In response to our FAQ on index investing, a viewer on our YouTube channel asks, “I am doing sip for the past one year in nifty50 and nifty next 50. Is frequent(once in a year) rebalancing necessary even for passively managed funds?”
While index funds remove the need for frequent fund performance review, they cannot magically remove other aspects of portfolio management. There is no “passive” button for risk management. It also has to be in active mode.
Steps to manage your portfolio
- Be clear about why you are investing. It has to be a lot more specific than “long-term wealth creation”!
- Be clear about when you need the money. Without this, all else fails.
- Do not mistake using equity or equity mutual funds for short-term goals. We recommend that new investors only use equity index funds for goals more than ten years away. Mutual fund AMCs would recommend equity funds for goals more than three years away, but we cannot afford to take them seriously. The shorter the duration in equity investing, the more the outcome depends on luck since we will not have time to recover from a loss or remove gains.
- Even for long-term goals, do not go overboard on equity. We recommend only 50% to 60% equity, even for goals 25-30 years away. Higher equity allocation only increases the risk and the need to maintain it, not the “potential” to make more returns.
- Only at this stage does one consider the instruments to choose: active funds or passive funds? Direct equity or mutual funds or both? What kind of debt products to invest etc.
- While the above allocation is good enough to get started, investors should start thinking seriously about how they will reduce this equity allocation in the future. For example, I am 30 and wish to retire by 50; how should I plan my investments? Without this step, the fate of your hard-earned money would depend on luck. We need to respect money better than that. Once this plan is in place, we need to check if we are investing enough to account for this reduction in equity.
- We need to review our investments at the portfolio level and not at the instrument level. How much did my portfolio gain from one year to the next? If it fell, how much lower did it fall compared to equity? Are my overall equity and debt returns in line with my expectations? Where is my portfolio today in terms of the target corpus growth? Is any course correction required?
- If the asset allocation is off by more than 5%, we recommend a rebalance. For example, if you start with 50% equity and 50% fixed income, and after a year, the asset allocation is 52% equity and 48% fixed income, nothing needs to be done. After one more year, if it becomes 56% equity and 44% fixed income, a reset or a rebalance to 50:50 is recommended.
- All investors need to do is rebalance systematically (once a year) between equity and debt. There is no need for an additional rebalance bet Nifty and Nifty Next 50. See: Should I rebalance between Nifty and Nifty Next 50 systematically?
All the above steps are independent of where you invest – stocks or active funds, or passive funds. The worst mistake with equity is to blindly invest and assume that we will get returns over the long term. Both investing and risk management must be systematic to reach our target corpus.
If you like to start investing the right way, consider starting with this free seminar: Basics of portfolio construction: A guide for beginners.
Join over 32,000 readers and get free money management solutions delivered to your inbox! Subscribe to get posts via email! 🔥Enjoy massive discounts on our robo-advisory tool & courses! 🔥
🔥Enjoy massive discounts on our courses, robo-advisory tool and exclusive investor circle! 🔥& join our community of 5000+ users!
Use our Robo-advisory Tool for a start-to-finish financial plan! ⇐ More than 1,000 investors and advisors use this!
New Tool! => Track your mutual funds and stock investments with this Google Sheet!
- Do you have a comment about the above article? Reach out to us on Twitter: @freefincal or @pattufreefincal
- Have a question? Subscribe to our newsletter with the form below.
- Hit 'reply' to any email from us! We do not offer personalized investment advice. We can write a detailed article without mentioning your name if you have a generic question.
Join over 32,000 readers and get free money management solutions delivered to your inbox! Subscribe to get posts via email!
Explore the site! Search among our 2000+ articles for information and insight!
About The Author
Dr. M. Pattabiraman(PhD) is the founder, managing editor and primary author of freefincal. He is an associate professor at the Indian Institute of Technology, Madras. He has over ten years of experience publishing news analysis, research and financial product development. Connect with him via Twitter, Linkedin, or YouTube. Pattabiraman has co-authored three print books: (1) You can be rich too with goal-based investing (CNBC TV18) for DIY investors. (2) Gamechanger for young earners. (3) Chinchu Gets a Superpower! for kids. He has also written seven other free e-books on various money management topics. He is a patron and co-founder of “Fee-only India,” an organisation promoting unbiased, commission-free investment advice.Our flagship course! Learn to manage your portfolio like a pro to achieve your goals regardless of market conditions! ⇐ More than 3,000 investors and advisors are part of our exclusive community! Get clarity on how to plan for your goals and achieve the necessary corpus no matter what the market condition is!! Watch the first lecture for free! One-time payment! No recurring fees! Life-long access to videos! Reduce fear, uncertainty and doubt while investing! Learn how to plan for your goals before and after retirement with confidence.
Our new course! Increase your income by getting people to pay for your skills! ⇐ More than 700 salaried employees, entrepreneurs and financial advisors are part of our exclusive community! Learn how to get people to pay for your skills! Whether you are a professional or small business owner who wants more clients via online visibility or a salaried person wanting a side income or passive income, we will show you how to achieve this by showcasing your skills and building a community that trusts you and pays you! (watch 1st lecture for free). One-time payment! No recurring fees! Life-long access to videos!
Our new book for kids: “Chinchu gets a superpower!” is now available!
Must-read book even for adults! This is something that every parent should teach their kids right from their young age. The importance of money management and decision making based on their wants and needs. Very nicely written in simple terms. - Arun.Buy the book: Chinchu gets a superpower for your child!
How to profit from content writing: Our new ebook is for those interested in getting side income via content writing. It is available at a 50% discount for Rs. 500 only!
Want to check if the market is overvalued or undervalued? Use our market valuation tool (it will work with any index!), or get the Tactical Buy/Sell timing tool!
We publish monthly mutual fund screeners and momentum, low-volatility stock screeners.
About freefincal & it's content policy. Freefincal is a News Media Organization dedicated to providing original analysis, reports, reviews and insights on mutual funds, stocks, investing, retirement and personal finance developments. We do so without conflict of interest and bias. Follow us on Google News. Freefincal serves more than three million readers a year (5 million page views) with articles based only on factual information and detailed analysis by its authors. All statements made will be verified with credible and knowledgeable sources before publication. Freefincal does not publish paid articles, promotions, PR, satire or opinions without data. All opinions will be inferences backed by verifiable, reproducible evidence/data. Contact information: letters {at} freefincal {dot} com (sponsored posts or paid collaborations will not be entertained)
Connect with us on social media
- Twitter @freefincal
- Subscribe to our YouTube Videos
- Posts feed via Feedburner.
Our publications
You Can Be Rich Too with Goal-Based Investing
Published by CNBC TV18, this book is meant to help you ask the right questions and seek the correct answers, and since it comes with nine online calculators, you can also create custom solutions for your lifestyle! Get it now.Gamechanger: Forget Startups, Join Corporate & Still Live the Rich Life You Want
This book is meant for young earners to get their basics right from day one! It will also help you travel to exotic places at a low cost! Get it or gift it to a young earner.Your Ultimate Guide to Travel
This is an in-depth dive analysis into vacation planning, finding cheap flights, budget accommodation, what to do when travelling, and how travelling slowly is better financially and psychologically, with links to the web pages and hand-holding at every step. Get the pdf for Rs 300 (instant download)