As investing is an important part of our lives to secure the future of your family and yours, rebalancing your portfolio to optimise the efficiency of your investment. To practice rebalancing, we need to understand what a rebalancing mutual fund portfolio is.
It refers to the process where investors regularly review their mutual fund portfolio and try to cut off the investment that has been non-performing for a long period of time and add those investment avenues that have potential to grow your money more than your existing ones.
READ MORE: Investment portfolio: How often should you rebalance it?
Why should you rebalance your mutual fund regularly?
- You have changed you financial objectives
- Your financial situations have changed
- Entrance of new investment avenues in the market
- Change in economic conditions due to which you need to shift to a different financial instrument.
Now, that you know why to rebalance, let’s understand ways of rebalancing
READ MORE: Amid market volatility, how to rebalance portfolio between active and passive funds
Calendar based rebalancing
As you know that investing is a continuous process, you need to invest and review your investments on a particular interval. Interval could be monthly, bi-monthly, half-yearly, or yearly. Such an interval might be based on the risk you have taken while making your investment portfolio. However, transaction costs play an important role in rebalancing, as when you buy or sell financial securities, you have to pay transaction costs to your broker.
READ MORE: Why should you rebalance your portfolios using index funds?
Market cap based rebalancing
When you rebalance your mutual fund portfolio on the basis of the market capitalization of the companies in which your fund manager has invested in as per your risk preference, then it is known as market cap based rebalancing. A company’s market cap is of three types : large, medium, and small.
Large cap funds are less riskier than medium and small cap funds. Assume that you have invested in large cap funds in 40:60 ratios of stocks and bonds, where 40% of your money is invested in stocks and remaining in bonds. Now, you are willing to take more risk and looking forward to investing in medium cap funds.
You rebalance your portfolio as 20:20:60. 20% in mid-cap funds, 20% in large-cap funds, and 60% will still be invested in bonds. This is how you can rebalance your funds based on market cap.
READ MORE: Should you rebalance your portfolio when the market is this volatile? We ask experts
Ratio based rebalancing
In mutual funds, there can be two categories in which you invest generally, stocks and fixed income securities. As per your current risk preference, you can change the ratio between stocks and fixed income securities investments.
For instance, if you have invested in the ratio of 40:60 in stocks and bonds, now your risk appetite has increased and you want to increase the stocks portion to 70:30 in stocks and bonds respectively.
Simply speaking, your finances are the source of keeping you and your family protected. You need to take care and try to be financially stable as much as possible. Fund rebalancing is one of the most important aspects of personal financial planning that help you in protecting you and your family financially.
Anushka Trivedi is a freelance financial content writer. She can be reached at anushkatrivedi.com
