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

Mr. Arvind Rao, aged 35, has a long investment horizon and high risk tolerance, but has a stated need to keep Rs 5,00,000 readily available for a possible medical emergency. Which element of his investment policy statement does this need primarily represent?

This is a liquidity constraint. The client needs Rs 5,00,000 accessible at short notice for emergencies, so that amount must be held in liquid, low-volatility instruments, limiting how much can be invested in illiquid or volatile assets despite his high risk tolerance.

  1. AReturn objective
  2. BLiquidity constraintCorrect
  3. CTax constraint
  4. DUnique circumstance of regulatory nature

Explanation

A need to access a sum quickly at short notice is a liquidity requirement, which is a constraint on the portfolio. It restricts how much can be put in illiquid or volatile assets. It is not a return target or tax matter.

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