Case 066Lump-sum allocationHard
A family office has Rs 85 crore to invest for a three-generation family with no near-term liabilities and Rs 2 crore of annual family spending. Build the policy portfolio across public equity, fixed income, alternatives and cash, and show the illiquidity budget.
1The situation
The Ravelkar Family Office in Pune manages Rs 85 crore for three generations: grandparents in their seventies, their two children in their forties and five grandchildren. The family draws Rs 2 crore a year for living costs, education and giving, and expects that draw to rise with inflation, taken here as 6% a year. There are no loans, no planned property purchases and no business that might need capital.
The investment committee wants a written policy portfolio: target weights across cash, fixed income, public equity and alternatives, and an explicit limit on how much can sit in assets that cannot be sold for years. For planning, assume illustrative expected returns of 6.5% for cash, 7.5% for fixed income, 12% for public equity, 14% for private equity and credit, 8% for REITs and InvITs and 7% for gold.
2Your task
What policy portfolio would you set, in rupees, and how large can the illiquid part safely be?
Quick check
The family spends Rs 2 crore a year and expects 6% inflation. What return does the portfolio need just to keep its real value?
Worked solution
Try it on paper, then open one step at a time.
30-second answerThe answer to give first
About 7% cash, 20% fixed income, 50% public equity and 23% alternatives, of which Rs 13 crore, 15.3%, is illiquid private equity and credit. Cash and fixed income cover 11.5 years of spending, so equity never has to be sold in a fall. The illustrative expected return, 10.7%, clears the 8.4% needed to preserve real wealth. The illiquid ceiling is set by a stress test: after a bad year it rises to 16.2% by itself.
Step 1What does the portfolio have to achieve?
A family that lives off a mango orchard must pick enough fruit to eat while leaving the trees healthy for their grandchildren. The portfolio has two jobs: pay Rs 2 crore a year that rises with inflation, and pass on at least the same real wealth, which needs about 8.4% a year before fees and tax. Spending is only 2.4% of the corpus, so this is a long-horizon, growth-led portfolio with a liquidity floor, not an income portfolio.
Step 2How do you set the weights in rupees?
Build from the bottom up. First the floor: Rs 6 crore of cash and liquid funds, three years of spending, and Rs 17 crore of fixed income, so 11.5 years of spending never depends on selling equity in a fall. Then growth: Rs 42.5 crore, half the corpus, in diversified public equity. The remaining Rs 19.5 crore goes to alternatives: Rs 13 crore in private equity and private credit for the extra return the family's long horizon lets it collect, Rs 3 crore in REITs and InvITs for income and Rs 3.5 crore of gold as a diversifier.
| Sleeve | Rs crore | Weight | Assumed return | Liquidity |
|---|---|---|---|---|
| Cash and liquid funds | 6.0 | 7.1% | 6.5% | same day |
| Fixed income | 17.0 | 20.0% | 7.5% | within a week |
| Public equity | 42.5 | 50.0% | 12.0% | within a week |
| Private equity and credit | 13.0 | 15.3% | 14.0% | locked 5 to 10 yrs |
| REITs and InvITs | 3.0 | 3.5% | 8.0% | within a week |
| Gold | 3.5 | 4.1% | 7.0% | within a week |
| Portfolio | 85.0 | 100% | 10.7% |
Step 3Why not put far more into private markets?
Because the illiquid share is not fixed; it rises exactly when you least want it to. In a stress year where public equity falls 35%, REITs 20% and private holdings are marked down only 15%, the portfolio shrinks to Rs 68.3 crore and the illiquid share climbs from 15.3% to 16.2% without a rupee being invested. This is the denominator effectWhen liquid assets fall faster than illiquid ones, the illiquid share of the portfolio rises even though nothing was bought.. Set the ceiling on the stressed number, say 25%, and solve backwards: the policy weight could rise to about Rs 20.5 crore before a bad year pushes it through the ceiling.
So why stop at Rs 13 crore rather than Rs 21 crore? Private commitments are drawn over three to four years, so reaching Rs 13 crore of invested value needs commitments spread across several vintages, and a margin below the ceiling leaves room for unfunded calls arriving in a bad year. The limit to state: private markets' 14% is an assumption with wide error, and their smooth marks understate their true risk. The policy is a starting point for the committee, reviewed each year as spending and the family change.
Where candidates lose it
The common answer lists percentages from a textbook, 60/40 or an endowment model, without sizing a single rupee against spending. The interviewer is listening for the floor first: how many years of spending are safe before any growth asset is touched.
The second miss is treating the illiquid share as a fixed number. Candidates who do not stress-test it end up with a portfolio that breaches its own limit in the first bad year.
What the interviewer asks next
- The grandparents want Rs 10 crore given to a charitable trust over five years. What changes?
- How would you commit to private equity so the invested amount reaches Rs 13 crore?
- Which sleeve would you rebalance from after a 35% equity fall, and why?
Asked at Schroders, Asset Management, London, 2023 (Wall Street Oasis): How would you invest 10 million pounds?
Company names and figures are illustrative.