Khota Paisa

Why Rebalance Your Portfolio?

Posted in Investment by khotapaisa on July 30, 2009

Rebalancing is a widely descussed & debated topic. Generally, the investor fixes a equity:debt ratio for his/her portfolio. Whenever this ratio for his/her portfolio chages significantly, he/she rabalances it. So, if equity gives pretty high returns, some of it is sold and invested into debt instrument. This keeps the ratio fixed. Since I don’t follow the fixed ratio portfolio (for me >10 years is all equity, others all debt), I try to rebalance my portfolio in a different way. Since all my financial planning calculations are based on 12% return from equity, I book profit whenever the overall return(not just for the current year) on my portfolio exceeds 12%. The excess gain is then invested in safe investments. This helps in two ways 1) the debt exposure increases as I get closer to my financial goals, 2) it reduces the risk as I discourage my portfolio to give higher returns. To show the effect of this rebalancing, here is a table showing the comparative results against sensex. The investment here is a monthly SIP for 10 years.



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