This document discusses different types of formula plans for portfolio management. It introduces constant ratio plans, variable ratio plans, and constant rupee value plans. Constant ratio plans maintain a fixed ratio between aggressive and defensive portfolios. Variable ratio plans adjust the ratio based on market price fluctuations. Constant rupee value plans force selling when prices rise and buying when they fall to maintain a constant rupee value of the aggressive portfolio. Formula plans provide rules for buying and selling securities and help investors make better use of market fluctuations.

1. Formula Plans
Presented by:
 Ritu Yadav
 Suryadipta Dutta

2.  Topics to be covered
Introduction
Limitations
Variable Ratio Plan
Constant Ratio Plan
Advantages
Constant rupee value plan
Types
Need

3.  Meaning of Formula Plans
• Formula plans are certain predefined
rules and regulations deciding when
and how much assets an individual
can purchase or sell for portfolio
revision.
• Securities can be purchased and
sold only when there are changes or
fluctuations in the financial market.

4.  Why Formula plans ?
• Formula plans help an investor to make the best
possible use of fluctuation in the financial
market. One can purchase shares when prices
are less and sell off when market prices are
higher.
• With the help of formula plans an investor can
divide his funds into aggressive and defensive
portfolio and easily transfer funds from one
portfolio to other.

5.  Aggressive Portfolio
• Aggressive Portfolio consists of funds
that appreciate quickly and guarantee
maximum returns to the investors.

6. • Defensive portfolio consists of
securities that do not fluctuate much
and remain constant over a period of
time.
 Defensive portfolio

7.  Advantages of the Formula Plans
• Basic rules and regulations for the purchase
and sale of securities are provided.
• The investors can earn higher profits by
adopting the plans.
• It helps to control the buying and selling of
securities by the investors.
• It is useful for taking decisions on the timing
of investment.

8.  Types of formula Plans
• The Constant Rupee Value Plan
• The Constant Ratio Plan
• The Variable Ratio Plan

9.  Constant rupee value plan
• This plan forces the investor to sell when the
prices rises and purchases as the price falls.
• In this plan, the rupee value of the aggressive
portfolio is held constant. Whenever the value of
the aggressive portfolio rises, a part of it is sold
to bring it back to its original value, and the funds
generated are re-invested in the defensive
portfolio.

10.  Example
Period Market
price
No. of
shares
Value of
aggressiv
e
portfolio
Value of
defensiv
e
portfolio
Total
1 50 200 10000 10000 20000
2 44 200 8800 10000 18800
3 40 200 8000 10000 18000
4 40 250 10000 8000 18000
5 44 250 11000 8000 19000
6 50 250 12500 8000 20500
7 50 200 10000 10500 20500
Revision Point : 20%

11. Questions?

12. Formula Plan

13. CONSTANT RATIO PLAN
 An investment strategy in which the market value of stocks and
bonds are kept at a predetermined ratio. That is, when compiling a
portfolio, an investor may decide that 60% of its value will consist of
bonds and 40% will be stocks. When prices rise or fall on the
securities in the portfolio, the investor will buy and sell accordingly in
order to maintain the ratio.
 A constant ratio plan is a form which is done in order to reduce the
risk in the portfolio.

14. Constant Ratio Plan
 Constant ratio between the aggressive and
conservative portfolios is maintained.
 The ratio is fixed by the investor.
 The investor’s attitude towards risk and
return plays a major role in fixing the ratio.

15.  Initial Portfolio Value = Rs.20,000
 Speculative Portion = 40%
 Conservative Portion = 60%
 Desired Speculative to Conservative Ratio =
0.67
 Trigger Points: Maximum ratio = 1.33 or above,
Minimum ratio = 0.33 or below

16. (1) (2) (3) (4) (5) (6) (7) (8)
Stock
Price
Index
Value of Buy
and Hold
Strategy
(2000 x Col. 1)
(₨.)
Value of
Speculative
Portfolio
(Col. 8 x
Col. 1)
(₨.)
Value of
Conservative
Portfolio
(Col. 5 - Col.
3)
(₨.)
Total Value
of constant
ratio
portfolio
(Col. 3 +
Col. 4)
(₨.)
Speculative
to
Conservati
ve Ratio
(Col. 3 /
Col. 4)
Revaluatio
n Action
Transaction
s
No. of
Shares in
Speculative
Portfolio
10 20,000 8000 12000 20000 0.67 800
20 40,000 16000 12000 28000 1.33 800
20 40,000 11233.54 16766.46 28000 0.67 Sell
238.32
securities
at 20
561.68
7 14,000 3931.76 16766.46 20698.22 0.23 561.68
7 14,000 8304.07 12394.15 20698.22 0.67 Buy
624.61
securities
at 7
1186.29

17. Notes
 Let the amount be Rs.x
We need to satisfy the following and solve for x:
(16000-x)/(12000+x) = 0.67
Therefore, x = Rs.4766.46
New Amount in the Speculation Portion = 16000 – 4766.46 = Rs.11233.54
New Amount in the Conservative portion = 12000 + 4766.46 = Rs.16766.46
Securities sold from Speculative Portion = 4766.46/20 = 238.32
New Securities in the Speculative Portion = 561.68
 Let the amount be Rs.y
We need to satisfy the following and solve for :
(3931.76+y)/(16766.46-y) = 0.67
Therefore, y = Rs.4372.316
New Amount in the Speculation Portion = 3931.76 + 4372.31 = Rs.8304.07
New Amount in the Conservative portion = 16766.46 – 4372.31 = Rs.12394.15
Securities purchase = 4372.31/7 = 624.61
New Securities in the Speculative Portion = 1186.29

18. VARIABLE RATIO PLAN
 Instead of maintaining a constant rupee amount in stocks or a
constant ratio of stocks to bonds, the variable ratio plan user steadily
lowers the aggressive portion of the total portfolio as stock prices
rise, and steadily increase the aggressive portion as stock prices
fall.
 By changing the proportions of defensive aggressive holdings, the
investor is in effect buying stock more aggressively as stock prices
fall and selling stock more aggressively as stock prices rise.

19. Variable Ratio Plan
 At varying levels of market price, the
proportions of the stocks and bonds change.
 Whenever the price of the stock increases,
the stocks are sold and new ratio is adopted
by increasing the proportion of defensive or
conservative portfolio.
 To adopt this plan, the investor is required to
estimate a long term trend in the price of the
stocks.

20.  Initial Portfolio Value = Rs.20,000
 Initial Speculative to Total ratio = 0.4 {Ratio 2:3}
 Trigger Points: If the actual ratio goes to 0.6
and above, bring the speculative portion to 0.5
{1:1} and if the actual ratio goes to 0.2 or below,
raise the Speculative portion to 0.3

21. (1) (2) (3) (4) (5) (6) (7) (8)
Stock
Price
Index
Value of Buy
and Hold
Strategy
(2000 x Col. 1)
(₨.)
Value of
Speculative
Portfolio
(Col. 8 x
Col. 1)
(₨.)
Value of
Conservative
Portfolio
(Col. 5 - Col.
3)
(₨.)
Total Value
of portfolio
(Col. 3 +
Col. 4)
(₨.)
Speculative
to Total
Ratio
(Col. 3 /
Col. 5)
Revaluatio
n Action
(Transactio
ns)
No. of
Shares in
Speculative
Portfolio
10 20000 8000 12000 20000 0.4 800
25 50000 20000 12000 32000 0.625 800
25 50000 16000 16000 32000 0.5 Sell 160
Shares at
25
640
15 30000 9600 16000 25600 0.375 640
5 10000 3200 16000 19200 0.17 640
5 10000 5760 13440 19200 0.3 Buy 512
Shares at
5
1152

22. Notes
 Desire Speculative Portion = 0.5 of total = Rs.16000
New Amount in the Speculation Portion = 20000 – 4000 = Rs.16000
New Amount in the Conservative portion = 12000 + 4000 = Rs.16000
Securities sold from Speculative Portion = 4000/25 = 160
New Securities in the Speculative Portion = 640
 Desire Speculative Portion = 0.3 of total = Rs.5760
New Amount in the Speculation Portion = 3200 + 2560 = Rs.5760
New Amount in the Conservative portion = 16000 – 2560 = Rs.13440
Securities purchase = 2560/5 = 512
New Securities in the Speculative Portion = 1152

23. The Formula Plans
 The formula plans provide the basic rules and
regulations for the purchase and sale of
securities.
 The aggressive portfolio consists more of
common stocks which yield high return with
high risk.
 The conservative/defensive portfolio consists
of more bonds that have fixed rate of returns.

24. Disadvantages of the
Formula Plan
 The formula plan does not help the selection
of the security.
 Should be applied for long periods, otherwise
the transaction cost may be high.
 Investor needs forecasting.

25. Questions?