Objectives and suitable investments

An investor rarely wants just one thing from their money. They may want it to grow. They may want it to pay them regularly. They may want to get at it in a hurry. They may simply want it to stay safe.

No single investment does all four well. The workbook lines up four objectives against the instruments that suit each one, and the lesson is really about concentration risk. Putting all your money behind one objective, in one asset, leaves you exposed exactly where that asset is weak.

The workbook's own table:

Five illustrative investors, one lesson each, all drawn from the workbook:

• Jayesh invests only in real estate. An urgent need for funds arises, and he cannot sell the property or get a loan quickly enough. Real estate fails the liquidity test.
• Kamal leaves everything in a savings account earning very low interest. Safe and liquid, but it fails to accumulate enough for his future goals.
• Latika invests entirely in equities. The value keeps fluctuating, and she is not sure the money will be there when she needs it.
• Harmeet holds most of her wealth in gold jewellery. No income is generated to meet her monthly expenses.
• Gayatri holds bank fixed deposits at a fixed rate, while her expenses keep rising. Income does not track inflation.

Each of them chose one objective and got only that one. Asset allocation, spreading money across categories so a fall in one is cushioned by another, is the workbook's answer to all five stories at once. A household splitting a Rs 10,00,000 surplus across two or more of the four objectives, rather than putting the full Rs 10,00,000 behind just one of them, is applying the lesson directly.

Mr Verma, 45, has three goals: a Rs 15,00,000 house down payment in 2 years, a monthly household top-up of Rs 20,000 once he retires in 15 years, and quick access to Rs 3,00,000 for emergencies at all times.

Following the table, the down payment sits in short-term debt funds and bank deposits for liquidity and near-term certainty. The emergency fund sits in a liquid mutual fund scheme or savings account for instant access. The retirement income goal, still 15 years away, is built through equity funds now for growth, to be shifted into debt instruments closer to retirement for regular income.

Had Mr Verma instead put all three goals into equity funds alone, chasing growth, he would face Latika's problem: a market fall in year 1 or 2 could wipe out the down payment just when he needs it, exactly the concentration risk the five stories illustrate.

Chapter 18, section 18.3.1 (Role of Risk Profiling in Asset Allocation), sets out the objectives-and-investments table immediately followed by the five investor vignettes: Jayesh, Kamal, Latika, Harmeet and Gayatri, as the worked illustration of concentration risk. Expect a question naming one of the five and asking what went wrong, or a scenario asking which instrument suits a stated objective.

• Real estate appears under both growth and regular income in the workbook's table. It is not purely a growth asset, but it fails badly on liquidity, as Jayesh shows.
• Gold appears only under growth, not income. Harmeet's problem is exactly that gold generates no income.
• Capital preservation and liquidity look similar in the table (cash, bank deposits) but are different objectives. Preservation is about not losing value; liquidity is about being able to access it fast.
• The five stories are not about bad products. Fixed deposits, equities, real estate and gold are all legitimate. The error in each case is concentrating a person's entire portfolio in one of them.