After Market Correction: Importance of Asset Allocation and Portfolio Rebalancing

Market Correction and the Need for Portfolio Review

In the wake of a market correction, the focus often shifts to which mutual funds to invest in or which ones performed poorly. However, experts suggest that a far more critical question involves asset allocation. With the Sensex down approximately 9.4 percent this year, examining how portfolios are spread across different asset classes is essential.

Importance of Asset Allocation

According to industry leaders, over 90 percent of portfolio returns depend on asset allocation. Diverse exposure beyond equities, such as debt and commodities, has proven beneficial against market fluctuations. A mere chase for top mutual funds can lead to unproductive outcomes.

Rebalance for Stability

• Rebalancing is often more valuable than adding new funds.
• Avoid panic selling or halting investments during market downturns; rebalancing maintains a healthy portfolio.

Review Your Contributions

When markets plunge, a simultaneous change in income may warrant a reassessment of your contribution size. Static SIPs can lag behind rising income unless adjusted upwards. According to experts, an annual increase of 5-10 percent in SIPs is crucial for combating inflation.

Track Your Portfolio

Even in market dips, it's vital to review your portfolio. Track how investments react during volatile periods and ensure they align with your original asset allocation plan. Minor deviations from your target asset classes should prompt rebalancing to maintain the intended risk profile.

Conclusion

Post-correction, avoid hasty fund switches. Focus first on verifying if your asset allocation aligns with your strategy, rebalance accordingly, and then reassess contributions to secure long-term growth.