Summary of this article
Portfolio rebalancing should not be driven by the calendar alone. Market valuations, changes in asset allocation, financial goals and the investor’s risk profile should also be considered.
Rebalancing may also be required after retirement, a change in income, the birth of a child, receipt of an inheritance or when an important financial goal is approaching.
A well-balanced portfolio can also provide more stable returns across different market conditions.
There is no single rebalancing frequency that works for every investor. For most long-term investors, reviewing the portfolio every six months and carrying out a formal rebalancing at least once a year is a sensible approach. However, according to financial experts, rebalancing should not be driven by the calendar alone. Market valuations, changes in asset allocation, financial goals and the investor’s risk profile should also be considered.
Suppose an investor starts with 60 per cent in equity and 40 per cent in debt. After a strong market rally, the value of the equity portion may rise and take the allocation to 70 per cent. The portfolio has earned well, but it has also become riskier than originally planned. Depending on the investor’s profile, some money can be shifted from equity to debt or other relatively stable assets. This helps protect a part of the gains and brings the portfolio back to its intended risk level.
“A combination of time-based and threshold-based rebalancing usually works better. The portfolio may be reviewed every six months, but action can be taken when an asset class moves meaningfully away from its target allocation. For example, a five-percentage-point deviation can be used as a broad trigger. A 60 per cent equity allocation moving to 62 or 63 per cent may not require immediate action, but a rise to 68 or 70 per cent deserves attention,” says Ajay Kumar Yadav, CFPCM, Group CEO & CIO, Wise Finserv.
Rebalancing can also take place within the equity allocation. There may be periods when Indian equities become expensive compared with their earnings potential or compared with other global markets. After carefully evaluating factors such as GDP growth, earnings growth, price-to-earnings ratios, interest rates, currency movement and future return potential, an investor may consider reducing some exposure to Indian equities and allocating a limited portion to emerging or developed markets through suitable international or global funds.
“However, this should not become a short-term call based only on which market performed well recently. Global allocation should be used for diversification, access to different sectors and reduced dependence on one economy. The allocation must remain consistent with the investor’s risk appetite, investment horizon and overall financial plan,” suggests Yadav.
Rebalancing may also be required after retirement, a change in income, the birth of a child, receipt of an inheritance or when an important financial goal is approaching. Money needed within the next few years should gradually be moved towards less volatile investments rather than being left exposed to a sudden market fall.
“Investors, however, should not rebalance their portfolios too often. Frequent buying and selling may lead to extra taxes, exit loads and rushed decisions. Rebalancing does not always mean selling investments. New SIPs, bonuses, dividends or maturity amounts can be invested in the asset class that has become lower than the planned allocation,” advises Yadav.
The aim of rebalancing is not to guess which market will perform best. It is to protect the wealth already created, control risk, and keep the portfolio in line with the investor’s goals. A well-balanced portfolio can also provide more stable returns across different market conditions.
