As a long term investor one needs to have certain allocation in equity and debt funds. But daily volatility disturbs such allocation. What is the ideal time to rebalance a portfolio?
— Hemendra Bhat
First let us look at the concept of asset allocation.
Asset allocation implies diversifying your investments across different categories -- equity, debt, gold, real estate, commodities and art, for instance.
The basic diversification takes place between equity and debt.
Based on your time horizon and risk tolerance, you can arrive at an equity:debt allocation. Let’s say you have a 10-year horizon in mind and fix your equity allocation as 60 per cent and the balance in debt. But as you near your goal, you may start to change that slightly and reduce the equity allocation and increase the debt.
Intermittently, if your equity assets are showing great returns, then the portfolio will tilt towards a larger equity tilt. The reverse can also happen. To rebalance you will need to either sell some of your equity investments and invest in debt or vice-versa to re-establish your original asset allocation mix. Alternatively, you can even change the amount you systematically invest. Normally, a rebalancing done once a year should be alright.
This article was originally published on May 04, 2012.
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