A reader wants to know if he can now rebalance his portfolio by shifting funds from fixed income to equity since the market is down. A discussion.
Yes, we think this market “correction” is a great opportunity to rebalance our portfolios and increase equity exposure. However, this opportunity is only applicable to certain investors.
Many investors go on and on about “sitting in cash” and waiting for the right opportunity. There is really no need to do all that. Regardless of whether you are an equity mutual fund or stock investor, you can always invest with the right asset allocation and simply rebalance periodically.
Just as we book excess equity allocation as “profit” and shift it to safe fixed income for risk reduction, the reverse process allows you to enter equity at market “lows” and will in part offset the return reduction from equity profit booking. Shifting money from debt to equity is not for achieving higher returns. It is meant to reduce fluctuations in portfolio returns. See: What are the benefits of portfolio rebalancing?
Only investors who have done a goal-based investing exercise and have a clear target asset allocation in mind (even if they are far from achieving it) should consider shifting funds from debt to equity.
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- Investors with fixed-income heavy portfolios aged less than 40 with goals at least 15 years or more away can certainly consider shifting some funds from liquid debt to equity. For some inspiration see Why I redeemed from EPF to invest in Equity MFs (technically this was using the lockdown-time EPF withdrawal rules, but the principle remains the same).
- Investors who started with the desired asset allocation can also consider shifting funds from liquid debt to equity if the current equity asset allocation is lower than the target by more than 5%. Suppose your target equity allocation is 60% and your current allocation is 55%, then you can redeem 5% of fixed income and shift it to equity.
- For new investors, a 5% deviation would mean thousands of Rs and for older investors, it could mean lakhs. That, however, should not deter anyone from rebalancing. To appreciate this in a better perspective see: Fearing tax I didn’t rebalance my portfolio in Sep 2021 and now suffer higher losses!
- The 5% deviation (threshold) will reduce the impact of tax and exit load as one need not rebalance each year. However sometimes one may need to rebalance twice a year if the goal is near. See: I rebalanced my retirement portfolio twice this year thanks to the bull market.
- For investors who have just started out with the right asset allocation, 5% threshold rebalancing should be enough.
- For investors who have been investing for many years now and are in the middle of the goal tenure, an equity de-risking plan is crucial. A tool like the freefincal robo advisory template can auto-compute a suitable variable asset allocation and rebalancing schedule.
In summary, actions based on market-induced portfolio changes should depend on personal circumstances. One size never fits all in personal finance.
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