Operational Aspects of Investment Management: formula sheet

Key formulas

Order of onboarding

Identify client → KYC → Disclosures and agreement → Risk profile and data gathering → Advice

Advice never comes before KYC, agreement and risk profiling.

KYC purpose

KYC = identity proof + address proof + verification, recorded once and reused

Done through a KYC Registration Agency; supports anti-money laundering compliance.

CKYC identifier

CKYC record → KYC Identification Number (KIN)

CKYC is a central registry across the financial sector, different from the KRA system.

Client agreement

Written agreement between adviser and client before advice

Covers scope of services, fees, rights and duties, and grievance process.

Client suitability

Advice must be suitable to the client's risk profile, goals and circumstances

The adviser carries this responsibility, not the client.

Overall risk level

Overall risk level = lower of (risk capacity, risk tolerance)

A common rule of thumb for conflicts, not a mandated formula. Use it when the exam gives a high-low mismatch.

Risk capacity drivers

Capacity ↑ with: longer horizon, stable income, higher net worth, fewer dependants, low liabilities

These are objective, measurable factors.

Risk tolerance drivers

Tolerance = attitude, experience, behaviour in falls

Subjective. Assessed by questionnaire and discussion.

Suitability rule

Product risk ≤ client risk profile

Recommended products must not carry more risk than the client's profile allows.

Three tests of risk

Ability (capacity) + Willingness (tolerance) + Need (required)

Risk required is driven by the goal, not by the client's feelings.

Sequence of the advisory process

Relationship → Data gathering → Analysis → Goals and plan development → Implementation → Monitoring and review

Some texts show goal setting as a separate step before plan development. The order of data before recommendation never changes.

Types of client data

Quantitative = income, expenses, assets, liabilities, insurance; Qualitative = goals, risk attitude, horizon, preferences

Questions often ask you to classify an item as one or the other.

Core client statements

Net worth = Total assets − Total liabilities; Surplus = Income − Expenses

These come from the analysis step and are the base for gap assessment.

Goal definition

A good goal is specific, measurable, time-bound and prioritised

Goals should carry an amount, a date and a priority.

Equity cash settlement cycle

Settlement day = Trade day (T) + 1 working day

T+1 is the cycle for equity cash market trades. Holidays and weekends are not working days.

Three accounts for equity investing

Trading account + Demat account + Bank account

Trading places the order, demat holds the shares, bank moves the funds.

Depository structure

Investor → Depository Participant → Depository (NSDL or CDSL)

The investor deals only with the DP.

Plan choice for advisers

Direct plan = no distribution commission; Regular plan = includes distributor commission

Both plans invest in the same portfolio. The direct plan has a lower expense ratio and a separate NAV.

Adviser's role in execution

Adviser recommends; client executes

The adviser does not hold client funds or securities.

Minimum record retention period

Records kept ≥ 5 years

Applies to client records such as KYC, risk profile, suitability, agreement, advice and rationale, and fees. Never choose a shorter period.

Form of records

Physical or electronic form

Both are allowed. Electronic records must be secure, retrievable and not alterable without trace.

Core record set

KYC + risk profile + suitability + agreement + advice with rationale + communications + fees

If a question asks what an adviser must keep, the correct option usually includes the rationale for advice, not only the advice.

Review trigger rule

Review when: periodic date reached OR client circumstances change OR portfolio drifts from allocation

A review is not only calendar based. A major life event or goal change also calls for one.

AUA-based fee ceiling

Maximum fee = 2.5% × assets under advice (per annum, per client)

Applies across all services to that client. The fee actually agreed can be lower.

Fixed fee ceiling

Fixed fee ≤ ₹1,51,000 per client (family) per annum

The cap applies across all services. SEBI has revised this figure and reviews it periodically, so check the current figure.

One model per client

AUA-based fee OR fixed fee, never both

A common trap option offers a mix of both.

Advance fee limit

Advance fee ≤ the period SEBI prescribes for the fee model

The permitted advance period depends on the fee model and is set by SEBI. Check the current master circular and do not assume one universal period.

Performance fee

Success or performance-linked fee = not permitted

Fees may be charged only under the AUA or fixed fee model.

Complaint route

Adviser → SCORES → ODR (if still unresolved)

SCORES is SEBI's online complaint platform. The client must first approach the adviser.

Quick revision

• Onboarding comes first: identify the client and complete KYC before advising.
• Risk profiling must precede any recommendation.
• Risk tolerance is willingness to take risk; risk capacity is ability to bear loss.
• Suitability means advice must fit the client's profile, goals and situation.
• Follow the advisory process in sequence: understand client, analyse, recommend, implement, review.
• Advice and execution are separate roles; check what the regulations permit for advisers.
• Keep client records and advice documentation for the period the regulations require; verify the period in the workbook.
• Review the plan periodically and when the client's circumstances change.
• Fees must follow the regulatory framework and be disclosed upfront.
• Disclose conflicts of interest to the client.
• Know the grievance route: adviser first, then the escalation channels in the workbook.
• On 2-mark caselet questions, avoid blind guessing: a wrong answer costs 25% of 2 marks.

Common mistakes

• Treating CKYC and KRA as the same thing Fix: Remember KRA serves the securities market, while CKYC is a central registry across the financial sector with a KIN.
• Thinking advice can begin once the client verbally agrees Fix: A written client agreement is required before advice. Verbal consent is not a substitute.
• Treating risk capacity and risk tolerance as the same thing. Fix: Remember capacity is ability (facts, money) and tolerance is willingness (feelings). Test: can it be measured from a balance sheet? Then it is capacity.
• Choosing the higher of capacity and tolerance when they conflict. Fix: Use the lower of the two as the guide. Excess risk can cause real loss or panic selling.
• Placing product recommendation before data gathering Fix: Remember that goals, risk profile and finances must be known first. Recommendations come only in plan development.
• Treating implementation as the last step Fix: Monitoring and review follows implementation. The process is a cycle, not a one-time event.
• Thinking the investor opens a demat account directly with NSDL or CDSL Fix: Remember the chain: investor, DP, depository. The DP opens the account.
• Counting calendar days for settlement Fix: Count only working days after the trade day.
• Choosing a retention period shorter than five years, such as one or three years. Fix: Keep the two numbers apart. Certificate validity is 3 years. Adviser record retention is not less than 5 years.
• Thinking only the final advice must be recorded. Fix: Remember the rationale, risk profile and suitability assessment must also be kept. They prove why the advice was right for that client.

Exam tips

• Learn the sequence: KYC, agreement, profiling, then advice. Many questions are just sequence tests.
• Keep KRA and CKYC separate. Note the KIN belongs to CKYC.
• Questions marked 2 marks cost more when wrong because negative marking is 25% of the marks for that question, so skip if unsure between two close options.
• Watch for options that shift duty to the client or allow a verbal arrangement. These are usually traps.
• In caselets, check which onboarding step the adviser skipped before reading the options.
• Questions often give a short client story. Sort each fact into capacity or tolerance before reading the options.
• When capacity and tolerance differ, the safe answer is usually the lower one.
• Watch for options that recommend a product before profiling is done. These are wrong under the regulations.