Why is it important to rebalance mutual fund portfolios?

Surbhi Khanna, ET Online

Apr 5, 2025

Importance of rebalancing

Investors need to rebalance their portfolio to manage risk.Rebalancing also helps one to book profits in a rising asset class and invest in another which has not risen, as reported by ET Bureau.

Rebalancing

For example, a low-risk investor may need 40% equity in his portfolio. But due to a rise in the stock markets, if the proportion increases to 60%, the investor is taking more risk than he intended to. Hence, restoring the original allocation will keep the risk within his tolerance limit.

When to rebalance?

Financial planners suggest investors should rebalance their portfolios annually, which could be at the start of the financial year or whenever there is a sharp movement in a particular asset class.

How to rebalance?

You can redeem MF units from an asset class which has grown more and add that to asset class whose proportion fell. If adding fresh money, you could consider adding to asset class which has lagged and not in your original allocation. This will increase value of this asset class and restore its original allocation.

What is portfolio rebalancing?

Various asset classes move in different directions over a period of time. Due to this, asset allocation of an individual changes over a time.

Should you rebalance now?

As we begin the new financial year, wealth managers believe investors should evaluate their mutual fund portfolio to see if it is in line with risk profile and rebalance such portfolios where there is a need.

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