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Business News/ Mutual Funds / Mutual Funds: With markets on a decline, is this the time to rebalance your portfolio?
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Mutual Funds: With markets on a decline, is this the time to rebalance your portfolio?

As benchmark indices are on a decline, it's natural to question the stability of your mutual fund portfolio. Here's why this might be the right time to reassess your investments.

Benchmark indices have taken a dip, sparking investor concerns. Reevaluate mutual fund portfolios during market downturns. Premium
Benchmark indices have taken a dip, sparking investor concerns. Reevaluate mutual fund portfolios during market downturns.

In the ever-fluctuating landscape of the stock market, recent weeks have seen Indian benchmark indices take a notable dip, sparking concerns among investors about the stability of their equity investments. 

With the Nifty 50 dropping 1.87% and the S&P BSE Sensex tumbling 1.64% in just a week, many mutual fund investors are left wondering whether it's time to reassess their investment strategies. 

While market downturns are a regular part of the investment journey, they often serve as a reminder to reevaluate portfolios and consider potential adjustments. So, is now the right time to take a closer look at your mutual fund portfolio? Let's delve into it. 

Risk tolerance

One factor to consider before you decide to rebalance your portfolio is your risk tolerance. If you're nearing retirement or have a low tolerance for risk, you may want to reconsider investments that are heavily reliant on equities. On the other hand, if you have a higher risk tolerance and a longer investment horizon, you may be more comfortable weathering market downturns.

Rebalancing your portfolio

Market downturns can create opportunities for portfolio rebalancing. Rebalancing involves adjusting your asset allocation to maintain your desired level of risk. For example, if your equity holdings have decreased in value, you may need to reallocate funds from other asset classes to maintain your desired asset allocation.

Maintain liquidity

During times of market decline, it's essential to review the performance of your mutual funds. While short-term fluctuations are to be expected, consistently poor performance may indicate underlying issues with the fund. Look for funds that have historically outperformed their benchmarks and have demonstrated resilience during market downturns.

“In light of the ongoing elections and the resulting market volatility, prudent investors are advised to maintain some liquidity to capitalise on potential corrections if any post-election. Given the current landscape, a strategic shift towards increasing exposure to large-cap schemes is recommended. Not only do large caps present compelling valuation opportunities, but historical trends indicate their resilience and outperformance during periods of market turbulence," says Pankaj Shrestha, Head - Investment Services, Prabhudas Lilladher. 

Consulting a financial advisor

If you're unsure about how to proceed, consider consulting with a financial advisor. A qualified advisor can help you assess your risk tolerance, review your investment objectives, and make informed decisions about your portfolio. They can also provide valuable guidance during times of market uncertainty and help you navigate changing market conditions.

Exercise caution

Although rebalancing your portfolio is vital for maintaining its long-term health, it's not always without its drawbacks. One concern is transaction costs; buying and selling can incur fees and taxes, which are investments in your portfolio's future. For instance, selling an equity mutual fund before a year might result in short-term capital gains tax. 

Another drawback is the potential for missed gains; if a particular asset continues to soar, rebalancing could mean selling a portion of those potential winners too soon. 

Moreover, there's a timing dilemma. Deciding when to rebalance is tricky; too frequent rebalancing can lead to unnecessary costs, while too infrequent rebalancing may increase your risk exposure. So, striking the right balance between potential costs and missed opportunities requires careful consideration.

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ABOUT THE AUTHOR
Deepika Chelani
A business media enthusiast. She covers personal finance beat for LiveMint.
Catch all the Mutual Fund news and updates on Live Mint. Download The Mint News App to get Daily Market Updates & Live Business News.
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Published: 11 May 2024, 12:02 PM IST
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