An investment portfolio is a collection of all the assets like a stock, bond, or other financial assets owned by any investor. Your portfolio determines your return or growth in the value of your assets over the period of time. When you assemble your portfolio consider different factors like asset allocation, risk tolerance, and how long you will invest.

What is Investment Portfolio Rebalancing and why is it important?

Investment portfolio rebalancing is a crucial task when it comes to long term investment planning. You should set a desired target asset alignment to achieve the ideal asset allocation. As time goes by the risk return profile changes depending on your asset performance. When an investor makes certain changes to the investment portfolio to adhere to the target asset allocation is called as investment portfolio rebalancing. Rebalancing assures better risk control and the profits are not dependent on any single investment.

What is your current asset allocation?

Scrutinize your current investment portfolio and gather information on your recent investment statements. After you note the current investment portfolio compare it with your target asset allocation. Determine all the necessary changes required in order to align your investment profile in the desired way.

Read the following step by step guide to understand how you can rebalance your investment portfolio:

• Based on the Original Master Allocation

This is the most rudimentary and machine driven approach. Let us understand how this approach works if suppose you have distributed your equity, debt and liquid funds in 60:30:10 ratio. You set a particular range for all the components of the portfolio. Whenever the decided mark is breached you can make changes to the allocation to retain the original master allocation. Using this approach you can easily manage your profits and different assets however this approach does not favor changing times.

• Based on the Emerging Trends in the Market

In this approach, you observe the emerging trends in the market to rebalance your investment portfolio. This is a dynamic approach and observes key market trends that trigger the investment portfolio. In this type of rebalancing the market trends are leveraged to reduce risks and maximize returns. Market trends has seen vast changes across the industries during the pandemic. However the market trends can change even in the absence of pandemic. This changes in market trends will give you insights to make investment decisions and rebalance your portfolio.

• Rebalance Based on Rule Based Theorem

This is another popular approach to rebalance your investment profile which uses a definite rule to adjust and make changes to the alignment. You can create rules for your equity valuations in this approach and change your equity allocation accordingly. For example, if your equity goes above 18 P/E you drop your equity allocation by 5% and vice versa. You further drop your equity allocation by 5% when the valuation rises above 22 P/E and vice versa. If the interest rates have deviated from the mean you can make shifts between the fixed rate and variable rate funds.

• Rebalance Dynamically with Managerial Discretion

This approach includes the total discretion of the fund manager to shift from equity to debt in order to rebalance the portfolio. The total success dependency in this rebalancing method is on the fund manager and his decisions. They implement investment strategies and buys or sells the securities they are managing for you.

• Rebalance Portfolio to make it More Tax Efficient

Using this strategy you can rebalance your portfolio to make it more tax efficient. Following are a few of the ways to rebalance your portfolio to make it more tax efficient:

1. After the deduction of Dividend Distribution Tax (DDT) on the dividend type equity fund, it is more logical to shift from dividend plans to growth plans to rebalance your portfolio.
2. Avoid small returns from small savings like PPF and switch to higher risk assets such as ELSS for better returns and tax saving benefits.
3. Hold securities for more than 12 months to make your profits qualify for long term capital gains which charge lower tax rates than ordinary income tax rates.
4. Now you know how to rebalance the mutual fund portfolio let us understand the benefits of investment portfolio rebalancing.

Now you know how to rebalance the mutual fund portfolio let us understand the benefits of investment portfolio rebalancing.

Benefits of Rebalancing Your Investment Portfolio

• Balancing risks and returns

Rebalancing is all about balancing risks and returns to gain returns and lower the risks. Proper asset allocation will give you an investment profile with lesser risks or no risks at all depending on your investment objective.

• Impose discipline

Rebalancing offers more discipline while you make trading decisions. Rebalancing allows you to make trading decisions after a thorough review of the portfolio and not basis your worst instincts.

• Review the fund performance

Rebalancing gives you a chance to review and evaluate the fund performance. You can review all your stocks and make decisions to sell if they don’t hit their growth target.

After the ‘How do I rebalance my portfolio?’ comes ‘How often investment portfolio rebalancing should be implemented?’

Rebalancing can be implemented at different time points or different allocation points. You can rebalance the portfolio quarterly, monthly, and annually. Rebalancing can be implemented when there is a drastic change in asset performance. Frequent rebalancing for every small up and down in the market is not advised as it can be stressful and unnecessary. Also, you are accountable for trading costs accompanied by buying and selling funds. So frequent rebalancing can be a bit expensive due to unnecessary spending.

To conclude rebalancing is crucial and saves the investor from undesirable risks. Considering important parameters like tax you can use any of the rebalancing strategies that works best for you as an investor.