Year-end portfolio rebalancing: Why and how should you do it?
In 2023, stock markets scaled new all-time highs. In this calendar year, while the Nifty 50 Index has done well, the mid-caps andsmall-caps have done exceedingly well. At the start of the year, if you had invested in equities and fixed income in a specified ratio, your current portfolio would be skewed in favour of equities due to their outperformance.
With portfolio rebalancing, you can revert to the original equity and fixed income ratio you started with at the start of the year. The year-end is a good time to review your investment portfolio and rebalance it if required. Let us understand what portfolio rebalancing is, why you should do it, and how to do it.
As per asset allocation, your investment portfolio may comprise various asset classes like domestic equity, international equity, fixed income, gold, etc. You may decide the portfolio percentage allocation to each asset class based on your age, risk profile, and other factors. Portfolio rebalancing is the process of reviewing the overall investment portfolio and reverting the percentage allocation of each asset class to the original ratio.
Portfolio rebalancing involves selling a portion of the asset classes whose percentage allocation has increased due to superior performance compared to that of other asset classes. The sale proceeds are then invested in the other asset classes whose percentage allocation has fallen due to underperformance compared to that of other asset classes.
When you sell some units of a particular asset class, its allocation in the overall portfolio falls back to the original ratio. Similarly, when you invest the sale proceeds in the units of the other asset class, its allocation in the overall portfolio rises back to the original ratio.
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