How to Rebalance Your Mutual Fund Portfolio

Rebalancing your mutual fund portfolio is a critical yet often overlooked aspect of wealth management. It involves adjusting your portfolio's asset allocation to align with your original investment strategy and financial goals. Over time, market fluctuations and varying asset performances can cause your portfolio to deviate from its intended allocation, exposing you to unintended risks. Here’s a step-by-step guide on how to effectively rebalance your mutual fund portfolio.

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Why Rebalancing is Important

1.?? Maintains Asset Allocation: If your portfolio's equity allocation rises during a market rally, it may increase risk exposure beyond your tolerance. Rebalancing restores the balance.

2.?? Reduces Risk: Rebalancing helps ensure that your portfolio remains aligned with your risk appetite and financial goals, minimizing the chance of unwanted losses.

3.?? Locks in Gains: By selling overperforming funds and reallocating to underperforming but potential-laden funds, you book profits while buying low.

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When to Rebalance

1.?? Periodic Rebalancing: Many investors rebalance annually or semi-annually. This schedule ensures regular alignment with your goals.

2.?? Threshold-Based Rebalancing: Rebalance when the portfolio deviates significantly from the target allocation (e.g., by 5% or more).

3.?? Life Events: Major life events, such as marriage, buying a house, or nearing retirement, may require rebalancing to reflect new priorities.

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How to Rebalance Your Portfolio

1.?? Assess Current Allocation: Review your portfolio to check if it aligns with your target allocation. For instance, if your goal is 60% equity and 40% debt but equity now constitutes 70%, it's time to rebalance.

2.?? Sell and Reallocate: If equities are overrepresented, consider redeeming some equity mutual funds and reallocating the proceeds to debt funds or other asset classes like gold.

3.?? Reinvest Dividends and Gains: Instead of withdrawing, reinvest dividends or gains into underweight asset classes to achieve balance.

4.?? Top-Up Underperforming Assets: If some asset classes are underrepresented, allocate fresh investments to those categories rather than redeeming overperforming funds.

5.?? Choose Tax-Efficient Strategies: Minimize tax liabilities by leveraging long-term capital gains (LTCG) tax benefits, using tax-harvesting strategies, or rebalancing within tax-free instruments like the NPS.

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Tools for Auto-Rebalancing

1.?? Balanced Advantage Funds: These funds are a nice tool for long term asset allocation as the objective of these funds is to increase or decrease the equity allocation based on market valuations. This helps to automatically rebalance the portfolio.

2.?? Multi-Asset funds: These funds invest in various asset classes like equities, debt, REITs & commodities like gold, silver, copper etc.

3.?? Hybrid funds: These funds have a specific allocation to debt & equity for eg: a savings fund would have typically 15-30% exposure to equity whereas aggressive hybrid fund would have minimum 65% exposure to equities. ?

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Rebalancing your mutual fund portfolio ensures that your investments remain aligned with your financial objectives and risk appetite. While the process might seem daunting, regular reviews and disciplined action can protect your portfolio from undue risks while optimizing returns. Remember, rebalancing isn’t just about numbers—it’s about staying true to your long-term financial vision. Happy Investing!