Investing in mutual funds does not end at investing in them. For managing your portfolio investments efficiently, you need to have a smart strategy in place. Your mutual fund portfolio needs to be reviewed at frequent intervals, so you can keep it well-maintained. This read will give you a comprehensive idea of portfolio rebalancing and how you can achieve your investment goals while averting possible risks.
Rebalancing your portfolio: What does it mean?
Let’s take a deeper look at the meaning behind the phrase.
- Returning existing investment allocations to original investment allocations as a step towards building your portfolio.
- Purchasing and selling shares of a few or all of the available mutual funds in your portfolio to balance your allocation percentages.
- Portfolio rebalancing strategies to decide on the appropriate timing and frequency of the rebalancing process.
Who is it for?
Portfolio rebalancing includes the following under its purview:
Applicable to mutual funds investors irrespective of the nature of investments– tenure, regularity of purchasing and selling, etc.
Why is it essential?
Over a period of time, you will notice that your portfolio has undergone a weighting change from its original asset allocations. This is because of the changing market value of the securities in your portfolio. Here’s why you need to rebalance it, so it returns to its original allocation.
- To protect you from unnecessary risks arising from an unbalanced portfolio. For instance, your original allocation of 70% stocks and 30% bonds may have now reached a figure of 90% stocks and 10% bonds prior to your investments throughout the year, exposing you to risks.
- T encourages you to take well-thought-out decisions for maximising your profits.
- To improvise your chances of being future-ready by exercising your foresight and knowledge of mutual funds.
When should you rebalance your portfolio?
Decisions regarding rebalancing cannot be taken arbitrarily. Not all securities in your portfolio will fetch you the best results at all times. Taking the right decision at the right time takes a certain degree of diligence and an idea of the market value of the assets in your portfolio. Considering the following conditions will tell you whether the time is ripe for rebalancing your assets.
- Review your financial and investment objectives for aligning the rebalancing process to your portfolio investment
- Sell shares when they are commanding the best price to bring it down to where you had started from.
- Purchase shares that are doing poorly to ensure that the share percentage returns to what it was during the original asset allocation.
- Enquire about trading costs that may be associated with buying or selling of mutual funds, so that you can take informed decisions.
How to rebalance your portfolio?
The different types of rebalancing will help you analyse and decide on the one that is the best suited for your unique needs.
Time-based rebalancing: Rebalancing on a pre-decided interval, either monthly, quarterly, bi-annually or annually.
Threshold-based rebalancing: Rebalancing on a pre-decided threshold, that is, 1%, 5%, 10% or any other percentage basis your risk preferences. The higher your risk-taking ability, the higher will be the threshold.
Time and threshold-based rebalancing: Reviewing the portfolio at a pre-decided time interval but rebalancing it only when the allocation has exceeded the threshold.
A clear understanding about rebalancing your portfolio is the first step towards finalising on your investment strategy and taking conscious decisions. Implement your strategy or introduce changes, whenever necessary, to overcome the volatility of your portfolio and prevent yourself from receiving low post-tax returns. You can use a gift or bonus to restore the balance. When you need to scale back, selling the securities in the tax-exempt accounts first will enable you to restrict the amount of tax you pay towards capital gains taxes.
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