Portfolio Rebalancing: Definition, Strategies and Its Importance

Ideally, portfolio rebalancing should be done only when there is an actually need for it due to changing market conditions, change in risk tolerance, underperformance of existing investments, etc. So, instead of following a schedule, rebalancing your portfolio should be based on an actual need for it.

An investment portfolio is bound to undergo multiple ups and downs during the short-term. Downside protection refers to the ability of an investment or investment to control losses when markets witness a downward trend. Typically, reducing equity investment allocation and increasing allocation towards debt instruments like bonds, treasury bills, etc. and gold investments can help improve downside protection of the portfolio.

While many investors only prefer debt investments to achieve short term investment goals, there are quite a few debt instruments that are suitable for the long-term too. Conservative investors or those who have low risk tolerance can choose specific types of debt funds like gilt funds or government-backed schemes like Voluntary Provident Fund (VPF), Public Provident Fund (PPF), etc. to make long-term investments in debt markets.

Portfolio rebalancing can involve increasing allocation towards gold typically when financial markets are in turmoil due to a global crisis like sub-prime crisis, COVID lockdown, etc. In such situations, both equity and debt markets tend to be in turmoil but gold not just holds its value but actually gives higher returns during such period. This way, gold act as a hedge for your investment portfolio against various crisis as well as inflation.

The National Pension System allows investors to diversify their investments across 4 key asset classes – Equities, Corporate Bonds, Government Bonds and Alternative Investments. You can current rebalance your NPS portfolio up to a maximum of 4 times a year.