NISM Certifications · NISM-Series-X-B: Investment Adviser (Level 2)

Comparison of Products Across Categories: formula sheet

Full chapter guide

Key formulas

Net return (after cost): Net return ≈ Gross return − Cost (expense ratio, charges); Always compare products on net return, not the advertised gross figure.
Post-tax return: Post-tax return = Pre-tax return × (1 − tax rate); Use for interest-type income taxed at a flat rate. Example: 7% at 30% tax gives 4.9%.
Real return (approximate): Real return ≈ Nominal return − Inflation rate; An approximation. It shows whether the product protects purchasing power.
Risk–return link: Higher expected return ⇒ generally higher risk; A general principle, not a guarantee. Higher risk does not ensure higher return.
Suitability test: Suitable product = fits goal + horizon + risk profile + liquidity need + tax position; Failing any one condition makes the product unsuitable for that client.
Risk-return trade-off: Higher expected return ↔ higher risk (volatility); A principle about expectations. It does not guarantee higher actual return from riskier assets.
Total return: Total return = (Income + Price change) ÷ Opening price; Gold has income of zero. Debt held to maturity is mostly income.
Real return (approximate): Real return ≈ Nominal return − Inflation rate; The exact form is (1 + nominal) ÷ (1 + inflation) − 1. Use the approximation only when the question allows it.
Volatility measure: Risk ≈ Standard deviation of returns; A higher standard deviation means wider swings around the average return.
Typical ranking of volatility: Equity > Gold (broadly) > Long-term debt > Short-term debt/liquid; A general pattern, not a rule for every period. Alternatives and real estate vary by type.
Exit load amount: Exit load = Exit load % × Redemption value (NAV × units redeemed); Applies only if redeemed within the exit load period. Net proceeds = Redemption value − Exit load.
Expense ratio cost: Annual cost ₹ = Expense ratio % × Average net assets (or the investor's average holding); Charged daily within NAV, not billed separately. Direct plan ratio is lower than regular plan ratio.
Annual cost difference: Saving = (Regular ratio − Direct ratio) × Investment value; Use the same investment value for both plans.
ELSS lock-in: 3 years from the date of each investment; For SIPs, each instalment has its own 3-year lock-in.
Key tenure facts: PPF: 15 years | Tax-saver FD: 5 years | ULIP: 5 years | SCSS: 5 years | AIF Cat I and II: closed-ended, minimum tenure 3 years; Learn these as a fixed list. SCSS can be extended by a further 3 years.
Minimum investment ladder: Mutual fund (small SIP) < PMS (₹50 lakh) < AIF (₹1 crore); Direct equity has no scheme minimum; you can buy even one share. Accredited investors can be accepted below the PMS minimum, and AIF employees or directors of the manager can invest ₹25 lakh.
Ownership of assets: MF and AIF: investor owns units | PMS and direct equity: investor owns securities; This drives tax and transparency. PMS securities are in the client's own demat account.
AIF categories: Cat I = VC, SME, social, infrastructure | Cat II = PE, debt, no leverage except operational | Cat III = hedge, complex strategies, leverage allowed; Category III can be open-ended. A typical trap swaps Category II and III.
Governing regulations: MF: 1996 | AIF: 2012 | PMS: 2020; Direct equity is governed by exchange, broker and SEBI market rules, not a product regulation.
Transparency and liquidity order: Direct equity and MF: high | PMS: medium to high (own account) | AIF: lower, often locked in; Use this as a quick ranking when options look similar.
Product purpose test: Protection → term insurance; Growth + cover → ULIP; Retirement corpus → NPS/EPF/PPF; Lifelong income → annuity; Stable return → deposit/small savings/bond; Always start with the client's need, not the product.
ULIP lock-in: Minimum lock-in = 5 years; Mutual funds are generally redeemable anytime; ELSS has a 3-year lock-in.
Bond price and yield: Interest rates ↑ ⇒ bond prices ↓ (and the reverse); Applies to bonds and debt funds before maturity. Held to maturity, a bond repays face value if the issuer does not default.
Return certainty ranking: Bank deposit/small savings (fixed or set rate) > bonds held to maturity > debt funds > NPS/ULIP (market-linked); Fixed means rate is known, not that there is zero risk. Deposit insurance covers a limited amount per bank.
Annuity trade-off: Annuity income = fixed at purchase; real value falls with inflation; Choose annuity type (life, joint life, with return of purchase price) based on dependants.
Risk ceiling rule: Acceptable risk = lower of (risk capacity, risk tolerance); Risk required does not override this. If risk required is higher, adjust the goal, savings or horizon.
Horizon mapping (general guide): Short horizon → debt/liquid; medium → hybrid/balanced debt-heavy mix; long → equity-heavy; This is a rule of thumb, not fixed limits. Adjust for the client's risk profile and liquidity needs.
Post-tax return: Post-tax return = Pre-tax return × (1 − tax rate); Use it only as a simple comparison, and use the tax rate that applies to that product and holding period.
Required corpus gap: Gap = Future goal cost − Future value of existing investments; Used to test whether the goal is achievable at the client's acceptable risk.

Quick revision

Compare products on the same parameters: risk, return, liquidity, tenure, cost, tax and regulation.
Higher expected return usually comes with higher risk, but it is never guaranteed.
Liquidity means how quickly you can convert to cash without a large loss in value.
Check for lock-ins, exit loads and surrender charges before calling a product liquid.
Mutual funds, PMS and AIFs differ in regulation, minimum ticket size and investor type.
Direct equity gives control but needs time, skill and diversification by the investor.
Insurance is first for protection; do not treat it only as an investment.
Pension products suit long-term retirement goals, and withdrawal rules matter.
Compare returns after cost and tax, not before.
Suitability means the product fits the client's goal, horizon, risk capacity and risk tolerance.
Eliminate options that break a client constraint before comparing the rest.
Confirm current tax rates and limits in the latest workbook before the exam.

Common mistakes

Choosing the product with the highest return without checking risk. Fix: Treat return as one parameter. Check the client's risk capacity and tolerance before ranking.
Comparing pre-tax returns of products taxed differently. Fix: Convert to post-tax return using the stated tax rate before comparing.
Saying equity always beats debt over any period. Fix: Remember that higher return is expected, not assured. Over short periods equity can lose money and debt can do better.
Treating debt as risk-free. Fix: Debt carries interest rate risk, credit risk and reinvestment risk. Only sovereign paper has negligible credit risk.
Treating ELSS lock-in as 3 years from the first SIP instalment for all units. Fix: Each SIP instalment is locked in for 3 years from its own date.
Saying exit load is paid to the distributor or the AMC as income. Fix: Exit load is charged on redemption within a stated period and is mainly credited to the scheme, net of GST. The AMC may retain up to 0.05% of the redemption proceeds to cover administrative and operational expenses related to the exit load, as per the SEBI Mutual Funds Regulations. It is not paid to the distributor.
Saying PMS investors own units like a mutual fund. Fix: Remember PMS holds securities in the client's own name. Units belong to MF and AIF.
Mixing up AIF Category II and Category III. Fix: Category II does not use leverage beyond operational needs. Category III uses complex strategies and leverage, like hedge funds.
Treating a ULIP as the same as a mutual fund. Fix: A ULIP includes life cover, a 5-year lock-in and insurance charges. A mutual fund has none of these.
Calling NPS returns guaranteed. Fix: NPS returns depend on the chosen asset mix and market performance. Only the structure is regulated.

Exam tips

Scenario questions reward suitability. Read the client's horizon and risk level before looking at options.
When two options look close, the deciding factor is usually tax or cost. Convert to post-tax and net figures.
Watch for words such as 'most suitable', 'least liquid' and 'except'. Reversing them is a common way to lose marks.
NISM X-B has negative marking of 25% of the marks assigned to a question, so on a 2-mark caselet question a wrong answer costs more. Eliminate first and guess only when you can remove two options.
Do not memorise product features in isolation. Practise placing each product on the seven parameters.
Watch for absolute words such as 'guaranteed', 'risk-free' or 'always'. They usually mark a wrong option.
Match each asset to its dominant risk: debt to interest rate and credit, real estate to liquidity, equity to market risk.
Remember that gold has no income, while debt, real estate and dividend-paying equity do.