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Adjust portfolio if allocation to have right asset allocation strategy

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   The stock market index belied investor expectations last financial year as predominantly global concerns stained its performance. Adding to the woes were scams that weaned the faith of foreign institutional investors (FIIs). Fund managers and investors panicked, and succumbed to selling pressures with concerns over the unrest in Egypt.


   Rising food prices and inflation have left small investors with little surplus for investments. Increase in home loan rates has increased the financial burden on homeowners. These additional factors have compounded to volatility in the stock markets. Is it time to shuffle your portfolio?

Don't shuffle for short-term gains    

Shuffling is also referred to as rebalancing. Rebalancing is periodic adjustment of a portfolio to restore the original asset allocation mix. If your investment strategy or risk threshold has changed, you can rebalance your investments so that the asset classes in the portfolio align with your new asset allocation plan.


   Do not indulge in shuffling your portfolio for short-term market changes. Rebalancing is a well planned quarterly or annual activity. It helps you book profits within your portfolio effectively and reduces risk exposure by maintaining the primary asset allocation.


   A booming market provides excellent opportunity to make profits. Consequently, the equity exposure in your portfolio increases phenomenally. This makes the percentage of debt investments lesser as compared to the original debt allocation. An investor is usually driven by the desire to reap greater yields in upward-bound equity markets.

Benefits of rebalancing    

It requires considerable effort and strategy to reap good returns in a falling market. Anyone can make it rich in a bull run but not in a downward-bound index. Investors usually stay away from equity markets in choppy conditions. Despite the market condition, an investor must re-align his portfolio of investments that have strayed away from the original asset allocation strategy periodically.


   There are numerous benefits from this exercise. Rebalancing helps your portfolio remain at your risk tolerance level. An asset allocation strategy is chalked out based on your age, risk appetite, financial goals, investment objectives, savings, debts, income flow and years left before retirement. The portfolio could become conservative or risky based on fluctuations in the stock markets. Rebalancing restores the portfolio to the original asset allocation plan to meet your goals.

CASE STUDY

Maheshwar has received a bonus of Rs 2 lakhs and wants to invest. Being a person with a moderate risk appetite, he prefers an asset allocation mix of 60 percent in debt and 40 percent in equity. He locks Rs 1.20 lakhs (60 percent of Rs 2 lakhs) in banks deposits, post office monthly income schemes and fixed maturity plans (FMPs). The remaining Rs 80,000 (40 percent of Rs 2 lakhs) is invested in stocks.


   After a year, Maheshwar discovers that the value of stocks in his portfolio has gone up by 40 percent and has become Rs 1.12 lakhs. On the other hand, his investments in debt have become Rs 1.32 lakhs (at 10 percent returns).


   He must rebalance his portfolio to get back to the original asset allocation mix of 60 percent debt and 40 percent equity. In line with his risk appetite, he sells some shares and reinvests in debt instruments that he is more comfortable with. Currently, his total investments are valued at Rs 1.12 lakhs plus Rs 1.32 lakhs, i.e., Rs 2.44 lakhs. At the end of the rebalancing exercise, he must have 40 percent of Rs 2.44 lakhs in stocks and the remaining locked in debt.

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