Investors choose an investment option based on their financial goals, risk appetite, investment duration and age. Investors also undertake a variety of tasks to achieve their goals. One such fast portfolio rebalancing happens. Through this article, we are going to give you information related to this.
Portfolio rebalancing is a method through which investors make necessary changes to suit their financial goals. Investors often create financial portfolios to track the performance of their mutual fund investments. Such portfolios require periodic adjustments to achieve higher returns or protect investors from market risk. Through portfolio rebalancing, investors can stay invested even during market fluctuations and identify and implement a system that works in their favor and minimizes losses. Investors have to consider the long-term consequences and tax implications when reviewing and rebalancing portfolios. Rebalancing operations include buying or selling shares or all units of your mutual fund to balance the allocation. Simply put, rebalancing your portfolio is an important aspect in building a portfolio of mutual funds.
Why portfolio rebalancing is important?
When it comes to your investment mix, portfolio rebalancing is important. Portfolio rebalancing allows you to adjust your investment strategy. If you have invested in assets that are not performing well due to the economic downturn or are not giving the expected returns, you may consider rebalancing your portfolio. This allows for mitigating the risk factor and altering your investment strategy to achieve your investment goals. If your risk appetite changes due to a change in income or as your investment strategy changes with age, you can re-adjust your portfolio to create a new investment strategy, thereby reducing your losses. May help. It helps in diversifying the asset allocation of the investor as per his convenience.
Steps to rebalance the portfolio
If you have invested in a mutual fund, you can rebalance your investment portfolio through the following steps –
Phase 1 – The first step is to create an asset allocation plan based on factors such as income, expected time of retirement, your current age, your financial liability and your risk appetite. If you know about asset allocation, you can create an asset allocation framework. You can also seek the help of a financial advisor for better guidance.
stage 2 – The second step is to understand your current asset allocation i.e. track your investments, assess where and how they are placed. Once you have done this step properly, do a comparative study of the goal you want to achieve and how your current situation is to achieve it. If you feel that the current asset allocation is not capable of giving you returns in line with your goal, then make the adjustment.
step 3 – If your current asset allocation is not in line with your investment goals, take the time to prepare an appropriate rebalancing plan. In this step you have to decide where you want to allocate by changing the allocation.
step 4 – Be sure to consider the tax implications when making such changes. Try to avoid short-term capital gains by staying invested for more than a year.
Step 5 – Keep reviewing your portfolio at least once a year or at regular intervals. This helps you understand how the adjustment you make is working.
Charges for rebalancing the portfolio
If you want to rebalance your investment portfolio, then as an investor you have to bear some of the charges, which are as follows –
Brokerage Fee – If you decide to rebalance your portfolio, the brokerage charge and securities transaction tax are among the primary charges you may have to bear. Brokerage fees include the cost of buying or selling shares and bonds.
Exit load – When mutual fund investments are sold within a specified time period, investors may have to bear an exit load of about 2% of their investment.
Tax on capital gains – Investors also have to pay tax while rebalancing their mutual fund portfolio. On selling your mutual fund investment within a year, you will have to pay around 15% capital gains tax. You may also have to pay a marginal tax for selling the debt instrument within 3 years.