As we begin the new financial year, wealth managers believe investors should evaluate their mutual fund portfolio to see if it is in line with risk profile and rebalance such portfolios where there is a need.
WHAT DO YOU MEAN BY REBALANCING MUTUAL FUND PORTFOLIOS?
Various asset classes move in different directions over a period of time. Due to this, asset allocation of an individual changes over a time. For example, due to a sharp rally in the price of gold by 35% in the last one year, investor allocation to gold would have increased. However, with the Nifty 50 moving up just 6-7% it could have lowered the overall allocation to equity in the portfolio. So you need to rebalance it to bring it back in line with the original. So an investor starting with 65% equity, 25% debt and 10% gold, needs to bring back this allocation at the end of the year, which is called rebalancing.
WHY IS IT IMPORTANT TO REBALANCE MF PORTFOLIOS?
Investors need to rebalance their portfolio to manage risk. For example, a low-risk investor may need 40% equity in his portfolio. But due to a rise in the stock markets, if the proportion increases to 60%, the investor is taking more risk than he intended to. Hence, restoring the original allocation will keep the risk within his tolerance limit. Rebalancing also helps one to book profits in a rising asset class and invest in another which has not risen.
WHEN SHOULD ONE REBALANCE MUTUAL FUND PORTFOLIOS?
Financial planners suggest investors should rebalance their portfolios annually, which could be at the start of the financial year or whenever there is a sharp movement in a particular asset class. For example, if the markets are up 50% in six months, it may be time to revisit your portfolio. So, if your equity allocation was 40% and the current allocation crosses 35% or 45%, it is time to rebalance your portfolio
HOW SHOULD YOU REBALANCE?
You can redeem mutual fund units from an asset class which has grown more and add that to the asset class whose proportion fell. For example, one can redeem some money from gold funds due to its rise and move that to equity or debt depending on the portfolio. If you are overweight small-caps and your risk profile changes which does not need these kinds of funds, you could move that money to large-caps and so on. Alternatively, if you are adding fresh money, you could consider adding to the asset class which has lagged and not in your original allocation. This will increase the value of this asset class and restore its original allocation.
WHAT DO YOU MEAN BY REBALANCING MUTUAL FUND PORTFOLIOS?
Various asset classes move in different directions over a period of time. Due to this, asset allocation of an individual changes over a time. For example, due to a sharp rally in the price of gold by 35% in the last one year, investor allocation to gold would have increased. However, with the Nifty 50 moving up just 6-7% it could have lowered the overall allocation to equity in the portfolio. So you need to rebalance it to bring it back in line with the original. So an investor starting with 65% equity, 25% debt and 10% gold, needs to bring back this allocation at the end of the year, which is called rebalancing.
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Investors need to rebalance their portfolio to manage risk. For example, a low-risk investor may need 40% equity in his portfolio. But due to a rise in the stock markets, if the proportion increases to 60%, the investor is taking more risk than he intended to. Hence, restoring the original allocation will keep the risk within his tolerance limit. Rebalancing also helps one to book profits in a rising asset class and invest in another which has not risen.
WHEN SHOULD ONE REBALANCE MUTUAL FUND PORTFOLIOS?
Financial planners suggest investors should rebalance their portfolios annually, which could be at the start of the financial year or whenever there is a sharp movement in a particular asset class. For example, if the markets are up 50% in six months, it may be time to revisit your portfolio. So, if your equity allocation was 40% and the current allocation crosses 35% or 45%, it is time to rebalance your portfolio
HOW SHOULD YOU REBALANCE?
You can redeem mutual fund units from an asset class which has grown more and add that to the asset class whose proportion fell. For example, one can redeem some money from gold funds due to its rise and move that to equity or debt depending on the portfolio. If you are overweight small-caps and your risk profile changes which does not need these kinds of funds, you could move that money to large-caps and so on. Alternatively, if you are adding fresh money, you could consider adding to the asset class which has lagged and not in your original allocation. This will increase the value of this asset class and restore its original allocation.
