Equity investing: As markets rise, it’s time to rebalance portfolio

Retirement Planning: Five tips to prepare for a worry-free retired life

The Covid-19 pandemic has shown that changing dynamics can play a spoilsport to one’s finances unless planned well. From medical needs to investment planning, there are a host of issues that one needs to take care of.

If you are not comfortable with this enhanced risk, then this is the right time to rebalance your portfolio.

Despite the Covid-19 pandemic raging across the country, the 30-share BSE Sensex has touched new highs, rising 16% during the last six months. Many companies paid hefty dividends and now most investors are wondering what could be the next level. Broad market benchmarks need not necessarily be the best measure of success at the end of the year as most investors own shares, bonds, mutual funds, ETFs, bank fixed deposits, etc., in their portfolio. So, investors could use this opportunity of new highs in the indices to sanitise their current portfolio. Let us discuss the same in detail.

Review your current asset allocation
The ideal asset allocation which is the mix of shares, bonds and other financial asset classes in which one invests his money is a function of the risk tolerance of the investors. If you are a person who tends to panic during market declines, you should consider a more conservative asset allocation, irrespective of your age. The essential reason to review your current asset allocation is to rebalance your portfolio to establish a better risk control mechanism and ensure that your portfolio is not solely dependent on the success or failure of a particular investment such as equity, bond, particular type of a mutual fund, etc.

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Check the risk and return
Not all the asset classes will perform in the same manner. Let us suppose that you have created a portfolio with 50% in shares (mid- and small-cap shares), 40% in AAA-rated corporate bonds, and 10% in gold ETFs. Over a period of one year, owing to the changes in the market, the value of your investments will also change.

Let’s say that after a year, the portfolio has 60% shares, 35% debt, and 5% gold. This means that stocks have appreciated in value occupying a significant percentage of your portfolio. However, as shares are riskier than bonds and gold, the risk exposure of your portfolio also goes up. If you are not comfortable with this enhanced risk, then this is the right time to rebalance your portfolio.

Change in financial goals
Life is full of surprises as sometimes unexpected events happen. While creating an investment portfolio, one must have a certain perspective about life but, circumstances can make certain goals redundant and force us to create new ones. For instance, one might plan for marriage and a child but be blessed with twins throwing all plans in disarray, compelling necessary alterations as one needs to plan for two children instead of one. Similarly, one might encounter many such situations which could lead to a change in financial goals. Hence, portfolios need to be rebalanced to reflect the changing goals and needs.

Risk minimisation
Investors should rebalance their portfolio regularly in-sync with market movements to minimise losses and manage risk. If you are able to move your investments from loss-making and under-performing asset classes to other assets with better prospects, on time, you could certainly minimise losses.

Your Queries (Mutual Funds): Continue with your fund if it has outperformed its category peers

Always evaluate a fund in the context of overall portfolio, with respect to the diversification it offers in terms of investment style (growth/value/blend), exposure to different market cap segments (large /mid/small-caps), and geography (domestic/international markets)

To conclude, markets are by nature dynamic and social, economic, political, and other macroeconomic factors influence the way your investments perform. You should monitor the performance of your portfolio regularly and rebalance the same.

The writer is a professor of finance & accounting, IIM Tiruchirappalli

Portfolio review
The ideal asset allocation is a function of the risk tolerance of the investors
The essential reason to review your current asset allocation is to rebalance your portfolio to establish a better risk control mechanism and ensure that your portfolio is not solely dependent on the success or failure of a particular investment
If you are able to move your investments from loss-making and under-performing asset classes to other assets with better prospects, on time, you could certainly minimise your losses


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