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NISM Certifications · NISM-Series-X-A: Investment Adviser (Level 1) · Portfolio Construction Process

Mr. Iyer, 35, plans to buy a house in 2 years and needs a down payment of Rs 20 lakh from his current savings. He says he can tolerate large market swings because he is 'young'. Which statement best reflects how an adviser should treat his risk profile for this goal?

His ability to take risk for this goal is low because the money is needed in two years and losses cannot be recovered in time. Even though his willingness is high, the lower of ability and willingness should guide the allocation, favouring safer instruments.

  1. AAbility to take risk is low for this goal because of the short horizon, despite high willingnessCorrect
  2. BAbility to take risk is high because of his age, so equity-heavy allocation is suitable
  3. CWillingness alone decides allocation, so follow his statement
  4. DRisk profile is irrelevant for goal-based money

Explanation

Risk tolerance combines willingness and ability. A 2-year horizon with a fixed-amount goal means little time to recover from losses, so ability is low. When willingness exceeds ability, the lower of the two governs the allocation.

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