NISM-Series-X-A: Investment Adviser (Level 1) · Portfolio Performance Measurement and Evaluation

Portfolio Monitoring, Review and Rebalancing Explained

Updated 11 October 2026 · Fact-checked

Portfolio monitoring is tracking a client's portfolio against their goals, risk profile and policy targets. Review is the formal periodic check. Rebalancing restores target asset weights, either on a set calendar date, when a weight crosses a threshold band, or both. To solve questions, compare current weights with targets and compute the trades.

Understand Portfolio Monitoring, Review and Rebalancing

A portfolio is built to meet a client's goals within their risk profile. That plan is written down as an asset allocation, for example 60% equity and 40% debt. Markets then move. Equity may rise faster than debt, so the portfolio drifts away from the plan and carries more risk than the client agreed to.

Monitoring is the continuous watch on the portfolio, the markets and the client's life. Review is the formal, scheduled check. In a review you ask three things: is the portfolio still on track for the goals, is the allocation still close to target, and has anything changed for the client?

Rebalancing is the action that fixes drift. You sell the asset class that is above target and buy the one that is below target. This is a risk-control step. It is not an attempt to predict the market. It keeps risk at the level the client accepted.

There are two main triggers. Calendar rebalancing acts at fixed intervals, such as every six or twelve months, whatever the drift. Threshold (percentage-band) rebalancing acts only when an asset weight moves outside a set band, such as target ±5 percentage points. Many advisers combine them: check on a calendar, act only if a band is breached.

Reviews can also be triggered by events: a change in income, marriage, a child's birth, retirement, a large expense, a change in risk tolerance, a change in tax rules, or a major change in a fund or its manager. After each review, you report to the client in clear terms: performance against the benchmark and goals, current allocation, any changes made, costs and the next steps.

Key formulas to remember

Current weight of an asset class: Weight = Value of asset class ÷ Total portfolio value × 100; Use current market values, not the amount originally invested.
Drift: Drift = Current weight − Target weight; A positive drift means overweight, so sell. A negative drift means underweight, so buy.
Threshold band: Band = Target weight ± tolerance; Rebalance only when the current weight falls outside the band. At exactly the limit, follow the policy wording.
Amount to trade to reach target: Trade = (Target weight × Total portfolio value) − Current value of asset class; A positive result is a purchase. A negative result is a sale. Trades across classes net to zero if no money is added or withdrawn.
Return versus goal check: Required return vs. achieved return since start; If achieved return is below the return needed for the goal, discuss higher savings, a longer horizon or a changed goal. Do not simply raise risk.

How to solve Portfolio Monitoring, Review and Rebalancing questions

Use this method for any question on review, triggers or rebalancing.

1Read the question and identify what is asked: the review frequency, the trigger type, the trade amount or the reporting content.
2Note the target allocation from the investment policy and any band or calendar rule given.
3Compute current values and weights from market values. Total them first.
4Find drift for each asset class and check it against the band, if one is given.
5Decide the action. Calendar method: rebalance on the date. Threshold method: rebalance only if outside the band.
6Compute the trade: target value minus current value. Check that sales and purchases match.
7Consider the client's circumstances: taxes, exit loads, transaction costs and any change in goals or risk profile.
8Pick the option that keeps the portfolio aligned with the client's goals and risk profile, and that is documented and reported to the client.

Quickest way: Weights, drift, trade in three lines

When to use it: Use when the question gives values and a target allocation and asks what to buy or sell.

Add the values to get the total.
Multiply total by each target weight to get the target value.
Subtract current value from target value. Positive means buy, negative means sell.
For theory options, prefer the answer that links the action to the client's goals and policy, not to market views.

Common mistakes in Portfolio Monitoring, Review and Rebalancing

Treating rebalancing as market timing.
Students think selling winners means predicting a fall.
Fix: Remember that rebalancing restores the agreed risk level. It is rule-based, not a forecast.
Rebalancing inside the threshold band.
Students act on any drift they see.
Fix: Under a threshold policy, act only when the weight is outside the band. Small drift inside the band is left alone.
Using original cost instead of market value to find weights.
Cost values are easier to read from the statement.
Fix: Weights always use current market values.
Ignoring costs and taxes when rebalancing.
The arithmetic looks complete once the trade is computed.
Fix: Mention transaction costs, exit loads and capital gains tax. A band wide enough to avoid constant trading reduces these costs.
Thinking reviews are only calendar-based.
Students memorise 'annual review' as the only rule.
Fix: Reviews are also triggered by life events, goal changes, risk tolerance changes and major market or product changes.
Confusing the direction of the trade.
Students mix up overweight and underweight.
Fix: Overweight means sell. Underweight means buy. Check that the total of sales equals the total of purchases.

Worked examples

Example 1

A client's policy is 60% equity and 40% debt, with threshold rebalancing at ±5 percentage points. The portfolio is worth ₹10,00,000 in total: equity ₹6,80,000 and debt ₹3,20,000. Should you rebalance? If yes, what trades are needed?

Show the solution

Equity weight = 6,80,000 ÷ 10,00,000 = 68%. Debt weight = 32%.
Equity drift = 68% − 60% = +8 points. The band is 55% to 65%, so 68% is outside it.
Rebalancing is required.
Target equity value = 60% × 10,00,000 = ₹6,00,000. Sell ₹6,80,000 − ₹6,00,000 = ₹80,000 of equity.
Target debt value = 40% × 10,00,000 = ₹4,00,000. Buy ₹4,00,000 − ₹3,20,000 = ₹80,000 of debt.
Check: sale of ₹80,000 equals purchase of ₹80,000.

Answer: Yes. Sell ₹80,000 of equity and buy ₹80,000 of debt.

Example 2

A portfolio has a target of 50% equity, 30% debt and 20% gold, with a ±5 point band. Current values are equity ₹5,40,000, debt ₹2,70,000 and gold ₹1,90,000. Which asset classes breach the band?

Show the solution

Total = 5,40,000 + 2,70,000 + 1,90,000 = ₹10,00,000.
Equity weight = 54%. Drift = +4 points. Band is 45% to 55%, so it is inside.
Debt weight = 27%. Drift = −3 points. Band is 25% to 35%, so it is inside.
Gold weight = 19%. Drift = −1 point. Band is 15% to 25%, so it is inside.
No asset class is outside its band.

Answer: None breach the band, so no rebalancing is needed under a threshold policy.

Exam tips

Know the difference between calendar, threshold and combined methods. Questions often describe a rule and ask which method it is.
In numerical questions, always use market values and check that sales equal purchases.
If an option links review to a change in client circumstances or goals, it is usually the stronger choice.
Watch for cost and tax consequences in rebalancing questions. Options that ignore them are weaker.
Reporting questions favour clear, goal-linked communication with the client, covering performance, allocation and actions taken.

Practice questions from Portfolio Performance Measurement and Evaluation

Portfolio Monitoring, Review and Rebalancing in other exams

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

Portfolio Monitoring, Review and Rebalancing: frequently asked questions

How often should a portfolio be reviewed?

There is no single fixed answer in theory. Reviews are done periodically, commonly at least once a year, and also whenever the client's circumstances, goals or risk tolerance change. Follow the frequency stated in the advisory agreement or the question.

What is the difference between calendar and threshold rebalancing?

Calendar rebalancing acts on fixed dates regardless of drift. Threshold rebalancing acts only when an asset weight moves outside a set band around its target. Threshold rebalancing needs ongoing monitoring.

Does rebalancing increase returns?

Not necessarily. Its main purpose is to keep risk in line with the client's agreed allocation. Returns may be higher or lower after rebalancing.

What should I report to the client after a review?

Report performance against the benchmark and the client's goals, the current allocation versus target, any trades made and their costs, and recommended next steps.