Smart Investing: Time To Rebalance Your Investment Portfolio

Investment portfolio rebalancing means reconstructing your portfolio as per the current individual risk tolerance and investment goals. Just like maintaining your car regularly or going to a doctor for a monthly check-up, portfolio rebalancing is nothing more than regular maintenance of your investments.

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Disclaimer: #The investment risk in the portfolio is borne by the policyholder. Life insurance is available in this product. The maturity amount of Rs 1 Cr. is for a 30 year old healthy individual investing Rs 10,000/- per month for 30 years, with assumed rates of returns @ 8% p.a. that is not guaranteed and is not the upper or lower limits as the value of your policy depends on a number of factors including future investment performance. In Unit Linked Insurance Plans, the investment risk in the investment portfolio is borne by the policyholder and the returns are not guaranteed. Maturity Value: ₹1,05,02,174 @ CAGR 8%; ₹50,45,591 @ CAGR 4%. *Tax benefits and savings are subject to changes in tax laws. All plans listed here are of insurance companies’ funds.

Rebalancing investments means keeping a regular check as just investing and forgetting about it does not work. In this article, we will understand balancing and rebalancing the investment portfolios.

Important Takeaways

Here are some key features about how rebalancing helps in your investment portfolio

Buying some stocks and selling some bonds, or vice versa, so that your portfolio’s asset allocation matches your risk tolerance and desired level of returns
Helps you maintain your desired level of risk over time
There is no optimal frequency or threshold when selecting a rebalancing strategy
When rebalancing, primarily, you want to sell over-weighted assets
The discipline of rebalancing can prevent panicked moves and increase your long-term returns

Why Rebalance Your Portfolio

To stay on track with your targeted asset allocation, rebalancing your portfolio is important. Allocation of assets means keeping a percentage of your portfolio in different investments like 30% in stock and 70% in bonds. The percentage depends upon the amount of risk you are willing to take on every investment.

The more stocks you hold the more risk you are putting yourself through in comparison to investing in bonds. But, stocks significantly outperform bonds in the long run. This is the reason most investors go for stocks over bonds to meet their financial goals.

Rebalancing not only means selling your assets at the time of loss, it means balancing your investments when they are doing well. Consider these reasons when you are rebalancing your investments:

Your investments might go low and you would suffer great losses than you even planned for
When you sell an investment that is performing well, you are locking in those gains
Rebalancing usually involves selling less percentage of your investments. So if you sell good investments and buy investments in losses, it is for the short term and with comparatively small amounts

How Often Should You Rebalance

There are 3 ways by which you can plan rebalancing your portfolios:

As per a fixed timeframe, say once in a financial year
When your target asset allocation strays by the certain desired percentage of yours, say 5 or 10%
Combination of above 2, that is, according to a fixed timeframe only if the target has strayed the desired percentage

Here are some tips as to how you can rebalance your investment portfolio and make the best of your asset allocations:

Stay With Asset Allocations

In asset allocation, the choice to add more or opt-out of equities depends upon elements such as tolerance of risk and long-term goals. A rising dividend payout ratio over a long period can be a great source of income after retirement.
Avoid Lump-Sum Investments

New investors should avoid investing in mutual funds in a lump sum method. In the lump-sum method, there is a risk of losing a significant amount if the market sees some correction. Instead, investing through Systematic Investment Plans (SIP) is much more suitable and recommended as they allow investors to buy units on a given date each month.
Look At Multi-Asset Funds

Multi-asset funds of mutual funds such as equity, debt, and gold exchange-traded funds can be a good option for the asset allocation mix. The fund house does the rebalancing and helps the investor to hold a diversified portfolio.
Choose Index Funds

Index funds are those kinds of funds that have stocks of market leaders across different sectors and in which fund manager’s intervention is very limited. So, instead of investing in direct stocks, investing in index funds is more beneficial due to their convenience, liquidity, and ease of investing.

Conclusion

In a nutshell, rebalancing means selling one or more assets and using the proceeds to buy another asset like bonds, stocks, mutual funds, etc. to achieve your desired asset allocation.

Selling high-performing investments and buying low-performing ones for the time being or allocating newly earned money strategically, rebalancing portfolio works wonders if done correctly.

†Policybazaar does not endorse, rate or recommend any particular insurer or insurance product offered by any insurer. This list of plans listed here comprise of insurance products offered by all the insurance partners of Policybazaar. The sorting is based on past 10 years’ fund performance (Fund Data Source: Value Research). For a complete list of insurers in India refer to the Insurance Regulatory and Development Authority of India website, www.irdai.gov.in

Past 10 Years' annualised returns as on 01-12-2024

^The tax benefits under Section 80C allow a deduction of up to ₹1.5 lakhs from the taxable income per year and 10(10D) tax benefits are for investments made up to ₹2.5 Lakhs/ year for policies bought after 1 Feb 2021. Tax benefits and savings are subject to changes in tax laws.

*All savings are provided by the insurer as per the IRDAI approved insurance plan.

Tax benefit is subject to changes in tax laws. Standard T&C Apply
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^^The information relating to mutual funds presented in this article is for educational purpose only and is not meant for sale. Investment is subject to market risks and the risk is borne by the investor. Please consult your financial advisor before planning your investments.

#The investment risk in the portfolio is borne by the policyholder. Life insurance is available in this product. The maturity amount of Rs 1 Cr. is for a 30 year old healthy individual investing Rs 10,000/- per month for 30 years, with assumed rates of returns @ 8% p.a. that is not guaranteed and is not the upper or lower limits as the value of your policy depends on a number of factors including future investment performance. In Unit Linked Insurance Plans, the investment risk in the investment portfolio is borne by the policyholder and the returns are not guaranteed. Maturity Value: ₹1,05,02,174 @ CARG 8%; ₹50,45,591 @ CAGR 4%

¶Long-term capital gains (LTCG) tax (12.5%) is exempted on annual premiums up to 2.5 lacs.

**Returns are based on past 10 years’ fund performance data (Fund Data Source: Value Research).