Optimizing Wealth Through Balancing, and Rebalancing, Your Mutual Funds

  • Posted By : reliancesmartmoney.com
  • Thursday Jun 07, 2018

Key Takeaways

  • Balancing is allocating investments across various instruments and asset classes
  • Rebalancing controls your risk and enhances returns.
  • Revisit your portfolio once a year and rebalance if needed

What is Balance?

The balance of an investment portfolio is made up of its allocation across various instruments and asset classes. The balance is entirely driven by investor’s income levels, risk tolerance and investment objectives. By and large these objectives are:

  • Multiplying one’s savings
  • Reducing Tax Liabilities
  • Earning ROI (Return on Investment)
  • Protection against inflation
  • Financing for future expenses 
  • e.g. family healthcare, emergencies, marriages, children’s education

And Rebalancing?

Over time differential returns can greatly impact the returns on your portfolio. So, while the initial balance is important, rebalancing is the next important concept to incorporate into your investing behaviour.

If you have a portfolio with allocation towards different asset classes, you should consider rebalancing them once a year if they have moved away from your original allocation. For instance, if you had a 75% exposure to equities and it moved to 85% after a rally, then this may be the time you reallocate by exiting some equity and moving to debt.

Basically, rebalancing controls your risk and enhances returns. Often certain mutual funds or mutual fund types will do better than others over a given period. But it is rare that large swings in financial markets will cause your portfolio of mutual funds to dramatically change your original allocation percentages. Also, there can be trading costs associated with buying and selling funds.

When should you rebalance your portfolio?

So, rebalancing too often can diminish the potential positive effects of doing it. A general rule of thumb is to revisit your portfolio once a year and rebalance if needed (keeping an eye on exit loads and capital gains taxes, if they apply)

Ideally, assessing the balance and rebalancing is best left to your advisor, unless you are an experienced investor who regularly tracks their portfolio. Leaving it to fund managers though comes with the risk of exposing yourself to misuse by unscrupulous advisors who’ll turn the exercise into a way to reap higher commissions.

Hence, an important point is that you should be knowledgeable and smart with your investment choices and have rebalancing in place periodically. 
Unbiased tools like Robot Assist offered by RelianceSmartMoney can help you take informed decisions for selecting the mutual funds of your choice.

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