Should you re-balance your portfolio now?

Asset allocation, that is, allocating money to different asset classes like equity, debt and gold etc, plays a key role in determining how close you will get to achieving your investment goals after the completion of your defined time horizon. Considering that long-term investment goals require you to focus on beating inflation and short-term ones on safety of capital, each of these asset classes have a role to play in your portfolio.

Investing for long-term goals is always challenging as the key is to invest in an asset mix that has the potential to generate positive real rate of returns, that is, gross returns minus taxation and inflation. Amongst the financial asset classes, equity has the potential to do so provided you stay committed to your time horizon and follow a disciplined approach.

It is equally important to build a balanced portfolio in terms of exposure to different segments of the stock market, that is, large, mid and small cap. In reality, however, many investors make the mistake of chasing short term performance in a rising market and thus end up having a very high exposure to mid-and-small-cap funds. Although these funds have the potential to improve overall portfolio returns, it is important to own them in the right proportion and understand the attendant risks. As a thumb rule, the combined exposure to these two segments should be around 40% of your equity portfolio.

A current market like situation, wherein mid-and-small-cap stocks have witnessed a deep correction, can be quite worrisome for investors. If your portfolio has a bias towards funds investing in these two segments, it would be prudent to have a relook at it to analyse the need to rebalance it. While the general perception is that portfolio rebalancing needs to be done only between the asset classes, in reality, it is equally important to rebalance the portfolio in terms of exposure to different segments of the market too. The corrective action will depend upon the reason for investing in these funds.

If you have been investing in mid-and small-cap funds as a part of your investment plan and in a disciplined way, you need not worry about the current volatility. In fact, investments made during these periods will get you more units and thereby reduce your average cost. As and when these segments start performing again, you will benefit the most.

However, if you chose to invest in them solely on the basis of their performance, you will do well to ascertain the need to rebalance the portfolio. The key to rebalancing process would be to figure out the right level of exposure to these two segments individually and deciding which funds to retain in the portfolio.

Considering that major differentiation between these funds is the stock picking ability of the fund managers, the quality of the portfolio should get its due. Besides, the recent standardisation and categorisation will make it easier for you to identify funds with a clear mandate. While SEBI has defined investment universe of mid-cap funds to be 101st -250th company in terms of full market cap, small cap funds can invest in 251st company onwards.

It is also important to consider longer term performance of funds as it evens out the impact of volatility on the portfolio. It also takes care of advantages and disadvantages of a particular investment philosophy or a strategy. Don't make the mistake of comparing the performance of mid-and small-cap funds with their large and multi-cap counterparts in the portfolio. In the current scenario, it will disappoint you even more. You must know that funds investing in different segments of the stock market behave differently when the market does well as well as when it spirals down.

The writer is CEO, Wiseinvest Advisors