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
