Case 043Risk profiling and IPSHard

A couple hold Rs 12 crore jointly; he scores 8 out of 10 on risk and she scores 3. Design one household policy with ranges both can sign, and show what each sees in a 25% equity fall.

The situation

Nakul and Revati Sabnis, 48 and 46, hold Rs 12 crore of financial assets jointly after selling a business. They spend about Rs 36 lakh a year from the portfolio. Nakul scores 8 out of 10 on the bank's risk questionnaire, which maps to about 80% equity; Revati scores 3, about 30% equity. Both say they want one plan, not two separate pots.

In the first meeting Nakul says anything under 70% equity is wasting time, and Revati says she would not sleep if the portfolio fell by more than about Rs 1.5 crore in a bad year.

Your task

Show what each partner's profile would lose in a 25% equity fall, design one household policy both can sign, and say what each of them sees on the statement when the fall arrives.

Quick check

At Nakul's 80% equity, what would a 25% equity fall cost the household?

Worked solution

Try it on paper, then open one step at a time.

30-second answerThe answer to give first

Build a shared core of Rs 10.5 crore at 45% equity, range 40% to 50%, plus a Rs 1.5 crore satellite for Nakul at up to 100% equity, capped at 12.5% of the household. Overall equity is about 52%. In a 25% fall the household loses about Rs 1.56 crore: Rs 1.18 crore in the core Revati watches, within her limit, and Rs 0.375 crore in Nakul's sleeve. Nakul's 80% would lose Rs 2.4 crore; Revati's 30%, Rs 0.9 crore.

Step 1Why can you not simply average the two scores?

Two people sharing one car cannot each drive at their own speed; they agree a speed, and perhaps one of them keeps a motorbike for weekends. An average of 8 and 3 gives a number neither partner chose, and in a fall the more anxious partner judges the plan by the rupee loss, not the score. The question is not what score the household has. It is what loss each of them will stay invested through, and what each needs to feel the plan is partly theirs.

Step 2What does each profile lose in a 25% equity fall?

Translate the scores into rupees, because the couple will argue in rupees. At 80% equity a 25% fall costs Rs 2.4 crore; at 30% it costs Rs 0.9 crore. Revati's limit of about Rs 1.5 crore sits between them, which tells you the answer lies closer to her profile than to his. Nakul's objection, that low equity wastes time, is about the upside; it can be met in a smaller, ring-fenced space.

The same 25% equity fall on Rs 12 crore, three ways, Rs croreNakul's score: 80% equity-2.40 (20.0%)Revati's score: 30% equity-0.90 (7.5%)Agreed policy: 52% equity-1.56 (13.0%)shared core: -1.18, what Revati watchesNakul's satellite: -0.38, capped at Rs 1.5 croreNeither extreme survives the other partner's reaction to a fall; the policy sits between them by design.
In a 25% equity fall on Rs 12 crore, Nakul's 80% equity loses Rs 2.40 crore and Revati's 30% loses Rs 0.90 crore; the agreed policy at about 52% equity loses Rs 1.56 crore, Rs 1.18 crore in the shared core and Rs 0.38 crore in Nakul's capped satellite.
Step 3How is the household policy built?

Two layers and a set of rules agreed before any fall. The shared core, Rs 10.5 crore, targets 45% equity within a 40% to 50% range and holds two years of spending in short debt; Nakul's satellite, Rs 1.5 crore, may run at up to 100% equity but is capped at 12.5% of household assets and never refilled from the core during a fall. Overall equity comes to about 52%. The cap is the key clause: it limits Nakul's appetite to a size Revati has agreed to in advance.

One household policy both can signShared core: Rs 10.5 croreEquity target 45%, range 40% to 50%At least two years of spending, Rs 72 lakh, in short debtRebalanced when outside the range, checked monthlyBoth sign every changeNakul's satelliteRs 1.5 croreUp to 100% equityCapped at 12.5% ofhousehold assetsNever refilled from the coreIn a 25% equity fall, agreed in advanceHousehold down about 13%, core down 11.2%: inside what Revati signed forNo selling of core equity below the 40% floor; rebalance back into the range from debtJoint review within a week; the satellite's loss stays in the satellite
The household policy pairs a Rs 10.5 crore shared core at 45% equity, range 40% to 50%, with a Rs 1.5 crore satellite for Nakul capped at 12.5% of assets, and fixes in advance what happens in a 25% fall: rebalance into range, no selling below it, and a joint review within a week.
Step 4What does each of them see when the fall arrives?

Revati looks at the core: down Rs 1.18 crore, 11.2%, inside the Rs 1.5 crore she named and with two years of spending untouched. Nakul looks at his satellite, down 25%, and at the household total, down 13.0%. Each sees a loss they agreed to in writing, which is what keeps both invested; a plan one partner never signed up to is the plan that gets sold at the bottom. The limit to say plainly: the core's return will trail an 80% portfolio in a long rise, and Nakul needs to accept that in advance too.

Where candidates lose it

Candidates average the scores to 5.5, pick 55% equity and stop. That answer ignores Revati's stated rupee limit and gives Nakul no reason to feel heard, so it fails in exactly the conversation the interviewer is simulating.

The second miss is leaving the satellite uncapped. Without a cap and a no-refill rule, a rising market grows Nakul's sleeve until it is the portfolio, and the policy quietly becomes his profile.

What the interviewer asks next

  • Nakul's satellite doubles in a strong year and is now 22% of assets. What does the policy say, and how do you enforce it?
  • Revati inherits Rs 3 crore in her own name. Does it join the core?
  • How would you run the review meeting the week after a 25% fall?

Company names and figures are illustrative.