POSTED BY January 3, 2014 5:40 pm COMMENTS (8)

ONHi All

I am currently holding a 3 mutual funds 1 debt and 2 equity funds as part of my portfolio for my kids education (long term goal of 18 years). My plan of debt to equity ration for next 5 years is 25% debt 75% in equity. However current ration is 48%:52%. Can you suggest what is the strategy to rebalanced the portfolio?

When I calculate I have to move around 42K from Debt to Equity funds.

Do you think its wise to do it at once or its better to do it in 6 transactions over next 6 months time?

Thanks

Sibin

Do we include PPF/EPF in debt assets ? If we do then my debt allocation goes to 50% (I want around 25-20%). The reason being that you get additional tax savings on these instruments so can’t ignore them.

So my question is: Does it make sense to rebalance at the cost of less PPF investment (EPF is fixed) and don’t leverage all the Tax benefits ?

Dear Sibin, your Eq. part related Tax liability ‘ll always be lower or near zero (15.45% for STCg and zero for LTCG) but in case of Debt part of portfolio, the tax may take a huge toll if you are in higher tax slab and STCGs are there due to market conditions.

Please think over it with an open mind.

Thanks

Ashal

Dear Sibin, who ‘ll pay the tax on rebalancing after every 6 months.

Thanks

Ashal

Hi Ashal,

Thanks for pointing this out. I am aware of the tax implication that may arise due to rebalancing. The current rebalancing that I have mentioned in my original question will be done anyways. I will pay the tax for that, no issues.

From next half year onwards I will rebalance the portfolio only if the debt to equity ratio is huge.

If the ratio change is not big enough I will only adjust the monthly contribution to debt or equity fund to make up the change, this way I will be able to possible redemption from these funds

Thanks

Sibin

irst you need to see how much part of your total portfolio is this equity and debt part ? If you have huge money in real estate or some other thing, then the impact of this whole portfolio rebalancing might not make much difference to overall scenario .

Now next point I want to make is that to not get attached to the exact ratio . If even if your debt : equity ratio gets to 35:65 or 30:70 , be ok with it and do not over try to fit the whole ratio in your calculations.

Rest , regarding the balancing part, you just need to transfer money from debt to equity . I not commenting on the exact procedure for it

Manish

Thank Manish.

At this point my real estate investment is 0.

I understood the concept of +/- 5%. I have read it from the blog and your book. Currenly the ratio is 48:52 which I suppose to be rebalanced to 25:75.

I have intiated STP as suggested by Srikanth to rebalance the portfolio in next 6 months. Once that is done I will be planning to only review and rebalance (if required) by every 6 months

Thanks

Sibin

Sibin,

Portfolio rebalancing can be tricky at times when there are more than two asset classes. In your case, it appears to be pretty simple.

Suppose your current portfolio value is Rs 1 lakh, you simply need to move Rs 23K from debt to equity to achieve your target ratio.

Since you are moving from debt to equity, yes, as you suggest, it would be better to do it using an STP process over the next six months.

Hope this helps,

Srikanth

FundsIndia.com

Thank you Srikanth