Why do you do rebalancing of portfolios?

"We periodically rebalance portfolios to align each portfolio with the model portfolio of the strategy. At any point of time, we have a model portfolio with certain allocations spread across different stocks in the portfolio. These allocations are based on 3 factors: a) the degree of our conviction in the competitive advantages of a company relative to others in the portfolio b) the quantum of earnings growth rate that we expect from a company in the longer run, relative to other stocks in the portfolio. c) Margin of safety and sustainability.

Over a period of time, as share prices of different stocks change, certain stock allocations in client portfolios go out of sync with model portfolio weights.

We carry out a rebalancing exercise to ensure that all client portfolios maintain the balance around model portfolio weights. This rebalancing exercise is carried out depending on the price dislocations and other factors like top up/redemption requests for the particular account.

This is not to “average” cost of any stock. To give you an example. Let’s say all stocks in your portfolio go up by 50%, except for one stock which goes up by 10%. In this case, the allocation of this one stock will fall in the portfolio, not because the share price has fallen. In this case, as well, we will carry out a rebalancing exercise."