It is often said that the only thing that remains constant in our lives is ‘change’. Really, this is true. Your likes and dislikes change over time, your goals and needs change, and so does the investment climate. If everything changes, why should your portfolio remain the same?

Let us take the example of three persons, Ravi, Manish and Sheena.

Ravi, who is just 35 years old, started his investment journey at the age of 24. At that time his income was very less and he also had to pay his education loan. As a result, their risk appetite was very low and thus, about 30% of their investments were in equity instruments and 40% of their investments were in debt investments. By the age of 25, he has paid off his education loan and over the years, his salary has increased significantly. However, he did not make any changes in his investment portfolio. Today, when he is 37 years old, he still does not have enough money accumulated to meet his goal of buying a house. He is very confused. Since he had been investing for the past 13 years, he thought he would be able to meet this goal. He didn’t know where he went wrong.

Manish, on the other hand, has always maintained a balanced portfolio. He invests 50% of the portfolio in equity instruments and 50% in debt instruments. As such, he believes that if the equity markets fall, only 50% of his portfolio will be affected. Manish is very happy with the performance of his portfolio. In the last one year, the equity market has been going up and so has its investment portfolio. However, just like everything changes in life, the equity markets also changed direction and witnessed a huge decline. While Manish was worried, he was not too worried as he was confident that only 50% of his portfolio would be affected. However, when he reviewed his portfolio, about 65% of it was affected. Manish was surprised to see such a huge loss. He didn’t know where he went wrong.

And then there is Sheena. His goal was to buy a luxury car in 6 years. Keeping in mind his risk-return requirements and his investment time horizon, he invests 20% of his money in equity mutual funds and 80% in debt mutual funds and a mix of other fixed-income instruments. Now, in the 5th year, she looked at her portfolio and was satisfied to see that equity investments have grown significantly and she is in a good position to buy her dream car next year. However, when it came time to buy the car, she was in shock. As compared to the previous year, there was a sharp fall in the equity market, resulting in a significant reduction in the value of the equity portion of the portfolio. Even after she started saving and investing for this goal 6 years back, she still could not achieve it. She doesn’t know where she went wrong.

Where did they go wrong? All three of them, i.e., Ravi, Manish and Sheena, forgot to review and rebalance their portfolios from time to time.

Importance of Periodic Portfolio Review and Rebalancing
Asset allocation is one of the most important ways to build a strong investment portfolio that can help you achieve your financial goals. It involves investing in a mix of investment instruments in equity, debt, commodities, etc. The idea behind asset allocation is that different investments react differently to similar growth and new inflows. As a result, while one investment may underperform or perform poorly, another investment in your portfolio may perform well. In this way, the risk of your portfolio is spread out among multiple investments, protecting the portfolio from downsides and potentially increasing portfolio returns. Now, asset allocation is done keeping in mind three primary factors. This includes:

• your return requirements
• your risk profile
• Your investment time period

Based on the above, you can decide how much to invest in equity, how much in debt and how much in other instruments. However, it is important to understand that your return requirements, risk profile and time period of the investment do not remain constant. They can keep changing. In addition, the investment climate may also keep on changing. Thus, to ensure that you are on track to achieve your goals and that your investment portfolio reflects your risk profile, it is important for you to review and rebalance your portfolio from time to time. .

Portfolio review and rebalancing involves looking at the composition of your current portfolio and then assessing whether the investments in your portfolio match your risk profile and are able to help you meet your financial needs. want. If not, it’s time to rebalance and change your portfolio to reflect the change in your circumstances and needs.

When should you rebalance your investment portfolio?

There are three scenarios under which you should consider rebalancing

1. Change in risk profile: When Ravi started his investment journey, he was small, his income was low and he also had liabilities. As a result, he had a conservative risk profile, that is, he could not take too many risks. Thus, his portfolio mainly consisted of debt instruments. However, after he had paid off his education loan and saw his salary rise, his risk profile became moderate and perhaps even aggressive. Therefore, he could easily take more risk by increasing his exposure to equities. He was young, had a good income, and had no liabilities. They should have more than 30 per cent equity in their portfolio. Ravi should have reviewed his portfolio and rebalanced it by buying more equity investments in the form of equity or hybrid mutual funds and reducing his exposure to debt instruments. Had he rebalanced his portfolio, the equity share could have increased and helped him reach his goal of buying a home.
2. Key changes from the asset allocation strategy: Often, when the equity market is bullish, the overall weight of equities in your portfolio may increase and exceed the risk specified by your asset allocation strategy. When Manish started, he invested 50% in equities and 50% in debt. So, if he invested Rs 100, Rs 50 was in equity and Rs 50 was in debt. Now when the market started rallying, the value of Rs 50 invested in equity increased to Rs 90. With this growth, the total value of his portfolio increased to Rs 140 and investment in equities increased to around 65%. Thus, when the markets fell, about 65% of his portfolio was affected. Ideally Manish should have reviewed his investment portfolio when the market started to rally. On review, he would have noticed that the equity ratio is increasing. This is where he should have consulted an advisor and rebalanced by selling some equity investments and bringing the proportion of equity in the portfolio back to 50%. Thus, by rebalancing, he could ensure that he continued to follow his asset allocation strategy, which would have helped him mitigate the impact of a fall in equity. In a typical market scenario, you should consider reviewing your investment portfolio annually. On the other hand, if there is a sharp volatility in the market, then you can review your portfolio twice a year. A 5 to 7% drop from your desired asset allocation may not require rebalancing. However, if you move more than 10% off your asset allocation strategy, you should consider rebalancing.
3. Getting closer to the goal: Most of us build an investment portfolio to achieve our financial goals. In Sheena’s case, she built a strong portfolio and was able to accumulate enough money to meet one of her goals. However, when it came time to exit his investment, the equity investment had fallen in value. Sheena should have reviewed her portfolio when she was a year away from reaching her target. At this point, he should have rebalanced his portfolio by redeeming his equity investments and moving that money to secured debt investments. This ensured that his return on equity investments would be protected so that when he finally reached the sixth year, he would have the money to buy the car of his dreams. Again, rebalancing would have helped him secure the profit he had made.

Life is not stable. Similarly, your financial plan and your asset allocation strategy should also not be static. If you really want to achieve your financial goals, you must ensure that you invest in accordance with your asset allocation strategy, review your investment portfolio from time to time, and ensure that if Your circumstances, risk profile, return requirements, or market.

As Darwin said,
“It is not the strongest of the species to survive, nor the most intelligent, but more amenable to change.” Be accountable and rebalance to survive.

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