Portfolio Rebalancing: Why Is It Important Before The Financial Year Ends?

March 31 is just a few days away. This is the ideal time for you to take a look at your investment portfolios and make adjustments, if necessary before the end of the current financial year. By rebalancing, you can make sure that your asset allocation stays in line with your financial goals and risk appetite. This, in turn, will help you maximise returns from your investments.

Over time, market fluctuations can cause certain investments in your portfolio to grow while others shrink. This can lead to an imbalance, either increasing your exposure to risk or reducing your potential returns. Rebalancing allows you to take a moment and understand your portfolio standings. 

Rebalancing involves adjusting your investments to bring them back in line with your original asset allocation and financial goals. By doing so, you ensure that no single asset class dominates your portfolio. This helps manage risk and maintain steady growth. It also allows you to take advantage of new opportunities while staying committed to your long-term investment strategy.

You need to consider a few things before rebalancing your portfolio. First, check if your portfolio has drifted significantly from its original asset allocation. Evaluate if your current investments still align with your risk tolerance and long-term financial goals. Also, determine if your portfolio needs minor tweaks or a complete overhaul to stay in line with your goals.

Ways To Rebalance Portfolio

• Set a rebalancing threshold: Establish a percentage range (for example, 5%) for each asset class. If an asset’s weight deviates beyond this range, rebalance accordingly.

• Allocate fresh investments wisely: If you are adding new funds, direct them towards underweighted asset classes instead of selling existing investments.

• Sell overweighted assets: If an asset class has grown beyond your desired allocation, sell a portion and redistribute the proceeds to other assets.

• Evaluate portfolio: Compare your current asset allocation with your target allocation.

• Identify imbalances: Determine which assets are overweighted or underweighted.

• Sell excess holdings: Reduce exposure to asset classes that have exceeded your desired allocation.

• Buy undervalued assets: Use the proceeds to invest in asset classes that have fallen below their target allocation.

• Add fresh investments: If you are adding new funds, allocate them in a way that brings the portfolio back into balance.

Long-term perspective: Short-term market fluctuations should not dictate your investment decisions.

Avoid frequent checks: Checking your investments too frequently can lead to impulsive choices.

Stick to an investment plan: Create an investment policy and stick to it to avoid emotional decision-making.

Consider tax implications: Selling assets may lead to capital gains tax. Tax-loss harvesting can help offset taxable gains.

With March 31 fast approaching, rebalancing your investment portfolio is important for maintaining a well-structured financial strategy. Reviewing your asset allocation, making adjustments and staying aligned with your long-term goals can help maximise returns and manage risks effectively.