It is important to hold unique funds/stocks within an asset class which would enable an investor to harness the benefits of diversification.
Have you assessed how your investment portfolio has been doing? Which are the assets or holdings that are giving you good returns and which are not performing well? Did you give a thought on rebalancing your portfolio?
While rebalancing one’s financial portfolio, one may either reduce allocation to an asset class that has performed strongly in recent times and increased allocation to an asset class that has underperformed and vice versa. Asset allocation review & rebalance can be undertaken either at the end of fixed pre-determined time periods such as every year and/or based on significant deviations from one’s original allocations. Also, while making a rebalancing decision, it is important to consider transaction costs and tax impact of such changes.
You must rebalance the portfolio periodically, but only if there are definite triggers. Therefore, only in certain circumstances one should rebalance or revisit one’s portfolio. Here are some of them:
When you need to redefine the financial goal’s time horizon
Investment towards financial goals are planned using various asset classes and allocating money in them is a critical task because the return factor decides in how many years you will achieve that goal and accordingly you choose your asset classes. Simultaneously, the higher the return you want, the more risk it involves. Hence, the overall asset allocation among different kinds of asset categories, such as equity (domestic & international), fixed income, gold, cash, etc. helps to achieve a feasible combination of risk and reward that is consistent with an investor's specific situation and goals.
Chintan Mehta, Senior Investment Analyst, Morningstar Investment Adviser India said that asset allocation puts the principle of diversification which helps one achieve his/her financial goals on time even if some asset classes are experiencing a downturn. “While others may be experiencing stronger performance given low correlation between asset classes, diversification is a way of dealing with the unpredictability of future events,” he said.
When you think that the goals can be achieved very easily or it’s too difficult to achieve, under both extreme scenarios, you unlikely to get your goals accomplish on time. Therefore, to a achieve one's goal on time, it is important to realign all your asset classes from time to time by redefining several strategies implied to it taking the help of an adviser.
When you analyse the risk factor in your investment portfolio
While rebalancing a portfolio, it is important to hold unique funds/stocks within an asset class which would enable an investor to harness the benefits of diversification by minimising the overall risk on your portfolio.
Mehta said that the objective should be to establish a specific role for each fund to play in the overall portfolio by selecting funds/stocks that are clearly different from one another, rather than similar or redundant ones. Combination of asset class level and fund level diversification would ultimately help in bringing down the overall risk of the portfolio. “It is essential to review one’s asset allocation and not just the performance of the underlying securities/funds on a regular basis and if required rebalance the portfolio to original weights,” he said.
When your income increases and you need to invest more
The time when you get extra money into your account and despite splurging the same, you think of investing it. In such case, you need to realign your investments in the existing products or you can make a fresh investment. Himanshu Kohli is the co-founder of Client Associates said that if there is a regular surplus wealth creation through salary income, bonus, and rental income, one may not revisit the asset allocation here but park the surplus savings into the asset classes where gaps exist. “Hence, it is actually the investment of surplus savings into the portfolio,” he said.
When markets move substantially highEquity growth is linked to market growth. If the markets have moved substantially and there is a change in asset allocation, then you need to think of rebalancing your portfolio. Kohli explained it with an example saying that let’s assume a profile of the investor is 50% equity and 50% debt. If equity markets do very well and this asset allocation changes to 55% equity and 45% debt. In this case, one needs to rebalance the portfolio. There are 2 ways to rebalance the portfolio. One fresh saving can be invested into debt or sell 5% equity and buy 5% debt ensuring there is no adverse cost like taxation or exit loads or brokerage in selling equity. “But markets have to change by about 20% plus to show a variation of 5% for a 50:50 portfolio,” he said.