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NISM Certifications · NISM-Series-X-A: Investment Adviser (Level 1) · Portfolio Construction Process

Mr. Rakesh Iyer's portfolio has a target allocation of 60% equity and 40% debt, with a policy of rebalancing whenever any asset class drifts more than 5 percentage points from target. His portfolio is worth Rs 10,00,000, of which Rs 6,80,000 is now in equity. What action does the policy require?

The policy requires selling Rs 80,000 of equity and buying debt. Equity is 68% of the portfolio, 8 points above the 60% target and beyond the 5-point band. Bringing equity back to Rs 6,00,000 needs Rs 80,000 shifted into debt.

  1. ANo action, as the drift is exactly at the limit
  2. BSell Rs 80,000 of equity and buy debt of the same valueCorrect
  3. CSell Rs 68,000 of equity and buy debt of the same value
  4. DBuy Rs 80,000 of equity by selling debt

Explanation

Equity weight is 6,80,000/10,00,000 = 68%, a drift of 8 points from 60%, which exceeds the 5-point band. Restoring the target means equity of Rs 6,00,000, so Rs 80,000 of equity is sold and moved to debt. Selling 68,000 uses the wrong base, treating 68% as a rupee figure.

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