Capacity, tolerance, need: the three risks

A friend ran one of those risk questionnaires last week. Twelve questions, a score, a single word at the end. Aggressive.

On the strength of that word he was about to tip his entire retirement pot into ninety percent equities. Eight years from the day he stops working.

Here is the part the quiz never told him. It measured one risk. His money answers to three.

Tolerance is how much of a drop you can sit through without selling. That is the one the questionnaire scored, and for him it read ninety.

Capacity is a different question. It asks how much loss the plan can actually absorb. Eight years from the finish line, on the only corpus he has, a deep equity fall right before he starts withdrawing may not have time to climb back. Capacity does not care how brave he feels. It sets a ceiling.

Need is different again. It asks how much risk the goal even requires. Turning about sixty lakh into one point two crore in eight years needs roughly nine percent a year. A sixty forty mix already delivers that. So the extra equity was buying upside he did not need.

Put numbers on it and the two questions the quiz skipped both point near sixty percent equity, not ninety. The cost of ignoring them shows up in a single bad year. A crash two years before he retires is a twenty two percent hole at sixty forty. At ninety ten it is thirty five, and climbing back needs a fifty five percent bounce he does not have the runway for.

Capacity sets the ceiling. Need sets the floor. Tolerance only decides where you sit in between. A risk score is one input, not the answer. Answer all three before you pick the mix.

Need, worked out

The need number comes from one formula: the return required is the target divided by the start, raised to one over the years, minus one. Rs 60 lakh to Rs 1.2 crore in eight years is a doubling, and the eighth root of 2 is about 1.0905, so the need is about 9.05 percent a year.

Then ask what share of equity delivers that, given assumed returns for each sleeve. With equity at 12 percent and debt at 6.5, a mix with w in equity earns 6.5 plus w times 5.5. Setting that equal to 9.05 gives w of about 46 percent. That is the floor: less equity than that and the plan, on these assumptions, falls short.

Three answers on one line

When tolerance sits inside the band, it picks the spot. When it sits outside, as here, it is overruled. A brave investor with a near deadline lands at the ceiling. A nervous one with a modest goal lands at the floor.

A real bad quarter, at two mixes

The opening's crash numbers are an illustration. The last real test was recent. From 31 Dec 2025 to 30 Mar 2026 the Nifty 50 fell 14.54 percent and the Nifty Composite G-sec Index fell 1.44 percent, by NSE closing data. Apply that one quarter to his Rs 60 lakh.

That was one quarter, and the index recovered part of it the next month. A deeper fall in the last two years before retirement is the case capacity is meant to guard against. The difference between the two mixes is not the return they promise. It is the loss they can deliver at the worst moment, when there is no salary left to keep buying.

The free Learn module on risk management covers risk budgets and drawdown limits in more depth, with a quiz and a certificate. The goal planner works out the return a goal needs from your own numbers. For what happens when one label is applied to several goals, read one profile, many goals.