Portfolio Rebalancing and Mutual funds

POSTED BY sreedhar raj ON March 18, 2011 6:18 pm COMMENTS (7)

Hi experts,

             I have often heard that say,  when one invests Rs. 10,000/- per month in pure equity funds and pure debt funds in the ratio 60: 40 (equity 60% and debt 40%) , portfolio rebalancing should be done atleast a year to maintain the ratio 60:40. 

            If the same person were to invest this Rs. 10,000/- p.m in a balanced fund that maintains the 60: 40 equity to debt ratio, then is portfolio rebalancing necessary? What are the factors to be considered and when should be book profits?

Reg,

Sreedhar

7 replies on this article “Portfolio Rebalancing and Mutual funds”

  1. moneysights.com says:

    hi sreedhar raj,

    may be its a late reply to this question. as always, there is no straight answer. ideally, when you buy a Balanced Mutual Fund, the responsibility is of the Mutual Fund manager to do the rebalancing whenever required. if ones horizon is long term, then ofcourse one can choose to avoid the “costly” rebalancing on his/her own.

    but many times people continue staying invested in Balanced Funds even when there is horizon about to get expired. in that scenario, it is advisable not to rely on fund manager.

    let me explain by an example – HDFC Prudence has a mandate to invest a minimum of 40% & a maximum of 75% in equity. As per the latest available portfolio data, HDFC Prudence has almost 75% in Equity. the point is, fund manager keeps shuffling depending on various parameters. he doesn’t take into account every investor’s asset allocation & goals in mind. he has a mandate to run the fund. it is investor’s or his advisor’s job to exit or rebalance.

    so, its not that you need to rebalance at the slightest deviation from your target asset allocation, but its better to monitor on a periodic basis & take an action which is suitable.

    Final word: Its better that you rebalance at the portfolio or your goal-portfolio level, not at a fund level (unless you have only 1 fund in the goal-portfolio).

    hope this helps.

    Santosh Navlani | moneysights.com

  2. sreedhar raj says:

    Hi Manish,
    Thanks for your reply..

  3. Sreedhar

    You have talked about something very good and people dont know this . If you invest in balanced funds , you dont need to take care of portfolio rebalancing 🙂

    Manish

    1. Ram says:

      Manish,

      What is the average CAGR that one can obtain from balanced funds?

      Also, could you name some good balanced funds?

      Thanks,
      Ram.

      1. Ramesh says:

        I would say, anything in between 8-10% over a long period is a conservative estimate from balanced funds.

      2. Ram

        Ramesh mentioned that 8-10% is a conservative estimate , but I would like to say around 10-11% in long run .

        Manish

        1. Ram says:

          Manish & Ramesh,

          Thank you both for your replies. I’m aware of HDFC Prudence Fund. Are there any others that you would suggest?

          Thanks,
          Ram.

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