Rebalancing

What is Rebalancing Meaning?

Rebalancing refers to the process through which an investor restores their Portfolio to the target allocation set. This process helps you achieve redirecting your portfolio to the desired Asset Allocation level. The term ‘rebalancing’ refers to an equal distribution of assets. This is an extremely important part of the portfolio management process.

This helps you safeguard against being exposed to risks that may wreak havoc. It also helps your portfolio exposure stay within the investors’ expertise area. These measures are usually opted for when the investor feels that the amount of risk is per his desire.

The need for portfolio rebalancing is to maintain risk control. It also helps your portfolio to not depend only on a particular Asset Class, investment or fund type.

For example, Raj has the original target asset allocation at 50% stocks and 50% Bonds. If his stocks do well during a time period, the stock weightage would increase to 70%. Raj can now decide to sell the 20% of stocks to rebalance his portfolio to the original target allocation.

Portfolio Rebalancing Strategies

1. Percentage-of-Portfolio Rebalancing

This strategy is quite preferred among investors. It is an intensive approach involving a rebalancing schedule that is focused on the allowable percentage composition of an asset in a portfolio. Asset classes or individual security has a target weight and corresponding tolerance Range.

2. Calendar Rebalancing

This strategy is to analyse investment holdings in a portfolio at time intervals that are determined from before. It involves adjusting to original allocation at a frequency of desire. Assessments that are conducted monthly or quarterly are preferred among investors as rebalancing weekly would be more expensive. Moreover, a yearly assessment would Call for a portfolio drift.

One of the major advantages of this type of rebalancing over formulaic rebalancing is that it takes less time while the other is a constant process.

3. Constant- Proportion Portfolio Insurance (CPPI)

This approach assumes that an investor’s wealth rise also causes risks to rise. The technique has a preference for minimum safety reserve held in cash or risk-free government bonds. When the value of the portfolio rises, funds are invested in equities whereas a decrease would result in a smaller position with risky assets.

Stock Investments – M* (T A - F)

• M= Investment Multiplier (More Risk = Higher M)

• TA= Total Portfolio Assets

• F= Floor Allowed

  Ready to Invest?
  Talk to our investment specialist

  Disclaimer:
  By submitting this form I authorize Fincash.com to call/SMS/email me about its products and I accept the terms of Privacy Policy and Terms & Conditions.Processing...Get Started

4. Threshold Rebalancing

This technique is valued in a diversified portfolio. With this, you can set asset allocation boundaries and then rebalance as they are breached. This is opposite to automatic rebalancing your portfolio on an already decided date.

Benefits of Rebalancing

Mentioned below are the benefits of rebalancing:

• Helps you balance risk and reward
• Helps you get disciplined with your Portfolio
• Gives you a good reason to review your portfolio from time to time
• Keeps you focused on your Financial plan