NISM Series XVII · Chapter 2: Financial Markets & Investment Products

L1 · Foundation

Foundation — Why savings must be invested, and what each asset class actually is

The arithmetic case for investing rather than saving idle; the difference between savings and investment; the three risks that come with investing and the risk-return trade-off; what defines an asset class; the features of equity, debt, cash and physical assets; how returns are earned and the four questions to ask of any asset class; fixed versus variable returns; and the asset class comparison table.

28 min read · Worth 10% of the paper · Written from pages 34–67 of the official NISM workbook · Updated 18 September 2026

Chapter 2 — Financial markets and investment products

Weightage: 10% — double the opening chapter. It covers the entire investment universe an adviser must know, from asset class characteristics through to specific products.

1. Why the retirement goal demands investment

The retirement goal has two features that force the issue:

⚠️ "It requires a LARGE CORPUS to be built OUT OF OWNED FUNDS, since it CANNOT BE FUNDED THROUGH LOANS OR BORROWINGS"
"It is LONG-TERM in nature. It has to be met at a time well in the future"

Two things go wrong if savings are left idle:

⚠️ "The money will LOSE VALUE given the effect of INFLATION over the long period to retirement"
"Keeping the money idle would mean that THE ABILITY OF MONEY TO BE INVESTED AND EARN RETURNS IS NOT BEING USED"

The workbook's arithmetic: X needs Rs 2 crore over 30 years.

Approach	Monthly contribution required
Keeping savings IDLE	⚠️ Rs 55,555 per month
Investing at 10%	⚠️ Rs 8,847 per month

A second illustration makes the same point: X wants Rs 1 crore over 25 years. From savings alone he needs about Rs 33,000 a month; invested at 8%, only about Rs 10,500.

⚠️ "Approximately Rs 22,500 (Rs 33,000 − Rs 10,500) BECOMES AVAILABLE to Mr X EACH MONTH to use for other goals."

And raising the return helps again: ⚠️ "HIGHER THE RETURNS EARNED, LOWER WILL BE THE SAVINGS THAT HAVE TO BE INVESTED." At 10% instead of 8%, the requirement falls from Rs 10,500 to around Rs 7,500.

2. Savings versus investment

Where savings are held for safety: "If the individual wants to SECURE THE SAVINGS FROM A LOSS IN ABSOLUTE VALUE, then it is held in SECURE AND GUARANTEED AVENUES such as SAVINGS BANK ACCOUNTS." ⚠️ "Typically, funds that are required for meeting the NEAR-TERM expenses or goals, or funds earmarked for MEETING EMERGENCIES, are held in this form."

But: "Money left idle LOSES REAL VALUE over time as a result of the effect of inflation and the PURCHASING POWER OF SAVINGS ERODES."

3. The three risks of investing, and the trade-off

"When savings are invested to earn returns, they are EXPOSED TO CERTAIN RISKS, depending upon the type of investments. The investor needs to UNDERSTAND THESE RISKS BEFORE COMMITTING their savings."

Risk	What it means
RISK OF LIQUIDITY	⚠️ "When savings are invested, they are typically LOCKED IN for a defined period. Unlike cash kept in sources such as savings bank accounts, INVESTED FUNDS ARE NOT AVAILABLE READILY. Some products may allow easy realisation, BUT THERE MAY BE A PENALTY IMPOSED ON EARLY WITHDRAWAL" — such as lower interest on a premature FD withdrawal
RISK TO EXPECTED RETURNS	"There may be a risk of THE EXPECTED RETURN NOT MATERIALISING." In debt, the interest is known at issue, "however THE ISSUER MAY DEFAULT... unless it is a guaranteed product such as a post office deposit guaranteed by the Government of India." In equity, there are "no fixed or assured dividends" and "if the business does not do as expected the company MAY NOT DECLARE A DIVIDEND AT ALL and the price may not see the expected appreciation." In real estate, "a TENANT MAY DEFAULT on paying rent OR THE PROPERTY MAY REMAIN UNOCCUPIED"
RISK TO CAPITAL INVESTED	⚠️ "Investments may involve the risk of a PARTIAL OR EVEN COMPLETE EROSION OF THE PRINCIPAL invested." Equity can fall to levels eroding capital; "a DEFAULT by the issuer of a debenture at maturity may mean the capital invested will be LOST, UNLESS the debt instruments are SECURED on the assets of the issuer"; and "physical investments such as real estate and gold TOO may see a fall in value"

3.1 The risk-return trade-off

Two illustrations the workbook gives:

"EQUITY investments are expected to provide HIGHER RETURNS to compensate the investor for the higher risk to returns and principal"
⚠️ "A bond with a HIGHER CREDIT RATING will pay a LOWER COUPON as compared to a bond of the SAME TENOR but with a LOWER credit rating, to reflect the lower risk of default"

"If an individual wants to select investments WITHOUT TOO MUCH RISK, THEY MUST BE WILLING TO SETTLE FOR LOWER RETURNS. This is the RISK-RETURN TRADE-OFF."

What varies the acceptable level of risk:

⚠️ "Investors with a HIGHER LEVEL OF INCOME AND SAVINGS and GREATER FINANCIAL SECURITY may be willing to take HIGHER risk relative to investors WITHOUT A SECURE SOURCE OF INCOME and lower accumulated wealth"
⚠️ "If the goals are WELL IN THE FUTURE, then the investor may be willing to invest in products that may show VOLATILITY in returns but has the potential to earn HIGH RETURNS over a period of time. On the other hand, if the goals are CLOSER AT HAND... the investor will seek LOW-RISK products that are likely to earn low returns BUT WILL PRESERVE THE CAPITAL ACCUMULATED"

4. What defines an asset class

The broad division:

	PHYSICAL assets	FINANCIAL assets
Nature	⚠️ "TANGIBLE assets — include REAL ESTATE, GOLD and other precious metals"	⚠️ "Represent a CLAIM that the investor has on BENEFITS represented by the asset" — bank deposits, equity shares, bonds
Purpose	⚠️ "Typically GROWTH investments that are bought for the APPRECIATION IN VALUE rather than the income they generate"	May be growth-oriented (equity), income-oriented (deposits), or structured "to provide LIQUIDITY AND CAPITAL PRESERVATION"
Other	⚠️ "Also seen as a HEDGE AGAINST INFLATION"	⚠️ "Typically STANDARDISED products and CONTROLLED BY THE REGULATIONS in force"

The asset classes:

Financial	Physical
Equity	Real Estate
Debt	Commodities
Cash

5. The features of each asset class

5.1 Equity

⚠️ "HOWEVER, if there are NO residual profits, OR the Board of Directors DO NOT RECOMMEND A DIVIDEND from available profits, then equity shareholders DO NOT RECEIVE A DIVIDEND. Equity shareholders CANNOT DEMAND A RETURN OF THE CAPITAL INVESTED." If listed, the shareholder can sell at current value, "which may be HIGHER OR LOWER than the value at which the investment was made."

As an investment:

"Investment in equity is investment in a GROWTH-ORIENTED asset. The PRIMARY SOURCE of return is typically from the APPRECIATION IN THE VALUE"
⚠️ "The returns from equity investments are NEITHER PRE-DEFINED NOR GUARANTEED. They can be VOLATILE from one period to the next and CAN EVEN BE NEGATIVE. This makes equity investments RISKY, ESPECIALLY IN THE SHORT TERM"
"OVER TIME, the value of WELL-MANAGED AND PROFITABLE companies will see appreciation and generate high returns"
⚠️ "SELECTING THE RIGHT STOCKS, MONITORING the performance of the companies and EXITING stocks where the performance is not as expected, is important for success in equity investing"
"Listed equity shares are LIQUID and can be easily converted into cash"

Sub-asset classes within equity are formed "based on the INDUSTRY (pharma, IT, auto, FMCG) or the SIZE of the company based on its MARKET CAPITALISATION (large, mid or small)." ⚠️ "LARGE-CAP stocks typically feature GREATER STABILITY IN EARNINGS relative to mid and small-cap stocks. They are therefore seen as LESS VOLATILE." Other examples: technology sector revenues are "sensitive to CURRENCY FLUCTUATIONS since exports form a large segment", and "companies in INTEREST-RATE SENSITIVE sectors such as REAL ESTATE see benefits when interest rates come down."

5.2 Debt

⚠️ The deposits-versus-securities distinction: "DEPOSITS are typically UNSECURED, while DEBT SECURITIES are SECURED against the assets of the borrower and therefore offer GREATER PROTECTION." "Deposit holders can exit ONLY AT THE END OF TERM; pre-mature withdrawal may imply a PENALTY in the form of lower interest." ⚠️ "Securities issued through a PUBLIC ISSUE have to be MANDATORILY LISTED. Investors can exit by SELLING on the stock exchanges" at a price "higher or lower than the price at which they bought" — a higher price giving capital gains that add to total return.

As an investment:

"Debt as an asset class represents an INCOME-ORIENTED asset. The MAJOR SOURCE of return is REGULAR INCOME in the form of INTEREST"
"The interest is typically KNOWN AT THE TIME OF ISSUE and may be GUARANTEED either by an undertaking of the government or by SECURITY created on the physical assets"
⚠️ "The price of debt securities REACTS TO INTEREST RATE LEVELS in the economy and this brings SOME VOLATILITY in the total returns"
"Risk in debt securities PRIMARILY comes from the POSSIBILITY OF DEFAULT by the issuer"
⚠️ "LIQUIDITY in debt instruments is LOW, EVEN WHEN THEY ARE LISTED. Most debt-oriented instruments impose a PENALTY if the funds are withdrawn before the committed time"

Sub-categories are based on "the CREDIT RISK (Government securities or corporate securities) or the TENOR (short or long term)."

5.3 Cash and its equivalents

Products include "SAVINGS BANK ACCOUNTS and MONEY MARKET MUTUAL FUNDS."

5.4 Physical assets

"Changes in the value of physical assets are impacted by DEMAND AND SUPPLY. The return is PRIMARILY in the form of the APPRECIATION IN VALUE rather than the income they generate."

⚠️ "Some such as REAL ESTATE may provide BOTH income and growth, while others such as GOLD are PURE GROWTH-ORIENTED assets."

"The value of physical assets is seen to MOVE IN TANDEM WITH INFLATIONARY TRENDS, and as such they may be able to generate INFLATION-PROTECTED RETURNS."

The risks:

⚠️ "The ILLIQUIDITY that some, such as real estate, suffer from. IT IS NOT EASY TO BE ABLE TO SELL A PROPERTY QUICKLY at what is perceived as the right price"
"Real estate also suffers from OPACITY IN VALUATION AND TRANSACTIONS, apart from LEGAL AND MAINTENANCE ISSUES"
⚠️ "They are typically LARGE TICKET INVESTMENTS and require substantial savings, OR A COMBINATION OF SAVINGS AND LOAN to acquire the asset"

6. Asset class returns

The four questions to ask of any asset class:

⚠️ "WHAT CONSTITUTES RETURNS from the investment: PERIODIC INCOME, CAPITAL APPRECIATION or A COMBINATION of the two? If a combination, WHICH COMPONENT IS THE PRIMARY CONTRIBUTOR?"
"Are the returns KNOWN IN ADVANCE? Is it FIXED? Is it GUARANTEED?"
"Will the returns VARY from one period to the next?"
"HOW MUCH do the returns vary, if they do?"

On periodic income: it "may be known at the time of investment" — a bond or FD investor "knows the coupon rate." ⚠️ "Investors in equity shares DO NOT KNOW the dividend they may receive. THEY MAY EVEN NOT RECEIVE DIVIDEND INCOME IN A YEAR." Interest "remains the SAME throughout the life of the debt instrument" (except for floating-rate securities), while "the rate of dividend GOES UP when revenues and profits go up and MAY GO DOWN when profits are low."

On appreciation: ⚠️ "In EQUITY investments, this component USUALLY FORMS THE BULK of the total return and sees FREQUENT SHIFTS based on daily market prices. DEBT securities see a change in value with changes in interest rates, BUT THE GAINS CONSTITUTE A SMALLER PORTION. In REAL ESTATE, the appreciation is a SIGNIFICANT portion, HOWEVER THE CHANGES IN VALUES ARE NOT FREQUENT. An asset such as GOLD provides NO PERIODIC INCOME and APPRECIATION IS THE ONLY SOURCE."

⚠️ And the warning: "Asset values can see a DEPRECIATION instead of an appreciation, and this will BRING DOWN the returns and CAN EVEN MAKE IT NEGATIVE. For example, if a bond pays 8 percent per annum coupon interest BUT THE PRICE FALLS BY 10 PERCENT in the year, then the TOTAL RETURN from the bond is −2 PERCENT."

6.1 The asset class comparison table

Asset class	Risk	Returns	Liquidity
Cash	Risk of INADEQUATE RETURNS (inflation risk)	Periodic interest income. LOW returns commensurate with the low risk	⚠️ HIGH. "Can be withdrawn at any time with NO COST OR PENALTY"
Bonds	Corporate bonds have the RISK OF DEFAULT by the issuer. Subject to INFLATION RISK, INTEREST RATE RISK and REINVESTMENT RISK	"Fixed return in the form of COUPON/INTEREST income. Also have the POTENTIAL TO GAIN IN VALUE if there is a FALL in interest rates, and the RISK OF LOSS in capital value if interest rates RISE"	⚠️ LOW. "There may be a LOCK-IN, PENALTY for early withdrawal or LOW TRADING in the stock markets"
Stocks	⚠️ "Stock prices are VOLATILE (MARKET RISK) and hence seen to be a RISKY investment UNLESS THE INVESTMENT HORIZON IS LONG ENOUGH... It is important to SELECT THE RIGHT STOCKS (SELECTION RISKS)"	"Primarily from the APPRECIATION IN VALUE along with the DIVIDEND that the company may declare. The FALL in the value may result in LOSS"	"Listed equity investments can be EASILY SOLD at the current price, which makes them LIQUID"
Real estate	⚠️ "LIQUIDITY RISK is the PRIMARY risk... it CANNOT BE SOLD IN SMALLER UNITS. LACK OF TRANSPARENCY in pricing and transactions and WEAK REGULATORY PROTECTION are among the biggest risks. MANAGING THE PROPERTY and LEGAL ISSUES are other risks. Returns are impacted by ECONOMIC CYCLES"	"BOTH from the RENTAL INCOME as well as the APPRECIATION in value. Seen as a HEDGE AGAINST INFLATION"	⚠️ "Liquidating real estate is a LONG AND CUMBERSOME process. LACK OF TRANSPARENCY in pricing makes the process complicated"
Gold	⚠️ "The primary risk is from the VOLATILITY IN PRICES DRIVEN BY SPECULATIVE FORCES"	⚠️ "ONLY from the APPRECIATION IN PRICE"	"Liquidity is HIGH in gold and gold linked securities"

6.2 Total returns and volatility

"In INCOME-oriented investments, the interest income is the PRIMARY source... the contribution of appreciation will be SMALL." In GROWTH-oriented investments, "the CAPITAL APPRECIATION is the PRINCIPAL source." And some products yield both — a debt mutual fund earning both interest income and gains from falling rates.

⚠️ "Total returns... is likely to be VOLATILE in nature. This is because THE FREQUENCY OR QUANTUM OF APPRECIATION/DEPRECIATION IN VALUE IS NOT FIXED. SHARE PRICES are likely to show changes from one day to the next — total returns from equity are thus VOLATILE. Changes in the price of DEBT securities are LESS FREQUENT AND VOLATILE and therefore the total returns are LESS VOLATILE."

⚠️ "If the funds earmarked for EMERGENCIES are held in EQUITY investments, then there is the risk that THE INVESTMENT VALUES MAY BE DOWN WHEN THE FUNDS ARE URGENTLY REQUIRED and the investor may have to SELL AT A LOSS."

6.3 Fixed versus variable returns

	Fixed returns	Variable returns
Example	A bank deposit paying a fixed interest each period	Dividends from equity, or mutual fund schemes earning total returns
Advantage	⚠️ "The investor has CLARITY on the AMOUNT that will be received and WHEN. This is USEFUL IN PLANNING INCOME AND EXPENSES"	⚠️ "There is a POSSIBILITY TO EARN HIGH RETURNS"; the return "will increase or decrease to reflect the earnings of the investment"
Drawback	⚠️ "THERE IS NO SCOPE FOR THE RETURN TO GO UP. The investor... is TIED TO THE CONTRACTED INTEREST RATE EVEN IF THE INTEREST RATE INCREASES SUBSEQUENTLY"	"NO CERTAINTY regarding the amount that may be received or the timing." ⚠️ "It makes MONITORING OF PERFORMANCE IMPORTANT so that investors can EXIT an investment that is likely to UNDER-PERFORM"

Think of it like this

Money in a cupboard versus money at work

Two farmers each have a sack of grain. One stores it carefully in a cupboard, checking each month that it is still there. The other sows it. At harvest, the careful farmer still has his original sack — minus what the rats and damp took. The other has a field.

The workbook puts the same choice in rupees. To reach Rs 2 crore in 30 years:

Keeping the savings idle: Rs 55,555 a month
Investing at 10%: Rs 8,847 a month

⚠️ The difference is not marginal — it is more than six times. And the money saved is not lost: "investing the money instead of keeping the savings unutilised FREES UP A LARGE CHUNK of X's savings for OTHER GOALS AND NEEDS."

The cupboard is not even safe, either. "Money left idle LOSES REAL VALUE over time as a result of the effect of inflation." The rats are real.

Hence the chapter's blunt conclusion: "LARGE GOALS LIKE RETIREMENT CAN ONLY REALISTICALLY BE MET IF THE MONEY SAVED IS INVESTED."

Why the safer bond pays you less — the loan to a friend

A friend with a steady government job asks to borrow Rs 1 lakh for a year. Another friend, whose small business is struggling, asks for the same. Do you charge them the same rate?

Of course not. You lend to the second one only if the return justifies the chance of not being repaid. The extra interest is not generosity to yourself — it is the price of the risk.

That is why ⚠️ "a bond with a HIGHER CREDIT RATING will pay a LOWER COUPON as compared to a bond of the SAME TENOR but with a LOWER credit rating, TO REFLECT THE LOWER RISK OF DEFAULT in payment of the periodic coupon income and repayment of principal."

The general principle behind it runs through the whole chapter: ⚠️ "The POTENTIAL FOR RETURN from an investment is expected to COMPENSATE FOR THE RISK that is undertaken: HIGHER THE RISK, HIGHER IS THE EXPECTED RETURN."

And the corollary clients dislike hearing: "If an individual wants to select investments WITHOUT TOO MUCH RISK, THEY MUST BE WILLING TO SETTLE FOR LOWER RETURNS." There is no third door.

The bond that paid 8% and lost you money

A shopkeeper sells goods at a healthy 8% margin all year and is delighted — until his accountant points out that the stock still sitting on the shelves has lost 10% of its value. He did not make 8%. He lost 2%.

The workbook uses exactly this arithmetic: "If a bond pays 8 percent per annum coupon interest BUT THE PRICE FALLS BY 10 PERCENT in the year, then the TOTAL RETURN from the bond is −2 PERCENT (8 percent + (−10 percent))."

⚠️ Total return is income PLUS the change in value — and the second half can be negative. This is why the chapter insists on asking of every asset class: "WHAT CONSTITUTES RETURNS: periodic income, capital appreciation, or a combination? If a combination, WHICH COMPONENT IS THE PRIMARY CONTRIBUTOR?"

The proportions differ sharply. In equity, appreciation "usually forms the BULK of the total return." In debt, the gains "constitute a SMALLER PORTION." In gold, ⚠️ "appreciation is the ONLY source of income." And in real estate, appreciation is significant but "the changes in values are NOT FREQUENT."

Emergency money does not belong in the stock market

You keep a spare house key with a neighbour, not in a bank locker. The locker is more secure — but on the night you are locked out at 11 p.m., security is not the quality you need. Availability is.

The same logic governs an emergency fund. ⚠️ "If the funds earmarked for EMERGENCIES are held in EQUITY investments, then there is the risk that THE INVESTMENT VALUES MAY BE DOWN WHEN THE FUNDS ARE URGENTLY REQUIRED, and the investor may have to SELL AT A LOSS."

Emergencies have a cruel habit of coinciding with bad markets — a job loss during a downturn is the same event, not two.

That is what cash and equivalents are for: ⚠️ "the objective... is PRESERVING THE ABSOLUTE VALUE OF THE CAPITAL INVESTED AND HIGH LIQUIDITY, RATHER THAN EARNING RETURNS." Low returns are not a flaw in the design — they are the price of certainty on the day you need it.

And the general rule the chapter draws: ⚠️ "AS GOALS COME CLOSER AND THE INVESTMENT HORIZON SHRINKS, INVESTORS SHOULD SHIFT FUNDS FROM THE VOLATILE ASSET CLASS TO ONE WITH STEADY RETURNS."

Rebalancing means selling what is doing well

A cricket captain sets a field for a plan, not for the last ball. If a bowler takes a wicket, he does not abandon the field settings and crowd every fielder round the bat — he sticks to the plan that produced the wicket.

Rebalancing under Strategic Asset Allocation feels equally counter-intuitive. The workbook's own example: a retirement portfolio set at 60% equity and 40% debt; a bull run pushes equity to 70%; and so "a rebalancing is undertaken to BRING DOWN the equity holding to 60 percent and the debt UP to 40 percent."

The client's objection is obvious — why sell the thing that is working? The workbook concedes the point honestly: ⚠️ "The DRAWBACK of SAA is that it is likely to UNDER-PERFORM when a particular asset class is BOOMING. This is because THE PORTFOLIO IS NOT REALIGNED to reflect asset class performance."

But the discipline is the purpose. Left alone, the portfolio quietly becomes riskier exactly when prices are highest — and rebalancing restores the risk level the client agreed to. SAA is tailored to "the specific goals and risk preferences of the investor," not to last quarter's returns.

Tactical Asset Allocation is where the opposite instinct is allowed to operate — "a DYNAMIC strategy, SHORT-TERM in nature," focused "on the PERFORMANCE OF ASSET CLASSES rather than the investor's objectives and goals" — and the standard practice is to build with SAA and use TAA only "in the short term to add some value."

Key terms in this chapter

Accumulation and distribution stages: The accumulation stage is when savings build the retirement corpus; the distribution stage is when that corpus generates retirement income. The move between them triggers a redesign from growth orientation to income orientation.
Annuity: An insurance contract where a corpus is built as a lump sum or in instalments, in return for which the insurer makes periodic payments to the purchaser.
Arbitrage fund: A fund that buys in the spot market and sells in the derivatives market to capture the price differential. With no borrowing cost and a fully hedged position, its NAV volatility is similar to a liquid fund.
Asset allocation: Building a portfolio that targets the investor's return and liquidity needs while rationalising risk through diversification across asset classes.
Asset class: A group of investments with similar risk and return characteristics that respond in a similar way to economic and market events. Equity, debt, gold, real estate and cash are the main ones.
Atal Pension Yojana (APY): A pension scheme for the unorganised sector, open to those aged 18–40 (income-tax payers barred from 1 October 2022), paying Rs 1,000 to Rs 5,000 a month. Joining earlier means a much smaller contribution — Rs 210 at 18 against Rs 902 at 35 for the same Rs 5,000 pension.
Business cycle: The repeating movement of an economy through expansion and recession. Recession slows sales, production and employment and hurts equity; expansion booms real estate and commodities but invites rate hikes that hurt bonds and equity.
Business risk: The risk arising from a company's own operations — raw material costs, employee costs, competing products, marketing costs. It affects both its shares and its ability to service debt, and is managed by diversification because it is company- or industry-specific.
Cash and equivalents: Savings accounts, short deposits and liquid holdings whose objective is preserving the absolute value of capital and providing high liquidity, rather than earning returns. Correct for emergencies and near-term needs.
Conservative and aggressive hybrid funds: A conservative hybrid holds 75–90% debt with 10–25% equity, mostly large cap, for a small lift in return. An aggressive hybrid holds 65–80% equity with 20–35% debt for income and stability.
Consumer Price Index / Wholesale Price Index: The two inflation price indices used to measure how fast the general level of prices is rising.
Contractionary policy: Interest rate or tax hikes used to contain inflation. It reduces both production and consumption, making equity and debt unattractive.
Credit risk fund: A debt fund that deliberately invests in securities rated below the highest credit rating, accepting more default risk for higher yield.
Current account deficit (CAD): A negative balance between total exports and imports of goods and services, making the country a net debtor of foreign currency. It is met by capital account inflows or, failing that, by running down forex reserves.
Default risk (credit risk): The probability that a borrower will fail to pay interest or principal as scheduled. Only the sovereign government can guarantee its obligations; every other borrower carries some degree of it. Measured by the credit rating.
DICGC insurance: Deposit Insurance and Credit Guarantee Corporation cover of up to Rs 5 lakh per depositor per bank, covering all deposits and the interest on them across branches held in the same capacity.
Duration: A measure of how sensitive a bond's price is to changes in interest rates, calculated from its coupon, term to maturity and yield. Higher duration means greater interest rate risk.
Dynamic bond fund: A debt fund that invests across durations based on the manager's interest rate view — cutting duration when rates are expected to rise and extending it when they are expected to fall.
Endowment policy: A level premium life policy with a savings feature that pays the sum assured plus any bonus at maturity or on earlier death. The rate of return is quite low.
Equity mutual fund (65% rule): Under SEBI regulations a scheme must invest at least 65% of its total assets in equity and equity-related instruments to be classified as an equity fund.
Expansionary policy: An easy money policy that keeps interest costs low. Equity appreciates in anticipation of better corporate performance, bond values rise, and real estate demand improves.
Fiscal deficit and crowding out: When government spending exceeds revenue, the gap is met by market borrowings. A high deficit crowds companies out of the market, pushes yields up, cuts profitability, and drags down both equity and bond values.
Gold ETF: An exchange traded fund where each unit typically represents one gram of gold, backed by physical gold of 99.5 percent purity, with up to 20 percent of net assets allowed in bank gold deposit schemes.
Gold Monetisation Scheme, 2015: Lets residents deposit gold (minimum 10 grams, no maximum) with scheduled commercial banks to earn interest. Since 26 March 2025 only the short-term bank deposit of 1–3 years is accepted; repayment is in rupees or gold as chosen at the time of deposit.
Gross Domestic Product (GDP): The final value of all goods and services produced by a country in a given period. Real GDP uses base-year prices so that inflation is excluded.
Inflation risk: The risk that money received from an investment is worth less once adjusted for inflation. Highest in fixed-return instruments and hardest on retired people whose income is fixed in absolute terms.
Interest rate risk: The risk that bond prices fall when interest rates rise and rise when rates fall. Bond prices and interest rates have an inverse relationship.
Life Cycle Fund: An open-ended scheme with a target maturity date that follows a glide path, becoming more conservative as maturity approaches. Tenures run from 5 to 30 years in multiples of 5, with a maximum of six open for subscription at a time.
Liquid fund: A debt fund investing in securities with a tenor not exceeding 91 days to maturity. An overnight fund uses securities of not more than one day.
Liquidity risk: The risk that an investment cannot be sold easily when wanted, must be sold below its intrinsic value, or costs a lot to transact. Corporate bonds, property, art and locked-in investments all carry it.
Mahila Samman Savings Certificate: A two-year scheme for women and girls at 7.5% compounded quarterly with a Rs 2 lakh maximum. The enrolment window closed on 31 March 2025; existing accounts run to maturity.
Market risk: The risk of losing value because of adverse price movements. It affects equity, bonds, gold and real estate — but not deposits or small savings schemes, which are not marketable and so neither lose nor gain market value.
Multi-asset allocation fund: A hybrid fund investing in at least three asset classes with a minimum 10 percent allocation to each.
National Pension System (NPS): A defined contribution scheme launched in January 2004 for central government employees, opened to all citizens aged 18–85 in May 2009, extended to companies in December 2011 and to minors through NPS Vatsalya in September 2024. The corpus buys an annuity at maturity.
Net Asset Value (NAV): The value of one mutual fund unit, reflecting the value of the securities held after adjusting for permissible costs. It is computed at the end of a business day — unlike an ETF price, which is real-time.
Non-competitive bidding: A facility reserving 5 percent of every government securities auction for retail and other non-competitive buyers, who get the securities at the cut-off price without having to bid a yield.
Open-ended, closed-end and interval schemes: Open-ended schemes allow subscription and redemption at any time at current NAV; closed-end schemes allow neither after the NFO and are exited by trading on the exchange or waiting for the tenor to end; interval funds offer units at pre-fixed intervals.
Portfolio Management Services (PMS): Professional management of an investor's own portfolio. Discretionary PMS lets the manager decide; non-discretionary PMS gives advice while the investor decides. Minimum investment Rs 50 lakh.
Primary and secondary markets: Securities are first issued in the primary market where investors subscribe directly from the issuer; they are then listed and traded between investors in the secondary market.
Public Provident Fund (PPF): A 15-year government-backed deposit account with a bank or post office. Minimum Rs 500 and maximum Rs 1,50,000 in a financial year, in any number of instalments in multiples of Rs 50.
Put and call options in bonds: A put gives the investor the right to redeem the bond before maturity; a call gives the issuer that right.
RBI Retail Direct Scheme: Launched on 12 November 2021, it lets any resident individual open a free Retail Direct Gilt account directly with the RBI to buy G-secs, T-bills and State Development Loans in auctions and trade them on NDS-OM.
Real return: The return left after adjusting for inflation. It is what actually decides whether your purchasing power has grown.
Re-investment risk: The risk that periodic cash flows from an investment cannot be reinvested at the same rate as the original investment, pulling the total return down. Present in coupon-paying bonds, absent in a cumulative bank fixed deposit.
REIT: A SEBI-registered trust investing in commercial real estate. At least 80% must be in completed rent-generating property, valuation is annual and updated half-yearly, NAV is declared within 15 days, and at least 90% of net distributable cash flows are distributed half-yearly.
Reverse mortgage: A way of generating income from a self-occupied house, which otherwise has limited use for retirement wealth because it can neither be sold nor produce income.
Senior Citizens Saving Scheme (SCSS): A small savings scheme available only to those aged 60 or above as first holder, held individually or jointly with the spouse.
Specialised Investment Fund (SIF): A SEBI-regulated vehicle managed by AMCs that bridges mutual funds and PMS or AIFs, allowing long-short, sector rotation and active allocation strategies, with unhedged short positions up to 25% of portfolio. Minimum investment Rs 10 lakh.
Strategic Asset Allocation (SAA): A long-term allocation tailored to the investor's goals, horizon and risk ability. It is rebalanced only when the allocation drifts or the investor changes — never on a view about market performance.
Sub-asset class: A division within an asset class. Within equity these are defined by industry (pharma, IT, auto, FMCG) or by market capitalisation (large, mid, small cap) — not by loose descriptions like "low risk stocks".
Sukanya Samriddhi Account: A scheme for a girl child under 10 at opening — one account per child, maximum two per guardian, Rs 250 to Rs 1,50,000 a year, maturing at 21 years, with 50 percent partial withdrawal allowed after age 18 and closure on marriage before 21.
Tactical Asset Allocation (TAA): A dynamic, short-term strategy that allocates based on expected market performance of asset classes rather than the investor's own goals. Normally used alongside SAA to add value in the short term.
Target maturity fund and FMP: Both hold debt securities to maturity so that an investor who stays until maturity faces no interest rate risk. A target maturity fund is open-ended; a fixed maturity plan is closed-end.
Total return: Income earned plus the change in the value of the investment, taken together. An 8% coupon combined with a 10% fall in price is a total return of minus 2%.
Trade balance: The difference between exports and imports of goods alone, without services.
Unit Linked Insurance Plan (ULIP): An insurance product where the investment portion goes into equity and debt funds chosen by the investor, with the option to switch between funds and to add top-up premiums. Returns are linked to market performance.
Variable Insurance Product (VIP): An insurance product where part of the premium goes to a policy account with a defined minimum floor rate of return, plus returns linked to an index, bonus or additional interest. Minimum term five years with a three-year lock-in.
Zero coupon bond: A bond that pays no periodic coupon; the interest is built into the difference between the issue price and the redemption price.

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Original explanatory writing based on the official NISM workbook for Series XVII, which is published and copyrighted by NISM. Check figures against the current edition at nism.ac.in.

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