Portfolio Rebalancing: Meaning and Ways To Rebalance Mutual Fund

You have learnt all about building your mutual fund portfolio. However, investing consistently has aspects that require regular monitoring. Similar to how different events in life steer you to make better decisions, changes in the mutual funds must also be tracked, and corrections must be made to align with your financial interest. Therefore, in this chapter, we’ll look at how to track & rebalance your mutual fund portfolio.  

Tracking Your Mutual Fund Portfolio

Mutual funds are subject to market risks – you have read this somewhere. Mutual funds come with a disclaimer but are also a good way to make your wealth grow.

But how will you determine which of the top mutual funds are? You would not be able to if it was not for an analysis. 

Indeed, an investor must see past a fund's past performance. In addition, tracking returns is a habit that can provide you with information on the time that allows you to make better investment decisions, and here, the prior analysis of the fund is an extremely important factor.

However, changes in the general economic conditions can also lead to fluctuations in capital markets. These changes also completely change the asset allocation of the portfolio.

Thus, it can raise the fund's risk profile above an investor's wishes. Besides, the assessment of these funds allows you to avoid any overlap between similar investments. In addition, a mutual fund portfolio requires periodic rebalancing due to essential characteristics or when there is a change in fund manager.

How To Track Your Mutual Fund Portfolio?

1. Open the Angel One app and go to the Home page.
2. Open the Mutual Fund portal from the Home page. Go to ‘Portfolio’. Here you will see all the funds in your mutual fund portfolio. 
3. If you want to further analyse your mutual fund portfolio, you can click on ‘VIEW PORTFOLIO ANALYSIS’. It will show you the value of your portfolio over time, its composition and the taxes applicable, etc.
4. You can also view the overall performance of your portfolio, including the performance of the funds bought via other brokers.

Benchmark the Performance of the Fund

First, the benchmark performance should be analysed. You must have learnt by now that each fund has a benchmark to follow and analyse its performance.

A reasonably good mutual fund is one that consistently outperforms the benchmark in the long run. A fund generates an alpha when it generates higher returns than the benchmark.

Always Compare Similar Funds

You cannot compare different funds while comparing a fund; it will never give you the correct answers.

An excellent way to put it is that it is like comparing apples with apples but not with mangoes; then, you won’t know which is better. If it is apples to apples, the better apple of the bunch is always known.

Consider Expense Ratio

At first, the expense ratio may appear negligible, but remember the chunk it can take off your investments. What does the term expense ratio mean? 

An expense ratio is a fund house fee to manage your portfolio. These costs involve manager fees, distribution, investor transactions, etc.

These costs are also dynamic, meaning they could change in the future. Therefore, the expense ratio and performance should be kept track. 

Note - Communicate with as many financial advisors as possible; you will likely receive diverging responses from each. They help you know what to examine, when and how you can decide which is the most suitable mutual fund for you. 

However, Is that the correct method to select a fund?

Definitely Not. Therefore, pay attention to evaluation and absorb all the information, but make decisions based on an objective mutual fund analysis. 

Risks – Forgotten by product

You are aware that mutual funds are associated with risks. It’s a foregone conclusion; everybody knows that. However, you cannot avoid it when you opt for mutual funds; obviously, you can evaluate it according to your risk preference.

All you need to analyse here is your mutual fund’s risk profile using a riskometer. Stock market indices are required to inform you about the risks of a mutual fund, and they can be a great help to you.

A Manager’s Tenure

The manager’s term on the preferred fund should also not be overlooked. This fund is worth considering if the manager has been around for a short time, for example, about three years.

This is because the current manager gets credit for only the 3-year returns. At the same time, he needs to take complete responsibility for the 10-year returns because this is your investment period. Sometimes, if the fund generates low returns, the blame can be easily shifted to the former fund managers. This creates an untasteful dilemma; you may lose trust due to such events. 

Avoiding such events starts with understanding how to analyse them. After mastering this, you will be free from the dilemma of hiring the best mutual fund for you.

What Are the Reasons for You To Rebalance Your Mutual Funds?

Asset allocation is an integral part of any investor's growing wealth, and it is done after considering risk profiling, investment psyche, liquidity, tax level, etc. Asset allocation requires investing inversely or poorly co-related asset classes as the cycle of each asset class is different.

An Investor can also access multiple asset classes through MF schemes that provide a spectrum of choices for an investor/ advisor. Mutual Funds is one of the most tax-efficient & transparent investment vehicles with professional expertise in Equity, Arbitrage, Fixed Income, Commodities and REITs MF.

It becomes critical for an investor to rebalance when he or she is facing idleness in a particular asset class. This could be because of other reasons, such as the expected growth in that asset class for a long time. In such a situation, the probability of reaching goals might have to be sacrificed.

Re-balancing can be seen in two ways: a straightforward option is to select Multi Asset Mutual Fund schemes or Balanced Advantage Funds for automatic re-balancing, which the Fund Manager professionally manages, and another option is to look at various asset classes along with their performances, valuations, taxation and exit cost if any and take action accordingly.

Strategic Rebalancing

The execution of Rebalancing depends on the goals, timing, and tenure level. For instance, retirement funds in the accumulation stage may have a higher equity allocation. Therefore, the assets must be reallocated to debt during consolidation or withdrawal.

Greed or fear can cause wrong decisions in Asset allocation, resulting in long-term impacts on retirement corpus and plan.

Tactical Rebalancing

In the Tactical Rebalancing scenario, an investor or advisor believes that some asset re-allocation will result in additional returns or loss minimisation to the portfolio.

These are the AA options whereby an individual must conduct an asset review regularly and evaluate the asset class based on valuation, market movement, tax implications, exit costs, etc.

Mutual Fund Portfolio Rebalancing: How?

A clear and well-structured asset-allocation framework is the cornerstone of long-term wealth creation. The dynamics of the market change daily, and the investor-and-forget mentality may not work for investors who track the market reasonably and proactively and aim to get superior risk-adjusted returns. Rebalancing is an act of allocation of the investment corpus across and within asset classes.

• Ways to Rebalance

Set a frequency

Usually, the most frequent intervals for reviewing are half-yearly & yearly. Interim fluctuations in the values of asset classes should not, in principle, call for any action unless the situation calls for action. Higher frequency represents higher attributable redemption impact cost and demands high attributable investment capital (HIC).

Set a trigger

Tactical play of Asset Allocation on the base asset allocation model set by an investor and his/her tolerance regarding price movements. For instance, let’s say that the base case is 50% equity - 50% debt & the tolerance band defines +/- 10%. As the portfolio composition will change to 60% equity – 40% debt, 10% of the equity exposure will be cut off & 10% of the debt exposure will be added to make the model back to base (i.e. 50% equity – 50% debt).

• A Combination

The approach under consideration focuses on a fusion of frequency & trigger. Depending on which of these two occurred earlier, a change to the base asset allocation may be warranted. In this light, a typical investor’s base asset allocation model is a 70% equity – 30% debt with a trigger of +/- 7.5% & a rebalancing frequency of 12 months. If the equity part increases to 77.5% within 12 months, the investor might want to cut the excess exposure (i.e. 7.5%) and allocate the same to the debt. If the equity portion rises to 75% in six months, the investor may reduce the additional exposure (i.e. 5%) and assign it to debt.

What Are the Ways To Rebalance Sip Investments?

Illustrating it, if you invest half of the money in equity and half in debt, the easiest way to rebalance in a tax-efficient manner with your ongoing SIP investment every year is to alter the incremental investments so that your portfolio gets rebalanced. Therefore, when you put your Rs 10,000 in a debt fund and another Rs 10,000 in an equity fund, you will always want it to be 50 per cent each in debt and equity at the end of each year.

Assuming, at the end of a year, your equity investment has fallen by 40 per cent because of the value, in reality, the debt has gone up by 8-9 per cent. Thus, invest your future money, that is, the future Rs 10,000 a month, in a way that your asset allocation is rebalanced. In this way, your marginal investment will occur in a way that you will invest in a security, whether debt or equity, that has lost, and you will invest less in something that has done very well. This is what you will need to do to obtain the asset location.

Conclusion

Well, there is no perfect rebalancing method. The investment horizon, market understanding, risk tolerance, and the nature of goals are other factors investors should consider when choosing what works for them and what doesn’t. 

When uncertain or unaware of how an asset allocation model is formed or rebalanced, it is advisable to contact a financial advisor. Knowing what an investor wants is critical to choosing the best option. 

You have two more choices: a passive approach with MF schemes that give everyday balancing through their valuation models, such as BAF or multi-asset schemes or an active one by rebalancing on your own. This change in asset allocation would attract exit loads/ taxation and require expertise/ time and effort.

So, create your mutual funds wisely. If it takes too much time or effort and makes you constantly obsessed with your portfolio, then the smarter choice would be to approach a SEBI-registered financial advisor who can understand your financial goals and manage your investments for you. 

However, if you decide to do it independently, be cautious and monitor your portfolio regularly. 

In the upcoming chapters, we’ll learn about the redemption process, systematic withdrawal plan (SWP) and the tax implications of your mutual fund investments.