I am 35 years working as an IT professional.Due to other responsibilities I started MUtual fund last year with 40k every month. quant active, small and Mid cap and ICICI prudential bharat Should I re balance these funds or need to check some other funds.

Ans: Excellent portfolio and thought process, no rebalancing required please continue.

Ans: It's great to see your proactive approach towards investing at a relatively young age. When reviewing your investment portfolio, it's essential to consider your financial goals, risk tolerance, and investment horizon. While your current allocation seems diversified, it's always wise to periodically reassess and rebalance your portfolio to ensure alignment with your objectives.

Consider evaluating the performance and prospects of each fund in your portfolio. Are they meeting your expectations in terms of returns and risk management? Are there any funds that have consistently underperformed or carry higher volatility than desired?

Additionally, reassess your asset allocation strategy. Are you comfortable with the current mix of equity and index funds, or would you prefer to adjust the allocation based on market conditions and your risk appetite?

Lastly, remember that investment decisions should be driven by a well-thought-out plan rather than short-term market movements. Consider consulting with a Certified Financial Planner who can provide personalized guidance tailored to your unique financial circumstances and goals. With careful planning and periodic review, you can work towards achieving long-term financial success.

Ans: Hi Umesh, it’s great that your mutual fund investment has grown from Rs. 22,00,000 to Rs. 32,50,000. This shows that you’ve made some good choices. With this growth, it’s important to reassess your portfolio and consider if rebalancing is necessary.

Why Rebalancing is Important

Rebalancing ensures that your investments stay aligned with your financial goals and risk tolerance. Over time, some funds may perform better than others. This can change the risk profile of your portfolio. For example, if equity funds grow faster, your portfolio might become more equity-heavy. This means more risk, especially if the market turns volatile.

Rebalancing helps in maintaining your desired asset allocation.

Assessing Your Current Asset Allocation

Start by reviewing the current allocation between equity, debt, and other asset classes in your portfolio. Compare this with your original investment strategy. Has the equity portion increased? Has the debt portion reduced? If yes, then your portfolio might have become riskier than you initially planned.

It’s essential to match your investment mix with your risk tolerance.

Steps to Rebalance Your Portfolio

If you find that your asset allocation has shifted, you can follow these steps to rebalance:

Evaluate Your Financial Goals: First, revisit your financial goals. Are they short-term, medium-term, or long-term? Ensure that your current portfolio aligns with these goals.

Determine the Desired Asset Allocation: Based on your goals, decide the ideal mix of equity and debt. For example, if you have a long-term horizon, you might want to keep a higher percentage in equity. If you are closer to your goal, you might want to shift more towards debt.

Sell Overweight Assets: If equity has grown more than debt, consider selling some equity funds. This helps in reducing the risk.

Invest in Underweight Assets: If your debt allocation is lower than desired, reinvest the proceeds into debt funds. This helps in stabilising your portfolio.

Frequency of Rebalancing

Rebalancing is not something you need to do frequently. Typically, it’s advisable to review and rebalance your portfolio once a year. However, if there are significant market movements, you might want to consider doing it sooner.

Remember, rebalancing too often can lead to unnecessary transaction costs and taxes.

Tax Implications of Rebalancing

When you sell mutual funds to rebalance, be aware of the tax implications. Equity funds held for less than one year attract short-term capital gains tax at 15%. If held for more than one year, long-term capital gains above Rs. 1 lakh are taxed at 10%. For debt funds, short-term capital gains are added to your income and taxed at your applicable slab rate. Long-term capital gains are taxed at 20% with indexation.

Rebalancing should be done with a focus on minimising tax liability.

The Importance of Professional Guidance

It’s commendable that you are thinking about rebalancing. However, the process can be complex. Consulting a certified financial planner (CFP) can be beneficial. They can provide a detailed analysis of your portfolio and suggest the best course of action. A CFP will ensure that your portfolio remains aligned with your financial goals and risk tolerance.

Professional advice adds value by tailoring strategies to your specific needs.

Disadvantages of Direct Funds

If you are investing in direct mutual funds, you may save on the expense ratio. However, direct funds require you to make decisions on your own. This can be challenging if you lack the expertise. A certified financial planner can guide you with regular funds, ensuring that your investments are well-managed and aligned with your goals.

Regular funds through a CFP offer ongoing advice and support.

Why Actively Managed Funds Are Better

Index funds and ETFs might seem attractive due to lower costs. However, they only track the market and do not aim to outperform it. In contrast, actively managed funds have the potential to generate higher returns, especially in a dynamic market. Fund managers make decisions based on market conditions, which can lead to better outcomes.

Actively managed funds offer flexibility and the potential for higher returns.

Finally

Rebalancing is an essential part of maintaining a healthy investment portfolio. Given the significant growth in your mutual fund investments, it might be the right time to rebalance. Assess your current asset allocation, align it with your financial goals, and take the necessary steps. Consulting a certified financial planner can ensure that your decisions are sound and beneficial in the long run.

Investing wisely is not just about returns; it’s about achieving your financial goals with confidence.

Best Regards,

K. Ramalingam, MBA, CFP,

Chief Financial Planner,

www.holisticinvestment.in

Ans: At 60, you have a disciplined approach to investing, and your mutual funds have provided you with an average return of 10%-13% over the last 5 years. It's excellent that you’re happy with your returns. However, even if you are satisfied with the returns, rebalancing plays a critical role in ensuring long-term financial stability. Let’s explore why, when, and how to consider rebalancing.

1. Why You Should Rebalance Even with Good Returns
Your investments may be giving great returns, but rebalancing is about risk management and ensuring that your portfolio aligns with your changing financial needs as you age. Here’s why rebalancing is important:

Portfolio Drift: Over time, your portfolio might have become more equity-heavy due to market growth. This could expose you to higher risks, even though you are seeing good returns.

Changing Risk Tolerance: As you age, your risk tolerance generally decreases. At 60, protecting your capital becomes more critical than seeking higher returns.

Market Volatility: While equity markets have been kind to you, markets are unpredictable. Without rebalancing, a market downturn could wipe out a significant portion of your gains.

Goal Alignment: Your financial goals might have changed over time. Rebalancing ensures that your portfolio is still aligned with your retirement or lifestyle goals.

Consistent Returns: Rebalancing periodically can help lock in profits and prevent overexposure to high-risk assets. It ensures that you don’t rely solely on equity markets for returns, balancing your portfolio between equity and safer assets like debt funds or liquid funds.

2. When to Rebalance Your Investment
Rebalancing isn’t based on age alone, but on various factors like risk tolerance, market performance, and financial goals. However, certain key moments in your life should trigger rebalancing:

Age-Based Trigger: At 60, your focus shifts more towards capital preservation than aggressive growth. It is essential to start rebalancing your portfolio to reduce exposure to volatile assets like equity and increase allocation to safer assets like debt funds.

Every Year or Market Movement: Many Certified Financial Planners recommend rebalancing your portfolio once a year. Another strategy is to rebalance when your asset allocation drifts significantly from your target (e.g., if your equity allocation grows more than 5%-10% higher than your target allocation due to market performance).

Specific Milestones: Major life events, such as retirement, health changes, or unexpected expenses, could also require portfolio rebalancing.

3. How to Rebalance Your Portfolio
Rebalancing doesn’t mean exiting equity investments altogether. Instead, it involves adjusting your asset allocation to match your age, financial goals, and risk tolerance. Here’s how you can approach it:

Gradual Shift: Start shifting a portion of your equity investments into debt funds or liquid funds. This reduces market risk while still allowing your money to grow steadily.

Fixed Asset Allocation: Based on your risk tolerance, maintain a fixed ratio of equity to debt. For instance, you might aim for 60% in debt funds and 40% in equity at your age.

Systematic Rebalancing: You don’t have to rebalance all at once. A Systematic Transfer Plan (STP) can help you gradually move funds from equity to safer options like debt or liquid funds.

Consult a Certified Financial Planner: To get a clearer idea of the right asset allocation, consider consulting a Certified Financial Planner. They can provide tailored advice based on your overall financial picture and retirement needs.

4. Consequences of Not Rebalancing
If you choose not to rebalance, you might enjoy continued growth during bull markets. However, ignoring rebalancing could expose you to significant risks:

Increased Risk Exposure: Without rebalancing, your portfolio may become too equity-heavy. This can lead to high volatility, which might be unsuitable at your age. If the market crashes, your portfolio could lose significant value.

Missed Opportunity for Profit Protection: By not rebalancing, you miss the chance to lock in profits. Equity investments are volatile, and without moving some gains to safer investments, you risk losing them during market downturns.

Not Meeting Financial Goals: Over time, your goals change. If your portfolio is not rebalanced, it might no longer align with your retirement needs. For example, you might need more liquid funds for regular withdrawals, but an equity-heavy portfolio won’t offer this.

Potential Stress During Volatile Markets: At 60, you may not want to deal with the stress of market volatility. A balanced portfolio gives you peace of mind, knowing that your investments are safer, even if the market faces turbulence.

5. Rebalancing at What Age
There’s no fixed age to rebalance your portfolio, but as you move closer to retirement and beyond, consider rebalancing more frequently:

60 to 65 Years: This is when you should start shifting more of your portfolio into debt funds, liquid funds, or other low-risk options. A 50:50 or 60:40 debt-to-equity ratio may work best for you at this stage, depending on your retirement plans.

65+ Years: By this age, your focus should be on income generation and capital protection. At this stage, you may want 70%-80% of your investments in safer assets like debt funds and fixed-income products, while keeping a small portion in equity for continued growth.

6. What Happens if You Do Rebalance
The primary benefit of rebalancing is that it protects your portfolio from excessive risk and aligns it with your retirement needs. Here’s what you can expect:

Stability in Volatile Markets: A balanced portfolio ensures that you won’t lose too much in market corrections, as your investments are spread across safer assets.

Peace of Mind: By gradually shifting to safer investments, you’ll have peace of mind knowing that your retirement funds are more secure.

Steady Income: Rebalancing into debt funds or liquid funds gives you the ability to use Systematic Withdrawal Plans (SWP) to generate regular income during retirement.

Better Alignment with Goals: Rebalancing ensures that your portfolio continues to meet your financial goals as they evolve, especially as your focus shifts from growth to stability.

7. Common Rebalancing Strategies
Here are a few rebalancing strategies that you can consider:

Age-Based Strategy: A simple rule is to subtract your age from 100 to determine how much of your portfolio should be in equity. For instance, at 60, you could aim for 40% equity and 60% debt.

Target-Date Strategy: As you approach specific target dates (such as retirement), gradually reduce your equity exposure and increase debt.

Market-Driven Rebalancing: Rebalance based on market performance. If your equity portion grows significantly, move a portion to safer assets like debt or liquid funds.

Final Insights
Rebalancing is not just about returns; it’s about managing risk and aligning your portfolio with your evolving goals.

At 60, it’s essential to start reducing your exposure to equities, even if they are delivering good returns. This ensures capital protection and provides you with liquidity when needed.

You can rebalance gradually, shifting profits into safer investments like debt or liquid funds.

If you don’t rebalance, your portfolio may become too risky for your age, exposing you to market volatility and reducing the chance of meeting your retirement goals.

Regular rebalancing, either yearly or triggered by significant market movement, helps keep your investments in check.

By adopting a rebalancing strategy that aligns with your needs and goals, you’ll not only protect your capital but also ensure long-term financial stability.

Best Regards,

K. Ramalingam, MBA, CFP,

Chief Financial Planner,

www.holisticinvestment.in

https://www.youtube.com/@HolisticInvestment