Tuesday, April 16, 2024

Portfolio Rebalancing | Why is 'rebalancing' essential in every portfolio? | leader

Radhika Bivalkar

Every investor loves a bull run. As the price of any asset increases, its wealth also increases. However, portfolio risk also increases during this period. In that case, he needs to control the risk in the portfolio. A good way to do this is to follow the path of asset allocation. It is necessary to have discipline and at the same time it is important to manage the funds properly. (Portfolio Rebalancing)

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Effect of boom

The effect on an investor in a 'bull run' is that the value of his assets increases rapidly. When an equity fund is bullish, its value increases rapidly. This is good news for investors. Because the value in his portfolio is increased and helps him achieve his goals. At the same time, there is a problem with the investment of values. Because, it is also important to see how long this asset is held.

It is possible to profit by selling the investment to achieve the initial target; But when the value increases, greed arises and the decision to sell it is delayed. Ultimately risk increases, as the portfolio gets stuck in one direction. In such a case, the investor does not get the desired benefit.

Asset allocation through rebalancing

A good way to handle this situation is to have an asset allocation structure in place. Simply put, an asset allocation strategy is about deciding how much to invest in different asset classes in a portfolio. Every person's situation is different and he does asset allocation according to his needs.

Every investor should consider his needs while doing asset allocation. As the values โ€‹โ€‹of different investments diverge over time, the asset allocation automatically changes. During these phases the concerned person needs to do 'rebalancing' and asset allocation as per requirement.

E.g. If equity funds are to hold 60 percent of the portfolio, the bullish fund will go up to 65 percent. In such a case, investors have to take five percent equity exposure and decide to invest elsewhere. The portfolio will be rebalanced to some extent by divesting from high-returning asset classes and investing elsewhere. (Portfolio Rebalancing)

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