A client says he can stand losing Rs 50 lakh of his Rs 4 crore in a bad year. If equity can fall 35% and debt 3% in a one-in-twenty year, what is the most equity he can hold?

About 30% equity, 29.7% to be exact. His Rs 50 lakh limit is 12.5% of Rs 4 crore. Debt costs 3% in a bad year regardless, and each point of equity adds 0.32 points of loss, so equity can be (12.5 minus 3) divided by 32, or 29.7%. His current 55% would lose about Rs 82 lakh, well past what he says he can stand.

Picture a car that uses a litre of fuel just idling and a further litre for every ten kilometres. If you have four litres, the distance is not 40 km; the first litre is spent before you move. The portfolio's bad-year loss works the same way: debt's 3% is spent regardless, and only the rest of the loss budget is available for equity. The budget is Rs 50 lakh on Rs 4 crore, 12.5%. Take off the 3% floor, and 9.5 points remain to be spent at 32 points of extra loss per unit of equity.

At 55% equity the bad-year loss is 55% of 35% plus 45% of 3%, which is 20.6% or Rs 82.4 lakh. His portfolio already carries about 1.65 times the loss he told you he can stand, so either the portfolio or the stated limit has to change. This is where the meeting becomes a conversation, not a calculation. Show him the Rs 82 lakh figure and ask whether he meant the limit; people often understate their risk toleranceHow much loss a client is willing to sit through without selling, which is a matter of temperament and can differ from what they can afford. when talking in percentages and state it more honestly in rupees.

Say them briefly. A one-in-twenty year is not the worst year; a deeper fall, say 50%, would breach the limit even at 30% equity. The 35% is a planning assumption, not a law of markets. And the method ignores time: a client who never sells can sit through a fall that a client needing the money cannot. The answer is a ceiling to start from, reviewed as his circumstances change.