Financial assets
Claims on future cash flows such as shares, debentures, bank deposits, PPF and mutual fund units, as opposed to real or physical assets like gold, diamonds, infrastructure and real estate.
In plain language
Everything an investor owns falls into one of two boxes.
- Real or physical assets are tangible: gold, diamonds and other precious metals, infrastructure, real estate.
- Financial assets are paper (or, today, electronic) claims: shares, debentures, bank deposits, public provident fund, mutual fund investments and the like.
A financial asset is not valuable for what it is. A share certificate has no use of its own. It is valuable for what it entitles you to receive — interest, dividends, redemption proceeds, a share of profits. The workbook puts it in one line in Chapter 2: financial instruments are essentially claims on future cash flows.
The workbook lists what makes financial assets attractive to ordinary savers (Box 1.1): greater liquidity, flexibility, convenience of investing and ease of maintaining the investments. They are primarily income generating, though some — equity-oriented investments — are held for long-term capital appreciation. And they allow small and frequent investments, which a flat or a kilo of gold does not.
How it works
The workbook classifies financial assets in two ways.
1. By the kind of claim (section 2.2). There are two generic types of financial instrument — debt and equity. A debt holder is promised a stream of cash flows. An equity holder owns what is left after every contractual claim is paid.
2. By transferability (section 2.2).
| Form | Examples | Secondary market? |
|---|---|---|
| Security form | shares, bonds, notes | Yes — easily transferable, traded on capital and money markets |
| Non-security form | fixed deposits, insurance | No — cannot be transferred to another investor |
Non-financial investments — real estate, gold, commodities — are called real investments.
Why the definition carries money in Chapter 15. SEBI's accreditation criteria for an individual, HUF, family trust, sole proprietorship or partnership count financial assets separately from total net worth. An applicant qualifies with:
- annual income of at least Rs 2 crore; or
- net worth of at least Rs 7.5 crore, of which not less than Rs 3.75 crore is in financial assets; or
- annual income of at least Rs 1 crore and net worth of at least Rs 5 crore, of which not less than Rs 2.5 crore is in financial assets.
A large house does not make an accredited investor on its own. Half the net worth threshold has to sit in financial assets.
A worked example
The investor and her holdings are illustrative; the thresholds are the workbook's.
Meera, a Pune business owner, applies for accreditation so she can invest through an AI-only Fund. Her annual income is Rs 80 lakh and her net worth is Rs 9 crore, made up of:
| Holding | Type | Rs crore |
|---|---|---|
| Commercial property | Real | 5.50 |
| Gold | Real | 0.50 |
| Listed shares | Financial | 1.60 |
| Mutual fund units | Financial | 0.90 |
| Bank fixed deposits | Financial | 0.50 |
| Total | 9.00 |
Financial assets = 1.60 + 0.90 + 0.50 = Rs 3.00 crore.
- Income route: Rs 80 lakh is below Rs 2 crore. Fails.
- Net worth route: Rs 9 crore clears Rs 7.5 crore, but financial assets of Rs 3.00 crore are Rs 75 lakh short of Rs 3.75 crore. Fails.
- Mixed route: income of Rs 80 lakh is below Rs 1 crore. Fails.
If Meera sells her gold and puts the Rs 50 lakh into mutual funds, her financial assets rise to Rs 3.50 crore — still Rs 25 lakh short. Her net worth has not changed at all; only its composition matters here.
Why NISM asks about it
Chapter 1, Box 1.1 (Financial Assets versus Real Assets), gives the list and the advantages. Chapter 2, section 2.2, gives the debt/equity split and security versus non-security form, and sample question 2 of Chapter 2 asks exactly this: financial assets are generically classified into debt and equity. Chapter 15, section 15.4, uses financial assets inside the accreditation thresholds. Expect a classification question and a threshold question.
Common exam traps
- The two generic categories are debt and equity — not "bonds and deposits", and not "equity and gold".
- Gold, diamonds, real estate and infrastructure are real assets, not financial assets. Gold held physically is a real investment.
- Not every financial asset is a security. A fixed deposit and an insurance policy are financial assets in non-security form: no secondary market.
- Financial assets are "primarily income generating" in the workbook's words — but equity-oriented investments are held for capital appreciation. Both statements are in Box 1.1.
- In the accreditation test, net worth alone is not enough on the Rs 7.5 crore route: at least Rs 3.75 crore of it must be financial assets. On the Rs 1 crore income route, the figures are Rs 5 crore and Rs 2.5 crore.
Where this is taught
- Series XIX-E · Chapter 1: Investments Landscapeintroduced here
- Series XIX-D · Chapter 1: Investments Landscapeintroduced here
- Series X-A · Chapter 1: Introduction to Personal Financial Planningintroduced here
Related terms
- InvestmentThe current commitment of savings for a defined period, in the expectation of receiving back more than was committed — savings put to work, as distinct from savings merely held.
- Accredited InvestorAn investor certified by an accreditation agency as meeting SEBI's income or net-worth tests, and therefore allowed into products on relaxed terms — including below the Rs 1 crore AIF floor.
- Equity sharesOwnership in a company entitling holders to a share in profits and a vote on its affairs; equity holders are residual owners after all contractual claims, rewarded by dividend and capital appreciation.
- LiquidityThe degree of ease with which you can turn an investment back into cash at a fair value — one of the three pillars of investing, alongside safety and return.
- Physical assetsTangible assets such as real estate, gold and other precious metals — held for appreciation, treated as natural inflation hedges, and illiquid, unregulated and large-ticket by nature.
- Traditional investmentInvestment in financial securities — listed stocks and bonds, general mutual fund units and ETFs — whose shared feature is liquidity; distinct from savings such as bank deposits or ornamental gold.
- LeveragingUsing borrowed funds rather than own funds to buy an asset — it can raise the return on the investment, and it magnifies the loss by the same mechanism.