NISM-Series-X-B: Investment Adviser (Level 2) · Comparison of Products Across Categories

Liquidity, Tenure and Cost Comparison of Investment Products

Updated 11 October 2026 · Fact-checked

Liquidity is how fast and cheaply you can exit a product. Tenure is its lock-in or maturity. Cost is what you pay through expense ratios, charges and exit loads. To solve a question, identify the product, check its exit rules, then check what it charges and when. Match both to the client's need.

Understand Liquidity, Tenure and Cost Comparison

Every product answers three practical questions. Can the client get money out when needed? For how long is the money tied up? What does it cost to hold and to leave? A good adviser compares products on these three, not on return alone.

Liquidity is the ease of turning an investment into cash at close to fair value. Listed shares and open-ended mutual fund units are highly liquid. Real estate, AIF units and PMS portfolios with exit conditions are less so. A product can be tradable and still be costly to exit, so look at the price of exit too.

Tenure has two forms. A lock-in is a period in which you cannot redeem at all, such as the 3-year lock-in of ELSS or the 5-year lock-in of a tax-saver bank fixed deposit. Maturity is the date the product ends, such as the 15-year term of PPF. Some products have both: PPF has a 15-year term and allows partial withdrawals from the 7th financial year, counted from the year of opening, within limits. NPS Tier I is meant to run until retirement, with limited partial withdrawals allowed for specified purposes.

Cost comes in layers. The expense ratio is the annual fee of a mutual fund scheme, shown as a percentage of average net assets and deducted daily from the NAV. Direct plans have a lower expense ratio than regular plans because no distributor commission is built in. An exit load is a percentage of the redemption value charged if you redeem within a stated period. It is mainly credited to the scheme, net of GST, and is not paid to a distributor. The AMC may retain up to 0.05% of the redemption proceeds to cover administrative and operational expenses related to the exit load, as per the SEBI Mutual Funds Regulations. Other costs include PMS management and performance fees, AIF fees, insurance charges and penalties on premature withdrawal from deposits.

In the exam, the same trap repeats. Students pick the product with the best features and ignore the client's time horizon. Always tie the product's exit rule to when the client needs the money.

Key formulas to remember

Exit load amount: Exit load = Exit load % × Redemption value (NAV × units redeemed); Applies only if redeemed within the exit load period. Net proceeds = Redemption value − Exit load.
Expense ratio cost: Annual cost ₹ = Expense ratio % × Average net assets (or the investor's average holding); Charged daily within NAV, not billed separately. Direct plan ratio is lower than regular plan ratio.
Annual cost difference: Saving = (Regular ratio − Direct ratio) × Investment value; Use the same investment value for both plans.
ELSS lock-in: 3 years from the date of each investment; For SIPs, each instalment has its own 3-year lock-in.
Key tenure facts: PPF: 15 years | Tax-saver FD: 5 years | ULIP: 5 years | SCSS: 5 years | AIF Cat I and II: closed-ended, minimum tenure 3 years; Learn these as a fixed list. SCSS can be extended by a further 3 years.

How to solve Liquidity, Tenure and Cost Comparison questions

Use this method for any liquidity, tenure or cost question. It stops you from choosing on return or familiarity.

1Read the client need first: when is the money needed, and could it be needed early?
2Identify each product's category: open-ended, closed-ended, listed, deposit, insurance or pension.
3Note the lock-in or maturity of each product and check whether it fits the time horizon.
4Check how the exit works: redemption at NAV, sale on exchange, surrender or premature closure with a penalty.
5List the costs: expense ratio, exit load, fees, commissions and penalties. Check whether the cost applies to this holding period.
6If a number is asked, compute the exit load or cost on the correct base, then subtract it from the value.
7Eliminate options with a wrong lock-in or a wrong cost description, then pick the one that fits the client.

Quickest way: Three-line scan: Exit, Lock, Charge

When to use it: Use it in MCQs that ask which product is most liquid, has the longest lock-in, or is cheapest to exit.

Exit: can the client redeem on any business day (open-ended fund, listed share) or only on conditions?
Lock: compare lock-in numbers directly. Among ELSS, tax-saver FD, ULIP, SCSS and PPF, ELSS (3 years) has the shortest lock-in and PPF (15 years) the longest fixed term. NPS Tier I is locked in until retirement, so you cannot compare it by years.
Charge: ask if the cost applies in the stated holding period. An exit load does not apply after its period ends.
If two options look right, choose the one that matches the client's time horizon.

Common mistakes in Liquidity, Tenure and Cost Comparison

Treating ELSS lock-in as 3 years from the first SIP instalment for all units.
Students think of the fund as one block.
Fix: Each SIP instalment is locked in for 3 years from its own date.
Saying exit load is paid to the distributor or the AMC as income.
It sounds like a selling charge.
Fix: Exit load is charged on redemption within a stated period and is mainly credited to the scheme, net of GST. The AMC may retain up to 0.05% of the redemption proceeds to cover administrative and operational expenses related to the exit load, as per the SEBI Mutual Funds Regulations. It is not paid to the distributor.
Confusing the expense ratio with a one-time fee.
Investors never see a bill.
Fix: It is an annual percentage of average net assets, deducted daily from NAV.
Calling a listed or tradable product always liquid.
Listing is equated with easy exit.
Fix: Check trading volumes and the price at which you can sell. Closed-end fund units may trade below NAV.
Mixing PPF tenure with its withdrawal rules.
Both are time-based.
Fix: PPF matures in 15 years and is extendable in blocks of 5 years. Partial withdrawals are allowed from the 7th financial year, counted from the year of opening, and within limits.
Computing exit load on the amount invested instead of the redemption value.
The investment amount is the number given first.
Fix: Apply the percentage to the value redeemed (NAV × units) unless the question says otherwise.

Worked examples

Example 1

A client invests in an open-ended equity fund and redeems units worth ₹5,60,000 after 8 months. The scheme charges an exit load of 1% if redeemed within 1 year. What are the net proceeds, ignoring tax?

Show the solution

Check the period: 8 months is within 1 year, so the exit load applies.
Exit load = 1% × ₹5,60,000 = ₹5,600.
Net proceeds = ₹5,60,000 − ₹5,600 = ₹5,54,400.

Answer: ₹5,54,400

Example 2

A client holds an average of ₹20,00,000 in a regular plan with an expense ratio of 1.5%. The direct plan of the same scheme has an expense ratio of 0.5%. How much cost does she save in a year by moving to the direct plan, assuming the same average holding?

Show the solution

Regular plan cost = 1.5% × ₹20,00,000 = ₹30,000.
Direct plan cost = 0.5% × ₹20,00,000 = ₹10,000.
Saving = ₹30,000 − ₹10,000 = ₹20,000. This is the same as 1.0% × ₹20,00,000.
Note that the saving arises because no distributor commission is built into the direct plan.

Answer: ₹20,000 per year

Exam tips

Memorise the tenure list: ELSS 3 years, tax-saver FD 5 years, ULIP 5 years, PPF 15 years, SCSS 5 years, AIF Cat I and II minimum 3 years.
When a question gives a client's time horizon, reject any product whose lock-in exceeds it, even if its return is higher.
In cost questions, check whether the exit load period has expired before applying it.
Read the question for the word 'direct' or 'regular'. It decides which expense ratio applies.
X-B has negative marking of 25% of the marks assigned to each question. A wrong answer on a 2-mark caselet question costs 0.5 marks, and on a 1-mark question it costs 0.25 marks. Guess only after you have ruled out options, and be most careful on the 2-mark caselet questions.

Practice questions from Comparison of Products Across Categories

Liquidity, Tenure and Cost Comparison: frequently asked questions

What is the difference between PPF, ELSS and NPS lock-in?

ELSS has a 3-year lock-in for each investment. PPF has a 15-year term with partial withdrawals allowed from the 7th financial year, counted from the year of opening, within limits. NPS Tier I is meant to run until retirement, with limited partial withdrawals for specified purposes.

What is the difference between expense ratio and exit load?

The expense ratio is an annual running cost of the scheme, deducted daily from NAV. The exit load is a one-time charge on redemption within a stated period. You can pay the first without ever paying the second.

Which products are the most liquid?

Cash, savings deposits, liquid funds, listed shares and open-ended mutual fund units are generally the most liquid. Real estate, AIF units and long-term insurance or pension products are less liquid.

Does the direct plan have an exit load too?

The exit load rule is set by the scheme and usually applies to both plans in the same way. The difference between plans is mainly in the expense ratio, because the direct plan has no distributor commission.