Monitoring and Rebalancing of a Portfolio

A fund’s operating expense ratio, for example, is always an important consideration. But it’s more important for categories such as intermediate-term bonds, where returns are low and the underlying investments are traded in very efficient markets, versus, say, international funds, where returns are higher and the underlying investments are traded in both efficient and less efficient markets.

In other words, expenses take a bigger bite out of bond fund returns and managers have less opportunity to make it up by security selection. The fourth thing to remember when evaluating fund performance is to remember to look at the whole story. The numbers are important, but qualitative considerations matter too.
Look at the fund manager’s profile, the performance of his/her other funds and his/her investment strategy. For instance, it could happen that the fund is categorized as a low-risk investment, but the fund manager is actually taking an aggressive stance.
Equity markets are too volatile in the short-term, but can give good returns in the long run. Debt funds, on the other hand, give steady but low returns. Therefore, depending on investor’s goal and risk profile, the asset class will be determined. If, say, investor’s retirement is 15 years away, an equity-dominated portfolio would be a good option.
But if an investor have taken a personal loan, which an investor has to pay up in just one year, debt funds will be more suitable. If an investor has a medium term goal, like a trip abroad, balanced funds may be the right answer. And generally, liquid funds are a nice place to park very short-term funds.
Depending on the corpus, an investor could invest in an average of 4-7 funds for an equity portfolio and maybe 3-4 funds for the debt and balanced category.
If an investor invests in too few funds, it could make investor’s portfolio concentrated and risky. If an investor invests in too many, the portfolio becomes unmanageable and doesn’t really serve the purpose.
So it’s important to strike the right balance. Also, while selecting funds, study each one’s portfolio mix to ensure that the funds are not all similar. If most of them are similar, an investor will not achieve the desired diversification even with 6-7 funds. In order to achieve diversification across asset classes, consider options such as real estate fund, gold fund, international fund, and so on. Once these factors are decided, a portfolio plan can be created that includes an appropriate mix of funds.
Rebalancing and monitoring discipline is a highly desirable trait, because it can lead to success in many aspects of our lives. Just as a disciplined diet and an exercise routine are critical to investor’s physical health, a disciplined rebalancing strategy is critical to investor’s financial well-being.
Unfortunately, many of us don’t rebalance our portfolio on a regular schedule, because we’re either too busy or because we let our emotions get the better of us, choosing to hold on too long to investments that have performed well. Following a disciplined rebalancing strategy means an investor is more likely to sell higher-priced assets in favor of lower-priced ones which make plenty of sense.
We recommend rebalancing back to investor’s target allocation at least annually. An investor may want to rebalance sooner if there is an extreme change in value in some part of investor’s portfolio. Portfolio management doesn’t stop with the creation of investor’s portfolio. It’s important to monitor funds on an ongoing basis.
An investor should consider selling a fund if there is a change in management, organization, or strategy, or if an investor foresees a significant deterioration in the fund’s prospects. If an investor doesn’t have the time, desire and expertise to construct, monitor and rebalance a diversified portfolio of mutual funds, a mutual fund advisor can help.