The success of a party can largely depend on its menu. If you put together the choicest of dishes that complement each other, cater to your guests’ taste buds, and are seasonally appropriate, you can have your guests licking their fingers. An investment portfolio is a bit similar, and the investments you choose can impact the success of your future
financial goals. But this is not a one-time selection and requires frequent portfolio rebalancing.
What is portfolio rebalancing?
Portfolio rebalancing refers to bringing your investments to the same target
asaset allocation as when you first invested. Since the market is dynamic, all investments may not move together. Suppose your original asset allocation was 60% stocks and 40% bonds, which changes as per the performance of your investments. In that case, you might have to rebalance it regularly to ensure your investments align with your goals, risk appetite, and expectations.
Here's an example:
You may have an SIP (Systematic Investment Plan) in multiple funds when you
invest in mutual funds. An SIP is a method that allows you to invest in mutual funds in regular instalments at a preferred frequency. Let us assume you started a SIP of Rs 5,000 each in three mutual funds. After a year, fund A and fund B, both equity funds, showed favourable growth. However, fund C, a debt fund, did not perform as expected and stalls behind. It will increase your stock allocation and change the ratio of stocks and bonds. In this case, you have the option to shift your funds from one mutual fund to another to ensure that your risk appetite is maintained.
Steps to rebalance your portfolio
Understand your risk appetite and target allocation: Stocks are riskier than bonds and cash. So, a higher percentage in stocks can present more risk. However, this can also be more rewarding as they may perform better than bonds and cash over the long term. Your ability to take risks will depend on your income, goals, age, etc. So, the first thing to do is map your tolerance to risk. You can then choose a suitable asset allocation.
Evaluate your present asset allocation: See if your current allocation resonates with the original asset allocation and your current risk appetite and goals. Depending on the results, you can rebalance the investments.
Understand the costs involved: Portfolio rebalancing can result in exit loads when you redeem your money. Your gain will also be levied by short-term capital gains (STCG) or long-term capital gains (LTCG) taxes. LTCG tax on equity held for more than 12 months is levied at 10%, whereas STCG tax on equity held for less than 12 months is charged at 15%. Long term capital gains on equity funds of up to Rs. 1 lakh in a year are tax-exempt. Likewise, LTCG tax on debt held for more than 36 months is charged at 20% with indexation (adjustment of your investment cost concerning inflation). STCG tax on debt funds held for less than 36 months is levied as per the tax slab you qualify for.
Things to consider in portfolio rebalancing
• Try to rebalance your portfolio every six months to a year.
• Note the tax implications.
• If you have multiple SIP investments in more than one mutual fund, look at them cumulatively when rebalancing your portfolio.
Conclusion
When you invest in mutual funds, it is essential to rebalance your portfolio periodically to achieve your goals and maintain your preferred risk appetite.
FAQs
How do I rebalance my portfolio?
You can rebalance your portfolio by following these steps:
• Understand your risk appetite and the target asset allocation
• Evaluate your present asset allocation
• Understand the costs involved and then proceed
When should I adjust my portfolio?
You can rebalance your portfolio once a year or every six months. It may also be good to rebalance your portfolio if your asset allocation shifts by more than 2-5%. For example: If your equity allocation in the portfolio shifts from, say, 48% to 58%, it may be a good time to recheck and rebalance the portfolio to bring the equity allocation back such that it is around 50-53%. Can I rebalance too often?
Although it may be sufficient to rebalance your portfolio once or twice a year, there is no right or wrong method. If your portfolio fluctuates wildly, you may have to rebalance it sooner than your peers. If you doubt portfolio rebalancing, you can seek help from a financial advisor for more clarity.
Disclaimer:
The information herein is meant only for general reading purposes and the views being expressed only constitute opinions and therefore cannot be considered as guidelines, recommendations or as a professional guide for the readers. The document has been prepared on the basis of publicly available information, internally developed data and other sources believed to be reliable. The sponsor, the Investment Manager, the Trustee or any of their directors, employees, associates or representatives (“entities & their associates”) do not assume any responsibility for, or warrant the accuracy, completeness, adequacy and reliability of such information. Recipients of this information are advised to rely on their own analysis, interpretations & investigations. Readers are also advised to seek independent professional advice in order to arrive at an informed investment decision. Entities & their associates including persons involved in the preparation or issuance of this material shall not be liable in any way for any direct, indirect, special, incidental, consequential, punitive or exemplary damages, including on account of lost profits arising from the information contained in this material. Recipient alone shall be fully responsible for any decision taken on the basis of this document.
Mutual Fund Investments are subject to market risks, read all the scheme related documents carefully.
