Educate Yourself

Rebalance MF Portfolio

Why should you rebalance MF Portfolio?

Most investors do not keep all their eggs in one basket and invest in various assets classes. Over a period of time all these move in different directions because of which you may have to do some changes in asset allocation. Hence, it becomes mandatory to rebalance ones portfolio from time to time.

    1. Define portfolio rebalancing?

      Portfolio rebalancing is the process of realigning an out of line portfolio with the original goal. Usually, drastic equity markets movement translate into asset allocations changing. Asset allocation implies that based on your risk profile and time frame, you proportionately invest in equity and debt schemes. Your investments could go up if markets keep moving up, or could go down if markets correct depending upon your asset allocation. Thus, changing your asset allocation determines the risk you take thereby influencing the returns on your portfolio. Hence, you need to rebalance it and bring it back in line with the original.


    2. Is it necessary to rebalance a portfolio?

      Risk management is one of the biggest reasons to rebalance a portfolio. As an investor if you have decided to allocate 25% to equity investments and markets rise increasing this proportion to 50%, you are taking more risk than intended. Hence, to keep the risk within the tolerance limit, you need to resort to the original allocation. Rebalancing also helps in booking profits in an asset class that is rising and investing in another, that is not risen. Rebalancing enables you to book profits in equities and buy more debt, thereby reducing the risk you take.


    3. How frequently should you rebalance?

      It is recommended that investors rebalance their portfolios minimum once a year, more so when there is a sharp movement in an asset class. Typically, if markets keep moving in a direction over a 6–8 month period, resulting in your equity allocation change by over 5%, you may want to revisit your portfolio and consider rebalancing it.

    4. How can one rebalance?

      The proportion of your allocation towards an asset class will change based on markets going up or down. Rebalancing can be done by redeeming units from the asset class that has grown and adding to the asset class whose proportion has fallen. Another way to rebalance is to add fresh money to the asset class that has lagged, thus increasing the value of this asset class and restoring its original allocation.

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