A new foundation has Rs 100 crore, spends 4.5% a year, faces 5% inflation and 0.5% costs. Build an allocation from a capital market assumptions table and show the chance of falling short over ten years.

Vetal needs about 10% a year, which points to the growth mix of 70% equity, 25% bonds and 5% gold. Its expected return is 11.2%, or about 10.4% compounded after volatility; the balanced and cautious mixes compound at 9.6% and 8.7%. Even the growth mix has about a 46% chance of falling short over ten years, so the spending rule matters as much as the mix.

Start from the promise, not from the market. A family that spends 4.5% of its savings every year while prices rise 5% has to earn about 9.5% just to stand still, and more if a broker takes a cut. Vetal's hurdle is spending plus inflation plus costs: 4.5 + 5 + 0.5, about 10% a year, or 10.28% if you compound the three exactly. Every allocation is judged against that number. An allocation that is comfortable but earns 8.5% quietly spends the fund's real value down.

Compute each mix's expected return and volatility from the table, then turn the average into what actually compounds. A volatile portfolio compounds at roughly its average return minus half its variance, so the growth mix's 11.2% average becomes about 10.4% a year. That still clears 10%. The balanced mix averages 10.1%, which looks like enough, but compounds at only 9.6%. The cautious mix is short on either measure. This is the volatility dragThe gap between the average yearly return and the compound return actually earned; a fall of 20% followed by a rise of 20% averages zero but leaves you 4% down. most candidates forget.

Treat the ten-year compound return as roughly normal, centred on the compound figure, with a spread equal to the volatility divided by the square root of ten. For the growth mix, the chance that ten years compound to less than 10% a year is about 46%: close to a coin toss, and better than any other mix offers. That is the honest message to trustees. The market cannot reliably deliver 10%; the growth mix merely gives the best odds. The lever that changes the odds most is the promise itself: at 3.5% spending the hurdle falls to about 9% and the chance of falling short to about 36%.

Three decisions, in this order. First, the growth mix, because the spending rule, not a market view, sets the equity share. Second, liquidity: Rs 25 crore in bonds covers more than five years of Rs 4.5 crore spending, so a bad equity year never forces a sale at the bottom. Third, a smoothed spending rule, such as 4.5% of the average value over the last three years, so that grants do not swing with every market move. If the trustees cannot accept a roughly 46% chance of eroding the fund's real value, the answer is to spend less, not to hold less equity. The limitation is the assumptions table itself: every probability here is only as good as a ten-year guess.