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

Portfolio Manager: formula sheet

Full chapter guide

Key formulas

Discretionary PMS: Manager decides + manager executes, no per-trade approval; Manager acts on the client's behalf within the contract and client's objectives.
Non-discretionary PMS: Manager decides + client approves each transaction before it is executed; Prior consent for each deal is the key feature.
Advisory PMS: Manager advises + client decides and executes; The manager does not execute trades for the client.
PMS vs mutual fund: PMS = individual client portfolio; mutual fund = pooled units with one NAV; A PMS client holds securities directly through an individual account.
Governing document: Portfolio management agreement between manager and client; Sets out the type of service, scope, fees and risks.
Who can be registered: Portfolio manager = body corporate holding a SEBI certificate of registration; An individual cannot be registered as a portfolio manager. Watch for options that say individuals can.
Minimum net worth: Net worth ≥ ₹5 crore; Must be maintained at all times. Earlier regulations had a lower figure, so reject older numbers such as ₹2 crore.
Net worth composition: Net worth = paid-up capital + free reserves − accumulated losses − deferred revenue expenditure − miscellaneous expenditure not written off − similar items; Use the regulation's definition. Do not add or exclude items on your own.
Minimum client investment: Funds + securities (or either) accepted from a client at onboarding ≥ ₹50 lakh; The minimum is tested at the time of onboarding. Funds, securities or both can make up the amount.
Types of PMS: Discretionary = manager decides | Non-discretionary = client decides; Identify the type by who takes the investment decision. Investment advisory services are a separate service a portfolio manager may offer, not a third kind of PMS.
Returns: No guaranteed returns may be promised; Any promise or assurance of returns is prohibited. Past performance is not a guarantee.
Onboarding sequence: Disclosure document → KYC → Risk profiling → Agreement → Account opening; A safe order to remember. The disclosure document must reach the client before the agreement is signed.
Agreement type: Discretionary | Non-discretionary | Advisory; The agreement must state which service applies, because it fixes who takes the investment decision.
Accredited investor: Meets SEBI criteria + certified by an accreditation agency; Status comes from certification, not from the investor's own claim.
Minimum investment: Check the current SEBI minimum per client for PMS; Learn the exact current figure and any accredited investor relaxation from the latest NISM workbook. Do not guess.
Fixed fee: Fixed fee = AUM × fee rate % (for the period); Charged irrespective of performance. Pro-rate if the period is less than a year.
Performance fee with hard hurdle: Fee = profit share % × (ending value − (opening value × (1 + hurdle))); Charged only if the ending value is above the hurdle value. Otherwise the fee is nil.
Performance fee with soft hurdle: Fee = profit share % × total profit, if return ≥ hurdle; Once the hurdle is cleared, the share applies to the whole profit. Nothing is due if the hurdle is not met.
Performance fee with high water mark: Fee = profit share % × (ending value − high water mark), if positive; The high water mark is the highest value on which a fee was already paid. Nil fee if the value is at or below it.
Time-weighted rate of return: TWRR = [(1 + r₁) × (1 + r₂) × … × (1 + rₙ)] − 1; Each r is the return of a sub-period between cash flows. Chain the sub-periods by multiplying, not adding.
Types of PMS: Discretionary = manager decides | Non-discretionary = client consent needed | Advisory = advice only; Exam questions often ask who takes the investment decision or who executes it.
Minimum client investment: ₹50,00,000 per client (funds or securities); relaxed for accredited investors; Applies under the 2020 Regulations to discretionary and non-discretionary services, across all of the client's portfolios with the manager. It is not a requirement for the advisory service. Do not confuse it with the manager's net worth requirement.
Minimum net worth of portfolio manager: ₹5 crore, maintained at all times; This is a continuing requirement for the manager, needed at registration and afterwards. It is not a client limit.
Investment approach: Investment approach = broad outline of securities and instruments + objective; It is disclosed to clients. A manager may offer more than one.
Segregation rule: Manager's own funds ≠ client funds; client A ≠ client B; Separate bank accounts and separate client-wise records apply.
Returns rule: No guarantee or assurance of returns; Past performance may be shown with disclosures, but future returns cannot be promised.

Quick revision

PMS means a portfolio manager manages a client's funds or securities under a contract, within SEBI's Portfolio Managers Regulations, 2020.
Three service types: discretionary, non-discretionary and advisory. The key difference is who takes the investment decision.
In discretionary PMS, the manager decides and executes on the client's behalf. In non-discretionary, the client's consent is needed for each decision.
An advisory service gives advice only. The client makes and executes the decisions.
Portfolio managers need SEBI registration and must meet the net worth and minimum client investment rules in the workbook.
A written agreement is signed with every client, supported by a disclosure document.
Fee models are fixed, return-based or hybrid. Know how a hurdle rate affects the performance fee.
Client money and securities must be kept separate from the manager's own.
Performance is reported to clients regularly, using the method and frequency in the workbook.
On a wrong answer in X-A you lose 25% of that question's marks, so skip only when you cannot narrow the options.

Common mistakes

Saying non-discretionary PMS means the client takes the decision. Fix: The manager still gives the decision. The client only approves it before execution.
Thinking advisory PMS means the manager executes trades. Fix: In advisory PMS the manager only advises. The client decides and executes.
Choosing ₹2 crore as the minimum net worth. Fix: For the 2020 regulations, use ₹5 crore. Treat ₹2 crore as an outdated figure.
Counting only cash towards the ₹50 lakh client minimum. Fix: The minimum can be met in funds, securities or both at onboarding. Add them together and compare with ₹50 lakh.
Treating the disclosure document and the agreement as the same document. Fix: The disclosure document informs before signing. The agreement is the binding contract.
Thinking the client can sign first and receive the disclosure document later. Fix: Remember that the client must have the disclosure document before entering the agreement.
Charging the performance fee on the whole profit under a hard hurdle. Fix: Hard hurdle means the fee is only on the excess over the hurdle. Soft hurdle means the fee is on the whole profit once the hurdle is cleared.
Charging a performance fee when the value recovers to the old peak but not beyond it. Fix: Compare the ending value with the high water mark. Only the amount above it is chargeable.
Treating PMS like a mutual fund with pooled units. Fix: Remember that PMS holds securities in the client's own portfolio, while a mutual fund pools money and issues units.
Mixing up ₹50,00,000 and ₹5 crore. Fix: ₹50,00,000 is the client's minimum investment. ₹5 crore is the manager's minimum net worth.

Exam tips

Reduce every type to three words: decide, approve, execute. Write them on your rough sheet at the start.
Watch for scenario questions with no type named. The clue is usually a phrase like 'with the client's prior consent' or 'client places the order'.
Expect distractors that swap the features of discretionary and non-discretionary PMS. Read both ends of the sentence.
Under 25% negative marking on NISM-Series-X-A, a wrong answer costs a quarter of the question's marks. Eliminate two options before guessing.
Study this topic with the SEBI Portfolio Managers Regulations, as questions on the types often blend with agreement and regulatory rules.
Memorise the two figures: ₹5 crore for the manager's net worth and ₹50 lakh for the client minimum. Many questions are only a number check.
Check which regulation version a question refers to. The 2020 regulations replaced the 1993 ones, so reject old figures.
Read options for absolute words such as 'guaranteed', 'any individual' or 'only once'. These are usually wrong.