NISM Certifications Investment Advisory and Wealth Management Syllabus

What is the formula for the Future Value of an ordinary annuity?

FV = P x [((1 + r)^n - 1) / r], where P is the periodic payment, r the periodic rate, and n the number of periods.

What is the difference between an ordinary annuity and an annuity due?

In an ordinary annuity, payments occur at the end of each period; in an annuity due, payments occur at the beginning of each period (so annuity due has one extra period of compounding/discounting).

What is the formula relating nominal rate to effective annual rate (EAR)?

EAR = (1 + i/m)^m - 1, where i is the nominal annual rate and m is the number of compounding periods per year.

What is the 'Rule of 72'?

An approximation for the number of years to double an investment: Years to double = 72 / annual rate of return (in %).

What is real rate of return and how is it approximated?

Real return is return adjusted for inflation. Approximately: Real return ≈ Nominal return - Inflation. Exact: (1 + nominal)/(1 + inflation) - 1.

What is goal-based financial planning?

An approach that structures investments around specific, quantified life goals (e.g., retirement, child's education, home purchase) each with its own time horizon, target amount, and asset allocation.

When quantifying a future financial goal, why must inflation be incorporated?

Because the goal's cost will rise over time; the present cost must be grown by the inflation rate to its future value to determine the actual target corpus needed.

What is the human life value (HLV) approach to determining life insurance need?

It estimates insurance need as the present value of the individual's future income (net of self-consumption) lost to dependents upon death - capitalising future earnings.

What is the 'needs analysis' approach to life insurance?

It calculates insurance cover required by summing the family's future financial needs (liabilities, goals, living expenses) and subtracting existing assets/resources.

What is the fundamental difference between term insurance and endowment insurance?

Term insurance is pure protection (death benefit only, no maturity value, low premium); endowment combines protection with savings (pays on death or maturity, higher premium).

What are the four main techniques of risk management?

Risk avoidance, risk reduction (control), risk retention, and risk transfer (e.g., insurance).

Why is health insurance important in a financial plan?

It transfers the risk of large, unpredictable medical expenses to the insurer, protecting accumulated savings and goals from being depleted by a health emergency.

What is the principle of indemnity in insurance?

The insured is compensated only for the actual loss suffered (restored to pre-loss financial position) and cannot profit from a claim; applies to general/non-life insurance.

Name the major asset classes considered in wealth management.

Equity, fixed income (debt/bonds), cash and cash equivalents, real estate, and commodities (e.g., gold); alternatives are sometimes added.

How do equity and debt asset classes compare on risk and return?

Equity offers higher expected long-term returns with higher volatility/risk; debt offers lower, more stable returns with lower risk and provides income and capital preservation.

What is the typical risk-return characteristic of cash/money market instruments?

Lowest risk and lowest return; high liquidity and capital safety, but vulnerable to inflation eroding real value.

What is strategic asset allocation?

Setting a long-term target mix of asset classes based on the investor's goals, risk profile, and time horizon, with periodic rebalancing back to the target weights.

What is tactical asset allocation?

Short-term deliberate deviations from the strategic allocation to exploit market opportunities or views, intending to add return; it is active and temporary.

What is portfolio rebalancing and why is it done?

Realigning portfolio weights back to target allocation after market movements; it controls risk, enforces buy-low/sell-high discipline, and keeps the portfolio aligned with the investor's risk profile.

What does diversification achieve in a portfolio?

It reduces unsystematic (specific) risk by combining assets whose returns are not perfectly correlated, lowering overall portfolio volatility without proportionally lowering expected return.

What is the difference between systematic and unsystematic risk?

Systematic (market) risk affects the whole market and cannot be diversified away; unsystematic (specific) risk is unique to a security/sector and can be reduced through diversification.

What does 'beta' measure in portfolio theory?

Beta measures a security's or portfolio's sensitivity to market movements (systematic risk). Beta = 1 moves with the market; >1 more volatile than market; <1 less volatile.

State the Capital Asset Pricing Model (CAPM) formula.

Expected return = Rf + Beta x (Rm - Rf), where Rf is the risk-free rate, Rm the expected market return, and (Rm - Rf) the market risk premium.

What does standard deviation represent as a risk measure?

It measures the total volatility (dispersion) of a portfolio's returns around its mean; higher standard deviation indicates higher total risk.

What is the Sharpe ratio and what does it measure?

Sharpe ratio = (Portfolio return - Risk-free rate) / Standard deviation. It measures excess return per unit of total risk; higher is better risk-adjusted performance.

What is the Treynor ratio?

Treynor ratio = (Portfolio return - Risk-free rate) / Beta. It measures excess return per unit of systematic (market) risk.

What does Jensen's Alpha measure?

Alpha is the portfolio's actual return minus its CAPM-expected return; a positive alpha indicates the manager added value (outperformance) after adjusting for risk.

What is the difference between time-weighted and money-weighted rate of return?

Time-weighted return removes the effect of cash flows and measures the manager's performance; money-weighted (IRR) reflects the investor's actual experience including the timing and size of cash flows.

How is long-term capital gains tax on listed equity shares/equity mutual funds treated in India (holding period and rate)?

Listed equity/equity-oriented funds held over 12 months are long-term; LTCG is taxed at 10% (now 12.5% post latest amendment) on gains exceeding the annual exemption limit (Rs. 1 lakh, raised to Rs. 1.25 lakh), without indexation.

What is the difference between estate planning tools 'Will' and 'Trust'?

A Will directs distribution of assets after death and takes effect on death (may require probate); a trust transfers assets to a trustee to manage for beneficiaries and can operate during life and after death, often avoiding probate and offering control/continuity.

In behavioural finance, what is 'loss aversion' and how does it affect investors?

Loss aversion is the tendency to feel the pain of losses more strongly than the pleasure of equivalent gains, leading investors to hold losing investments too long and sell winners too early.