It’s that time of year when people plan fresh starts. While gym memberships are part of many people’s resolutions, some take a step back to review their investments. In fact, several people make it a habit to review their portfolios at the end of every year. But the question remains: how often should you tweak your portfolio?
Like what you're reading?
Get our latest, straight to your inbox.
There’s no straightforward answer, but here’s what you need to know.
Why Is Rebalancing Important?
Rebalancing helps restore your portfolio to its original or pre-decided allocation level. Over time, market movements can cause certain asset classes, such as equities, to grow disproportionately, increasing the risk in your portfolio beyond your comfort level.
For instance, if the equity portion of your portfolio swells due to a strong market, bringing it back to the pre-decided allocation level is advisable, ensuring your portfolio remains aligned with your risk tolerance.
How Often Should You Review Your Portfolio?
Some investors suggest reviewing an investment portfolio once every six months. This frequency strikes a balance—it’s “not too frequent nor too laidback.”
Others may prefer annual reviews, which allow for adjustments without incurring frequent transaction fees. Ultimately, the ideal frequency depends on your investment goals and the market conditions.
What About Taxes and Fees?
Before selling investments to rebalance, it’s important to account for tax and transaction costs:
- Equities: Gains are taxed at 12.5% if held for 12 months or longer, and 20% if held for under a year. There is an exemption limit of up to ₹1.25 lakh in a year on capital gains from equity and equity-oriented funds.
- Debt funds: Taxed at the slab rate based on your income.
Should You Exit Investments to Rebalance?
Instead of exiting investments and incurring capital gains tax, some experts suggest considering fresh investments.
For instance, if you feel the markets are overvalued and want to reduce equity exposure, you could start by cutting down on systematic investment plan (SIP) contributions toward equity mutual funds. The redirected funds can be invested in debt or liquid funds instead.
For those maintaining a 50:50 portfolio between debt and equity, adjusting to 60:40 in favor of debt when markets are overvalued is a possible approach.
How to Plan Your Exit Strategy
Investing isn’t just about entering the market—it’s equally important to have a systematic exit plan.
For example, if you’re saving for a car purchase five years from now:
- Start by setting aside money in equity mutual funds.
- After four years, systematically withdraw 1/12 of the funds each month.
- Move these withdrawals into liquid funds, which are safer and less volatile.
This approach ensures you avoid emotional decisions and stay on track with your goals.
Are Diversified Funds a Good Option?
Diversified funds, such as multi-asset, hybrid, or equity savings funds, can simplify rebalancing. These funds are managed by professionals who handle asset allocation adjustments within the scheme, saving you from:
- The effort of personal intervention.
- The immediate tax implications of shifting investments between asset classes.
What About Young Investors?
For investors in their 20s who are just starting out, it’s advisable to churn the portfolio as little as possible. This avoids unnecessary transaction fees and taxes, especially when the portfolio size is still small.
As your corpus grows, you can consider reviewing your SIP contributions into debt and equity funds annually. While market conditions can influence adjustments, ensure that your allocation remains broadly aligned with your risk-reward ratio.
Key Takeaway
Rebalancing is crucial to maintaining a healthy portfolio, but the frequency and approach depend on your personal financial goals, tax considerations, and market conditions. Whether you review your portfolio semiannually, annually, or when there’s a significant shift in allocation, the ultimate goal is to stay aligned with your risk tolerance and long-term objectives.
By planning your strategy for 2025, you can achieve a balanced and resilient investment portfolio without unnecessary costs or risks.
