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How to monitor and rebalance your mutual fund portfolio?


You have carefully selected mutual funds that align with your investment goals and strategies. You have done your research, analysed each fund’s performance, and parked your hard-earned money in them. But how do you ensure you are maximising your returns while minimising your risks as your portfolio grows? The answer lies in having a plan to regularly review your portfolio, assess its performance, and make changes as needed to keep it on track and aligned with your objectives.

Here are a few key strategies that can help you achieve that.

  • Keep an eye on your investments’ performance

Periodically review and rebalance your investments according to their current performance levels. It means selling off shares from those funds that have had significant gains and buying more shares of those funds that have seen losses to bring each portion of the portfolio back into balance with the other portions.

This can be done simply by checking your statements, reviewing annual performance reports of your mutual fund investment plans, and comparing returns against the benchmark index.

  • Use deviation-based rebalancing

This approach involves setting up tolerance bands that an asset allocation must stay within to remain balanced according to predetermined criteria.

Let’s say your tolerance band is +/-10 percent, and you prefer a 60:40 equity/debt ratio. Here, if your portfolio goes below 50% or above 70% percent stocks, then it would have to be rebalanced back within that range again. This way, you can ensure that none of your assets become overweight or underweight in relation to their target allocations.

  • Monitor your financial goals

Your financial goals might change over time, so keeping track of your goals and ensuring that your portfolio aligns with them is essential.

For instance, if you planned to save for your child’s education, but your child has secured a scholarship, or you have decided on a different education path, you may not need to invest in mutual funds as aggressively as you once did. You can reduce exposure to high-risk mutual fund schemes and increase your allocation to bonds or fixed-income investments.

Alternatively, if your financial goals have increased, consider increasing your allocation to higher-risk equity funds to maximise your returns.

  • Use market valuation

Certain factors can change market valuation, such as performance of the securities in the fund portfolio, fund management team, economic changes, expense ratio, fund cash flows, assets under management (AUM), etc. Market valuations may require your portfolio to be rebalanced as it can significantly impact your funds’ performance, affecting their risk level and potential returns.

For example, let’s assume the Nifty 50 is currently trading at a low P/E (price-to-earnings) relative to its historical average. This may indicate that the market is undervalued, which could present a good buying opportunity for equity investors. Alternatively, if the Nifty 50 is trading at a high P/E ratio, it may indicate that the market is overvalued, and investors may want to consider rebalancing their portfolios towards safer assets such as debt or cash.

 The bottom line

While rebalancing, it’s crucial to consider exit loads and tax implications. Exiting funds that have not completed the specified holding period could result in an unnecessary expense in the form of an exit load. Therefore, it’s wise to choose funds that have completed their holding period or plan your exit around the period.

While rebalancing is key, a disciplined approach is just as important. One way to achieve this is through systematic investment plans (SIPs). With each instalment, you have the opportunity to invest in new funds, maintaining a diversified portfolio. However, before investing, make sure to use an SIP calculator to compare different SIP plans along with their expected returns at maturity and determine the appropriate amount to invest for your set goals.

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