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 Shuffling ones portfolio as important as allocation Tarun Bhatia

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PostSubject: Shuffling ones portfolio as important as allocation Tarun Bhatia    Tue Sep 04, 2012 11:14 pm

Shuffling ones portfolio as important as allocation

Tarun Bhatia



Most of us follow an exercise or game routine to stay physically fit,followed by a medical check-up every year to ensure that vital body parameters are stable.
Our investment portfolio too needs similar nurturing and tracking of performance of investments across asset classes to assess the impact of changing market dynamics.
When one starts investing,a lot of thought is put into deciding how the money is allocated between various asset classes to ensure that the investments reflect the risk profile of the investor and also enable him/her to meet future goals.
However,this may prove futile if the portfolio is not monitored and subsequently adjusted.
Here,one can follow a threepronged strategy: 1) Rebalance portfolio for any change in asset allocation on account of markingto-market the portfolio,2) Track portfolio using a composite benchmark index,and 3) Weed out nonperformers.
One must also go through a risk-profiling process every year to ensure that asset allocation fits ones risk appetite,else long-term financial goals could get impacted.

Case study

Rahul and Samir had investible funds of Rs 1 lakh each,invested it in a ratio of 40% in equity and 60% in debt.The first year was bad for equities as markets fell 15% while debt markets performed well.At the end of the year,asset allocation changed to 34% equity and 66% debt.To bring the allocation back to original 40%:60%,(equity:debt),Rahul sold debt and bought equities.But Samir didnt rebalance his portfolio.
Post rebalancing,in the second year equities gave a 20% return while debt continued to give returns near about as seen in the first year.Samir,who did not rebalance,got lower returns (12.74%) compared to Rahul who got higher positive returns (13.40%).This shows that the rebalanced portfolio benefited when the equity market rose sharply as Rahul had invested more in that asset class after the slide in the first year.In addition to rebalancing,weeding out the non-performers in the portfolio can also multiply returns.
Investors should review their portfolio on a half-yearly or yearly basis.The time gap for reviewing the portfolio should neither be too long,nor too short.A less than half-yearly rebalancing period may add to churning costs like brokerage and exit loads.
However,one must avoid timing the market while rebalancing.And rebalancing must be more disciplined and neutral to market movements.


The author is senior director,
capital markets,Crisil Research
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