Is it the right time to rebalance your mutual fund portfolio?

Many investors want to be conservative. Want to switch from small cap to large cap, from ‘risky’ debt funds to AAA funds. This is not rebalancing. This is you changing your risk-appetite.

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ETMutualFunds.com asks mutual fund advisors and financial planners every week for a list of frequently asked queries by their clients. Often, these questions would be very topical, something that may be worrying many regular investors. The idea is to present the questions and the response of these advisors/planners to those questions for the benefit of our readers. This week we talked to Santosh Joseph, a financial planner based in Bengaluru, to find out what are the common queries his clients are asking him these days. Read on.

Financial Planner
: Santosh Joseph, Founder, Germinate Wealth Solutions, a financial planning firm, based in Bengaluru.

Question asked by his clients:

  • Should we increase our fallen equity allocation?
  • In times of uncertainty, should we make our portfolio conservative?
  • Does moving from small cap to large cap change my asset allocation?
  • Should we rejig our debt portfolio towards safe AAA funds?

  • %Annualized Return for
  • Suggested Investment Horizon
  • N.ATime taken to double money
His response:


First of all, let me begin with answering a fundamental question. Portfolio rebalancing is an exercise that one does once a year or in two years, when needed. It is usually done when the percentage allocation of an asset class or some asset classes increase or decrease significantly. However, when you shift your money from one type of scheme or asset class based on your risk-taking ability, that maybe called course correction and not rebalancing.

Moving on, to answer the first question, investors should increase their allocation to equity if it has fallen. Ideally, they should. Many people have seen job losses and salary cuts in the past few months and this question thus has different answers for different investors. If you didn’t have an impact on your job or suffered a minute loss on the salary front, I would suggest that you should increase your allocation to equity if it has gone below your ideal allocation. I would also say that don’t pay much attention to those who are asking you to sit on cash. Don’t stop your SIPs. I have said this multiple times that these are the times when SIPs work wonders.

Many investors want to be conservative. Want to switch from small cap to large cap, from ‘risky’ debt funds to AAA funds. This is not rebalancing. This is you changing your risk-appetite. Many investors say they are aggressive investors and want to invest for a long term and hence they would like to invest in small caps. We tell them that small caps might go through very rough phases, but they are adamant. Switching from small cap to large cap when markets are falling changes your asset allocation drastically. It means the kind of returns you expected in 10 years might not be achieved now. Investors should judge their risk appetite keeping in mind situations like the current one.
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However, some debt investors didn’t understand the risk associated with some schemes and hence it is okay to switch to safer funds. My advice now is that don’t jump back to duration funds when they start getting higher returns than AAA funds. Stick to what you want and what suits your investment strategy. Such changes might not change your overall asset allocation but it impacts you with taxes, loads, and sometimes converts your notional losses to actual ones.


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