How often should I rebalance my portfolio?

Ideally, portfolio rebalancing should be done only when there is an actually need for it due to changing market conditions, change in risk tolerance, underperformance of existing investments, etc. So, instead of following a schedule, rebalancing your portfolio should be based on an actual need for it.

How can portfolio rebalancing improve downside protection?

An investment portfolio is bound to undergo multiple ups and downs during the short-term. Downside protection refers to the ability of an investment or investment to control losses when markets witness a downward trend. Typically, reducing equity investment allocation and increasing allocation towards debt instruments like bonds , treasury bills , etc. and gold investments can help improve downside protection of the portfolio.

Is debt investment only suitable for short-term investments?

While many investors only prefer debt investments to achieve short term investment goals, there are quite a few debt instruments that are suitable for the long-term too. Conservative investors or those who have low risk tolerance can choose specific types of debt funds like gilt funds or government-backed schemes like Voluntary Provident Fund (VPF) , Public Provident Fund (PPF) , etc. to make long-term investments in debt markets.

When should one increase gold allocation in the portfolio?

Portfolio rebalancing can involve increasing allocation towards gold typically when financial markets are in turmoil due to a global crisis like sub-prime crisis, COVID lockdown, etc. In such situations, both equity and debt markets tend to be in turmoil but gold not just holds its value but actually gives higher returns during such period. This way, gold act as a hedge for your investment portfolio against various crisis as well as inflation.

Can I rebalance my portfolio in National Pension System?

The National Pension System allows investors to diversify their investments across 4 key asset classes – Equities, Corporate Bonds, Government Bonds and Alternative Investments. You can current rebalance your NPS portfolio up to a maximum of 4 times a year.

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Portfolio Rebalancing: Definition, Strategies and Its Importance

Name: What is Portfolio Rebalancing
Brand: Axis Max Life Insurance
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Investing in different asset classes instead of relying on a single type of asset is often recommended by experts as an effective strategy for minimizing risk while simultaneously optimizing returns. So, implementing asset allocation strategies when designing your portfolio can help you stay on track to reach your investment goals while m

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: In Unit Linked Policies, the investment Risk in the investment portfolio is borne by the policyholder. *⁺Nifty Mid-cap 150 Momentum 50 Index was launched in Aug’22. These are returns of benchmark indices and are not indicative of return on Axis Max Life Insurance’s Midcap Momentum Index fund. 5 year return of NIFTY Midcap 150 Momentum 50 Index as on 31/12/2023. Axis Max Life Midcap Momentum Index Fund (SFIN: ULIF02802/01/24MIDMOMENTM104) is passively managed Index Fund that mirrors NIFTY Midcap 150 Momentum 50 Index.

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What is Portfolio Rebalancing?

Portfolio rebalancing refers to the process of realigning or shifting the weightage of different asset classes in your investment portfolio. The main aim of portfolio rebalancing is to change your investment portfolio’s asset allocation as per the investor’s goals and objectives. Through this, investors can ensure better risk control and can bring back their portfolio to the desired asset allocation that is in line with their risk tolerance and investment goals.

However, as asset allocation is not a one-time activity, you have to rebalance your portfolio periodically to ensure that you are on track to reach your investment goals. In order to balance the portfolio, you have to buy or sell portions of your portfolio with time with the intention to set back the weightage of every asset class as per your investment strategy.

Investors use portfolio rebalancing as a risk-minimizing strategy. The process involves selling or buying assets to reach a desired portfolio mix. Typically, portfolio rebalancing involves replacing the underperforming assets currently included in the portfolio and investing the proceeds in new assets that are likely to witness grow in the future. The goal of portfolio rebalancing is thus ensuring that overall performance of the portfolio is not based on the success or failure of a single investment, type of mutual fund, or asset class. In most cases, market condition acts as a major guide for investors while making adjustments in asset allocation.

Importance of Portfolio Rebalancing

Here are the advantages of portfolio rebalancing:

Maintaining Optimal Asset Mix

With portfolio rebalancing, the asset mix of the portfolio is changed in response to changing market conditions or investment goals. This can provide a number of advantages ranging from superior long-term investments and reduced concentration risk to reducing the impact of inflation on the investment portfolio.

Enhanced Risk Management

The risks associated with any investment or asset class can change over time. In such scenarios, you might have to reconsider the risks related to the portfolio. Portfolio rebalancing can also help change the asset allocation of your investments to manage overall risk. It is because periodically checking performance of investments can help gauge the risk that comes with any investment. In this context, you should know how to understand the risk profile of each asset class.

How to Rebalance Portfolio?

Here are 4 key steps you should follow to start the process of portfolio rebalancing:,

Step 1: Review Current Asset Allocation

Try to draft an asset allocation framework based on your income status, anticipated retirement time, etc. Optimal asset allocation refers to the appropriate combination of equity, debt, gold, real estate and other asset classes in which one makes investments for retirement based on their financial goals. It is imperative to take into account risk tolerance while going ahead with proper asset allocation and the time for which you want to hold the investment.

Step 2: Evaluate Target Portfolio Allocation

After analysing current investments, you need to consider the target allocation in your investment portfolio. This can be done by assessing the portfolio mix you need to maintain in investments like cash, bonds, stocks, and other investment options. Proceed to analyze the asset allocation target and then make necessary adjustments.

Step 3: Sell Underperforming Investments

In order to strike the proper balance of asset allocation, you next need to sell investments preferably those that have underperformed, however, you might also choose to reduce the portfolio allocation of some investment with high weightage in order to free up cash to purchase securities whose weight you wish to increase in your portfolio. In case you have a high degree of risk tolerance, you can sell relatively safe investment options and invest in potentially high return schemes that might be riskier.

Step 4: Understand the Tax Implications

It is very important to be aware of the tax implications. You must hold on to equity investments like equity mutual funds for more than a year to eliminate short-term taxes imposed on capital gains. In the case of debt funds, you will have to pay taxes depending on your income tax slab.If you are required to limit the spending, plan to transfer the securities in tax-exempt funds. This is an effective way by which you can reduce the amount of taxes you have to bear on capital gains.

Step 5: Examine the portfolio

In order to comprehend your position in the investment sphere, examine your investments and portfolio annually or after every 6 months. The moment you observe that the asset allocations will not help you achieve the goal, rebalance it all together. Generally, under three circumstances, you can rebalance the portfolio.

Annually, after the tax has been paid.
Upon observing that the target asset allocation is straying by 5% or 10%.
When the target asset allocation is straying by a certain percentage depending on the predetermined time frame.

Additional Reasons to Rebalance Your Portfolio

Here are the additional situations when you can decide to go for portfolio rebalancing:

When you gain a lot of financial stability:

When you have higher income status or financial stability, you can rebalance your portfolio to a more conservative one. In case you are married, both you and your spouse will be able to efficiently manage the assets.

Failing health:

Medical exigencies can crop up at any time and affect your finances. This is the time when you might be in need to rebalance your asset allocation especially if you have inadequate or no health insurance plan in place. Quite naturally, you will be in need of money that is left with you to back the medical expenses.

Planning to buy a new home:

In case you plan to make a large investment like purchasing a house, you must rebalance your portfolio in order to maintain higher liquidity or to bolster your emergency funds. This is how you can have adequate cash when you are prepared to withdraw the down payment.

Costs Involved with Portfolio Rebalancing

Here are some of the expenses that are associated with the portfolio rebalancing, which you must be aware of:

There are expenses associated with brokerage and STT (Securities Transaction Tax), which encompasses the transaction cost of buying and selling asset classes.
In the case of some mutual funds, you have to bear an exit load of up to 2% if you sell the investment within a specific time-period such as within 1 year.
As mentioned above, if you sell equity investments prior to completion a year, you will have to pay short term capital gains tax as per mutual fund taxation rules. You will have to pay long term capital gains tax on selling your investments after 365 days or more.

With periodic portfolio rebalancing, you can align your investment with your financial goals. Also, with age, investors tend to learn new investment techniques or become risk-averse. With portfolio rebalancing, they will be able to align their portfolio and match it with their changing investment style. However, before taking the decision to rebalance the portfolio, it is important that you must weigh in on the costs that are involved with the process.

Frequently Asked Questions

ARN: Sep23/Bg/16N

Sources:

groww.in/blog/portfolio-re-balancing-everything-you-need-to-know

cleartax.in/s/portfolio-rebalancing

www.etmoney.com/learn/mutual-funds/rebalancing-what-is-it-why-do-you-need-it-how-to-do-it/

www.fisdom.com/portfolio-rebalancing/

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