A trust has Rs 100 crore to spread across liquid, short-duration debt, large-cap and flexi-cap funds. It spends Rs 6 crore a year and can bear a 10% fall in a bad year. Propose an allocation.

Hold 12% in liquid funds, 48% in short-duration debt, 25% in large-cap and 15% in flexi-cap equity: an expected return of about 9.8% with a bad-year fall of about 8.9%, inside the 10% limit. The liquid bucket holds two years of scholarships, so no equity is sold in a fall. Equity is capped near 44% by the loss limit, and 40% leaves a margin. The order matters: spending first, then loss tolerance, then return.

A household that keeps six months of expenses in the bank before buying shares is not being timid; it is making sure a bad year in the market never forces a sale. Allocate in the order of the trust's constraints: cash for the spending it cannot postpone, then a ceiling on loss, and only then the search for return. Any honest allocation answer begins with the investor's needs and appetite for risk, and here both are given. Rs 6 crore a year of scholarships is the first claim. Two years of it, Rs 12 crore, goes into liquid funds, which barely move in value. That liquidity bucketMoney set aside in very low-risk, quickly redeemable investments to cover known spending for a fixed period, so that riskier holdings never have to be sold at a bad time. lets the trustees ride out a bad year without selling equity at the bottom.

Define a bad year plainly: each fund returns its expected return less two volatilities, roughly a one-in-forty-year outcome if returns were normally distributed, and assume they all happen at once. Liquid then earns 5%, short-duration debt 2%, large-cap equity -24% and flexi-cap -30%. With equity split five to three between large-cap and flexi-cap, the equity sleeve falls about 26.2% in that year. With the remaining money in debt, the portfolio reaches the 10% limit at about 44% in equity, so 40% leaves about a point of room under the limit.

Put 48% in short-duration debt, 25% in large-cap equity and 15% in flexi-cap equity alongside the 12% liquid bucket. The expected return is about 9.78%, Rs 9.8 crore a year against Rs 6 crore of spending, and the bad-year fall is about 8.94%, inside the limit. Large-cap gets the larger share of equity because it falls less for each point of return; flexi-cap adds two points of expected return for four more points of volatility and is kept the smaller part.

Three. First, the bad year assumes every fund falls together. If debt and equity moved independently, with only the two equity funds closely linked, the same portfolio's bad year would be about -5.7%, much milder; the all-at-once version is deliberately harsh because in a real crisis things do tend to fall together. Second, the return assumptions are long-run guesses, not promises, and the trustees should see the allocation tested against them, not built on them. Third, if the scholarships must grow with inflation, the trust needs a return of 6% plus inflation just to stand still in real terms, and at about 9.8% it may be eroding slowly; that is a trade-off for the trustees, not the adviser, to make. Finally, check the trust deed and the tax status: in India a registered charitable trust is limited to the investment modes the income-tax rules permit, which may exclude equity funds altogether, so confirm the current list before any of this applies.