Commentaries on the Internet abound about how you must have a disciplined approach to savings. And what better way than setting up systematic investment plans (SIPs). But SIPs are only the first step to accumulating wealth. Managing the portfolio is as important. Previously, we discussed about portfolio rebalancing. Here, we discuss why this is key to accumulate wealth.
Protecting gains
Your first step in the investment process is complete when you invest as per your asset allocation decision, say, 60% of annual savings in an equity fund and 40% in a recurring deposit. Then, you must manage your investments through the time horizon for the life goal.
This is relevant when investing in capital-appreciation products. Bank deposits do not need continual monitoring if invested in cumulative and recurring deposits, as they compound interest till maturity.
Crucial Process
The process of managing and adjusting your investment allocation is referred to as portfolio rebalancing. Why is this process important? A dip in the equity market can significantly reduce the gains accumulated over the years. So, you must design a rule to protect these gains. Now, taking out unrealised gains every year will attract taxes, lowering investment’s post-tax returns.
Where to invest
Also, where to invest the gains? Reinvesting in the equity market defeats the very reason you took the gains in the first place. So, you are likely to invest in bank deposits. But that means reducing the expected return on investments; for return on bank deposits are hugely lower than the expected return on equity investments. So, what should you do?
Conclusion
To create a rebalancing rule, you must first assume a realistic expected pre-tax annual return on equity (say 12%). Then, add one percentage point to this expected return to arrive at a threshold level (13%). If the unrealised gains (say 14%) on equity investments is more than the threshold level (13%) in any year, you should sell units equivalent to the difference between the unrealised gain and the expected return (14 less 12%).
This rule maintains the initial investment and the expected pre-tax return in the portfolio and lowers the frequency of taxable events through the threshold level. Note the sale proceeds must be invested in fixed deposits with maturity matching the time horizon of the life goal.
(The author offers training programmes for individuals to manage their personal investments)
Published on October 27, 2025
