Portfolio Rebalancing Results
Rebalancing action required
Rebalancing calculator – FAQs
The calculator says I need to redeem from an asset class. How do I know which funds to exit?
The funds to exit would be those that are underperforming in your portfolio. Check our MF Review Tool to know our call (buy/sell/hold) on your funds to help you decide. If you have no underperformers or it is not sufficient to meet the redemption requirement, then you can do any of the following: one, use funds where allocations are low and no SIP is running. Two, go to the fund category which is inflated in equity – such as smallcaps or midcaps, and go to the higher-risk funds in debt – such as funds with higher credit risk or those prone to higher volatility (those that follow duration-based strategies like dynamic bond or gilt)
The calculator says I need to invest in an asset class to get it to my desired allocation. How do I know which funds to enter?
For investments (reinvestment of redeemed amounts and/or additional fresh investments), go for funds that are buys in our MF Review Tool, which are part of your portfolio. Alternatively, you can also refer to Prime Funds, if you wish to add new funds to your portfolio. Do make sure that:
One, the fund you pick matches your portfolio’s timeframe and risk profile. Two, that you do not pick funds that will significantly change the risk profile of your portfolio. For example, if a mid-cap fund is in your portfolio and a buy in our MF Review Tool, don’t simply invest here if it takes your portfolio’s mid-cap allocation to levels higher than you’re comfortable with. In debt, try to stick to funds that do not take duration or credit calls. Three, that you keep an individual fund’s exposure within a limit of 20-25% of your portfolio (10-20% if it’s a debt fund). Add funds to your portfolio if your reinvesting takes your fund’s allocation beyond this limit.
I have hybrid funds in my portfolio. How do I know my asset allocation and how do I manage redemption/reinvestment?
Generally speaking, you can use rough thumb rules: for aggressive hybrids, consider a 75-25 equity-debt allocation. For balanced advantage funds, consider a 50-50 split. For the other hybrid categories - arbitrage, conservative hybrid, equity savings - you can assume them to be part of your debt allocation. Simply mark the latter two categories as part of high-risk debt.
Do I exit and reinvest in one go, or should I do it through STPs/ SIPs?
Ideally, redemption can be done at one shot. There’s no real need to stagger exits because you’re trying to book profits based on performance; a few months will not matter significantly. However, if spreading out redemptions makes it more tax-efficient for you if you need to redeem from debt/gold, then you may do so. In equity, it’s best to avoid phasing it out too much as you risk market levels changing in the meantime.
When reinvesting, whether to make a one-time investment or spread it out depends on two factors. One, the asset class you are entering and two, if you’re making fresh investments, how much it accounts for in your portfolio. Both these factors are explained in detail in these two articles: switching between funds and lumpsum investments.
What are the costs of rebalancing?
You may suffer exit loads on some funds at the time of redemption if your holding period falls within the load period. This apart, you will have to pay capital gains tax (short-term or long-term, depending on the fund and your holding period) on the funds you are switching out of/ redeeming. This is one of the reasons why minor asset-allocation deviations can be ignored as it leads to unnecessary costs.
How often should I rebalance?
It is sufficient to check if your portfolio needs rebalancing, once a year. Very frequent checks can lead to unnecessary action on your part, portfolio churn and being influenced by market movements. Too long a gap will reduce the ‘profit-booking at the right time’ benefit that rebalancing offers. An annual check strikes a balance between these two. You can also run a quick check if equity markets have rocketed very sharply. You can go by calendar year or fiscal year – just make sure you stick to that frequency.
Do market levels and stock valuations matter when rebalancing?
No. The beauty of rebalancing to your own asset allocation means that you don’t go by prevailing market levels nor be influenced by them, but what your own portfolio is doing. Remember that you cannot time market highs and lows, or know when equity markets are too expensive to handle. Rebalancing addresses this by using your own asset-allocation to know when an asset is inflated.
My goal is decades away and I’m not concerned about market falls in the short term. Do I still have to rebalance?
The objective of rebalancing is to help you book profits and protect your gains when they come by, and prevent your portfolio from eventually getting too skewed towards one asset class or widely deviant from what you originally started out with. But if your goal is truly over 10 years away, then you can skip rebalancing until you’re closer to your goal.
All of my equity funds are in ELSS, under lock-in period. The rebalancing tool is asking me to redeem my equity allocation. What can I do?
In such a case, the only option you have is to bring in additional fresh investments to bring your allocation back in line.
The above rebalancing tool should not be construed as an advice to sell or buy any fund. It is a tool to check if any of the asset classes you hold are inflated in relation to their original/desired allocation and whether it needs to be brought back to the desired levels. The input on the desired allocation is solely provided by you and not a recommendation by PrimeInvestor. You should execute the changes suggested in the tool only after considering your own risk appetite, time frame, taxes and exit load. PrimeInvestor will not be responsible for managing your portfolio nor does it seek to provide any individual portfolio advice.
General Disclosures and Disclaimers