This document discusses how investment products should be chosen based on tenure and objective. It presents a table mapping products to typical tenures and objectives: bank FDs, liquid funds, and ultra-short term funds for less than 1 year for liquidity; bank FDs and income funds for 1-3 years for extra returns and liquidity; hybrid funds for 3-5 years for better returns than FDs and liquidity; and equity funds for more than 5 years for capital appreciation and liquidity. It notes that investors often mismatch products and tenures, such as keeping bank FDs for 5-10 years when their objective is short-medium term liquidity, or liquidating equity funds too early when they are meant for long

1. Product, Tenure and Objective
Yesterday a good friend who happens to be a prospect as well asked, Vinayak how does it
matter all the products give more or less the same return, then why not only one product i.e.
Bank FD for 10 years. Her bank is offering 9.5% for 10 years.
This compelled me to write this article. How a product needs to be understood and the
objectives they are supposed to meet basis their tenure. Let me try to put it in Table :
Product Tenure Objective
Bank FD,Liquid funds,ultra short
term funds
Less than one year Liquidity with some extra return
over normal a/c
Bank FDs, income funds Upto three years Extra returns with liquidity
Hybrid funds Three years to five years Better return than FDs,liquidity
Equity funds More than five years Capital appreciation, Liquidity
SIP in equity funds Min 7 years To achieve high priority long
term goals
The objectives written above are in the order of priorities which means the liquid fund should
be looked for first as liquidity then return, similarly while investing into equity one should
keep the capital appreciation as top priority even if it offers liquidity that automatically sets
condition for long term investing.
Let’s look at how as an investor we tend to behave. First of all people buy an endowment plan
of life insurance which becomes a liability over next 15-20 years. The premiums are high for a
miniscule life cover. Returns are so poor that I didn’t feel like putting it in the above table.
Bank FD which is for our short to medium term objective we keep it for 5-10 years, where as its
primary objective is to offer liquidity with moderate returns. But what we liquidate the first is
‘Equity’, which is a long term investment and may take longer to deliver.
Now let us look at the returns part. Assuming that long term FD and Equity mutual fund both
will give 10% return, which is not a fair comparison in favor of equity funds because they have
delivered much higher returns.
Product Returns Tax Inflation Real Return
1-3 years FDs 8% 30% 8% -2.4%
Income funds 2-3
years
8% 10% (Long term
capital gain)
8% -0.8%
5-10 years Bank
FDs
10% 30% 8% -1%
AAA Tax free bonds
for 10 years
8.4% NIL 8% 0.4%
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2. Equity mutual fund
for 10 years
10% NIL 8% 2%
• Assumption 1: Highest tax bracket is considered
• Assumption 2: Surcharge and education CESS is not considered for calculation
simplicity
• The above table is for illustration purpose only. The actual returns offered by Banks
may vary
The above table clearly suggests that when one is looking for returns, it’s the real return i.e.
(Real Return= Return-tax-inflation). The table suggests that only equity has given positive real
return over 10 years, does that mean should I put all my money in equity, the answer is big
‘NO’. The overall portfolio should be able to beat the inflation over longer period and for short
term to medium term needs (read 1-3 years) liquidity should be the highest priority.
In the above table the assumption for equity returns has been taken as very conservative. Over
10 years period one should expect 12-15% return from this asset class. But as I keep mentioning
‘Patience is the key’. Life is a marathon so is equity.
Very often investors pull out money from equity or discontinue their SIPs after 2-3 years to fund
their medium term needs and most of the time at a loss by not giving enough chance to the
asset class which has a huge potential to deliver great returns over longer period because they
can’t touch or STOP their endowment life policy and the FDs which is of longer tenure.
If one sets the priorities right as mentioned in the table and align it to the financial goals,
journey should be very happy and peaceful.
Happy investing!
Disclaimer: Mutual fund investments are subject to market risks. Please read the scheme
related documents carefully before investing.
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