Based on our blog ‘7 Rules Of A Smart Fund Manager (That Everyone Should Follow)’, we’re running a week long series spending a little more time with each rule, so you can easily digest each and every tidbit! #SharingIsCaring
Rebalancing is an investment principle that is not known widely, although fund managers and smart retail investors use it as a magic bullet for portfolio management. *It entails reviewing your investments periodically to determine if your current exposure to different assets matches your initial allocation. *
Didn’t get it? It took me a few tries as well. Let me illustrate with an example.
You have Rs. 100 to invest. You decide to invest Rs. 50 in an equity mutual fund, and Rs. 50 in a debt mutual fund (50:50 equity:debt ratio). After a year, the debt fund has grown by 10% (to Rs. 55), and the equity fund by 30% (to Rs. 65). The equity:debt ratio is now 65:55 – no longer equal. So you redeem Rs. 5 from equity, and invest it in debt, and your asset allocation is back to parity i.e. 60:60.
Rebalancing is also automatically tuned to make you buy low and sell high. As in the above example, you sold equity when it outgrew the rest of your portfolio. Conversely, you would purchase more equity if it underperforms compared to other assets. Fund managers know this, and make it an integral part of their strategy.
Make rebalancing a part of your investment strategy today!