Earning members and dependent members

A household's ability to take investment risk is not just about one person's income. It is about how many people in the family are bringing money in, and how many are relying on that money.

The workbook treats these as two separate factors, pulling in opposite directions. More earning members in a family raises how much risk the family can afford to take. More dependent members lowers it.

The reasoning is simple. Earning members can help absorb a bad year. Dependent members cannot — they need the money regardless of how markets perform.

Both factors sit in Table 18.1's "Family Information" group, stated directly:

Earning Members:    Risk appetite INCREASES as the number of earning members increases.
Dependent Members:  Risk appetite DECREASES as the number of dependent members increases.

The mechanism behind both is the same idea, seen from two sides. An earning member is a source of income the household can fall back on if an investment underperforms — more earners means more combined income to absorb a bad patch, and more flexibility about when money actually has to be withdrawn. A dependent member — a child, a non-earning spouse, an elderly parent — is a claim on the household's income that does not go away just because markets are down, and cannot itself contribute income to offset a shortfall.

These two factors are usually read together, not separately, because most families have both: what matters for risk capacity is less the raw headcount and more the ratio of earners to dependants.

Two households, each with a combined income of Rs 15,00,000 a year and identical expenses.

Household A: a working husband and working wife (2 earning members), with no children and no elderly parents living with them (0 dependent members). If one investment underperforms, both incomes continue, and there is flexibility about timing withdrawals.

Household B: a single working spouse (1 earning member) supporting a non-earning spouse, two school-going children, and an elderly parent (4 dependent members) on the same Rs 15,00,000. If that one income is disrupted, or if an investment loss forces an early withdrawal, there is no second income to fall back on and four people whose needs cannot wait.

Even with identical income and identical goals on paper, an adviser would reasonably assign Household A a higher risk appetite than Household B, purely on the strength of this one pair of factors — before even considering either family's psychological willingness to take risk.

Chapter 18 (Risk Profiling for Investors), Table 18.1, "Factors affecting risk appetite," lists Earning Members and Dependent Members as the first two rows under Family Information, immediately followed by Life Expectancy. Expect a question matching each factor to its direction of influence (increases or decreases risk appetite), or a scenario comparing two families that differ mainly in this ratio.

• Earning members raise risk appetite; dependent members lower it — the two move in opposite directions, and mixing them up is the most common error.
• This is a capacity factor (what the family can afford), not a willingness factor (what any one person wants). Keep it separate from psychological risk-tolerance factors like psyche or knowledge of markets.
• A non-earning spouse counts as a dependent member, even if they contribute to household work — the factor is about income contribution, not contribution generally.
• The relevant comparison is usually the ratio of earners to dependants within one family, not the absolute headcount compared across different families of different sizes.