For an investment to deliver desired results, timely rebalancing and reallocation is as important as making right allocations to different asset classes.
An investor may or may not realise the importance of rebalancing but MFDs surely do. Most MFDs are known to rebalance their clients' portfolio from time to time to maintain the desired asset allocation.
However, what we generally do not know is if rebalancing means the same for all MFDs. If they have a set rebalancing formula or it differs from client to client. And how frequently do they review and rebalance assets?
MFDs say there's no fixed time or formula for rebalancing as a lot depends on the clients and the prevailing market situation. Often, the risk profile and requirements of clients change to such an extent that instead of rebalancing, MFDs have to redesign the asset allocation.
"It is not a thumb rule that the allocation designed today will continue forever. Risk appetite changes from time to time. The allocation needs to be tweaked to reflect the change," said Garvit Chaharia of Deeva Ventures.
MFD Rushabh Desai says rebalancing should not be an obligation. The timing, according to him, should depend on the client's goals, investment horizon and risk appetite.
"Suppose, a client invested 60% in equity and 40% in debt. And with a decent amount of time, the 60% becomes 70%. In such a scenario, MFDs should sit with their clients and explain the situation. If the client is uncomfortable with the enhanced risk and/or the client’s goal is nearing, rebalancing is required or else the investment can be left as it is," the founder of Rupee With Rushabh Investment Services said.
Garvit said that he maintains a sheet for every client to better time the rebalancing and reallocation. Garvit said, "We make a note of all the details shared by clients including his risk taking capability, goals and the recommendations we made. We keep the note in front of us whenever we relook at the portfolio for rebalancing."
For Odisha MFD Prabir Sharma, data decides the timing for rebalancing and reallocation.
"I use P/E ratio to review portfolio. The first step is to calculate the 10-year average P/E ratio. Then I set two limits — the 10-year average plus standard deviation becomes the upper limit and 10-year average minus standard deviation becomes the lower limit. If the present P/E ratio exceeds the upper limit, I reduce equity allocation. If P/E ratio goes below the lower limit, I enhance equity allocation," he explains.
However, Prabir says he tries not to disturb the core equity allocation. "I try to move only the debt part. If the market is lucrative, I advise clients to redeem a part of debt allocation and invest in equities. If market becomes expensive, I recommend some profit booking and invest in debt," he says.
Click here to see a sample shared by him.
One common thing we gathered from the conversations is that MFDs do not prefer frequent mechanical rebalancing. The timing is generally dictated by data and changes in market and customer preferences.
Is your rebalancing process different from the ones shared above? Please write to us at newsdesk@cafemutual.com. We will try to include your process in the next article.
