Portfolio

Revision
Constant Rupee,
Constant Ratio
and Rupee cost
Averaging Plans.
(सरल भाषा में )

Portfolio Management : Dr. Ishwar Sharma

18-Apr-20 Portfolio Managment by Dr. Ishwar Sharma 1

 Meaning of Portfolio Revision
Portfolio Revision refers to the periodic
changes made in the components of a
portfolio on the basis of the performance
evaluation. This can be performed by
adding or removing securities in the
portfolio or changing the proportion of
funds invested in the components of the
existing portfolio.
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 Portfolio Revision Includes
• Selling of securities included in the portfolio
whose prices are at historic high.
• Getting rid of securities by selling which are
not performing as per the expectations/Goals.
• Including new securities in the portfolio which
are undervalued but fundamentally strong.
• Changing the proportion of existing securities
(Company wise as well as sector wise).

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 Factors forced a investor to revise the
portfolio/ Need of Portfolio Revision
1. Change in aptitude/perception of
Investor.
2. Shift in Investment Goals
3. Change in disposable funds available to
investor. (Increase or Decrease)
4. Change in Return profile of the
securities.
5. Change in Macroeconomic Factors.
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 Types of Portfolio Strategies
1. Passive Portfolio Strategy: The investor
invests in the broad market index and does
not perform any security analysis. He does
not select individual securities. A Passive
investor simply invests in the index and holds
it in order to earn commensurate returns.
Hence the analysis of securities and revision
of portfolio is not required if one is a passive
investor.
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2. Active Portfolio Strategies: Here investor actively
engaged in the analysis and selection of
securities so as to earn superior returns. So the
securities of higher or overvalued price are sold
to reap profit and fresh investment is made in
undervalued securities having strong
fundamentals.
Individual Security Analysis and Revision of
Portfolio is relevant only in case of Active
Portfolio Strategy.

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 Major Constraints in Portfolio Revision

• Transaction Cost
• Taxes (Capital Gain and Security
Transaction Tax)
• Statutory Restrictions (Restrictive caps on
Portfolio (Pre-determined Proportion).
Like in case of Mutual Funds)
• No Single Formula.
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 Portfolio Components for the purpose
of Revision
1. Aggressive Portfolio: Consists more risky
Securities mainly Common Stocks. This part
yield superior returns with high risk. High
Price Fluctuations, Volatile Returns.
2. Defensive or Conservative Portfolio: This part
mainly consists fixed income securities like
bonds. It is called conservative portfolio
because the return is certain and risk is less
in case of bond investment.

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 Techniques of Portfolio Revision
The portfolio revision techniques basically suggest
the TIMING OF REVISION of a Portfolio.
These techniques suggest the optimum timing of
changing the proportion of Aggressive Portfolio
and Defensive Portfolio.
When to sell the existing securities / purchase of
new securities or changing the proportion.
These techniques do not suggest anything about
the selection of securities.
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 Portfolio Revision Techniques
A. Formula Plans B. Rupee Cost
1. Constant Rupee Value Plan Averaging Plan
2. Constant Ratio Plan
a. Rebalancing between
Aggressive and Defensive
Portfolio
b. Rebalancing between Equity
Portfolio
3. Variable Ratio Plan

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 Constant Rupee Value Plan
• The invested amount in Aggressive Portfolio is
kept Constant.
• When share price increase beyond the set
target (Trigger Point) , the excess value is sold
and the sale proceeds is invested in
conservative fund.
• When share price decrease beyond set target
(trigger Point) , the shares are purchased to
maintain it its initial value and Bonds are sold.

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 Example:
Total Investment: Rs. 2,00,000
Aggressive Portfolio: Rs. 1,00,000 (1000 Equity
Shares @ Rs. 100 per Share)
Defensive Portfolio : Rs. 1,00,000 (in Bonds)
Trigger change :20%

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 In case of downside movement
Equity Share No. of Value of Value of Total Action to
Price Equity Share Aggressive Defensive Value of Revise
Stock Stock Portfolio
100 1,000 1,00,000 1,00,000 2,00,000
90 1000 90,000 1,00,000 1,90,000 No action
Required
80 1,000 80,000 1,00,000 1,80,000 Trigger
80 1250 1,00,000 80,000 1,80,000 250 new
shares
purchased @
80 per share
and for this
purpose bonds
of Rs.20,000
are sold out.

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 In case of Upside movement
Equity Share No. of Value of Value of Total Value Action to
Price Equity Share Aggressive Defensive of Portfolio Revise
Stock Stock
100 1,000 1,00,000 1,00,000 2,00,000
105 1000 1,05,000 1,00,000 2,05,000 No action
Required
125 1,000 1,25,000 1,00,000 2,25,000 Trigger
125 800 1,00,000 1,25,000 2,25,000 200 shares
sold @ 125
per share
and the
proceeds of
Rs. 25,000
invested in
Bonds.

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 Constant Ratio Plan
The Ratio of Aggressive Portfolio in total value of
portfolio remain constant.
Ratio= Market Value of Common Stock/ Market
Value of Total Portfolio.
This ratio is maintained by selling or purchasing
the securities if the share price moves up or
down beyond the trigger point.

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 Example:
Total Investment: Rs. 2,00,000
Aggressive Portfolio: Rs. 1,20,000 (1200 Equity
Shares @ Rs. 100 per Share)
Defensive Portfolio : Rs. 80,000 (in Bonds)
Ratio of Aggressive Portfolio in Total Portfolio
=1,20,000/2,00,000 = 60%
Trigger change :20%

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 In case of downside movement
Equity Share No. of Value of Value of Total Action to
Price Equity Share Aggressive Defensive Value of Revise
Stock Stock Portfolio
100 1,200 1,20,000 80,000 2,00,000
90 1,200 1,08,000 80,000 1,88,000 No action
Required
80 1,200 96,000 80,000 1,76,000 Trigger
80 1,320 1,05,600 70,400 1,76,000 120 new
shares
(60%) (40%) purchased @
80 per share
and for this
purpose bonds
of Rs. 9,600are
sold out.

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 In case of downside movement
Equity Share No. of Value of Value of Total Value Action to
Price Equity Share Aggressive Defensive of Portfolio Revise
Stock Stock
100 1,200 1,20,000 80,000 2,00,000
110 1,200 1,32,000 80,000 2,12,000 No action
Required
120 1200 1,44,000 80,000 2,24,000 Trigger
120 1120 1,34,400 89,600 2,24,000 80 shares
will be sold
(60%) (40%) and sale
proceeds of
Rs. 9600 is
Invested in
Bonds

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 Variants of Constant Ratio Plan
• Maintaining of Constant Ratio of Aggressive
Portfolio in the Value of Total Portfolio.
• Rebalancing / Maintaining the proportion of
Different Sectors or Companies in the
Aggressive Portfolio.
• E.g. maintaining the sector Baking, Auto,
FMCG and Energy in ratio of [Link]

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 Variable Ratio Strategy
• Complete Analysis with full freedom.
• No predetermined Ratio.
• Purchase/sale or change in proportion is done on
the basis of performance of individual securities.
• More investment can be made in aggressive stock
in Boom Period and in case of depression the
investment can be switched towards fixed income
securities (Bonds).
• Sale of overvalued securities and purchase of
undervalued securities.
• Trigger point may defined here also.

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 Rupee Cost Averaging
• It is like the systematic investment plan (SIP).
• Simplest and Most effective strategy.
• Stocks with good fundamentals are selected
with a long time horizon.
• Continuous buying of shares at a regular
interval.
• Shares are purchased continuously regardless
of increase or decrease in share price.
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Month Investment Share No of Cumulative Market Unrealised
Amount Price units units Value profit/loss
Purchased Of
Investment

1 10,000 25 400 400 10,000 N.A.

2 10,000 20 500 900 18,000 (2,000)

3 10,000 16 625 1525 24,400 (5,600)

4 10,000 22 454.5 1979.5 43,549 3,549

5 10,000 25 400 2379.5 59,487.5 9487.5

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Evaluation of Rupee Cost Averaging
Advantages Limitations
• Reduce the average cost per • High Transaction cost.
share. • It is basically a buying
• Removes the pressure of strategy. It does not suggest
timing of purchase or selling anything about when to sell.
the shares.
• Very effective in long term • The averaging does not
investment. work in case of a long term
• Very simple to apply and downside trend. So it is
applicable in both, falling effective only when price
and rising of market. trends shows a cyclical
pattern.

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Thank you
Have a Nice Day.

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