Strategic Financial Management · Portfolio Performance Evaluation and Portfolio Revision

Formula Plans in Portfolio Revision: Constant Ratio, Rupee Value and Variable Ratio

Updated 11 October 2026 · Fact-checked

Formula plans are passive portfolio revision rules. You fix in advance how a portfolio is split between aggressive (stock) and conservative (bond) parts, and you rebalance mechanically when prices move. The main plans are constant rupee value, constant ratio and variable ratio. To solve a question, compute the new values, apply the plan's target, and state the buy or sell amount.

Understand Portfolio Revision Formula Plans

Portfolio revision means changing the securities you hold as prices and conditions change. Active revision relies on your forecasts and judgement about which securities to buy or sell. Passive revision uses fixed rules decided in advance, so no forecast is needed. Formula plans are the passive approach.

All formula plans split the portfolio into two parts: an aggressive portfolio (usually equity shares) and a conservative portfolio (usually bonds, debentures or cash). When the market moves, the split drifts. The plan tells you exactly how much to move between the two parts. The effect is that you sell some stocks after a rise and buy some after a fall.

In the constant rupee value plan, the rupee value of the stock part is held fixed. If stock value rises past the trigger, you sell the excess and put it in bonds. If it falls, you move money from bonds into stocks. In the constant ratio plan, the ratio of stock to bond is fixed, for example 50:50. When the ratio drifts beyond a set tolerance, you restore it. Here the stock value in rupees changes, because it is always the fixed share of the total.

In the variable ratio plan, the target ratio itself changes with the market level. As prices rise, you cut the stock share. As prices fall, you raise it. This is more aggressive in its contrarian stance than the other two, but it needs your own judgement to set the ratio table in advance.

Rupee cost averaging is a related rule: you invest a fixed rupee amount at regular intervals, whatever the price. You buy more units when the price is low and fewer when it is high. Your average cost per unit is then lower than the simple average of the prices. A SIP works this way. Formula plans suit investors who cannot forecast the market. They limit gains in a strong rising market and need a market that moves up and down, not one that only falls or only rises.

Key rules to remember

Constant rupee value plan: Stock part = fixed ₹ amount; Action = Current stock value − Fixed value; If positive and the trigger is met, sell that amount and add it to bonds. If negative, buy stock from bonds.
Constant ratio plan: Target stock value = Stock % × (Stock value + Bond value); Action = Target − Current stock value. Bond target is the remaining percentage of total. Rebalance only when drift crosses the stated tolerance.
Variable ratio plan: Target stock value = Stock % for the new market level × Total portfolio value; Take the stock % from the table given in the question. It falls as the market rises and rises as it falls.
Rupee cost averaging: average cost: Average cost per unit = Total amount invested ÷ Total units bought; This is the harmonic mean of the purchase prices. It is never above the simple average of the prices.
Units bought each period: Units = Fixed amount ÷ Price (NAV) in that period; Add units across periods before dividing.

How to solve Portfolio Revision Formula Plans questions

Use this order for any formula plan question. Identify the plan first, because the target rule differs for each.

1Identify the plan named or implied: constant rupee value, constant ratio, variable ratio, or rupee cost averaging.
2Write the starting stock part, bond part and total in a small table.
3Update the stock part for the price change in the question. Leave the bond part unchanged unless told otherwise.
4Compute the new total and check whether the plan's trigger or tolerance is met. If the question gives one, apply it before acting.
5Find the target stock value using the plan's rule. Constant rupee: the fixed amount. Constant ratio: the fixed % of the new total. Variable ratio: the % for the new market level.
6Action = target minus current stock value. Positive means buy stock, negative means sell. Show the bond side as the opposite move.
7Write the revised portfolio and the total, and check that the total is unchanged by the switch (apart from costs the question mentions).
8For rupee cost averaging, compute units per period, total units and total cost, then average cost. Compare it with the simple average price if asked.

Quickest way: Table-and-target shortcut

When to use it: Use it for multi-period constant ratio or constant rupee value questions where time is short.

Draw columns: Stock, Bond, Total, Target stock, Action.
Fill each row in turn, carrying the post-action values into the next row.
In a constant ratio plan, the target is a simple percentage of the total. Action is the gap.
Always check that the stock and bond actions are equal and opposite.
For rupee cost averaging, compute units for each period first, then divide the total amount by total units once at the end.

Common mistakes in Portfolio Revision Formula Plans

Mixing up constant rupee value and constant ratio plans.
Both rebalance between stocks and bonds, so the names sound alike.
Fix: Remember what is fixed. Rupee value plan: the stock amount in ₹. Ratio plan: the percentage split, so the stock amount moves with the total.
Computing the constant ratio target on the old total.
Students forget that the price change has already altered the total.
Fix: Add the new stock value and the bond value first. Apply the percentage to that new total.
Taking the average cost in rupee cost averaging as the simple average of prices.
It feels natural to add the prices and divide by their number.
Fix: Divide the total amount invested by the total units bought. The simple average is only a comparison figure.
Rebalancing when the trigger or tolerance has not been reached.
Students ignore the action point stated in the question.
Fix: Check the stated percentage change or ratio band first. If the drift is inside it, the answer is no action.
Calling a formula plan active revision, or saying it forecasts the market.
Buying and selling looks like active trading.
Fix: Say that the rules are fixed in advance and need no forecast. That is why it is passive.
Using a variable ratio plan without the ratio table, or applying the wrong band.
Students assume a fixed percentage as in the constant ratio plan.
Fix: Read the market level, find its row in the table, and use that stock percentage for the target.

Worked examples

Example 1

Rohan holds ₹10,00,000 under a constant ratio plan of 50:50 between equity shares and bonds. Equity value rises to ₹7,00,000 while bonds stay at ₹5,00,000. He rebalances. Later, equity falls by 20% from its rebalanced value, and he rebalances again. Show the action each time.

Show the solution

Start: stocks ₹5,00,000, bonds ₹5,00,000, total ₹10,00,000.
After the rise: stocks ₹7,00,000, bonds ₹5,00,000, total ₹12,00,000.
Target at 50:50: stocks ₹6,00,000, bonds ₹6,00,000.
Action 1: sell stocks worth ₹7,00,000 − ₹6,00,000 = ₹1,00,000 and buy bonds for ₹1,00,000.
After the fall: stocks = ₹6,00,000 × 0.80 = ₹4,80,000; bonds ₹6,00,000; total ₹10,80,000.
Target: stocks ₹5,40,000, bonds ₹5,40,000.
Action 2: buy stocks ₹5,40,000 − ₹4,80,000 = ₹60,000 by selling bonds worth ₹60,000.

Answer: First rebalancing: sell ₹1,00,000 of stocks and buy bonds of the same amount. Second rebalancing: sell ₹60,000 of bonds and buy stocks. The portfolio is ₹5,40,000 each in stocks and bonds, total ₹10,80,000.

Example 2

Meera invests ₹10,000 every month in a mutual fund scheme for four months. The NAVs are ₹50, ₹40, ₹25 and ₹50. Find the average cost per unit, compare it with the simple average NAV, and find her gain if the NAV at the end is ₹50.

Show the solution

Units: 10,000 ÷ 50 = 200; 10,000 ÷ 40 = 250; 10,000 ÷ 25 = 400; 10,000 ÷ 50 = 200.
Total units = 200 + 250 + 400 + 200 = 1,050.
Total invested = ₹40,000.
Average cost = 40,000 ÷ 1,050 = ₹38.10 (approx).
Simple average NAV = (50 + 40 + 25 + 50) ÷ 4 = 165 ÷ 4 = ₹41.25.
Value at ₹50 = 1,050 × 50 = ₹52,500.
Gain = 52,500 − 40,000 = ₹12,500.

Answer: Average cost is about ₹38.10 per unit, which is below the simple average NAV of ₹41.25. The value is ₹52,500, so the gain is ₹12,500.

Exam tips

Write the plan's name and what it holds fixed in one line before the numbers. It earns marks for concept.
Show the table with stock, bond, total, target and action. A clear table gets method marks even if you slip in arithmetic.
In theory questions, contrast active and passive revision, and list limits: no gain from a one-way market, and the need for a fluctuating market.
In an MCQ, check which quantity the plan fixes. That alone usually removes two options.
In rupee cost averaging, state that the average cost is total investment divided by total units.

Practice questions from Portfolio Performance Evaluation and Portfolio Revision

Portfolio Revision Formula Plans in other exams

The same ground in other exams, if you are preparing for more than one or want another angle on it.

CA FinalPortfolio Revision and Investment Strategies

Portfolio Revision Formula Plans: frequently asked questions

What is the difference between active and passive portfolio revision?

Active revision depends on your forecasts of prices and your judgement on which securities to switch. Passive revision follows preset rules, such as formula plans, and needs no forecast. Formula plans are therefore passive.

What is the difference between a constant ratio plan and a constant rupee value plan?

A constant rupee value plan keeps the stock part at a fixed rupee amount, so any gain above it moves to bonds. A constant ratio plan keeps the stock to bond percentage fixed, so the stock amount changes with the total portfolio value.

How does a variable ratio plan differ from a constant ratio plan?

In a variable ratio plan the stock percentage is not fixed. It falls as the market rises and rises as the market falls, following a table set in advance. A constant ratio plan returns to the same percentage every time.

Why does rupee cost averaging lower the average cost?

A fixed rupee amount buys more units when the price is low and fewer when it is high. More of your units are therefore bought cheaply. The average cost is the harmonic mean of the prices, which never exceeds their simple average.