Rebalancing Portfolios

I am 31-year-old. About 65 per cent of my mutual fund investments are in debt fund and the rest in equity funds. I will not require the money for 15 years till I need to spend on my child's education. I am a moderate risk-taker. Should I reallocate my portfolio under the current circumstances of the market?
Deep Gupta
As a moderate risk-taker, you can afford to have a higher equity allocation. Anywhere between 50 to 65 per cent of your portfolio can comfortably be invested in equities. While this will increase the volatility of the portfolio, it will also enhance the potential returns. With a 15-year investment horizon, you have time on your side and this will help you to withstand the ups and downs of the equity markets.

Irrespective of your asset allocation, rebalancing is required in order to maintain the original asset allocation. After all, your asset allocation is a reflection of your ability to take risks and as long as this remains the same, it should be reflected in your asset allocation. We suggest that you rebalance your portfolio at regular intervals. This involves bringing the asset allocation back to its original level.

Thus if equities have grown to form 80 per cent of the portfolio, then sell the excess amount to restore the original allocation. Similarly, if equities have fallen, then more should be added to this asset class. Rebalancing will enable you to secure your profits by moving them into a more stable asset class.

At times such as these when markets have risen, it gives much satisfaction to book profits and rebalancing will achieve this for you.

While you are rebalancing, do take into account the tax implications. Thus, when rebalancing for the first time, do so only after a year so as to avoid short-term capital gains tax, which is much higher.

This article was originally published on May 25, 2004.