Your money: Portfolio rebalancing ensures risk-adjusted optimal returns

financialexpress.com:

By Prateek Pant

Every asset class has a role to play in differing economic conditions and it is impossible to time the winning asset class. A right mix of these asset classes along with periodic rebalancing exercises may help investors to lower drawdowns, smoothen returns and achieve reasonable returns to attain their long-term financial goals.

Portfolio rebalancing primarily entails rejigging allocations across asset classes such as, but not limited to, equity, debt, gold, real estate, and even alternatives like private equity funds, venture capital funds and hedge funds etc. The right mix of these asset classes may help investors achieve an optimal level of risk-adjusted return.

Chemistry of investing

Each asset class addresses a unique investment goal. Equities offer superior inflation-adjusted returns over the long term compared to other competing asset classes. Gold has delivered high double-digit to negative returns over the past 12 years; however it tends to underperform during economic booms and equity market rallies.

Debt has certain characteristics that appeal to a specific class of investors but might entail interest rate risk and credit risk. Bank deposits, though considered the safest, have given the worst inflation-adjusted returns over a long period. Investment in real estate has yielded double-digit returns in phases, but liquidity is an issue.

How do you rebalance?

Rejigging of the portfolio could be tactical and within asset classes as well. Seasoned investors with longer time horizons have viewed volatility as an opportunity to increase exposure to risky assets.

Rebalancing can also be done by allocating additional money to the asset class which has underperformed. The objective is to reinstate the