How And When to Rebalance Your Mutual Fund Portfolio?

May 27

3 min read

Tags: Wealth Management, Investment Lesson, Mutual Funds, Stock market, Budget, Finance, Investing, Personal Finance, Investment, ETFs

Rebalancing your mutual fund portfolio is an essential part of maintaining a healthy investment strategy. It ensures your asset allocation remains aligned with your financial goals and risk tolerance.

What Is Rebalancing?

Rebalancing involves adjusting the proportions of different assets (like equity, debt, and hybrid funds) in your portfolio back to their original or target allocation.

Example:

Suppose your desired asset allocation is:

60% Equity
40% Debt

After one year, due to market performance, it shifts to:

70% Equity
30% Debt

This means you're now taking more risk than intended. So, you sell some equity and buy debt to restore the 60:40 balance.

Why Rebalancing Matters:

Controls Risk: Prevents your portfolio from becoming too aggressive or too conservative.
Locks in Gains: You may sell high-performing assets and buy undervalued ones.
Disciplined Investing: Helps avoid emotional investing and chasing trends.

When to Rebalance?

🔄 Time-Based Rebalancing

Annually or Semi-Annually: Review and rebalance every 6 or 12 months.
Pros: Simple and systematic.
Cons: May ignore major market shifts.

📉 Threshold-Based Rebalancing

Rebalance when allocation deviates by more than a set % (e.g., 5% or 10% from the target).
Example: If equity grows to 65% instead of the target 60%, you rebalance.
Pros: More responsive to market changes.
Cons: Requires regular monitoring.

Steps to Rebalance Your Portfolio

Review current allocation of all mutual funds.
Compare with target allocation.
Identify overperforming or underperforming assets.
Redeem or invest accordingly to restore balance.
Consider tax implications (especially with equity funds).
Avoid exit loads and short-term capital gains where possible.

Pro Tips:

Use SIP adjustments instead of lump-sum switches for smoother rebalancing.
Avoid frequent rebalancing; once or twice a year is sufficient for most retail investors.
Consider consulting a financial advisor for large portfolios.

Disclaimer:

The information set out above is included for general information purposes only and is not exhaustive and does not constitute legal or tax advice. All complaints regarding Mutual Fund can be directed towards visit www.scores.gov.in (SEBI SCORES portal). Readers are requested to make informed investment decisions and consult Chaitanya Financial Consultants – 9000628943 / mfd.mmr@gmail.com to determine the financial implications with respect to investing in Mutual Funds.

Mutual Fund investments are subject to market risks, read all scheme related documents carefully.

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