Make Money Fast Sans Risk! This mutual fund portfolio management trick is just what you need

Money tips: Investing money in equity mutual funds and debt funds? You might have an allocation strategy favourable for you at the time of investment.

Mutual Funds portfolio rebalancing is the process of observing and making alterations in an existing portfolio so that it matches the desired portfolio of the investor. Photo: Courtesy Ujjivan SFB website

Money Tips: Investing money in equity mutual funds and debt funds? Initially, at the time of your first investment, you might have an allocation strategy that was favourable for you in lessening risk. However, 2 years later, your portfolio may shows that your total equity exposure (risky part) has increased even as your debt exposure (less or no risk) has decreased by a certain percentage leaving you exposed to more danger. How did this happen? Well, over the course of these two years, the market value of each fund within your portfolio earned a different return, resulting in a weighting change and a gap between different assets. Chances are that in the next few years, the initially equally allocated portfolio may end up overweighing the high-risk asset, thereby increasing the risk in an investor’s portfolio.

This clearly indicates that creating a portfolio to meet your financial goals is just half the job done. Investors have to keep adjusting and aligning it as per their needs. How? Through the rebalancing trick. This can help them to restore the original allocation. Let’s first understand what portfolio rebalancing is all about.

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Speaking on the importance of portfolio rebalancing for the mutual fund investors Kartik Jhaveri, Director — Wealth Management at Transcend Consultants said, "Portfolio rebalancing is the process of observing and making alterations in an existing portfolio so that it matches the desired portfolio of the investor. It involves sporadically redeeming money invested in old funds and re-investing them in the present fund recommendations in order to keep the portfolio aligned to a risk level that is in sync with the investor’s goal plan. As the investors move closer to their goals, they must lower the risk by increasing their debt and decreasing the equity."

Jhaveri went on to add that the process involves the addition of no fresh money to the existing profile. Investors need to simply re-invest their old fund money. While this reallocation of assets helps in leveling down the risks, it also helps the investors to get rid of under-performing investments within an asset class and substitute them with better-performing investments, especially if they are using actively managed funds to invest. This can translate into making more money fast. The idea is to let the investors invest only in the best funds as they are not going to invest in the same funds for their entire life. After all, some of the best performing funds today may not exist 10 years later.

Highlighting the benefits of portfolio rebalancing for the mutual fund investors, Jitendra Solanki, a SEBI registered tax and investment expert said, "While Portfolio rebalancing inculcates a sense of discipline on investing and prevents the investors from trading on the basis of emotions, there are three major benefits of getting it done." Solanki said that portfolio rebalancing in mutual funds investment benefits on three fronts — risk management, improved returns and saving tax through tax harvesting.

Elaborating upon risk management, Solanki said, "An unbalanced portfolio can become riskier over a period of time as the percentage of high-growth high-risk assets tend to increase. To keep the percentage of risk on the same level, investors must sell off some portions of their investments in the heavy asset class and re-invest the redeemed amount in the under-weighted asset class. All of these can be possible only through periodic rebalancing." He said that in case of investments being made with actively managed funds, it is crucial to regularly assess the performance of the funds in the current portfolio. When certain funds stop meeting the investor’s selection criteria, they can be replaced by new ones. Doing this on a regular basis will ensure superior returns.

On how does portfolio rebalancing helps a mutual fund investor save income tax, Kartik Jhaveri said, "A systematic portfolio rebalancing on a regular basis can help investors to save taxes depending on the prevalent taxation rules. For instance, considering the current tax structure of 10% on Long Term Capital Gains for equity investments whereas an LTCG of up to 1 lakh exempted from this tax, investors can keep booking up to 1 lakh of gains under LTCG every year without paying any tax."

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