Everyone is concerned about earning high returns on their investments. Isn't that the primary reason why you invest your savings in the first place? Most people diversify their investments across various asset classes (viz. equity, debt and gold) to avoid concentration risk in any particular asset class. Your risk appetite and risk tolerance level determine your investment behavior, if you are a prudent investor. You put in a lot of efforts to invest your hard earned money in investment avenues that may help you satisfy your long term goals. But if you do not rebalance your portfolio at regular intervals, all your efforts in creating a prudent investment portfolio would go in vain.

What is portfolio rebalancing?
In simple words, portfolio rebalancing is nothing but correcting the deviations in the original allocation. For example, initially you invested 70% in equity, 20% in debt and 10% in gold. After a few years, equity became 80% of your portfolio and gold became 15% of your portfolio due to an increase in their value. As a portfolio rebalancing exercise you would cut exposure from equity and gold and put the money into debt to achieve the asset mix you had started off with.

Why is it necessary to rebalance your portfolio?

It is possible that an asset class drifts significantly away from the initial allocation due to appreciation / depreciation in its own value or appreciation / depreciation in the value of other assets. If you do not rebalance your portfolio from time to time, it is possible that it might not yield the desired results. There is a possibility that unbalanced portfolio may be skewed towards a particular asset class, exposing you to a risk of concentration.

When should you rebalance?
 

• When deviation of a particular asset class touches the preset limit
• For a change in your financial circumstances
• When there is a change in your financial goals
• When you make windfall gains or losses
   

Portfolio Rebalancing is especially important when you plan for your retirement. Let us consider an example - After analyzing your risk appetite, time horizon, rate of return and other constraints, you determine that a suitable asset allocation for your retirement portfolio would be - 60% in equities, 30% in debt and fixed income and 10% in gold. After a period of time, if you have not rebalanced your portfolio it is probable that the exposure to equities may have risen and that to other asset classes may have reduced. These components if not rebalanced could expose your portfolio to a greater risk and might also erode your retirement savings when you reach the retirement age.

You see, retirement planning is one of the most crucial aspects of financial planning and must be handled with utmost care. When you are significantly away from retirement (30 - 35 years), you can take a larger exposure to risky assets such as equities and real estate. However, when you are nearing retirement (5 - 7 years), this asset allocation must be realigned to safer instruments such debt and fixed income products to protect the accumulated corpus from market volatility.

Just to inform you, PersonalFN is about to launch an exclusive retirement product for you. This product will guide and hand-hold you through the process of planning your retirement even during uncertain times such as the one prevailing now. It will walk you through everything that is required for a Rich Retirement. So stay logged on to www.personalfn.com to reap benefits.

Should you rebalance your portfolio in the current market conditions?

Markets are rising on hopes that NDA will come to power and the new government would boost the economic growth. However, the growth in the country has remained tepid so far. The industrial growth is subdued and fiscal deficit is also high. Moreover, the GDP growth has slumped to 4.7% in the third quarter of the FY 2013-14. Higher interest rates are making it difficult for a large number of companies to control costs and maintain profitability.

As far as the markets are concerned, valuations in the mid and small cap space are appearing cheaper than the large cap domain. However, small caps and smaller midcaps may experience extreme volatility if poll results don't turn out to be as expected by the market. Investors should get rid of equity oriented mutual funds which have failed to generate market beating returns across time periods and market phases. These funds can be replaced with consistently performing funds offered by fund houses following sound investment processes.

Although PersonalFN strictly recommends investors to follow goal based asset allocation; some of you might like to follow a tactical approach to asset allocation and hence may consider keeping balanced funds in your portfolio which are basically equity-oriented hybrid funds having a mix of equity and debt instruments in their investment portfolio. These funds are not over aggressive in terms of allocation and concentration and hold the ability to limit the excessive downside risk during bearish market conditions.

Investors wanting pure equity funds with limited exposure to debt instruments in their portfolio may consider Value funds. These funds follow a school of investment thought that believes in buying companies at a deep discount to their fair value. Value investors believe that stocks though not all and not always, are mispriced in the market.

Investors who have invested in company fixed deposits must revisit their portfolio as the creditworthiness of many companies has deteriorated. There have been numerous instances of companies being unable to service their debt. Those who have exposure to long term debt funds may bring it back to 20% of their debt portfolio. PersonalFN is of the view that, one should not hold more than 20% of one's portfolio in long term debt. Gold still remains attractive from the long term view point; however PersonalFN believes that you should not expose more than 10-15% of your portfolio to the yellow metal.

Many of you, who might be tempted to speculate on the outcome of Lok Sabha election, might be considering equities attractive at this juncture. However, PersonalFN believes that you should not get carried away by this momentum in the market and refrain from speculation. Instead of speculating on election outcome and predicting the market movement, you should follow your goal based approach to asset allocation and rebalancing.

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