Expert advice

May 25, 2015,13.17 IST

5 benefits of regular financial plan review & rebalancing

Nitin Vyakaranam
ArthaYantra.com

Constructing a financial plan involves a process which considers various factors of an individual like income, expenses, savings, future goals and risk appetite of an investor. These factors are then combined with macro-economic factors which impact the growth of their portfolio.

However, it must be noted that these factors are dynamic in nature and change over a period of time. When a significant change happens in one of the factors, it can impact the future course of your investments. Regular reviewing and rebalancing of the portfolio would make sure that these changes are well adjusted in the portfolio and investments continue to give better returns throughout.

Below are some benefits of reviewing and rebalancing the portfolio
1) Lifestyle Changes
Over a period of time an individual faces a lot of changes in his financial life. For instance, a salaried employee would experience annual bonus, hike and promotions which would change the surplus levels. Inflation also impacts expenses and reduce the investable surplus which could be considered during the review. Instances when there is an addition to a family -  child birth, the financial plan needs to be revisited as there would be an additional goal to plan for the child’s future.

2) Goals can be tracked and any goal achieved would change the investment strategy for remaining goals
Goals can be tracked better if do a periodic review and rebalancing. It really helps to know how far we have headed in terms of achievement of a particular goal. During the review, additional goals or any modification towards existing goals can be done if found feasible. In case where post implementation of the plan, some of the short term goals would be achieved, a review of goals would ensure that the surplus released from the first goal can be used for remaining goals. For example if the goals for car or home is achieved, the surplus released post achievement of the goal could be used to enhance the investments towards retirement or child’s education goal.

3) Portfolio remains on track, balance of different asset classes remains intact to reduce the market risk
Equity debt balance in the portfolio would change after a period of 12-18 months depending on the market conditions. As the investment portfolio is designed keeping in mind the macro economic conditions, rebalancing would make sure such allocation would be maintained throughout. Asset allocation revision may also be needed once there is a major change in fiscal policies (for example, interest rate changes). For example, when there is an interest rate cut, the exposure towards equity based asset class can be enhanced to earn better returns.

4) Helps in securing benefits of equity markets over the period of time.
In case of a bullish market, equity part of the portfolio would grow higher than the debt portion. Rebalancing would shift the gains from the equity to debts so that the profits are secured. If the original allocation for investment of Rs 1 lac between debts and equity was 50:50 and during the investment tenure of one year equity grew by 20% and debts by 10%, then there would be a gap in the allocation of asset classes. The value of equity would be Rs 60000, whereas debts would become Rs 55000. In order to maintain the original allocation Rs 2500 should be moved to debt funds. Thus, by rebalancing gains from equity can be secured and invested towards debt funds.

5) Bad investments can be eliminated and replaced
During the recommendation of investment portfolio, the investment avenues are expected to perform well to get high inflation adjusted returns. But, this may not happen due to various reasons.

Nonperformance could occur due to macroeconomic factors which make instruments a loss making avenue. E.g. During recessionary markets small cap or midcap schemes would not perform well, hence replacing them with short term debt funds would help in controlling the losses. By having regular reviews of the investments, these non-performing asset classes can be replaced with other asset class which may be suitable as per the market conditions.

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