Case 056Rebalancing and driftCore
A Rs 10 crore portfolio with a 50/40/10 target in equity, debt and gold has drifted to 62/31/7 after a rally, and Rs 80 lakh of new money arrives. Rebalance it with the fewest sales.
1The situation
The Pendharkar portfolio has a written policy of 50% equity, 40% debt and 10% gold, with a band of 5 points either side for equity and debt. An equity rally has pushed it to Rs 6.2 crore of equity, Rs 3.1 crore of debt and Rs 70 lakh of gold, 62/31/7 on Rs 10 crore.
The client has just received Rs 80 lakh from a property sale and wants it invested. About 40% of the equity holding's value is unrealised gain; for this case, assume equity gains are taxed at an illustrative 12.5% when sold and confirm the current rate before acting.
2Your task
What trades bring the portfolio back to policy while selling as little as possible, and what does it cost?
Quick check
How much equity has to be sold to hit the exact target once the Rs 80 lakh is in?
Worked solution
Try it on paper, then open one step at a time.
30-second answerThe answer to give first
Put all Rs 80 lakh into debt and gold, then sell Rs 80 lakh of equity to hit target exactly, or only Rs 26 lakh to reach the edge of the band. On Rs 10.8 crore the target is Rs 5.4 crore equity, Rs 4.32 crore debt and Rs 1.08 crore gold. Using the inflow first cuts the sale from Rs 1.2 crore to Rs 80 lakh and the illustrative tax from Rs 6.0 lakh to Rs 4.0 lakh.
Step 1Why use the new money before selling anything?
If your fridge is overstocked with milk and short of vegetables, you fix it at the next shop by buying only vegetables, not by pouring milk away. New money is a free rebalance: every rupee sent to the underweight assets closes the gap without a sale, a tax bill or a transaction cost. All Rs 80 lakh goes to debt and gold. That alone takes equity from 62% to 57.4%, still outside the 55% ceiling, so some selling is unavoidable.
Step 2How much must be sold to reach the exact target?
Recompute the target on the new total. At Rs 10.8 crore, 50/40/10 means Rs 5.4 crore equity, Rs 4.32 crore debt and Rs 1.08 crore gold, so equity is Rs 80 lakh over and must be sold. The Rs 80 lakh from the sale plus the Rs 80 lakh inflow gives Rs 1.6 crore to deploy: Rs 122 lakh into debt and Rs 38 lakh into gold. Without the inflow, reaching 50% of Rs 10 crore would have needed a Rs 1.2 crore sale.
Step 3Is the exact target even the right destination?
The policy has a band for a reason. A rebalancing bandThe range around a target weight inside which a portfolio is left alone, so trades happen only when drift is large enough to matter. exists so the portfolio trades only when drift matters; the cheapest compliant move is to the edge of the band, not the centre. Bringing equity to 55% of Rs 10.8 crore, Rs 5.94 crore, needs a sale of only Rs 26 lakh. The trade-off is that the portfolio sits at the top of its risk range and may breach again after the next rally.
| Route | Equity sold, Rs lakh | Gain realised, Rs lakh | Illustrative tax, Rs lakh | Equity after |
|---|---|---|---|---|
| Ignore the inflow, sell to 50% of Rs 10 crore | 120 | 48 | 6.0 | 50% |
| Inflow first, sell to exact target | 80 | 32 | 4.0 | 50% |
| Inflow first, sell to band edge | 26 | 10.4 | 1.3 | 55% |
| Inflow only, no sale | 0 | 0 | 0 | 57.4%, outside policy |
Give the client a recommendation for the process, not only the numbers. The view is to go to the exact target now, because the drift came from a rally and a fresh inflow is the cheapest moment to reset, then let the band govern after that. Choosing which equity lots to sell, the ones with the smallest gains first, can shrink the Rs 4.0 lakh further.
Where candidates lose it
The common error is computing the target on the old Rs 10 crore and selling Rs 1.2 crore, then adding the Rs 80 lakh on top. That sells Rs 40 lakh more than needed and leaves the portfolio underweight equity.
The other miss is forgetting the band. An interviewer who wrote a band into the policy wants to hear that the minimum trade goes to its edge, and why you might still choose the centre.
What the interviewer asks next
- The inflow is Rs 1.6 crore instead. What trades now?
- How would you choose which equity lots to sell?
- Why not simply direct the client's next year of SIPs into debt instead of selling?
Company names and figures are illustrative.