmark commonly up to about 35% to 40%. Use the same period for both figures.
Debt-to-asset ratio: Total debt ÷ Total assets × 100; Lower is safer. Commonly below 50%.
Solvency ratio: Net worth ÷ Total assets × 100; Net worth = Total assets − Total liabilities. Solvency ratio + Debt-to-asset ratio = 100%.
Investment assets to gross income / net worth ratios: Investment assets ÷ Gross annual income; Investment assets ÷ Net worth; Show how much wealth is building up. Read them against the client's age and goals.
Net worth: Net worth = Total assets − Total liabilities; Shown on the balance sheet. A negative value means liabilities exceed assets.
Liquidity ratio (emergency fund ratio): Liquid assets ÷ Monthly non-discretionary cash expenses; Gives months of expenses covered. A common benchmark is about 3 to 6 months; follow the benchmark stated in the question.
Savings ratio: Annual savings ÷ Gross annual income; Check whether the question uses gross or net income. Use what it states.
Debt service ratio: Total monthly loan repayments (EMIs) ÷ Monthly gross income; Shows how much of income goes to debt. A common guideline is about 30 to 40 percent at most; use the question's figure.
Solvency ratio: Net worth ÷ Total assets; Shows the share of assets owned free of debt. Higher is stronger.
Debt to asset ratio: Total liabilities ÷ Total assets; Solvency ratio and debt to asset ratio add up to 1.
Gap: Gap = Required amount − Available amount; Use for insurance cover, emergency fund and goal corpus. A positive gap is a shortfall.
Surplus or deficit: Surplus = Total income − Total expenses (including EMIs); A negative result is a deficit. Use the same period (monthly or annual) for both.
Savings ratio: Savings ratio = Savings ÷ Gross income × 100; Check whether the question asks for gross or net income. Use what is stated.
Debt service ratio (EMI to income): Debt service ratio = Total monthly EMIs ÷ Gross monthly income × 100; A common guide is up to about 40%. It is a rule of thumb, not a law.
Housing EMI ratio: Housing EMI ratio = Home loan EMI ÷ Gross monthly income × 100; A common guide is about 30 to 35%. Compare only with the benchmark in the question.
Emergency fund: Emergency fund = Monthly essential expenses (including EMIs) × number of months; Three to six months is the usual guide. Use the months stated in the question.
Debt repayment priority: Repay the loan with the highest interest rate first; Credit card dues usually come first because the cost is very high.

Quick revision

The balance sheet is a snapshot at a date. The cash flow statement covers a period.
Net worth = total assets − total liabilities.
Surplus = total inflows − total outflows for the period.
Liquid assets are those quickly convertible to cash with little loss of value.
Home used for living is a personal-use asset, not an investment asset.
Short-term liabilities fall due within a year. Long-term liabilities fall due later.
Always match ratio formula components: same period, same income basis.
A ratio is judged against a benchmark and the client's goals, not in isolation.
Fix liquidity and emergency cover before pushing investments.
Prioritise paying off high-cost debt before low-cost debt when surplus is limited.
A gap means goal need is higher than resources. Close it by saving more, extending time or revising the goal.
Read the question for the period used, monthly or annual, before calculating.

Common mistakes

Using purchase price instead of current market value for assets. Fix: Always use the latest market value on the statement date unless the question says otherwise.
Adding liabilities to assets instead of subtracting. Fix: Keep two separate totals and subtract only at the end.
Treating the self-occupied house as an investment asset. Fix: If the client lives in it, it is a personal use asset. A house let out for rent can be an investment asset.
Calling a whole home loan long-term and ignoring the current portion. Fix: Put the principal due in the next 12 months under short-term liabilities and the rest under long-term.
Using total assets instead of liquid assets in the liquidity ratio Fix: Include only cash, bank balance and near-cash holdings. Leave out house, vehicle and retirement corpus.
Dividing liquid assets by annual expenses Fix: Divide annual essential expenses by 12 first, or multiply the result by 12.
Using total expenses, including discretionary spending, for the emergency fund ratio. Fix: Use non-discretionary monthly expenses unless the question says otherwise.
Mixing monthly and annual figures in one ratio. Fix: Convert both to the same period before dividing.
Using net income in one place and gross income in another. Fix: Use the income the formula needs. Debt service ratio normally uses gross income unless the question says otherwise.
Leaving EMIs out of expenses when computing surplus. Fix: Treat EMIs as a fixed outgo. Subtract them to get true surplus.

Exam tips

Check the period first: net worth is as on a date, surplus is for a period.
Watch for distractor items such as original cost or loan sanctioned, which should not be used.
Read whether the question wants a figure for one month or one year.
Questions on the difference between the two statements are usually definition-based. Remember snapshot versus flow.
A negative net worth is possible. Do not rule out an option because it is negative.
Watch qualifying words such as 'self-occupied' versus 'rented out'. They change the class of a property.
For loans, look for the 'due within 12 months' clue. It signals a split between short-term and long-term.
Always check whether the question wants the nature split (financial or physical) or the purpose split (liquid, investment, personal use).