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Money Matters - Master the rebalancing act

Rising markets offer an opportunity to move money from equity to debt. But when both are doing well, one needs to be cautious

Soon after the stock market touched the 20,000 mark on September 21, talks ensued whether a correction was in the offing. This was followed by anxious investors wanting to know - should we book profits or remain invested? An investor should rebalance his/her portfolio whenever the market moves very high.

While that is one thumb rule, the other one is to rebalance your portfolio regularly (irrespective of the market movement) and maintain the quintessential debt-equity ratio of 30:70. Typically, for a long-term investor, market levels should not matter.

But, if you are six months to one year away from your investment horizon, experts say rejig your portfolio between different asset classes. Reason: Closer to the goal, capital protection is more important. Shift gradually from equity to debt.

But, if you are started investing in January 2008 for his further studies, which he plans in twothree years, do not even touch your investment. Such individuals should be focussed on their goal and may slightly realign their investment within the same asset class. For instance, if Mishra has higher exposure to large-caps, he can safely move 5-10 per cent from there to mid- or small-caps as in rising markets, these stocks move faster as they are high beta stocks.

Of course your exposure to riskier segments like mid- and small-caps depends on your risk appetite.

If you are not going for a major rejig, at least book profits. And, invest that amount to buy contrarian sectors/stocks. But, do not disturb your portfolio if it is up by just 10-15 per cent because at any point in time a small correction can wipe off such gains.

Never move out of markets completely, warns experts, because it becomes difficult to identify an entry point. If you do not or cannot manage your portfolio actively, mutual funds is the best option. Or, you can invest in balanced funds, where asset allocation changes automatically.

Experts say debt portfolio needs to be managed more carefully than equities. The interest rate changes frequently with the Reserve Bank of India's Monetary Policy Reviews. Therefore, it is more important to know your investment horizon and invest in the best debt product for that time period. For instance, for a horizon of over two years, short-term debt funds fare well when interest rate are going down and debt-oriented hybrid when they are flat. In a rising interest rate scenario, fixed maturity plans (FMPs) make for a good debt investment option.

As for new entrants, never make the mistake of investing a large amount at one go. Use a systematic investment plan (SIP) in mutual funds to invest regularly.

WHAT TO DO?

Rebalance your portfolio regularly

Market levels should not guide your investment

Move to debt if you are nearing your investment horizons

Book small profits or rejig only if your portfolio has risen over 20 per cent

Debt needs to be more actively tracked than equity

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