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Taking Risks With Your Capital: Capacity And Willingness

“Capacity” comes from availability of surplus funds. This part can be dealt objectively and rather quickly as we are dealing with facts as they exist.

“Willingness” can be defined as going ahead and deploying a sizable part of available surplus funds into so called “risky” investments such as equity mutual funds. Herein comes subjectivity as one must take decisions results of which will only show up in distant future.

Let’s first hit the surplus funds (capacity) part. Say you are a government employee with an assured pension. On your retirement, you get a lump sum amount of INR 1 Crore and an assured pension of INR 1 Lac per month. Let’s say hypothetically your monthly expenses will be very well covered by the pension amount. Academically speaking, you have the “capacity” to go for risky investments to the tune of your surplus capital which here is the lump sum amount of INR 1 Crore. Realistically speaking, if you cannot bring yourself to invest sizeable amount of this corpus - say 25% of INR 1 Crore in “risky” equity mutual funds, we have “willingness” issue to deal with.

What if you don’t have a pension income in your non earning years. Assuming you are a private sector employee and have amassed INR 2 Crore by the time you are done with your job. Say your monthly expenses will be INR 1 Lacs. One can keep aside 10 years worth of expenses in risk less assets and still have surplus funds (Capacity) of INR 80 Lacs. Whether one is open to deploy 25% (INR 20 Lacs) of this “capacity” into risky investments will define the “Willingness” part.

If you are nearing your retirement or are already retired, “capacity” will not be much of an issue. “Willingness” is what may require some effort!!!

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