The Beginner’s Guide to Re-balancing Investment Portfolio

One of the most common investment-related advice that you will come across is regarding rebalancing. “Investors should periodically rebalance their portfolio,” is what investment experts advise. 

Of course, they are right. Periodic rebalancing is very important. But what does rebalancing really mean, why is it so important and how can you do it? Well, these are the questions that we are here to answer.

What makes a portfolio balanced?

Before we get into what rebalancing is, let’s first try to understand why your portfolio should be balanced. A balanced portfolio is one that is invested in different types of asset classes. These asset classes could be equity, debt, gold and real estate. For most regular investors, a balanced portfolio would have exposure to equity as well we debt.

The split across equity and debt would be determined by your investment goals, risk appetite, and time horizon. Typically, investors who have long-term goals and more time on hand should have a higher exposure to equity. Conversely, investors with short-term goals should have more of their portfolio in debt. 

Having the right allocation to different asset classes makes a portfolio balanced. The balance here is between risk and reward. Higher risks can result in higher rewards, which will help you build wealth. But the wealth that has been built needs to be protected as well, which is why your portfolio needs to be balanced.

In short, your portfolio should be spread across asset classes and investment types for you to be able to get the best of all worlds.

How does a portfolio get unbalanced?

Obvious question, right? Well, there are many reasons that can lead to your investment portfolio getting unbalanced:

• Fluctuations in investment values: Let’s say your portfolio is worth Rs 100, out of which Rs 70 is invested in equities. Now, if the value of your equity holdings goes down to Rs 50, then the 70:30 balance that you had set out to achieve will change

• Changes in mutual fund objectives: Mutual funds sometimes change their investment objective, which can lead to an equity turning into a hybrid fund, for example. Such a change can shake the balance of your portfolio of your have invested in the fund
• Unplanned redemptions or investments: There can be times when you will redeem a part of your portfolio or make a lump sum investment. Such instances will usually not be planned for and can disrupt the balance of your portfolio

If you are investing for the first time then you must also read: The 5 Step Guide to Avoid Making Investment Mistakes

How to rebalance your portfolio?

The best way to keep a tab on your portfolio’s balance is by checking the asset allocation every six months or once a year, depending on your investment horizon. Check where you are invested, across assets and types. If you see an imbalance, then change the asset allocation to meet the initial portfolio balance you had in mind.

Here’s how to rebalance your portfolio:

1. Review the asset allocation: Check whether your portfolio still has the mix of asset classes and investment types that you had initially planned to begin with. You can do this either manually or by using a portfolio management tool like Wealthy’s Portfolio Tracker
2. Buy and sell investments: If you have a higher equity exposure than what you’re comfortable with, then the best thing to do is sell some of your equity shares or mutual funds and invest the amount in debt. And vice versa
3. Check back after a year: Or six months, if you have a shorter time period. The idea is to not rebalance your portfolio too often, but also to not leave it unbalanced for too long either. For most investors, an annual rebalance would suffice

This, essentially, is all that there is to rebalance your investment portfolio. It’s one of those investment-related things that is easy to procrastinate, but also something that you shouldn’t do.