The National Pension System (NPS) is a pension cum investment scheme launched by the Government of India to provide old-age security to citizens of India. It allows systematic savings and investment for retirement.

The disclosure document was to be given to the prospective client along with the account opening form by a Portfolio Management Service (PMS). It provides important information about the PMS and helps the client make an informed decision.

The counterparty risk in a futures contract is primarily mitigated through the functions of the clearing corporation. Clearing houses act as intermediaries between the buyer and the seller, ensuring the financial integrity of the futures market by guaranteeing trades and requiring collateral (margin) from both parties. This helps minimize the risk of default by either party.

In a rights issue, the offer is required to be made to the existing shareholders on a pro-rata basis to their existing holdings. This means that each shareholder is offered the opportunity to buy additional shares in proportion to their current ownership in the company.

Clearing and Settlement are post-trading activities that constitute the core part of the equity trade life cycle. After the trading phase, where securities are bought and sold, clearing involves confirming the trades and arranging for the transfer of securities and funds between buyers and sellers. Settlement is the actual transfer of securities and funds.

Bond price volatility is directly related to the term to maturity. Longer maturity bonds experience larger price changes for a given change in yields. As interest rates change, the prices of bonds with longer maturities are more sensitive, leading to higher volatility in their prices.

An Alternative Investment Fund (AIF) is a privately pooled investment vehicle that collects funds from sophisticated investors and invests them in accordance with a defined investment policy for the benefit of its investors. AIFs are distinct from traditional investment vehicles like mutual funds and are designed for a more sophisticated class of investors.

The current yield is calculated by dividing the annual interest payment by the current market price. In this case, the bond has an 8.24% coupon rate, and it is selling for Rs. 105.0. Therefore, the current yield is (8.24 / 105.0) * 100 = 7.80%.

Discretionary services manage the funds of each investor as per the contract based on an existing investment approach or strategy customized to the client’s requirements. In discretionary portfolio management, the portfolio manager has the authority to make investment decisions on behalf of the client without requiring their explicit approval for each transaction.

The consolidation stage of the typical life cycle is characterized by the period when income exceeds expenses. During this stage, individuals typically focus on preserving and consolidating their wealth, as their income is more than sufficient to cover their expenses.

Operational efficiency measures the cost of carrying out trades in the market. It focuses on the effectiveness and cost-effectiveness of the processes and systems involved in executing trades, ensuring that transactions are conducted smoothly and at minimal cost.

Exclusion of companies involved in restricted businesses, such as alcohol, tobacco, gambling, weapons, hazardous chemicals, etc., is known as Negative Screening. This approach involves excluding certain types of investments based on specific criteria or values.

The fund factsheet contains the basic information of each scheme, such as the inception date, corpus size, current Net Asset Value (NAV), benchmark, and a pictorial depiction of the fund’s style of managing the fund. It serves as a concise document providing key details about the mutual fund scheme for investors.

Exchange rate risk, also known as currency risk, is the uncertainty of return introduced by acquiring investments denominated in a currency different from that of the investor. It arises from the potential changes in exchange rates between the foreign currency in which the investment is held and the investor’s domestic currency, impacting the investment’s value.

The most straightforward rate of return is the holding-period-return. It measures the total return earned on an investment over a specific period, considering both capital appreciation and any income generated, such as dividends or interest.

The Fixed Income Money Market and Derivatives Association of India (FIMMDA) is a voluntary market body for the bond, money, and derivatives markets in India. It plays a key role in the development and regulation of these markets.

Government Securities (G-Secs) are often referred to as risk-free gilt-edged instruments. This is because they are issued by the government and are considered to have virtually no default risk, making them a relatively secure investment. The term “gilt-edged” is used to signify the high credit quality of these securities.

According to the Mental Accounting Theory, people treat money differently based on factors such as the money’s origin and intended use. This theory suggests that individuals mentally compartmentalize their money and assign different values or priorities to funds based on the source or purpose of the money.

If investors require compensation for the uncertainty associated with future cashflows over the nominal risk-free rate, it is called a risk premium. The risk premium represents the additional return investors demand for taking on risk beyond the risk-free rate.

The portfolio manager shall not borrow funds or securities on behalf of the client. It is generally not a responsibility of the portfolio manager to initiate borrowing activities on behalf of the client.

The Security Market Line (SML) graphically depicts the relationship between risk and the estimated rate of return for individual securities. It is a graphical representation of the Capital Asset Pricing Model (CAPM), showing the expected return for a given level of systematic risk (beta).

The SEBI (Fraudulent and Unfair Trade Practices) Regulations prohibit a person from directly or indirectly buying, selling, or dealing in securities in a fraudulent manner.

A large tracking error indicates that either the benchmark is difficult to replicate or the portfolio manager is slow in reacting to such changes. Tracking error measures the divergence of a portfolio’s returns from the returns of its benchmark or index. A large tracking error suggests that the portfolio’s performance is significantly different from the benchmark’s performance.

Pre-Tax return enables comparisons across different investments and strategies, as it represents the return before accounting for taxes. Since different investors may be subject to different levels of taxation, looking at pre-tax returns allows for a more standardized comparison of investment performance.

Cognitive errors are statistical, information-processing, or memory errors that cause a person to deviate from rational behavior. These errors are associated with biases and can impact decision-making and judgments.

In a Value Weighted Index, a specified percentage change in the value of a large company has a greater impact than a comparable percentage change for a small company. This is because the weight of individual stocks in the index is determined by the market value of the stocks. As the market value of a company increases, its weight in the index increases, leading to a larger impact on the overall index.

The SEBI Regulations 2012 define the term “Alternative Investment Fund” (AIF) as one which is primarily a privately pooled investment vehicle. AIFs are a category of pooled-in investment funds that collect funds from investors, whether Indian or foreign, for investing in accordance with a defined investment policy.

Tracking Error is always calculated against the Total Returns Index, which shows the returns on the Index portfolio, inclusive of dividends. The Total Returns Index accounts for both the capital appreciation of the underlying securities and any income generated, providing a more comprehensive measure for tracking performance.

Cyclical industries rise and fall very closely following the general economic activity. These industries are sensitive to changes in economic conditions and tend to perform well during economic expansions but may face challenges during economic downturns.

Factor Models are helpful not only in portfolio creation but also in attribution analysis of the portfolio. Attribution analysis helps identify the sources of portfolio performance, indicating how much of the return can be attributed to various factors or exposures.

Technical analysis converts the price and volume data into charts that represent stock price movements over a period of time. It involves studying historical price patterns and trading volumes to make predictions about future price movements and identify potential buy or sell signals.

Forwards are an agreement made directly between two parties to buy or sell an asset on a specific date in the future, at the terms decided today. Unlike futures, forwards are customizable contracts and are traded over-the-counter (OTC), meaning they are not standardized or traded on an exchange.

Standard deviation quantifies the degree to which returns fluctuate around their average. It is a measure of the dispersion or volatility of a set of values, indicating how much individual values deviate from the mean (average) of the data set.

The Sharpe ratio is a measure of relative performance. It assesses the risk-adjusted return of an investment portfolio compared to a risk-free rate or benchmark. A higher Sharpe ratio indicates better risk-adjusted performance.

Forwards are bilateral over-the-counter transactions where the terms of the contract, such as price, quantity, quality, time, and place, are negotiated directly between two parties to the contract. Unlike standardized futures contracts that are traded on exchanges, forwards are customizable and are not standardized.

When an issuer makes an issue of securities to a select group of persons, which is neither a rights issue nor a public issue, it is called a Private Placement. In private placements, securities are offered directly to a specific group of investors, and the offering is not made to the general public.

An optimum portfolio is a combination of investments that has desirable individual risk-return characteristics for a given set of constraints. It represents the most efficient mix of assets in a portfolio, balancing risk and return according to the investor’s preferences and constraints.

Breadth, in the context of portfolio management, is about how many times such a skill was used in the portfolio in terms of the number of independent bets. It measures the diversity or number of different opportunities that a portfolio manager has taken positions in. A higher breadth indicates a broader range of investments or independent decisions.

Anchor investor means a qualified institutional buyer who makes an application for a value of ten crore rupees or more in a public issue made through the book building process in accordance with Securities and Exchange Board of India Regulations. Anchor investors play a significant role in stabilizing and bringing credibility to the initial public offering (IPO) process.

The portfolio manager shall furnish periodically a report to the client as agreed in the contract but not exceeding a period of 3 months. This report typically includes information on the performance and composition of the client’s portfolio.

A criticism of a value-weighted index is that large companies with higher market capitalization have a disproportionate influence on the index. This means that the movements in the stock prices of larger companies have a greater impact on the overall index value compared to smaller companies.

Investors compare the utility value of a risky portfolio with a risk-free investment offering the same utility to determine the certainty equivalent rate, which represents the guaranteed amount that an investor would find equally desirable to the uncertain returns of a risky investment.

Active management requires portfolio managers to extensively evaluate companies, analyze financial performance, assess stock mispricing relative to intrinsic value, and manage risks to optimize the portfolio’s return.

The types of costs involved in rebalancing a portfolio include transaction costs (associated with buying and selling securities) and tax costs (related to capital gains or losses incurred during the rebalancing process).

On the basis of product class, Portfolio Management Services (PMS) can be categorized into various types, including Commodity PMS, Equity-based PMS, Mutual Fund PMS, and more.

Overconfidence can lead to misguided conviction, causing individuals to overestimate their abilities and attribute success to skill rather than luck. This may blur the distinction between skill and luck in decision-making.

Forward contracts are bilateral agreements between two parties, specifying the terms of the contract. They are customized, over-the-counter (OTC) instruments tailored to the needs of the parties involved.

Government securities (G-Secs) with a tenor typically range between 5 to 30 years, and interest payments are made based on the specified terms of these securities.

Investment management styles are broadly classified based on fundamental parameters, and one of these styles is “Growth.” This style focuses on investing in stocks or securities of companies that are expected to experience above-average growth in earnings and revenues.

A Mutual Fund is a professionally managed collective investment scheme that pools money from many investors to purchase securities on their behalf. Mutual funds offer diversification and professional management for individual investors.

The Maturity stage is typically the longest phase in the life cycle of an industry. During this stage, the industry experiences stable growth, market saturation, and a focus on efficiency and cost control rather than rapid expansion.

Gifting is the final phase in personal finance when an individual realizes they have more assets than they will need for spending and may choose to distribute or gift assets to others.

A zero coupon bond makes no interest payments throughout its term. Instead, it is issued at a discount to its face value, and the investor receives the face value at maturity. The difference between the issue price and the face value represents the interest earned by the investor.

Government securities are the largest component of the debt market in India as well as worldwide. They are issued by governments to raise funds and are considered relatively secure investments.

The principal officer is responsible for the decisions made by the portfolio manager for the manager, administration of the portfolio of securities, and all other operations of the portfolio managers. The principal officer plays a key role in overseeing various aspects of portfolio management operations.

The distinction between value and growth investing can be best appreciated by considering the thought process of a portfolio manager for each style. Portfolio managers focusing on value investing look for stocks perceived to be undervalued, while those practicing growth investing seek stocks with strong potential for future growth.

In the business cycle, products or businesses that tend to move in the opposite direction of the overall economic cycle are called “Counter-cyclical.” These are less affected by economic downturns and may even perform well during recessions.