It’s crucial to safeguard your financial security and keep track of your portfolio of mutual fund schemes & investment. If not, you won’t be able to efficiently accumulate wealth or meet your financial objectives.
Your mutual fund portfolio should occasionally be rebalanced and optimized. You can either review your mutual fund portfolio annually or whenever it seems to be drastically out of alignment with your financial goals. The terms rebalancing and optimization, which both pertain to the proper management of a mutual fund portfolio and re-aligning them, continue to confound some investors. Let’s first clarify the distinction between portfolio optimization and rebalancing!
Rebalancing and mutual fund portfolio optimization differ in certain ways. The practice of changing the asset composition of your investment portfolio in light of the previously covered considerations is known as portfolio rebalancing. Although the goal of portfolio rebalancing is to change the investment strategy and rebalance the portfolio’s components, the ultimate goal is to outperform inflation over the long term by holding the best and most suitable assets across each asset class that can help you reach your financial goals, such as planning for your children’s education, retirement, marriage, etc.
Rebalancing a portfolio The portfolio should be examined to see if it is in line with the asset allocation decision you made when you made the purchase, for example, if you wanted to create a mutual fund investment that consisted of 80% equity investments and 20% debt investments. You made the asset allocation decision while maintaining this ratio of equity to debt.
You will need to rebalance your portfolio to get the asset allocation back to 80% equity and 20% debt if, after a year, your portfolio shows 85% equity and 15% debt. In order to keep your target asset allocation, you should sell equities and buy debt if your equity allocation rises to more than 80% in a year. Similarly, you would sell debt and buy equity to preserve a 20% asset allocation if the equity ratio dropped below 80%. However, this rebalancing should be carried out with the aid of professionals in order to maximise the mutual fund portfolio.
Optimization Of Mutual Fund Portfolios
Let’s say that you carefully select a few mutual funds based on a variety of characteristics, such as past performance, reviews, etc., to better comprehend optimization. But what can a shareholder do if a certain mutual fund starts to perform poorly? But what can a shareholder do if a certain mutual fund starts to perform poorly? What would you do if a component of your car broke down? Either you fix it or you buy a new one!
You can still choose to have a mechanic fix it if it’s simply a car. Although the money you invest in a particular mutual fund is managed by AMCs and fund managers, you do not own the mutual fund. You won’t be able to rebuild your allocation of mutual fund assets as a result. What is the remedy? Replacement is the second-best choice!
The nice thing about investing in mutual funds is that there are lots of options, both generally and within specific categories. So, if one of your mutual fund investments starts to underperform, you can quickly switch it out for another scheme that falls under portfolio optimization.
Regular analysis of the portfolio is just as important as investing. This gives you the ability to track the performance of your funds in various market settings relative to other asset classes and determine whether or not your investing goals are being met. Remember that historically high-yielding funds have occasionally underperformed in the short term. Therefore, it is essential to regularly analyze your investment portfolio. If current mutual funds have persistently underperformed over the past three years, an investor may want to consider transferring to another set.
Set your financial objectives: According to experts, it is wise to match your portfolio to a well-planned financial target that details all of your hopes for the future as a sort of investment roadmap. This not only motivates you to continue investing consistently, but it also effectively ties your investment portfolio to your financial goals, maximizing returns and optimizing your mutual fund portfolio. When you invest without a plan and goals, you run the risk of frequently and unintentionally selling your mutual fund investments, which robs you of the potential momentum from prospective capital appreciation brought on by the force of compounding on your returns.
By strategically matching your mutual fund portfolio with your various financial goals, you optimise your mutual fund portfolio. There is no debate about the benefits of doing so.
Diversify Your Mutual Fund Portfolio
Gains from mutual fund investments depend on a variety of factors, including the fund manager’s investment decisions, the mix of asset classes they choose to invest in, the circumstances under which they place your money, the state of the financial markets, and many others. For instance, when it comes to the market, certain investment types, such as equity investments, demonstrate relatively opposing relationships, showing a negative correlation with one another. When there is financial uncertainty, gold funds often outperform stock mutual funds, which typically underperform.
The association between short-term debt mutual funds and rising interest rates is also inversely proportional. In these circumstances, short-term debt mutual funds perform better than long-term debt mutual funds.
In order to maximize your mutual fund portfolio and provide the optimum rate of returns depending on an investor’s risk tolerance, you should have a well-diversified mutual fund portfolio that is optimally associated with a blend of mutual funds that stretch across multiple fund houses and asset classes.
However, in order to avoid over-diversification, an investor should avoid making diversification selections on their own and consult a specialist, such as a mutual fund distributor, before working on rebalancing mutual funds or optimizing a mutual fund portfolio.
Retail investors should also refrain from purchasing an excessive number of mutual funds because doing so can make it more difficult to track their performance and may even have a negative impact on how well their total mutual fund portfolio is performing.
Most investors, especially novice ones, are unaware of how to optimise their mutual fund portfolios since they are undereducated on the value of diversity and asset allocation. Asset allocation is obviously less significant while investing in mutual funds with a low monthly systematic investment plan (SIP), but as your portfolio gets stronger, it becomes tremendously helpful.
Select the SIP route: If you’re serious about diversifying your mutual fund portfolio , the Systematic Investment Plan (SIP) is the way to go. The majority of investors in mutual funds favour SIP because of the discipline it promotes in saving. SIP enables you to regularly invest a set amount of money.
The investment frequency can be set to daily, monthly, or even quarterly. When comparing mutual funds and stock market investments as a beginner investor, equity linked mutual fund SIP plans offer better returns with less oversight.
The cash is automatically debited from the savings account after the user selects the amount and frequency of the investment, encouraging consistent investing behaviour. An investor can begin investing in mutual funds with as little as Rs. 500 every month. Rupee cost averaging is most advantageous when done on a regular, automated monthly basis.
Through SIP, an investor can add additional mutual fund units at a lower NAV during a negative movement, averaging costs and improving the mutual fund portfolio.
Continue To Make Regular Investments
Numerous investors paused their SIPs in expectation of more bear markets after seeing sharp price declines like those brought on by the coronavirus crisis in March and April of last year. Fortunately, unexpected market declines and periods of financial instability present the best chances for long-term economic expansion. It makes it possible for fund managers to buy premium stocks for incomparable prices.
In order to optimise their mutual fund portfolio by averaging purchase costs, investors who regularly invest in equity linked schemes should continue their SIPs during times of market volatility. They should also try to top-up their SIP contributions with higher transactions in order to further average out their investment costs. This would make it possible to accumulate far more wealth with considerably fewer contributions, and there is a risk that an investor could meet their financial objectives even earlier than the predetermined time horizon.
Selecting Direct Mutual Funds vs. Regular Mutual Funds
Understanding which mutual fund investment plan is ideal for you based on your investment experience is vital when making a decision about mutual funds. Direct and conventional mutual fund plans are the two ways that asset management companies provide investors to invest in mutual funds. Given that both direct and conventional mutual fund plans operate differently for individual investors, it is crucial to compare them. When investing in direct mutual funds, investors must rely on their own financial knowledge, whereas with ordinary mutual funds, you receive professional advice from mutual fund distributors, which is crucial if you want to achieve your financial objectives.
Balance Your Risk
Since each investor has distinct financial objectives, diversification criteria are always variable for each individual. The effectiveness of a diversification plan is also influenced by a variety of additional factors, including the investor’s age, risk tolerance, investment horizon, and expected rate of return.
For instance, a novice investor who is still young and wants to maximize their mutual fund portfolio should allocate more of their assets to equity linked mutual fund schemes, whereas an experienced investor who is close to retirement age must choose safer and fixed income mutual fund schemes, such as debt funds.
The bottom line is that, in order to maintain a good balance, the investment portfolio should be properly dispersed among a variety of schemes, and investors should steer clear of the most frequent mutual fund investment blunders from the very start of their financial journey. Consider a scenario in which you are a young, entry-level investor who has allocated roughly 70% of your total mutual investment to equity mutual funds and 30% to debt mutual funds.
Accordingly, based on your investment objectives, you should distribute the funds among a number of equity mutual funds that target small, mid, and large-cap mutual fund schemes rather than investing the entire amount in a single equity mutual fund scheme. To optimize the mutual fund portfolio, there should be an appropriate balance of risk throughout your asset allocation. In response to the market correction and your risk tolerance, the allocation of funds to various asset classes should be consistently changed over the course of the investment time frame.
Before investing, carefully read the documentation relating to the programme. Mutual fund investments are subject to market risk.
Conclusion
Mutual fund optimization is incorrectly perceived as a one-time activity by many investors. However, ideally, this exercise should be undertaken frequently, there is no harm in evaluating your investment portfolio even on a monthly basis. Historically, optimization of your investment portfolio was an extremely challenging task, which involved lot of paperwork and calculations. However, in the recent past this has been simplified with the advent of new technology such as mutual fund apps and various other investment apps.
Interested in how we think about the markets?
Read more: Zen And The Art Of Investing
Watch/hear on YouTube:
Start investing through a platform that brings goal planning and investing to your fingertips. Visit Kuvera.in to discover Direct Plans and Fixed Deposits and start investing today.
#MutualFundSahiHai #KuveraSabseSahiHai!
