A commitment is not a cash payment
Series XIX-A case study · set 1, case 1 of 5 · 4 questions · 1 mark each
Question 1 of 4Case practice
0 right · 0 wrong · 4 to go
The case · stays here for all 4 questions
Meera has ₹400 lakh of financial assets. She must keep ₹100 lakh available for a house purchase next year and ₹40 lakh as an emergency reserve. She is considering a ₹100 lakh commitment to an eight-year private equity fund. The fund initially calls 30% of the commitment and expects to call another 40% next year. The remaining commitment can be called later. There is no ordinary redemption right, and a secondary sale is uncertain. Meera plans to meet every call from the ₹260 lakh left after protecting her house money and emergency reserve. The distributor has verified her eligibility separately. No income, investment gains or other cash flows should be assumed.
All amounts and the drawdown schedule are hypothetical.
Eligibility is assumed. This case tests liquidity and commitment planning.
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The case and its answers
Every question of this case, with its answer and why each other option is wrong.
Meera has ₹400 lakh of financial assets. She must keep ₹100 lakh available for a house purchase next year and ₹40 lakh as an emergency reserve. She is considering a ₹100 lakh commitment to an eight-year private equity fund. The fund initially calls 30% of the commitment and expects to call another 40% next year. The remaining commitment can be called later. There is no ordinary redemption right, and a secondary sale is uncertain. Meera plans to meet every call from the ₹260 lakh left after protecting her house money and emergency reserve. The distributor has verified her eligibility separately. No income, investment gains or other cash flows should be assumed.
All amounts and the drawdown schedule are hypothetical.
Eligibility is assumed. This case tests liquidity and commitment planning.
Q1How much must Meera pay in the first call?
Option A. ₹70 lakh
Why it is wrong: This combines the first two calls.
Option B. ₹100 lakh
Why it is wrong: This is the total commitment, not the first 30% call.
Option C. ₹30 lakh — Correct answer
Option D. ₹40 lakh
Why it is wrong: This is the next expected call percentage applied to the commitment.
Answer: C. The first call is ₹100 lakh × 30% = ₹30 lakh. A commitment is a promise to supply capital when called. It is not necessarily paid entirely on day one. Remember: Separate committed capital from capital already called.
Hint, shown before you answer in practice mode: Apply the first-call percentage to the commitment.
XIXA-S1-C01-Q1easynumerical
Q2After paying the first two calls, what commitment remains uncalled?
Option A. ₹0 lakh
Why it is wrong: The two specified calls total 70%, not 100%.
Option B. ₹30 lakh — Correct answer
Option C. ₹60 lakh
Why it is wrong: This subtracts only the second call.
Option D. ₹70 lakh
Why it is wrong: This is the amount paid across the two calls.
Answer: B. The two calls total ₹30 lakh + ₹40 lakh = ₹70 lakh. The uncalled commitment is ₹100 lakh − ₹70 lakh = ₹30 lakh, which still needs a funding plan. Remember: Uncalled commitments remain future funding obligations.
Hint, shown before you answer in practice mode: Subtract both calls from ₹100 lakh.
XIXA-S1-C01-Q2mediumnumerical
Q3What is the largest amount of the ₹260 lakh pool that remains uncommitted after reserving the full AIF commitment?
Option A. ₹260 lakh
Why it is wrong: This reserves nothing for the AIF commitment.
Option B. ₹230 lakh
Why it is wrong: This reserves only the first call and ignores future calls.
Option C. ₹160 lakh — Correct answer
Option D. ₹190 lakh
Why it is wrong: This reserves only the first two calls.
Answer: C. ₹260 lakh − ₹100 lakh = ₹160 lakh remains outside the AIF commitment. Keeping only the first ₹30 lakh ready would understate the amount she has promised to fund. Remember: Plan liquidity for the full commitment.
Hint, shown before you answer in practice mode: Reserve the full promise, not just today’s payment.
XIXA-S1-C01-Q3mediumnumerical
Q4Which statement best addresses Meera’s house-purchase need?
Option A. Keep the ₹100 lakh house reserve outside this illiquid commitment. — Correct answer
Option B. Commit the house reserve because the fund has an estimated return.
Why it is wrong: An estimated return does not create a redemption right.
Option C. Use the emergency reserve for calls without changing her plan.
Why it is wrong: That would break the stated protected emergency reserve.
Option D. Treat an uncertain secondary sale as guaranteed liquidity.
Why it is wrong: The case specifically says that a secondary sale is uncertain.
Answer: A. The house payment is due next year, while the fund has an eight-year horizon and no ordinary redemption right. Keeping that reserve separate respects the stated need even if the fund looks attractive. Remember: Suitability includes when cash must be available.
Hint, shown before you answer in practice mode: Match the investment’s exit terms to the date the money is needed.
XIXA-S1-C01-Q4easyapplication
Reading a fund’s capital account
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