How to rebalance your mutual fund portfolio

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First things first. What is an ideal timeframe to review and rebalance your portfolio? We say five years because this is the time period during which goals, circumstances and needs change as per the revolving cycle of life. It is also a decent gap to re-evaluate your investment choices, products and their performances. You may cut the weeds and water the flowers now.

One may sell losers in between five years, but better to buy and hold throughout the period before the rebalancing day arrives. I keep topping up my existing asset allocation with the surplus fund unless there is a real pull factor such as a market or fund specific news or a major personal need that calls for a change. What are key elements of MF portfolio rebalancing? I compiled eight takeaways from my own experience:

Fund/AMC selection Being the chief executive officer of a fund house, people often ask me if all my investments are in Edelweiss funds. My portfolio is of course heavily Edelweiss, but I do have mutual funds from other asset management companies (AMCs). My number one criterion in choosing external funds is the ability of the fund management team. It overrides everything. Belonging to the industry gives me an added advantage of gleaning valuable insights. Every AMC will have a specific area of speciality such as midcap, value or growth. Choose them accordingly.

AMC/fund size AMC size doesn’t matter. I have seen big AMCs underperform the small AMCs, while latter growing to become a medium-sized AMC. Talking about the scheme size, it matters hugely. Avoid schemes where the size has ballooned; especially in the small cap category despite how good the performance has been.

Consistent versus star performers Star ratings don’t matter. My new portfolio does not have any funds that make it to the top of portal rankings or 5-star rankings or are the most talked about. I prefer to shortlist consistent performers and choose my picks among those. A 4-star fund, the one not on the top of the charts yet, is unlikely to swing to the bottom. Consistency rules over the best performance.

The good old SIPs Doing monthly SIPs works well. My investor performance has nearly always beaten fund performance because of SIPs. Why so? Because I keep collecting units when markets fall and it works. Even absolute SIP performance is heartening: More than 14 per cent in BAF categories and 18 per cent in midcap categories. Another learning is to review your SIP amounts. With rising incomes, we often don’t top up our SIP. Try to target a post-tax savings amount and periodically review and increase what you can invest.

Limit number of schemes How many MF schemes should there be in a portfolio? Not more than 10 or so. Limiting schemes is important. With so many MF categories it isn’t easy though. I have broken my approach into six categories. Each category will have a one or two schemes making for a total of 10 funds. These categories include flexi or large and midcap; midcap; small cap; asset allocation funds; Indo global funds (tax-efficient) and pure global funds. The last one is a new addition for tax reasons although I have kept a pure play international fund as well.

Diversification is key Outside of Edelweiss, I don’t allocate more than one scheme to an AMC. I try to look at a fund house with a distinctive style. Diversification really is about getting exposure to different investment approaches and ideas that perform at different points in time. Between active versus passive bifurcation, I am still biased towards active funds, although I have added one passive fund, that is, Edelweiss NIFTY Large Mid Cap 250 Index Fund in the flexi or large and midcap category. My midcap, smallcap and BAF exposure is entirely active and I feel comfortable with that.

Risk appetite I adopt a conservative approach in my asset allocation. It means most of my MF schemes have had lesser equity exposure. I have increasingly turned a little aggressive in my approach as some of key goals such as owning a house is out of the way. I have also created a separate portfolio to fund my son’s college education.

Avoid complex products One may have an aggressive approach to investments, but better to avoid complex products or closed-ended structures in the portfolio. The ease of investing or redeeming is underrated. You must understand the product in which you invest and get a good understanding of the redemption process. Liquidity is important.

Disclaimer: The author is the MD & CEO of Edelweiss Asset Management Limited. Views expressed are personal. Mutual fund investment is subject to market risks, read all scheme related documents carefully.