Dhirendra Kumar explains if and when should you rebalance your portfolio
Is it a good time to rebalance the portfolio?
- Verghese Joseph
It depends. If it is an old portfolio and you have already set an asset allocation for yourself that has gone completely out of whack, then change it. If it is a new portfolio and you have set an asset allocation, and it has still gone out of whack, look at the cost. That's because the cost you will incur is exit load, possibly on some of your investments and the capital gains tax.
So rebalance if the asset allocation goes entirely on a different tangent. Say if your original asset allocation to debt and equity was 50:50 per cent, and now, because of appreciation in equity, your equity exposure has become 90 per cent, you must change it. Because otherwise, you will have great regret if the market tanks. But don't do it too much.
Earlier, there was only one disadvantage in exit load, and now there are two because of capital gains tax. Earlier, when there was no long-term capital gains tax, you could move your money from equity to debt, but now you have to be a little careful given the capital gain applicability on equity. Assuming that you invested Rs 100 in equity which becomes Rs 150, the moment you realise Rs 50 gain by redeeming that money, you are liable to pay 10 per cent tax if it is a long-term gain and 15 per cent for short-term gains. So, your Rs 50 will get reduced to say Rs 40. If you reinvest the gain after redeeming, your money which was worth Rs 150, will be Rs 140 because Rs 10 would have gone to the government. So, look at the cost because it is not a zero-cost game anymore.