May 31, 2016
Asset allocation and portfolio rebalancing are topics that you’ll hear about when talking finances. Most times these terms are overlooked, unless there’s a market crash, which should not be the case. By following a well-executed balancing programme, you could increase your total returns and decrease your overall risk. Don’t mix up balancing of your portfolio with a balance transfer, Home Loans offer.
What is asset allocation?
This allocation is an investment strategy that aims to balance risk and reward by adjusting the percentage of each asset in a portfolio, based on the investor’s risk tolerance, financial goals, and investment tenure. The three main asset classes for an investor include fixed incomes, cash, and equity. Each asset has its own levels of return and risk, so over time each asset will perform differently.
How does this work?
Deciding how to allocate your assets may appear simple, but it’s a little more complex than it looks. First, you will need to note down your three most important assets; your income profile, financial goals, and risk tolerance. Average Indians investors have very little equity exposures as they prefer to not risk it all. They will mostly invest in property and use an interest calculator for Home Loans to make sure that their EMIs stay on point. Studies show that even young investors, who earn handsomely, are more likely to invest in a low-risk scheme, even though they can afford to take significantly higher risky investments.
How often should you rebalance?
A majority of financial advisors will tell you that your portfolio must be rebalanced once, every year. However, a more frequent reorganisation leads to higher transaction costs and fewer tax implications. If you sell your debt mutual funds too soon, or if you break your fixed deposits early, then you will have to deal with heavy exit loads and penalty charges. If you happen to sell your equity mutual funds and stock, you will pay 15% to tax on these capital gains. If you aren’t careful at this time, you may end up rebalancing your portfolio too often.
With all this, the effort of stabilising your portfolio can be difficult to manage. You won’t be able to rebalance unless you track your investment portfolio. Financial portals, including Value Research, offer portfolio trackers that can help you at this time. You can import your mutual fund statement from the registrar and get assistance from online agents, which will include details like past transactions and other details.
Can you rebalance your portfolio by yourself?
Rebalancing your portfolio isn’t very easy, as you will have to make a few difficult calls. You will have to sell assets that are doing well and buy ones that aren’t, and that’s a difficult thing to do. In fact, many financial planners say that small investors should not rebalance their portfolios themselves, as they have neither the emotional maturity nor the discipline to do it. Going to a professional who has both these qualities can help you make difficult choices simpler and help you understand the complexity of rebalancing. They will also take into consideration all market realities, to help you find a good balance.
So, here it is. Just keep reviewing your portfolio as often as you can and consult a financial advisor. In the end, you will be able to increase your returns and reduce risks you might have faced otherwise.