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.
- 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.
Do share if you found this useful
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 nine years of experience publishing news analysis, research and financial product development. Connect with him via Twitter or 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 for promoting unbiased, commission-free investment advice.
Use our Robo-advisory Excel Template for a start-to-finish financial plan! Now with a new demo video! ⇐ More than 1000 investors and advisors use this!
Our flagship course! Learn to manage your portfolio like a pro to achieve your goals regardless of market conditions! ⇐ More than 2800 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 675 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!
My new book for kids: “Chinchu gets a superpower!” is now available!
Most investor problems can be traced to a lack of informed decision making. We have all made bad decisions and money mistakes when we started earning and spent years undoing these mistakes. Why should our children go through the same pain? What is this book about? As parents, if we had to groom one ability in our children that is key not only to money management and investing but for any aspect of life, what would it be? My answer: Sound Decision Making. So in this book, we meet Chinchu, who is about to turn 10. What he wants for his birthday and how his parent’s plan for it and teach him several key ideas of decision making and money management is the narrative. What readers say!
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 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 (will work with any index!), or you buy the new Tactical Buy/Sell timing tool!
We publish mutual fund screeners and momentum, low volatility stock screeners .every month.
About freefincal & its content policy Freefincal is a News Media Organization dedicated to providing original analysis, reports, reviews and insights on developments in mutual funds, stocks, investing, retirement and personal finance. 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 from credible and knowledgeable sources before publication. Freefincal does not publish any paid articles, promotions, PR, satire or opinions without data. All opinions presented will only 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
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, seek the correct answers, and since it comes with nine online calculators, you can also create custom solutions for your lifestyle! Get it now. It is also available in Kindle format.
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, 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 199 (instant download)
Free android apps
