What is the process of re-balancing a portfolio?

Answer transcript: Re-balancing of portfolio requires two things: one is to frame a rule as to what your asset allocation with be and at what periodicity it should be re-balanced. I think the first rebalancing should be done after 1 year, simply because it will be tax-efficient.

There are two rules you can formulate about rebalancing. Take a look at your asset allocation every 1 year and if it changes by more than 5%, rebalance it; otherwise not. But resist your temptation to re-balance every now and then because you might incur transaction costs and taxes.

If you are investing through SIP, re-balancing should be done based on the value of your portfolio. Let's assume your asset allocation is 75% in equity and 25% in debt. Now, after a year, say you find that your equity part has gone up by 20% and debt is up by 10%, and consequently your overall portfolio now consists of 85% equity. Then you should stop your SIP for a few months and make larger investment in debt instruments. This way you will be able to rebalance without selling or redeeming any investment, and avoid any tax implication.

This article was originally published on April 17, 2017.