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Rebalance To Lessen Risk

To reduce the threat of market crashes, rebalancing is important

My mutual fund investments soared until the market slide of 2008 wiped out a lot of those gains. Is profit booking recommended in mutual funds? If not, how should I protect myself against such market risks?
-    Harshal Jayavant

It is impossible to fully eliminate the cyclicality of equity returns. Over a longer time frame, equities prove to be the most rewarding asset class. Timing the market entry and exit will create psychological barriers to investing.

In a limited way, this goal can be achieved through portfolio rebalancing, but even this is not a guaranteed method. Rebalancing means that in light of a certain debt-to-equity ratio, you move investments from equity to debt whenever equities rise beyond their pre-determined asset allocation, and vice versa.

Stay invested in equity funds only if you are a long-term investor. If not, stick to debt funds. The closer you get to your goals, the less should be your equity allocation so that the markets do not hurt your investments.

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