Portfolio Rebalancing Calculator

Many of you may be using the term portfolio rebalancing interchangeably with portfolio reviewing. While that is not entirely wrong, it’s better to understand the difference between the two. Rebalancing is essentially re-aligning the asset allocation weights in your portfolio to bring them back to your original level or the desired level you fixed. For example, if you started out with a 60:40 portfolio of equity and debt and it becomes 70:30, then selling equity and redeploying in debt to bring it back to 60:40 is called rebalancing.  

What is portfolio rebalancing?

Rebalancing seeks to reduce massive swings (falls) in your portfolio. It works by checking and correcting deviations in current asset allocation compared to the intended allocation, to prevent a single asset class from having too great an influence on your portfolio. Portfolio rebalancing can help book profits and redeploy in the under-valued asset class. Checking your portfolio on whether it needs rebalancing can be an annual affair. 

How rebalancing works

In portfolio rebalancing, you consider the current asset allocation of your portfolio between equity, debt & gold (if using). You then compare it to the original or your intended asset allocation. If the deviation between current and original is high, you need to bring the asset allocation back in line. This will involve making the necessary changes in the mutual funds you hold to alter the asset allocation.

At its core, portfolio rebalancing will involve reducing the asset class that has gone up and increasing the asset class that has reduced. In this manner, it helps booking profits when profits are strong and redeploying in under-valued assets. This is because, for the share of an asset class in your portfolio to move much higher than you first invested means that the asset class has rallied well. So, in order to reduce the allocation you will wind up taking some profits off the table.

Keep a thumb rule of at least 5 percentage points deviation in any asset class to start the act of portfolio rebalancing. There is nothing very scientific about this cut-off. Generally speaking, setting this level as a starting point to check for rebalancing calculator would mean that your portfolio would actually have some inflation in an asset class and therefore hint that it is overvalued.

Why is portfolio rebalancing important?

Rebalance seeks to do the following:

• One, it can help ensure that you keep your portfolio asset allocation in line with what you need. Thereby, it keeps your portfolio risk even
• Second, it helps to be periodically booking profits in an inflated asset (overvalued asset class) and redeploying in a deflated one (undervalued one). Indirectly, you will be selling high and buying low, without having to watch the market level every time.
• Third, it can help prevent a single asset class from taking over your portfolio.

The portfolio rebalance calculator can act as a guide in telling you how much to sell and reinvest in order to keep your portfolio in line. Use this rebalance calculator along with our tools and recommendations to manage your portfolio easily.

How Can You Rebalance Your Portfolio?

Our portfolio rebalancing calculator will help you arrive at the changes you need to make to your current portfolio for rebalancing. To use this portfolio rebalancing calculator, you need to give the following inputs:

• Your current investments in equity, debt, and gold (if using). You can enter this in value terms.
• Your desired asset allocation: This is the split between equity, debt and gold that you would like to have in your portfolio to keep your risk within line.
• Fresh investments: Rebalancing can be done either by investing afresh in the lower-share asset class or by redeeming and reinvesting from your mutual funds so that you reduce one asset class and increase the other. If you wish to make fresh investments and minimise redemptions, enter the amount you wish to invest.
• Rebalance threshold: Minor deviations in asset allocation do not call for portfolio rebalancing. Only once the deviation moves above a cut-off do you need to rebalance. The portfolio rebalancing calculator lets to enter this cut-off or threshold for rebalancing.

After taking into account the inputs above, the output of the portfolio rebalancing calculator will tell you how much you need to invest or redeem from equity, debt and gold asset classes. You can use the following pointers to rebalance your portfolio.

• Use the MF Review tool or the Portfolio Review Pro to take a decision on where to invest or redeem your mutual funds. Those with a sell call can be used to exit or reduced first, followed by mutual funds with a hold call.
• You can also use the Portfolio Review Pro to see if there are category-risk level changes that you may need to make especially in equity mutual funds – such as too much exposure to high-risk fund categories. You can accordingly reduce by redeeming from these high risk categories, if required.
• When equity is inflated, booking some profits and keeping it in liquid funds can be useful when the next correction in equity unfolds.
• When you are increasing exposure to an existing fund due to portfolio rebalancing, ensure that this fund’s share in your portfolio is not more than 20-25% for equity funds (except index funds) and within 10%-20% for debt funds. If it is higher, add a new fund. Note that these guidelines are subject to individual limits you may set in place already.

You can get more pointers and understanding of how to use portfolio rebalancing calculator in this detailed article.

Rebalanced portfolio vs non-rebalanced portfolio

Portfolio rebalancing seeks to take money out of one asset class and invest this in another. As a side-effect, it will also curtail some amount of growth in a prolonged rallying market. Rebalancing has a larger role to play in portfolios with goals less than 10 years as over shorter periods, there isn’t much time to recover from corrections in an asset class or participate in any rally triggered by under-valued asset class. However, over very long periods, there is a higher chance that your portfolio reacts less to market swings.

The rebalancing calculator also requires you to enter a minimum cutoff to trigger portfolio rebalancing. A very low deviation does not require any action. A rebalanced portfolio, when the asset allocation has deviated significantly, can help contain losses in steep falls as well as participate in low-priced asset opportunities.