How often should you rebalance your portfolio?

Rebalancing an investment portfolio is crucial for investors aiming to manage risk and optimise returns, especially in the dynamic financial landscape of India.

 

What is the purpose of rebalancing?

 

Doing a regular review of your portfolio is essential to keep your investments on track and ensure you are moving in the direction of your stated objective. 

 

But what should be the frequency?

 

According to experts, the portfolio review mechanism can be in two stages: 

 

A monthly or quarterly review to keep track of the performance of the portfolio and understand if any corrective measures are needed.

 

A detailed annual review which involves a review of the overall objective, broad portfolio strategy, and product allocation. As life and goals change, an annual review helps ensure your investments are still headed in the right direction. 

 

Factors influencing rebalancing decisions

 

Market volatility: In times of high volatility, more frequent reviews may be necessary to manage risk effectively. Conversely, in stable markets, less frequent adjustments might suffice.

 

Investment goals and life stage: Younger investors may adopt a more aggressive rebalancing strategy as they face significant life expenses, while those nearing retirement might prefer a conservative approach to protect their accumulated wealth.

 

Transaction costs: Frequent trading can incur higher costs due to brokerage fees and taxes. Therefore, balancing the need for adjustments with cost considerations is essential for maintaining overall portfolio performance

 

“The goal and objective of reviewing and rebalancing the portfolio is not only about maximising the performance but also minimising the risk, in addition to the market fluctuations that may cause deviation in your asset allocation from the desired target mix.

 

“Let’s say, for example, you have invested with an allocation of 80:20 in equity and debt, which was suitable to your risk tolerance, but after a year, due to the good rally in the equity markets, your equity investment performance has been done well, and their portfolio weightage has been increased from 80 to 88 per cent, this change will affect your risk tolerance and liquidity in the portfolio,” Shweta Rajani, head - Mutual Funds, Anand Rathi Wealth Limited.

 

“So, reviewing the portfolio and rebalancing it periodically, like once a year, will help to minimize the potential risks in the portfolio and ensure that you are on the right track to reach your objective,” she said.