Investor Q&A: Should I rebalance even if my funds are in a loss?


We recently updated our list of recommended Mutual Funds for 2019 based on our MF Selection Strategy.

Based on this, we recommended our investors with ongoing SIPs to update their SIPs to the latest recommendations.

We also recommended all investors to use our one-click Portfolio Rebalancing feature to move their existing investments to the new funds (exit load free amount only).

One common concern that some investors initially had was this -

"Currently my Goalwise account is suggesting that I Rebalance Portfolio for my Retirement goal. However, I would be booking a loss of [Rs X] if I go ahead with this transaction.

Is it really advisable to rebalance portfolio by booking a loss?

Shouldn't I wait for the investments to come up and then rebalance?"

Yes, it is advisable to rebalance portfolio even by selling at a loss. (Note however that we advise rebalancing only the exit load free part of the portfolio).

First of all, the current loss is already there whether we rebalance or not.

In due time your existing mutual funds will recover as the stock market recovers.

But if we rebalance then the recovery may be faster, because the new funds are expected to do better than the old funds.

Let's say you invested Rs 100 and currently the value is Rs 90. So during rebalancing the choice you are facing is this - keep Rs 90 invested in the old funds and wait for them to recover or move Rs 90 to new funds and 'recover' better with them.

When we update the list of recommended funds based on the latest data, the sole reason of doing so is that we expect the new funds to perform relatively better than the old funds.

(No one knows the future, but this is what we expect to happen on average because this is what our studies have shown to happen in the past.)

This is true for investors who have profits in the old funds as well as true for investors who have a loss in the old funds.

Hence, Rs 100 in new funds is expected to do somewhat better than Rs 100 in old funds (irrespective of the fact that that Rs 100 was originally Rs 110 or Rs 90).

Holding on to the old investments just because they are below the price at which you bought them originally is not very rational (in fact this is a well documented flaw in investing behaviour known as disposition effect).

These investments may come up in future but in that case, the new funds are expected to come up even more thereby getting you higher returns.

So go ahead and rebalance your portfolios in just a click!