An education trust with Rs 25 crore must pay grants of 5% a year that rise with 3% inflation, for ever. What return does it need, and what goes in the objectives and constraints of its investment policy?

The trust needs about 8.5% a year, or 8.7% if the pieces are compounded. A perpetual spender must earn its spending rate in real terms, 5%, plus inflation of 3%, plus costs of 0.5%. The policy writes that build-up as the return objective and pairs it with a liquidity line of Rs 1.25 crore rising 3% a year. At 7% the corpus loses about 40% of its real value in 20 years.

Think of a family farm that must feed the family every year and still hand the same farm to the next generation. It can eat the harvest, never the land. A perpetual trust can spend only what it earns above the growth needed to keep the corpus's buying power intact, so its real return must at least equal its spending rate. For Chaitrali that means 5% real. Add 3% of inflation and 0.5% of costs and the nominal target is 8.5%. If grants are paid at the end of each year, the sum is exact: a corpus of Rs 25 crore earning 8.5% less 0.5% of costs ends the year at Rs 27.00 crore, pays Rs 1.25 crore, and starts year 2 at Rs 25.75 crore, exactly 3% larger.

An investment policy statementA written agreement between a client or trustees and the adviser that sets the return objective, risk limits and constraints the portfolio must work within. has two objectives, return and risk, and five constraints: time horizon, liquidity, legal and regulatory, tax, and unique circumstances. Every line must come from the trust's own facts, and the return line must be built from spending, inflation and costs rather than picked from a list. Risk is where candidates stumble: a perpetual horizon gives the trust a high ability to ride out falls, but promised grants mean it has little ability to absorb a cut in spending, so the policy says both.

The legal and tax lines are where you state a framework and stop. Indian charitable trusts can generally hold their funds only in forms of investment that income tax rules permit, and their exemption depends on applying enough of their income to their objects each year. Write both constraints into the policy and have the trustees confirm the current permitted list and conditions with their tax adviser, because a portfolio that breaks either can cost the trust its exemption, which is far more than any return difference.

The shortfall looks small, 1.5 points, but it compounds against a spending line that keeps rising. Earning 7% and paying the same grants, the corpus is worth about Rs 14.8 crore in today's rupees after 20 years, against Rs 25 crore at 8.5%. By year 20 the promised grant takes 8.1% of the corpus instead of 5%, and the trust is now eating its land. The fix is either a riskier portfolio, if the trustees can bear it, or a spending rule tied to a smoothed corpus value rather than a fixed promise.