A client's risk questionnaire scores her aggressive, but she needs most of her money for a flat in two years. How do you set her allocation?

Put the down payment in debt and only the surplus in equity: roughly 27% equity, not 80%. On these assumptions the 80/20 mix has about a 2.9% chance of ending below Rs 25 lakh, and a 40% equity fall would leave her about Rs 8.7 lakh short. The 10/90 mix almost never misses. Rs 21.8 lakh in debt at 7% grows to Rs 25 lakh, leaving Rs 8.2 lakh free to take risk.

A risk questionnaire measures how a client feels about losses. It says nothing about what the money has to do. Her tolerance for risk is high, but her capacity to take it on this money is low, because most of it is spoken for in two years. Think of a family saving for a daughter's college fees due next June: however brave the parents are, the fee money does not go into a stock that could halve. The investment policy statementThe written agreement between an adviser and a client setting out objectives, constraints, time horizon and the allocation that follows from them. should record the goal first and the score second.

She can afford to lose Rs 5 lakh, 16.7% of the pot, over two years. The 80/20 mix is expected to return 11% a year with 14.4% volatility, so over two years about 22% with a spread of 20.4%. That puts the Rs 25 lakh line 1.9 standard deviations below the centre: roughly a 2.9% chance, about 1 in 35, of missing the flat. The 10/90 mix returns 7.5% a year with 2.5% volatility; the line is almost nine standard deviations away.

Because the normal curve understates bad years. Equity falls of 40% within two years have happened in most markets, and the curve treats them as close to impossible. Run the stress instead: if equity falls 40% and debt earns 7% a year, 80/20 ends at Rs 21.3 lakh, Rs 3.7 lakh short, while 10/90 ends at Rs 32.7 lakh. The cost of missing is not a smaller flat; it may be no flat, or a forced loan at the worst moment.

Work backwards from the goal. Rs 25 lakh in two years at 7% needs Rs 21.84 lakh today. That money goes into debt matched to the date, and only the Rs 8.16 lakh left over, about 27% of the pot, can go into equity. Even if that equity lost 40%, the flat is safe. Her aggressive score then applies fully to her future savings and to this surplus, which is where it belongs.

Name the limits. The 7% debt return assumes she holds to maturity; a debt fund can wobble too, so match the maturity to the purchase date. If the flat purchase slips by three years, the horizon changes and so does the answer. The allocation is a split by job, not a verdict on her as an investor.