Portfolio rebalancing: What is it? Is it time to reassess your investments in the new financial year?

Building wealth needs a well planned investment strategy over a period of time. You can plan long-term and short-term investments depending on your financial goals. What is challenging for most of the investors is that many people put their money in different savings instruments and forget it. For prudent financial planning, only investing in multiple savings instruments or asset classes is not enough. Your investment portfolio needs regular reassessment due to several factors.

As the new financial year (FY25) has started several changes in rules have come into effect which could affect your investments. Apart from regulatory changes, multiple factors, from macroeconomic indicators to geo-political conditions, can also affect the performance of investment instruments in your portfolio.

It’s advisable to take a relook at your investment portfolio and make necessary adjustments to get the best from emerging opportunities. You can also reduce allocations to some investment instruments which could potentially give low returns in the new financial year.

Asset allocation is the core to your wealth accumulation journey, as it determines the size of your corpus and the returns each asset class you have in your portfolio can provide over time. There comes a phase when you need to reassess your investments and see if they are performing as per your financial goals.

All you need is a careful portfolio rebalancing to align with your investment plans.

What is portfolio rebalancing?

As diverse financial instruments perform differently over a period of time, the returns on the instruments in your portfolio keep changing. There, you may feel the need for portfolio rebalancing. It is basically reassessing your financial goals and making changes in the portfolio to reach the planned target.

Let's say you are in your 20s and have a portfolio comprising PPF, FDs, NPS, stocks, mutual funds and gold. These assets vary in nature, as some of them are linked to the stock market, where returns normally fluctuate but give better results. In the early stages of your career, you can afford to remain invested mostly in equities, as they give you better returns over FDs and other non-riskier assets. However, as you grow older and your risk-taking ability diminishes, you will need to reassess your investments and lean more towards safer ways of investing.

Here are three main reasons why you should reassess your portfolio from time to time.

Changing financial goals and circumstances

When you start your financial journey, your priorities are different and you make your investment decisions based on present circumstances. In the beginning, you set your financial goals based on your current income levels and rough estimates of your future expenses. However, as you progress in life, you gain a clearer picture of the investments and savings needed to meet future requirements.

Market dynamics

Financial markets face volatility from time to time. By reassessing your portfolio, you can make adjustments in the changing market conditions. Reassessing helps you tackle market uncertainties and events like shifts in interest rates, economic trends, geopolitical events, etc. You get prepared to optimise your investment strategy and mitigate risks.

Risk management

As the saying goes, the greater the risk, the better the rewards. This basically applies to investment as well. As your investment horizon keeps changing, so does your risk tolerance. You can adjust the balance between risk and return by reassessing your portfolio. Rebalancing ensures that your investments are aligned with your current income level and long-term financial objectives.

Key factors to consider while evaluating your portfolio

A thorough research about the market and the investment instruments in your portfolio could help you to take an informed decision while reassessing your investments. You can carefully analyse the performance of some asset classes in the previous financial year. Also, this can help you to get an idea about new investment opportunities to put your money and the emerging asset classes with potential growth.

An analysis at the split of equity, debt, gold and other instruments is essential to do a readjustment in asset classes with changing scenario. You can increase or decrease your allocation of total savings for a particular asset class depending on the growth prospects or rate of returns.

The key to success of your investment journey is to understand that portfolio rebalancing is not just a routine exercise, but it needs a careful strategic readjustment.

To sum up

At the start of the new financial year portfolio rebalancing may help you to explore emerging opportunities and mitigate risk. The important aspect is not to take a hasty decision and make adjustments to your investment with desired asset allocation and a diversification of the portfolio.