Personal Finance

How to rebalance your portfolio

Manikaran Singhal | Updated on January 24, 2018 Published on March 29, 2015


With markets doing well, equity investors are a bit confused. Is it better to book profits assuming the market will fall anytime? Buy more and bet that markets will rise further? Practically, it is difficult to predict market movements. So, the answer is quite simple. Lay down an asset allocation process and stick to it. Here are some practical tips to rebalance your portfolio.

Asset allocation

Asset allocation is about distributing your investments into different asset classes such as equity, debt, gold and real estate, depending on the risk tolerance and goals targeted. You need to stay true to this allocation.

One, it checks the tendency to run after those investments which are performing at that particular moment. It thus restrains your portfolio from going overboard on a particular class and too volatile or defensive.

Two, over-allocating in one asset class will prevent you from having a surplus to invest in other assets when markets take a turn.

Three, it lets you apply the buy-low-and-sell-high approach.

Review risk profile

To rebalance your investment and go back to the ratio you originally decided on, you need to withdraw investments from the asset that has outperformed and deploy the proceeds into the asset class that has declined. Let’s illustrate this with an example.

Suppose you have ₹100 to invest. After understanding your risk profile and goals, you decide your asset allocation as 60 per cent equities, 30 per cent debt and 10 per cent gold.

After a year, thanks to market movements, you may find that your equity portfolio has grown to ₹80, your debt to ₹37 and your gold is worth Rs ₹8.

That makes your asset allocation 64 per cent, 29.6 per cent and 6.4 per cent in the respective asset classes. So you need to redeem 4 per cent (₹5) in your equity and invest 0.4 per cent (₹0.5) in debt and 3.6 per cent in gold (₹4.5) to bring your portfolio back to the original allocation.

Rebalancing can be done at pre-decided intervals, normally one or two years. You can also choose to do so at specified percentage fall or gain in the value of one asset class.

You also have to keep reviewing your risk profile at least once in three years. Your asset allocation should shift more towards the safer, defensive side when nearing your goal.

The writer is a SEBI-registered investment adviser and member of The Financial Planners’ Guild India

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