How to re-balance your Mutual Fund Portfolio

How to Rebalance Your Mutual Fund Portfolio

A mutual fund is a popular investment option through which one can invest in a portfolio of securities such as stocks and debt investments. There are multiple types of mutual funds to cater to your different financial goals and needs. You build a mutual fund portfolio when you invest in different mutual funds such as equity funds, debt funds to achieve your long term and short-term financial goals.

The asset allocation of your mutual fund portfolio is the mix of different assets such as equities and debt. The ideal asset allocation in your mutual fund portfolio will depend on your various parameters such as financial goals, investment horizon and risk tolerance. For instance, your ideal asset allocation of mutual fund portfolio between equity and debt may be 60:40. This means that out of our total investments in mutual funds, 60% of your investment should be invested in equity investments and the rest in debt instruments. 

Rebalancing refers to selling equity investments or buying debt investments, or vice versa, ensuring that the portfolio’s asset allocation matches the ideal asset allocation.

Often, rebalancing is considered a part of a long-term investment strategy. In other words, it is an exercise that needs to be undertaken regularly to fulfil long-term financial goals.

How to Rebalance Your Mutual Fund Portfolio?

Here is how you can start with portfolio rebalancing for your mutual funds:

  • Set Goals for Asset Allocations:

The initial step in the portfolio rebalancing is to set goals for asset allocation. If your stock or bond ratio seems better to you in the current market scenario and you think it will still have better performance in upturn or downturn, go for the same. However, if you do not have any asset allocation strategy, you must focus on having one. You can seek help from an experienced financial planner to help you figure out your ideal asset allocation.

  • Find out About your Current Asset Allocation:

Once you have finalised a strategy for asset allocation, you must find your current asset allocation. Gather all the investment statements you have, and you can calculate to understand the current asset allocation. There are multiple free and paid online tools other than mobile applications that can show the asset allocation breakup of your investments.

  • Create a Portfolio Rebalancing Plan:

If your asset allocation goals and the current portfolio are in line, the task is almost done. However, you might have to make some changes. When you decide upon the funds to be added to your portfolio and the units to be sold or bought, you will find that the process is more about trial and error. You might require revaluating the impact of buying or selling some holdings before making the actual trade. Even though your portfolio doesn’t need to be a replica of the market, you must find out if it is heavily skewed towards some sector or style.

  • Paying Heed to Tax Angle:

Before you rebalance your mutual funds’ portfolio, you must consider the tax impact of your investments. Therefore, if you invest in the equity funds, ensure not selling off the units before a year to avoid paying the short-term capital gains taxes. For non-equity mutual funds, any holdings sold within three years from the purchase are subject to the short-term capital gains tax. The capital gains are added to the income and taxed as per the income slab. In contrast, the holdings sold after three years are subject to long-term capital gains tax of 20% after indexation benefits.

How often should you rebalance the portfolio?

There is no right or wrong answer to this question. A significant life event such as marriage, the birth of a child or death may call for portfolio rebalancing in addition to a regular portfolio check-up.

Ideally, you should review your portfolio every year. You can decide on a fixed date that is easily memorable.  You can look at rebalancing your portfolio if there has been an extreme change in the asset allocation mix.  Moreover, consider the expenses before rebalancing your portfolio.

This blog is purely for educational purposes and not to be treated as personal advice. Mutual fund investments are subject to market risks, Read all scheme-related documents carefully.

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