Last Updated on November 16, 2020 at 3:03 pm
We continue answering frequently asked investor questions on portfolio rebalancing to help with practical implementation. The first part (question 1 to 13) is available here: Portfolio Rebalancing: We answer frequent questions investors worry about (part 1) and the second part (question 14 to 28) here: Portfolio Rebalancing FAQ Part 2.
Q29: How should I consider 1. Physical gold; 2. House I have already; 3. House that I already own; 4. House that I currently pay EMI while rebalancing my portfolio? A: Anything you use should not be part of a portfolio. If you get rental income, then it can be used for lowering your retirement corpus (our robo template does this) but should not be considered for rebalancing.
Q30: How to rebalance money from equity + risky debt into cash as the goal nears. Do I take it out of equity or debt or both and in what proportion? A: Sell from both in one-shot and move to cash. This could be partly liquid fund partly arbitrage fund, partly FD, SB acct. Any mix that will make you sleep better.
Q31: Choosing the various Debt components for rebalancing apart from epf/ppf among long term gilt funds/arbitrage fund/money market funds. Risks vs reward in choosing each of these funds? A: This is a personal choice. Some investors like no volatility in debt component. So for them, “liquid” debt options are low-risk debt funds from liquid or money market or arbitrage categories. For those comfortable with volatility can use long-term gilts appropriately. See: Can we invest via SIP in gilt mutual funds for the long term?
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Q32: Can rebalancing activity can be timed – say when MOVI or such valuation index suggests that the market is at a high.A: In principle yes, with the understanding that it is primarily for risk reduction and not return enhancement.
Q33: Gilt funds are debt. Going down the line, equity has to be less and shifted to debt(gilt here). However, gilt funds are volatile over a shorter period. Is there any need to again shift to a lesser volatile debt instrument like arbitrage/money market fund? How can we do this? A: I would recommend adding less volatile debt instrument – money market or liquid) and gradually increase the exposure down the line. This is because gilt themselves are quite volatile and once cannot go from say 50% equity 50% gilts to 100% gilts when the need is near.
Q34: How should I rebalance my portfolio? Currently 98.5% FD & 1.5% MF. A: You are far away from rebalancing. Please get professional help from a SEBI registered fee-only advisor
Q35: (a). Should we look at rebalancing as a tool only to reduce risk or to get better returns as well? A: I would prefer to look at it as a goal-based risk reduction tool. This means we focus on the corpus required at any time and not the returns. This helps be in much better control and not leave the fate of our investments to luck.
(b). Same question as many above. I am now 40% in equity, 60% EPF. My monthly/yearly investment amount that I can afford is 50-50 in index fund & pf. I’m now 32-33 years old. I don’t think I’ll reach 60-40 equity for the next 5-6 years at least. Is there a different rebalancing strategy that I should look at meanwhile other than keep investing as much as possible in index funds? Does this become more important if we land up in a decade long sideways market? A: Do not worry about rebalancing now. Focus on investing more in equity and increasing income.
(c) For 15-16 yr child education goals where I can start with 60-40 in equity, what is the better rebalancing strategy? Do I split monthly investment 60-40 and rebalance once a year, or I invest monthly such that the overall ratio comes close to 60-40 and do a hard rebalance to 60-40 once a year? Have you already run a backtest comparing these two? A: I do not see how the two are any different 🙂
(d). Combined with the 2nd point above, does it make sense to keep 5% of monthly investment in a liquid fund and add it to equity when the market falls 10-20%? I know that buying on dips alone is not TAA, but with my allocation, I can’t really afford to sell equity now. A: If it makes you happy, yes. A 5% change in allocation will not make a difference.
(e). With epf being a major part of the portfolio, how do we consider the epf interest during rebalancing? This year, I estimate that the epf interest itself will be ~5% of the portfolio, which will cause significant deviations in the AA when the interest is credited. A: Focus on increasing equity exposure 🙂
Q36: (a) I am not sure if its repeat but I will post my queries. Should one do rebalancing the folio itself(assuming a folio of N50, NN50 and S&P 500 in ratio 40:35:25)? A: You should focus on rebalancing bet equity and debt primarily. As you remove money from equity or put some into it, you can decide to do that among those funds as close as possible to your internal target. See: Should I rebalance between Nifty and Nifty Next 50 systematically?
(b) Should rebalancing be done if the folio size is small? Small is very objective here. One person’s small of 25lakh can be other’s huge amt. A: Who needs risk reduction more? The “small guy” or the “big guy”? Everyone has to rebalance. Everyone needs a plan.
Q37: Portfolio constituents and re-balancing: (assumption – portfolio has direct equity, equity MF, PPF, EPF, debt MF). Query 1 – Will direct equity be also part of re-balancing exercise? Considering it is more volatile then MF, more frequent rebalancing is required, and if we do not consider the direct equity portion, then percentage allocation will be faulty. A: Yes, it has to be part of the rebalancing exercise. Frequent selling of direct equity can be counterproductive. So once a year is good enough, in my opinion.
Q38: Rebalancing once a year on a specific date/month each year is what everyone usually suggests, rt? But on top of this, should I consider rebalancing at the time of major corrections like what did happen this year. If I usually rebalance once a year in December. And like in 2020 march/April a major correction happened, the should I ignore it and wait for December to perform the usual rebalancing? A: If there is a major up or down movement bet Jan and Dec, you can rebalance immediately. Or do it in Dec. Of course, the change can occur the month after you rebalance if your goals are far away nothing more need to be done. If you are in the middle of your investment tenure or later, you can do another rebalance if there are equity gains.
Q39: While rebalancing, is it advisable to sell in one go or in tranches. Similarly, is it advisable to buy in tranches to average out the cost? A: one-shot both directions.
Q40: If I am a self-employed professional of age 54 and since I can practice till my health permits, say maybe till 70 yrs. My only goal is retirement and if I continue to have income though less, say by 50% and if that income is sufficient for my monthly expenses. I had no liabilities. At present, I am investing for retirement considering arbitrarily at the age of 60 and my present allocation is 50:50, so how should I rebalance and how should I reduce exposure to equity in a gradual manner? A: Please either get professional help or enrol in the lectures on goal-based portfolio management where the main topic is “how should I reduce exposure to equity in a gradual manner?”
Q41: If my E:D ratio is 40:60 due to heavy EPF with goal 15-20 years away. Should I increase the equity exposure to 60 gradually now or wait until one year considering the market is volatile? A: Waiting is a waste of time.
Q44: “From Equity”, Rebalancing into Liquid funds? Rebalancing into Arbitrage Fund? Rebalancing into Ultra-short funds? Rebalancing into Short Term Funds? Rebalancing into Corporate Bond Funds? Which is apt? What are the pros and cons? A: Rebalancing is a secondary activity. The primary activity is to decide the instruments that are suitable for your goal and suitable for your temperament in equity as well as debt.
Q45: (a) If 15 year worth (goal+ expense) is in Debt MF, yet the allocation is (D: E is 30:70), do we still need to rebalance to make it 40:60 or lower yearly? A: Rebalancing is done only if you have a clear asset allocation in mind. If you do, then you must rebalance!
(a) If we are moving towards indexing, once the amount grows to high no, at what threshold is it advisable to open a second fund of the same category in another AMC to avoid money being locked as in case of FT?. A: Some people are okay with having 50 lakhs in the same fund. Some do not like more than five lakh. It is up to you. This is regardless of whether you are an index investor or not.
This concludes the three-part series on portfolio rebalancing. Thank you for your participation. My general impression from these questions: Portfolio rebalancing is relevant only for those who have a proper goal-based financial plan and de-risking strategy in place from day one. If you are not confident about this, work on this first and then consider portfolio rebalancing.
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