Rebalancing Assets

I invest regularly in equity mutual funds. I have often read in your publications about the importance of asset rebalancing. I want to know how I should approach the same. Should I invest in bond funds as well?
-Anonymous

Asset rebalancing is a very important aspect of investing. The different asset classes available to investors are equities, debt, real estate and commodities. But in context to your question, we will talk here about two asset types, namely: equity mutual funds and fixed income mutual funds.

Primarily, for fund investors, asset rebalancing refers to the shift of funds from equity to debt. Ideally, this should be done periodically, depending upon your investment goals and requirements. A major part of the money that you will need in 2-3 years time should be in debt. On the other hand, long-term money should stay invested in equities. The nearer you come to your goal, you should systematically move your invested money from equities to debt.

However, this can be tedious thing to do. Picking the right type of bond fund to invest in is not easy, and most investors wouldn’t know the ideal equity-debt ratio that they should maintain. And in the current economic situation, staying invested in both asset classes can prove to be very beneficial.

Hence, the easy way out for you would be to invest in balanced funds. An equity-oriented balanced fund invests about 60-70 per cent of its assets in equities, and the rest in debt. Such an asset allocation gives investors the benefit of gains from equities and protection from debt. Of course, you could do the same by investing separately in debt funds and equity funds, but the easier thing would be to pick a balanced fund with a proven track record. We would suggest you pick a fund from Birla Sun Life 95, Tata Balanced and HDFC Prudence and let their expert fund managers do the rebalancing work for you.

This article was originally published on February 02, 2012.