The 52-Year-Old Executive Who Wants 90% Equity
A 52-year-old salaried executive plans to retire at 60. He earns Rs 650,000 a month and spends Rs 380,000, including a Rs 90,000 mortgage payment on a home with Rs 8 million outstanding. He has Rs 12.5 million in savings, mostly in equities, and wants to raise equity exposure to 90% because 'inflation will eat cash'. His two children need Rs 5 million in 3 years and Rs 7 million in 6 years for education at today's costs; education inflation is 8%. His risk questionnaire score is moderate, but he says he can tolerate volatility. He has no emergency fund beyond Rs 300,000 and no separate health cover. His current portfolio is 85% equities, 10% money market and 5% cash. The advisor must build an investment policy statement, test whether the 90% equity target is suitable, and decide how to fund the two education dates without exposing the family to a badly timed equity drawdown.
1. Assess the suitability of the 90% equity target and outline an appropriate portfolio structure.
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Suitability. A 90% equity portfolio is not suitable for a client with Rs 5 million due in 3 years and Rs 7 million due in 6 years, a mortgage, a tiny emergency fund and no health cover. Equity volatility and sequence risk mean a 25-30% drawdown in year 3 could force selling at the worst time. The moderate risk score reinforces this. The client's inflation concern is valid, but inflation does not justify ignoring liability dates.
Structure. Build a three-bucket IPS. Bucket 1 covers the 3-year education goal and emergency reserve in low-duration government or Islamic money market instruments and cash. Bucket 2 covers the 6-year goal in a balanced allocation with some equity but a rising fixed-income glide path. Bucket 3 is retirement money, which can hold more equity because the horizon is 8 years plus retirement. Overall equity might be 50-60%, not 90%. Also review mortgage prepayment versus investing, and arrange health cover before increasing equity risk. The IPS should state return assumptions, rebalancing bands, liquidity needs and review triggers.
2. Estimate the education funding position and explain why a deterministic return calculation is not enough.
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Funding estimate. Inflate the goals: Rs 5 million x 1.08^3 = about Rs 6.30 million; Rs 7 million x 1.08^6 = about Rs 11.11 million; total about Rs 17.41 million. The client has Rs 12.5 million and a monthly surplus of Rs 270,000 (Rs 650,000 income less Rs 380,000 spending). On a nominal 8% return, Rs 12.5 million grows to about Rs 19.8 million in 6 years, and the surplus adds more, so the goals look fundable on a deterministic basis. The real risk is timing and volatility: the first Rs 6.3 million is due in 3 years. The advisor should earmark that amount in low-risk assets and not rely on equity returns. The 5.68% compound return needed on current savings alone to reach Rs 17.41 million in 6 years is a useful check, but it ignores the mortgage and retirement.
3. The client insists on 90% equity. How should the advisor communicate the risk and document the decision?
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Communication. Show the client a bad-case scenario, not just an average return: a 30% equity fall in year 2 and the forced sale needed to pay the first education bill. Explain that the 90% target is a belief about inflation, not a plan for dated liabilities. Offer a compromise: keep a larger equity allocation for retirement, but ring-fence the education money. Put the recommendation and the client's decision in the IPS. If the client still insists on 90% equity, document that the advisor explained the risk and that the client accepted a higher probability of shortfall. Set a review trigger for a 10% portfolio drawdown and for any change in income, health or mortgage. Do not promise that equities will beat inflation over 3 years.