How to choose the right financial product

Published: September 7, 2015 at 9:25 am

Last Updated on

How to choose the right financial product suitable for my needs?” How I wish this question was asked more often! Instead, many investors (if not most), soon after they start earning, ask questions like, which is the best tax-saving product?, the best pension plan?, the child plan?, best mutual fund ? etc.

The right answer to the wrong question does not help much. An attempt to answer the titular question by focussing on personal needs –> deciding an investment strategy –> choosing a suitable class of products and then (only then) —> choosing the right financial product.

This post is meant for young earners. Request experienced readers to please share this post with their contacts.

Some self-explanatory questions:

  • How much can I set aside for investment/saving each month?

A simple cash flow analysis: how much is earned, how much spent and how much is left, is enough to tell you this.

  • How much of this amount am I going to ‘save’ for short-term goals (less than 5 years away)?

The benchmark for such goals is capital protection. That is, I will not use volatile instruments for such goals. This eliminates stocks, equity mutual funds, gold, ULIPS, all debt mutual funds except liquid and ultra-short-term funds.

Simple products like fixed deposits and recurring deposits will get the job done (tax liability and inflation can be ignored for short-term goals) for durations below 3 years.

One does not need a portfolio for such goals. A single financial product is enough.

If the return is fixed and guaranteed, liquidity is not an issue. The money can be locked in.

  • How much of this amount am I going to ‘invest’ for long-term goals (more than 10 years away)?*

Inflation is the primary benchmark for such goals. Reducing tax liability is the secondary benchmark.

Such goals require a portfolio. That is. it must contain a basket of different financial products.

Some of it volatile, but with high potential to beat inflation – stocks or equity mutual funds. The fact that gains from equity instruments are currently tax-free is an icing on the cake.

Some of it steady – they may not beat inflation, but lend crucial stability to the portfolio:  fixed income products like debt mutual funds are preferable to fixed deposits because of lower tax liability.

Hate ads but would like to support the site? Subscribe to our ad-free newsletter and get beautifully formatted full articles delivered to your inbox!

Once we understand that both types of products are crucial for the goal, the next step is to decide on the asset allocation for a financial goalThat is, the percentage exposure to equity and fixed income should be decided. Say, for example, 50% in equity and 50% in fixed income.

Tax-saving options are available in both categories: Equity Linked Saving Scheme  (volatile ) mutual funds with a lock-in of 3 years and PPF (steady income) with a lock-in of 15 years.

The amount set aside for long-term goals can also include the amount to be used for tax-savings.  For example, if two lakhs a year is to be allocated for long-term investments, 1.5L of that can be set aside for tax savings: 50% in ELSS mutual funds and 50% in PPF (that is in the same proportion as the asset allocation).

Key takeaway: Financial product categories are decided as per when the corpus is required. Choosing the right product category is the major step. Once there is clarity about this, it is so much easier to choose the product from that category. One product from that category can be a tax-saving product. There are several posts here on choosing equity and debt mutual funds. You can check them out using the search option.

Liquidity of a financial instrument is a key factor. An asset is an asset only if it can be liquidated at will.

Real estate is a big no-no because of this reason.

NPS is a bigger no-no because of this reason: Do Not Invest Rs. 50,000 in NPS For Saving Tax!

Anything that is difficult to liquidate at the time of need or in case of emergencies (emergency fund can help only so much sometimes).

All products discussed above are extremely liquid under normal circumstances (please don’t quote the JP Morgan case here, please!)

(*) Planning for goals between 5-10 years can be a bit tricky. You could consult this post for some thoughts: Planning for intermediate-term financial goals

In summary, to choose the right financial product,

Understand the need  –>  write down an investment strategy –> Shortlist product categories that fit in this strategy  –> Choose products from that category, including tax-saving products, inline with the investment strategy.

Do share if you found this useful
Hate ads but would like to support the site? Subscribe to our ad-free newsletter and get beautifully formatted full articles delivered to your inbox!

About the Author M Pattabiraman author of freefincal.comM. Pattabiraman(PhD) is the author and owner of  He is an associate professor at the Indian Institute of Technology, Madras since Aug 2006. Pattu” as he is popularly known, has co-authored two print-books, You can be rich too with goal based investing (CNBC TV18) and Gamechanger and seven other free e-books on various topics of money management.  He is a patron and co-founder of “Fee-only India” an organisation to promote unbiased, commission-free investment advice. Pattu publishes unbiased, promotion-free research, analysis and holistic money management advice. Freefincal serves more than one million readers a year (2.5 million page views) with numbers based analysis on topical issues and has more than a 100 free calculators on different aspects of insurance and investment analysis. He conducts free money management sessions for corporates  and associations(see details below). Previous engagements include World Bank, RBI, BHEL, Asian Paints, TamilNadu Investors Association etc. Contact information: freefincal {at} Gmail {dot} com (sponsored posts or paid collaborations will not be entertained)
Want to conduct a sales-free "basics of money management" session in your office?
I conduct free seminars to employees or societies. Only the very basics and getting-started steps are discussed (no scary math):For example: How to define financial goals, how to save tax with a clear goal in mind; How to use a credit card for maximum benefit; When to buy a house; How to start investing; where to invest; how to invest for and after retirement etc. depending on the audience. If you are interested, you can contact me: freefincal [at] Gmail [dot] com. I can do the talk via conferencing software, so there is no cost for your company. If you want me to travel, you need to cover my airfare (I live in Chennai)

Connect with us on social media

Content Policy

Freefincal has original unbiased, conflict-of-interest-free,  topical reports, reviews, commentary and analysis on all aspects of personal finance like mutual funds, stocks, insurance etc. All guest authors and contributors to the site also do not have any conflict of interest. If you find the content useful, please consider supporting us by (1) sharing our articles and (2) disabling ad-blockers for our site if you are using one. No promotional content We do not accept sponsored posts and link exchange requests from content writers and agencies. This is our privacy policy Our website is non-profit in nature. The revenue from the advertisement will only be used for hosting charges, domain registration charges, specific plugins necessary for traffic growth and analytics services for search engine optimisation.

Do check out my books

You Can Be Rich Too with Goal-Based Investing

You can be rich too with goal based investingMy first book is meant to help you ask the right questions, seek the right answers and since it comes with nine online calculators, you can also create custom solutions for your lifestyle! Get it now.  It is also available in Kindle format.
Gamechanger: Forget Startups, Join Corporate & Still Live the Rich Life You WantGamechanger: Forget Start-ups, Join Corporate and Still Live the Rich Life you wantMy second book is meant for young earners to get their basics right from day one! It will also help you travel to exotic places at low cost! Get it or gift it to a young earner

The ultimate guide to travel by Pranav Surya

Travel-Training-Kit-Cover This is a deep dive analysis into vacation planning, finding cheap flights, budget accommodation, what to do when travelling, how travelling slowly is better financially and psychologically with links to the web pages and hand-holding at every step.  Get the pdf for ₹199 (instant download)

Free Apps for your Android Phone

All calculators from our book, “You can be Rich Too” are now available on Google Play!
Install Financial Freedom App! (Google Play Store)
Install Freefincal Retirement Planner App! (Google Play Store)
Find out if you have enough to say "FU" to your employer (Google Play Store)

Blog Comment Policy

Your thoughts are vital to the health of this blog and are the driving force behind the analysis and calculators that you see here. We welcome criticism and differing opinions. I will do my very best to respond to all comments asap. Please do not include hyperlinks or email ids in the comment body. Such comments will be moderated and I reserve the right to delete the entire comment or remove the links before approving them.

Leave a Reply

Your email address will not be published. Required fields are marked *