Allocating money across conflicting goals
Series X-A case study · set 3, case 7 of 9 · 5 questions · 2 marks each
Question 1 of 5Case practice
0 right · 0 wrong · 5 to go
The case · stays here for all 5 questions
A couple has ₹20 lakh of financial assets in cash. They reserve ₹3 lakh for emergencies and ₹4 lakh for a tuition payment due in one year. They agree that both reserved amounts must remain in instruments with stable value and ready access for the stated needs. The remaining amount is for a goal twelve years away. Their chosen policy for that long-term bucket is 70% equity and 30% debt, with no borrowing. A salesperson proposes placing 70% of the entire ₹20 lakh in equity. Assume no current tax or product restrictions. The exercise tests their stated goal-based policy and cash constraints, not a recommended allocation for real clients.
All people, firms, prices and contract terms are fictional.
Ignore taxes and transaction costs unless the case explicitly includes them.
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The case and its answers
Every question of this case, with its answer and why each other option is wrong.
A couple has ₹20 lakh of financial assets in cash. They reserve ₹3 lakh for emergencies and ₹4 lakh for a tuition payment due in one year. They agree that both reserved amounts must remain in instruments with stable value and ready access for the stated needs. The remaining amount is for a goal twelve years away. Their chosen policy for that long-term bucket is 70% equity and 30% debt, with no borrowing. A salesperson proposes placing 70% of the entire ₹20 lakh in equity. Assume no current tax or product restrictions. The exercise tests their stated goal-based policy and cash constraints, not a recommended allocation for real clients.
All people, firms, prices and contract terms are fictional.
Ignore taxes and transaction costs unless the case explicitly includes them.
Q1What amount is available for the long-term bucket?
Option A. ₹13 lakh — Correct answer
Option B. ₹16 lakh
Why it is wrong: This excludes only tuition money.
Option C. ₹17 lakh
Why it is wrong: This excludes only emergency cash.
Option D. ₹20 lakh
Why it is wrong: This ignores both reserved goals.
Answer: A. ₹20 lakh − ₹3 lakh − ₹4 lakh = ₹13 lakh. Remember: Different goals can require separate investment constraints.
Hint, shown before you answer in practice mode: Deduct both reserved amounts before long-term allocation.
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Q2How much equity belongs in the long-term bucket under the stated policy?
Option A. ₹7 lakh
Why it is wrong: This uses the combined reserved amount.
Option B. ₹3.90 lakh
Why it is wrong: This is the long-term debt amount.
Option C. ₹14 lakh
Why it is wrong: This applies the long-term equity weight to all assets.
Option D. ₹9.10 lakh — Correct answer
Answer: D. 0.70 × ₹13 lakh = ₹9.10 lakh. Remember: A bucket’s allocation percentage must use that bucket’s asset base.
Hint, shown before you answer in practice mode: Apply 70% only to ₹13 lakh.
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Q3What percentage of all ₹20 lakh is allocated to equity under this plan?
Option A. 70.00%
Why it is wrong: This is the equity weight within the long-term bucket.
Option B. 65.00%
Why it is wrong: This is the long-term bucket’s share of total assets.
Option C. 45.50% — Correct answer
Option D. 30.00%
Why it is wrong: This is the long-term debt weight.
Answer: C. ₹9.10 lakh ÷ ₹20 lakh × 100 = 45.50%. Remember: A subportfolio weight is different from a whole-portfolio weight.
Hint, shown before you answer in practice mode: Divide the equity rupee amount by total financial assets.
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Q4By how much does the salesperson’s proposed equity amount exceed the agreed plan?
Option A. ₹0
Why it is wrong: The two policies apply 70% to different asset bases.
Option B. ₹4.90 lakh — Correct answer
Option C. ₹3.90 lakh
Why it is wrong: This is the long-term debt amount.
Option D. ₹7 lakh
Why it is wrong: This is the total reserve, not the difference in equity.
Answer: B. ₹14 lakh − ₹9.10 lakh = ₹4.90 lakh extra equity. Remember: Applying one allocation to all assets can unintentionally put near-term goals at risk.
Hint, shown before you answer in practice mode: Compare 70% of ₹20 lakh with 70% of ₹13 lakh.
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Q5Which approach best follows the couple’s stated priorities?
Option A. Borrow ₹7 lakh so every rupee of existing cash can be invested in equity.
Why it is wrong: The couple explicitly rules out borrowing.
Option B. Put tuition money in equity because the retirement goal is far away.
Why it is wrong: The tuition goal has its own one-year horizon.
Option C. Ignore the emergency reserve when measuring investible money.
Why it is wrong: The reserve is a binding requirement in the case.
Option D. Preserve the two reserved amounts and apply the 70/30 policy only to the long-term bucket. — Correct answer
Answer: D. The plan recognises near-term liquidity and a separate long-term risk budget. The same household can have multiple time horizons. Remember: Suitability attaches to particular goals as well as the investor’s overall profile.
Hint, shown before you answer in practice mode: Do not let one goal’s horizon replace another goal’s needs.
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Comparing performance after adjusting for risk
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