How To Rejig Your Portfolio Of Mutual Funds

The steps you need to take rejig or rebalance your portfolio of your mutual fund investments.

Hello and welcome to FundooMoney, your 24X7 buddy for all your money matters. Over a period of time, as we invest in mutual funds, we end up building mutual fund portfolios. Often, we need to rejig the mutual fund portfolio after a major change in the market, persistent underperformance of an existing investment or spotting a new investment opportunity. How does an investor go about rejigging or rebalancing one’s mutual fund portfolio? We provide a brief primer on how to rebalance your mutual fund portfolio.

When rejigging your mutual portfolio, you need to be guided by a basic understanding of asset allocation rather than misinformed opinion of others. Typically, two types of situations can spur you to rejig your portfolio or in technical parlance, portfolio rebalancing.

When existing investments and assets appreciate significantly 
You may want to keep the proportion of your assets the same after a change in market conditions that alters it appreciably. Let’s assume that you had 80% of your investments in equity and 20% in debt investments like fixed deposits and debt funds. After a market upturn, if the ratio goes up to 90%, you might want to bring the proportion back to 80% by selling off some equity investments which are either not doing well or have their best behind them. The sales proceeds are then invested in debt investments to get the proportion back to the original. Experts will call this as strategic asset allocation.

When new short-term opportunities emerge
The second possibility is when you spot short-term opportunities and want to tap them. For instance, after the outbreak of global financial crisis in 2008, gold investments started doing well even as equity and debt investments lagged behind them. To keep the overall return from investments chugging along, you could have invested in gold exchange traded funds or gold ETFs offered by mutual funds. Of course, it was known that as the global economy would recover, equities will again do better than gold, as they have done historically. Hence, the stepped up gold investment opportunity was short-term one.

These types of moves are not meant to alter your overall asset allocation strategy or strategic asset allocation, but to take advantage of emerging opportunities. These moves are called tactical asset allocation.

Adjustments with sales, re-investments and fresh investments
Depending on the situation at hand you can adjust your mutual fund portfolio with fresh investments or selling off existing investments and re-investing them in asset classes where you are less invested in. What is the overall logic for this?

By doing this you ensure that your average annual return doesn’t fluctuate too much. An investment portfolio, growing well with relatively stable returns, helps you save much more in the long-term than a portfolio that touches the sky one day and plumbs the depths the other.

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