Wealth special: NAVs in red? Here's what to do next

What is the key to a healthy life? Apart from a good sleep and exercise plan, it is a balanced diet that keeps us fit.

So, if you are more of a ‘rice eating’ person, you can ‘rebalance’ your diet by including a fair share of rotis and subzis. This way, you gain more nutrition and can maintain your weight too! In short, it is a win-win situation.

Just like your diet, even your investments do well with a balancing act. This ensures that your portfolio is on the right track, irrespective of the changing market scenario.

What is portfolio rebalancing?

When you build an investment portfolio, you define a clear-cut proportion of equity and debt in it. This is known as asset allocation. The proportion of equity and debt that you include is based on your investment objectives, time horizon and risk appetite.

For instance, say you have an investible surplus of Rs 10 lakh, which you divide in an equity-to-debt ratio of 60:40. Accordingly, you invest about Rs 6 lakh in equity funds and Rs 4 lakh in debt funds.

Suppose after a year, your equity funds have appreciated by 30 per cent and debt funds by 7 per cent. Thus, the value of your equity funds will be about Rs 7.8 lakh and debt will be around Rs 4.3 lakh. In other words, your equity-debt ratio now stands as 65:35. This means your portfolio has got a little more skewed towards equity and you can bring it back to your original level with portfolio rebalancing.

You can do this by selling equity funds worth about Rs 0.55 lakh and invest the money in debt.

Alternatively, say after one year, your equity portfolio has depreciated by 30 per cent and debt has increased by 7 per cent. Thus, you would have Rs 4.2 lakh in equity and about Rs 4.3 lakh in debt, that is, an equity-debt ratio of about 50:50. This means that your asset allocation has become more defensive and you need to rectify it. You can do this by selling debt worth about Rs 0.89 lakh and investing in equity to restore the 60:40 ratio.

This, in a nutshell, is portfolio rebalancing.

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How to rebalance when markets are falling?

In today's context, when the markets are crashing, portfolio rebalancing suggests we buy equity funds.

This, of course, requires conviction in the growth potential of the Indian economy. It is true that factors such as high crude oil prices, high inflation, political uncertainty, US recession, sub-prime crisis and so on, will affect economic growth.

But does it mean that India will never bounce back? Will India not see a 9 per cent plus growth rate again? Will inflation remain double digit/near double digit for a long time to come? We have seen many a crisis in the past and come out stronger. So, why not this time?

What funds to buy?

You can consider including large-cap funds in your portfolio. Large companies have a better capability to survive a downturn. Mid-cap and small companies may not have that kind of staying power and resilience.

Therefore, when the markets bounce back, large caps would probably be the first off the block. Later, as and when the economy gains momentum, mid-cap funds could be added.

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