📚 PASS Research Analyst Certification Examination Difficulty: Beginner ℹ️ Info   ~5 min read
📌 Chapter 12.3 — Risks in Investments

Imagine you are reviewing a client’s portfolio that includes a significant holding in Public Provident Fund (PPF) and long-term National Savings Certificates (NSC). Your junior analyst asks why these assets aren’t appearing on the same volatility chart as the equity indices in your market report. You must explain that these are non-marketable financial products, which carry an entirely different risk profile compared to exchange-traded securities. While market-linked assets provide continuous price discovery, non-marketable products are locked in, lacking the secondary market liquidity that dictates daily valuations.

In the Indian context, non-marketable assets—such as bank fixed deposits, small savings schemes, or even certain private equity placements—do not fluctuate with market sentiment. Because there is no active secondary market, these instruments are generally held to maturity. This lack of marketability means you cannot ‘sell out’ of a position when you believe interest rates are set to rise, making them immune to daily market volatility but highly vulnerable to liquidity and opportunity cost risks.

When conducting a holistic financial analysis, you must treat these assets differently in your valuation models. Since they lack a market price, they are typically carried at cost or amortized value rather than fair market value. This requires you to look beyond the ticker symbol and focus on the underlying cash flows and the regulatory environment.

For instance, while a government-backed NSC offers safety from default risk, it ties up capital that could otherwise be deployed into market-linked opportunities during a market correction. Ignoring the impact of these non-marketable assets in an asset allocation strategy can lead to an inflated sense of portfolio liquidity.

Ultimately, your role as an analyst is to quantify the trade-off between the stability of non-marketable assets and the flexibility of marketable ones. When a client holds a large portion of their wealth in locked-in products, they essentially sacrifice ’exit optionality’ for a guaranteed interest rate. Your recommendation should reflect this by stress-testing the client’s ability to meet sudden cash requirements without forcing a liquidation of their long-term marketable investments. Always ensure that the return on non-marketable assets adequately compensates for the complete lack of liquidity during the investment tenure.

Nuance

⚠️ Nuance
A common pitfall for candidates is equating ’non-marketable’ with ‘risk-free’. While these assets may lack market price volatility, they are highly sensitive to inflation risk and reinvestment risk. Analysts often forget that the inability to exit a position during a period of rapidly rising interest rates is a significant economic loss, even if the asset’s ledger value remains stable.

Check Your Understanding

Practice Question 1

Which of the following is the defining characteristic of a non-marketable financial product in the Indian financial system?

Practice Question 2

An investor holds a 5-year bank fixed deposit that does not permit premature withdrawal. What is the primary risk identified by a research analyst for this specific instrument?

This is a companion read for Section 12.3 — Risks in Investments from PASS Research Analyst Certification Examination by Akhilesh Gururani, available on Amazon Kindle.

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