NISM-Series-X-A: Investment Adviser (Level 1) Certification Workbook

Comprehensive vocabulary flashcards covering personal finance, investment products, portfolio theory, and regulations based on the NISM Investment Adviser Level 1 workbook.

Financial Planning

The process of streamlining the income, expenses, assets, and liabilities of a household or individual to take care of both current and future need for funds.

Time Value of Money (TVM)

The principle that the value associated with the same sum of money received at various points on the timeline is higher in earlier periods compared to later time periods because of its potential to earn returns.

Present Value (PV)

The amount that would be paid today for a cash flow that comes in the future, calculated using the formula: $PV = \frac{C}{(1+r)^n}$ where $C$ is the future cash flow, $r$ is the rate of return, and $n$ is the number of compounding periods.

Compounded Annual Growth Rate (CAGR)

The underlying compound interest rate that equates the end value of an investment with its beginning value, computed as: $CAGR = \text{((End Value/Beginning Value)}^{(1/n)}\text{)} - 1$

Ordinary Annuity

A series of regular payments made at the end of each relevant time period.

Annuity Due

A series of regular payments made at the start of each period, which increases the value of the annuity compared to an ordinary annuity because money is received earlier.

Perpetuity

A cash flow from an investment that provides a constant stream for an unlimited time period, with a present value calculated as: $PV = \frac{C}{r}$

Net-worth

The assessment of the financial well-being of a household calculated as: $\text{Total Assets} - \text{Total Liabilities}$

Savings Ratio

The percentage of annual income that a person saves, calculated as: $\frac{\text{Savings per year}}{\text{Annual Income}}$

Liquidity Ratio

A measure of how well a household is equipped to meet its expenses from short-term assets, calculated as: $\frac{\text{Liquid Assets}}{\text{Monthly Expenses}}$

Revolving Credit

The situation when a credit card user does not pay the entire amount by the due date and carries the balance over into following business cycles, incurring interest charges.

Credit Score

A three-digit number (e.g., CIBIL ranging from 300 to 900) assigned to an individual by a credit information bureau based on their credit behavior and repayment history.

Amortisation

The process of repaying the capital borrowed over a period of time through Equated Monthly Instalments (EMI), consisting of both interest and principal components.

Moratorium

A period during which repayments on a loan are stopped temporarily due to extraordinary factors such as a crisis, though interest continues to accrue.

Hypothecation

A term for creating a charge against a movable asset where the asset remains with the borrower, but the lender can repossess it in case of default.

Avalanche Strategy

A debt repayment strategy that involves paying off loans with the highest interest rates first.

Snowball Strategy

A debt repayment strategy that focuses on paying off the lowest outstanding debt amount first to build momentum.

Primary Market

The market where equity or debt funds are raised by companies from 'outside' investors through an offer of securities for the first time; also known as the 'new issue market'.

Secondary Market

The market where securities once issued are bought and sold between investors, providing liquidity and price discovery.

ASBA (Application Supported by Blocked Amount)

An application for subscribing to a security issue containing an authorization for the bank to block the application money and release it only upon allotment.

Market Capitalisation

The market value of a company’s share capital, calculated as: $\text{Number of shares outstanding} \times \text{Market price per share}$

Novation

The process whereby a clearing corporation steps in as the legal counterparty to every trade on a stock exchange, assuming all counterparty risk.

Bonus Issue

An issue of additional shares made to existing shareholders without any consideration, funded from the company's free reserves.

Differential Voting Rights (DVRs)

Shares issued by a company that offer superior or inferior voting rights or differential dividends compared to ordinary equity shares.

Credit Spread

The difference between the yield on a government security and a corporate security of the same maturity, representing the 'risk premium' for default risk.

Impact Cost

The percentage price movement caused by a particular order size from the average of the best bid and offer price, used as a measure of liquidity risk.

P/E Ratio

The Price to Earnings ratio, calculated as: $\frac{\text{Current Market Price}}{\text{Earnings Per Share (EPS)}}$

PEG Ratio

A valuation measure that takes price, earnings, and earnings growth rates into account, calculated as: $\frac{\text{P/E Ratio}}{\text{Annual EPS Growth Rate}}$

Enterprise Value (EV)

A measure of a business value calculated as: $\text{Market capitalization of equity} + \text{Market Value of Debt} - \text{Excess cash and cash equivalents}$

Indenture

The legal agreement between a bond issuer (borrower) and the investors (lenders).

Macaulay Duration

A measure of the time taken (in years) for a bond to repay its own purchase price, representing the price sensitivity of the bond to interest rate changes.

Repo (Ready Forward Contract)

Mechanism for borrowing funds via the sale of securities with an agreement to repurchase them at a future date at a higher price that includes interest.

Open Interest

The total number of outstanding derivative contracts in the market that have not been settled or closed out.

In-The-Money (ITM) Call Option

A call option where the current market price of the underlying asset is higher than the strike price.

Net Asset Value (NAV)

The net assets per unit of a mutual fund scheme, calculated as: $\frac{\text{Net Assets}}{\text{Number of outstanding units}}$

ELSS (Equity Linked Savings Schemes)

An open-end equity fund that provides tax deduction benefits under Section 80C of the Income Tax Act and has a mandatory 3-year lock-in period.

Fixed Maturity Plan (FMP)

A closed-end debt fund that invests in securities with maturities matching the term of the scheme to eliminate interest rate risk.

Rupee Cost Averaging

The benefit of a Systematic Investment Plan (SIP) where investors buy more units when prices are low and fewer when prices are high, reducing the average cost per unit over time.

High Watermark Principle

A principle in Portfolio Management Services where performance-based fees are only charged on incremental gains that exceed the previous highest value of the portfolio.

Accredited Investor

A category of investors (Individual, HUF, Body Corporate) meeting specific income or net-worth criteria who are eligible for specialized products with lower minimum thresholds.

Efficient Frontier

A set of optimal portfolios in Modern Portfolio Theory that offer the highest expected return for a given level of risk or the lowest risk for a given level of return.

Jensen Alpha

The return generated by a portfolio over and above the required rate of return as predicted by the Capital Asset Pricing Model (CAPM).

Sharpe Ratio

A risk-adjusted performance measure that assesses reward per unit of total risk, calculated as: S = \frac{R_p - R_f}{\text{\sigma}_p}

Treynor Ratio

A risk-adjusted performance measure that assess reward per unit of systematic risk (Beta), calculated as: $T = \frac{R_p - R_f}{\beta_p}$

Tracking Error

The standard deviation of the difference between the returns of a portfolio and its target benchmark index.

ISIN (International Securities Identification Number)

A unique 12-character identification code assigned to securities to distinguish them for trading and settlement.

Fiduciary Capacity

The legal and ethical obligation of an investment adviser to act honestly, fairly, and in the best interests of their clients.

Transmission

The legal process of passing on the ownership of investments to joint holders, nominees, or legal heirs upon the death of the original investor.

SCORES

A centralized web-based complaints redress system launched by SEBI to help investors lodge and track their grievances against market participants.

Life Cycle Funds

Open-ended funds with predetermined maturity and a glide path that adjusts asset allocation (transitioning from equity to debt) as the goal target date approaches.