Constant mix strategy

Set a target mix — say 60% equity, 40% debt — and markets immediately start pushing it off course. Assets with higher returns grow faster, so their share of the portfolio drifts upward. Because high-return assets are usually high-risk too, an untouched portfolio gradually becomes riskier and more concentrated than intended.

The constant mix strategy refuses to let that happen. Periodically, it sells what has grown beyond its target and buys what has fallen below it, resetting the mix.

The workbook calls it "actually the rebalancing process" — a "do something" strategy, in contrast to buy and hold's "do nothing".

The workbook contrasts the two:

When to rebalance is a separate choice:

• Time-based (calendar) — monthly, quarterly (a popular choice), half-yearly or annually. Simple, no monitoring in between, but blind to how far the mix has drifted.
• Threshold-based — rebalance when a weight crosses a trigger point. For a 60% equity target the workbook suggests triggers at 50% and 70%; the range between them is the corridor, which also leaves room for tactical allocation. Higher transaction costs justify wider corridors; more volatile assets need narrower ones.

Rebalancing has costs — monitoring, trading, and tax on selling appreciated assets — so the rebalancing policy in the IPS must weigh cost against benefit.

Target value of asset i = Target weight_i × Current total portfolio value
Trade in asset i        = Target value_i − Current value_i
                         (positive = buy, negative = sell)

The workbook's Chapter 21 caselet. A PMS manager receives ₹50 lakh, keeps ₹5 lakh in cash, and invests ₹15 lakh equally in three shares, maintaining constant proportions.

Target per share = 55.5 ÷ 3 = ₹18.5 lakh.

The answer is buy K and L by selling M — trimming the winner, adding to the laggards.

Illustrative threshold case: ₹1 crore at 60:40 equity:debt. Equity rises 50% and debt 5% → ₹90 lakh : ₹42 lakh, equity at 68.2% — inside a 50–70% corridor, no trade. Had equity risen 70% instead → ₹102 lakh : ₹42 lakh, 70.8% — the trigger is crossed, so sell ₹15.6 lakh of equity to return to 60% of ₹1.44 crore.

Chapter 21 (Portfolio Rebalancing) covers the need for rebalancing, its costs, calendar versus threshold rebalancing (section 21.3) and buy and hold versus constant mix (sections 21.4–21.5). Two Chapter 21 caselets use the K, L, M portfolio above — one asks for the direction of trades, the other for the number of L shares to buy.

• Constant mix sells winners and buys losers. CPPI does the opposite.
• Buy and hold lets market risk rise; constant mix keeps it steady.
• Wider corridors for costly-to-trade assets; narrower for volatile assets. Reversing these is a common error.
• Calendar rebalancing ignores drift between dates — it can trade when the mix is barely off, or wait while it is far off.
• Rebalancing is not free. Transaction costs, illiquidity (private equity, real estate) and tax on gains all count. International equity costs more to trade than domestic.
• In the K, L, M caselet the ₹5 lakh cash sits outside the rebalancing — only the equity is reset to equal thirds.