NISM-Series-XXI-A: Portfolio Management Services (PMS) Distributors · Portfolio Management Process

Portfolio Monitoring and Rebalancing Explained for NISM PMS Exam

Updated 11 October 2026 · Fact-checked

Portfolio monitoring is the regular review of a portfolio against the client's objectives, constraints and benchmark. Rebalancing is trading the portfolio back to its target asset allocation after market moves or changed client needs. To solve questions, compare current weights with target weights, then buy the underweight and sell the overweight.

Understand Portfolio Monitoring and Rebalancing

A portfolio is built to meet a client's objectives, such as growth, income or capital protection, within limits on risk, time horizon, liquidity and tax. Building it is not the end. Markets move, and the client's life changes. So the portfolio must be watched and adjusted. This is the monitoring and rebalancing step of the portfolio management process.

Monitoring has two parts. The first is checking the client: has the risk appetite, income, time horizon, liquidity need or goal changed? The second is checking the markets and the portfolio: has the economy, interest rate view or a holding's outlook changed, and how has the portfolio performed? Performance is judged against a benchmark, such as a suitable index, and against the client's own objective. A good benchmark matches the portfolio's style and asset mix. Comparing a debt-heavy portfolio with an equity index tells you little.

Rebalancing restores the target asset allocation. Suppose the target is 60% equity and 40% debt. If equities rise, equity may drift to 70%. The portfolio now carries more risk than the client agreed to. Rebalancing means selling some equity and buying debt to return to 60:40. It also forces a discipline of trimming what has risen and adding to what has lagged.

Rebalancing can be triggered by time (for example every quarter or year), by thresholds (when a weight moves beyond a set band, such as ±5 percentage points), or by a change in the client's objectives or constraints. Rebalancing has costs: brokerage, taxes and market impact. So managers do not rebalance for tiny drifts.

The common strategies differ in how they respond to market moves. Buy and hold sets the mix once and does not trade; weights drift with markets. Constant mix keeps fixed percentages by selling winners and buying losers. Constant proportion portfolio insurance (CPPI) raises equity exposure as the portfolio value rises and cuts it as value falls, protecting a floor value. Exact names and details vary by workbook, so learn the logic of each.

Key formulas to remember

Current weight of an asset class: Weight = Value of asset class ÷ Total portfolio value × 100; Calculate this for every asset class before comparing with the target.
Drift: Drift = Current weight − Target weight; Positive drift means overweight (sell). Negative drift means underweight (buy).
Rebalancing amount: Trade value = (Target weight × Total portfolio value) − Current value; Positive means buy. Negative means sell. Trades across classes net to zero if there is no new cash and no costs.
Active return vs benchmark: Active return = Portfolio return − Benchmark return; Compare over the same period and on the same basis (for example both total return).
Constant mix response: Market rises → sell the rising asset; market falls → buy the falling asset; Buy and hold does no trading. CPPI does the opposite of constant mix: it buys the rising asset and sells the falling one.

How to solve Portfolio Monitoring and Rebalancing questions

Use this method for both concept and numerical questions on monitoring and rebalancing.

1Identify what is asked: monitoring (review, benchmark, client change), rebalancing (restore target), or a named strategy.
2Note the target allocation and any permitted band from the client's objectives or policy.
3Compute current values and current weights of each asset class.
4Find the drift for each class: current weight minus target weight.
5Decide the action: sell overweight, buy underweight. Compute trade values using target weight × total value.
6Check that buys and sells match and that final weights equal the target.
7For strategy questions, match the behaviour: no trading is buy and hold, fixed percentages is constant mix, rising exposure in rising markets is CPPI.
8Consider costs and taxes if the question asks why a manager may not rebalance.

Quickest way: Target-times-total shortcut

When to use it: Use when the question gives values and a target mix and asks for the amount to buy or sell.

Add up the total portfolio value.
Multiply total by each target percentage to get the target value.
Subtract current value from target value for each class.
Negative is sell, positive is buy. Only one class needs calculating for a two-asset portfolio, as the other is equal and opposite.
Eliminate options whose buy and sell amounts do not match.

Common mistakes in Portfolio Monitoring and Rebalancing

Calculating the rebalancing amount on the old target value or on one asset's value instead of total portfolio value.
Students apply the target percentage to the wrong base.
Fix: Always apply the target weight to the total current portfolio value.
Confusing constant mix with buy and hold.
Both start with a fixed allocation.
Fix: Buy and hold never trades after the start. Constant mix trades regularly to restore fixed percentages.
Saying constant mix buys the asset that has risen.
Students assume following the trend is natural.
Fix: Constant mix sells what has risen and buys what has fallen. CPPI is the one that follows the trend.
Judging performance against any popular index.
Benchmark choice is treated as a formality.
Fix: The benchmark must fit the portfolio's asset mix, style and objective.
Thinking rebalancing is only needed when markets move.
Students forget the client side of monitoring.
Fix: A change in the client's risk profile, goals, horizon or liquidity needs can also require a change in allocation.
Ignoring costs and taxes.
Textbook examples are cost-free.
Fix: Remember that frequent rebalancing adds brokerage and may trigger tax, so bands and thresholds are used.

Worked examples

Example 1

A client's target allocation is 60% equity and 40% debt. The portfolio is now worth ₹10,00,000 with equity at ₹7,00,000 and debt at ₹3,00,000. How much equity must be sold to restore the target, and what is the debt purchase?

Show the solution

Total value = ₹7,00,000 + ₹3,00,000 = ₹10,00,000.
Target equity = 60% × ₹10,00,000 = ₹6,00,000.
Equity to sell = ₹7,00,000 − ₹6,00,000 = ₹1,00,000.
Target debt = 40% × ₹10,00,000 = ₹4,00,000.
Debt to buy = ₹4,00,000 − ₹3,00,000 = ₹1,00,000, which matches the sale.

Answer: Sell ₹1,00,000 of equity and buy ₹1,00,000 of debt.

Example 2

Which strategy, after a sharp market fall, would require the manager to buy more equity to bring equity back to a fixed 50% of the portfolio: buy and hold, constant mix, or CPPI? Explain briefly.

Show the solution

Buy and hold does no trading after the start, so it makes no purchase.
After a fall, equity weight drops below 50%.
Constant mix restores fixed percentages, so it buys equity to return to 50%.
CPPI cuts equity exposure as value falls to protect the floor, so it would sell equity.

Answer: Constant mix. It buys the asset that has fallen to restore the fixed 50% equity weight.

Exam tips

Learn the one-line behaviour of each strategy: buy and hold does nothing, constant mix is contrarian, CPPI follows the trend.
In numerical questions, check that sales equal purchases before choosing an answer.
Expect questions on why the benchmark must match the portfolio's style and asset mix.
Remember that both market movements and client changes can trigger a review.
Do not guess on 4-option trap questions that mix up strategies. Negative marking in this exam is 10% of the question's marks.

Practice questions from Portfolio Management Process

Portfolio Monitoring 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 and Rebalancing: frequently asked questions

What is portfolio rebalancing?

It is adjusting a portfolio back to its target asset allocation after market moves or changes in the client's needs. You sell the overweight asset classes and buy the underweight ones.

How do I monitor portfolio performance against a benchmark?

Pick a benchmark that matches the portfolio's asset mix and style. Compare portfolio return with benchmark return over the same period. The difference is the active return.

What is the difference between constant mix and buy and hold?

Buy and hold sets the allocation once and does not trade, so weights drift. Constant mix trades regularly to keep the percentages fixed, selling gainers and buying laggards.

How often should a portfolio be rebalanced?

There is no single correct frequency. Managers use set intervals, drift thresholds, or changes in the client's circumstances, and weigh the cost and tax of trading.