Rebalancing portfolio has its own compulsion as rebalancing can help you to return on the route if you have deviated away from your primary asset allocation. Also, rebalancing can secure your portfolio from the volatility of the market in the case you want to minimize your investment risk. There can be several reasons that may lead you to rebalance your portfolio like a change in your financial situation or in the case if you have acquired your goals, rebalancing the portfolio is a must.
But there is a set of rules while rebalancing the portfolio otherwise you will end up going beyond the defined level for your debt as well as an equity component. There are a lot of consequences and implications in terms of taxes, the effect on goals etc. while rebalancing the portfolio.
There are some common and avoidable mistakes that one must not do while rebalancing.
Focusing on the losers only rather than current winners
While rebalancing, it is a most important thing to keep in mind that it is necessary to take a look at the investments that are performing well while it’s alright to replace the investments that are leading you to lose your money otherwise you will end up exposing yourself to a big risk. It’s always a better plan to take a step back if you are willing to reorganize things throughout your portfolio.
To manage rebalancing by presumptions
Rebalancing is too important to be done only by one’s presumptions as you may assume that rates are going to get down in upcoming months and you move your debt portfolio in favor of funds that are long-dated. Reversely, you may have a feeling that the equities are going to get overpriced and a result of that you may want to shift more into low beta equities. Both views are based on just presumptions and may vary in reality. So, it is good to do rebalancing according to the rules.
Disregarding the tax factors
It’s very important to rebalance carefully when it comes to the tax bill. One must be attentive to how it might affect. You need to know while rebalancing that even the equity funds have to pay the LTCG tax on profits more than ₹1 lakh per year which is 10%. When you are exiting out of debt funds, tax bills can be higher. The taxes can be at the highest rate that is 20% after evaluating the benefit of indexation if you are selling out in less than 3 years. The tax costs can change the economics of rebalancing the portfolio.
Rebalancing without any supervision
It’s always a great decision to be on yourself and to do things on your own but sometimes a little guidance can take you out of the future risks. Like in rebalancing, it is always a better decision to take an advice of any expert while rebalancing your portfolio. An expert can help you in making quick and fruitful decisions and may tell you the do’s and dont’s of rebalancing. Those will make more comfortable for you to make further decisions about your long-term goals.
Rebalancing without any particular investment goal
One of the most common mistakes is rebalancing without any particular investment goal. Also, It is always a better decision to stay in liquid funds and not to rebalance it when you are close to your goals. Rebalancing is an important decision concerning the portfolio, the only thing is it must always be linked with your long-term goals and the costs do not exceed your benefits of rebalancing.
Rebalancing portfolio is not as hard as it seems but if one is willing to take proper gains from the benefits it gives, then there is a necessity to follow some rules and take some guidance in order to maximize the returns of your investments and minimize the risk factor.