Evaluating the Financial Position of Clients for NISM certification
Before recommending anything, an adviser must read the client's finances the way an analyst reads a company's accounts: where the money comes from and goes (budget and cash flow), what the household owns and owes (balance sheet), how well it is protected (contingency planning), and a handful of ratios that turn all of this into a quick health check.
Advice & ResearchSeries X-A66 MCQs5 lessons13 flashcards3 memory tricks
Practise Evaluating the Financial Position of Clients free
What you'll learn
- Cash flow and the household budget
Build a monthly budget and find the savings. - Cash management and the income and expenditure statement
Tell a budget, a cash view and an income and expenditure statement apart. - Budgeting, forecasting and monitoring
Prepare, forecast, monitor and improve a budget, and raise savings in steps. - The personal balance sheet and contingency planning
Draw up a balance sheet, find net worth and plan for contingencies. - Personal finance ratios
Calculate and interpret the main ratios used to judge a client's position.
Concepts explained
Household budget
A plan of a typical month's income and spending, applied in the order mandatory → essential → discretionary, with savings what remains (or, better, a fixed target moved out first).
What it means
- Disposable income = income − mandatory expenses.
- Savings = surplus in hand + PF/NPS + planned investments.
- Discretionary expenses are the easiest to cut.
- Income ₹1.6 lakh
- Surplus ₹10,000 + PF ₹8,000 + SIPs ₹25,000
Answer: Savings ₹43,000; savings ratio ≈ 26.9%
Emergency fund
Money set aside, usually as the first goal, to meet about six months of expenses (including EMIs) if income stops.
What it means
- Hold in liquid assets: savings account, short FDs, liquid funds.
- With secure jobs, ladder: ~3 months liquid, rest slightly less liquid.
- Replenish after use; review yearly or when a new EMI starts.
- Monthly expenses incl. EMIs ₹1.4 lakh
- × 6
Answer: ₹8.4 lakh
Related terms
- Liquidity ratio: c-xa-ratios
Personal finance ratios
Savings, expense, savings-to-income, leverage, solvency, liquidity, financial assets and debt-to-income ratios summarise a client's position.
What it means
- Expense ratio = 1 − savings ratio.
- Solvency = 1 − leverage.
- Liquidity 4–6 comfortable; debt-to-income above 35–40% excessive.
- Savings-to-income about 3× by the early 40s.
- Assets ₹158 lakh
- Liabilities ₹50 lakh
Answer: Leverage 31.6%; solvency 68.4%
Exam tip: Shares and equity funds are not liquid assets for the liquidity ratio, because their value can swing just when cash is needed.
Memory tricks
Mandatory → essential → discretionary → savings.
Expense = 1 − savings; solvency = 1 − leverage.
Six months of expenses; about three liquid if laddered.
Try 3 NISM-style questions
Q1. Assets of ₹80 lakh and liabilities of ₹20 lakh give a solvency ratio of
- 75%
- 25%
- 60%
- 33%
Show answer
Answer: (1) 75%
Net worth ₹60 lakh ÷ ₹80 lakh = 75%.
Q2. A credit card purchase is made in May and the bill is paid in June. In the income and expenditure statement, the expense appears in
- June
- May
- Neither month
- Both months
Show answer
Answer: (2) May
Expenses are recorded when incurred.
Q3. A liquidity ratio of about 4 to 6 indicates
- A comfortable buffer for several months without income
- Excessive debt
- Too little equity in the portfolio for the client's age
- Negative net worth
Show answer
Answer: (1) A comfortable buffer for several months without income
It means 4–6 months of expenses are covered by liquid assets.
Practise all 66 questions Free · explanations for every option · see where you go wrong