Rebalancing too often? Watch this.

Once my asset allocation is set, how often should I rebalance between equity and debt, and what triggers should I watch for?

Ashutosh Gupta: Follow some basic ground rules. Your asset allocation should change for two, three reasons.

The first is when the allocation has drifted. Say you started at 60:40 and, over time, one asset class has done well and the other has not, so your 60 per cent has become 70. Trim that holding back to 60 and move the redemption proceeds to the underweight asset class. A useful rule is to act whenever your allocation drifts by 8 to 10 per cent.

The second is when the goal you were investing for is close. A goal that was 10 years away may now be a couple of years off, so it is time to move that money into safer debt. It should be a glide path. You should not wait till the last moment. Pare down equity gradually over the years rather than at the last moment. 

The third is when your life circumstances change. So, while your goal and allocation may both be on track, but your financial situation or your risk appetite has changed, your asset allocation needs a rethink. 

As a general thumb rule, if your allocation has not drifted by a wide margin, rebalancing once a year is worthwhile. After a year, your equity gains are taxed  more favourably. Rebalance too often and you end up with short-term gains, paying tax at the rate of 20 per cent, which is not worth it. Once a year keeps your tax outgo down.

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