Unit study guide · NISM Series XXI-A
Operational Aspects of Portfolio Managers
20 questions in this unit
What this unit covers
- A prospect has seen a PMS presentation showing past returns but has not reviewed the disclosure document or agreement. What is the most appropriate next step before committing?
- Under SEBI’s 16 July 2025 PMS master circular, how should the Most Important Terms and Conditions document be treated?
- A company applies for a PMS account. Its authorised signatory is identified, but the natural persons who ultimately own or control the company have not been established. Which issue remains?
- A distributor asks a new client to send the PMS contribution to the distributor’s personal bank account for onward transfer. The onboarding instructions identify a different authorised destination. What should the client do?
- Under the direct-onboarding provision in SEBI’s 16 July 2025 PMS master circular, which distinction is correct?
- A prospect is asked to sign an incomplete agreement so that fees and the investment approach can be entered later. What is the most appropriate response?
- A hypothetical agreement charges a performance fee only on value above a high-water mark of ₹120 lakh. With no cash flows or other fees, value falls to ₹108 lakh and later recovers to ₹118 lakh. What is the fee base at that later point?
- A hypothetical agreement charges 20% of value above an unchanged ₹120 lakh high-water mark. At the assessment date value before this fee is ₹132 lakh. No other hurdle, cash flow or fee applies. What performance fee is due?
- A portfolio is worth ₹100 lakh with a matching fee reference. The client adds ₹20 lakh, and market values do not change. Why should the new ₹120 lakh account value not automatically create a ₹20 lakh performance gain?
- A hypothetical one-year contract charges 20% only on gains above an 8% hard hurdle on opening capital of ₹80 lakh. Closing value before this fee is ₹90 lakh. No other fee or higher reference applies. What fee is due?
- On ₹100 lakh for one year, gross profit is ₹12 lakh. Contract H charges 20% only on profit above an 8% hurdle. Contract S charges 20% on all profit once that hurdle is exceeded. No other condition applies. How much more fee does S charge?
- A hypothetical contract charges a 1.5% annual management fee on a constant ₹120 lakh base using actual/365. What fee accrues over 73 days, excluding taxes and all other costs?
- A client starts a year with ₹100 lakh. Investment gains before expenses are ₹12 lakh, and total expenses deducted are ₹2 lakh. With no external cash flows, what is the net return?
- For an ordinary PMS withdrawal in the second year, apply the maximum 2% exit-load rate specified in SEBI’s 16 July 2025 master circular. What is that maximum on ₹20 lakh withdrawn? Exclude co-investment and special large-value accredited arrangements.
- A report says an account grew from ₹60 lakh to ₹90 lakh during a period when the client contributed ₹30 lakh. What further information is essential before accepting a claim of 50% investment return?
- A bank statement shows a ₹12,000 dividend receipt that is absent from the client’s portfolio ledger. Which action best addresses the discrepancy?
- A client has raised an eligible securities-service complaint with the portfolio manager’s designated grievance contact but remains dissatisfied. Which SEBI platform is relevant for escalation?
- A portfolio declines after a broad market fall. The client asks whether that loss alone proves the manager breached the agreement. Which response is most accurate?
- A distributor learns that a PMS approach has materially changed its investment universe. A prospect has only last year’s presentation. What is the appropriate response?
- A portfolio opens at ₹80 lakh. During the period it receives ₹20 lakh from the client, earns ₹8 lakh before fees, pays ₹10 lakh to the client and deducts ₹1 lakh of fees. What is the closing value?
Key ideas
From the practice bank · 1
A prospect has seen a PMS presentation showing past returns but has not reviewed the disclosure document or agreement. What is the most appropriate next step before committing?
Pre-investment review links the proposed service to the investor’s objectives and the actual contractual and risk disclosures. Identify what is missing: authority, eligible investments, fees, risk disclosures and rights on withdrawal or termination. Read the relevant documents and clarify inconsistencies before committing. Past performance should be evaluated in context, not used to replace the documents. Remember: A performance presentation is not a substitute for understanding the agreement.
Hint Common mistake: Allowing an attractive return figure to overshadow the service terms.
XXI-A-072From the practice bank · 2
Under SEBI’s 16 July 2025 PMS master circular, how should the Most Important Terms and Conditions document be treated?
A key-terms summary improves attention to important conditions while the complete agreement and disclosures remain relevant. Distinguish the purpose of a concise summary from the function of the full contract. The dated master circular adds an acknowledged MITC document. It does not turn that document into a performance assurance or erase the remaining terms. Remember: Read a key-terms summary alongside, not instead of, the complete service documentation.
Hint Common mistake: Assuming that a short summary contains every relevant condition.
XXI-A-073From the practice bank · 3
A company applies for a PMS account. Its authorised signatory is identified, but the natural persons who ultimately own or control the company have not been established. Which issue remains?
Customer due diligence for a legal entity separates its legal identity, authorised representatives and ultimate beneficial ownership or control. Verify the signatory’s authority, but do not assume that this establishes the ownership chain. Obtain and verify the appropriate ownership and control information under the applicable framework before treating the due-diligence process as complete. Remember: A person authorised to sign is not necessarily the person who ultimately owns or controls the customer.
Hint Common mistake: Stopping corporate due diligence after checking one representative’s identity.
XXI-A-074From the practice bank · 4
A distributor asks a new client to send the PMS contribution to the distributor’s personal bank account for onward transfer. The onboarding instructions identify a different authorised destination. What should the client do?
Funding controls should establish the authorised beneficiary and route before money is transferred. Compare the requested account with the verified onboarding instructions. Resolve the mismatch directly through authorised channels rather than relying on informal assurances or changing the transfer size. Remember: Verify where money is going before making an investment transfer.
Hint Common mistake: Treating personal familiarity with a distributor as proof of payment authority.
XXI-A-075From the practice bank · 5
Under the direct-onboarding provision in SEBI’s 16 July 2025 PMS master circular, which distinction is correct?
Direct access, distributor involvement and the timing and type of fees are different dimensions of a PMS arrangement. The named rule allows direct onboarding and restricts charges at that point except statutory charges. Read the continuing management agreement separately. Do not infer that the client receives every later service without a fee. Remember: Apply a fee restriction to the stage and charge category it actually covers.
Hint Common mistake: Turning a specific onboarding restriction into a claim of zero ongoing cost.
XXI-A-076From the practice bank · 6
A prospect is asked to sign an incomplete agreement so that fees and the investment approach can be entered later. What is the most appropriate response?
An informed commitment requires sufficiently complete and understood material terms. Identify the missing terms as material: the service’s investment scope and costs. Seek a completed document, verify consistency with disclosures and resolve questions before signing. This prevents reliance on unspecified future insertions. Remember: Do not delegate understanding of material agreement terms through a blank signature.
Hint Common mistake: Confusing an administrative shortcut with informed consent.
XXI-A-077From the practice bank · 7
A hypothetical agreement charges a performance fee only on value above a high-water mark of ₹120 lakh. With no cash flows or other fees, value falls to ₹108 lakh and later recovers to ₹118 lakh. What is the fee base at that later point?
A high-water-mark condition prevents charging a performance fee merely for recovering a previously suffered loss below the relevant reference. Compare the fee-assessment value directly with the unchanged ₹120 lakh mark. Fee base = max(₹118 lakh − ₹120 lakh, 0) = ₹0. The ₹10 lakh recovery from the trough is not the contractual fee base. Remember: A recovery is not automatically a new fee-bearing gain.
Hint Common mistake: Using the lowest intervening value as the performance-fee reference.
XXI-A-078From the practice bank · 8
A hypothetical agreement charges 20% of value above an unchanged ₹120 lakh high-water mark. At the assessment date value before this fee is ₹132 lakh. No other hurdle, cash flow or fee applies. What performance fee is due?
A fee percentage applies to the contractually defined fee base, not necessarily to total assets or total lifetime gains. Qualifying gain = ₹132 lakh − ₹120 lakh = ₹12 lakh. Performance fee = 20% × ₹12 lakh = ₹2.40 lakh. The value is explicitly stated before this fee, avoiding a circular calculation. Remember: Identify the fee base before applying the fee rate.
Hint Common mistake: Applying a performance percentage to total assets.
XXI-A-079From the practice bank · 9
A portfolio is worth ₹100 lakh with a matching fee reference. The client adds ₹20 lakh, and market values do not change. Why should the new ₹120 lakh account value not automatically create a ₹20 lakh performance gain?
External cash flows must be separated from investment performance, including when maintaining fee references. Reconcile the increase: ₹100 lakh + ₹20 lakh contribution = ₹120 lakh, with no market gain. Apply the contract’s relevant cash-flow adjustment. Do not infer a performance-fee base from the raw account-value increase alone. Remember: Client contributions enlarge a portfolio without being portfolio returns.
Hint Common mistake: Mistaking new capital for investment skill or fee-bearing profit.
XXI-A-080From the practice bank · 10
A hypothetical one-year contract charges 20% only on gains above an 8% hard hurdle on opening capital of ₹80 lakh. Closing value before this fee is ₹90 lakh. No other fee or higher reference applies. What fee is due?
A hard hurdle makes only the specified excess above the hurdle value eligible for the performance fee. Hurdle gain = ₹80 lakh × 8% = ₹6.40 lakh. Hurdle value = ₹86.40 lakh. Excess gain = ₹90 lakh − ₹86.40 lakh = ₹3.60 lakh. Fee = 20% × ₹3.60 lakh = ₹0.72 lakh. Remember: Under a hard hurdle, distinguish the hurdle gain from the gain above it.
Hint Common mistake: Charging on all profits after the hurdle has merely been crossed.
XXI-A-081From the practice bank · 11
On ₹100 lakh for one year, gross profit is ₹12 lakh. Contract H charges 20% only on profit above an 8% hurdle. Contract S charges 20% on all profit once that hurdle is exceeded. No other condition applies. How much more fee does S charge?
Hurdle terminology is not enough without the contract’s fee-base definition. These supplied methods charge on different profit amounts. H fee = (₹12 lakh − ₹8 lakh) × 20% = ₹0.80 lakh. S fee = ₹12 lakh × 20% = ₹2.40 lakh because the hurdle was crossed. Difference = ₹2.40 lakh − ₹0.80 lakh = ₹1.60 lakh. Remember: Compare fee formulas, not just the headline percentage and hurdle rate.
Hint Common mistake: Assuming that every contract with the same hurdle has the same fee outcome.
XXI-A-082From the practice bank · 12
A hypothetical contract charges a 1.5% annual management fee on a constant ₹120 lakh base using actual/365. What fee accrues over 73 days, excluding taxes and all other costs?
A time-apportioned fee needs a defined asset base, annual rate and day-count convention. Annual fee on the stated base = ₹1,20,00,000 × 0.015 = ₹1,80,000. Time fraction = 73/365 = 0.2. Fee = ₹1,80,000 × 0.2 = ₹36,000. Remember: Keep the asset base, fee rate and time fraction explicit.
Hint Common mistake: Using a rough month fraction instead of the stated day-count convention.
XXI-A-083From the practice bank · 13
A client starts a year with ₹100 lakh. Investment gains before expenses are ₹12 lakh, and total expenses deducted are ₹2 lakh. With no external cash flows, what is the net return?
For a no-external-flow holding period, net return reflects gains after the relevant expenses on the opening value. Closing value after expenses = ₹100 lakh + ₹12 lakh − ₹2 lakh = ₹110 lakh. Net return = (₹110 lakh − ₹100 lakh)/₹100 lakh = 10%. The expense amount is supplied directly rather than inferred from an annual fee ratio. Remember: Check which expenses are included before comparing gross and net performance.
Hint Common mistake: Subtracting an annual fee percentage mechanically when the actual expense base is unstated.
XXI-A-084From the practice bank · 14
For an ordinary PMS withdrawal in the second year, apply the maximum 2% exit-load rate specified in SEBI’s 16 July 2025 master circular. What is that maximum on ₹20 lakh withdrawn? Exclude co-investment and special large-value accredited arrangements.
A maximum rate is a ceiling for the relevant withdrawal category and period, not proof that every agreement charges that maximum. Use the named second-year ceiling: 2% × ₹20,00,000. The result is ₹40,000. An actual contractual charge may be lower, and the explicitly excluded special arrangements are not assessed. Remember: Distinguish a regulatory ceiling from the actual contractual charge.
Hint Common mistake: Applying a rate from the wrong holding period or to the whole account rather than the withdrawal.
XXI-A-085From the practice bank · 15
A report says an account grew from ₹60 lakh to ₹90 lakh during a period when the client contributed ₹30 lakh. What further information is essential before accepting a claim of 50% investment return?
Account-value growth includes both investment results and cash moving in or out. A return measure must separate them appropriately. The ₹30 lakh increase equals the contribution amount, but the timing and intra-period valuation history are not provided. Do not infer a 50% return from the opening and closing values alone. Use the data required for the chosen time-weighted or money-weighted measure. Remember: Account growth is not a return until external cash flows have been treated correctly.
Hint Common mistake: Dividing closing value by opening value despite material contributions.
XXI-A-086From the practice bank · 16
A bank statement shows a ₹12,000 dividend receipt that is absent from the client’s portfolio ledger. Which action best addresses the discrepancy?
Reconciliation compares independent records and resolves differences with evidence rather than forcing numbers to agree. Match the payer, security entitlement, date and amount against the client’s records. If the receipt is the client’s dividend, post the missing income and retain the audit trail. A reconciliation should explain the difference, not hide it. Remember: Investigate the economic cause of an exception before making a corrective entry.
Hint Common mistake: Using an unsupported balancing entry to make two records match.
XXI-A-087From the practice bank · 17
A client has raised an eligible securities-service complaint with the portfolio manager’s designated grievance contact but remains dissatisfied. Which SEBI platform is relevant for escalation?
Grievance handling distinguishes raising an issue with the responsible entity from escalating it through an appropriate complaint mechanism. The client has already used the entity’s designated grievance route. For an eligible unresolved complaint, SCORES provides a relevant SEBI escalation channel. Its use does not promise a particular recovery or replace every legal dispute forum. Remember: Use the designated entity route and then the appropriate escalation mechanism.
Hint Common mistake: Assuming that submitting a complaint guarantees compensation.
XXI-A-088From the practice bank · 18
A portfolio declines after a broad market fall. The client asks whether that loss alone proves the manager breached the agreement. Which response is most accurate?
A performance outcome does not by itself establish whether the manager fulfilled its contractual and other duties. Identify the alleged action or omission and compare it with the agreement, disclosures and applicable obligations. A market decline can occur without default, while a mandate breach can exist even in a rising market. Evidence about conduct is necessary. Remember: Assess performance and compliance separately before drawing a conclusion about responsibility.
Hint Common mistake: Treating either a gain or a loss as conclusive evidence of proper conduct.
XXI-A-089From the practice bank · 19
A distributor learns that a PMS approach has materially changed its investment universe. A prospect has only last year’s presentation. What is the appropriate response?
Investment descriptions must be consistent with the service actually offered, especially after a material change. Identify the difference between the historical presentation and the current investment universe. Use updated documents, explain the implications and reassess fit. Historical performance should not be presented as though it came from unchanged conditions if that is misleading. Remember: Update the information behind a recommendation when the investment approach changes.
Hint Common mistake: Relying on a familiar label instead of current underlying terms.
XXI-A-090From the practice bank · 20
A portfolio opens at ₹80 lakh. During the period it receives ₹20 lakh from the client, earns ₹8 lakh before fees, pays ₹10 lakh to the client and deducts ₹1 lakh of fees. What is the closing value?
A portfolio-value bridge separates external cash flows, investment results and charges. Add the inflows and investment result: ₹80 lakh + ₹20 lakh + ₹8 lakh = ₹108 lakh. Deduct withdrawal and fees: ₹108 lakh − ₹10 lakh − ₹1 lakh = ₹97 lakh. This reconciliation is not, by itself, a return calculation. Remember: Reconcile the account first, then select the appropriate performance measure.
Hint Common mistake: Treating all value changes as gains or losses from investing.
XXI-A-091