Investment Advisor NISM Series X-B — Investment Adviser (Level 2) 5 — Questions and Answers
Question 1: A client realizes a short-term capital gain of ₹1,00,000 from equity mutual funds held for 8 months. What is the applicable tax rate in India?
- Nil (exempt)
- 10% without indexation
- 15% flat (Correct answer)
- 30% at slab rate
Correct answer: 15% flat
Short-term capital gains on equity mutual funds (held less than 12 months) are taxed at a flat 15% under Section 111A of the Income Tax Act.
Question 2: Which of the following is a key difference between a Portfolio Management Service (PMS) and an investment adviser?
- Only PMS providers can charge fees
- PMS managers directly manage client assets; investment advisers only provide advice (Correct answer)
- Investment advisers must hold client funds in custody
- PMS cannot invest in equities
Correct answer: PMS managers directly manage client assets; investment advisers only provide advice
PMS providers take discretionary control of client assets, while investment advisers only give advice; execution remains the client's decision.
Question 3: Rebalancing a portfolio back to its target asset allocation primarily serves which purpose?
- Maximizing short-term returns
- Maintaining the client's intended risk exposure over time (Correct answer)
- Minimizing tax liability
- Reducing brokerage commissions
Correct answer: Maintaining the client's intended risk exposure over time
Rebalancing restores the original risk-return profile by trimming outperforming assets and adding to underperforming ones, keeping risk aligned with the client's tolerance.
Question 4: Which of the following behavioral biases causes investors to hold losing investments too long hoping to break even?
- Overconfidence bias
- Anchoring bias
- Loss aversion / Disposition effect (Correct answer)
- Herding bias
Correct answer: Loss aversion / Disposition effect
The disposition effect (driven by loss aversion) leads investors to hold losing positions to avoid realizing a loss while prematurely selling winners.
Question 5: An adviser recommends a client invest a lump sum in a liquid fund temporarily before deploying into equity via STP. The primary benefit of this strategy is:
- Higher returns than a direct equity investment
- Rupee-cost averaging combined with capital preservation during deployment (Correct answer)
- Avoiding all market risk permanently
- Maximizing dividend income
Correct answer: Rupee-cost averaging combined with capital preservation during deployment
Using an STP from a liquid fund into equity provides rupee-cost averaging over the deployment period while preserving capital in a low-risk instrument in the interim.
Question 6: Which of the following is NOT a component of a comprehensive financial plan prepared by an investment adviser?
- Retirement planning
- Tax planning
- Insurance needs analysis
- Filing of income tax returns on behalf of the client (Correct answer)
Correct answer: Filing of income tax returns on behalf of the client
Filing tax returns is the domain of a tax consultant or CA; investment advisers provide planning advice but do not execute tax compliance on behalf of clients.
Question 7: Under the net present value (NPV) rule, an investment project should be accepted when:
- NPV equals zero
- NPV is negative
- NPV is positive (Correct answer)
- The payback period exceeds five years
Correct answer: NPV is positive
A positive NPV indicates the project generates returns exceeding the required rate of return, creating value for the investor.
Investment Advisor NISM Series X-B — Investment Adviser (Level 2) 5
A client realizes a short-term capital gain of ₹1,00,000 from equity mutual funds held for 8 months.
What is the applicable tax rate in India?