Case 001Lump-sum allocationWarm up
A 22-year-old has saved his first Rs 1 lakh, has no emergency fund, and asks for the one thing to put it in. What do you tell him, and in what order?
1The situation
Ishaan Varkey is 22 and eight months into his first job. He takes home Rs 40,000 a month and spends about Rs 25,000, so he saves roughly Rs 15,000 a month. He has just reached Rs 1,00,000 in his savings account, the first time he has held that much. He has no emergency fund other than this money, no dependants, and his only insurance is the group health cover that comes with his job.
A friend has told him to put the whole lakh into a small-cap fund that did well last year. Ishaan asks you a simple question: if he can pick one thing to put the money in, what should it be?
2Your task
Which one thing gets the first rupee, what happens to the rest of the lakh, and how do you show him why the order matters?
Quick check
What should the first Rs 75,000 of Ishaan's lakh buy?
Worked solution
Try it on paper, then open one step at a time.
30-second answerThe answer to give first
The one thing is an emergency fund: Rs 75,000, three months of his spending, in a liquid fund. Only then does money take risk. Of the remaining Rs 25,000, about Rs 7,000 buys a personal health policy so his cover does not vanish with his job, and Rs 18,000 starts a diversified equity index fund, followed by a monthly SIP from his Rs 15,000 surplus.
Step 1Why is asking which product to buy the wrong first question?
Think of a new shop owner who spends every rupee on stock and keeps nothing in the till. The first slow week, she sells goods below cost to pay the rent. Money that may be needed at short notice cannot take market risk, because the need arrives on its own schedule, not the market's. Ishaan's lakh is not yet an investment; it is the only buffer between him and a bad month. So your first job is to sort his rupees by when they might be needed, and only then choose where each group goes.
Step 2How big should the emergency fund be, and where does it sit?
Size it from spending, not salary. Ishaan spends Rs 25,000 a month, so three months is Rs 75,000 and six months is Rs 1,50,000. Three months is the floor for a single person with no dependants and a steady salaried job; six months is the target he builds towards. It sits in a liquid fundA debt mutual fund holding very short-term instruments, so its value barely moves and money can usually be withdrawn within a working day. or a sweep-in deposit: money he can reach within a day or two, with very little chance of a fall in value. The return here barely matters. An illustrative 6.5% instead of 3% in a savings account adds about Rs 2,600 a year on Rs 75,000: welcome, but not the point.
Step 3What does the order protect him from?
Run the bad quarter both ways. Suppose he puts the whole lakh in the small-cap fund, markets fall 30%, and his company lets him go the same quarter. The fund is worth Rs 70,000 and he needs Rs 75,000 to live for three months. He sells everything at the bottom, turns a paper loss of Rs 30,000 into a real one, and is still Rs 5,000 short. With the order followed, the liquid fund pays the three months, the Rs 18,000 in equity falls to Rs 12,600 but is never touched, and it has time to recover with the market.
| Rs, after a 30% fall and a job loss | All Rs 1 lakh in small caps | Emergency fund first |
|---|---|---|
| Liquid money available | 0 | 75,000 |
| Equity, marked down 30% | 70,000 | 12,600 |
| Three months of spending needed | 75,000 | 75,000 |
| Equity he is forced to sell | 70,000 | 0 |
| Loss made permanent | 30,000 | 0 |
Step 4What happens to the rest of the lakh and to next month's savings?
Next, check the two things that can wipe out savings faster than any market: illness and death. Ishaan has no dependants, so he does not need life cover yet, but his health cover ends the day his job does. A personal health policy at an illustrative Rs 7,000 a year closes that gap, and buying it young and healthy is cheaper and starts any waiting periods early. The last Rs 18,000 goes into a diversified equity index fund, not a single hot category, because at this stage the habit and the spread matter more than the pick.
His Rs 15,000 monthly surplus then does two jobs. Rs 7,500 tops up the emergency fund until it reaches Rs 1,50,000, which takes 10 months, and Rs 7,500 goes into a monthly SIP; after that the full Rs 15,000 can go to the SIP. The honest answer to his question is a sequence, and the one thing is simply its first step. Say the limitation too: three and six months are conventions, not laws. A freelancer with lumpy income needs more; someone with a working spouse may need less. The order does not change, only the size of each rung.
Where candidates lose it
The common loss is answering the question as asked and naming a fund. Interviewers who ask what you would do with a first lakh, or a first dollar, are testing whether you ask what the money is for before you choose where it goes. A product answer, however good the product, fails that test.
The second miss is treating the emergency fund as something to optimise. Candidates argue for longer-duration debt or equity savings funds to squeeze out yield and forget that this money has one job: to be there, at full value, in the week it is needed.
What the interviewer asks next
- Ishaan's parents will depend on his income from next year. What changes in the order?
- He wants to use his credit card limit as his emergency fund instead. What do you say?
- Why an index fund rather than the small-cap fund for his first equity rupee?
- How would the plan differ for a freelancer with the same average income?
Asked at Invesco, Real Estate, Dallas, 2023 (Wall Street Oasis): If you had a dollar today, what would you invest it in?
Company names and figures are illustrative.