Delay tax impact: Rebalance by buying more of laggard assets
Business Standard|April 01, 2024
But if you are close to a goal, transfer assets from equity to debt, tax implications notwithstanding
SANJAY KUMAR SINGH & KARTHIK JEROME
Delay tax impact: Rebalance by buying more of laggard assets

The beginning of a financial year is an ideal time to conduct the annual portfolio review. If you have a financial advisor, schedule a meeting with her. For those who don't, here's a detailed road map.

Equity market surge

Midcap and smallcap funds have surpassed their largecap peers over the past year. Debt funds have performed reasonably well in a high interest rate scenario. Gold exchange-traded funds (ETFs) have on average turned in double-digit return.

Many investors may find that their portfolios have become overweight on equities, especially on midcap and smallcap funds. This skew must be corrected through rebalancing.

Why and how to rebalance

Many investors want to let the winners within their portfolios run so that they can make the most of the ongoing bull run.

Doing so is fraught with risks.

Take an example. Suppose an investor originally had a portfolio with 50 per cent equities and 50 per cent debt, and has not rebalanced it for a long time.

The equity portion is now 75 per cent of the portfolio and debt is 25 per cent. The equity market crashes by 20 per cent. If she had a 50 per cent allocation to equities, this portion would have suffered a 10 per cent drawdown.

But since equities now comprise 75 per cent, it suffers a 15 per cent drawdown. Thus, risk rises with increased equity allocation.

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