Have you been hearing about mutual funds a lot? It’s not just out of randomness. Mutual funds have been gaining popularity in the wider market, especially in the market of investments. While we learn everything about mutual funds, we also need to know more about everything we must be doing. Beginning from what are Mutual Funds, how to invest in them, and so much more, we always have something new to talk about in regard to mutual funds. It just never gets over. It’s also only fair on the side of the investor if they have sound expertise while they invest in mutual funds. Here we will discuss how to rebalance a mutual fund portfolio.
First things first, let us start from the basics.
What does Rebalancing a Mutual Fund Portfolio Mean?
Even if you are a buy-and-hold investor, once you have finished growing your mutual fund portfolio, you will still need to undertake some maintenance on a regular basis. Rebalancing a mutual fund portfolio is merely the act of reverting one’s current investment allocations to their previous allocations.
Rebalancing will necessitate the purchase or sale of shares in some or all of your mutual funds in order to bring the allocation percentages back into balance. To put it another way – rebalancing is a vital maintenance part of creating a mutual fund portfolio, just as an oil change or tune-up is to the continuing upkeep of your car.
The concept of rebalancing is straightforward, but the timing and frequency of rebalancing can introduce some strategy into the process. In reality, many investors make rebalancing more difficult than necessary. Financial advisors and money managers sometimes disagree over how frequently an investor should rebalance. Should it be done monthly, quarterly, yearly, or something else?
Also, you have to remember that rebalancing does not mean you were initially investing in only one company’s mutual fund, such as the IIFL mutual fund schemes, and then you decide to invest in several other companies and sectors. It is much more work than that and much more analyzing to do. Now you may be wondering why you need to rebalance your portfolio – here is why.
Why do Investors need to Rebalance their Portfolio?
It is critical to understand why investors rebalance their portfolios in the first place. Often, certain mutual funds or mutual fund types outperform others over a certain time span.
Rebalancing does not need to be done on a regular basis because major changes in financial markets are unlikely to cause your mutual fund portfolio’s allocation percentages to shift dramatically. If you devote 20% of your portfolio to one fund, it is rare that it will deviate from that allocation by more than 3 or 4% points in any one year.
There may also be transaction expenses connected with buying and selling funds. As a result, rebalancing too frequently can reduce the potential benefits of doing so. Rebalancing your mutual fund portfolio once a year is a sufficient frequency. Many people do it at the end of the year, when other year-end methods, such as tax-loss harvesting, would be more prudent.
Now, let us get going on how to rebalance a portfolio without a wait.
How do I Rebalance my Mutual Fund Portfolio?
It is not as hard as it seems, and it is going to be simple to rebalance your portfolio once you get the hang of it.
1. Set Goals
Setting asset allocation targets should be the first step in rebalancing your mutual fund portfolio. If you had a certain stock/bond ratio that made sense before any recent market uptick or fall, it will still make sense now. And if you don’t have an asset allocation strategy, now is the time to develop one.
There is no such thing as an off-the-shelf asset allocation solution. The best way to go about it is to seek the advice of a seasoned financial advisor.
2. Know your Current Goal
Once you’ve developed an asset allocation strategy, you’ll need to determine where you’re currently invested. Gather all of your investment statements or simply look them up online to have a clearer picture of the current situation. To keep track of your investments, you can utilize a variety of free and paid web tools and mobile phone apps.
3. You Need a Rebalancing Master Plan
If your current portfolio is already in accordance with your asset allocation goals – you’re virtually done. However, you will almost certainly need to make some adjustments.
When determining which funds to add to the portfolio and how many units to sell/buy, you’ll notice that the portfolio revamping process is largely based on trial and error.
Before making the deal, you should consider the impact of buying/selling certain holdings on your asset mix. Although your portfolio does not have to be an exact reproduction of the larger market, you should be able to tell if it is highly skewed towards a specific sector or style.
4. Make Sure you Consider Tax
Before making any changes to your mutual fund’s portfolio, consider the tax implications of any units sold. You should never rebalance your portfolio without first considering the tax implications. It is critical to account for the capital gains generated by the sales.
We are at the end of how to rebalance your portfolio. Just as important as diversification is, so is rebalancing your portfolio. But make sure you do it the right way. Moreover, in order for you to keep succeeding with mutual funds in the long run, you need to rebalance.
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