Financial products
Also written Financial and non-financial products
Investment options such as a bank fixed deposit, shares or a mutual fund — as opposed to non-financial products like land, gold or silver — that the booklet asks investors to judge on safety, liquidity and return.
In plain language
When you invest, your money goes into one of two kinds of things.
A financial product is a paper or electronic claim: a fixed deposit with a bank, shares in a company, or units of a mutual fund. A non-financial product is a physical thing you can hold: land, gold, silver.
The booklet's reason for making this split is that the two behave differently. Financial products are usually easier to buy, sell and value at a fair market price. Non-financial products can be harder to sell quickly, and the price is often a matter of local negotiation rather than a public quote.
The booklet also warns that "complexity of financial products" is one of the reasons ordinary people need financial literacy in the first place — the range of financial products on offer keeps growing, and not every one of them suits every investor.
How it works
Chapter 2's own wording: investment is "the act of deployment of money out of savings into financial or non-financial products with the expectation of earning higher returns over a period of time." It lists financial products as "fixed deposit in bank, buying shares in stock market, investing in Mutual funds, etc." and non-financial products as "purchase of land, gold, silver, etc."
Chapter 3 gives the yardstick for judging any financial product: the three pillars of investment — safety (will your capital and return come back as agreed), liquidity (how quickly can you convert it to cash at a fair price) and return (income plus capital appreciation). Every financial product in the booklet — a savings account, a fixed deposit, a mutual fund, a share — is judged against these three, and they trade off against each other: a savings account is very liquid and very safe but pays little; equity can return more but is less safe and, for an individual company, sometimes less liquid.
A worked example
Kavita has Rs 3,00,000 to invest. She splits it two ways.
Rs 2,00,000 goes into financial products: Rs 1,00,000 into a bank fixed deposit and Rs 1,00,000 into an equity mutual fund via SIP. Both are electronic holdings she can check on an app, and both can be converted to cash — the FD after its term, the mutual fund units on any working day at that day's NAV.
Rs 1,00,000 goes into a non-financial product: 15 grams of gold, bought from a local jeweller. When she needs cash in a hurry eighteen months later, the fixed deposit and the mutual fund redemption both credit her bank account within a few working days. The gold has to be taken to a jeweller, weighed, and sold at whatever price and making-charge deduction he offers that day — a slower, less transparent process than either of her financial products.
Why NISM asks about it
Chapter 2 (Key Concepts in Personal Finance) introduces the financial-versus-non-financial split as part of defining "What are Investments?" Chapter 3's three pillars of investment (safety, liquidity, return) is the framework the exam applies to test whether a candidate can classify and judge financial products. Expect a classification question — is an item a financial or a non-financial product — and a pillars question testing which of the three a given product scores well or badly on.
Common exam traps
- Gold and land are non-financial products in the booklet's own classification, even though gold is bought and sold through organised commodity exchanges elsewhere in the same booklet (Chapter 5). The Chapter 2 split is about direct personal ownership of the physical asset.
- Liquidity is about speed and fairness of conversion to cash, not just whether a sale is possible. A non-financial product can usually be sold eventually; the concern is how fast and at what certainty of price.
- Do not treat "financial product" as a synonym for "investment" — a non-financial product like gold is still an investment in the booklet's own definition, just not a financial one.
Check yourself
1.Which of the following best describes investment as defined in the chapter?
- a)Money kept aside in a savings bank account for emergencies
- b)The deployment of money out of savings into financial or non-financial products with the expectation of earning higher returns over a period of time
- c)A guarantee of higher returns than a bank deposit
- d)Money borrowed to purchase an asset
Show the answer
Answer: (b) The deployment of money out of savings into financial or non-financial products with the expectation of earning higher returns over a period of time
"Investment is the act of DEPLOYMENT OF MONEY OUT OF SAVINGS into financial or non-financial products with the EXPECTATION of earning HIGHER RETURNS OVER A PERIOD OF TIME." Four things are asserted and each matters. It comes out of savings — savings must exist first, which is why the two concepts are taught in that order. It goes into financial products (fixed deposit, shares, mutual funds) or non-financial products (land, gold, silver). It carries an expectation, not a promise — option (c) fails on exactly this word, and the chapter reinforces it: "return on investments may rise or fall over time and it is quite normal for that to happen." And it has a time horizon: short, medium or long term.
2.Which of the following is NOT among the issues the chapter says generated the need for better management of personal finances?
- a)Complexity of financial products
- b)Prevalence of fraudulent and Ponzi schemes
- c)Fluctuation in foreign exchange rates
- d)Need for funds to get a better quality of life after retirement
Show the answer
Answer: (c) Fluctuation in foreign exchange rates
"People face various issues like COMPLEXITY OF FINANCIAL PRODUCTS, PREVALENCE OF FRAUDULENT AND PONZI SCHEMES, NEED FOR FUNDS TO GET A BETTER QUALITY OF LIFE AFTER RETIREMENT, etc. These issues have generated need for a better management of personal finances with PROPER MANAGEMENT OF INCOME AND EXPENDITURE." Currency movement is a genuine economic phenomenon, but it is not one of the four the chapter names. Examiners build this question type by inserting a real-world problem that simply is not on the list — other common intruders are unemployment, stock market volatility, rising interest rates and taxation. Learn the four as a closed set: complexity, fraud, retirement, income versus expenditure.
3.A bank relationship manager offers a product described as "insurance plus investment plus tax saving, all in one, with money back". The customer cannot read the document but is impressed that it does three jobs. Which of the chapter's four issues is this, and what is the right response?
- a)It is a Ponzi scheme, so the customer should complain to the police
- b)It is the complexity of financial products; the customer should obtain in writing the split between cover and investment, the charges, what happens on stopping payment, the payout schedule and the free-look period — and should not sign on the day of the pitch
- c)It is a retirement funding issue, so the customer should simply buy more of it
- d)It is not one of the four issues, since a regulated bank is involved
Show the answer
Answer: (b) It is the complexity of financial products; the customer should obtain in writing the split between cover and investment, the charges, what happens on stopping payment, the payout schedule and the free-look period — and should not sign on the day of the pitch
This is complexity of financial products, the first of the four issues — not fraud. The bank is regulated and the product is very likely legitimate; the customer is simply being sold something he cannot read, which is precisely the exposure the chapter names. "Three jobs at once" is not automatically a virtue: a bundled product must charge for all three, usually invisibly inside one premium, so the protection is often thin compared with pure term cover and the savings portion is often inflexible, with heavy surrender losses in the early years — which cuts directly against the liquidity pillar of Chapter 3. The literate response is a set of written answers (cover versus investment split, charges, consequences of stopping, payout schedule, free-look period) and one procedural rule worth more than all of them: do not sign anything on the day it is first shown to you. Complexity loses most of its power once time pressure is removed.
Where this is taught
Free preparation for NISM Series SEBI-ICERelated terms
- Mutual fundA trust registered with SEBI that pools money from many investors and invests it in securities on their behalf — not a different product from shares and bonds, but a different way of owning them.
- Economy of scaleThe lower per-unit transaction cost a mutual fund achieves by buying and selling large amounts of securities at once, compared with what an individual investor would pay for the same trades alone.
- Goal-based investingAn investing approach that starts from a specific personal goal — its cost and its date — and works backward to the asset allocation and investments needed to reach it.
- Non-financial productsPhysical assets bought as an investment — land, gold, silver and the like — as distinct from financial products such as fixed deposits, shares and mutual funds.
- Personal financeThe practice of managing your own money — income, spending, saving, investing, insurance, tax and retirement — so both daily life and future goals are funded.