Rebalance your mutual fund portfolio in 4 simple steps

Rebalance your mutual fund portfolio in 4 simple steps
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Review your portfolio regularly to see how your investments are doing and use this opportunity to eliminate underperformers. If your portfolio has underperformed, you may need to increase the investment amount. A bull or a bear run can skew the asset allocation, so you must rebalance your retirement portfolio at regular intervals.

It may sound intimidating at first, but like all other aspects of investing, it just requires preparation.

Here are four tips to get started:

Set asset allocation goals

The first step in rebalancing of your mutual fund portfolio should be setting of asset allocation goals. If you had a certain stock/bond ratio that made good sense before any recent market upturn/downturn, it’ll still make sense. And in case you don’t have any asset allocation strategy, it’s high time that you have one.

There’s no single off-the-shelf asset allocation solution that you can use. The good way to go about it is by seeking help of some seasoned financial planner.

Find out what your asset allocation is as of today

Once you’ve devised an asset allocation strategy, you need to find out where all are you invested as of today. Gather all your investment statements or simply check them online to get a better view of the present status. There are several free/paid online tools and mobile phone applications you can use to stay on top of your investments.

Create a portfolio rebalancing plan

Your work is almost done if your current portfolio is already in line with your asset allocation goals. However, in all likelihood, you’d need to make certain changes.

When deciding about the funds to be added to the portfolio, and the number of units you must sell/buy, you’ll discover that the portfolio overhauling process is actually a lot about trial and error.

You may need to evaluate the possible impact of buying/selling certain holdings on your asset mix before actually doing the trade. Although your portfolio doesn’t necessarily needs to be an exact replica of the broader market, you should at least be able to figure out whether it’s skewing heavily towards a certain sector or style.

The alterations required may become too obvious in certain situations, for instance if you’re heavily invested into bonds, adding some equity funds may solve the problem.

Pay heed to the tax angle

Before you make any changes to your mutual fund’s portfolio, you must take the tax impact of any units sold, into account. You must never engage in portfolio rebalancing without considering the tax consequences. It’s important to factor in the capital gains resulting from the sales.

So, if you’re invested into equity funds, make sure that you don’t sell off any units before one year, in order to avoid paying short-term capital gains tax.

Non-equity mutual funds are treated as debt funds for taxation purposes. They include all kinds of monthly income plans, gold ETFs (exchange traded funds), International funds and debt funds. Any holdings that are sold within three years from their purchase would be subjected to short-term capital gains tax (if any gains are made) and will be calculated as per the investor’s income tax bracket. Holdings sold after three years would be subjected to long-term capital gains tax at a flat rate of 20% with indexation.

Final Word

The rebalancing of a mutual funds’ portfolio is something that you must engage once every year. You can either do it as per your yearly schedule, or whenever your portfolio seems like way out of sync with your targets.

Mutual fund investments are subject to market risks, read all scheme related documents carefully.


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