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Today I will show you how to re-balance your invested portfolio regularly and show you, how you can benefit from this activity. As the common saying “Dont put all your eggs in one basket, put it in different baskets and if one basket fails to generate the required return then the other will save your investments”. This is always true and you need to maintain this throughout your investment tenure.

But how to decide how much % of your investment should be towards equity and debt? Common theory to judge is, consider 100 as your life span and deduct the current age from this, the remaining should be the % of your investment towards equity. For Example, suppose your age is 35 then deduct your age from 100 i,e 100-35=65. So, 65% should be towards Equity and  35% should be towards Debt. As your age progress your equity exposure should decline in same proportion and Debt proportion should increase in same proportion. Also if your investment is for any specific goal then before 3-4 years of that goal, your whole investment should be towards Debt. This move will protect you from equity fluctuations which may be disaster like 2008 recession.

Now how you can benefit from from re-balancing of your portfolio?

Suppose Mr.Ajay is investing Rs.1,000 each in Equity Mutual Fund and Debt Mutual Fund for the tenure of 15 yrs. Aprox Returns from Equity Mutual Fund 15% and Debt 9%. He is re-balancing his portfolio for each 5 years by maintaining 50% in each category.  Then

1) At the end of 5th year his Equity returns will be Rs.87,342 and Debt Rs.75,271. Which he will add and re-balance it to 50:50 in Equity and Debt. Also continue to invest.

2) At the end of 10 year his Equity returns will be Rs.2,51,331 and Debt Rs.2,00,717. Again he will add and re-balance it to 50:50 in Equity and Debt. Also continue to invest.

3) At the end of 15 year his Equity returns will be Rs.5,41,957 and Debt Rs.4,23,037

So, even though his total return without re-balancing  is around 12.40% but this re-balancing will fetch you 12%. Hence in this case you will not notice any such difference.

But you can’t predict always that Equity will give the same expected 15% return for the whole 15 years. Again we will consider Mr.Ajay who is investing Rs.1,000 each in Equity Mutual Fund and Debt Fund for 15 years. But we will not predict Equity returns this time while predicting Debt returns as 9%.

1) Suppose in the first 5 years the Equity gave the expected returns of 15% then at the end of 5th year his Equity returns will be Rs.87,342 and Debt Rs.75,271. Which he will add and re-balance it to 50:50 in Equity and Debt. Also continue to invest.

2) But  in 6th to 10th year Equity market fell considerable and it gave only 8% returns then at the end of 10th year his Equity returns will be Rs.1,93,209 and Debt returns will be Rs.2,00,717 which he will add and re-balance it to 50:50 in Equity and Debt. Also continue to invest.

3) From 11th to 15th year suppose Equity market again fell and it gave only 7% returns then at the end of 15th year his Equity returns will be Rs.3,47,849 and Debt Rs.3,78,323.

At end if you calculate his total returns then it will be work out around 8.79% which is more than average last 10 years return of Equity (8% 6-10 yr and 7% 11-15 yr, hence average will be (8+7)/2 is 7.50%)

Hence by re-balancing activity you preserved your money and got higher returns than what Equity gave during that turbulent last 10 yrs of Mr.Ajay’s investment.

But is it possible to follow this re-balancing activity yourself? If you have time and little bit of knowledge then you can do it yourself. Else better to take help of any Certified Financial Planners.

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