Time to rebalance your investment portfolio now | Economic Times

The rally in the equity market continues unabated and benchmark indices like Sensex and Nifty have generated more than 50% returns in the past year. Though other markets are participating in this global rally, the Indian markets have outperformed them handsomely. Not just developing markets, Indian equities are giving major developed markets a run for their money as well. In addition to this massive outperformance, prevailing high valuation is another reason why equity investors should be cautious now.Should investors exit the market? Since triggers for the present rally—improving earnings profile and very low interest rate regimes across the globe—are still intact, there is no need to exit completely. Since one cannot time the exact peak or bottom, complete exit from any asset class will be a mistake. However, equity allocation of most investors might have gone up due to this rally and therefore, they should realign it to their strategic asset allocation. For example, if you had set the asset allocation at 50% equity and 50% debt a year back, it might have changed to 60:40 now. We took the category average returns of flexi-cap funds and medium and long duration debt funds as proxy for this analysis. Do this calculation for yourself because the exact change will depend on your segmental mix. Compared to around 50% return generated by large-cap funds, returns generated by mid and small-cap funds are around 60% and 80% respectively. You might wonder why you should rebalance now since it is supposed to be an annual exercise. “Usually, asset allocation rebalances are done yearly. However, investors should tweak their asset allocation and bring it back to the original one it if there is major variation to pre-fixed asset allocation due to change in asset returns like now,” says Amol Joshi, Founder, PlanRupee Investment Services. Experts say that a 5% variation from strategic asset allocation— for instance equity portion going up from 50% to 55%—warrants action.Tactical asset allocationThe above-mentioned equity reduction is based on strategic asset allocation – based on age, risk appetite etc. – which you should follow religiously. What about evolved investors who do tactical allocation? Experts say that evolved investors can make variation to their strategic asset allocation based on market situations. For example, the stock market was in doldrums a year back and that warranted increased allocation to equities. But you do not need that anymore. “If you had made additional equity investments due to the market fall earlier, sell them mercilessly now and bring back your asset allocation to strategic asset allocation level,” says Melvin Joseph, Managing Partner, Finvin Financial Planners. Tactical asset allocation should be counter cyclical— increase equity allocation during bear market and reduce during a bull market. So, should you go underweight on equities now? “Given the sharp run up in the markets, investors can reduce any tactical overweight position in equities, and realign their portfolios to their strategic allocation, which is more long-term oriented,” says Unmesh Kulkarni, MD & Senior Advisor, Julius Baer India. Some part of the high valuation in the markets will correct with earnings picking up in due course, and therefore long-term investors can stay invested, and not go underweight on equities, he adds.How to go about itInvestors should use this time to clean their portfolio. “Rebalancing is the best time to get rid of deadwood or tail enders from your portfolio,” says Joshi.Do not ignore the taxation angle. Tax impact will be more for retired people or HNIs because they have to shift money from one asset class to another. Since each of these sales will be a tax incidence, you need to do it with the products which have least tax implications. For instance, avoid selling equity funds which have not completed a year because the gains from there will be treated as short term capital gains and will be taxed at 15%. After a year, these gains will be long term capital gains and be taxed only at 10%. Long term capital gains from equity shares and equity mutual funds are also tax-free up to Rs 1 lakh per annum. Most equity funds charge exit loads till one year and this is another reason why you should avoid selling before a year.Managing taxation is easier for people in the accumulation stage. Instead of selling equity shares or equity funds, they can do the rebalance slowly by directing fresh investment into debt funds.