How to rebalance your investment portfolio
WHAT’S REBALANCING?
As the name suggests, rebalancing means helping regain the balance. When the reference is to an investment portfolio, it means reverting to the original asset allocation or portfolio composition. This is done by buying or selling different assets so that the initial balance or weightage of assets is retained. An investment portfolio is built with different assets— equity, debt or fixed income, real estate, gold—in a specified proportion or percentage. This depends on the investor’s financial goals, time horizon, risk appetite, returns from assets, etc.
Now, suppose the market is in a bull phase and the equity component earns very high returns. This means the proportion or value of one asset (equity) will increase, while that of another (debt) will drop due to differing returns, altering the original equity-debt mix. This altered weightage needs to be returned to the initial balance by buying or selling assets.
This is done to reduce losses from any potential market dips and ensure that you reach your goals with the required goal values.
HOW TO REBALANCE A PORTFOLIO
You will realise the need to rebalance your portfolio only if you monitor it periodically, whether it is quarterly, half-yearly or annually. This should also be done if the markets have faced high volatility and altered your asset mix.
Know original asset mix: To be able to rebalance, you need to know the initial asset allocation you have set for yourself in accordance with your goal values, horizon and risk tolerance. Let’s assume
