Markets have corrected six percent from their recent highs. Both the benchmark indices CNX NSE Nifty and S&P BSE Sensex have lost some of their momentum amid concerns over Omicron cases.
To be sure, the market volatility is not what was seen when the Covid-19 outbreak took place in March last year.
Diversification and rupee cost averaging through SIPs are the two risk-management concepts investors are familiar with. SIPs allow investors to buy more mutual fund units when equity prices fall and lesser units when equity prices rise. So, the average cost of buying is kept low.
Re-balancing of portfolio is another tool that investors can use to their advantage, especially when markets swing between extreme highs and lows.
Simply put, you keep bringing your allocation between equity and debt, back to your original allocation when markets go through excesses, on higher or lower side.
So, if the market correction has reduced the share of equity investments in your portfolio, you add to it. Similarly, if market euphoria has increased the share of equity investment beyond your original allocations, you reduce it and increase debt exposure. This approach also ensures that investors are booking profits at regular intervals, and not just passively sticking to a hold-and-sit tight approach.
While major events and its market impact can be the reasons to re-balance your portfolio, you can also choose to review your portfolio at regular intervals, quarterly, semi-annually or annually to decide whether re-balancing is needed.
You can do the re-balancing with other asset classes like gold and international equities as well. If the share of either of the asset classes drop or rise above your original allocations, you can take steps to revert to original allocations.