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Should I Rebalance My Mutual Fund Portfolio with Rs.22 Lakh Investment Now Valued at Rs.32.5 Lakh? - Umesh

Ramalingam

Ramalingam Kalirajan  |7101 Answers  |Ask -

Mutual Funds, Financial Planning Expert - Answered on Aug 13, 2024

Ramalingam Kalirajan has over 23 years of experience in mutual funds and financial planning.
He has an MBA in finance from the University of Madras and is a certified financial planner.
He is the director and chief financial planner at Holistic Investment, a Chennai-based firm that offers financial planning and wealth management advice.... more
UmesH Question by UmesH on Jul 20, 2024Hindi
Money

hi i am umesh i have 2200000 investment in mutual fund that now 3250000 is rebalancing of fund necessary, if yes how i can do it

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
DISCLAIMER: The content of this post by the expert is the personal view of the rediffGURU. Users are advised to pursue the information provided by the rediffGURU only as a source of information to be as a point of reference and to rely on their own judgement when making a decision.
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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: I understand your situation as an IT professional managing multiple responsibilities. Starting mutual funds with Rs 40k every month is a great step! Let's dive into how you can optimize your investments for the best results.

Understanding Your Current Investment
You’ve started investing in active, small, and mid-cap funds, as well as an ICICI Prudential Bharat fund. Each type of fund serves different purposes and has unique risks and rewards.

Small and mid-cap funds can provide high returns but are more volatile.

Active funds aim to beat the market through expert stock selection.

Evaluating Fund Performance
Firstly, it's important to evaluate how your current funds have been performing. Check the returns of each fund over the past year, three years, and five years.

Consider their performance compared to their benchmark and category peers.

If any fund consistently underperforms, it might be time to consider alternatives.

Importance of Diversification
Diversification helps in spreading risk. By investing in different types of funds, you reduce the impact of any single fund's poor performance.

It's great that you have a mix of active, small, and mid-cap funds.

However, it's crucial to ensure you’re not overly concentrated in any one sector or market cap.

Actively Managed Funds vs. Index Funds
Actively managed funds aim to outperform the market through strategic stock selection. This can lead to higher returns, especially in a volatile market.

Index funds, on the other hand, simply track a market index. They tend to have lower costs but often provide lower returns compared to actively managed funds.

Considering your choice of actively managed funds, you're positioned to potentially benefit from higher returns, provided the fund manager's strategies pay off.

Regular Funds vs. Direct Funds
Direct funds have lower expense ratios as they don't include distributor commissions. However, they require you to choose and manage your investments independently.

Investing through a Certified Financial Planner (CFP) with mutual fund distributor (MFD) credentials ensures professional guidance. They can help you navigate market changes and rebalance your portfolio when needed.

The slightly higher cost of regular funds can be worthwhile due to the expert advice and support you receive.

Rebalancing Your Portfolio
Rebalancing involves adjusting your portfolio to maintain your desired asset allocation. It’s essential to review your portfolio at least once a year.

Look at the performance of each fund and your overall investment goals.

If one type of fund has grown significantly, it may dominate your portfolio, increasing risk.

Rebalancing can help you realign your investments with your risk tolerance and goals.

Considerations for Adding or Switching Funds
Before adding new funds or switching existing ones, consider the following:

Fund Objectives: Ensure the fund’s objective aligns with your financial goals.

Risk Profile: Understand the risk associated with each fund and ensure it matches your risk tolerance.

Expense Ratio: Lower expense ratios can significantly impact your returns over the long term.

Past Performance: While past performance is not a guarantee of future returns, consistent performance over time is a good indicator.

Professional Advice
A Certified Financial Planner can provide personalized advice based on your financial situation and goals. They can help you choose the right funds, monitor their performance, and make necessary adjustments.

Their expertise can be invaluable in navigating market fluctuations and optimizing your investment strategy.

Staying Informed
Stay updated with market trends and fund performance. Regularly read financial news, attend webinars, and consult with your financial planner.

Being informed helps you make better investment decisions and stay on track with your financial goals.


It's commendable that you have started investing Rs 40k every month despite your busy schedule. Balancing work, responsibilities, and investments is not easy.

Your commitment to securing a financially stable future is truly impressive. Keep up the excellent work!

Continuous Learning and Adaptation
The financial market is dynamic, and continuous learning is crucial. Adapt your strategy as needed based on market conditions and personal circumstances.

Remember, the goal is not just to invest but to invest wisely.

Final Insights
Investing is a journey, and you’ve taken significant steps by starting mutual funds. Regularly evaluate and rebalance your portfolio to align with your goals.

Seek professional advice to navigate complexities and optimize your strategy. Stay informed and adaptable to changes.

Keep up the dedication, and you’ll likely achieve your financial aspirations.

Best Regards,

K. Ramalingam, MBA, CFP,

Chief Financial Planner,

www.holisticinvestment.in

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Can you please suggest on capital gains as per Indian taxation laws arising in the below two queries : 1) property purchased with joint ownership, me and my wife’s name in 2015 at a cost of 64,80,000, housing improvements done for the cost of 1000000 and brokerages of 200000 paid and sold the same property at 10000000 in Dec 2023? 2) 87% of the proceeds got from the deal i.e 8700000, have been reinvested to pay 25% amount in purchasing another joint ownership property in Dec 2023, 3) I have invested in another under construction property in Nov 2023 by taking housing loan, which is on me and my wife’s name worth 1.4 cr, here the primary applicant is me only while wife is just made a Co applicant in the builder buyer agreement and also on the housing loan . So what are the LTCG tax liabilities arising from the above 3 scenarios for FY 2023-2024 and FY 2024-2025. I intend to sale off the property acquired in (2) by Dec 2024 and use that proceeds to close the housing loan for the property acquired in (3), will this sale of property be inviting any tax liabilities if the complete proceeds received from the sale of the property in (2) would be utilised to close the housing loan taken in Nov 2023 for the property in (3) ? Since in FY 23-24, I would be claiming the LTCG from the sale proceeds of 1) invested in the purchase of property in 2), and I intend to sale off this property in Dec 2024, will the LTCG claim be forfeited on the property sale in (1), should I hold this property at least for further 1 year so that sale of this property in 2) will not invite STCG?
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You jointly sold a Property during the year for Rs.76.80 lakhs (64.80+10.00+2.00), & sold the same for Rs.100.00 lakhs.
You have jointly also purchased Property No.3 (I suppose it is Residential only), for Rs.140.00 lakhs.
You should avail exemption u/s-54 & file your ITR accordingly. Please disclose all details about sale & purchase in your ITR.
02. Now coming to the F/Y 2024-25 :
You intend to Sell Property No.2, which was acquired in 2023-24. Any Gain on Sale of it would be Short Term capital Gains & taxed accordingly.
Alternatively, you may hold this sale of property no.2 (for 2 years from its purchase) & avoid STCG
You are free to utilize the sale proceeds in a way you like, including paying off your housing Loan.
Please note to avail exemption u/s 54 only from investment in property no.3 & not 2.
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DISCLAIMER: The content of this post by the expert is the personal view of the rediffGURU. Investment in securities market are subject to market risks. Read all the related document carefully before investing. The securities quoted are for illustration only and are not recommendatory. Users are advised to pursue the information provided by the rediffGURU only as a source of information and as a point of reference and to rely on their own judgement when making a decision. RediffGURUS is an intermediary as per India's Information Technology Act.

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