While rebalancing, should one increase or decrease the allocation to equity in a systematic manner through an SIP/STP or in a lump sum?
- Ravi Jain
When you are still in your accumulation phase i.e. you are still doing your SIPs and you have a pre-decided asset allocation, for example 75 per cent of your money is going to equity and 25 to debt and if you have done it for two-three years, there is a likelihood that 75 per cent allocation to equity would become 80 or 90 per cent, while the fixed- income portion would be reduced correspondingly. A simple, non-intrusive and tax-efficient way of doing it is, don't make your SIP commitments long term. Revise it every year, depending on the change in asset allocation.
For example, you have decided to do a 75:25 asset allocation for equity and debt and now, your equity has become 80 per cent. So, increase your new investment allocation to fixed income so that in a year's time, if you continue doing it with a steady pace of growth, the asset allocation will be reset to the ratio you have decided upon initially. Don't act in a huff for small deviations. Rebalance your asset allocation in a hurry only if this has changed dramatically.
You decided to invest in equity to the tune of 75 per cent and suppose it has gone up dramatically so that the fixed income has become 5 per cent and your equity has become 95 per cent, then realise some gains and move that money quickly. Don't think of doing it methodically over the next 12 months or 15 months by the way of diverting your new investment to fixed income because that way, you will lose that opportunity. With rebalancing your asset allocation you will be able to sell high and buy low in a methodical way, which is guided by your investment plan and not by the fear and greed that drive the market all the time.
This is the biggest advantage of having a pre-decided asset allocation and rebalancing it whenever that changes dramatically. This is the only way because people have a lot of regret at not investing in equity when the market goes down dramatically without notice. Asset rebalancing is the only market contingency plan in this case wherein you can sell and reset your allocation.
Assuming that you are a relatively new investor, once in a while when the market falls, you get so scared that you sell and then you don't know when to come back again. If we pull out, we never have a plan when we will get back to the market again or whether we will invest again at all. So, asset rebalancing helps keep your investment plan on track, which turns out to be a very comforting thing for most investors.