General rule in mutual funds investment is that equity mutual funds for long term and debt mutual funds for short term. Once you start mutual fund SIP, it would continue based on investment goals. Mostly investors invest in mutual fund SIP and not looking at re-balancing the mutual funds in between investment horizon. Debt funds are those that invest in Government and Corporate bonds which pay certain amount of interest periodically. Since they are not involved in markets and market fluctuations, these are usually considered as less risk investments. Let us discuss the importance of rebalance your mutual fund investment.
Make a mix of debt and equity mutual funds for your financial goal
If we start with 80% on equity mutual funds(stocks) and 20% on debt mutual funds(bonds), we have to re-balance the investment based on market condition. We have to review the mutual fund portfolio six months once and adjust based on market condition. Re-balancing is that balancing equity and debt mutual funds share based on market condition. In case of fluctuating market condition, allocating more to debt funds would give better return compare to equity mutual funds. You can allocate 40% to debt mutual funds and 60% to equity mutual funds. It would reduce risk in case of uncertain market condition.
Allocate 40% – 60% to debt mutual funds in case market is uncertain.
Re-balancing is risk-minimizing strategy for you. Yearly once revisit your portfolio and re-balance it based on market condition. If your risk tolerance or your investment strategies change, you can re-adjust the weighting of the asset class in your portfolio by re-balancing and devise a new asset allocation.
Once in a year, look at your investment and RE-BALANCE based on market condition.
It is not compulsory to re balance it in case market condition is good and growing. Re-adjust your investment in case market change or market stagnation. Otherwise just review it and continue with existing allocation.
Common mistake in mutual funds investment is that 100% allocation to equity mutual funds. 100% allocation on equity investment would have high impact in case of market changes. To avoid that better allocate 20% of your investment in debt mutual funds. It would act as emergency fund and help in case of emergency. It would give better returns in case of bear market. Diversify the investment to get better returns and flexibility.Mutual Funds Meaning With Example in Simple Terms
Allocate 20% of your mutual funds investment in debt mutual funds.
Mutual funds are not risky in the long term i.e. > 10 years. However, in the short term also mutual funds are effective and efficient way of investing for a common man as there is risk diversification and the funds are managed by professionals.Investment for Retirement or Kids higher studies? Long term investments
Invest for longer horizon to get better returns. Investment horizon should be more than 5 years.
Re-balance is part of your investment strategy. Yearly once re-adjust your investment portfolio to get better returns. Mutual funds SIP is better investment to experience the power of compounding. Revisit your investment and re-balance now if required. Happy Investing:)