How to Rebalance Asset Allocation

While making investments, one of the most important criteria individuals usually ignore or give the least priority is Asset Allocation & Rebalancing. Research shows that over 91% of the returns being generated by maintaining proper asset allocation. However, this is easy said than done.

Practically investors are driven under various biases & emotions, which act as a hurdle to take corrective action at a later stage. It is also observed that people are left with junk or penny stocks as they exited from performing stocks quite early. The rule says that one must keep booking the profit from the performing asset class and transfer that amount to the underperforming asset class. That doesn't mean averaging on junk stocks and keep on accumulating. Also, this process should be executed over a fixed interval preferably once a year. 

Let's understand with a practical example. 

You intend to invest Rs. 1 lac and created a portfolio comprises 60,000 in equity, 25000 in debt, and 15000 in gold. One year returns on equity, debt & gold are 11%, 6% & 9% respectively. At the end of the year to maintain your current asset allocation, you need to rebalance your portfolio by shifting.......

After a year, you need to shift excess gain from equity to debt & gold funds to rebalance existing asset allocation. The wealth creation formula is that you must focus on your goal & asset allocation and not on the return or market movement. 

Disclaimer: This is not a recommended asset allocation, please check your risk profile & other parameters before taking an investment call. Investment in securities & mutual funds are subject to Market Risk