Which aspects should you consider while trying to build a balanced investment portfolio? The answer differs for every investor and depends on the securities in which they have invested. However, there is an 8-step procedure you can follow to effectively eliminate funds from your portfolio. Read on to know more.
Steps to reduce the number of funds in your mutual fund portfolio:
Here are the steps you must follow to carry out portfolio rebalancing:
- Identify and exit underperforming mutual fund investments: If you are an investor who regularly assess their mutual fund investments, you will know about the overall performance of every fund. Some of these funds might turn out to be underperformers – funds that have not yielded any significant return till date. Regardless of the taxes that you might have to pay after selling them, you must exit these funds to declutter your portfolio.
- Exit sectoral and thematic funds that aren’t yielding satisfactory returns: The performance of most sectoral or thematic funds can be quite volatile. If, upon analysing your funds, you realise that you have invested in a sectoral/thematic fund based on its short-term performance, you must exit that fund. Sectoral funds generally offer limited diversification.
- Reassess the need for mid- and small-cap investments: If you have invested in extremely volatile and risky investments like mid- and small-cap mutual funds, you must consider exiting them for the purpose of portfolio rebalancing. If you wish to remain invested in these funds, you must consider balancing your portfolio and mitigating overall risk. You must avoid investing solely in mid- and small-cap funds as they can considerably increase your portfolio’s overall risk.
- Consider exiting your large-cap mutual fund investments: Large-cap funds are low-risk investments, some of which are tax-saving investments under Section 80C of the Income Tax Act. If you wish to take more risk, you can consider exiting these investments. However, be sure to maintain a balanced investment portfolio.
- Assess your investments in debt-based securities: Next, you must assess your debt-based securities. If your assessment tells you that you need to increase your debt allocation, you can consider investing in an appropriate debt mutual fund. However, if you don’t wish to do that, you can consider various types of equity funds before investing in the one that aligns with your investment objectives.
- Consider investing in hybrid mutual funds: Hybrid mutual funds help you build a balanced investment portfolio by helping you invest in equity and debt-based securities. These funds also allow the fund manager to dynamically adjust the asset allocation to optimise returns and minimise risks.
- Assess if an overlap exists in your portfolio allocation: A “portfolio overlap” is a scenario in which your mutual fund portfolio contains several “overlapping funds”. These are essentially duplicate funds. You must try and eliminate all overlapping funds in your portfolio.
- Realign your portfolio if required: Finally, you must check if your mutual fund portfolio aligns with your investment goals. If it doesn’t, you must make changes to the funds in your portfolio by realigning them.
Consider using an SIP CAGR calculator before investing in an SIP mutual fund to have an accurate estimate of your returns before investing.
*The information in this article does not necessarily reflect the views of The Global Hues. We make no representation or warranty of any kind, express or implied, regarding the accuracy, adequacy, validity, reliability, availability or completeness of any information in this article.*
