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How and why to re-balance your portfolio?

05 Jan 2023

Your portfolio creation is a complex task. It involves scouring across a plethora of investment options and then convincing yourself that it fits into your risk-return matrix. Additionally, you also need to be certain that these funds are in sync with your liquidity needs and your tax profile. However, all this is just the beginning. The big challenge is to monitor your portfolio on a continuous basis and satisfy yourself that your portfolio represents the best choice in the current circumstances and acting accordingly. The task here is to rebalance your portfolio with the changing market realities and with shifts in your own goals.


Rebalancing the equity component of your portfolio..
There are various triggers for rebalancing your portfolio. Let us look at a few of them..
You may have taken a small exposure to sector funds and the sector cycle may be peaking out and that could be a trigger to move out of that sector fund and back into less risky diversified mutual funds

You may have purchased equity funds of a particular AMC but that fund may be consistently underperforming the market as well as the peer group. A couple of quarters are understandable, but consistent underperformance is a signal that something is wrong.

You may have invested in a particular combination of equity and debt funds to meet a certain goal and that goal may have been achieved. That again calls for a rebalancing of the portfolio in the light of future goals

Global macros or domestic macros may be changing and that could call for rebalancing of your portfolio in favour of assets that are less vulnerable. These include a global slowdown in demand, macro worries on inflation, rising interest rates etc.

Diversified funds may not be able to really generate the required alpha and that means you may be better off being in index funds. In the process you will also be saving on the expense ratio and that will create some alpha for you.

Rebalancing the debt component of your portfolio..
There are various triggers for you to restructure the debt component of your portfolio..

The most common is the problem of choice between FDs and debt funds. FDs may be proving to be less remunerative and also less tax-efficient. That is a good case for you to shift out of FDs into debt oriented funds.

Corporate balance sheets may be coming under stress and therefore you may be better off shifting your fund portfolio from AA rated debt to AAA rated debt, even if it means lower yields. You need to tweak your mutual fund portfolio accordingly.

Interest rates are one of the key reasons for tweaking your debt portfolio. Normally, you must prefer a longer duration portfolio when interest rates are on the way down as they benefit more in terms of appreciation.

An important trigger for rebalancing your debt portfolio may come from the equity side. We have seen this situation in 2002 and 2009 when equities were available at around 11 times P/E valuations. This is so compelling that you may have a strong justification to actually shift out of debt and into equity to sweep the additional alpha.

What to consider when rebalancing your portfolio?
While the above factors are triggers to rebalance your equity or your debt portfolio, there are practical considerations you need to go through. Here are a few of them..

Any rebalancing has a cost attached. There is a cost in terms of brokerage and commissions, cost in terms of statutory charges and costs in terms of exit loads.

Rebalancing is a major decision and hence the conviction has to be there that the shift will be actually value accretive. There should also be conviction that the trend is a sustained trend and not just a one-off trend to be capitalised through rebalancing.

Finally, there is a very important tax consideration to be taken into account before rebalancing. Equity and debt have different criteria for calculation of capital gains tax. It should not happen that you give away your tangible benefits in the form of higher taxes.

Rebalancing your portfolio; the Robo Wealth way..
The big challenging to rebalancing your portfolio comes from the plethora of variables to be considered and the mutual inter-relationships between these variables. More often than not, it is impossible to effectively track the need to rebalance your portfolio manually. That is where a Robo Wealth platform comes in handy. On the one hand the platform uses the power of research and insights to create a large range of possibilities in the financial firmament. Then the platform relies on the power of big data to pigeon-hole suggestions on portfolio rebalancing to unique shifts in the market. And all this has to be achieved keeping you the investor as the centrepiece of the entire exercise.
Your financial planning exercise is incomplete unless it is backed by a strong and robust rebalancing engine. That is where technology and big data can play a big part in offering you an effective rebalancing solution!

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