Corridor

A portfolio's target mix is never held exactly. Prices move every day, so the real weights drift a little either side of the target all the time.

Threshold-based rebalancing accepts that drift up to a point, and only acts once it goes too far. The corridor is that permitted range — a band above and below the target weight. Stay inside it, and the manager does nothing. Break out of it, in either direction, and a trade is triggered to bring the mix back.

Section 21.3.1 gives the workbook's own worked corridor. A balanced (hybrid) portfolio has a 60% target allocation to equity. Trigger points are set at 50% and 70% — the corridor is therefore 60% ± 10 percentage points. The portfolio is rebalanced only when equity's value falls below 50% or rises above 70%; between those two points, it is left alone. This range also serves, in the workbook's words, as "a corridor for tactical asset allocation by the portfolio managers" — the manager has room to drift the mix deliberately within the band before threshold rebalancing forces a trade.

Corridor width is not arbitrary. Assets with higher transaction costs normally warrant wider corridors, because trading them to correct small deviations is expensive relative to the benefit. More volatile asset classes usually get narrower corridors, because they drift further and faster if left unattended, so a wide band would let risk build up unchecked before a trade is triggered.

Illustrative figures, extending the workbook's own 60% example. A client's Investment Policy Statement sets a 60% equity / 40% debt target, with a 50%–70% corridor on equity exactly as in the workbook's illustration, on a portfolio starting at Rs 1,00,00,000 (Rs 60,00,000 equity, Rs 40,00,000 debt).

Over 18 months, equity markets rally hard: the equity sleeve grows to Rs 78,00,000 while debt grows modestly to Rs 44,00,000. Total portfolio = Rs 1,22,00,000; equity weight = 78 ÷ 122 = 63.9% — still inside the 50%–70% corridor, so no trade is triggered, even though the rupee value of equity has grown by 30%.

Six months later, equity markets rally further: the equity sleeve reaches Rs 90,00,000 against debt of Rs 46,00,000. Total = Rs 1,36,00,000; equity weight = 90 ÷ 136 = 66.2% — still inside the band. But a further sharp rally taking equity to Rs 98,00,000 against debt of Rs 47,00,000 (total Rs 1,45,00,000) pushes equity weight to 98 ÷ 145 = 67.6%... and one more leg to Rs 1,05,00,000 equity (total Rs 1,52,00,000) crosses 69.1%, still inside — it is only a move past 70% of the then-current total that would finally breach the upper trigger and force the manager to trim equity back toward 60%.

Chapter 21 (Portfolio Rebalancing), section 21.3.1 (Time versus threshold based rebalancing), gives the 60%/50%/70% corridor example directly and links corridor width to transaction cost and volatility. Expect a question asking whether a stated equity weight is inside or outside a given corridor, and one on which asset characteristic widens or narrows a corridor.

• The corridor is measured on the asset's weight in the total portfolio, not on its rupee value alone — a rising portfolio total can keep a growing asset's weight inside the corridor even as its rupee value rises sharply.
• Higher transaction costs widen the corridor; higher volatility narrows it — these two rules pull in opposite directions and are easy to swap.
• The corridor only matters for threshold-based rebalancing — time-based (calendar) rebalancing ignores drift entirely and rebalances on a fixed schedule regardless of how far the mix has moved.
• Breaching the corridor triggers a trade back toward the target weight, not to a new corridor edge — the portfolio is rebalanced to the 60% target, not merely brought back to 70%.