Mutual Fund Portfolio – Why and When to Rebalance

Many times when we start to invest, we start building our investment portfolio, which is diversified and asset-allocated. You might have already chosen the best mutual funds to invest in but the asset allocation needs to be based on the goal’s timeline and the risk you are willing to take. But most of the investors do not review their portfolio after making their investments. This can at times leave them with losses. Let us understand how.

When the markets are volatile and proportion of asset allocation too needs to change. If you have invested in equity mutual funds, you can earn good returns when the markets go up but you can as well lose it all when there is a downfall. This is when investors need to rebalance their portfolio to bring it back to a stable position.

What is a mutual fund portfolio rebalancing?

Most of us invest in various kinds of mutual fund schemes. But it is also important to review the same from time to time. In simpler terms, a portfolio rebalancing is a process where the investor’s portfolio is brought back to its "original asset allocation". In a mutual fund portfolio, the proportion of debt funds and equity mutual funds is determined based on the factors like risk appetite and time frame. With time, one asset class can move more when compared to another and this can diverge the portfolio from the original. This, in turn, affects the returns and the risk associated with the portfolio.

Why do we need to rebalance?

As mentioned earlier, there are two major reasons as to why portfolio rebalancing is important. Firstly, it helps to keep a tab on the risk factors. For example, you might have a portfolio that is 40% invested in debt and the rest 60% in equity. This can be an ideal percentage based on your risk appetite and the time. In such a case, if the equity component gets increased to 65%, you are taking more risk than intended. So, restoring the portfolio back to its original 60:40 ratio helps to keep the risk within limits.

Secondly, investors can take good advantage of the rising asset class and can invest in a fund that has a cheaper value. This way you can even avoid timing the market. For example, when the equity component has seen a high rise when compared to debt and this means that the stock markets have gained well. If you rebalance your portfolio in such a situation, you earn profits from the asset class due to the rally.

So, it is important to focus on the investment portfolio and rebalance it when the time is right. This way you can be assured of booking good profits.

When is the right time to rebalance?

Rebalancing your mutual fund portfolio gets easy when you invest with the best direct mutual fund platform that can provide you with a number of online tools to assess your investments. One of the best and the easiest ways to rebalance your mutual fund portfolio is to review the asset allocation from time to time. When you find that the asset allocation is diverging by a set percentage, you can go ahead and rebalance the portfolio. If you are investing with a reliable online mutual fund investment platform, you can as well take an advice from the fund manager.

So, if you haven’t yet rebalanced your mutual fund portfolio, review and rebalance it when it calls for.

Vivaan Ahuja is a leading mutual fund and financial advisor, who provides guidance about buying mutual funds. He has been guiding individual Investors, Hnis and Corporate houses to increase their profitability by suggesting best funds.