How often should we rebalance our portfolio? Is there any particular time to do it?
- Binu Krishnan
That is a very important question but unfortunately, there isn't an easy answer. First, you need to decide the asset allocation, then only you can rebalance. Assuming that you have decided to do the asset allocation of 50:50 between equity and debt, I would say that in normal circumstances, when equity is growing by 10-12 per cent and fixed income is giving you 7-8 per cent, an annual rebalancing is good enough. But at the same time, follow the rule that anytime your asset allocation goes out of whack i.e. gets completely unusual, maybe a 10 per cent movement of the allocation, it should prompt you to rebalance. That way, you will have to frame your rules beforehand so that you do not need to act in an ad-hoc way. At Value Research, we are providing you with the portfolio tracker tool where you can have your stocks, mutual funds, bonds, PPF, deposits, NPS investment. This tool gives you the resulting asset allocation that you can see in the 'Analysis' tab. When you see your asset allocation going out of range, sell some equity, buy some fixed income or reduce your fixed income by selling and invest it in equity, according to the circumstances.
If you are still in your accumulation phase, then there is another way of doing the rebalancing. For example, if you are doing your SIP and your equity portion has gone up considerably that you need to rebalance it, then don't rebalance it in a hurry if there is only a change of few percentage points. Just redirect your fresh investment to other asset class. For example, if equity is 54 per cent at the year-end under normal conditions and your fixed-income portion has gone down as a result of this and has become 46 per cent, then put your fresh money in fixed income so that it becomes 50:50 once again. So, in normal market conditions, you can do it by redirecting your fresh investments as well.
Value Research Online will give you your asset allocation very precisely every day. So, you may do a monthly review to check if it has gone completely out of range. Nevertheless, while rebalancing, you should take two other things into consideration. Don't do it too often. With one or two percentage point change in your asset allocation, you don't need to act. Let it run to a point where you will be uncomfortable and decide this point at the very beginning. The other thing to be cautious of is the tax implication of rebalancing. As your investment gets older, it becomes all the more tax-efficient.
Thus, ideally, you should plan to do your asset rebalancing in the month of February because nowadays, it is possible to realise only up to one lakh rupees' worth of long-term capital gains in equity every financial year which are tax-sheltered. So, book your gains in equity and move it to fixed income or vice-versa around that time so that you can realise a part of the gains that should be tax-sheltered i.e. it will be tax-free. So, just be conscious of the tax implication of your redemptions of new investments and also be wary of the applicable exit load. If you just rebalance by redeeming your new investment, which is less than one-year-old in equity, you'll be liable to pay tax for that short-term capital gain. So, Value Research Online will actually help you look at these facts very clearly to your specific investment, as the portfolio tracker now is ready to answer all these questions every day for you.