Investments
11 questions. Each answer is explained.
Question 1 of 10Practice · Series XXI-A — Portfolio Management Services (PMS) Distributors
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Learn these topics
More units in NISM Series XXI-A
- Introduction to Securities Markets7
- Investing in Stocks15
- Investing in Fixed Income Securities8
- Derivatives7
- Collective Investment Vehicles8
- Role of Portfolio Managers15
- Operational Aspects of Portfolio Managers20
- Portfolio Management Process22
- Performance Measurement and Evaluation of Portfolio Managers15
- Taxation7
- Regulatory, Governance and Ethical Aspects of Portfolio Managers15
Exam format
| Questions | 100 · 1 mark each |
|---|---|
| Duration | 120 min · 2 hours |
| Pass mark | 60% · 60 of 100 marks |
| Negative marking | 10% · 0.1 marks off per wrong answer |
| Certificate validity | 3 years · from the date of the examination |
| Marks for this unit | Not published by NISM |
NISM Series XXI-A Portfolio Management Services (PMS) Distributors
Exam rules read on NISM's site on 3 October 2026. Check the current rules on NISM's site (opens in a new tab)
What these answers assume, and when it was last checked
Each question uses the rules listed below. We last checked them on 5 September 2026. A Budget or SEBI circular can change a rate, lot size or expiry day. If a rule changes before your exam, treat the linked questions as out of date and check NISM's current workbook.
- NSE uses Tuesday expiry and BSE uses Thursday expiry. This applies from 1 September 2025.
- The January 2026 index lot sizes are NIFTY 65, BANKNIFTY 30, FINNIFTY 60, MIDCPNIFTY 120 and NIFTYNXT50 25.
- The October 2024 SEBI framework sets a minimum index contract value of Rs 15–20 lakh. Each exchange may list one weekly benchmark index.
- Option buyers pay the premium upfront from 1 February 2025. A short index option has an extra 2% Extreme Loss Margin on expiry day from 20 November 2024.
- Equity short-term capital gains are taxed at 20%. Long-term gains are taxed at 12.5% above Rs 1.25 lakh. Both rates apply from 23 July 2024.
- F&O income is non-speculative business income in ITR-3. NSE equity derivatives trade from 9:15 a.m. to 3:40 p.m.
- The final ten-minute session began on 3 August 2026. It aligns with the cash market Closing Auction Session.
- Most Securities Transaction Tax questions test the base and who pays. On an option sale, it is the premium and the seller pays. On a futures sale, it is the traded value and the seller pays.
- On exercise, Securities Transaction Tax uses intrinsic value: settlement price minus strike price. The buyer pays it.
- Two questions test the current rate. From 1 April 2026, option sales carry 0.15% on the premium and futures sales carry 0.05% on traded price. The earlier rates were 0.10% and 0.02% from 1 October 2024.
- This section uses the T+1 rolling settlement cycle. Obligations are fixed on T+1. A short delivery goes to buy-in auction on T+1 and settles on T+2.
- The trade-for-trade surveillance segment uses direct close-out. Funds pay in by 10:30 a.m. and pay out on or after 1:30 p.m. on settlement day.
- Securities pay in to the settlement pool by 10:30 a.m. They pay out directly to the client’s demat account by 3:30 p.m.
- The 3:30 p.m. deadline replaced 1:30 p.m. under SEBI’s 10 October 2024 circular. Direct client credit was required by SEBI’s 5 June 2024 circular.
- The optional T+0 cycle trades until 1:30 p.m. Obligations are fixed by 2:30 p.m. on the trade day. An early pay-in shortage is closed out directly.
- Cash-market Value at Risk margin is six times exponentially weighted moving-average volatility. It has a 9% floor for Group I, a 21.5% floor for Group II, and a fixed 50% or 75% level for Group III.
- Extreme Loss Margin is 3.5% for a share and 2% for a broad-market-index exchange traded fund. Mark-to-market margin is collected before the next day’s trading. The trade-for-trade segment has 100% upfront margin.
- Close-out uses the higher of the highest price from trade day to auction day and 20% above the auction day’s official close.
- A funds shortage costs 0.07% a day. The trading facility is withdrawn at a shortage of Rs 5 lakh or more.
- SCORES allows 21 calendar days, then two 15-day review levels. Online Dispute Resolution moves from conciliation to arbitration after the market participant and SCORES steps.
- At NSE, the Investor Protection Fund limit is Rs 35 lakh per investor for each defaulting or expelled member. This applies to claims arising after 13 August 2024.
- A Basic Services Demat Account has no annual maintenance charge up to Rs 4 lakh of holdings. It costs up to Rs 100 above that, until the Rs 10 lakh eligibility ceiling. These slabs apply from 1 September 2024.
- The rupee pairs are USD-INR, EUR-INR, GBP-INR and JPY-INR. The cross-currency pairs are EUR-USD, GBP-USD and USD-JPY.
- Each contract covers 1,000 units of the foreign currency, except JPY-INR. JPY-INR covers 100,000 yen and is quoted in rupees per 100 yen.
- The tick is 0.25 paise, or Rs 0.0025. It equals Rs 2.50 a contract.
- Rupee pairs trade from 9:00 a.m. to 5:00 p.m. A monthly contract stops trading at 12:30 p.m. two working days before the expiry month’s last business day.
- Final settlement is in cash at the FBIL reference rate on expiry day. FBIL, Financial Benchmarks India, has published this rate in place of the Reserve Bank since 2018. Premium-style European options are quoted in rupees. The buyer pays the premium in cash on T+1.
- Daily settlement is on T+1 and final settlement is on T+2.
- NSE Clearing circular 026/2020 sets SPAN margin plus Extreme Loss Margin. The futures margin is 0.50% for USD-INR, 0.15% for EUR-INR, 0.25% for GBP-INR and 0.35% for JPY-INR. A short option has 0.75%. These figures apply from 1 June 2020.
- A USD-INR client may hold 6% of total open interest or USD 20 million, whichever is higher. A trading member may hold 15% or USD 100 million.
- A resident user has one USD 100 million equivalent limit across all rupee pairs and exchanges. No document is needed below that limit, but a valid underlying contracted exposure must still exist. This clarification applies from 3 May 2024.
- The currency segment has no Securities Transaction Tax.
The exam figures (questions, time, pass mark, negative marking and certificate validity) come from NISM's own pages, read on 3 October 2026. Timed practice uses the same figures. Study with the official workbook as well.
The written-out answers on this page are hidden while your timed set runs.
All 11 questions on Investments, with answers
Q1A client retains ₹15,000 from monthly income and later uses it to buy a bond. Which description correctly separates the two actions?
Option A. Only money used to buy equity can be called an investment.
Why it is wrong: Debt instruments can also be investments. Equity ownership is not a necessary condition.
Option B. Both actions are investing because the money was not spent.
Why it is wrong: Money left unspent is a saving, but that fact alone does not describe an investment decision.
Option C. Retaining the surplus is saving, and buying the bond is investing. — Correct answer
Option D. Buying the bond is saving, while retaining the surplus is borrowing.
Why it is wrong: No borrowing occurs in the stated transactions. Buying the bond deploys the saved money.
Answer: C. Saving is the part of income not consumed. Investing concerns the assets into which available money is placed. Identify the action involving income: the client does not consume ₹15,000, creating a saving. Identify the action involving an asset: the bond purchase puts that money to work for an expected return, with the relevant risks. Remember: Distinguish the creation of a surplus from the subsequent use of that surplus.
Hint, shown before you answer in practice mode: Common mistake: Treating saving and investing as mutually exclusive labels for the same person.
XXI-A-001easyapplication
Q2A buyer enters a share solely because a rumour may lift its price tomorrow. No assessment of business value is made. What most directly characterises this decision?
Option A. Fundamental valuation using business cash flows
Why it is wrong: The question explicitly says business value has not been assessed.
Option B. Capital preservation through liability matching
Why it is wrong: There is no matching of an asset’s cash flows to a liability, and the rumour-driven trade can lose value.
Option C. Speculation on a short-term price movement — Correct answer
Option D. Diversification across unrelated sources of risk
Why it is wrong: A reason for buying one share does not establish a diversified portfolio.
Answer: C. Investment and speculation are distinguished by the basis and nature of the decision, not simply by whether the instrument is a share. The buyer is relying on a near-term market reaction to a rumour. A short holding period alone would not settle the classification, but the absence of an investment thesis and reliance on a price catalyst support speculation here. Remember: Look at why a position is taken, rather than labelling every share purchase an investment.
Hint, shown before you answer in practice mode: Common mistake: Using the instrument’s name instead of the decision process to identify speculation.
XXI-A-002easyapplication
Q3A client must pay an essential ₹8 lakh bill in four months and cannot replace a shortfall. Which objective should dominate the assessment of money earmarked for that bill?
Option A. Preserving the required capital and having it available on time — Correct answer
Option B. Maximising the number of holdings so the money is spread widely
Why it is wrong: A holding count does not by itself establish capital protection or availability on the due date.
Option C. Maximising long-term growth so the money becomes as large as possible
Why it is wrong: The liability is near and essential, so pursuing uncertain growth cannot override its funding constraint.
Option D. Matching the highest return that similar portfolios earned recently
Why it is wrong: Recent performance says little about whether the required amount will be available in four months.
Answer: A. Capital preservation and liquidity become central when money is assigned to a near-term liability with little capacity for loss. The date and required amount are fixed, while the client cannot readily absorb a deficit. Assess loss exposure and access to money first. This objective does not, by itself, identify a universally suitable product. Remember: An essential liability can constrain risk even when a client likes high-return investments.
Hint, shown before you answer in practice mode: Common mistake: Choosing an investment from past returns without considering the consequences of a shortfall.
XXI-A-003easyapplication
Q4Which requirement most clearly describes a current-income objective rather than a capital-appreciation objective?
Option A. Seeking a temporary rise in price before the next trading session
Why it is wrong: A near-term price gain is not a recurring-income objective.
Option B. Seeking periodic cash receipts to support living expenses — Correct answer
Option C. Seeking the largest possible sale value after twenty years
Why it is wrong: The focus is growth in terminal capital rather than cash receipts now.
Option D. Seeking to reduce tax on gains realised after a long holding period
Why it is wrong: Tax efficiency on a later gain is not the same as periodic cash income for current spending.
Answer: B. Current income focuses on cash flows received while an asset is held. Capital appreciation focuses on an increase in its value. Identify whether the client needs money to spend during ownership or a larger asset value later. Periodic receipts address the first requirement, although their reliability, timing and tax treatment still need assessment. Remember: Income and appreciation are different components of total return.
Hint, shown before you answer in practice mode: Common mistake: Assuming that a large quoted yield alone proves an income source is safe.
XXI-A-004easyconceptual
Q5A client requires a real return of 3% when expected annual inflation is 5%. Using the exact compound relationship, what nominal annual return is required?
Option A. 8.00%
Why it is wrong: Adding the two rates gives an approximation that omits their interaction.
Option B. 2.00%
Why it is wrong: Subtracting the real target from inflation does not produce a nominal return.
Option C. 8.15% — Correct answer
Option D. 1.94%
Why it is wrong: Dividing 1.05 by 1.03 gives about 1.94%, but the required nominal factor is their product, not their ratio.
Answer: C. A nominal return must provide both the desired increase in purchasing power and compensation for inflation. Use 1 + nominal return = (1 + real return) × (1 + inflation). Substitute 1.03 × 1.05 = 1.0815. Subtract 1 and convert to a percentage to obtain 8.15%. Remember: Use the compound relationship when an exact real-versus-nominal answer is required.
Hint, shown before you answer in practice mode: Common mistake: Adding rates even when the question asks for the exact result.
XXI-A-005mediumnumerical
Q6An analyst uses a nominal risk-free rate of 6% and adds a 4 percentage-point risk premium. Under this stated model, what required return results?
Option A. 6.24%
Why it is wrong: This treats 4% as a percentage increase in the six-percent rate rather than a four-point premium.
Option B. 4%
Why it is wrong: This omits the risk-free component of the required return.
Option C. 10% — Correct answer
Option D. 2%
Why it is wrong: Subtracting the premium would reduce the return required for bearing risk.
Answer: C. A risk premium is additional required compensation for exposure beyond the selected risk-free reference. The question specifies an additive model, so no further compounding convention is needed. Required return = 6% + 4 percentage points = 10%. This is a required return, not a promised realised return. Remember: Keep a percentage-point premium distinct from a percentage change in a rate.
Hint, shown before you answer in practice mode: Common mistake: Treating the required return as a guaranteed outcome.
XXI-A-006easynumerical
Q7Two firms have the same operating assets and sales uncertainty. One finances half its assets with fixed-interest debt. Which additional risk to its shareholders most directly arises from that financing choice?
Option A. Exchange-rate risk caused by overseas sales
Why it is wrong: The question does not introduce foreign-currency revenues or obligations.
Option B. Liquidity risk caused by infrequent share trading
Why it is wrong: Nothing is stated about trading volumes or the ability to sell the shares.
Option C. Financial risk from fixed financing commitments — Correct answer
Option D. Business risk caused by a new product market
Why it is wrong: The operating assets and sales uncertainty are held the same in the comparison.
Answer: C. Business risk arises from operations. Financial risk reflects how financing commitments affect the residual return to equity. Hold the operating business constant as instructed. The distinguishing feature is fixed-interest debt, which must be serviced before residual earnings accrue to shareholders. Remember: Separate the risk of the business from the extra risk introduced by leverage.
Hint, shown before you answer in practice mode: Common mistake: Attributing every difference in shareholder risk to the operating business.
XXI-A-007mediumapplication
Q8A portfolio holds a security with a recent indicative value of ₹200, but the only executable bid for the required quantity is ₹184. Which risk is most directly illustrated?
Option A. Liquidity risk — Correct answer
Option B. Reinvestment risk
Why it is wrong: No maturing cash flow or change in reinvestment rates is described.
Option C. Financial leverage risk
Why it is wrong: The security’s financing structure is not the reason given for the discount.
Option D. Currency risk
Why it is wrong: The example contains no change between currencies.
Answer: A. A displayed or estimated value is not always an executable price for a particular transaction size. The investor needs to sell a specified quantity, so the available executable bid matters. The discount illustrates the cost of obtaining liquidity. It need not indicate that the issuer has defaulted. Remember: Evaluate exit depth and executable prices, not only a recent valuation.
Hint, shown before you answer in practice mode: Common mistake: Assuming that an indicative price guarantees a sale at that price.
XXI-A-008easyapplication
Q9A foreign asset gains 5% in its local currency. Over the same period, one unit of that currency falls 5% in rupee value. What is the unhedged rupee return, ignoring income, costs and tax?
Option A. −5.00%
Why it is wrong: This counts only the currency movement and ignores the local asset gain.
Option B. 0.00%
Why it is wrong: Adding 5% and −5% ignores the interaction between the two return factors.
Option C. 10.00%
Why it is wrong: This treats a fall in the foreign currency’s rupee value as a gain.
Option D. −0.25% — Correct answer
Answer: D. The home-currency value of a foreign asset depends jointly on its local price and the exchange rate. Let the starting rupee value be ₹100. A 5% asset gain makes its local-currency value equivalent to ₹105 at the old exchange rate. Apply the new exchange-rate factor: ₹105 × 0.95 = ₹99.75. The loss is ₹0.25 on ₹100, or 0.25%. Remember: Multiply gross asset and currency return factors for an unhedged foreign investment.
Hint, shown before you answer in practice mode: Common mistake: Adding the two percentage changes as though the interaction were zero.
XXI-A-009hardnumerical
Q10A client owns one office property and may need a small part of its value at short notice. Which feature creates the clearest difficulty compared with selling a small number of exchange-traded units?
Option A. Rent received automatically removes the need for an emergency reserve.
Why it is wrong: Rental receipts may not match the timing or size of an unforeseen cash need.
Option B. A physical asset cannot face a fall in price.
Why it is wrong: Physical assets can lose value, including when an urgent sale is required.
Option C. The property necessarily has no market value until it is sold.
Why it is wrong: An unsold property can still have an estimated market value.
Option D. The property may be difficult to sell in small portions quickly. — Correct answer
Answer: D. Divisibility concerns whether an asset can be sold in convenient portions. Liquidity concerns the time and price impact of conversion to cash. The client needs only part of the property’s value rather than wishing to sell the entire asset. A direct property holding may not permit that partial sale, and arranging a full sale or borrowing takes time and involves costs. Remember: Assess divisibility and liquidity separately from an asset’s estimated value.
Hint, shown before you answer in practice mode: Common mistake: Equating high net worth with immediately available cash.
XXI-A-010mediumapplication
Q11A note promises repayment of principal at maturity only if its issuer meets its obligations. Which risk remains even when the market-linked payoff cannot be negative?
Option A. Only equity-market risk remains
Why it is wrong: The question specifically identifies repayment as conditional on issuer performance.
Option B. Only reinvestment risk remains
Why it is wrong: Reinvestment risk concerns future deployment of cash, not the issuer’s ability to deliver it.
Option C. Issuer credit risk — Correct answer
Option D. No risk remains because the payoff formula has a floor
Why it is wrong: A payoff floor does not remove default risk or necessarily protect an early sale price.
Answer: C. A contractual payoff design and the creditworthiness of the party promising that payoff are separate considerations. The market-linked calculation limits one source of loss under the contract. The issuer must still honour the obligation. Also, a maturity promise should not be assumed to establish an equivalent early-exit value. Remember: Read who provides protection, when it applies and what obligations support it.
Hint, shown before you answer in practice mode: Common mistake: Treating a protected payoff formula as protection against every type of loss.
XXI-A-011mediumapplication
Investments: common questions
How many practice questions are there on Investments?
11 questions, all written out on this page with the correct answer and why each other option is wrong. This unit is one of the 12 practice topics for NISM Series XXI-A, which has 150 questions in total.
Are these real NISM Series XXI-A questions on Investments?
No. LearnNifty wrote every question from NISM's public syllabus. NISM does not publish its question bank, so nobody can offer you the real paper. Use these questions to check that an idea has gone in. Use the official NISM workbook to see what is examined.
Does negative marking apply to NISM Series XXI-A?
Yes. NISM takes off 10% of a question's marks for a wrong answer. On a 1-mark question that is 0.1 marks off. A blank question earns nothing and loses nothing, so a wrong guess costs marks on this paper. Timed practice here uses the same rule.
Are these practice questions kept up to date?
Each question is written against the rules printed on this page, last checked on 5 September 2026. A Budget or a SEBI circular can change a rate, a lot size or an expiry day. If one of those rules changes before your exam, treat the questions that use it as out of date. Then check NISM's current workbook.
Introduction to Securities Markets
7 questions on Introduction to Securities Markets. Its quiz opens on that unit.
Open Introduction to Securities Markets