Constant Rupee Value Plan: Study Summary
The Constant Rupee Value Plan is a popular formula-based investment strategy
designed to manage portfolio risk by maintaining a fixed monetary value in a specific
asset class.
1. Portfolio Structure
The investor maintains two distinct portfolios:
Aggressive Portfolio: Primarily consists of high-risk assets like equity shares.
Defensive Portfolio: Consists of low-risk, stable assets like bonds and debentures.
2. Core Mechanism
The primary objective is to keep the value of the aggressive portfolio constant at its
original investment amount.
When share prices rise: The aggressive portfolio's value increases. The investor
must sell shares to return the portfolio to its original value and reinvest the proceeds
into the defensive portfolio.
When share prices fall: The aggressive portfolio's value decreases. The investor
must liquidate part of the defensive portfolio to buy more shares, bringing the
aggressive portfolio back up to its original level.
3. Key Benefits
Automatic Profit Booking: It forces the investor to sell high and transfer gains to safer
assets.
Disciplined Buying: It forces the investor to buy more shares when prices are low.
Reduced Emotional Bias: Rebalancing is triggered by predetermined mathematical
rules rather than market sentiment.
4. Implementation: Revision Points
To implement this, investors must predetermine revision points (action points).
These are specific percentage changes (e.g., +/- 10%, 15%, or 20%) in the aggressive
portfolio that trigger a rebalancing action.
The choice of these points significantly impacts the overall returns of the plan.
The Constant Rupee Value Plan is a popular formula-based investment strategy
designed to manage portfolio risk by maintaining a fixed monetary value in a specific
asset class.
1. Portfolio Structure
The investor maintains two distinct portfolios:
Aggressive Portfolio: Primarily consists of high-risk assets like equity shares.
Defensive Portfolio: Consists of low-risk, stable assets like bonds and debentures.
2. Core Mechanism
The primary objective is to keep the value of the aggressive portfolio constant at its
original investment amount.
When share prices rise: The aggressive portfolio's value increases. The investor
must sell shares to return the portfolio to its original value and reinvest the proceeds
into the defensive portfolio.
When share prices fall: The aggressive portfolio's value decreases. The investor
must liquidate part of the defensive portfolio to buy more shares, bringing the
aggressive portfolio back up to its original level.
3. Key Benefits
Automatic Profit Booking: It forces the investor to sell high and transfer gains to safer
assets.
Disciplined Buying: It forces the investor to buy more shares when prices are low.
Reduced Emotional Bias: Rebalancing is triggered by predetermined mathematical
rules rather than market sentiment.
4. Implementation: Revision Points
To implement this, investors must predetermine revision points (action points).
These are specific percentage changes (e.g., +/- 10%, 15%, or 20%) in the aggressive
portfolio that trigger a rebalancing action.
The choice of these points significantly impacts the overall returns of the plan.
