Financial assets ratio
The share of an investor's total assets held in financial form — shares, deposits, mutual funds — rather than physical form such as gold or real estate, expressed as a percentage.
In plain language
A household's wealth is not all held the same way. Some of it sits in financial assets — bank deposits, shares, mutual fund units, the Public Provident Fund. The rest sits in physical assets — gold, land, other precious metals.
The financial assets ratio measures how much of total wealth is in the first, financial form. Financial assets are easier to convert to cash, easier to invest in small or frequent amounts, and easier to track and manage than physical ones — which is why a higher ratio is usually preferred, especially as a goal gets closer and the household needs income or funds from its investments.
How it works
It is calculated as financial assets ÷ total assets, expressed as a percentage. Financial assets are primarily income-generating — some, like equity, are also held for long-term capital appreciation — while physical assets like gold and real estate are held differently and are harder to deploy in small amounts.
A higher financial assets ratio is generally preferred when goals are closer to being met and the household is more likely to need funds or income soon; when goals are further away, a lower ratio is less of a concern.
A worked example
PQR holds: shares worth Rs 5 lakh, fixed deposits of Rs 10 lakh, mutual fund investments of Rs 12 lakh, land worth Rs 9 lakh, and gold worth Rs 14 lakh.
Financial assets = 5 + 10 + 12 = Rs 27 lakh
Physical assets = 9 + 14 = Rs 23 lakh
Total assets = 27 + 23 = Rs 50 lakh
Financial assets ratio = (27 ÷ 50) × 100 = 54%
More than half of PQR's wealth is financial, giving reasonable flexibility to draw on it for near-term goals — unlike a household holding most of its wealth in gold and land, which would need to sell an illiquid physical asset first before that money became usable.
Why NISM asks about it
Chapter 3 (Cash Flow Management and Budgeting), section 3.9.9 (Financial Assets Ratio), works through the PQR example in full, right after the leverage ratio and just before the debt to income ratio. Expect a question computing this ratio from a list of assets, or one testing whether a candidate can correctly separate financial from physical assets.
Common exam traps
- Classify each asset correctly before totalling — mutual funds and PPF are financial assets; gold and land are physical, even though both can appreciate in value.
- A conservative approach excludes personal jewellery, the family's own residence, and personal-use assets like a car when totalling assets for financial planning purposes — this convention, covered under Total Assets, applies here too.
- A higher ratio is preferred as goals get closer, not as an absolute rule for every investor regardless of their goals.
Check yourself
1.PQR holds shares of Rs 5 lakh, fixed deposits of Rs 10 lakh, mutual fund investments of Rs 12 lakh, land of Rs 9 lakh and gold of Rs 14 lakh. What is PQR's financial assets ratio?
- a)54 per cent
- b)46 per cent
- c)44 per cent
- d)117 per cent
Show the answer
Answer: (a) 54 per cent
This is the chapter's own worked example (section 3.9.9).
Financial assets = shares + fixed deposits + mutual funds = 5 + 10 + 12 = Rs 27 lakh. Physical assets = land + gold = 9 + 14 = Rs 23 lakh. Total assets = 27 + 23 = Rs 50 lakh. Financial assets ratio = (27 ÷ 50) × 100 = 54%.
Option B (46%) is wrong because it is the physical assets share (23 ÷ 50).
Option C (44%) is wrong because it leaves out the shares (22 ÷ 50). Shares are excluded from liquid assets because their value is uncertain, but they are still financial assets — the chapter lists "shares, debentures, bank deposits, Public Provident Fund, mutual fund investments" as financial assets.
Option D (117%) is wrong because it divides financial assets by physical assets (27 ÷ 23). The denominator is total assets.
Reading the result: "A higher proportion of financial assets is preferred especially when goals are closer to realisation and when there is a need for income or funds to meet the goals."
Where this is taught
Free preparation for NISM Series X-ARelated terms
- Debt to income ratioMonthly debt servicing commitment divided by monthly income — the ratio that says whether a household's income can carry the loans it already has, let alone another one.
- Leverage ratioTotal liabilities divided by total assets — the personal finance ratio that measures how much of a household's asset build-up was paid for with debt.
- Liquidity ratioLiquid assets divided by monthly expenses including loan repayments — the number of months a household could keep paying its bills from short-term assets if income stopped.
- Personal balance sheetA statement of an individual's or household's assets and liabilities at a particular date, whose difference is net worth — the starting point for the personal finance ratios.
- Savings to income ratioTotal accumulated savings divided by annual income — a measure of how prepared a household is for long-term goals such as retirement, expected to rise with age.
- Liquid assets to net worth ratioLiquid assets as a share of net worth — read against the timing of the household's goals, so a low figure is right when goals are distant and a higher one when they are near.
- 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.
- Total assetsThe current market value of everything an individual owns — physical and financial — and the figure from which total liabilities are subtracted to get net worth.
- Discretionary expensesHousehold spending that is not essential and can be cut if money is tight — entertainment and lifestyle wants, as against the mandatory and essential living expenses that come before them in a budget.
- Essential living expensesThe spending a household needs for daily life — groceries, rent, transport, utilities — that comes after mandatory expenses but before discretionary spending in a household budget.