Unit 10 · 9% of the paper
Selecting the Right Investment Products for Investors
Matching a product to a person rather than to a market view — risk profile, time horizon and the purpose of the money. Nine per cent of the paper, and where suitability stops being a word.
In short
- Suitability is decided by the investor's circumstances, not by which scheme is doing well.
- Risk profile has two halves: how much loss they can afford, and how much they can tolerate.
- Time horizon usually decides the asset class before anything else does.
- Money needed soon does not belong in equity, however good the outlook.
- Recommending the highest-paying product rather than the suitable one breaches the code of conduct.
Unit 9 was about telling schemes apart. This one is about telling investors apart, which is the harder half and the one the code of conduct is written around. Nine per cent of the paper, and almost every question is a situation rather than a definition.
What goes into a risk profile?
Two things that are easy to run together and should not be. Risk capacity is what an investor can afford to lose without damage — a function of income, savings, dependants, existing commitments and how far away the money is needed. Risk tolerance is what they can live with emotionally, which is about temperament and experience.
They can point in opposite directions. A young earner with no dependants may have high capacity and low tolerance; someone comfortable with volatility may have a capacity their circumstances do not support. The lower of the two is usually where a recommendation has to sit, because a portfolio abandoned in a bad month has failed regardless of how sound it was.
Why time horizon usually decides first
Because it is the least negotiable input. Money needed in eight months cannot be exposed to equity, however promising the outlook, since there may be no time to recover from a fall. Money not needed for fifteen years can bear volatility that would be reckless over one.
This is why the goal has to be established before the product. 'Where should I invest' has no answer; 'where should I put money I need in three years for a specific purpose' has a narrow one.
Matching a product to a need
- Short horizon, capital needed intact: the safer, shorter-duration end. Return is not the objective here; availability is.
- Long horizon, growth wanted, volatility bearable: equity-oriented schemes, given time to work.
- Regular income required: a withdrawal approach designed for it, rather than relying on distributions that are not guaranteed.
- A specific tax objective: ELSS, remembering the three-year lock-in on every instalment.
- Uncertain timing: liquidity matters more than the last half per cent of return.
How mutual funds compare with other products
An investor is choosing among options, not only among schemes, and a distributor should be able to place mutual funds honestly against a deposit, gold, property or a small savings scheme. Each is better at something: a deposit gives certainty of amount; property is illiquid and lumpy; gold behaves differently from equity, which is sometimes exactly the point.
What mutual funds offer is diversification, professional management and liquidity at a small ticket size. What they do not offer is a guaranteed amount on a date, and saying so plainly is more useful than any comparison table.
The rule underneath all of it
Recommend what suits the investor. Not what is performing, not what is being promoted, and not what pays the most — that last one is a breach of the code of conduct and can cost the ARN. Examination questions here are usually a scenario with one option that fits the person and one or two that fit the market; the fit to the person always wins.
What the examination tends to ask here
Nine questions or so, mostly scenarios: an investor with a stated horizon, a stated need and a stated temperament, and four products. Work from horizon first, then capacity and tolerance, then the product. The distractor is almost always the option that would perform best if the market cooperated.