Sensex has rallied from its March lows and it is scaling new highs. Because of this rally, asset allocation of many investors has got heavily skewed towards equity. Now the conundrum for such investors is whether to rebalance their portfolio by selling a portion of equity and investing in fixed income products.
To get deeper insight on this, we spoke to a few industry experts. Here is what they told us.
G Pradeepkumar, CEO of Union MF said that investors can use this rally to rebalance their portfolio back to the asset allocation level that they are comfortable with. For instance, if someone is comfortable with 60% equity allocation and it has run up over the past few months to a 70% allocation, there is a need to rebalance.
Now, there are two ways of doing this. One, sell equity and invest in fixed income products. Two, use incremental flows to invest in debt and stop equity investing till they are back at their desired asset allocation.
Many advisors, however, feel the latter rebalancing will be tantamount to a certain degree of market timing.
Suresh Sadagopan of Ladder7 Financial Advisories recommends periodic rebalancing to his clients rather than rejigging the asset allocation in reaction to sharp market movements. He believes that investors should avoid knee-jerk reaction as market often goes up and down. “I do not know if this is the end of the rally. So I will not recommend my clients to book profit on equities just because of market rally unless a client is very conservative and jittery.”
Vinod Jain of Jain investment also said that he recommends portfolio rebalancing to his clients when they conduct their portfolio review exercise every six months. “You cannot do portfolio rebalancing every time there is a sharp movement in the markets. Therefore, we do the necessary portfolio rebalancing in six months’ time, which is a good time frame to assess and align a client's portfolio based on their life changes and goals,” Jain said.
Further, some MFDs feel that rebalancing need not be desirable for every client.
Kolkata MFD Bharat Bagla of Beas Network feels that the decision to rebalance will depend upon age, risk appetite and goals of the client. “If a client is young and is in his 30s with a moderate risk appetite, I do not advise to book profit every now and then. Meanwhile, if the client is in the 60s and gets anxious amid volatility, then I look at rebalancing,” says Bharat.
Bharat and Suresh said that one has to take note of the impact cost of rebalancing as well. MFDs must take into consideration expenses such as exit load and taxation.
