Creating a perfectly balanced portfolio is key to success in mutual fund investment. But this is not an easy job. You need to thoroughly understand your investment goals and risk appetite and then find mutual fund portfolios that you can invest in.
But your job doesn’t end there. Of course, mutual funds are made for convenient investment, and you don’t need to keep an eye on the portfolio regularly. But you will need to revisit your portfolio once in a while as the stock markets and hence, the characters and potential of market-linked investments will keep changing. Let us learn more about rebalancing your mutual fund portfolio and learn how you can learn the same.
Why is a balanced portfolio important?
Different investors could have different risk appetites. Investor A might be alright with losing a considerable amount of money trying to find a profit, but Y’s limit could be half that. In this scenario, one should go for a portfolio that closely matches their appetite, but at the same time, there should be an ideal mix of other securities as well. This is important in ensuring your investment stays as safe as possible during times of market uncertainty.
Having said that, the perfect mix for X may not be the same for Y. Since X has more risk appetite, their mix might have more high-risk and reward options like equities.
What is portfolio rebalancing?
A portfolio is a collection or a list of all the securities that you have invested in. When you are building a portfolio from the scratch, you will ideally do your research to find securities that have the best chance for growth. You could employ a number of research methods for this.
But the thing about stock markets is that it tends to change. What might be beneficial a year before need not be worth keeping in your portfolio this year. This change is often unpredictable as well, and this happens due to many factors, including changes in the economy.
The best way to deal with this is to bring changes in your portfolio to counter the changes. Such a change is meant to rebalance your portfolio so that there is a chance for growth, and at the same time, your corpus is protected.
Since we are talking about mutual funds, let us see how you can go about rebalancing a mutual fund.
- Ensure that you keep diversification a key factor. Diversification simply means your investment presence in multiple asset classes. This can ensure that your investment portfolio has lesser risk factors.
- Evaluate your risk appetite and investment goals. Similar to the stock markets, it could change too. For instance, when you start investing, your goal would have been to make a sizable emergency fund. But five or so years later, you might have bigger funds to use in an emergency. You might even want to convert the current corpus into a retirement fund and keep building that. In that event, where and how you invest might change.
- This is a good time to gauge your investment so far as well. Keep an eye on factors such as expense ratio. On occasions, this could eat into your earnings.
- Consider newer investment options. Investment options are very dynamic these days, and the whole investment scenario could do an overhaul every few years. Hence, make sure you consider newer investment opportunities as well, including in mutual funds, before finalising your rebalanced portfolio.
The role of a financial advisor in helping you find the right balance is imperative. Hence, it is a wise idea to talk to one before you rebalance your portfolio.