Publication:\u00a0Business Standard,\u00a0Mumbai;\u00a0\u00a0 Date:\u00a06 October 2008;\u00a0\u00a0\u00a0 Section: Money Matters ;\u00a0\u00a0\u00a0<\/p>\n
Rebalancing your portfolio is an important part of money management. Here\u2019s when to do it and how.<\/p>\n
All investors, depending on their risk profile, build up a portfolio consisting of different asset classes over time. Take for instance, Rahul Sinha\u2019s portfolio. It includes fixed deposits, public provident fund, post office deposits, life insurance policies (all taken for tax-saving and investments), mutual funds, stocks and gold.<\/p>\n
INITIAL PORTFOLIO
\nAsset Type \u00a0Percentage\u00a0
\n\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0of Portfolio (%)\u00a0 Portfolio Allocation (Rs)
\nCash \u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0 10 \u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0 10 lakh
\nDebt\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a030 \u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0 30 lakh
\nEquity \u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0 50 \u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0 50 lakh
\nGold ETF\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0 10 \u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0 10 lakh
\nPortfolio Value = Rs 1 crore<\/p>\n
Often Sinha is faced with a situation, where one part of his portfolio gives steady and good returns and the other part performs dismally. Currently, when his mutual funds and equity investments have fallen by over 20 per cent, his debt investments are giving steady returns. His constant worry: should he move money from equity to debt and rebalance the portfolio or should he continue with the same debt-equity ratio?
\nCHANGE IN\u00a0 PORTFOLIO
\nAsset Type \u00a0Percentage
\n\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0 of Portfolio (%)\u00a0\u00a0\u00a0\u00a0 Portfolio Allocation (Rs)
\nCash \u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0 10 \u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0 20 lakh
\nDebt \u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0 30 \u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0 40 lakh
\nEquity\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a050 \u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0 40 lakh
\nGold ETF \u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0 10 \u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0 40 lakh
\nPortfolio Value = Rs 1 .2 crore<\/p>\n
Rebalancing a portfolio is an important aspect of financial planning. Depending on the size and nature of the portfolio, you should take stock every six months and rebalance, if required. It is like conducting routine maintenance of your car that is needed on a regular basis. As the value of your assets changes (equity, gold, real estate and debt) with different market conditions, you deviate from the original asset allocation. In order to maintain the asset allocation, you need to tinker to avoid over-concentration or getting underweight in any one asset class.<\/p>\n
Additionally, as you near your financial goal, you must certainly rebalance your portfolio and move assets from equity, gold or real estate into debt and cash. Do it at least 18-24 months before the goal, if the market is on the rise or if you have already created the wealth that is supposed to cater to specific needs.<\/p>\n
If the market is bearish, you could postpone till you are 6-12 months closer to the goal. Ideally, you should target strong growth in the earlier years of the goal by investing in equities and then move towards debt and cash as you near your goals.<\/p>\n
All this will vary based on the type of investor you are, your behaviour towards risk, your capacity to take risks and the returns that are needed to achieve these goals.<\/p>\n
Let\u2019s take a look at a Sinha\u2019s asset allocation. Based on his financial condition and ability to take risk, the portfolio looks something like this. Earlier, his portfolio looked something like this.<\/p>\n
His equity allocation was 50 per cent (Rs 50 lakh) and his debt was at 30 per cent (Rs 30 lakh) See Initial Portfolio. However, with a fall in the market, his debt has gone up to Rs 40 lakh and equity has fallen to Rs 40 lakh. Also, his cash and gold positions have doubled to Rs 20 lakh each (See Change in Portfolio).<\/p>\n
So though his net worth is up, his asset allocation has deviated by more than 10 per cent for most assets. Hence, it could be a good time to change. Sinha is an aggressive investor because he has 50 per cent of his assets in equities. To attain 50 per cent back in equities, he has to buy another Rs 20 lakh of equities, which he can do by selling his gains from gold and debt and a portion of cash. This ensures that he sells at a higher point in other assets and buys at a lower level in equities.<\/p>\n
The costs, as you can see, are substantial. That is, if you rebalance in less than a year, the cost of rebalancing would be Rs 3.39 lakh. After two years, the same re-allocation will cost Rs 1.13 lakh.<\/p>\n
However, there is another important point. Though the cost of rebalancing is higher in the short term, there are gains in gold ETFs (Rs 10 lakh) and the cash position has improved by Rs 10 lakh. In such a case, it does make sense to book profits, lest the tide turns against a particular asset class.<\/p>\n
In our example, the investor has actually gained in his cash and gold positions to effect the rebalance. There could be circumstances where the value of the entire portfolio is down. In such circumstances, it makes sense to sit tight sometimes or speak to a financial planner before coming to any decision.<\/p>\n
The writer Amar Pandit is director, My Financial Advisor<\/p>\n