The start of a new financial year presents a golden opportunity for investors to reassess their investment portfolio and make strategic adjustments by revisiting their asset allocation and risk management strategies. Portfolio rebalancing is not merely a routine exercise, but a strategic imperative for investors seeking to optimise their investment returns and mitigate risk.
At its core, rebalancing involves adjusting the composition of one’s investment portfolio to maintain the desired asset allocation mix that one started with. However, if risk profile, goals or major life events have happened, then rebalancing the portfolio anyway becomes unavoidable.
In addition to rebalancing, conducting a periodic review of one’s investment portfolio is essential for maintaining financial health and achieving long-term investment objectives.
Here’s why this should be your first task in Financial Year 2024-25.
Investing in the US markets offers compelling advantages that enhance your financial portfolio:
1️⃣ Reflecting on Past Performance: First, reflect on past performance. Take a look at your investment journey over the previous year. Celebrate successes, learn from mistakes, and use these insights to inform your decisions moving forward.
In the past financial year, certain sectors/themes such as PSUs, Automobiles, Capital Goods, Telecom and, Pharmaceuticals performed very well while Financials, Consumer Stocks, Commodities, etc, underperformed.
Therefore, it may be prudent to book profits from some of these sectors which have got a disproportionate allocation in the portfolio now and reallocate funds to sectors like financials as a tactical move in the portfolio.
On the debt side, the past years have not been particularly favourable, but with the expectation of a reversal in the interest rate cycle, debt mutual funds, especially long-duration funds, may reward investors in times to come.
2️⃣ Fresh Start: The new financial year provides a clean slate to evaluate your portfolio’s performance over the past year. This allows you to identify any asset classes that have outperformed or underperformed relative to your expectations.
The overall outlook for 2024 for equities in general still looks strong, with easing bond yields, a stabilising China, peaking inflation, and possibly a weaker US dollar.
However, the sharp market rise in the recent past may mean short, sharp corrections which can sometimes extend to longer downs too. If your important goals are likely to figure in the short term, equity to bond shift for that much amount is definitely recommended.
3️⃣ Setting Sail With Clear Objectives: As you embark on the voyage of the new financial year, it’s crucial to set clear objectives and chart a course for success. Whether your goal is to grow your wealth, preserve capital, or achieve financial independence, clarity of purpose will guide your investment decisions and keep you on track.
4️⃣ Preserving Asset Allocation: Over time, market fluctuations can skew the proportion of assets in your portfolio. Rebalancing enables investors to realign their investments according to their desired asset allocation, ensuring that their risk exposure remains within acceptable limits.
For example, during equity market rallies, as in the last financial year, the overall weight of equities in a portfolio can increase, exceeding the exposure assigned by the asset allocation strategy. So, an initial allocation of 50 percent each of equity and debt could have got changed to 60 percent equity and 40 percent debt due to the market rally, substantially increasing the portfolio’s risk profile. Therefore, during rebalancing, the investor should consider shifting some equity investments to debt to bring the equity allocation back to 50 percent.
Evaluate performance as well. Seize opportunities where they exist, and capitalise on undervalued assets or emerging market trends.
5️⃣ Managing Risk: Diversification is the cornerstone of sound investment practice. By rebalancing regularly, investors can mitigate the risk associated with over-exposure to any single asset class or security, thereby safeguarding their portfolios against market volatility.
Think of your investments like different flavours of ice cream. Some, like government Treasury Bills (T-bills), are vanilla – safe and predictable. Others, like stocks, are more adventurous flavours, exciting but with risks. So, before you scoop up your portfolio, know your goals, timelines, and risks involved. Just like picking up the right ice cream, a portfolio review is all about finding the balance that satisfies your flavour cravings without the stomachache. In the same vein, though Gold may have chalked up a good performance last financial year, it should not be chucked out, or if is not already there, it can be included for acting as a risk-diversifier, or ‘a hedge’ since the geopolitical and economic reasons which prompted its unprecedented rise are very much around still.
6️⃣ Goal Alignment: Your financial goals might evolve over time. Perhaps you’re nearing retirement, or you have a child’s upcoming education to plan for. The new year is a good time to revisit your financial goals and ensure your portfolio allocation aligns with them. If your risk tolerance has changed, you may need to adjust your asset allocation accordingly. Let’s say you’re a thrill-seeking solo adventurer with a high-risk tolerance. You invest heavily in stocks, picturing yourself scaling Mt Everest with your retirement nest egg. But then the grandchildren enter the scene! Suddenly, funding their dream college education becomes a high priority two years later. You rebalance your portfolio, rappelling down the stock mountain a bit and setting up a secure camp in bonds to ensure a smoother trek towards their future. This keeps your investments aligned with your evolving life goals.
7️⃣ Adapting to changing market conditions: The financial landscape is dynamic, characterised by evolving market trends and economic uncertainties. Rebalancing allows investors to adjust their portfolios in response to changing market conditions, positioning themselves to capitalise on emerging opportunities while minimising downside risks.
8️⃣ Tax Considerations: Tax rules can change every year, and the new financial year brings updated tax regulations. Reviewing your portfolio in light of these changes can help you reduce your tax liabilities.
For instance, there could be tax benefits associated with rebalancing your portfolio to align with updated tax-advantaged investment options. Recall how suddenly the equity and later debt taxations were changed which necessitated changing some categories of mutual funds in one’s portfolio.
Same way, the new tax regime becoming a default regime also meant that staple and recurring yearly investments in tax saving schemes were not required anymore.
Last, but the most important of them all: Be a disciplined investor.
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